South Grand Avenue, Suite 2450 32013 Los Angeles, CA 90071...

Case 2:12-cv-05062-PSG-AJW Document 32 Filed 05/03/13 Page 1 of 78 Page ID #:305

II ALJ*L L

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]

0. 1711K, U.S. DISTRICT COURT

MAY 32013

CENTRAL DISTRICT OF CAL: FOR NIf V DEPJTV

Lead Counsel for Plaintiffs and the Class

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

BYRON BROWN, TTANQING ZHANG, CASE No.: 12-cv-5062 AND ROBERTO SALAZAR, INDIVTDUALLY AND ON BEHALF OF CLASS ACTION ALL OTHERS SIMILARLY SITUATED,

SECOND CONSOLIDATED Plaintiffs, AMENDED COMPLAINT FOR

VIOLATIONS OF THE FEDERAL vs. SECURITIES LAWS

AMBOW EDUCATION HOLDING LTD., J1N HUANG, PAUL CHOW, XUEJIJN

JURY TRIAL DEMANDED

XIE, MARK ROBERT HARRIS, LISA LO, DANIEL PHILLIPS, TAO SUN AND SASHA CHANG

I

Defendants.

Lead Plaintiff Tianqing Zhang, and named plaintiffs, Byron Brown and

Roberto Salazar ("Plaintiffs), by and through their attorneys, alleges the f011owing

upon information and belief, except as to those allegations concerning Plaintiffs,

which are alleged upon personal knowledge. Plaintiffs' information and belief is

based upon, among other things, their counsel's investigation, which includes

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1 Second Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws

:12-cv-05062-PSG-AJW Document 32 Filed 05/03/13 Page 2 of 78 Page ID #:306 Case 2

without limitation: (a) review and analysis of regulatory filings made by Ambow

Education Holding Ltd. ("Ambow" or the "Company"), with the United States

Securities and Exchange Commission ("SEC"); (b) review and analysis of press

releases and media reports issued by and disseminated by Ambow; (c) review of

other publicly available information concerning Ambow, (d) interviews of former

Ambow employees and other persons with personal knowledge of the facts alleged

herein.

NATURE OF THE ACTION AND OVERVIEW

1. This is a class action on behalf of purchasers of Ambow's American

Depositary Shares ("ADS") from the date of its initial public offering on August 5,

2010 through February 27, 2013, inclusive (the "Class Period"), seeking to pursue

remedies under Sections 11 and 15 of the Securities Act of 1933 (“Securities Act”)

and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the

"Exchange Act").

2. Ambow provides educational and career enhancement services in the

People's Republic of China. Ambow has two business divisions: "Better Schools,"

which includes tutoring centers and K-12 schools; and "Better Jobs," which

includes career enhancement centers and colleges.

3. On August 5, 2010, Ambow sold 10,677,207 American Depositary shares at

$10.00 per share raising $106,772,070 in an initial public offering to investors

(“IPO” or “Offering”) and its shares began trading on the New York Stock

Exchange (“NYSE”). 1

4. Ambow filed a prospectus for the offering on August 5, 2010 (the

“Prospectus”).

1 The underwriters sold another 1,601,582 additional ADSs as part of their overallotment option, raising another $16,015,820 from investors for Ambow.

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:12-cv-05062-PSG-AJW Document 32 Filed 05/03/13 Page 3 of 78 Page ID #:307

1 5. The ADS’s sold in the IPO were registered pursuant to an amended

2 registration statement filed with the SEC on July 20, 2010 and declared effective

3 August 5, 2010 (the “Registration Statement”).

4 6. Ambow’s Registration Statement contained misrepresentations and 5 omissions of material fact.

6 7. The Registration Statement misrepresented the nature of its acquisition of the

7 Changsha Study School (“Changsha Tutoring”), an entity engaged in providing

8 after-school tutoring services for junior high and high school students in Changsha,

9 which was purportedly acquired on November 15, 2008.

10 8. It recorded the purchase price for the acquisition as RMB52,282,000 ($7.7

11 million). (Prospectus at F-62-63). It represented that the purchase price consisted

12 of RMB25,000,000 in cash and RMB27,282,000 in equity exchanged through the

13 issuance of 1,400,560 ordinary shares.

14 9. In reality, this was a fake acquisition. Ambow paid its shares to the school’s

15 owner to borrow this school’s name and revenue for the IPO. Ownership and

16 control of the school and its revenue and income did not pass to Ambow in the

17 purported acquisition. This was reported by Changsha Tutoring’s owner to

18 Ambow’s auditor (PriceWaterhouseCoopers “PWC”) on July 2, 2012 and was

19 followed by a Company announcement on July 5, 2012 that its audit committee

20 would conduct an internal investigation.

21 10. In truth, Ambow never acquired Changsha tutoring. Instead, the cash for the

purchase was secretly returned back to Ambow in the form of fake software sales in 22

the following three years. This is confirmed by Plaintiffs’ counsel’s interview of a 23

close family member of Changsha Tutoring’s owner and by four articles in 24

reputable Chinese media. Based on these four news articles in reputable Chinese 25

media, described more fully below, Ambow structured other fake acquisitions in the 26 IPO to inflate its reported revenue. 27

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Case 2


1 11. In the Registration Statement, and following the IPO, Ambow touted its fast

2 growing, higher profit margin software business in an effort to increase its stock

3 price relative to its earnings. Ambow inflated its software sales by transferring 4 tuition revenue from its slower growing and less appealing bricks and mortar 5 education business in its career education subgroup into the revenue of software 6 sales by creating fake software sales contracts. These facts were confirmed by a

7 former Ambow manager. By doing so, Ambow was able to falsely report

8 outstanding (but false) annual growth of software sales of over 300% in 2009, 74%

9 in 2010, and 63% in 2011.

10 12. During fiscal 2011, as part of its scheme to inflate its software sales, Ambow

11 improperly reported its “sale” of software to distributors on credit even though the

12 distributors had no demonstrated ability to pay for the product in violation of

13 generally accepted accounting principles (“GAAP”). Ambow did not increase its

14 allowance for doubtful accounts by a dollar or percentage amount during 2011 even

15 though its accounts receivable (credit sales) skyrocketed – doubling in the third

16 quarter of 2011 and increasing 450% for the fiscal year 2011.

17 13. The longer a receivable is outstanding, the more remote the likelihood of

18 collection. In accordance with GAAP, provisions needed to be taken to reserve

19 against non-recoverabilty of outstanding receivables. To comply with GAAP’s loss

20 contingency provisions, Ambow was required to adopt policies which provided an

21 appropriate allowance for doubtful accounts to write off amounts that it was

probable Ambow would not collect. 22

14. Ambow’s failure to increase its allowance for doubtful accounts is 23

particularly deceitful because (a) during this period Ambow changed its prior 24

practice of not permitting credit sales, (b) the increase in credit sales was to new 25

and unproven customers with no payment history, and (c) any credit sales required 26 special approval from Ambow management – meaning management knowingly 27 deceived investors. 28


Case 2


1 15. In its IPO registration statement Ambow stated that it didn’t make sales on

2 credit, except in unusual circumstances to its two key distributors, and that any such

3 extensions of credit required special approval of management. Ambow stated that 4 its credit sales to the two key distributors were insignificant. Its allowance for 5 doubtful accounts for fiscal 2009 was RMB351,000 (US$ 51 ,395) 2 for total 6 accounts receivable of RMB21,879,000 (US$ 3,203,602) or 1.6%. For the three

7 months ended March 31, 2010, its allowance for doubtful accounts was

8 RMB351,000 (US$ 53,182) for total accounts receivable of RMB38,146,000 (US$

9 5,779,697) or 0.9%.

