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Case 2:11-cv-09495-PSG-JCG Document 97 Filed 05/20/13 Page 1 of 43 Page ID #:1447

THE ROSEN LAW FIRM, P.A. Laurence M. Rosen, Esq. (CSB# 219683) 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071 Telephone: (213) 785-2610 Facsimile: (213) 226-4684 Email: [email protected]

Lead Counsel for Plaintiffs and Class

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

NEIL VANLEEUWEN AND RODNEY

No.: CV-1 I-09495-PSG (JCGx) OMANOFF, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, THIRD AMENDED

COMPLAINT FOR Plaintiffs, VIOLATIONS OF THE

FEDERAL SECURITIES LAWS VS.

CLASS ACTION KEYUAN PETROCHEMICALS, INC. CHUNFENG TAO, AICHIJN LI a/k/a

JURY TRIAL DEMANDED

AICHUN ANGELA LI, ANGELA LT and ANGELA AICHUN LI, WEIFENG XUE, Hon, Philip S. Gutierrez and DELIGHT REWARD LIMITED,

Defendants.

Lead Plaintiff Neil Vanleeuwen and named plaintiff Rodney Omanoff

collectively ("Plaintiffs"), individually and on behalf of all other persons similarly

situated, by their undersigned attorneys, for their complaint against Defendants,

allege the following based upon personal knowledge as to their own acts, and

information and belief as to all other matters, based upon, inter alia, the I

investigation conducted by and through their attorneys, which included, among

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Third Amended Class Action Complaint for Violation of the Federal Securities Laws-CV-1 1-09495-PSG (CGx)

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Case 2: 11-cv-09495-PSG-JCG Document 97 Filed 05/20/13 Page 2 of 43 Page ID #:1448

1 other things, a review of the defendants’ public documents, conference calls and

2 announcements made by defendants, United States Securities and Exchange 3 Commission (“SEC”) filings, wire and press releases published by and regarding 4 Keyuan Petrochemicals, Inc. (“Keyuan” or the “Company”), securities analysts’ 5 reports and advisories about the Company, and information readily obtainable on

6 the Internet. Plaintiffs believe that substantial evidentiary support will exist for the

7 allegations set forth herein after a reasonable opportunity for discovery.

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NATURE OF THE ACTION

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1. This is a securities class action on behalf of the following “Class”:

10 (a) all persons other than Defendants who purchased the common stock of

11 Keyuan between August 16, 2010 and October 7, 2011, inclusive, (the “Class

12 Period”); and seeking to recover damages caused by Defendants’ violations of

13 federal securities laws; and

14 (b) all persons other than Defendants who purchased Keyuan securities

15 pursuant to the confidential private offering memorandum dated March 22, 2010

16 (“Offering Documents”), consisting of purchasers in the first tranche that closed on

17 April 22, 2010 and the second tranche that closed on May 18, 2010 (collectively the

“Private Placement”). 18

2. Defendant Keyuan is a petrochemical company with its headquarters 19

and operations in the People’s Republic of China (“PRC”). 20

3. In connection with the sale of Keyuan stock in the Private Placement 21 and throughout the Class Period defendants failed to disclose material related party 22 transactions that personally benefitted Keyuan management. 23 4. Keyuan made undisclosed related party sales to, among others, entities 24 owned and controlled by defendant Chunfeng Tao, the Chairman and CEO of the

25 Keyuan. Related party sales to Tao were over $21 million and $100 million in

26 2009 and 2010, respectively. These amounts represented nearly 31% and 20% of

27 Keyuan’s sales in 2009 and 2010. Keyuan also made undisclosed related party

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2 Third Amended Class Action Complaint for Violation of the Federal Securities Laws-CV-11-09495-PSG (JCGx)`

11-cv-09495-PSG-JCG Document 97 Filed 05/20/13 Page 3 of 43 Page ID #:1449 Case 2:

1 purchases of raw materials from Tao in 2009 and 2010, representing 36% and 47%

of the value of all of the Company’s inventory for those years, respectively.

5. The undisclosed related party transactions were not arms’ length

transactions and unjustly enriched the related parties. Keyuan’s gross profit

margins from related party sales were much lower than what Keyuan earned from

arm’s-length external sales.

6. The Company’s own auditor took the drastic step of qualifying its

2010 audit opinion and explaining that “[i]t is possible that the terms of these

transactions may not be the same as those that would result from transactions

among unrelated parties.”

7. Keyuan also lied to freight companies to benefit the related parties. In

its 2010 10-K Keyuan admitted that “[i]n the past we sometimes accommodated

requests from our customers to change the name of products so that our customers

could save on freight costs.”

8. Keyuan also admitted in the 2010 10-K that it may have committed

crimes in connection with the related party transactions. Keyuan stated in its 2010

10-K:

[W]e engaged with certain related and other parties in short term financings to overcome the restrictions regarding the use of certain bank loans or to satisfy the banks’ internal requirements to demonstrate the usage of the loans. Though we are current on our loan payments and as a general rule, the risk of prosecution and or civil liabilities is diminished if the loans have been repaid, we are advised that such practices may have been in violation of PRC banking laws.

9. As a result of Defendants’ undisclosed related party transactions which

rendered the Company’s financial statements and Offering Documents materially

misleading, trading in Keyuan’s stock was halted on April 1, 2011.

10. When Keyuan’s stock began to trade again on October 7, 2011, it fell

over $3.83/share, or 69%-- causing investors’ substantial losses.

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1 11. On September 17, 2012 the Company announced that it received a

2 Wells Notice from the SEC in connection with a with prospective civil injunctive

3 securities fraud action against Keyuan. Keyuan also announced that defendant Tao 4 received a Wells Notice alleging that he violated Section 304 of the Sarbanes-Oxley 5 Act of 2002. These investigations concern the undisclosed related party 6 transactions detailed herein.

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12. On February 28, 2013 the SEC filed a civil action in the U.S. District

8 Court for the District of Columbia, against Keyuan for violations of the anti-fraud

9 provisions of the Exchange Act and against Aichun Li, Keyuan’s CFO, for

10 violations of financial reporting, record keeping, and internal control, under the

11 Exchange Act. The action was based on, among other things, the failure to disclose

12 the material related party transactions in Keyuan’s financial statements- which were

13 issued during the Class Period in this case.

14 13. Filed with the SEC complaint, were proposed consent judgments for

15 Keyuan and Aichun Li settling the action. Keyuan’s consent was signed by

16 defendant Chunfeng Tao. Keyuan agreed to pay a $1 million fine-- a large penalty

17 given that Keyuan’s most recent 10-Q filed with the SEC on November 20, 2012,

18 reports only $7.2 million in cash. Li agreed to pay a fine of $25,000 and agreed to

the entry of an order banning Li from practicing before the SEC, with a right to 19

apply for reinstatement in two years. The SEC investigation is continuing. 20

21 JURISDICTION AND VENUE

22 14. The claims asserted herein arise under and pursuant to Sections 10(b) 23 and 20(a) of the Securities Exchange Act, and Rule 10b-5 promulgated thereunder 24 (17 C.F.R. §240.10b-5).

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15. This Court has jurisdiction over the subject matter of this action

26 pursuant to Section 27 of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. §

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1331.

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11-cv-09495-PSG-JCG Document 97 Filed 05/20/13 Page 5 of 43 Page ID #:1451 Case 2:

1 16. Venue is proper in this Judicial District pursuant to §27 of the

Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1391(b).

17. In connection with the acts, conduct, and other wrongs alleged in this

Complaint, Defendants, directly or indirectly, used the means and instrumentalities

of interstate commerce, including but not limited to, the United States mails,

interstate telephone communications and the facilities of the national securities

exchange.

PARTIES

18. Lead Plaintiff Neil Vanleeuwen purchased Keyuan securities at

artificially inflated prices during the Class Period and has been damaged thereby.

His PSLRA certification has previously been filed with the Court and is

incorporated herein by reference.

19. Plaintiff Rodney Omanoff purchased Keyuan securities in Keyuan’s

Private Placement at artificially inflated prices. Plaintiff Omanoff also purchased

Keyuan securities on the open market during the Class Period. His Amended

PSLRA certification is filed herewith and is incorporated herein by reference. 1

Plaintiff Omanoff at all relevant times maintained and continue to maintain a

residence in Los Angeles County, CA.

20. The Offering Documents were made available to Plaintiff Omanoff in

Los Angeles County, and he reviewed and relied on them in Los Angeles County in

connection with his purchase of units in the Private Placement.

21. Plaintiff Omanoff also purchased Keyuan common stock on the open

market on November 16, 2010 as set forth in his amended certification filed

herewith. Prior to his purchase on November 16, 2010, Plaintiff Omanoff reviewed

and relied on the Company’s quarterly reports filed with the SEC on form 10-Q and

related financial statements that are alleged to be misleading herein. These

1 The Amended PSLRA certification merely corrects the date of a 1,000 share purchase, which had been incorrectly provided as September 2010 rather than November 16, the correct purchase date.

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1 documents were all made available to Plaintiff Omanoff in Los Angeles County.

