There is precedence:
Brief Introduction
Plaintiff: Andrew Chien
Defendants: Skystar Bio Pharmaceutical Company (Skystar), Scott Cramer ("Mr. Cramer", "Cramer"), Stave Lowe ("Mr. Lowe", "Lowe"), and David Wassung ("Mr. Wassung", "Wassung"), Weibing Lu ("Mr. Lu", "Lu")
Time of filings: December 29, 2008
Court: Filed in Superior Court Of Connecticut; then transferred to
United States District Court, Connecticut
Case number: 3:09CV00149
Reference Cases:
(1) 08-3960-CV (filed in August 2008)
United States Court of Appeal Second Circuit
(2) 3:07-cv-781 (filed in May 2007)
United States District Court, Connecticut
I. Brief of the Story
1. CGPN was a computer relative technology developing company. The Company ceased operation in 2002. In 10KSB for the period ended December 31, 2002, it reported revenue zero, inventory zero, and to stop operation including having sold all computers and office equipment, and cancelled the rental of office, and its only assets were $800 cash and some debt. Then there were no any business activities until to engage in a reverse merger with Skystar from September to November 2005.
2. Cramer as CEO and CFO fabricated the story of CGPN " concentrated in research and development activities ... and " We are currently marketing PPIRT to government agencies, corporations and OEM's" in the CGPN's periodical reports ranging from January 1, 2003 to September 30, 2005. Under the fabricated story, Cramer hired Lowe on January 27th, 2003 to engage "Investor Relations and Marketing and Sales", andhired Wassung on October 1, 2004. The employee status ofCramer, Lowe and Wassung were all fabricated due to IRS definition of Employees, because they didn't submit, directly or indirectly, regular services to CGPN.
3. Cramer, Lowe and Wassung fabricated unpaid compensation about $0.9 million until the reverse merger with Skystar.
4. Since none of Cramer, Lowe and Wassung was the founder of CGPN, they together only owned a small portion of the shares before November 2005. On September 20 2005, when the merger agreement announced, Cramer, Lowe and Wassung together only owned 23% of outstanding shares on equity for partial payment of the fabricated compensation, taken place on Decembers 31, 2004.
5. To do reverse merger with Skystar should have majority of CGPN shareholder to approve due to Regulation M-A [17 CFR§229.1014(c)]. A proxy process is required. But they didn't.
6. The action of that Cramer, Lowe and Wassung wanted to own 72% of CGPN by claimed unpaid compensation (fabricated) is defined as Rule 13e-3 -- Going Private Transactions by Certain Issuers or Their Affiliates, and regulated by Regulation M-A [17 CFR §§229.1000 - 229.1016].
There are two essential things to be done:
An appraisal report of going private transactions fairness from outside [§ 229.1015]; and
A majority vote approval from nonaffiliated shareholders [§229.1014(c)]: shareholders not including Cramer, Lowe and Wassung. Another proxy process is required.
7. After the merger, CGPN took a reverse merger in February 2006, the reverse merger ratio increased to 397 for 1 from 140 for 1 due to issuance of about 323 millions to Cramer, Lowe and Wassung.
II. CGPN Communicated with Investors in the Merger Process by News Releases and SEC Filings without Proxies
8. The Merger Agreement signed on September 20, 2005, but filed 8K with SEC on September 26, 2005. However, on September 21, 2005, five days ago before the SEC filing, CGPN made a News Release, which caused Mr. Chien to begin purchasing the stock of CGPN. Following is the full text of the news release:
"Wednesday, September 21, 2005 08:48 ET
Sep 21, 2005 (M2 EQUITYBITES via COMTEX) --Cyber Group Network Corporation (CGPN) (OTCBB: CGPN.OB), a publicly traded Nevada corporation, announced on Tuesday (20 September) that it has entered into a definitive agreement to acquire Skystar Bio-Pharmaceutical Company Co Ltd, a biopharmaceutical company based in the Cayman Islands.