10 16. In its fiscal year 2010 annual report, as of December 31, 2010, Ambow

11 reported an allowance for doubtful accounts of RMB458,000 (US$ 69,394) and

12 total accounts receivable of RMB48,745,000 (US$ 7,385,606) or 0.9%.

13 17. Thus, Ambow had recorded a relatively low allowance for doubtful accounts

14 of 0.9% for its accounts receivable to reflect its policy of only granting credit to its

15 two key customers, in special circumstances, when approved by management.

16 18. Beginning in 2011, Ambow began to expand credit terms in violation of its

17 stated credit policies in an effort to recognize as much revenue as possible and

18 inflate its reported revenue figures.

19 19. Beginning in the third quarter of 2011, Ambow increased by 128% the

amount of sales on credit. Ambow made credit sales to customers that had no 20

21 proven payment history in violation of its stated credit policies and GAAP.

However, Ambow did not simultaneously increase its allowance for doubtful 22

accounts in absolute terms or as a percentage of total accounts receivable, even 23

though credit sales increased more than 450% from December 31, 2010 to 24

December 31, 2011. In fact, in each quarter during 2011, Ambow kept its 25

allowance for doubtful accounts at ($73,000) even though total accounts receivable 26 ballooned by 451%. 27

2 Exchange rate for 2009 is 1 USD = 6.8295 RMB; for 2010 is 1 USD = 6.6 RMB. 28


Case 2


1 20. During fiscal 2011, in each quarterly period and for the full year, Ambow

2 overstated materially its revenue, gross profit, operating profit, net income and

3 accounts receivable by material amounts. 4 21. On April 30, 2012, Ambow unexpectedly announced that it would be unable 5 to timely file its Annual Report on Form 20-F with the SEC for the 2011 fiscal 6 year.

7 22. On this news, the Company's shares declined $0.59 per share, or 7.71%, to

8 close on April 30, 2012, at $7.06 per share, on unusually heavy volume.

9 23. On May 16, 2012, Ambow disclosed that the Company was further delaying

10 the filing of its 2011 Annual Report with the SEC because the Company required

11 additional time to complete the audit of its 2011 financial statements and because

12 the Company had identified certain preliminary adjustments to its previously issued

13 2011 unaudited financial statements. Ambow stated it planned to make the

14 following adjustments, and possibly others, to correct its inaccurate financial

15 statements:

16 (a) to change its revenue recognition method with respect to sales to

17 certain distributors, leading to the reversal of between $13.5 million (RMB

18 85 million) and $15.1 million (RMB95 million) of revenue previously

19 recognized in 2011;

20 (b) to make a bad debt provision of between $2.1 million (RMB13

21 million) and $2.4 million (RMB15 million); and

(c) to increase its depreciation and other expenses by between $0.5 million 22

(RMB3 million) and $0.6 million (RMB3.5 million). 23

24 24. Additionally, on May 16, 2012, Ambow further disclosed that the Company

25 was evaluating whether to take a one-time non-cash charge of between $1.6 million

26 (RMB10 million) and $3.2 million (RMB20 million) associated with a 2011 27 acquisition, as well as the need to make an additional tax provision of between $3.2 28


Case 2


1 million (RMB20 million) and $4.8 million (RMB30 million) for one of its

2 subsidiaries.

3 25. On this news, the Company's shares declined $0.99 per share, or 17.55%, to 4 close on May 16, 2012 at $4.65 per share on unusually heavy volume, and further 5 declined $0.30 per share, or 6.45%, to close on May 17, 2012 at $4.35 per share, 6 also on unusually heavy volume.

7 26. On July 5, 2012 the company announced that, a former Ambow employee

8 made allegations of financial impropriety and wrongful conduct in connection with

9 the Company’s acquisition of a training school in 2008.

10 27. The Company also announced on July 5, 2012, that the Audit Committee of

11 the Board of Directors of the Company determined that it would conduct an internal

12 investigation to thoroughly review these allegations. The Company said it would

13 refrain from commenting further until the independent investigation is concluded.

14 28. The Company has never disclosed the results of its investigation.

15 29. Immediately following this announcement, Ambow’s share price plunged

16 $0.91 per share on July 5, $0.52 per share on July 6 and $0.43 per share on July 9,

17 2012.

18 30. On July 9, 2012, Jeffries reduced its ratings on Ambow stock as a result of

the adverse news. 19

20 31. On July 10, 2012, one of the investment banks for the IPO, Macquarie

21 Group, reduced its rating for Ambow as a result of the recent adverse news and its

share price dropped another 8.2% or $0.18 per share. 22

32. To date, Ambow has not revealed the results of its special investigation. 23

33. In the Registration Statement and throughout the Class Period, Defendants 24

made false and/or misleading statements, as well as failed to disclose material 25

adverse facts about the Company's business, operations, and prospects. Specifically, 26 Defendants made false and/or misleading statements and/or failed to disclose: 27

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Case 2

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(1) that certain of its acquisitions did not truly transfer control of the

school’s operations or its revenue and income to Ambow, (2) that the

cash purchase price for certain schools was secretly being returned to

Ambow in form of fake software sales that inflated its revenue and

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income, (3) that certain of the Company's distributors did not have an

6 adequate history of timely payment; (4) that, as such, the collection of

7 receivables from these distributors was not reasonably assured; (5)

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that, as a result, the Company was improperly recognizing revenue on

9 sales to these distributors; (6) that, as a result of the foregoing, the

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Company's financial results were misstated during the Class Period; (7)

11 that the Company lacked adequate internal and financial controls; and

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(9) that, as a result of the above, the Company's financial results were

13 materially false and misleading at all relevant times.

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15 34. On February 27, 2013, Bloomberg ran a news article publicizing the

16 amended complaint filed in this action on February 19, 2013. The amended

17 complaint included new allegations of fraud not previously disclosed concerning

18 the fraudulent 2008 acquisition, among other things. As a result of the adverse

19 facts publicized from the amended complaint, Ambow’s share price dropped $0.53

20 per share on February 27 and $0.13 per share on February 28 or 27% in aggregate.

21 35. On March 15, 2013, Baring Private Equity Asia Limited announced it had

made proposal to Ambow’s board of directors to purchase all outstanding shares of 22

Ambow stock for $1.46 per share and take the company private. The going private 23

proposal caused Ambow’s stock price to increase from the prior day’s closing price 24

of $1.01 per share to close at $1.55 per share on March 15, 2013 – a 53% increase. 25

36. On March 18, 2013, three of the Company’s directors resigned: Daniel 26 Phillips, Mark Harris, and Lisa Lo. 27

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Case 2


1 37. Daniel Phillips was the Chairman of the Company’s Audit Committee.

2 Phillips resigned because “the Audit Committee has reached a fundamental and

3 irreconcilable difference of opinion with Ambow’s senior management regarding 4 the process required to complete the current 10A investigation , and also regarding 5 proposed changes to Ambow’s internal controls and overall corporate governance 6 to address deficiencies identified by the Audit Committee.” [emphasis added].

7 38. A 10A investigation refers to Section 10A of the Exchange Act of 1934

8 (“Section 10A”), which provides that if an auditor detects or becomes aware of an

9 illegal act it must (a) determine whether it is likely that an illegal act occurred, and

10 if so, determine and consider the possible effect of the illegal act on the financial

11 statements of the issuer, and (b) inform the appropriate level of management and

12 the audit committee with respect to the illegal act.

13 39. In this context, 10A investigation refers to the investigation that the audit

14 committee had initiated in connection with the disclosure on July 5, 2012, by a

15 former Ambow employee to PWC of fraud in connection with the 2008 acquisition.