2 Plaintiff reviewed them in Los Angeles County.

3 22. Defendant Keyuan is a Nevada Corporation, headquartered in China. 4 Through its operating subsidiaries, Keyuan engages in the manufacture and sale of 5 petrochemical products in China. Until October 6, 2011, Keyuan’s stock was listed 6 on the NASDAQ exchange under ticker “KEYP.” On October 6, 2011, the

7 NASDAQ de-listed the Company’s stock, it began to trade on over-the-counter on

8 the “Pink Sheets” under ticker KEYP.PK .

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23. Keyuan became a public company through a reverse merger

10 transaction that commenced on April 22, 2010 through a share exchange agreement.

11 The reverse merger was completed on May 12, 2010.

12 24. Defendant Chunfeng Tao (“Tao”), was and is, Chairman of the Board

13 and Chief Executive Officer of Keyuan. Mr. Tao indirectly controls approximately

14 34.52% of Keyuan’s common stock.

15 25. Defendant Aichun Li a/k/a Aichun Angela Li, Angela Li and Angela

16 Aichun Li (collectively “Li”) was the Chief Financial Officer of the Keyuan until

17 her resignation from the Company on October 12, 2011. According to a filing

18 Keyuan made with the SEC, Li was appointed CFO May 10, 2010. Li is a US

Certified Public Accountant, and earned an MBA and a MS in Accounting from 19

two U.S. universities. She previously served as a member of the CFO Group with 20

Bank of America and consultant with Deloitte Touche LLP. 21 26. Given’s Keyuan’s disclosure, defendant Li is sued herein as a 22 defendant as in the Public Class, and not the Private Class. All other defendants are 23 sued herein in connection with both Classes. 24

27. Defendant Weifang Xue (“Xue”) was the Company Vice President of

25 Accounting until August 2011. In the Company’s SEC filings, Xue was noted as a

26 key and essential employee of the Company. Xue was “terminated” as a result of

27 the Company’s undisclosed related party transactions that rendered Keyuan’s SEC

28 filings materially misleading.



1 28. Defendant Delight Reward Limited (“Delight Reward”) is a British

2 Virgin Islands Corporation, and at all times during the Class Period, a controlling

3 shareholder of Keyuan. According to Keyuan’s annual report for the fiscal year 4 ended December 31, 2010, Delight Reward beneficially owns more than 80% of 5 Keyuan’s common stock.

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29. Tao, Li, and Xue, and Delight Reward, are herein referred to

7 collectively as the “Individual Defendants.”

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30. Keyuan is liable for the acts of the Individual Defendants and its

9 employees under the doctrine of respondeat superior and common law principles of

10 agency as all of the wrongful acts complained of herein were carried out within the

11 scope of their employment with authorization.

12 31. The scienter of the Individual Defendants and other employees and

13 agents of the Company is similarly imputed to Keyuan under respondeat superior

14 and agency principles.

15 The Private Placement

16 32. Keyuan through its placement agent TriPoint Global Equities, LLC

17 offered and sold $30 million of units consisting of 6% series A convertible

18 preferred stock, common stock, and warrants to purchase common stock of Keyuan

through the Private Placement memorandum. Attached to memorandum was the 19

audited financial statements of Keyuan for the fiscal years ended December 31, 20

2009 and 2008, and a PowerPoint presentation prepared by TriPoint Global 21 Equities, LLC (collectively the “Offering Documents.”). The Offering Documents 22 are attached hereto as Exhibit 1 and are incorporated herein.

23 33. The Private Placement was offered pursuant to SEC Regulation D (17 24 C.F.R. §230.500) which exempted the offering from the registration requirements

25 of Section 5 of the Securities Act of 1933. Therefore, pursuant to 17 C.F.R.

26 §230.502(b), et seq. , Keyuan was required to provide financial statements to

27 investors that complied with GAAP and SEC regulation.

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1 34. As part of the Private Placement, Tao delivered 5 million shares of

2 Keyuan common stock into escrow. This was used as an inducement to investors in

3 the Private Placement. If Keyuan did not achieve net income of $33 million in 4 2010, the escrowed shares would be provided to the investors in the Private 5 Placement based on each percentage point the Company missed the $33 million net 6 income target.

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35. The Offering Documents were uniformly presented to each

8 prospective and actual purchaser of the Private Placement. While the Offering

9 Documents had sections for related party transactions and the audited financial

10 statements that purported to comply with GAAP and SEC regulations, none of the

11 related party transactions complained of herein was disclosed in the Offering

12 Documents, rendering them materially misleading.

13 36. The first tranche of the Private Placement was consummated on April

14 22, 2010 for the issuance and sale of 661,562 units at a purchase of $35 per unit,

15 consisting of an aggregate of:

16 • 5,954,058 shares of Series A convertible preferred stock, par value $0.001

17 per share convertible into the same number of shares of Common Stock;

• 661,562 shares of Common Stock; 18

• three-year Series A Warrants to purchase up to 661,562 shares of

19 Common Stock at an exercise price of $4.50 per share; and

20 • three-year Series B Warrants to purchase up to 661,562 shares of

21 Common Stock at an exercise price of $5.25 per share, for aggregate

22 gross proceeds of approximately $23.2 million.

23 37. On May 18, 2010, the Company closed the second tranche of the 24 Private Placement for the issuance and sale of 87,142 units at a purchase price of

25 $35 per unit, consisting of an aggregate of:

26 • 784,278 shares of Series A convertible preferred stock, par value

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$0.001 per share convertible into the same number of shares of

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Common Stock;



1 • 87,142 shares of Common Stock;

2 • three-year Series A Warrants to purchase up to 87,142 shares of

3 Common Stock at an exercise price of $4.50 per share; and

4 • three-year Series B Warrants to purchase up to 87,142 shares of

5 Common Stock at an exercise price of $5.25 per share, for aggregate

6 gross proceeds of $3,049,970.

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38. Each unit, sold for $35, consisted of : (a) nine shares of Series A

8 preferred stock that was converted to Keyuan common stock one-for-one; (b) one

9 share of Keyuan common stock; and (c) three year out-of-the-money warrants.

10 Tao Prepared the Offering Documents

11 39. At the time of the Private Placement, Tao was Keyuan’s Chairman,

12 President, Chief Executive Officer and Chief Financial Officer. Thus, Tao was the

13 controlling person of Keyuan under Section 20(a) of the Exchange Act.

14 Consequently, Tao’s scienter at the time of the Private Placement is imputed the

15 Company.

16 40. Plaintiffs engaged the services of an investment banking expert, Mr.

17 William H. Purcell, in determining the duties and responsibilities of an issuer’s

18 CEO and CFO and a placement agent in performing a private placement of

securities. Mr. Purcell has over 45 years of experience as an investment banker. He 19

started his career at the investment banking firm of Dillon, Read & Co. Inc. 20

(“Dillon Read”) after graduating from business school in 1966. He was elected a 21 Managing Director in 1982. During his approximately 25 years at Dillon Read, he 22 worked in all areas of corporate finance and the capital markets - - including for a 23 number of years being co-head of Dillon Read’s private placement department. He 24 is currently a Senior Director of Seale & Associates, an investment banking firm in

25 the Washington, DC area. During his career, Mr. Purcell has worked on over 100

26 financing transactions - - both debt and equity financings and both public and

27 private financings. He has also worked on over 100 merger and acquisition related

28 transactions. In addition, Mr. Purcell has been an expert witness over the years in



1 over 100 cases, a number of which have involved disclosure and due diligence

2 issues. Mr. Purcell graduated from Princeton University with a B.A. in economics

3 in 1964, and from New York University Graduate School of Business with an MBA 4 in 1966. 5 41. Mr. Purcell reviewed the Offering Documents and he has formed the 6 following opinions about the preparation of Keyuan’s Offering Documents:

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(a) It is well understood in the investment banking industry and the

8 financial community generally that the responsibility for preparing an offering

9 memorandum or private placement memorandum (or as in the case of Keyuan, the

10 Offering Documents) is primarily that of the senior management of the company,

11 especially the CEO and/or President of the company and the CFO. In my many

12 years of executing private placement transactions at Dillon Read, I almost

13 exclusively worked with the CEO and/or CFO of the company in preparing the

14 private placement transaction. In regard to companies with a modest market

15 capitalization, such as Keyuan, I would have worked with both the CEO and CFO

16 of the company in connection with the private placement.

17 (b) In every instance, not only would the CEO and CFO review and

18 comment on the Offering Documents, I as placement agent would make them both

initial every page of the Offering Documents to ensure that they agreed with 19

language, number, and any statistics set forth in the Offering Documents. This 20

procedure was essential to me as placement agent given their intimate knowledge of 21 the company, in order to fulfill my duty of due diligence as a placement agent to 22 ensure that the Offering Documents are accurate and not misleading in any way. 23 (c) The responsibility of preparing a private placement memorandum 24 (“PPM”) to be used by a placement agent in a private offering to provide relevant

25 information to potential investors involves not just an accurate and detailed

26 description of the company’s business but most importantly an accurate and

27 detailed description of its financial position, operating performance and the

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1 significant factors that affect, or will affect, the company’s performance in future

2 years.