The acquisition will see preferred shares of CGPN issued to Skystar and these shall be convertible, in the aggregate, into a number of shares of CGPN common stock(emphases added). This would equal 89.5% of total outstanding shares of CGPN's common stock, if the shares were to be fully converted at the time of completion.
Weibing Lu, Chairman and CEO of Xian Tianxing and Skystar, will be the Chairman and CEO of CGPN upon closing of the acquisition."
This news release clearly told investors that the share dilution would happen only for issuance of new shares to primary Skystar shareholders, not to Cramer, Lowe and Wassung.
9. On September 26, 2005 CGPN filed 8K with the Share Exchange Agreement. In the 8K, Cramer, Lowe and Wassung claimed that they represented "a majority of the issued and outstanding capital stock of CGPN", to "have approved" and "executed" the Share Exchange Agreement (emphases added).
10. There was no any disclosure of issuance of 323 million shares to Cramer Lowe, and Wassung in the 8K dated September 26, 2005.
11. After the 8K filed on September 26, 2005, there was no proxy created, and no proxy-card distributed to every shareholder at all, which violated Rules 14a-12(b) (17 CFR 240.14a-12) or Rule 14d-2(b) (17 CFR 240.14d-2(b)) under the Exchange Act.
12. On November 11, 2005 Skystar had another 8K filing, disclosed that Cramer, Lowe and Wassung got additional about 323 million shares to become a majority ownership of 72%, and the merger completed. There was no proxy created for approval of the issuance of huge quantity of shares, and no proxy-card distributed to every shareholder at all, as required by the Exchange Act.
13. Even before 8K filing of November 11, 2005, there was another news release, dated November 8, 2005, to announce the merger completion. Following is the full text (from quotemedia.com):
Acquisition of Skystar by Cyber Group Network is Consummated
XI'AN, China, Nov. 8 /Xinhua-PRNewswire-FirstCall/ -- Cyber Group Network Corporation, a publicly traded Nevada corporation (OTC Bulletin Board: CGPN; 'CGPN') has successfully closed on the definitive agreement to acquire Skystar Bio-Pharmaceutical Company Co., Ltd., a Cayman Islands Company ('Skystar').
The Board of Directors, effective upon Mr. Cramer's resignation as Chief Executive Officer and Chief Financial Officer on the same day, appointed Weibing Lu as Chief Executive Officer and a Director, and Erna Gao as Chief Financial Officer and a Director. The Board of Directors also appointed Wei Wen and Xinya Zhang as new Directors on the Board.
14. There was no disclosure of the material information of the issuance of about 323 million shares to Cramer, Lowe and Wassung in the News release.
15. After the merger, all primary CGPN shareholders total would own 1,260,651 shares of Skystar (10.5% of New company's total shares). Then if before merger, total shares of original CGPN shareholders were 177,188,665 shares, Mr. Chien would get 44,384 new shares with reverse split ratio of 140 to 1 (in his internet post, he predicted and expected the ratio would be 135 to 1). Finally the reverse split ratio increased to 397 to 1 because the total shares of original CGPN were counted as
500,000,000 shares, Mr. Chien only got 15,726 shares, and missed 28,658 shares that are 65% of what he deserved, and expected.
16. On January 23, 2006, Skystar filed DEC 14C and announced the 397 for 1 reverse split, and mailed copies of DEC 14C to every shareholder as required by SEC.
Therefore in whole process, the fully service of CGPN to retail shareholders is only one to inform them the stock reverse split ratio of 397 for 1, that is 397 shares of CGPN to exchange for a share of Skystar, and then to commence the trade after the reverse split on February 16, 2006.
III. False Accounting for Stock-Based Compensation
17. One of the critical issues here is "False Accounting for Stock-Based Compensation", due to SFAS (Statement of Financial Accounting Standards) No.123, "Accounting for Stock-Based Compensation," it encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation costs are determined using the fair value of stock-based compensation determined as of the date of grant.
