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The situation surrounding China Medical Technologies (CMEDY.OB) continues to get more curious daily.

On July 13, in California Superior Court, three holders of the defaulted convertible notes filed suit against the chairman of China Medical, Wu Xiaodong, for allegedly engineering the transfer of most of the company’s operating assets to a pair of companies he privately controls.

The trio of hedge funds, WhiteBox Advisors LLC, GLG Partners LP and Visium Asset Management LP, holders of the 4% and 6.25% convertible notes, are seeking a jury trial and damages based on their ultimate losses. While all three funds have large asset bases, the losses appear material: Whitebox owns about $29.8 million of the two classes of notes, GLG has $26.8 million and Visium over $51 million.

If their argument is correct – that Wu transferred the majority of China Medical’s operating assets to himself – then their effective recovery is likely to be zero. For their part, a lawyer for the hedge funds told FI.com that their asset transfer claim was based on documents uncovered in China, but which are to be revealed in full at a later date.

The thrust of the hedge fund’s claims is that on February 9, Wu transferred 60% of the equity and personnel of China Medical’s operating subsidiaries, Beijing GP Medical Technologies Co. Ltd, Beijing Bio-Ekon Biotechnology co. Ltd., and Beijing Yuande Bio-Medical engineering Co. Ltd., to a pair of companies he owns.

According to the claim, the asset transfer was done at a minimal cost, with Wu paying only 5% of the (unspecified) amount China Medical paid to acquire the assets several years prior.

Given that there is substantive doubts China Medical Technology is even operational – one investigator told FI.com that its headquarters has been abandoned “for months” – personally suing Wu, who allegedly owns property in Orange County, California, is the most logical choice for a suit. There are few levers available, however, to either the U.S. government or the hedge funds’ attorney’s at Stroock & Stroock & Lavan to compel a response from Wu, a Chinese citizen.

After a 10-day SEC imposed trading halt, the shares reopened on Monday and promptly collapsed to $3 at Tuesday’s close from $10.78 two weeks prior. They have rallied to $3.48 today in light trading on the OTC Bulletin Board.

The most curious aspect of the China Medical saga, the massive amount of capital spent by the Deutsch family through their investment advisors at AER Advisors on shares of a company that has been de-listed from an exchange for failure to comply with its listing standards, and whose auditors have resigned, appears no closer to resolution.

FI.com attempts to get comment from AER’s Carol O’Leary or Peter Deutsch were unsuccessful; O’Leary asked that FI.com desist from contacting her. However, FI.com has obtained several email threads between China Medical investors and researchers and the president of Carol O’Leary. She is steadfast in refusing to acknowledge that PriceWaterhouseCoopers has resigned, or that allegations of fraud have any merit, insisting that short-sellers such as Kerrisdale Capital Management’s Sahm Adrangi are involved in a manipulation scheme to discredit the company.

Disclosure: I do not have any sort of investments in the securities of any company I write about, nor for that matter, in anything at all (save for my house).