3 (d) Nobody is better able to provide such important and relevant 4 information than the CEO and/or the CFO of a company. Their job function is 5 precisely to know this information and to plan the company’s business strategy.

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(e) A company’s auditing firm also has an important responsibility in

7 making sure a company’s financial statements are accurate and not misleading in

8 any way. However, the auditing firm must depend on the fact that the information

9 provided to it by the company’s CEO and CFO is accurate and truthful.

10 Accordingly, an auditing firm receives a written certification or management

11 representation letter from both the CEO and CFO stating that they have reviewed

12 the financial statements and are not aware of any important and/or relevant

13 information not disclosed to the auditors that should be reflected in the financial

14 statements. The representations also generally include any important and/or

15 relevant subsequent events that might have occurred after the date of the financial

16 statements. Any PPM presented to investors must be accurate as of the date it is

17 presented.

18 (f) An auditing firm has a duty of due care in preparing a company’s

financial statements - - but no level of due diligence would most likely uncover 19

outright management lies or fraud. In the case of Keyuan, the auditor would have 20

expected the Company’s CEO and/or CFO to accurately disclose all related party 21 transactions, as required by GAAP accounting principles.

22 (g) The accurate disclosure of all related party transactions is an absolute 23 must not only for a company’s auditor but also for a company’s placement agent. 24 The area of related party transactions has historically been a major problem - -

25 because very often related party transactions can be manipulated so that true arm’s-

26 length transactions are not reflected and/or possible fraud might be involved. It is

27 my understanding that the magnitude of undisclosed related party transactions in

28 the case of Keyuan was as much as $100 million (in sales) over a two-year period.



1 (h) The placement agent for a financing also has a duty of due diligence in

2 assisting with the preparation of a PPM. The placement agent has a duty to make

3 sure to the best of its ability that the disclosures being made to investors are 4 accurate and not misleading and do not omit any important information. The 5 placement agent’s due diligence should involve interviewing both company 6 management, especially the CEO and the CFO, and the company’s auditor to

7 ensure that the financial information in the Offering Documents are accurate and

8 complete. However, as stated previously, even a thorough due diligence is unlikely

9 to uncover fraud or fraudulent activities. Only the company’s CEO and CFO would

10 be aware of the fraud, if any.

11 (i) The information provided in Keyuan’s Offering Documents was that

12 primarily of the Company’s CEO and CFO. With the CFO of the Company having

13 an MBA and MS degrees in accounting and having previously worked for or with

14 Bank of America and Deloitte Touche, it is unconceivable from an investment

15 banking point of view that the CFO, as well as the CEO, did not know about the

16 undisclosed related party transactions.

17 (j) The Offering Documents have language indicating that the PPM

18 information has been provided by Keyuan management, i.e.: “The information

contained in this Memorandum is proprietary to the Company...” (at p. 000003) 19

and “The agents [the placement agent] and the agent’s counsel assume no 20

responsibility .... for the accuracy, adequacy or completeness... as to whether all 21 information concerning the Company required to be disclosed by the Company has 22 been generally disclosed.” (at p. 000096).

23 (k) In addition, it is well known and understood that a company’s CFO 24 typically has the responsibility to make sure all financial statements presented to

25 investors and/or regulatory authorities if applicable, are accurate and complete.

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42. In connection with the Private Placement, Keyuan had a number of

27 road show events to solicit investors to purchase in the Private Placement.

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1 43. At these events prospective investors were provided the Offering

Documents. For example, during a road show event at the 21 Club in New York

City in the late fall or early Spring 2010, defendant Tao made a presentation to

prospective investors by going over the information in Offering Documents.

44. During road show events, TriPoint CEO Mark Elenowitz told investors

that he worked directly with defendant Tao for one to two years performing due

diligence on Keyuan and checking the accuracy of the company’s financial

statements and operations.

Tao Signed the Securities Purchase Agreement for the Private Placement

45. The Private Placement memorandum represented that Tao was

Keyuan’s President, CEO, and CFO, and that after the Private Placement he would

be the chair of its board.

46. As part of the Private Placement, defendant Tao signed a securities

purchase agreement dated April 22, 2010 (the “Securities Purchase Agreement”).

Keyuan filed the Securities Purchase Agreement with the SEC on Form 8-K. The

Form 8-K was also signed by defendant Tao.

47. The Securities Purchase Agreement, demonstrates that Tao signed a

document attesting that Keyuan has disclosed all circumstances that required

disclosure, when in fact the Company had not disclosed the related party

transactions. The Securities Purchase Agreement contains the following relevant

language:

“To the Company’s knowledge, no event or circumstance has occurred or exists with respect to the Company, the non-PRC Subsidiaries or the PRC Subsidiary or their respective businesses, properties, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.”

48. The Securities Purchase Agreement, signed by Tao, states that

“Commission Documents” defined to include financial statements of Keyuan that

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1 were provided to Private Placement investors complied with U.S. GAAP and were

accurate.

GAAP Required Defendants to Disclose The Related Party Transactions

49. GAAP constitutes those standards recognized by the accounting

profession as the conventions, rules, and procedures necessary to define accepted

accounting practices at a particular time.

50. GAAP are the common set of accounting principles, standards, and

procedures that companies in the United States use to compile their financial

statements.

51. The SEC has the statutory authority for the promulgation of GAAP for

public companies and has delegated that authority to the Financial Accounting

Standards Board (the “FASB”).

52. SEC and NASDAQ rules and regulations require that publicly traded

companies such as Keyuan include financial statements that comply with GAAP in

their annual and quarterly reports filed with the SEC. See Section13 of the

Exchange Act; Rule 10-01(d) of Regulation SX.

53. SEC Rule 4-01(a) of Regulation S-X states that “[fjinancial statements

filed with the Commission which are not prepared in accordance with generally

accepted accounting principles will be presumed to be misleading or inaccurate.”

17 C.F.R. § 210.4-01(a)(1) 2 (emphasis added).

54. Management retains responsibility for preparing financial statements

that conform with GAAP. The American Institute of Certified Public Accountants

(“AICPA”) Professional Standards provide:

The financial statements are management’s responsibility . . . Management is responsible for adopting sound accounting policies and for establishing and maintaining internal controls that will, among other things, record, process, summarize, and report transactions (as well as events and conditions)

2 Unless otherwise noted, all emphases are added.

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1 consistent with management’s assertions embodied in the financial

2 statements. The entity’s transactions and the related assets, liabilities, and

equity are within the direct knowledge and control of management. . . . Thus,

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the fair presentation of financial statements in conformity with generally

4 accepted accounting principles is an implicit and integral part of

management’s responsibility. 5

AIPCA, Professional Standards, vol. 1, AU § 110.02 (1998).

6 55. GAAP Statement of Financial Accounting Standards (“SFAS”) and

7 SEC regulation S-K required the Company to disclose all material related party 8 transactions.

9 56. SFAS No. 57 and No. 850 provide that a public company’s “[fjinancial 10 statements shall include disclosures of material related party transactions.” SFAS

11 No. 57 ¶ 2; 850-10-50-1.

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57. “Related party transactions” include those between “an enterprise and

13 its principal owners, management, or members of their immediate families” and

14 those between a company and its “affiliates.” SFAS No. 57 ¶ 1; 850-10-05-3.

15 “Affiliate” includes any company that is under common control or management

16 with the public company. SFAS No. 57 ¶ 24(a, b); 850-10-20.

17 58. Disclosures of related party transactions shall include (a) the nature of

18 the relationship involved, (b) a description of the transactions for each period for

19 which income statements are presented and such other information necessary to an

20 understanding of the effects of the transactions on the financial statements, (c) the

21 dollar amount of transactions for each of the periods for which income statements

22 are presented, and (d) amounts due from or to related parties as of the date of each

balance sheet presented and, if not otherwise apparent, the terms and manner of 23

settlement. SFAS No. 57 ¶ 2; 850-10-50-1.

24 59. Keyuan admitted in a Form 8-K filed with the SEC on October 20,

25 2011 that GAAP required the Company to disclose related party transactions that it

26 previously failed to disclose during the Class Period. 27

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1 60. Keyuan admitted in the Form 8-K filed with the SEC on October 20,

2 2011 that the failure to disclose the additional related party transactions was a

3 violation of GAAP requiring Keyuan to restate its financial statements.

4 61. Restatements are required for material accounting errors that existed at 5 the time financial statements were prepared. See SFAS 154.

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62. An accounting “error” is a term of art and results from, among other

7 things, an error in recognition, measurement, or mistakes in the application of

8 GAAP. SFAS 154.

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63. Under SFAS 154, errors result from (i) mathematical mistakes, (ii)

10 mistakes in application of GAAP, or (iii) oversight or misuse of facts that existed at

11 the time the financial statements were prepared.

12 64. The failure to disclose the related party transactions herein was an

13 oversight or misuse of facts that were actually known to Defendants Tao, Li and

14 Xue at the time they signed and filed Keyuan’s financial statements with the SEC.

15 65. Chinese Generally Accepted Accounting Principles (“PRC GAAP”) is

16 substantially the same as GAAP as they both require disclosure of material related

17 party transactions.

