(Newswire October 15, 2010)-On September 20, 2010 China Armcometals, Inc. (NYSE:CNAM) was served with a securities fraud complaint (United States District Court-Nevada, Case No:2:10-cv-1581) Titled Shaw v China Armcometals, the lawsuit alleges among other things that; Tao Pang a branch manager of Bank of China (HKG:3988) and an Independent Audit Director of the China Armco, was part of a conspiracy to conceal securities fraud. The allegations plead that Keuan Yao, CEO of China Armco illegally removed the restrictive legend on 1.3 million shares China Armco in violation of Section 5 of the Securities Act of 1933, and that the board of Directors instead of disclosing this to the public, made a conscious decision to conceal this matter in violation of federal securities laws. As remedy the suit seeks the appointment of a receiver.
Tao Pang is a member of the board of directors and a director of China Armco’s Audit Committee which is given by the Audit Committee Charter the responsibility for:
“…(3) Compliance by the Company with legal and regulatory requirements…,” and “… (5) business practices and ethical standards of the Company…”
Pang is also the branch manager for the Bank of China Ltd., Lianyungang Economic and Technological Development Zone Branch, and the UNDISCLOSED loan officer of a 70,000,000 RMB ($10,500,000) loan to Armet Renewable Resources Co., Ltd., a subsidiary of China Armcometals.
As the Legal Representative, it is Pang’s duty to the Bank of China to ensure the bank and its shareholders that he maximizes its profits and minimizes its loses to protect the value of the bank’s shares. This duty to the Bank of China’s shareholders is in direct conflict with Pang’s duties to the shareholders of CNAM to report any suspicion of fraudulent activity within the Company and to report any significant events that the shareholders should know about.
The Lawsuit alleges that Pang knew about the sale of unregistered securities by the Company’s Chairman of the Board. We know this because the Company’s corporate counsel wrote a letter to Transcend Capital, Yao’s brokerage firm, informing the firm that violations of Section 5 of the Securities Act of 1933 were committed. Pang did not report this significant event to the SEC on an 8-K as required by the SEC and the Code of Federal Regulations. Pang has also failed to report the pending litigation in the U.S. District Court for Nevada alleging among other things fraud by Yao and the other members of the board.
Why would a member of the board of directors and a member of the Audit Committee specifically tasked with the responsibility to report any suspicious activity not comply with Federal Securities law? Because doing so would negatively affect the share price of CNAM which would jeopardize the Company’s ability to service its debt to the Bank of China. As a member of the board of directors and a director of the Audit Committee for CNAM and as the Legal Representative for the Bank of China Pang placed himself in the precarious position of having to choose where his loyalties would be placed. Pang chose to protect the interest of the Bank of China at the expense of the shareholders of CNAM.
The Story Gets Better
Another director of CNAM’s Audit Committee, prior to the lawsuit, that should be independent but is definitely not is Heping Ma. Ma is the founder, member of the Board of Directors, Chairman and holder of 85% of Henan Chaoyang Steel Co., Ltd., a company that guaranteed loans to CNAM by the Bank of China for up to $43,900,000. In consideration for the loan guarantee Henan Chaoyang Steel received 500,000 shares of CNAM stock valued at approximately $1,940,000. You guessed it one of the loans that Ma guaranteeed is none other then the loan that Pang is the legal representative for (70,000,000 RMB).
Like Pang, Ma has a huge financial incentive to hide the fraudulent activities of Yao so as not to jeopardize the value of CNAM’s stock and in turn compromise the Company’s ability to repay the loan to the Bank of China. If CNAM is unable to repay the loan Ma’s company will be responsible for the repayment.
This begs the question: “How can two of the three directors of CNAM’s Audit Committee perform their duties when they have direct financial conflicts of interests?” The answer to that is they can’t. History has shown that they have on numerous occasions chosen to ignore the fraudulent activities of CNAM’s Chairman and chosen to violate the rules governing U.S. public companies in favor of protecting their Chinese interests. Digging into the incestuous relationships the directors of CNAM have with Chinese financial companies provides the shareholders a horrific glimpse into corporate mismanagement and undisclosed conflict of interest.