16 40. The audit committee retained law firm Fenwick & West and accounting firm

17 Ernst & Young to assist in its investigation. Satisfactory completion of the 10A

18 investigation was necessary in order for PWC to complete its audit of Ambow’s

fiscal 2012 financial statements 19

20 41. Mark Harris was also a member of the Company’s Audit Committee. In his

21 resignation letter, Harris stated that Ambow’s senior management was not only not

cooperative during the independent investigation, but that Ambow CEO, defendant 22

Jin Huang, was frustrating the efforts of the audit committee, Fenwick & West and 23

Ernst & Young to complete the investigation. 24

42. In order to complete the investigation the audit committee insisted on 25

reviewing the conduct of management, including defendant Jin Huang. The audit 26 committee asked defendant Jin Huang to resign as CEO or at least take a leave of 27

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1 absence, pending completion of the investigation. Huang refused to do either,

2 further frustrating the investigation.

3 43. Harris also stated the Audit Committee had required Ambow to put in place 4 enhanced internal controls throughout the company (including for treasury, external 5 financing, contract approvals and accounting records), but recent events 6 demonstrate that at least some of these changes, even when directed by the Board,

7 have been embraced at best reluctantly and with hesitation, and the controls are not

8 being honored consistently.

9 44. Harris stated that “Dr. Huang’s refusal to step aside will further frustrate and

10 extend Ambow’s investigation. As a result, and because the Audit Committee

11 (despite our efforts) has been unable to effect all of the changes in Ambow that I

12 believe are appropriate and necessary, I am tendering my resignation.”

13 45. Harris is an officer of Avenue Asia Capital Management, which manages GL

14 Asia, the largest single investor in Ambow, holding about 21% of Ambow’s

15 outstanding stock.

16 46. Lisa Lo was also the chairman of the Company’s compensation committee.

17 In her resignation letter, Lo stated that she was convinced by recent events and her

18 personal circumstances that she won’t be able to continue serving in these roles

19 effectively.

20 47. The three directors’ resignation letters are attached as Exhibit 5.

21 48. On disclosure of the three directors’ resignations on April 18, 2013.

Ambow’s share price dropped $0.25 per share or 16%, to close at $1.30 per share 22

on unusually heavy volume. 23

49. Ambow’s March 18, 2013 announcement focused mostly on the Barings 24

going private proposal and minimized the news of the 3 directors’ resignations. 25

Since Baring’s going private proposal was at $1.46 per share and served to buoy 26 Ambow’s stock price (as investors expected to sell their Ambow shares to Barings 27 for at least $1.46 per share), absent the Baring proposal and Ambow’s shifting 28



focus to that good news, Ambow’s share price would have dropped much further as

a result of the negative news of the 3 Ambow directors’ resignations.

50. On March 19, 2013, the Company appointed Justin Chen as the Chairman of

the audit committee and the Chairman of the Special Committee with respect to the

special investigation even though has absolutely no accounting or finance

background. Chen is a patent lawyer with no relevant experience to lead audit

committee or its investigation into financial fraud.

51. On information and belief, Justin Chen’s independence is highly questionable,

as he has been deeply involved with Ambow’s legal affairs since 2009. Justin Chen

represented Ambow during its negotiation with the former owners of those schools

acquired by Ambow in which the fraud occurred, including Changsha Tutoring and

the others; and has been handling disputes with those former owners as both the

Company’s counsel and Secretary of the Board of Directors. 3 .

52. On March 22, 2013, the Company’s independent auditor

PriceWaterhouseCoopers (“PWC”) resigned.

53. In its letter, PWC stated it was resigning as a result of its concerns that the

Investigation may not be given the necessary resources and time, and the presence

of existing management may make conducting an investigation of the scope that

PWC believes is warranted unlikely.

54. PWC also stated it has not reached any conclusions in connection with the

Investigation, which is still ongoing, although it is possible the ultimate outcome of

the Investigation and any remediation effects by the Company might have caused

PWC to seek additional information, conduct additional procedures and may have

caused PWC to conclude that the Company’s previously issued financial statements

and its opinions thereon should no longer be relied upon or that PWC could no

3 Justin Chen’s identification as the Board’s Secretary is indicated by the Company’s ordinary share certificates, as well as his participation in both roles in the Company’s 2011 annual shareholder meeting held in Hong Kong in November 2011

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1 longer rely on the Company’s internal controls or the representations of the

2 Company’s management. The Company’s press release regarding PWC’s

3 resignation is attached as Exhibit 6 4 55. While Ambow paraphrased PWC’s resignation letter using words like 5 “possible” and “might have”, PWC clearly resigned because Ambow’s CEO Jin 6 Huang had frustrated the investigation, and did not take the remedial steps PWC

7 required to address the illegal acts that PWC had learned of on July 5, 2012, which

8 had spawned the Investigation.

9 56. In addition, PWC’s determination that it was possible that the outcome of the

10 investigation would lead it to conclude that Ambow’s previously issued financial

11 statements (and PWC’s prior audit opinions) could not be relied on or that PWC

12 could not rely on the representations of Ambow management – support a finding

13 that Ambow’s financial statements were false and misleading during the Class

14 Period, and that defendants Huang and CFO Chow knew that Ambow’s financial

15 statements were false and misleading at all times.

16 57. Following PWC’s resignation, Fenwick & West LLP ("Fenwick") resigned

17 as counsel to the audit committee of the Company for the special investigation.

18 58. Upon disclosure of PWC’s and Fenwick’s resignation, the Company's shares

19 immediately declined $0.13 per share, or 11%, to $0.95 per share on unusually

20 heavy volume. Ambow’s share price would have fallen further, except that the

21 NYSE halted trading within two hours of market open because of the resignations

and statements made by PWC, Fenwick & West and the 3 directors. 22

59. On March 25, 2013, Baring withdrew its non-binding going private proposal 23

dated March 15, 2013 as a result of unexpected events, including the resignations of 24

three independent directors and the Company’s independent auditor and the 25

suspension of trading of the Company’s ADSs on the NYSE. 26 60. Ambow’s annual report for the fiscal year 2012 is due on March 31, 2013. It 27 has been delayed and not been filed as this date. 28



61. Then things really got interesting at Ambow! Something unprecedented

happened which evidences defendant Jin Huang’s intentional misconduct and

knowing violations of the securities laws.

62. On April 23, 2013, Former Ambow director Mark Harris caused the

investment fund he manages, GL Asia (owner of 21.6% of Ambow’s stock) 4 to file

a petition (the “Petition”) to the Grand Court of the Cayman Islands (where Ambow

is incorporated) to: (a) wind up Ambow and liquidate its assets, or in the alternative

to (b) enjoin defendant Jin Huang from stealing any of Ambow’s assets.

63. The basis for the Petition is that

• Dr. Huang has acted and continues to act in a manner which is oppressive

and unfairly prejudicial towards Ambow’s shareholders.

• Ambow’s shareholders cannot obtain any relief from Dr. Huang’s oppression

and unfairly prejudicial conduct without the Court’s intervention.

64. The basis for former director Mr. Harris’ investment fund’s Petition is

summarized by the following quotation from the Petition: 5

Loss of confidence in management

More fundamentally, Dr. Huang’s conduct has placed Ambow in

grave distress. Dr. Huang’s desire to remain entrenched in office—

and to frustrate any effort to investigate the allegations of wrongdoing

against her—demonstrate that she has elevated her personal interests

over those of the shareholders and Ambow, in plain violation of her

fiduciary duties as a director. Dr. Huang remains in control of

Ambow’s business, operations, and Board. Moreover, the

4 GL Asia Mauritius II Cayman Ltd. (“GL Asia”)- is managed by Avenue Capital Group (“Avenue Capital”). Mark Harris controls Avenue Capital and GL Asia. 5 The term “Shareholder” as used in the Petition refers to GL Asia, the investment fund managed by former director Mr. Harris.