Here, we have two issues:
(a) From January 2003 or early to November 2005, there were no, or very little services from Cramer, Lowe and Wassung to CGPN. However, they charged the Company with salaries for full service. Therefore the General and Administrative Expenses were overstated in every quarter and year's financial statements ranged from January 2003 or early, to the end of September 2005;
(b) On November 7, 2005, when Cramer, Lowe and Wassung got about 323 millions of shares, the market value of them were worth of $4.1 million, which were appropriated in the excuse of paying fabricated compensation $0.9 million. According the GAAP (General Accepted Accounting Principles), the unjustified rich payment of the $3.2 millions should charge against the earnings of 2005, while the $4.1 millions should be recorded as paid-in capital in 2005. However, the financial statements for the fiscal year ended 2005 missed the two items. If Skystar missed to record paid-in capital $4.1 millions and earning charge $3.2 millions in the financial statement of fiscal year 2005, they recorded and will record the wrong numbers of two items: Paid-in-capital and Retained earnings in both Balance Sheet and Shareholders' Equity Statement in every quarter and every year of 2006, 2007, 2008 and 2009 so on.
Therefore Mr. Chien alleged Skystar having false accounting and wrong book keeping from January 2003 or early, till today.
18. Defendant Skystar had conflicted grant date statement.
In the 10k filed on April 17, 2006, Skystar stated the grant date of issuance of about 323 million shares to Cramer, Lowe, and Wassung was on September 1, 2005, to replace the statement made in 11/14/05 8K that these shares issued on November 7, 2005. They backdated the stock issuance for 67 days in order to get a lower price grant day.
19. However, in the financial statement of 10QSB for the three-month period ended September 30, 2005, CGPN only reported about 177 million of shares issued and outstanding, no new shares issued, which indicated that backdating report fabricated.
As a public list company, only transfer agency's book of the shareholder list is a legal record. Whenever the public Company issued new shares, the transfer agency needs a filled form plus legal opinion, which Defendants never showed existed in the issuance of new shares dated September 1 or September 20.
Obviously, Skystar has inaccurate book and records in the outstanding shares.
20. Defendants considered the issuance of about 323 million shares didn't hurt the CGPN's primary investors because that when 8K filed on November 11, 2005, the stock price was not immediately dropped significantly. This is not true.
21. As above-mentioned Paragraphs 8-15, CGPN communicated with investors by News Release and SEC filings. When to issue about 323 million of shares, CGPN failed to follow the Exchange Act requirement to create and send copies of the proxy to shareholders for approval. In its associated released news, titled as "Acquisition of Skystar by Cyber Group Network is Consummated" of Paragraph 13, there was no description of about 323 millions of shares being issued at all, and the shareholders hadn't been well informed.
22. CGPN was, and is thinly traded stock. Most of the investors were small investors. The scam of to issue about 323 million to insiders was hidden until November 11, 2005 in the 8K filing of the website of SEC, and the description of the issuance of new shares was with few lines hidden within more than 100 pages; only experiences investors would access the document, and be aware the potential consequence of the dilution. Most small investors read the company's news release only.
8K of November 11, 2005 didn't straightly state that the reverse split ratio would greatly increase, and then it would create liquidity problem in trading as fewer shares available for trading.
23. After about 323 millions of the new shares issued, the reverse split ratio greatly increased from 140 to 397.
24. On January 23, 2006, Skystar filed DEC 14C and announced the 397 for 1 reverse split, and mailed copies of DEC 14C to every shareholder as required by SEC. We can say that only in the end of January 2006, all shareholders were fully informed about the reverse split and became aware of the dilution and no liquidity (in trading) consequences of issuing about 323 million of shares to insiders in November 2005.
25. In the end of January and beginning of February 2006, the stock price of CGPN dropped sharply with big volume because investors received the DEF 14C, and didn't like the huge reverse split ratio.