18 66. ABSE 36 (the applicable Chinese GAAP) requires disclosure in the

financial statements of related party transactions. The definition of related parties is 19

materially the same as SFAS 57. A translated copy of ABSE 36 is attached hereto 20

as Exhibit 2 and is referenced herein. 21 SEC Regulations Mandate Disclosure of the Related Party Transactions

22 67. SEC Regulation S-K (“Reg. S-K”) (together with the General Rules 23 and Regulations under the Securities Act of 1933 [“Securities Act”] and the 24 Exchange Act and the forms under these Acts) states the requirements applicable to

25 the content of the non-financial statement portions of the annual reports on form 10-

26 K, quarterly reports on form 10-Q and proxy statements on from 14A. (See, Reg. S-

27 K, §229.10).

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1 68. Reg. S-K at Section 229.404, Item 404, required, at all times during

2 the Class Period, that the Company “[d]escribe any transaction, since the beginning

3 of the registrant’s last fiscal year, or any currently proposed transaction, in which 4 the registrant was or is to be a participant and the amount involved exceeds 5 $120,000, and in which any related person had or will have a direct or indirect 6 material interest.”

7

69. Reg. S-K required the disclosure of detailed information concerning

8 related party transactions exceeding $120,000, including the names of the “related

9 person” or entity participating in the transaction, and the amounts of the transaction.

10

70. Reg. S-K Section 229.303, Item 404 (b)(1)(6) also mandates disclosure

11 of any other relationships that the registrant is aware of between the nominee or

12 director and the registrant that are substantially similar in nature and scope to those

13 relationships listed in paragraphs (b)(1) through (5).

14 71. A “related person” is defined by Reg. S-K as including any director or

15 executive officer of the Company, any nominee for director, or any immediate

16 family member of a director or executive officer of the registrant, or of any

17 nominee for director or any 5% or greater shareholder.

CEO TAO AND CFO LI INTENTIONALLY CONCEALED THE RELATED 18

PARTY TRANSACTIONS

19 72. As part of each annual audit, under Generally Accepted Auditing

20 Standards AU 333, and 334, the Company’s auditor is obligated to inquire, either

21 orally or in writing, of each senior officer and each director as to the existence of 22 any related party transactions with the Company.

23 73. As part of each annual audit, under Generally Accepted Auditing 24 Standard AU 560, the Company’s auditor is obligated to inquire of management

25 whether the corporation has entered into any material transactions that must be

26 listed as subsequent events in the financial statements pursuant to GAAP and SEC

27 regulations.

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74. In addition, prior to issuing an unqualified or “clean” audit opinion, an



1 auditor will require that a Company’s Chief Executive Officer and its Chief

2 Financial officer sign a “management representation letter.” These written

3 representations are mandated as a professional standards requirement under the 4 Statements on Auditing Standards No. 85 (“SAS 85”). 5 75. Under SAS No. 85, a public company’s independent auditors are 6 required to obtain written representations from a company’s senior management,

7 normally the chief executive, as part of the audit process. (See also AU 333.06).

8 These representations are contained in what is known in auditing jargon as a

9 “management representation letter.” The management representation letter should

10 cover all periods covered by the auditor’s report. Management representation

11 letters are used to provide information to the auditors about matters that cannot be

12 objectively tested because they depend on management’s knowledge, such as

13 management’s intentions and the completeness of information provided to the

14 auditor. A copy of a standard management representation letter is attached as

15 Exhibit 3 hereto and incorporated herein by reference.

16 76. The management representation letter inquires of management whether

17 there are any related party transactions or material subsequent events that must be

disclosed in the financial statements. 18

77. The management representation letter required defendants Chunfeng 19

Tao and Aichun Li to individually represent to the Company’s independent auditors 20

each reporting period that as of that date, among other things: 21

i. He or she has disclosed all related party transactions relevant to 22 the Company to the auditors and that he was not aware of any other 23 such matters required to be disclosed in the financial statements. 24

ii. All the accounting records have been made available to the

25 auditor for the purpose of its audit.

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iii. All the related party transactions undertaken have been properly

27 reflected and recorded in the accounting records.

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iv. All minutes of directors meetings and summaries of board



1 actions for which minutes are not yet available have been made

2 available to the auditor.

3 v. There are no material transactions that have not been properly

4 recorded in the accounting records underlying the financial

5 statements.

6 vi. All guarantees under which the company is contingently liable

7

have been properly recorded or disclosed in the financial statements

8

vii. The financial statements are fairly presented in conformance

9 with Generally Accepted Accounting Principles.

10 viii. The Company has no plans or intentions that may materially

11 affect the carrying value or classification of assets and liabilities.

12 78. The last paragraph of the management representation letter required

13 The CEO and the CFO to state: “To the best of our knowledge and belief, no events

14 have occurred subsequent to the balance-sheet date of this letter that would require

15 adjustment to or disclosure in the aforementioned financial statements.”

16 79. The management representation letter thus required CEO Tao and

17 CFO Li to disclose to the auditors the details of the related party transactions.

18 80. Tao and Li signed knowingly false management representation letters

to Keyuan’s auditors prior to issuance of the financial statements in the 2009 and 19

2010 Form 10-K annual reports filed during the Class Period, otherwise the 20

auditors would have learned of and disclosed the related party, as eventually 21 occurred once the transactions were discovered and disclosed on October 20, 2011.

22 81. Additionally, for each quarterly financial report Statement on 23 Standards for Accounting and Review Services No. 9 (“SSARS”) required the 24 Keyuan’s auditors obtain from Tao and Li Management Representation letters in

25 connection with the Company’s second and third quarter 10-Qs filed with the SEC

26 during the Class Period.

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82. These review Management Representation letters required Tao and Li

28 to certify that they disclose all related party transactions to its auditor. A sample



1 Management Representation for a review is attached hereto as Exhibit 4 and is

2 incorporated herein. The letter was published by in the April 2004 edition of the

3 CPA Journal, which is published by the New York State Society of CPAs.

4 83. Tao and Li signed knowingly false management representation letters 5 to Keyuan’s auditors prior to issuance of the financial statements in the Company’s 6 second and third quarter 10-Qs, otherwise the auditors would have learned of and

7 disclosed the related party, as eventually occurred once the transactions were

8 discovered and disclosed on October 20, 2011.

9

84. According to the SEC’s civil action against Li, “[i]n or about April or

10 May 2010” Li spoke with an audit manager for Keyuan’s auditor, who informed her

11 that “the company was engaged in related party transactions and that those

12 transactions should be separately identified and disclosed as related party

13 transactions in the company’s financial statements.” The SEC claims that despite

14 receiving this information, “Li failed to take reasonable steps to ensure that the

15 company was properly identifying and disclosing related party transactions.”

16 85. The SEC identified the following misconduct by Li:

17 (a)

“[I]n August 2010, during the preparation of the second-quarter 2010

10-Q, the Chairman of Keyuan’s Audit Committee asked Li to determine whether 18

the company was engaged in related party transactions. He specifically noted that 19

the company’s loans were guaranteed by various unidentified third parties and 20

asked whether any of those guarantors were related parties. Li thereafter followed 21 up with Individual A, the company’s Vice President of Accounting, as well as the 22 company’s Deputy Accounting Manager, and she was expressly told that the 23 loans were guaranteed by related parties. In that communication, Li 24 acknowledged her understanding that the loans were guaranteed by related 25 parties .” (¶34 of SEC action).

26

(b) “Li was also copied on four e-mails which attached summary

27 schedules of Keyuan’s bank debt. These schedules identified loan guarantors

28 (including Tao, Chen, Wang, and entities affiliated with those individuals) that



were related parties.” (¶35 of SEC action).

(c) “The information provided to Li took place in an environment where

the issue of related party disclosures warranted heightened scrutiny. For instance, in

connection with the preparation of the second quarter 2010 10-Q, in July 2010,

Keyuan’s Audit Committee Chairman specifically asked Li for a ‘detailed listing of

all related party transactions.’ The same Audit Committee Chairman directed Li on

two subsequent occasions to ensure proper disclosure of related party transactions.”

(¶36 of SEC action).

(d) At the same time other members of Keyuan’s senior management

submitted questionnaires, which specifically asked for the identification of related

party transactions. “None of the questionnaires that Li received, however, disclosed

any such transactions, including the related party loan guarantees of which she had

been expressly made aware of and which the Audit Committee Chairman had

asked her to identify. ” (¶38 of SEC action).

The Undisclosed Related Party Transactions

86. In Keyuan’s financial statements filed with the SEC during the Class

Period and in the Offering Materials, Keyuan failed to disclose the following

related party transactions.

87. According to Keyuan’s 2010 10-K filed with the SEC on October 20,

2011, Keyuan admitted that it failed to disclose and should have disclosed the

following related party sales of products in its periodic reports filed with SEC:

Sales to Related Parties Related Party Year ended December 31,

2009 2010 Ningbo Kewei Investment Co., Ltd. (“Ningbo $4,869,959 -- Kewei”)3

3 According to the 2010 10-K, defendant Tao controls Ningo Kewei. 4 According to the 2010 10-K, defendant Tao’s mother was a 65% nominee shareholder of Ningbo Kunde.