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1 Shareholder is concerned that, without the proper and independent

2 oversight—which the Company now lacks—Dr. Huang may attempt

3 to enter into non-arms’ length transactions that divert revenue or

4 otherwise transfer assets from Ambow’s mainland China operations,

5 subsidiaries, and affiliated entities for consideration less than their fair

6 market value leaving Ambow’s shareholders with nothing more than

7 empty shells.

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Shareholder has justifiably lost confidence in Dr. Huang to manage

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the Company’s affairs in the best interests of all its members

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including the Shareholder. The longer Dr. Huang is allowed to

12 remain in control of Ambow, the greater the harm will be to both

13 Ambow and its shareholders.

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15 Need for independent liquidators

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17 In light of the above, there is a real and urgent need for independent

18 liquidators to be appointed in order to take control of the Company,

19 investigate the business and affairs of the Company and its senior

20 management, and protect the interests of shareholders.

21 Petition at ¶52-¶54.

65. That Ambow’s director (who is also a defendant in this action) would cause 22

his investment fund to level such serious charges (and seek such drastic relief) 23

against Ambow’s CEO Jin Huang speaks volumes about just how serious the 24

securities fraud at Ambow is and about how defendant Jin Huang is not only 25

ruthlessly attempting to cover up the fraud, but is intent on continuing to defraud 26 shareholders. 27

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1 66. Also on April 23, 2013, GL Asia sent a letter to Ambow’s board of directors

2 (“GL Asia’s Letter”).

3 67. GL Asia’s Letter gave credence to the alarming reports of allegations of 4 Ambow’s financial improprieties and wrongful conduct set forth in this complaint. 5 It states that: 6

It has become clear based on the public reports that Dr. Huang’s desire

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to entrench herself in her position as the Chairperson and CEO of the

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Company by her continuing failure to resign or take a leave of absence

9 continues to impede an impartial investigation of alleged accounting,

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finance and governance deficiencies. These critical Company affairs

11 are serving to (i) oppress the Shareholder’s interest as a shareholder of

12 the Company, (ii) unfairly prejudice the Shareholder’s rights as an

13 equity owner, and (iii) squander shareholder value.

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15 Shareholder Urges Steps to Protect the Company’s Assets

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17 The Shareholder urges each current individual member of the Board,

18 as well as the Company’s management, advisors and agents, not to

19 take, or permit to be taken, any action to manipulate the Company’s

20 corporate machinery to entrench existing management and directors to

21 the willful detriment of the Company and its shareholders or otherwise

impair or permit the continued destruction of shareholder value. 22

23 In particular, no current individual member of the Board or

24 management, or any of the Company’s advisors or agents, should

25 permit (i) any sale or other transfer of material assets of the 26 Company or any of its affiliated entities, (ii) any related-party 27 transactions, or (iii) any other conduct designed to conceal past 28



1 improprieties or to enrich the Company’s management at the

2 expense of the Company and its shareholders, while these matters

3 are pending before the Cayman court. Each current individual

4 member of the Board and management, as well as the Company’s

5 advisors and agents, should take all necessary steps to ensure that

6 any such activities do not occur. Each current individual Board

7 member and member of management, as well as the Company’s

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advisors and agents, are now on notice that should any of them do

9 otherwise, the Shareholder shall take further steps appropriate to

10 enforce its rights under applicable law, including without

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limitation, litigation against any or all of such persons in the

12 People’s Republic of China, the Cayman Islands, the United

13 States and any other relevant jurisdiction.

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15 Dr. Huang’s Refusal to Resign Continues to Place the Company in

16 Imminent Peril .

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18 As has been publicly announced, one day after a former employee

19 made allegations of financial impropriety and other wrongful conduct

20 in connection with the Company’s acquisition of a training school in

21 2008, on July 3, 2012, the Audit Committee of the Board commenced

an internal investigation (the “Internal Investigation”) to attempt to 22

review the allegations. In mid-March 2013, both members of the

23 Company’s Audit Committee resigned, as did the Audit Committee’s

24 outside legal advisors. In connection with their resignations, the

25 former Audit Committee members have cited an inability to complete

26 the Internal Investigation because of the continued presence of the

27 Company’s senior management and fundamental differences of 28



1 opinion with management regarding the process required in order to

2 complete the Internal Investigation.

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4 In a similarly alarming recent development, on March 22, 2013, the

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Company’s registered independent accounting firm,

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PricewaterhouseCoopers Zhong Tian CPAs Limited Company

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(“PWC”), announced its resignation, citing its concerns that the

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Internal Investigation may not be given the necessary resources and

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time, and that the presence of existing management may make

10 conducting an investigation of the scope that PWC believes is

11 warranted unlikely. Moreover, PWC suggested that the Internal

12 Investigation’s outcome could cause PWC to conclude that the

13 Company’s previously issued financial statements and its opinions

14 thereon should no longer be relied upon or worse, that PWC could no

15 longer rely on the Company’s internal controls or the representations

16 of the Company’s management.

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18 As a result of these and other developments, the New York Stock

19 Exchange reported that it suspended trading of the Company’s

20 American Depositary Shares on March 22, 2013.

21 Shareholder Urges Cessation of Further Destructive Behavior and

22 Vote to Replace Entire Board .

23

24 As these developments have unfolded, there have been no annual

25 general meetings of shareholders. The time has now come to hold a

26 shareholder meeting to provide the shareholders a voice and a vote for

27 who they would like to represent their interests. 28



1

2 Further deterioration of the Company’s business and value could be

3 avoided if Dr. Huang immediately resigns as CEO and director of the 4 Company and the remaining Board members each agree to resign 5

following a prompt annual general meeting of shareholders to replace 6 the entire board of directors. This will allow a new, unconflicted

7

Board to investigate, without further impediments, the financial

8

impropriety and wrongful conduct allegations, thereby allowing the

9

Company to continue to grow and unlock shareholder value.

10

11

We encourage other shareholders who may have similar concerns to

12 those expressed in this letter to consider taking actions that they deem

13 appropriate and necessary to protect their investment.”

14

15 68. GL Asia’s Petition seeks various forms of relief, including, in the absence of

16 other adequate relief, the winding-up of Ambow. The Petition also seeks the

17 immediate appointment of independent provisional liquidators to take control of

18 Ambow, investigate the business and affairs of Ambow and its senior management

19 and protect the interests of the Ambow’s shareholders.

20 69. The Petition and GL Asia’s Letter are attached hereto, and incorporated by

21 reference herein, as Exhibit 7 and Exhibit 8 respectively.

70. The statements made by GL Asia, an investment fund controlled by 22

defendant and former director Mr. Harris, show that the allegations of securities 23

fraud set forth herein are just the tip of the iceberg; that the fraud at Ambow is 24

pervasive, and that Ambow ‘s management is rotten to the core. 25

71. On April 30, 2013, Ambow notified investors that it is unable to file its 2012 26 annual report within the prescribed time period due to PwC’s resignation. 27

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1 72. From beginning of the Class Period up to date, the Company’s stock price

2 has dropped from $7.65 per share to $0.95 per share, or 87.58%. As to date, the

3 Company’s stock is still halted. 4 73. Absent the trading halt, Ambow’s share price would have dropped further. 5 Upon information and belief, when trading resumes, Ambow’s share price will 6 immediately drop below $0.95 per share.

7 74. As a result of Defendants' violations of the federal securities laws, and the

8 precipitous decline in the market value of Ambow's securities, Plaintiffs and other

9 Class members have suffered significant damages.

10

JURISDICTION AND VENUE

11 75. The claims asserted herein arise under Sections 10(b) and 20(a) of the

12 Exchange Act (15 U.S.C.§§78j(b) and 78t(a)) and Rule 10b-5 promulgated

13 thereunder by the SEC (17 C.F.R. § 240.10b-5), and pursuant to Sections 11 and 15

14 of the Securities Act (15 U.S.C. §§ 77k, 77l and 77(o)).

