Deloitte Touche Tohmatsu CPA (DTTC) on Monday defeated claims that it defrauded ChinaCast Education Corporation investors by failing to detect alleged fraud at the Shanghai-based company.
In a 63-page ruling, U.S. District Judge Edgardo Ramos in Manhattan dismissed a securities fraud case brought against DTTC by a coalition of U.S. hedge funds that bought a combined 20 million shares of ChinaCast common stock. The judge ruled that the plaintiffs couldn’t back up their claims that DTTC missed red flags that former ChinaCast CEO Ron Chan raided the company of its assets.
The ruling is a loss for Lawrence Rolnick of Lowenstein Sandler, who represented the investor group. DTTC is represented by attorneys at Sidley Austin including David Gordon, Michael Warden and Gary Bendinger, while DTTC’s U.S. partnership Deloitte & Touche is represented by William Maguire and Savvas Foukas of Hughes Hubbard & Reed. Neither Rolnick nor Gordon immediately returned calls seeking comment. The judge gave the plaintiffs 20 days to submit an amended complaint.
Chan cofounded ChinaCast in 1999 and helped build it into a major for-profit education company in the Chinese market. It gained a Nasdaq listing in 2006 by acquiring an already-listed U.S. company, a process known as a reverse merger, which can help companies bypass the scrutiny of an initial public offering.
Chan rebuffed document requests from DTTC in 2011, leading to an investigation into his leadership by ChinaCast’s officers and directors. Following a contentious proxy battle, the board kicked Chan and his allies out of the company in March 2012. The board also alerted the U.S. Securities and Exchange Commission that it has uncovered “questionable activities and transactions which raise the specter of possible illegal conduct.” The disclosures prompted a massive sell-off of ChinaCast’s stock.
Fir Tree, Ashford and other investors brought suit against Deloitte in February 2013, alleging tens of millions of dollars in damages. They claimed that they bought ChinaCast stock because it had DTTC’s seal of approval, then learned that DTTC performed “no audit at all.”
Ramos took a very different view of the evidence. “Rather than recklessness, the more compelling inference is that Ron Chan deceived DTTC, or that DTTC was merely negligent,” Ramos wrote. “Plaintiffs’ own allegations indicate that for years, Chan and his cohorts effectively concealed their dealings from the ChinaCast board; the fraud was a tightly held secret.”
The ChinaCast case isn’t the first time Deloitte has faced down claims over Chinese company audits. Last year the company beat back an investor class action related to Longtop Financial Technologies also ended a standoff with the SEC over its refusal to hand over Longtop audit records.
On June 19, U.S. District Judge Katherine Forrest in Manhattan dismissed a similar investor lawsuit against the auditing firm Moore Stephens over its audit of Puda Coal Inc., a Chinese company that defrauded U.S. investors.