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Case 1-cv-09495-PSG-JCG Document 97 Filed 05/20/13 Page 22 of 43 Page ID #:1468

1 Ningbo Wanze Chemical Co., Ltd (“Ningbo $2,500,021 -- Wanze”) 5

2 Ningbo Zhenhai Jinchi Petroleum Chemical -- $10,180,273 Controlled by Mr. Shou Co., Ltd (“Zhenhai

3 Jinchi”) 6 Total Related Party Sales $21,491,643 $111,860,732 4

88. The related party sales were a material percentage of the Company’s 5

total sales.

6 Year ended December 31, _______________________________________ 2009 2010

7 Total Related Party Sales: $21,491,643 $111,860,732

8 Total Sales $68,653,603 $558,752,069 Percentage of Total Sales to Related Parties 31% 20%

9 89. Keyuan also admitted in its 2010 10-K that it failed to disclose and 10 should have disclosed the related nature of certain other sales:

11 Year ended December 31,

12 2009 2010 Ningbo Litong Petrochemical Co., Ltd (“Ningbo $17,922,288 $29,625,766

13 Litong”)7

90. Keyuan admitted in its 2010 10-K that it failed to disclose and should 14

15 h ave disclosed the following purchases of raw materials from related parties:

16 Purchase of Raw Material Purchases From Related Parties Year ended December 31,

17 2009 2010 18 Ningbo Kewei $952,594 $4,465,563

Ningbo Kunde $3,777,986 $20,549,245

19 Total $4,730,580 $25,014,808

20 91. The purchases of raw material from related parties was a material

amount of the Company’s raw material inventory:

21 Year ended December 31, 2009 2010

2 Total Raw Material Purchases From Related $4,730,580 $25,014,808

23 Parties Total Raw Materials $12,922,654 $53,160,604

24 Percentage of Raw Materials from Related 36% 47% Parties

25 5 According to the 2010 10-K, defendant Tao’s sister-in-law is Ningbo Wanze’s

26 legal representative. 6 According to the 2010 10-K, Hengfeng Shou, the Vice President of Ningbo

27 Keyuan Petrochemical, controls Zhenhai Jinchi. 7 According to the 2010 10-K, Ningbo Liton is the former 12.75% nominee

28 shareholder of Ningbo Keyuan.



1 92. Keyuan also admitted in its 2010 10-K that it failed to disclose and

should have disclosed additional purchases of raw material due to its related nature: Year ended December 31, 2009 2010

Ningbo Litong $3,280,566 $18,994,104

93. Keyuan admitted in its 2010 10-K that it failed to disclose and should

have disclosed additional related party transactions involving among, other things,

accounts receivable to the Company from related parties, and financing transactions

between related parties.

94. Keyuan through its quarterly and restated quarterly reports it filed with

the SEC on November 1, 2011, admitted that it should have disclosed the above

related party transactions in its interim 2010 and 2009 quarterly periods, when

those financial statements were first issued.

95. In Keyuan’s restated 10-Q for the second quarter ended June 30, 2010

filed with the SEC on November 1, 2011, the Company admitted that it failed to

disclose and should have disclosed the following related party sales and purchases

of raw material from related parties: Sales to Related Parties

Three Months ended June 30, 2009 I 2010

Ningbo Kunde -- 424,477 Zhenhai Jinchi -- 941,976

-- -- -- -- -- --

96. In Keyuan’s restated Form 10-Q for the third quarter ended September

30, 2010 filed with the SEC on November 1, 2011, the Company admitted that it

failed to disclose and should have disclosed the following related party sales and

purchases of raw material from related parties:

Sales to Related Parties Three Months ended September Nine Months ended

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Six Months ended June 30 2009 2010

-- $43,228,614 -- $3,958,248


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1 3 2009 2010

2009 2010

$7,362,101 $35,72

05 $7,362,101 $79,072,843

-- $294

64 -- $6,910,274

Purchases of Raw Materials from Related Parties Three Months ended September Nine Months ended September 30

30, 2009

F 2010 2009 2010 Ningbo Kewei -- -- -- $4,440,207 Ningbo Kunde $2,530,203 $14,154,723 1 $2,530,203 $15,409,928

The Undisclosed Related Party Transactions Were Not Arm’s Length

Transactions

97. The undisclosed related party transactions personally benefited the

identified defendants and were not arm’s length transactions.

98. The gross profit margin on related party sales was significantly smaller

than the profit margins Keyuan realized from non-related party sales. Stated

differently, dollar-for-dollar Keyuan was earning less profit from sales related

parties than it was on sales to non-related parties.

99. For example, for Q3 2010 the gross profit margin on the related party

sales was 11.4%, yet it was 25.2%% for the external sales. A table comparing the

gross profit margins from related party sales and external sales for each reporting

period in 2010 is attached Exhibit 5, and is incorporated herein by reference.

100. Not surprisingly, in the Company’s 2010 10-K filed with the SEC on

October 20, 2010 that set forth the restatement adjustments above, the Company’s

auditor took the drastic step of qualifying its audit opinion by explaining that:

The Company has significant transactions and relationships with related parties and certain other parties which are described in Note 24 to the consolidated financial statements. It is possible that the terms of these transactions may not be the same as those that would result from transactions among unrelated parties.

101. The Company admitted that it committed crimes in connection with

the related party transactions. In the 2010 10-K Keyuan revealed that:

2 I Zhenhai Jinchi

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1

2 [W]e engaged in certain related and other parties in short term financings to

overcome the restrictions regarding the use of certain bank loans or to satisfy

3

the banks’ internal requirements to demonstrate the usage of the loans.

4 Though we are current on our loan payments and as a general rule, the risk of

prosecution and or civil liabilities is diminished if the loans have been repaid,

5 we are advised that such practices may have been in violation of PRC

6 banking laws.

7 102. Defendants also lied to benefit the related parties. In the 2010 10-K,

8 the Company stated in relevant part:

9

In the past we sometimes accommodated requests from our customers

10 to change the name of products so that our customers could save on

freight costs.

11 Attached as Exhibit 6 and incorporated by reference herein are selected portions

12 of Keyuan’s October 20, 2011 10-K in which it details the related party

13 transactions and the nature of the relationships that require such transactions be

14 disclosed as “related party” under GAAP. 15

16 Defendants’ Misleading Financial Statements

103. During the Class Period, the following SEC filings were rendered 17

materially misleading due to Defendants’ nondisclosure of the material related 18

party transactions.

19 (a) 10-Q for the second quarter ended June 30, 2010, filed with the SEC

20 on August 16, 2010, signed by defendants Tao and Li; and

21 (b) 10-Q for the third quarter ended September 30, 2010, filed with the 22 SEC on November 15, 2010, signed by defendants Tao, Li, and Xue.

23

(c) Registration Statements on form S-1 filed with the SEC on September

24 2, 2010, October 15, 2010, November 3, 2010, December 29, 2010, January 14,

25 2011 , each signed by Chunfeng Tao, Aichun Li, and Weifeng Xue.

26

104. Defendants’ nondisclosure of the related party transactions in the

27 financial statements for fiscal 2009 included in the Offering Documents rendered

28 those documents materially misleading. The Company’s Offering Documents, had



1 section entitled “Certain Relationships and Related Party Transactions.” While

2 certain related party transactions were disclosed, none of the above related party

3 transactions were disclosed.

4 105. The Offering Documents for the Private Placement also contained 5 audited financial statements of Keyuan for the fiscal years ended December 31, 6 2009 and 2008. There was no disclosure of any related party transactions in the

7 Offering Documents.

8

106. Defendants represented that Keyuan’s financial statements included in

9 each of the above SEC filings were prepared according to, and conformed to,

10 GAAP.

11 107. Each of Keyuan’s 10-Qs, S-1 Registration Statements and the Offering

12 Documents omitted to disclose the related party transactions, violated GAAP and

13 were therefore misleading.

14 Truth Begins to Emerge and Materialize Damaging Investors

15 108. Prior to market open on April 1, 2011, trading in the Company’s stock

16 was inexplicably halted. The last trade was at $4.88/share.

17 109. Later in the morning, the Company filed a Form 12b-25 with the SEC

18 announcing that it would not be able to timely file its annual report for the fiscal

year ended December 31, 2010 due to issues raised by Keyuan’s auditor, KPMG, 19

LLP, relating to “regarding certain cash transactions and recorded sales.” The 20

announcement also revealed that the Audit Committee has also commenced an 21 investigation. The Form 12b-25 states: 22

In connection with the Registrant’s financial statements as at December 31,

23

2010 and for the fiscal year then ended, issues were raised by the Registrant’s

24 independent auditor, primarily relating to unexplained issues regarding

certain cash transactions and recorded sales. The independent auditor

25 reported these issues to the Registrant’s Audit Committee. The Registrant’s

26 Audit Committee has engaged independent legal counsel and commenced an

investigation of the issues raised by the Registrant’s auditors. Inasmuch as

27 completion of Registrant’s 2010 financial statements is dependent, following

28 completion of the Audit Committee’s investigation, upon a satisfactory



1 resolution of the issues raised and any other matters that may come to light as

2 a result of further audit procedures, the Registrant was not able to complete

its Form 10-K Annual Report by March 31, 2011. Although the Registrant

3

believes that the Audit Committee shall undertake to complete its

4 investigation as soon as practicable, and the Registrant shall use its best

efforts to file the Annual Report by April 15, 2011, there can be no assurance

5 that it will be able to do so by such date.