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

16 28 U.S.C. §1331 and Section 27 of the Exchange Act (15 U.S.C.§78aa), and

17 pursuant to Section 22(a) of the Securities Act.

18 77. Venue is proper in this Judicial District pursuant to 28 U.S.C. §1391(b) and

19 Section 27 of the Exchange Act (15 U.S.C. §78aa(c)); Substantial acts in

20 furtherance of the alleged fraud or the effects of the fraud have occurred in this

21 Judicial District. Many of the acts charged herein, including the dissemination of

materially false and/or misleading information, occurred in substantial part in this 22

Judicial District. 23

78. In connection with the acts, transactions, and conduct alleged herein, 24

Defendants directly and indirectly used the means and instrumentalities of interstate 25

commerce, including the· United States mail, interstate telephone communications, 26 and the facilities of a national securities exchange. 27

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1 PARTIES

2 79. Plaintiff Tianqing Zhang, purchased Ambow ADS during the Class Period

3 that were issued and sold in Ambow’s IPO pursuant and traceable to the 4 Registration Statement, and suffered damages as a result of the federal securities 5 law violations alleged herein. His PSLRA certification has been previously filed 6 with the Court and is incorporated by reference herein.

7 80. Plaintiff Byron Brown purchased Ambow ADS during the Class Period that

8 were issued and sold in Ambow’s IPO pursuant and traceable to the Registration

9 Statement and suffered damages as a result of the federal securities law violations

10 alleged herein. His PSLRA certification has been previously filed with the Court

11 and is incorporated by reference herein

12 81. Plaintiff Roberto Salazar purchased Ambow ADS during the Class Period.

13 Mr. Salazar purchased shares that were issued and sold in Ambow’s IPO pursuant

14 and traceable to the Registration Statement and suffered damages as a result of the

15 federal securities law violations alleged herein. His PSLRA certification is attached

16 to the complaint as Exhibit 1.

17 82. Defendant Ambow is a Cayman Islands corporation with its principal

18 executive offices located in Beijing, China. Ambow describes itself as offering

19 high-quality, individualized services and products through its combined online and

20 offline delivery model powered by its proprietary technologies and infrastructure.

21 It offers a variety of educational and career enhancement services and products to

students, recent graduates and corporate employees and management in China. As 22

of December 31, 2011 Ambow had a total of 183 centers and schools, 150 tutoring 23

centers, five K-12 schools, 25 career enhancement centers, two career enhancement 24

campuses and one college, which are located in 19 provinces and autonomous 25

regions within China. It also has software and corporate training companies. In 26 addition, Ambow has partnerships with schools, through its distributors and 27

28



1 corporations, allowing it to provide its products and services to students in 30 out of

2 the 31 autonomous regions within China.

3 83. Defendant Jin Huang ("Huang") was, Ambow’s President and Chief 4 Executive Officer ("CEO") and a director from 2000 until the present and signed 5 the Company’s Registration Statement in connection with the Offering. Ms. Huang 6 exercises complete control over Ambow by virtue of her stock ownership, board

7 position and the unique provisions of Ambow’s corporate charter.

8 84. Following 180 days after the IPO, Huang was permitted to sell her Ambow

9 shares on the NYSE. Prior to the IPO Huang owned 14.5 million Ambow class B

10 ordinary shares.

11 85. The Registration Statement represented that no one could sell any restricted

12 Ambow shares publicly for 180 days following the IPO.

13 86. Defendant Paul Chow ("Chow") was Chief Financial Officer ("CFO") of

14 Ambow from February 2010 until December 2011, and signed the Company’s

15 Registration Statement in connection with the Offering. He also signed the interim

16 quarterly reports during the Class Period.

17 87. Defendant Xuejun Xie (“Xie”) was, at all relevant times, a director of

18 Ambow, and signed the Company’s Registration Statement in connection with the

19 Offering.

20 88. Defendant Mark Robert Harris (“Harris”) was, at all relevant times, a director

21 of Ambow, and signed the Company’s Registration Statement in connection with

the Offering. 22

89. Defendant Lisa Lo (“Lo”) was, at all relevant times, a director of Ambow, 23

and signed the Company’s Registration Statement in connection with the Offering. 24

90. Defendant Daniel Phillips (“Phillips”) was, at all relevant times, a director of 25

Ambow, and signed the Company’s Registration Statement in connection with the 26 Offering. 27

28



1 91. Defendant Tao Sun (“Sun”) was, at all relevant times, a director of Ambow,

2 and singed the Company’s Registration Statement in connection with the Offering.

3 92. Defendant Shasha Chang (“Chang”) was, at all relevant times, a director of 4 Ambow, and signed the Company’s Registration Statement in connection with the 5 Offering. 6 93. Each of Huang, Chow, Xie, Harris, Lo, Phillips, Sun and Chang signed the

7 Registration Statement and was either a director or officer of the Company at the

8 time it filed the Registration Statement with the SEC.

9 94. Defendants Huang, Chow, Xie, Harris, Lo, Phillips, Sun and Chang are

10 collectively referred to as the “Individual Defendants.”

11

AMBOW’S REGISRATION STATEMENT CONTAINED FALSE

12 STATEMENTS AND OMISSIONS OF MATERIAL FACT

13 95. Prior to the IPO, Ambow purportedly made a string of acquisitions of

14 tutoring and education businesses in China.

15 96. Acquiring other tutoring and career education businesses was one of

16 Ambow’s main growth strategies it touted to investors in the IPO.

17 97. Ambow also touted its fast growing, high profit margin software business in

18 an effort to attract and increase its share price in the IPO.

19 98. In order to go public at a higher valuation Ambow improperly recognized

20 revenue in a manner designed to make Ambow appealing to investors in the form of

21 large revenue growth.

99. On August 5, 2010 Ambow filed its prospectus for an initial public offering 22

of 10,677,207 American Depositary shares at $10.00 per share raising 23

$106,772,070. 24

100. The Registration Statement contained false and misleading statements and 25

omitted to state material facts in connection the Company’s purported acquisition of 26 Changsha Tutoring. 27

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1 101. The Registration Statement represented that Ambow acquired Changsha

2 Tutoring on November 15, 2008.

3 102. A source familiar with the details of this fake acquisition, who is a close 4 family member6 of the seller and former owner of Changsha Tutoring, Mr. Minxu 5 Huang, confirmed to Plaintiffs’ counsel that the allegations of fraud on July 2, 2012 6 made by a former Ambow employee to PWC involved Changsha Tutoring in

7 Changsha city, Hunan Province.

8 103. When Ambow acquired this school in 2008, Ambow agreed to acquire 100%

9 equity of the school from Mr. Minxu Huang, for RMB 25,000,000 in cash plus the

10 equivalent value of Ambow Cayman Island company’s shares (rather than ADSs),

11 meaning half in cash half in shares. According to Mr. Minxu Huang’s close family

12 member, in reality, this was a fake acquisition. Ambow was just borrowing this

13 school’s name and consolidating its revenue and income for the IPO. Minxu Huang

14 retained legal and operational control over Changsha Tutoring’s business, assets,

15 operations and cash flows.

16 104. As agreed between Ambow and Minxu Huang of Changsha Tutoring, the

17 RMB 25 million cash acquisition payment was wired to accounts designated by

18 Minxu Huang as follows:

19 Date

Payer

Payee

Amount

20

2008/6

Ambow Sihua

Hunan Rongyuan

2008/7

Ambow Sihua

Changsha Heyuan

7,500,000 21 2008/12/8

Ambow Sihua

Changsha Heyuan

12,500,000

22

Total

25,000,000

23

24 105. The close family member confirmed that Minxu Huang returned the RMB

25 25,000,000 cash back to AMBO in what is known in accounting fraud parlance as

26 “round-trip” transactions. The seller, Minxu Huang returned the funds to Ambow,

27 6 This source’s last name is “Wang”.

