Former CEO and CFO of China Medical Technologies Charged in a $400 Million Securities Fraud Scheme

BROOKLYN, NY – A three-count indictment was unsealed this afternoon in federal court in Brooklyn, New York, charging Xiaodong Wu, the founder, Chief Executive Officer and Chairman of the Board of Directors of China Medical Technologies, Inc. (China Medical), and Tak Yung Samson Tsang, also known as “Sam Tsang,” the Chief Financial Officer and a member of the Board of Directors of China Medical, with securities fraud, securities fraud conspiracy and wire fraud conspiracy.

Wu and Tsang are alleged to have defrauded China Medical’s noteholders and investors of more than $400 million through misrepresentations about the use of proceeds raised through two note offerings and by then stealing the invested funds by transferring them to entities controlled by, or affiliated with, Wu and Tsang.  The defendants, both residents of People’s Republic of China, are fugitives.

The charges were announced by Bridget M. Rohde, Acting United States Attorney for the Eastern District of New York, and William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI).

“As alleged, Xiaodong Wu and Samson Tsang deceived unsuspecting investors who thought they were investing in a NASDAQ-listed medical device company but whose investments were stolen and fraudulently transferred to entities in China controlled by Wu and Tsang.  The defendants’ scheme defrauded the investing public of more than $400 million,” stated Acting United States Attorney Rohde.  “Today’s indictment further demonstrates our commitment to protecting investors and to holding accountable those who seek to abuse the financial markets to enrich themselves.”

As detailed in the indictment, between January 2005 and November 2012, Wu and Tsang, together with their co-conspirators, orchestrated a scheme to defraud China Medical’s noteholders and investors through material misrepresentations and omissions relating to, among other things, the use of approximately $426 million in investments and the subsequent transfer of these investments to entities controlled by, or affiliated with Wu and Tsang.  China Medical issued three series of notes: (i) on or about November 21, 2006, $150 million of 3.5 percent convertible senior subordinated notes due 2011 (2011 Notes); (ii) on or about August 15, 2008, $276 million of 4 percent convertible senior notes due 2013 (2013 Notes); and (iii) on or about December 6, 2010, $150 million of 6.25 percent convertible senior notes due 2016 (2016 Notes).

Wu and Tsang represented in the offering memoranda for the 2013 Notes and 2016 Notes that they would use the proceeds for general corporate purposes, for the acquisitions of businesses, products and technologies and to repurchase outstanding convertible notes.  Contrary to these representations, most of the money raised through the 2013 Notes and the 2016 Notes was eventually transferred by Wu and Tsang to entities controlled by Wu, Tsang and their co-conspirators.  For example, between November 3, 2006 and December 4, 2008, approximately $303.75 million of the approximately $576 million that China Medical raised in its three note offerings was transferred to an entity that was owned by an associate of Wu and Tsang, and approximately $202 million was subsequently transferred to bank accounts controlled by Wu. Additionally, the intellectual property that was the subject of the note offerings was approximately 20 years old and off-patent, and any value it had was minimal.

To execute their fraudulent scheme, Wu and Tsang caused China Medical’s independent director and outside auditor to resign, stopped making public disclosures of material events affecting the value of its securities and stopped making interest payments on the notes.  On August 31, 2012, China Medical filed for Chapter 15 bankruptcy protection in the Southern District of New York.

To date, $246.5 million of the 2013 Notes and $150 million of the 2016 Notes remain outstanding.