6

7 110. During the afternoon on April 1, 2011, the Company filed an 8-K with

8 the SEC reiterating the matters set forth in the SEC filings earlier that day, and

9 announcing that the Company has been informed by its auditor that the Company’s

previously issued financial statements cannot be relied upon. The 8-K states in 10

relevant part: 11

12 Item 4.02 Non-Reliance on Previously Issued Financial Statements

13

We are in the process of preparing our Annual Report on Form 10-K for the

14 year ending December 31, 2010, which is due on March 31, 2011. In

connection with our consolidated financial statements as at December 31,

15

2010 and for the fiscal year then ended, issues were raised by our

16 independent auditor, primarily relating to the unexplained issues regarding

certain cash transactions and recorded sales. The independent auditor

17 reported these issues to our Audit Committee, and our Audit Committee has

18 commenced an investigation of the issues raised. Inasmuch as completion of

our 2010 consolidated financial statements is dependent, upon a satisfactory

19 resolution, following completion of our Audit Committee’s investigation, of

20 the issues raised and any other matters that may come to light as a result of

further audit procedures, we were not able to complete our Form 10-K

21

Annual Report by March 31, 2011. Although we believe that the Audit

22 Committee has undertaken to complete its investigation as soon as

practicable, and we will use our best efforts to file the Form 10-K Annual

23

Report by April 15, 2011, there can be no assurance that we will be able to

24 do so by such date.

25

In light of the investigation by our Audit Committee, our auditors have

26 informed us that there is a possibility that we may be required to make

certain adjustments to certain of our previously issued financial statements,

27 and that such previously issued financial statements may not be relied upon.

28 Although we are hopeful that the results of our Audit Committee’s



1

investigation will not require material adjustments or restatements of our

2 historical financial statements, there can be no assurance that this will be the

case. 3

4 As set forth above, our Audit Committee is conducting an investigation of

the above referenced issues raised by our independent auditors during their

5 audit of the financial statements that are to be included in the subject Annual

6 Report. The investigation has just commenced and no conclusions have been

reached by the Audit Committee. As it is possible that the issues raised may

7 either result in material changes or restatements of our financial statements

8 previously filed, or be resolved to the satisfaction of both the Audit

Committee and the auditors, at this time, we cannot estimate the type of or

9 amount of change that may occur in connection with the audit of our 2010

10 consolidated financial statements or any financial statements previously filed.

11 111. On May 20, 2011, KPMG resigned as the Company’s auditor.

12 112. On October 6, 2011, the Company filed an 8-K that the Company’s

13 stock would be delisted from the NASDAQ.

14 113. On October 7, 2011, after having been halted since April 1, 2011, the

15 Company’s stock began trading over-the-counter on the “Pink Sheets.” The

16 Company’s stock opened for trading at $1.05/share (down $3.83/share) and

eventually closed at $1.50/share, a decline of $3.38/share or 69%. 17

114. On October 19, 2011, the Company filed an 8-K with the SEC that 18

Keyuan’s Q2 and Q3 2009 10-Qs would be restated, because of, among other 19

things, the need to add “disclosures of our related party transactions to ensure that 20 we include all of the disclosures required under US GAAP and the rules and 21 regulations of the Securities Exchange Commission.”

22

115. On October 20, 2011 the Company filed its annual report for the fiscal

23 year ended December 31, 2010 which provided certain restatement adjustments

24 relating to the undisclosed related party transactions set forth above.

25

116. On November 1, 2011, the Company filed its restated 10-Q of the

26 second quarter ended June 30, 2010, and third quarter ended September 30, 2010.

27 Additional Allegations Demonstrating Scienter

28



1 117. The breadth and scope of the related party transactions support a

2 strong inference of scienter. In addition to the millions in sales and purchases of 3 raw materials, there were undisclosed related party transactions, there was related 4 party purchase of transportation services, related party guarantees, short-term 5 financings to and from related parties, and accounts payable and receivable to

6 related parties. There were more than 16 different related party entities involved in

7 the undisclosed related party transactions.

8

118. Keyuan was aware of the requirement to disclose material related party

9 transactions, as it disclosed some related party transactions in the Offering

10 Documents and in periodic reports filed with the SEC during the Class Period.

11 119. The Company’s extensive and pervasive lack of internal controls as set

12 forth by the 2010 10-K and the restated 10-Qs filed with the SEC.

13 120. During the Class Period, as evidenced by the 2010 10-K, the Company

14 had “[a] Chief Financial Officer (CFO) for Chinese operations that did not report to

15 the Company’s CFO.”

16 121. Keyuan’s own internal investigation of the matters alleged herein

17 identified possible violations of U.S. Securities laws.

The SEC Has Warned of Chinese Reverse Merger Companies (“RCMs”) Like 18

Keyuan

19 122. Chinese reverse mergers have been a magnet for disreputable stock

20 promoters, leading the SEC to issue warnings about investing in companies like 21 Keyuan.

22 123. Shielded by the geographic distance of thousands of miles and 23 operating under a regulatory framework that is a world apart from the SEC’s

24 oversight, RCMs have few incentives to provide complete and accurate disclosures

25 to American investors. An August 28, 2010 article in Barron’s by Bill Alpert and

26 Leslie P. Norton entitled, “Beware This Chinese Export,” discusses the enforcement

27 problems that American regulators face when dealing with Chinese companies that

28 trade on U.S. exchanges through RCMs. The article states that “[t]he SEC’s



enforcement staff can’t subpoena evidence of any fraudulent activities in China,

and Chinese regulators have little incentive to monitor shares sold only in the U.S.”

124. U.S. regulators have finally begun to take notice of the manipulation

and fraud endemic in RCMs. The SEC has recently established a task force to

investigate investors’ claims regarding the impropriety and fraud of RCMs trading

on the U.S. markets. SEC Commissioner Luis A. Aguilar (the “Commissioner”)

discussed Chinese reverse mergers and the process of “backdoor registration,”

stating: In the world of backdoor registrations to gain entry into the U.S. public market, the use by Chinese companies has raised some unique issues, even compared to mergers by U.S. companies. Two important ones are:

• First, there appear to be systematic concerns with the quality of the auditing and financial reporting; and

• Second, even though these companies are registered here in the U.S., there are limitations on the ability to enforce the securities laws, and for investors to recover their losses when disclosures are found to be untrue, or even fraudulent.

I am worried by the systematic concerns surrounding the quality of the financial reporting by these companies. In particular, according to a recent report by the staff of the Public Company Accounting Oversight Board (PCAOB), U.S. auditing firms may be issuing audit opinions on the financials, but not engaging in any of their own work. Instead, the U.S. firm may be issuing an opinion based almost entirely on work performed by Chinese audit firms. If this is true, it could appear that the U.S. audit firms are simply selling their name and PCAOB-registered status because they are not engaging in independent activity to confirm that the work they are relying on is of high quality. This is significant for a lot of reasons, including that the PCAOB has been prevented from inspecting audit firms in China.

125. On June 9, 2011, the SEC issued an Investor Bulletin warning

investors about investing in companies that enter U.S. markets through RCM “...

there have been instances of fraud and other abuses involving reverse merger

companies.” “Given the potential risks, investors should be especially careful when

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1 considering investing in the stock of reverse merger companies,” said Lori J.

2 Schock, Director of the SEC’s Office of Investor Education and Advocacy. 3 PLAINTIFFS’ CLASS ACTION ALLEGATIONS 4 126. Plaintiffs bring this action as a class action pursuant to Federal Rules 5 of Civil Procedure 23(a) and (b)(3) on behalf of the following Class: (a) a class

6 consisting of all persons other than Defendants who purchased the common stock

7 of Keyuan during the Class Period; and (b) a class consisting of all persons other

8 than Defendants who purchased Keyuan securities pursuant to the Private

9 Placement. Excluded from the Class are the Defendants, TriPoint Global Equities,

10 LLC (“TriPoint”), the officers and directors of the Company or TriPoint at all

11 relevant times, members of their immediate families and their legal representatives,

12 heirs, successors or assigns and any entity in which defendants have or had a

13 controlling interest.

14 127. The members of the Class are so numerous that joinder of all members

15 is impracticable. Throughout the Class Period, Keyuan’s securities were actively

16 traded on the NASDAQ. While the exact number of Class members is unknown to

17 Plaintiffs at this time and can only be ascertained through appropriate discovery,

Plaintiffs believe that there are at least hundreds of members in the proposed Class. 18

Members of the Class may be identified from records maintained by Keyuan or its 19

transfer agent and may be notified of the pendency of this action by mail, using a 20 form of notice customarily used in securities class actions. 21 128. Plaintiffs’ claims are typical of the claims of the members of the Class, 22 as all members of the Class are similarly affected by Defendants’ wrongful conduct 23 in violation of federal law that is complained of herein.

