Alleged fraud and litigation
In 2009, three years prior to CMED's filing for bankruptcy, an anonymous letter alleging possible illegal and fraudulent activities by management since 2007 was sent to KPMG Hong Kong, then CMED's auditor.[10][15][18] In response, at KPMG's request, in 2009 the CMED Audit Committee retained law firm Paul Weiss Rifkind Wharton & Garrison to investigate the allegations and advise the committee as to any appropriate further measures.[10][18][19] Paul Weiss as part of its investigation conducted on-site visits and interviews in China and collected documents from employees and servers of CMED.[18] CMED announced the substantial completion of the independent internal investigation on 30 July 2009.[20]
In early 2012, CMED ceased operating and left investors unpaid on $426 million worth of bond debt, as a result of a suspected fraud by CMED's former Chairman & CEO.[10] In January 2012, a class action fraud lawsuit was filed by CMED investors against CMED and its CEO and CFO in the US District Court in the Southern District of New York.[21] In July 2012, original purchasers of the CMED bonds sued the CEO in a civil case in California, alleging he stripped assets from CMED.[12][22]
Post-bankruptcy filing, CMED's liquidator found itself probing an alleged $355 million insider fraud.[10] In November 2012, the liquidator filed a complaint to the Hong Kong Police Force and the US Federal Bureau of Investigation (FBI) alleging that $400 million that CMED raised in stock and bond sales had gone missing, and that the CEO's wife had gambled substantial sums at the Wynn and Bellagio casinos in Las Vegas, Nevada.[12] Two of CMED's creditors said the CEO's wife gambled $62 million in slot machines at the Bellagio casino in Las Vegas between 2008 and 2012.[23] Creditors' law firm Stroock & Stroock & Lavan said the wife's tax returns for 2009-11 showed $17 million of "gambling winnings" as income, along with matching "gambling losses", as to which the lawyers said: "This huge 'gambling' cash flow is inconsistent with [the wife]'s banking records and gives rise to a strong suspicion that [she] may have engaged in money laundering and tax evasion."[23] Subsequently, the liquidators increased their estimate of missing cash to $670 million.[23]
Paul Weiss refused to give CMED's liquidator documents relating to its investigation as to which Paul Weiss claimed privilege.[18] In September 2015, US District Judge Ronnie Abrams of the US District Court for the Southern District of New York held that Paul Weiss must give CMED's liquidator, Kenneth Krys, who was scrutinizing the alleged $355 million CMED fraud, otherwise-privileged information concerning Paul Weiss's internal investigation.[15][24][25] Judge Abrams held that while audit committees play a critical role in monitoring corporate management and a corporation's auditor pre-bankruptcy, the justifications for protecting attorney-client communications "dissipate in bankruptcy."[24]
In March 2017, the U.S. Department of Justice in Brooklyn, New York, criminally indicted CMED founder and CEO Xiaodong Wu, as well as former Chief Financial Officer Tak Yung Samson Tsang, charging them with securities fraud and wire fraud conspiracy for stealing more than $400 million from investors as part of a seven-year scheme.[14][17] They were alleged to have lied about how they would spend the proceeds of note offerings from January 2005 to November 2012, saying they would be used for general corporate purposes, to buy businesses and technologies and to repurchase outstanding notes, while in fact the two men diverted more than $400 million to entities they controlled.[14] Wu and Tsang also allegedly halted public disclosures of material events affecting CMED's securities and stopped making interest payments.[14] The note offerings allegedly were based on intellectual property that was over two decades old, off-patent, and had little value.[14] FBI Assistant Director-in-Charge William Sweeney said "Wu and Tsang led their victims down a narrow path of deceit. They betrayed the trust of those who took them at their word, stole their money, and made off with more than $400 million."[26]
In November 2017, 91 partners of the auditor KPMG faced contempt proceedings in Hong Kong High Court, as CMED liquidators took action against KPMG with regard to its refusal honor a February 2016 court order to produce Chinese working papers, correspondence, and records to the liquidators.[17][28][29][30][31] The liquidators are asking that 91 defendants be held in contempt of court, which could result in criminal penalties, or weekly fines.[28] KPMG had issued written audit reports for CMED from 2003 to 2008, and was replaced by PwC Zhong Tian in August 2009.[17]
