China Medical: Liquidators Request SEC To Suspend Shares

About: China Medical Technologies, Inc. ADR (CMEDQ)
by: Shiner Young

China Medical Technologies (CMEDY.OB) has been forced into involuntary bankruptcy. China Medical went dark following its failure to pay the Dec. 15, 2011 coupon on some of its convertible notes. The company failed to make any statement whatsoever to justify the default on its debt, and since then management has ceased communication with investors and creditors. In addition, China Medical's auditor, PWC, resigned April 23, 2012. For all intents and purposes, China Medical has completely ceased to be as a company.

Creditors, logically, have sought to reclaim whatever they can get from the unfortunate situation by forcing China Medical into bankruptcy.

It turns out that all the "mosaic theories" and speculative rumors bandied about regarding an imminent buyout, and/or favorable debt restructuring, were baseless and entirely mistaken. There was never a white knight coming in to rescue China Medical's shareholders. It seems to me that the run-up in China Medical's shares was due to the misguided enthusiasm of certain seeking alpha writers, as well as AER Advisors and the Deutsch family. Once the hype ended, the fall came quickly. After improbably peaking at $12 a share, China Medical's shares have quickly fallen toward their true value - zero - since the SEC intervened and temporarily halted trading in June.

The game of musical chairs is almost over, and equity holders may have only days to bail out of their investment and recover what they can now before they end up with nothing at all. This is because China Medical's creditors have succeeded in their petition at the Cayman Islands' court to wind up China Medical and liquidate it entirely. China Medical's Chinese assets, if they can be recovered at all, amount to far less than what the company owed to creditors, assuring us that there will be absolutely no remaining value whatsoever for equity holders. China Medical's shares retain no claim to any assets at all.

Unlike many bankruptcy cases, where seemingly worthless equity holds a little value as it trades listlessly along on the pink sheets for awhile before finally being delisted, China Medical's equity is likely to lose all value in the very near future. This is because the creditors have taken control of the company, and have filed a form with the SEC indicating that they will be winding down the company shortly. As of July 27th, Cosimo Borrelli and Kenneth M. Krys were appointed as the Joint Official Liquidators of China Medical. The liquidators have complete power over China Medical now.

And in the liquidators' SEC filing, they make the following statement that should send shivers down the spine of every China Medical shareholder:

"[A]ny transfer of [China Medical] shares after the filing of the petition on 15 June 2012 is void unless the Cayman Court otherwise orders. The Liquidators have requested the United States Securities and Exchange Commission to suspend the trading in the Registrant's shares immediately."

So, it is possible that any trades made in CMED stock after June 15 will be busted. It may already be too late to sell remaining China Medical shares before they are suspended for good and end up worthless. However, if current shareholders are fortunate, trades already made prior to the upcoming suspension will be allowed to stand. To have any hope of getting some value for their shares, it is imperative that shareholders of China Medical sell before the SEC halts China Medical trading for good. There is every reason to believe that China Medical will never reopen again at any price after it is re-halted, as its equity will likely simply be canceled outright as part of the liquidation process.

Disclosure: I am short CMEDY.PK.