24

129. Plaintiffs will fairly and adequately protect the interests of the

25 members of the Class and have retained counsel competent and experienced in class

26 and securities litigation.

27

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1 130. Common questions of law and fact exist as to all members of the Class

2 and predominate over any questions solely affecting individual members of the 3 Class. Among the questions of law and fact common to the Class are:

4 (a) whether the federal securities laws were violated by Defendants’ acts 5 as alleged herein;

6

(b) whether the Offering Documents were materially misleading;

7

(c) whether public statements made by Defendants to the investing public

8 during the Class Period omitted material facts about the business, operations and

9 management of Keyuan; and

10

(d) to what extent the members of the Class have sustained damages and

11 the proper measure of damages.

12 131. A class action is superior to all other available methods for the fair and

13 efficient adjudication of this controversy since joinder of all members is

14 impracticable. Furthermore, as the damages suffered by individual Class members

15 may be relatively small, the expense and burden of individual litigation make it

16 impossible for members of the Class to redress individually the wrongs done to

17 them. There will be no difficulty in the management of this action as a class action.

Applicability of Presumption of Reliance: 18

Affiliated Ute

19 132. Neither Plaintiffs nor the Class need prove reliance – either

20 individually or as a class because under the circumstances of this case, which 21 involves a failure to disclose the material related party transactions described herein 22 above, positive proof of reliance is not a prerequisite to recovery, pursuant to ruling 23 of the United States Supreme Court in Affiliated Ute Citizens of Utah v. United

24 States , 406 U.S. 128 (1972). All that is necessary is that the facts withheld be

25 material in the sense that a reasonable investor might have considered the omitted

26 information important in deciding whether to buy or sell the subject security.

27

28 Applicability of Presumption of Reliance:



1 Fraud-on-the-Market Doctrine

2 133. At all relevant times, the market for Keyuan’s common stock was an 3 efficient market for the following reasons, among others:

4 (a) Keyuan’s met the requirements for listing on the NASDAQ, a highly 5 efficient and automated market;

6

(b) During the Class Period, on average, over 175,000 shares were traded

7 weekly or more than 2.0% of the float was traded on a weekly basis, demonstrating a

8 very active and broad market for Keyuan stock and permitting a strong presumption of an

9 efficient market;

10 (c) As a regulated issuer, Keyuan filed periodic public reports with the

11 SEC;

12 (d) Keyuan regularly communicated with public investors via established

13 market communication mechanisms, including through regular disseminations of

14 press releases on the national circuits of major newswire services and through

15 other wide-ranging public disclosures, such as communications with the financial

16 press and other similar reporting services;

17 (e) Keyuan was followed by several securities analysts employed by

major brokerage firms who wrote reports that were distributed to the sales force 18

and certain customers of their respective brokerage firms during the Class 19

Period. Each of these reports was publicly available and entered the public 20 marketplace;

21 (f) Numerous NASD member firms were active market-makers in Keyuan 22 stock at all times during the Class Period; and

23

(g) Unexpected material news about Keyuan was rapidly reflected and

24 incorporated into the Company’s stock price during the Class Period.

25

134. As a result of the foregoing, the market for Keyuan’s common stock

26 promptly digested current information regarding Keyuan from all publicly available

27 sources and reflected such information in Keyuan’s stock price. Under these

28 circumstances, all purchasers of Keyuan’s common stock during the Class Period



1 suffered similar injury through their purchase of Keyuan’s common stock at

2 artificially inflated prices, and a presumption of reliance applies. 3

4 FIRST CLAIM 5

Violation of Section 10(b) Of

6

The Exchange Act Against and Rule 10b-5

7

Promulgated Thereunder Against All Defendants

8

135. Plaintiffs repeat and reallege each and every allegation contained

9 above as if fully set forth herein.

10 136. This claim is brought against Keyuan and all of the Individual

11 Defendants, except that defendant Li is being sued under this Claim for only the

12 Public Class.

13 137. During the Class Period, Defendants carried out a plan, scheme and

14 course of conduct which was intended to and, throughout the Class Period, did: (1)

15 deceive the investing public, including plaintiffs and other Class members, as

16 alleged herein; and (2) cause plaintiffs and other members of the Class to purchase

17 Keyuan’s common stock at artificially inflated prices. In furtherance of this

unlawful scheme, plan and course of conduct, Defendants, and each of them, took 18

the actions set forth herein. 19

138. Defendants (a) employed devices, schemes, and artifices to defraud; 20 (b) made untrue statements of material fact and/or omitted to state material facts 21 necessary to make the statements not misleading; and (c) engaged in acts, practices, 22 and a course of business that operated as a fraud and deceit upon the purchasers of 23 the Company’s common stock in an effort to maintain artificially high market

24 prices for Keyuan’s common stock in violation of Section 10(b) of the Exchange

25 Act and Rule 10b-5 thereunder. All Defendants are sued either as primary

26 participants in the wrongful and illegal conduct charged herein or as controlling

27 persons as alleged below.

28



1 139. Defendants, individually and in concert, directly and indirectly, by the

2 use, means or instrumentalities of interstate commerce and/or of the mails, engaged 3 and participated in a continuous course of conduct to conceal adverse material 4 information about the business, operations and future prospects of Keyuan as 5 specified herein.

6

140. These Defendants employed devices, schemes and artifices to defraud,

7 while in possession of material adverse non-public information and engaged in acts,

8 practices, and a course of conduct as alleged herein in an effort to assure investors

9 of Keyuan’s value and performance and continued substantial growth, which

10 included the making of, or participation in the making of, untrue statements of

11 material facts and omitting to state material facts necessary in order to make the

12 statements made about Keyuan and its business operations and future prospects in

13 the light of the circumstances under which they were made, not misleading, as set

14 forth more particularly herein, and engaged in transactions, practices and a course

15 of business that operated as a fraud and deceit upon the purchasers of Keyuan’s

16 common stock during the Class Period.

17 141. Each of the Individual Defendants’ primary liability, and controlling

person liability, arises from the following facts: (1) the Individual Defendants were 18

high-level executives, directors, and/or agents at the Company during the Class 19

Period and members of the Company’s management team or had control thereof; 20 (2) each of these defendants, by virtue of his or her responsibilities and activities as 21 a senior officer and/or director of the Company, was privy to and participated in the 22 creation, development and reporting of the Company’s financial condition; (3) each 23 of these defendants enjoyed significant personal contact and familiarity with the

24 other defendants and was advised of and had access to other members of the

25 Company’s management team, internal reports and other data and information

26 about the Company’s finances, operations, and sales at all relevant times; and

27 (4) each of these defendants was aware of the Company’s dissemination of

28



1 information to the investing public which they knew or recklessly disregarded was

2 materially misleading. 3 142. Defendants had actual knowledge of the omissions of material facts set 4 forth herein, or acted with reckless disregard for the truth in that they failed to 5 ascertain and to disclose such facts, even though such facts were available to them.

6 Such Defendants’ material omissions were done knowingly or recklessly and for

7 the purpose and effect of concealing Keyuan’s operating condition and future

8 business prospects from the investing public and supporting the artificially inflated

9 price of its common stock. As demonstrated by Defendants’ misleading financial

10 statements issued throughout the Class Period, Defendants, if they did not have

11 actual knowledge of the omissions alleged, were reckless in failing to obtain such

12 knowledge by deliberately refraining from taking those steps necessary to discover

13 whether those financial statements were misleading.

14 143. As a result of the dissemination of the materially misleading

15 information and failure to disclose material facts, as set forth above, the market

16 price of Keyuan’s common stock was artificially inflated during the Class Period.

17 In ignorance of the fact that market prices of Keyuan’s publicly-traded common

stock were artificially inflated, and relying directly or indirectly on the misleading 18

financial statements issued by Defendants, or upon the integrity of the market in 19

which the common stock trades, and/or on the absence of material adverse 20 information that was known to or recklessly disregarded by Defendants but not 21 disclosed in public statements by Defendants during the Class Period, Plaintiffs and 22 the other members of the Class acquired Keyuan common stock during the Class 23 Period at artificially high prices and were or will be damaged thereby.

24

144. At the time of said omissions, Plaintiffs and other members of the

25 Class were ignorant of their misleading nature, and believed them to be true. Had

26 Plaintiffs and the other members of the Class and the marketplace known the truth

27 regarding Keyuan’s financial results, which were not disclosed by defendants,

28 Plaintiffs and other members of the Class would not have purchased or otherwise



1 acquired their Keyuan common stock, or, if they had acquired such common stock

2 during the Class Period, they would not have done so at the artificially inflated 3 prices that they paid. 4 145. By virtue of the foregoing, Defendants have violated Section 10(b) of 5 the Exchange Act, and Rule 10b-5 promulgated thereunder.

