Kerrisdale issues report on ChinaCast Education Corp.

Kerrisdale Capital Management says in a new report that it has found evidence that the main operating subsidiary of ChinaCast Education Corp. — a company regarded as “the one shining beacon within a sea of scams,” according the report — is overstating revenue and profit.

Kerrisdale says the company is reporting significantly more revenue to the Securities and Exchange Commssion than it is to the Chinese government. Kerrisdale said that it also uncovered evidence indicating that ChinaCast has been diverting company assets through acquisitions. In one case, says the report — which is based on public documents from the Shanghai Stock Exchange — the company reported buying other companies for more than what the seller actually received. The difference, says Kerrisdale, was pocketed by a middleman company that acted as a conduit for the acquisition. In another case, the sale price was simply overstated.

Medical company sues investor Vicis over billing scheme

Medical Solutions Management Inc. has sued Vicis Capital LLC claiming the hedge fund forced it into a medical billing scheme that attracted the attention of the FBI and resulted in two indictments and two guilty pleas.

Medical Solutions Management (Pink Sheets; MSMT.PK) alleged in the suit that its unwitting participation in the scheme destroyed the value of the company. It also claimed that several million dollars generated by medical receivables it purchased were diverted from another Vicis-controlled company MDWerks Inc. (Pink Sheets: MDWK.PK).

According to the lawsuit, Vicis — the subject of an earlier Sharesleuth investigation — steadily gained control of Medical Solutions Management (Pink Sheets: MSMT.PK) after it invested money to help the medical equipment company go public through a reverse merger. Medical Solutions Management said Vicis brought in Lowell Fisher, another defendant in the suit, as chief executive. The hedge fund also placed one of its founding partners, Shadron Stastney, on the board

Then, Medical Solutions Management said in court documents, Vicis arranged for the company to buy more than $12 million in receivables at a steep discount from a California company called Deutsche Medical Services. Those receivables were connected to insurance claims for medicine-laden skin creams supposedly given to workers compensation patients in that state. According to the suit, Medical Solutions Management had no time for due diligence on the receivables, and had trouble collecting them.

“Dissatisfied with the collection rate by MSMI, Vicis Capital ordered that collection responsibilities be transferred to another Vicis Fund-controlled company, defendant MDWerks,” the company says in its complaint. But MDWerks had trouble collecting, too, and Vicis then turned to a third company that specialized in medical billing, Global Healthcare Recovery.

But, according to court documents in the criminal case against Vicis’ managing director, Christopher D. Phillips, the president of the Global Healthcare Recovery told the then-chief executive of MDWerks, Howard Katz, that there were problems with the Deutsche Medical receivables and that many of the claims were probably fraudulent. Among other things, they listed incorrect dates of service, billed for charges on services that had never been provided and even claimed an expense for skin cream purportedly dispensed to a dead person. At some point, Boudreau contacted the FBI, which eventually led to Katz and Phillips being indicted for scheming to doctor the bad receivables so they could still be collected. Both men pleaded guilty.

(read Sharesleuth’s earlier story on Phillip’s and Katz’s guilty pleas)

Medical Solutions Management also named Phillips, Katz and MDWerks as defendants. It alleged in its suit that Katz diverted some of the money that MDWerks collected from the receivables to an offshore bank account.

In its complaint, Medical Solutions Management says that when Phillips found out about the FBI’s investigation in 2009, he sent a letter to Fisher, Medical Solutions Managment’s Vicis-installed CEO, that said:

it has come to our attention that the Federal Bureau of Investigation is currently investigating whether certain workers compensation claims being made and/or processed by MDWerks, Inc. and Medical Solutions Management, Inc. are fraudulent. It is our understanding that these claims may have been acquired from, or are somehow related to, Deutsche Medical Services, Inc. An investigation by the FBI is a very serious matter and we hope that Medical Solutions Management treats it as such. As a director and representatives of a large shareholder of Medical Solutions Management, Inc., we strongly urge you to conduct an internal investigation into this matter and to seek the advice of counsel as to what steps Medical Solutions Management should take so that the company and its directors and employees do not engage in any wrong-doing.

Fisher resigned a week later, along with Stastney, the Vicis founding partner on Medical Solutions Management’s board. In announcing Fisher’s resignation, Medical Solutions disclosed the investigation. The company says after the disclosures and the departures of its top executives, its stock plunged 70 percent to $.01 a share, and has never recovered.

Vicis, which once managed $5 billion, later announced it was dissolving.

SEC moves against Longtop Technologies for failing to file accurate reports

The SEC has filed an administrative proceeding against Chinese company Longtop Financial Technologies, Ltd. (PInk Sheets: LGFTY:PK), saying the company had failed to file its financial report for the year ended March 31, and that its reports for 2008, 2009 and 2010 could no longer be relied upon.

According to the Wall Street Journal, the trouble started for Longtop in May when Deloitte Touche Tohmatsu resigned as its auditor after the company resisted its attempts to verify its bank balances. The New York Stock Exchange delisted Longtop in August and the company has been trading in the over-the-counter market since.
The government is also seeking access to Deloitte’s records on Longtop through a¬†separate¬†lawsuit, according to the WSJ, but the firm is resisting, saying it’s not been given permission by Chinese regulators to release any information.
The SEC’s move, if successful, could get Longtop kicked out of U.S. financial markets altogether and is the latest in a string of bad regulatory news for Chinese companies trading in the United States. In June, the SEC issued a warning against Chinese companies that have gone public in the U.S. through reverse mergers and has already suspended trading in dozens of such firms.