IV. False Pretense of Majority in 8K of September 26, 2005
26. "False Ownership Statement before Merger " in the 8K filed on September 2, 2005:
Cramer, Lowe, and Wassung only owned 23% of total issued stock of CGPN on September 20, 2005. However, they claimed, in SEC 8K filing dated on September 20, 2005, that they represented "a majority of the issued and outstanding capital stock of CGPN", to "have approved" and "executed" the Share Exchange Agreement (emphases added).
27. Since this issue argued with Defendants for many times, we use another method, and take a relax and read a children's fairy tale named:
"Witch-King"
Many years ago, a young King of a remote island Kingdom was playing alone on the shore of a sea. A Witch, who wanted to become the King, approached the King, and tempted and cheated the King to exchange the clothes for each other. After the Witch got the clothes of the King, he put on his body and hurried to the Palace and pretended himself as a King. Then the Witch ordered the soldiers going to the seashore to kill the young King. The soldiers performed the order because they couldn't recognize the King under the Witch's clothes. Finally the Witch became the King of the remote island.
In this tale, the Witch became King by following three steps:
(a) Witch pretended him as a King by put on the King's clothes;
(b) Witch executed King's power: by ordering soldiers to kill the real young King;
(c) Witch occupied the Palace to become a King.
In order to compare the procedure of the two stories, we assumed Majority ownership as a King, and minority ownership as a Witch. Then we will find the similarities:
(a) On September 20, 2005, minority ownership (Witch) pretended that they represented "a majority of the issued and outstanding capital stock of CGPN" (King's clothes);
(b) Minority (Witch) executed the authorization which belongs to Majority (King): to "have approved" and "executed" the Share Exchange Agreement.
It told all other shareholders "Don't ask anything although we withheld material information from public. We already took all vote rights, and all of your vote rights vanished".
(c) Minority (Witch) issued huge quantity shares to themselves, then becoming Majority (King).
Now, the question is "whether or not the procedure of Minority (Witch) becoming Majority (King) legal?" The answer of Defendants is "yes", because they considered nothing wrong in the 8K of September 26, 2005.
V. Alleges
First claim: Breach of Fiduciary Duty
28. Plaintiff realleges and incorporates the entire prior paragraphs as if fully set forth herein.
29. Defendants had, and have fiduciary duties of loyalty, good faith and due care to every individual shareholder's interests. They can't be abuse of their control of the Company's management. However, Cramer, Lowe and Wassung by fabricated employment status and unpaid compensation, wrongly appropriated the interests of other individual shareholders including Mr. Chien in the reverse merger with Skystar. And Mr. Lu, in November 11, 2005's 8K by including the item of the issuance about 323 million shares, of CGPN in his signature rather than approval of non-affiliated shareholders of CGPN, abused his power and discriminated the interests of CGPN's every individual shareholder including Mr. Chien other than Cramer, Lowe and Wassung.
30. By engaging in the conduct described above, Defendants breached their fiduciary duties of loyalty, good faith and due care to Mr. Chien.
Second Claim: Violating Connecticut Unfair Trade Practices Act
31. Plaintiff realleges and incorporates the entire prior paragraphs as if fully set forth herein.
32. Security is the investment contract, as defined in Connecticut Uniform Securities Act chapter 672a (17). When CGPN was solvent on November 7, 2005, Defendants should have the obligation to honor shareholders the Liquidation Rights as described in the company's early registration statement of 1999, and to make the reverse spilt on the ratio of 140 for 1, and to distribute the 10.5% of the new company's shares (total: 1,260,651 shares) to every existing shareholder on pro rata to their holding shares, aggregating about 177 million shares. However, Cramer, Lowe, Wassung and Lu together made the unauthorized issuance of new about 323 million shares, and increased the reverse spilt ratio to 397 for 1, and violated the investment contract. Further they added more deceptive actions, including not limited to false accounting, and back-dating scam, to miss report paid-in capital $4.1 million and unjustified rich payment of $4.1 million to Cramer, Lowe, and Wassung in the financial statements for the fiscal year ended 2005, 2006, and 2007, and for every quarter from first quarter of 2006 to the third quarter of 2008, and to miss report 17 CFR 229.403 (c) Change to control, and 17 CFR 229.404 Certain relationships and related transactions, in the 10KSB for fiscal year 2006, and filed on May 18, 2007. However, Mr. Lu certified all the above financial statements as "accurate", with audit reports. So far, there are no official organization to confirm the Plaintiff's allegations. Therefore these deceptive actions, including invest contract violation, are still in the discovery stage.
