Delisted Chemical Company Faces Class Action Suit

Lucas Gilmore, “Big 4″ observer
May 02, 2011 /

Following allegations of accounting and operational issues raised by KPMG, chemical company ShengdaTech, Inc. has received a letter from the Listing Qualifications Department of The NASDAQ Stock Market LLC delisting the Chinese firm.

Nasdaq found that ShengdaTech’s securities were no longer warranted based on several public disclosures.

Meanwhile, Holzer Holzer & Fistel, LLC has filed a class action suit in the United States District Court for the Southern District of New York against the chemical company on behalf of investors that purchased common stock of ShengdaTech between March 15, 2010 and March 15, 2011.

The complaint alleged that ShengdaTech made materially false and misleading statements with regards to its business, prospects, and operations.

Holzer Holzer & Fistel particularly charged ShengdaTech of violating the federal securities laws by failing to inform the public that its internal controls contained material deficiencies. In 2010, the chemical company’s financial statements did not comply with the US GAAP, the plaintiff added.

Citing the basis for delisting the chemical company, Nasdaq pointed out that ShengdaTech had issues with its accounting and operational practices as revealed by its independent registered public accounting firm, KPMG.

Following KPMG’s investigation into the alleged discrepancies connected to ShengdaTech’s financial reports, including that of its subsidiaries, the chemical company formed a special committee consisting of the members of its board and three independent directors who were then authorized to probe the issues in question.

Nasdaq added that ShengdaTech has been obstructing investigations into these matters by at least refusing to present all the necessary information.

ShengdaTech allegedly violated the rules set forth for the functioning of the Audit Committee. The chemical company also failed to timely file with the Securities and Exchange Commission its annual report on Form 10-K for the period ended December 10, 2010, which is required by the listing rule of Nasdaq.

Its inability to file the annual report on Form 10-K with the SEC came after the pendency of the investigation which was to be carried out by O’Melveny and Meyers of the special committee that in turn brought in PricewaterhouseCoopers LLP to conduct a forensic audit.

Based on reports prepared by the special committee, ShengdaTech’s board of directors passed a resolution on March 26, 2011 to implement cash control and validation plan. The resolution required the transfer of control of all cash assets of the company to another account solely accessible to the chairman of the audit committee.

The resolution would cover the assessment of ShengdaTech’s relationships with its vendors, customers, banks, and other related parties.

However, the cash control and validation plan were not enforced despite the letters sent by the special committee to the management on April 7 (request to comply) and April 22, 2011 (demand to comply), respectively.

Subsequently, KPMG sent a letter to the company’s board of directors on April 19, suggesting that ShengdaTech failed to take prompt remedial actions regarding the discrepancies it identified with the company’s financial records.

The company’s failure to take immediate actions was expected by KPMG to warrant for its resignation as ShengdaTech’s auditor.

The SEC received a notification from the company on April 20 confirming that it had received KPMG’s letter.

The chemical company manufactures and sells nano-precipitated calcium carbonate (“NPCC”) products.

The delisting action of Nasdaq may take effect only after a hearing slated on May 26, 2011 following ShengdaTech’s request for a reconsideration of the matter with the Hearings Department of Nasdaq.

 

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