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through fake software contracts with Ambow Online executed by several different

business entities, one owned by him, one owned by his friend and one which

doesn’t exist. The contracts were for fake software sales by Ambow Online to the

three entities over a period of three years. AMBO never delivered the software for

these sales.

106. In addition to the RMB25,000,000 of fake software contracts related to the

acquisition payment, Ambo online entered into additional fake software contracts

with companies controlled by Minxu Huang totaling another RMB7.52 million in

an effort to inflate Ambow’s reported revenues.

107. A list of most of the fake software contracts and amounts payable under each

(which counsel for plaintiffs has obtained and/or reviewed) are listed below: 7

Date Purchaser Contract price Remarks

2008/6/16 Changsha RMB 4.176 According to a business associate of

Xiuye million Minxu Huang, this company never existed. Education Plaintiffs confirmed this fact by checking

Technology State Administration Industry and

Co., Ltd. Commerce (“SAIC”) corporate records in

PRC. Ambow made it up and fabricated its

corporate chop to have the fraudulent

contract, signed, as well as for the product

receipt confirmation. The software sales

contract only listed the company’s name,

but left its address and contact info blank.

No person signed it either. The only part

on the contract showing its legitimacy is the corporate chop on it.

2008/8/20 Xinbo RMB 6.08 million Xinbo Tech is owned by Minxu Huang’s

Technology friend’s and it agreed to serve as a shill (Changsha) “distributor” of Ambow’s software

Co., Ltd. products. These three contracts were

2008/10/20 Xinbo RMB 6.08 million used to return the acquisition money back

7 Plaintiff’s counsel has not been able to obtain all of the fake software contracts. There are several others. The total amounts to about RMB32 million. Plaintiffs’ counsel confirmed the existence of the other contracts with a business associate of Minxu Huang.

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1 Technology to Ambow Online. (Changsha) As the 2013/4/26 Chinese article revealed,

Co., Ltd. the returned money was sent from

2008/11/20 Xinbo RMB 6.08 million several individuals’ accounts instead of

Technology Xinbo’s, and one of the individuals, Faqun

(Changsha) Zhou, is Minxu Huang’s wife. Based on

Co., Ltd. statements from a business associate of

Minxu Huang, the other individuals used

to funnel payments back to Ambow were

Minxu Huang’s employees.

2009/2/23 Changsha RMB 0.47 million Tutoring

Total RMB 22.886 Upon information and belief, the

million remainder of the RMB25,000,000

acquisition payment was returned to

Ambow by Changsha Heyuan as the charts

below show certain wire transfers from

Changsha Heyuan to Ambow Online.

108. On August 29, 2012, a representative of Xinbo Tech (Mr. Yang) made a

statement in front of a notary public, stating that 1) the three contracts described in

the above chart were never performed by Ambow or Xinbo Tech; 2) though Xinbo

signed on the delivery receipt confirmation form provided by Ambow Online, in

fact, Xinbo Tech never received any software from Ambow Online; AND 3) Xinbo

Tech never paid any contract price to Ambow Online as specified in the contracts.

109. Instead of Xinbo Tech and Changsha Xiuye Education Technology and

Changsha Tutoring making payments to Ambow online pursuant to the fake

software contracts, Minxu Huang arranged for the Changsha Tutoring acquisition

purchase price to be returned to Ambow Online through various other entities and

individuals. The individuals who were used to funnel the payments back to

Ambow included Minxu Huang’s wife and his employees.

110. The phony acquisition allowed Ambow to inflate its consolidated revenue for

2008, and then subsequently AMBO overstated at least RMB25,000,000 in

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1 software sales from 2008 through 2010 – which inflated sales were included in

2 Ambow’s financial statements contained in the Registration Statement.

3 111. Thus Ambow simply paid for the right to say that it owned the school, its 4 assets, and its revenues, without actually owning it, in order to enhance its 5 attractiveness to investors in the IPO. Indeed, while it was supposedly “acquired” 6 in 2008, as of February 29, 2012 the official legal representative was Minxu Huang

7 according to the website of the Tianxin District Education Bureau in Hunan

8 Province.

9 112. Furthermore, while Ambow pretended to pay cash for the acquisition, it in

10 fact entered into a secret side agreement whereby the seller, Minxu Huang, would

11 instead of keeping the cash paid, return it to Ambow in the form of fake purchases

12 of Ambow’s educational software.

13 113. Four recent articles corroborated the details of Ambow’s fake acquisitions

14 which were designed to allow Ambow to overstate revenue in the IPO.

15 114. A January 17, 2013 article in Chinese Times Weekly, a well-known and

16 reputable financial journal in China, entitled (roughly translated): "Investigation on

17 messy Ambow: Acquisition of famous Hunan School for half price and 'creation of

18 revenue' crazily”, (available at

19 http://business.sohu.com/20130117/n363709631.shtml) 8 reported that in 2009

20 Ambow acquired Changsha Tutoring and Changsha Bull’s Ear Education

21 Consulting Co., Ltd. ("Changsha Career Enhancement") for 52.28 million and

86.77 million RMB respectively- half in cash and half in shares of Ambow 22

common stock. 23

115. According to the article, a key person familiar with the matter disclosed that 24

the seller signed a side agreement with Ambow stating that the acquisition was 25

fake, designed to enhance Ambow’s financial statements, and that Ambow 26

27 8 Last time checked on February 18, 2013.

28



essentially “borrowed” the purported companies rather than actually acquiring

them.

116. Another January 29, 2013 article in Zhicheng Finance Website, 9 a popular

financial portal website in China, entitled “Exclusive disclosure of Ambow’s listing

in the U.S. stock market by using fake acquisitions and fake financial

performance”, confirmed that Ambow’s acquisition of Changsha Tutoring was

fraudulent, and designed to inflate Ambow’s revenue without actually acquiring

true ownership of the schools. The Zhicheng Finance article asserted that Ambow

had fraudulently acquired other schools in addition to Changsha Tutoring, citing for

example Changsha Career Enhancement.

117. The Zhicheng article described in great detail Ambow’s fraudulent

acquisition of Changsha Tutoring.

118. According to the Zhicheng report, the so-called "acquisition" money for

Changsha Tutoring was paid in batches by Ambow from the bank account of

“Ambow Sihua”- a subsidiary of Ambow who was acquiring all those schools

including Changsha Tutoring into accounts (pre-agreed by both parties) designated

by Changsha Tutoring, such as “Changsha Heyuan Electrical and Mechanical

Manufacturing Co., Ltd." another company owned by Changsha Tutoring’s former

owner Minxu Huang. Then in the following three years, Changsha Tutoring used

this money to purchase so-called "blasting School" software from Ambow, and

made the payments from Changsha Heyuan Electrical to the account of “Ambow

Online”- a subsidiary of Ambow engaged in software business.

119. Further demonstrating the fraudulent nature of the acquisition, the Zhicheng

Finance article also attached several bank wire receipts as examples for payments

from Changsha Heyuan to Ambow Online. Details of the receipts are as following:

9 http://www.ctcnew.com/show.asp?ArticleID=9079, last time checked on February 18, 2013.