6

146. As a direct and proximate result of Defendants’ wrongful conduct,

7 Plaintiffs and the other members of the Class suffered damages in connection with

8 their respective purchases and sales of the Company’s common stock during the

9 Class Period.

10 147. This action was filed within two years of discovery of the fraud and

11 within five years of each plaintiff’s purchases of securities giving rise to the cause

12 of action.

13 SECOND CLAIM

14 Violation of Section 20(a) Of

15 The Exchange Act Against the Individual Defendants

16 148. Plaintiffs repeat and reallege each and every allegation contained

17 above as if fully set forth herein.

149. This claims is brought against all Individual Defendants, except that 18

defendant Li is being sued under this Claim for only the Public Class. 19

150. The Individual Defendants acted as controlling persons of Keyuan 20 within the meaning of Section 20(a) of the Exchange Act as alleged herein. By 21 virtue of their high-level positions, agency, and their ownership and contractual 22 rights, participation in and/or awareness of the Company’s operations and/or 23 intimate knowledge of the misleading financial statements filed by the Company

24 with the SEC and disseminated to the investing public, the Individual Defendants

25 had the power to influence and control, and did influence and control, directly or

26 indirectly, the decision-making of the Company, including the content and

27 dissemination of the various statements that plaintiffs contend are misleading. The

28 Individual Defendants were provided with or had unlimited access to copies of the



1 Company’s reports, press releases, public filings and other statements alleged by

2 Plaintiffs to have been misleading prior to and/or shortly after these statements 3 were issued and had the ability to prevent the issuance of the statements or to cause 4 the statements to be corrected. 5

151. At the time of the Private Placement Tao was Keyuan’s Chairman,

6 President, Chief Executive Officer and Chief Financial Officer. Thus, he had day-

7 to-day control of Keyuan’s business and operations. Given that Tao held nearly all

8 the top executive level positions at the time of the Private Placement, and was also

9 Chairman of Keyuan, Tao had control over the Private Placement, including the

10 drafting of and ultimate authority over the Offering Documents.

11 152. Given Tao’s control, over the Company and the Private Placement, his

12 scienter is imputed to Keyuan.

13 153. During the Class Period, defendant Li was Keyuan’s CFO. As

14 Keyuan’s CFO she was the officer most knowledgeable about US GAAP and

15 financial reporting. At all relevant times Li was responsible for the Company’s

16 review and disclosure of material related party transactions, and the accurate

17 disclosure of such transactions in the periodic reports she signed and was issued

during the Class Period. 18

154. Under the Sarbanes-Oxley Act, both defendants Li and Tao were 19

responsible for the Keyuan’s disclosure controls. As such, both Li and Tao has an 20 independent responsibility and duty to assure themselves that material information 21 required to be disclosed by Keyuan in its SEC filings, i.e. material related party 22 transactions, are recorded, processed, and disclosed. 23

155. In particular, each Defendant had direct and supervisory involvement

24 in the day-to-day operations of the Company and, therefore, is presumed to have

25 had the power to control or influence the particular transactions giving rise to the

26 securities violations as alleged herein, and exercised the same.

27

28



1 156. As set forth above, Keyuan and the Individual Defendants each

2 violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this 3 Complaint.

4 157. By virtue of their positions as controlling persons, the Individual 5 Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct

6 and proximate result of Defendants’ wrongful conduct, Plaintiffs and other

7 members of the Class suffered damages in connection with their purchases of the

8 Company’s common stock during the Class Period.

9

158. This action was filed within two years of discovery of the fraud and

10 within five years of each Plaintiff’s purchase of securities giving rise to the cause of

11 action.

12 PRAYER FOR RELIEF

13 WHEREFORE , Plaintiffs pray for relief and judgment, as follows:

14 (a) Determining that this action is a proper class action, designating

15 Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil

16 Procedure and Plaintiffs’ counsel as Class Counsel;

17 (b) Awarding compensatory damages in favor of Plaintiffs and the

other Class members against all defendants, jointly and severally, for all damages 18

sustained as a result of defendants’ wrongdoing, in an amount to be proven at trial, 19

including interest thereon;

20 (c) Awarding Plaintiffs and the Class their reasonable costs and

21 expenses incurred in this action, including counsel fees and expert fees; and

22 (d) Awarding such other and further relief as the Court may deem 23 just and proper.

24

JURY TRIAL DEMANDED

25

Plaintiffs hereby demand a trial by jury.

26

27 Dated: May 20, 2013 Respectfully submitted,

28



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THE ROSEN LAW FIRM, P.A.

/ao-t Laurence M. Rosen, Esq. (SBN 219683) 355South Grand Avenue, Suite 2450 Los Angeles, CA 90071 Telephone: (213) 785-2610 Facsimile: (213) 226-4684 Email: [email protected]

Lead Counsel for Lead Plaintiff and Class


27

28


AMENDED CERTIFICATION

The individual or institution listed below (the "Plaintiff') authorizes the Rosen Law Firm, P.A. to file an action or amend a current action under the federal securities laws to recover damages and to seek other relief against Keyuan Petrochemicals, Inc. ("KEYP"), and certain of its officers and directors. The Rosen Law Firm, P.A. agrees to prosecute the action on a contingent fee basis not to exceed one-third of any recovery and will advance all costs and expenses. Any legal fees and expenses will be determined by and payable, only upon order of the U.S. District Court.

Plaintiff declares, as to the claims asserted under the federal securities laws, that:

1. I have reviewed the complaint against KEYP and certain of its officers and directors and I retain the Rosen Law Firm, P.A. as counsel in this action for all purposes.

2. I did not engage in transactions in the securities that are the subject of this action at the direction of plaintiffs counsel or in order to participate in this or any other litigation under the securities laws of the United States.

3. I am willing to serve as a lead plaintiff either individually or as part of a group. A lead plaintiff is a representative party who acts on behalf of other class members in directing the action, and whose duties may include testifying at deposition and trial.

4. The following is a list of all of the purchases and sales I have made in KEYP securities during the class period set forth in the complaint. I have made no transactions during the class period in the debt or equity securities that are the subject of this lawsuit except those set forth below.

Number of Date(s) Price Paid Date(s) Sold Price Sold Shares Purchased Purchased Per Share (if applicable) Per Share or Sold 1,000 Units 4/1212010 $35/Unit $

1,000sbares I /'tbf,_oc, $

$ $ $ $

PLEASE FAX CERTIFICATION TO ROSEN LAW FIRM at (212) 202-3827 OR EMAIL TO [email protected] OR SEND BY U.S. MAIL TO: THE ROSEN LAW FIRM PA 275 MADISON AVENUE, 34th FLOOR NEW YORK, NY 10016

Signature:________ Name: Address:

Phone: E-mail:


5. 1 have not, within the three years preceding the date of this certification, sought to serve or served as a representative party on behalf of a class in an action involving alleged violations of the federal securities laws, except: for the following company(ies):

6. 1 will not accept any payment for serving as a representative party beyond my pro rata share of any recovery, except reasonable costs and expenses, such as travel expenses and lost wages directly related to the class represcntalion, as ordered or approved by the court pursuant to law.

I declare under penalty of perjury that the foregoing is true and correct. Executed this I ' day of 2013.

Item, 4 (continue from prior page if needed)

Number of Date(s) Price Paid Date(s) Sold Price Sold Shares Purchased Purchased Per Share (if applicable) Per Share or Sold

PLEASE FAX CERTIFICATION TO ROSEN LAW FIRM at (212) 202-3827 2 OR EMAIL TO INFQJROSENLEGALCOM OR SEND BY LLS. MAIL TO: THE ROSEN LAW FIRM PA 275 MADISON AVENUE, 34" FLOOR NEW YORK, NY 10016


CERTIFICATE OF SERVICE

I, Zachary Halper, pursuant to 28 U.S.C. § 1746, hereby declare under penalty of perjury

as follows: I am an employee of the Rosen Law Firm, P.A. I am over the age of eighteen. On

May 20,2013, 1 served the following THIRD AMEND AMENDED CLASS ACTION

COMPLAINT FOR VIOLATION OF THE SECURITIES LAWS by U.S. mail to counsel of

record for defendants at the addresses listed below:

Robert David Weber Mark David Hunter DLA Piper US LLP Hunter Taubman Weiss LLP North Tower 255 University Drive 2000 Avenue of the Stars Suite 400 Coral Gables, FL 33134 Los Angeles, CA 90067-4704 305-629-8816 310-595-3000 Fax: 305-629-8877 Fax: 310-595-3309 Email: [email protected] Email: [email protected]

Counsel for defendant Keyuan Petrochemicals, Counsel for defendant Chunfeng Tao Inc. Howard M Privette Paul Hastings LLP 515 S Flower Street 25th Fl Los Angeles, CA 90071-2228 213-683-6000 Fax: 213-627-0705 Email: howardpriveUe(2lpaulhastings.com

Counsel for defendant Aichun Li

I declare under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. I declare that I am employed in the office of a member of the bar of

this Court at whose direction the service was made.

Executed on May 20, 2013, in New York, New York.

c'v

e/chary/Hdper

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