Investor sues Nasdaq-listed Chinese steelmaker for investing in antique porcelain

China Gerui Advanced Materials Group Ltd, a Chinese specialty steelmaker, was sued by an investor for spending more than US$230 million (RM769 million) on antique porcelain and the share price decline that followed.

Chief Executive Officer Mingwang Lu announced the purchase of the collection, which he described as a rare set dating back to the Song Dynasty more than 1,000 years ago, as a good investment, saying it would “support our steel operations while the steel industry gains stronger fundamental balance.”

An investor who sued in the company in federal court in New York today didn’t see it that way. When the company disclosed September 4 that it spent US$234 million of unrestricted cash reserves to acquire a collection that it valued at US$905 million, China Gerui didn’t reveal who it bought the porcelain from or where it’s stored, whether it’s insured or even whether it’s been authenticated, according to the complaint filed by shareholder Aram Pehlivanian.

The purchase was “all the more shocking because, in the years and months leading up to the announcement, CHOP had consistently and unambiguously,” told investors “its goals for growth included an expansion and diversification of its product lines, identification of overseas markets, and business combinations with competitors,” according to the complaint, referring to the company’s Nasdaq ticker.

The announcement caused investors to lose confidence in the company and its share price to plunge after the purchase was disclosed, according to the suit.

Cash reserves

Before to the purchase, the company in March touted significant cash reserves, including US$230.7 million in unrestricted cash, US$18.6 million in certificates of deposit and US$75.5 million in restricted cash, Pehlivanian said. After the company announced the purchase of the porcelain collection, without details, China Gerui’s share price dropped from US$.61 per share on September 3, to US$.49, according to the complaint.

To prevent the company’s shares from being delisted on Nasdaq, the company’s directors on November 6 approved a one-for-ten reverse stock split to raise the share price above the US$1 per share listing requirement.

Lu and other company officers and directors are named as defendants in the complaint, which was filed as a proposed class-action on behalf of investors who bought shares from January 11, 2012, to September 4 of this year.

Vivian Chen, an outside spokeswoman for China Gerui with Grayling, didn’t immediately respond after regular business hours to e-mail and phone messages seeking comment on the lawsuit.

Shares closed at US$2.19 yesterday, down a penny.