China Agritech: Questioning Management's Credibility (Part 1)

Oct. 5.10 | About: China Agritech, (CAGC)

In times when it seems like every other week there is news about another Chinese RTO stock scandal, any prospective investor should carefully consider the role of the CFO. This is all the more important in a market like China, where the prevalence of questionable financial dealings make the reliability of the CFO key to any choice of investment.

So when one examines the chequered past of China Agritech’s (OTCPK:CAGC) CFO, one might begin to wonder why he was hired by the CEO and controlling shareholders in the first place. They say that those who do not learn from history are doomed to repeat it; so let’s dig deep into this one, because it’s a long and interesting story. Put on your reading glasses though, because the web of the financial shenanigans here is long and runs deep.

In China Agritech’s 2009 10-K they describe the corporate background of their CFO Yau Sing (Gareth) Tang:

Mr. Tang has been our Chief Financial Officer and Controller since October 22, 2008…From April 2003 to December 2005, he was executive director and chief financial officer of China Cable & Communication, Inc., which is quoted on the Pink Sheets under the symbol CCCI.PK.

Further examination of CCCI.pk reveals a series of shady financial transactions culminating in the demise of the stock from a $3.60 high in Q3 of 2003 to the sub-penny price it sits at today; equity holders suffered complete loss of their investment. Mr. Tang meanwhile pocketed 7-figure returns in a series of dubious and illegal insider sales of unregistered stock. The amazing thing is that CCCI.pk is not the only outfit managed by Mr. Tang that turned hopeful equity holders into unfortunate bag holders.

As will be presented, CCCI.pk represents the second iteration of a stock fraud involving Mr. Yau Sing Tang in which management and their affiliates systematically fleeced ordinary investors and violated securities law; and they did it all without more than a slap on the wrist from the relevant authorities.

China Cable and Communication Inc: Once Upon a Time in America

The birth of China Cable and Communication Inc. (formerly CCCI.ob, now CCCI.pk) reads much like any other Chinese reverse merger: an exciting story, a large number of closely held shares and the dream of a 1.3 billion-strong market. According to the company’s 2003 10-K the company was formed as follows:

Pursuant to a Share Exchange Agreement dated as of November 1, 2002, as amended on February 21, 2003, between the Company (CCCI.pk) and Martin Rifkin and William Rifkin on the one hand; and Kingston Global Co., Ltd. ("Kingston") and Sino Concept Enterprises Limited (collectively the "Sellers"); and Solar Touch Limited ("Solar Touch"), on the other hand, on February 28, 2003 (the "Closing Date"), the Company acquired (the "Acquisition") from Kingston all of the issued and outstanding equity interests of Solar Touch (the "Solar Touch Shares"). As consideration for the Solar Touch Shares, the Company issued 49,567,002 shares of its Common Stock to the Sellers. In addition to the Common Stock issued to the Sellers, the Company issued 4,760,931 shares to the Sellers' financial consultants.

What was the big draw of the investment? Only to be involved in “the first and only joint venture allowed to have a foreign investor invest in and to operate the cable television network in the PRC.” The business description could whet many investors’ appetites:

The Joint Venture operates a cable television network in the municipality of Baoding, near Beijing in the PRC. The Joint Venture has over 200,000 subscribers in a market with a population of over 10 million. The Company believes that the Joint Venture is at present the only Sino-foreign joint venture approved by the State Administration of Radio, Film and Television to be licensed as a cable television network operator in the PRC.

But management also seemed to enter into some rather questionable arrangements during its tenure at the helm of this promising venture. For instance, from the 2004 10-K:

In November 2003, the Company paid a $3,000,000 refundable deposit to the owner of Macau Media Holdings Limited ("Macau Media") under a letter of intent for the Company's proposed acquisition of Macau Media and its subsidiaries. The completion of the proposed acquisition was subject to due diligence and Chinese government approval for the renewal of Macau Media's satellite broadcasting license.

The purchase price for Macau Media was originally to consist of $3,000,000 in cash and 8,500,000 shares of Company common stock. If the proposed acquisition was not completed, the deposit of $3,000,000 would be refunded.

In early 2005, the Company received notice from Macau Media that the Chinese government did not approve the renewal of Macau Media's satellite broadcasting licenses. Management of the Company has determined that the owner of Macau Media is not financially capable of repaying the $3,000,000 deposit. Accordingly, the deposit has been reserved in the accompanying statements of operations and comprehensive income for the year ended December 31, 2004.

At first glance it appears that Macau Media may have run away with CCCI’s cash. But what was management getting in exchange for giving them a $3 million deposit in the first place? If management were intent on acting unscrupulously, this type of transaction could also have been used as a way to remove cash from the public entity and into the hands of unseen individuals.

The constitution of CCCI’s board of directors left much to be desired, especially when it came to independence from management. As will often be the case without an independent board, management seemed to reward themselves extremely well. The board of directors, which consisted largely of management, proceeded to adopt a generous equity-based compensation plan as outlined here.

Here is more free-share offering. Note the auditing accountant, Thomas Leger & Co. Veterans to the Chinese RTO space may recognize Leger as one of the accountants for Eternal Technologies (ETLT.pk) a defunct, importer of livestock embryos and one-time edible turtle breeder that stopped filing with the SEC in 2008 despite supposedly having $90 million in assets and almost no liabilities. Also note that the company entered into a consulting agreement with Mr. Chiu Wing Chiu granting him 600K shares. Again, veteran RTO followers may recognize his name as being involved in a similar “shares for imaginary consulting” agreement with China Energy Savings Inc. (Delisted - was CESV).

What was done with the shares issued and held by various members of management and the board of directors? In the interest of brevity, we shall not examine the filings by every member of management but will focus on Mr. Yau Sing Tang. Interested parties may view all of the relevant filings on the SEC website and confirm that all members of management engaged in dubious and illegal insider sales of unregistered stock.

Here is Yau Sing Tang in August 2003, receiving 1.2M shares as compensation for “services rendered” with regard to the RTO.

Here is Yau Sing Tang in October 2003, receiving shares as compensation for “services rendered”. Note the explanation below: Mr. Tang is to receive 30K shares of the issuer every month for services rendered; a sum, which given the share price at that point in time was between $60-90K per month.

Here, here and here are some interesting declarations from December 2003. Take note of the entities associated with the company and with Kingston Global Group, the controlling shareholder of CCCI. They are mentioned in the explanation section of the filings: Best Fortune Capital and China Convergent Corp. They will surface again in Part 2 of this report.

Here is Yau Sing Tang in March 2004 selling 810K shares at $1.20 and pocketing $976K.

Here, here, here and here is Yau Sing Tang in 2004, receiving more shares as compensation for “services rendered”.

Here is Yau Sing Tang selling his shares in 2005 shortly before CCCI stopped reporting to the SEC.

The following prospectus should indicate that something might be wrong with the management and board of directors of the company. Look how few shares they all have by the end. This one of the last things the company filed before it simply stopped reporting to the SEC altogether and disappeared from the landscape of stocks.

All of the share sales were actually illegal sales of unregistered stock as no prospectus under which their registration would fall was ever declared effective by the SEC. The fact that this matter has not been pursued by the SEC does not diminish the illegality of the actions in question.

That is the story of CAGC CFO Yau Sing Tang’s involvement in CCCI, but surprisingly, not even 5 years prior it would appear that Mr. Tang engaged in similar activities in Hong Kong. This story will be examined in Part 2 of this article.

Disclosure: Author is short CAGC