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1 Date From To Amount Purpose

8/26/2008 Changsha Ambow RMB6,075,000.00 Purchase of Heyuan Online goods

1/23/2009 Changsha Ambow RMB1,055,000.00 [illegible] Heyuan Online

11/25/2009 Changsha Ambow RMB598,872.00 [illegible] Heyuan I Online I

120. The former employee who reported this fake acquisition to Ambow’s auditor

on July 2, 2012 and who is referenced in the Chinese Times Weekly article as the

“key person”, and in the Zhicheng Finance article as the person who reported the

fraudulent acquisition to Ambow’s auditor on July 2, 2012, is the former owner and

manager of Changsha Tutoring, Mr. Minxu Huang.

121. The Zhicheng Finance article asserted that many of Ambow’s other

acquisitions were also structured fraudulently, citing Ambow’s acquisition of,

Changsha Career Enhancement on September 30, 2009 as another example..

122. According to both Mr. Minxu Huang’s close family member (as told to

Plaintiffs’ counsel) and the Zhicheng Finance article, Ambow refused to allow Mr.

Minxu Huang to convert his Ambow common shares it paid to him for “borrowing”

Changsha Tutoring into ADSs so that he could sell the shares publicly on the

NYSE. As a result, Mr. Minxu Huang reported this fraudulent acquisition to

Ambow’s auditors, PWC on July 2, 2012.

123. Ambow then leveled embezzlement charges against Minxu Huang in

retaliation for blowing the whistle on Ambow’s fraudulent acquisition strategy in

an effort to cover up the fake acquisitions. The police subsequently determined that

Minxu Huang did not embezzle any funds because he was the rightful owner of

Changsha Tutoring. Mr. Huang was able to prove his innocence and obtain release

from police custody by providing documents evidencing that he still legally owned

and controlled Changsha Tutoring. Upon information and belief, the notary public

statement from Xinbo Tech was another document Minxu Huang’s business

associate showed to the PRC police to prove the Ambow was leveling false

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charges, that he really owned Changsha Tutoring and that Ambow had merely

borrowed the school’s name to use in its Prospectus for the IPO.

124. On July 5, 2012, the Company announced that the Audit Committee of the

Board of Directors determined that it would conduct an internal investigation to

review allegations made on July 2, 2012 by a former Ambow employee financial

impropriety and wrongful conduct related to the 2008 acquisition of a training

school. These allegations referenced in Ambow’s press release were the ones made

by Mr. Huang to PWC concerning his sale of Changsha Tutoring to Ambow in

2008. Mr. Minxu Huang told one of his business associate that PWC interviewed

Minxu Huang concerning the fraud he reported, however, no one from Ambow’s

audit committee’s Independent Investigation Committee has ever interviewed Mr.

Minxu Huang (as of February 19, 2013).

125. On April 10, 2013, an article titled “Shareholders Transferred Allegiance”, 10

Ambow was Questioned of Financial Problems” was publicized on Securities

Times China’s website. 11 Mr. Minxu Huang confirmed to the Securities Times

China reporter that the Changsha Tutoring acquisition was a fake acquisition, and

he was the former employee who reported the fraud to Ambow’s auditor, PWC, on

July 2, 2012. Mr. Minxu Huang also confirmed to the reporter that the RMB25

million cash paid by Ambow in several batches for its Changsha Tutoring

acquisition has been returned back to Ambow in the form of fake software

purchases from Ambow.

126. On April 26, 2013, another article titled “Further Exposure of AMBOW

Education’s Financial Fraud- a Deep Throat’s Disclosure of a Big Lie” was

publicized on Dongguan Information Website. 12 This article disclosed more details

10 Literally “Turned their Guns Around”. 11 http://news.stcn.com/2013/0410/10402387.shtml . Last time checked on April 13, 2013. 12 http://www.dg163.cn/news/social/sh/2013/0426/19922.html . Also see http://edu.fecn.net/2013/0427/97176.html . Last time checked on May 1, 2013.

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about the fraudulent acquisition of Changsha Tutoring and software sales contracts.

Specifically, the article attached detailed bank transaction records as following:

Records of Ambo’s payment for the acquisition

Date 2008/6 2008/7

2008/12/8 Total

Ambow Sihua Ambow Sihua Ambow Sihua

Pa Hunan R

Amount 5,000,000 7,500,000 12,500,000 25,000,000

Detailed records of the first RMB 5 million returned to Ambow Date Received Paid Balance Details

2008/6 5000000 5000000 Ambow Sihu to "Hunan

Rongyuan Zhiye Co.,” From Qunfa Zhou ’s acct.

2008/7/4 2205000 2795000 290459980110189424 to Ambow Online From Saihua Cui’s acct.

2008/7/4 790000 2005000 19011005101203053734 to Ambow Online From Xiaoyan Song’ s acct.

2008/7/4 1180000 825000 19011005101203053858 to Ambow Online

5000000 4175000

Detailed records of the second RMB 7.5 million returned to Ambow

Date Received Paid Balance Details Balance 825000

Ambow Sihu to “Changsha H eyuan

2008/7 7500000 8325000 ”.

2008/8/26 6075000 2250000 Changsha Heyuan toAmbow Online Changsha Tutoring to

2008/8/29 3999000 6249000 Changsha Heyuan (service fee, see notes)

2008/10/28 3037500 3211500 Changsha Heyuan to

Ambow Online

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Date Balance

2009/1/22

2008/12/8 12500000

Total 27524512.7 12150000

2008/11/28

2008/11/28

2008/12/31 3525512.7

2009/10/30

2009/1/23

2009/4/30

2009/5/25

2009/6/29

2009/7/29

2009/8/27

2009/9/27

Detailed records of the third RMB 12.5 million returned to Ambow

Received Paid Balance Details 16199512.7

385000 15814512.7 Changsha Heyuan to Ambow Online

1055000 14759512.7 Changsha Heyuan to Ambow Online From Qunfa Zhou’s acct.

310000 14449512.7 19011005012010288 to Ambow Online From Qunfa Zhou’s acct.





773235.5 9828743.2 290459980110189424 to Ambow Online

1200000 8628743.2 From Xu Huang’s acct. 1901004201000616138 to

2337500

700000

874000 Changsha Heyuan to Ambow Online From Qunfa Zhou’s acct.

174000 290459980110189424 to Ambow Online Changsha Tutoring to

3699512.7 Changsha Heyuan (service fee, see notes)

16199512.7 Ambow Sihu to “Changsha Heyuan”.




1 Ambow Online From Xu Huang’s acct.

8029871.2 1901004201000616138 to Ambow Online

7229871.2 From Changsha Heyuan to Ambow Online From Qunfa Zhou’s acct.

4470166.2 290459980110189424 to Ambow Online From Qunfa Zhou’s acct.

2122096.2 290459980110189424 to Ambow Online From Xu Huang’s acct.

122096.2 6227002920460189244 to Ambow Online

-87903.8 From Changsha Tutoring to Ambow Online

-347903.8 From Changsha Tutoring to Ambow Online

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2009/11/25

598872

2009/12/18

800000

2010/2/25

2759705

2010/4/1

2348070

2010/7/27

2000000

2009/7/27

210000

2009/3/30

260000

Total 16547416.5 13

127. On information and belief, both Hunan Rongyuan and Changsha Heyuan

were entities used by Changsha Tutoring’s owner Minxu Huang to facilitate the

fraudulent acquisition with Ambow.

128. According to a business associate of Minxu Huang, those individuals who

wired money to Ambow Online were Minxu Huang’s affiliates, family members

and/or employees. For example, Qunfa Zhou is Minxu Huang’s wife. Ambow

asked Minxu Huang to use personal accounts to wire money back to Ambow in

order to hide the fraud.

129. Certain bank statements were also included in the April 26, 2013 report

further evidencing the above transactions.

13 The total amount of payments back to Ambow is about RMB32.5million. This is because of additional fake software contracts that Changsha Tutoring entered into with Ambow to help Ambow inflate its revenues.