These behaviors were immoral, unethical, unscrupulous, and caused substantial injury to Plaintiff. They lost the duty of good faith and substantive fairness in business activity.
33. By engaging in the conduct described above, Defendants violated Connecticut Unfair Trade Practices Act, known as "CUTPA," "Sec. 42-110b Unfair Trade Practices Prohibited," and "Sec. 42a-1-203 Obligation of good faith."
Third Claim: Violating Connecticut Uniform Fraudulent Transfer Act(UFTA)
34. Plaintiff realleges and incorporates the entire prior paragraphs as if fully set forth herein.
35. Defendants, on November 7, 2005, made a fraud transfer by shifting 65% of the new company's 1,260,651 shares to Cramer, Lowe and Wassung, from primary CGPN's existing shareholders by engaged in fabricated employment status, fabricated unpaid compensations, false accounting, depriving of shareholder voting rights, false shareholder Records, Back-dating Scam, and false some SEC annual and quarterly financial reports and 8K filings, violated the Connecticut Uniform Fraudulent Transfer Act Sec § 52-552a to 52-552l.
The deprive of shareholder voting rights violated Connecticut Article 8— Investment Securities "Sec. 42a-8-207. Rights and duties of issuer with respect to registered owners."
Forth Claim: Engaged in "Larceny"
36. Plaintiff realleges and incorporates the entire prior paragraphs as if fully set forth herein.
37. Defendants engaged in “Larceny”, as defined in Connecticut General Status § 53a-119, including:
"(1) Embezzlement. A person commits embezzlement when he wrongfully appropriates to himself or to another property of another in his care or custody."
Herein, Defendants Cramer, Lowe, and Wassung wrongfully appropriated the new shares after the merger, from CGPN's other individuals, including Chien.
"(2) Obtaining property by false pretenses."
Defendants had many false pretenses, including
(a) False Statement of 09/01/05 Granted Majority Ownership:
Skystar made a false ownership statement in the 10k filed on April 17, 2006, when it stated the grant date of issuance of the huge quantity of shares to Cramer, Lowe, and Wassung was on September 1, 2005. There are no any disclosures of SEC filings in Form 10QSB for the period ended September 30, 2005, and Form 8K, Form 4 or 5, no documents of the approval of majority of nonaffiliated shareholders, and no records of Transfer Agency to verify that Cramer, Lowe and Wassung were granted to get a control position in CGPN on September 1, 2005.
(b) False Statement of 09/20/05 Majority Representatives:
Cramer, Lowe and Wassung made a false statement in 09/26/05 8K filing: they "represents at least a majority of the issued and outstanding capital stock of CGPN" on September 20, 2005. There are no legal documents, such Form 10QSB for the period ended September 30, 2005, and Form 8K, Form 4 or 5, documents of the approval (or trust) of majority of nonaffiliated shareholders, and no records of Transfer Agency to verify that Cramer, Lowe and Wassungto represents at least a majority of the issued and outstanding capital stock of CGPN on September 20, 2005.
(c) False Statement of 09/20/05 CGPN Shareholder Approval & Execution:
Cramer, Lowe and Wassung made a false statement in 09/26/05 8K filing: on September 20, 2005,"the CGPN Shareholders have approved the Exchange Agreement and the transactions contemplated thereunder ...", therefore "no other actions on the part of CGPN are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by CGPN and the CGPN Stockholders and constitutes a valid and binding obligation of CGPN and each CGPN Stockholder...." There is no proxy statement or other legal documents such as other SEC filings or record of Transfer Agency to verify that the CGPN Shareholders had approved and executed the Exchange Agreement on September 20, 2005.
