Chinese medical firm sued by U.S. SEC for fake sales

The U.S. Securities and Exchange Commission (SEC) on Tuesday charged China Sky One Medical Inc. (CSKI) and its boss with fraud for allegedly blowing up the company's revenues by recording phony sales of a weight-loss product.

CSKI, a Chinese medical firm once listed on the Nasdaq stock market and now traded on the OTC market, falsely stated in its 2007 annual and quarterly reports that it had entered into a strategic distribution agreement with a Malaysian company, according to a complaint filed by the SEC at a U.S. district court in California.

CSKI claimed that the agreement made the Malaysian company the "exclusive" distributor of CSKI's "slim patch" in Malaysia, which would generate 1 million U.S. dollars per month in sales, but it never actually entered into any such agreement, said the U.S. regulator agency.

The complaint added that CSKI created about 19.8 million dollars in fake export sales to Malaysia that were recorded as revenue in its financial results for 2007 and 2008.

Meanwhile, CSKI's CEO Yan-qing Liu certified the magnified financial results, which appeared in the company's financial statements through 2010 and impacted the retained earnings on its balance sheet, according to the complaint.

CSKI and Liu are charged with violating various securities and exchange rules including corporate reporting, recordkeeping, internal controls, and false statements to auditors, the SEC noted in a statement.

The SEC complaint seeks financial penalties against CSKI and Liu as well as disgorgement of ill-gotten gains by Liu. In addition, the market watchdog also instituted administrative proceedings 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.

CSKI, based in Harbin city of northeast China, produces and sells weight-loss patches, sprays, ointments, and other Chinese traditional pain relief and health and beauty products. It was listed on the U.S. markets through a reverse merger in May 2006, according to the SEC.