Pomerantz LLP

9th Circuit Revives Suit Over ChinaCast CEO’s $120M Fraud

Pomerantz again made the law on October 23, when the Ninth Circuit revived our shareholder class action against ChinaCast Education Corp. over its CEO’s looting of $120 million from the company’s coffers, ruling the company might have to share the blame for the executive’s intentional misleading of investors. The Firm represents Lead Plaintiff Costa Brava Partnership III LP.

The appeals court reversed a lower court’s dismissal of the lawsuit, ruling that Ron Chan Tze Ngon’s fraud could be imputed to ChinaCast, even though the CEO’s alleged embezzlement and misleading of investors were adverse to the company’s interests.

“Taking the allegations in the complaint as true,” the Ninth Circuit decided, “the panel . . . concluded that the CEO’s fraudulent misrepresentations and, more specifically, his scienter or intent to defraud could be imputed to the company because the CEO acted with apparent authority on behalf of the company, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business. . . . Chan was hardly a random corporate bureaucrat or mid-level manager. He was ChinaCast’s founder and CEO, the one person on whom the board undoubtedly should have kept close tabs. Permitting imputation under these circumstances encourages appropriate corporate oversight.”

In November 2012, U.S. District Judge John F. Walter dismissed the suit against ChinaCast, ruling that Chan was the “only corporate agent who may supply the requisite scienter,” and was acting completely against the company’s interests.

Managing Partner Marc I. Gross stated that Pomerantz is “very pleased that the Ninth Circuit has made clear that corporations are accountable for defrauding investors, as they should be, even when the company's own coffers have been looted by its own officers. After all, the corporation hired the officers and should be held responsible for how their misconduct impacts innocent investors.”

ChinaCast, founded in 1999, is a for-profit postsecondary education and e-learning services provider that sells distance learning and “multimedia education content” over the Internet and from three campuses in China. Before its abrupt downfall, ChinaCast boasted a market capitalization topping $200 million and was listed on the NASDAQ Global Select Market.

Costa Brava Partnership III LP et al. v. ChinaCast Education Corporation et al., No. 12-57232, U.S. Court of Appeals for the Ninth Circuit.

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