(d) False statements of the business activities and job description for claiming fabricated compensations:
(i) From SEC filings of the CGPN's periodical reports ranging from January 1, 2003 to September 30, 2005, in the section of "Item 2. Management Discuss and Analysis or Plan of Operation", it repeatedly wrote:
" ...Because substantially all of its efforts have been concentrated in research and development activities (emphasis added)".
(ii) In 10KSB for the period ended December 31, 2003, CGPN reported:
"We are currently marketing PPIRT to government agencies, corporations and OEM's," and "In late 2001, we removed our PPIRT product off of retail stores shelves and we expect to be releasing new versions in the second or third quarter of 2004 (emphasis added)."
(iii) In 10KSB for the period ended December 31, 2004, CGPN reported:
"We are currently marketing (emphasis added) PPIRT to government agencies, corporations and OEM's."
(iv)On 02/10/2003, CGPN reported, "This Form 8-K is being filed to announce the appointment of Steve Lowe to the Board of Directors. Mr. Lowe's appointment is effective as of January 27th, 2003. Mr. Lowe ... will focus his energies in the areas of Investor Relations and Marketing and Sales (emphasis added)."
(v) David Wassung was appointed to the Board on October 1, 2004 as disclosed in the annual financial statement of 2004.
Defendants made these false pretenses for the purpose to wrongly appropriate more new shares of Skystar from other CGPN's individual investors including Mr. Chien by following scam:
32,542000 shares of Common stock with a fair value of $192,900 as reported on 10KSB/A of May 20, 2005 for fiscal year ended December 31, 2004, and
About the 323 million shares with market value about $4.1 million on November 7, 2005 without any authorization.
Fifth Claim: Engaged in "Conspiracy"
38. Plaintiff realleges and incorporates the entire prior paragraphs as if fully set forth herein.
39. This is a conspiracy because:
(a) This action performed by three people: Cramer, Lowe and Wassung, and assisted by Mr. Lu.
(b) To move 323 million shares to their own account without pre-disclosure and without authorization was an illegal action, which was done under the legal excuse of to payoff the fabricated unpaid compensation for reverse merger purpose.
(c) Performed under the false pretense that Majority company's capital approved the merger in 8K filing of September 26, 2005.
(d) Most of the unpaid compensation caused by the non existing new product development and marketing expenses fabricated by the Cramer, Lowe and Wassung for several years.
(e) These acts were done under false accounting method in the issuance huge quantity of deep discounted equity for fabricated unpaid compensation, which greatly reduced Plaintiff holding percentage of the common stock, as well as eventually reduced the common stock value greatly. Plaintiff suffered huge economy damage.
Note:
(1) The lawsuit classified as "group shareholder lawsuit" to represent a group's interests. We are not taking the derivative lawsuit because the award of derivative lawsuit is returned to the Company. However, in this case, only the economy benefits of the primary CGPN's shareholders were hurt. Therefore after the derivative lawsuit, there needs another lawsuit to get the award back to the primary CGPN's shareholders, not an efficient way for business.
(2) This lawsuit represents the benefits of primary CGPN's shareholders who had the registered shares of CGPN on November 7, 2005. Since there are three business days for settlement, you must purchase CGPN on November 2, 2005 or early to qualify to file the lawsuit. This lawsuit is to sue the "civil theft". If plaintiff can fully get the compensation, then under every 100 shares you owned, you should get 144 shares back at price $0.013 per share or after 397 for 1 reverse split, $5.16 per share regardless of your costs.
(3) Defendants opposed the lawsuit because it already met the time-barred. Plaintiff disagreed because the fraud not being discovered yet. But anyway time-bared is an important condition the shareholders must consider. If you want to join the lawsuit, contact Mr. Chien immediately. E-mail addresses:
uschien@uschinachannel.net
jcs23@yahoo.com
Disclaimer: Following Information comes from USChina Channel LLC, a private company owned by Andrew Chien, and all responsibility belongs to USChina Channel LLC.
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