SEC Charges Yan-qing Liu With Fraud For Bolstering Financial Results With Fake Sales

SEC v. China Sky One Medical, Inc. and Yan-qing Liu, Case No. CV12-7543 MWF (MANx) (C.D. Cal.).  On September 4, 2012, the SEC charged China-based China Sky One Medical, Inc. (“CSKI”) and its CEO and chairman Yan-qing Liu with fraud.  CSKI claimed in public reports that it had entered into a strategic distribution agreement with a Malaysian company that would become the exclusive distributor of one of CSKI’s products and generate $1 million per month in sales.  In reality, there was no agreement.  So, CSKI fabricated nearly $20 million in phony sales that were recorded as revenue in its financial statements.  CEO Yan-qing Liu certified the financial results.

The SEC charged CSKI and/or Liu with violating, or aiding and abetting, violations of Section 17(a)(2) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5(b), 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.  The SEC also charged Liu with violating Exchange Act Section 13(b)(5) and Rules 13a-14, 13b2-1 and 13b2-2.  The SEC seeks civil monetary penalties and disgorgement.  The SEC is also asking to have Liu reimburse CSKI for certain incentive-based compensation he received pursuant to Section 304 of the Sarbanes-Oxley Act, and to have Liu barred from serving as an officer or director of a public company.  Lastly, the SEC seeks injunctive relief against future violations of the anti-fraud, internal controls, and books and records provisions of the federal securities laws.

In a separate proceeding, the SEC issued an Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Exchange Act to determine whether to revoke or suspend registration of CSKI’s securities due to the company’s failure to file its annual report for 2011 or any quarterly reports for 2012.

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