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1 130. Furthermore, the reporter also obtained a notary certificate from Xinbo

2 Technology (Changsha) Co., Ltd. (“Xinbo”). This notary certificate was applied for

3 by Xinbo to confirm that software sales contracts it signed with Ambow were 4 fraudulent, and it never received any software from Ambow, and it never paid any 5 amounts to Ambow Online for the software. 6

7

FALSE STATEMENTS AS TO SOFTWARE SALES IN THE

8

REGISTRATIONS STATEMENT AND FOLLOWING THE IPO

9 131. In the Registration Statement and following the IPO, Ambow continued to

10 tout its fast growing, high profit margin software business in an effort to attract

11 investors, increase market demand for its stock and increase its stock price relative

12 to its earnings and attract investors.

13 132. In Ambow’s Form 20-F, filed with the SEC on April 14, 2011, Ambow

14 reported historical net revenue and growth, citing both its acquisitions, changes in

15 the way it sells training materials to students and its selling stand-alone software

16 products to distributors:

17 In addition to organic growth, our historical net revenues and profitability

18 growth was largely driven by acquisitions, which may not be sustainable or

19 indicative of our future results. In the past, we delivered our learning

20 materials through courses to students at our partner schools with the help of

21 sales agents and maintained responsibility for the delivery of this service. In

May 2008, we began to change the method by which we utilized our 22

training materials to students at our partner schools, and started selling 23

stand-alone software products to distributors who then sell those 24

products to students not in our directly-operated schools and centers. 25 For these product sales under our new business model we have no 26 obligation to students or schools. At the same time, we have phased out 27 our previous model of providing services to students of schools and 28



1 centers that are not directly operated by ourselves. This change in our

2 business process and changes in our business mix amongst our four operating

3 segments will make our historical results and growth rates less effective for

4 predicting our future results. Under our new product sales model for sales to

5

distributors we recognize less net revenue per sale, but higher gross margins.

6

As a result of these and other factors, we may not sustain our past growth

7 rates in future periods, and we may not sustain profitability on a quarterly or

8 annual basis in the future.

9 See Ambow Form 20-F filed April 14, 2011

10 133. Ambow cited its relationship with distributors and corporate partners, who

11 purportedly helped it distribute software products throughout China, as a factor

12 contributing to its growth:

13 We rely on our distributors and corporate partners to help drive our net

14 revenues and profitability growth rates. We have developed a number of

15 strategic partnerships with significant national and multinational

16 corporations who are expanding the business they do in China, including

17 Cisco Systems, Inc., Skillsoft Plc and The McGraw-Hill Companies, Inc.

18 We derive both direct benefits, such as expanding and improving the

19 curriculum in our career enhancement centers and helping to attract

20 additional students to these centers, and indirect benefits, such as

21 strengthening the Ambow brand, from these partnerships. We have

distributors who help us to distribute our software products throughout 22

China to additional schools and students and to expand our geographic

23 reach to areas where we do not have a direct presence.

24 See Ambow Form 20-F filed April 14, 2011 at page 10.

25 134. Ambow also received preferential tax treatment in the PRC because Ambow

26 online was recognized as a “Software Enterprise”. Ambow was able to do this by 27 fulfilling the criteria necessary to be recognized as a Software Enterprise. One of 28



1 these criteria is that annual software sales must comprise more than 35% of annual

2 revenue. Ambow was able to fulfill this criterion by fraudulently transferring

3 revenue from its slow growth student tuition segment to its high growth software 4 sales segment: 5 For the years ended December 31, 2008, 2009 and 2010, we received the 6

following preferential tax treatments: (i) Ambow Online was recognized as a

7

"Software Enterprise" and was exempted from income tax on its profits for

8

2008 and 2009, and is subject to a 50% reduction in income tax rate from

9

2010 to 2012; and (ii) certain of the affiliated entities of our VIEs, namely,

10

Shandong North Resource Information Technology Co., Ltd. and Jinan

11

Prosperous Resource Technology Co., Ltd., were recognized as "Software

12 Enterprises." Shandong North Resource Information Technology Co., Ltd.

13 was exempt from income tax on profits for 2005 and 2006, and was subject

14 to a 50% reduction in income tax rate from 2007 to 2009 while Jinan

15 Prosperous Resource Technology Co., Ltd. was exempt from income tax for

16 2008 and 2009 and is subject to a 50% reduction in income tax rate from

17 2010 to 2012. In order to maintain the "Software Enterprise" status, each of

18 these entities is required to obtain a Certificate of Software Enterprise issued

19 by the provincial IT industry administration authorities through meeting the

20 following conditions....(g) its annual software sales make up more than

21 35% of its total annual revenue and the sales of self-produced software

make up more than 50% of the software sales. 22

See April 14, 2011 Form 20-F at 16-17. 23

135. Ambow reported an increase in gross profit under its new services delivery 24

model, and an increase in gross margins for software products: 25

Gross profit as a percentage of our net revenues was 35.6%, 54.7% and 26 58.6% in 2008, 2009 and 2010, respectively. The significant increase in our 27 gross margin from 2008 to 2009 was primarily due to the increased gross 28



1 margins generated by our acquired entities as well as changes in services

2 delivery model. In 2008, during the initial period of our transition to our new

3 services delivery model, our gross margin was 35.6%. Under our new

4 model, gross margins for our software products are significantly higher

5 as our costs to produce these software products are minimal . In 2009 and

6

2010, gross margin was 54.7% and 58.6% respectively, the improvement in

7 gross margin was attributable to increased demand for premium services as

8 well as better utilization of facilities in tutoring and career enhancement.

9 See April 14, 2011 Form 20-F at 76.

10 136. Ambow attributed its explosive growth from 2008 to 2009 in part to

11 additional sales of software products under its new sales model (4/14/11 Form 20-F

12 at page 85):

13 Year ended December 31, 2009 compared with year ended December 31,

14 II 2008

15 Net revenues . Our net revenues increased by 77.4% from RMB508.4

16 million in 2008 to RMB902.0 million in 2009. This increase was primarily

17 due to a full year of net revenues generated in 2009 from our ten

18 acquisitions through business combinations and one acquisition of long-

19 term operating rights completed in 2008, and partial year revenues from

20 the 13 acquisitions completed in 2009, as well as additional sales of our

software products under our new sales model . 21

See April 14, 2011 20-F at page 85. 22

137. In truth, Ambow inflated its software sales by transferring all of the revenue 23

from the slower growing and less appealing bricks and mortar education business in 24

its career education subgroup into revenue from software sales by creating fake 25

software sales contracts. 26 138. Plaintiffs’ investigator interviewed the former vice president of Ambow 27 Group in charge of Ambow’s Career Enhancement division, who was employed 28



1 from September 2009 to September 2012 He was responsible for the group's career

2 enhancement division's strategy making, overall and regional sales target and

3 budget making, processes supervision and crisis management, among other things. 4 139. This Ambow vice-president stated that in order to inflate software sales, the 5 acquired companies transferred their income derived from tuition for traditional 6 tutoring services into sales of software and signed fake software sales contracts

7 which were never used.

8 140. The Ambow Vice-President stated that to inflate the sales of strategic

9 software products, all the acquired companies in Ambow’s career education

10 subgroup transferred their revenue from tuition to sales of software products when

11 they submit revenue figures to Ambow Online Software Co., Ltd. so that the

12 revenue from these acquired companies will be reported as software sales based on

13 how many student software accounts have been sold instead of as tuition in the

14 financial records. In the meantime, the acquired companies would sign a bogus

15 software sales contract with Ambow Online Software Co., Ltd for the same number

16 of student software accounts. Then Ambow’s IT staff would produce accounts in

17 the Ambow system for the same amount. But actually, most of these student

18 software accounts were never used, said the former vice president.

19 141. Under Ambow senior management’s direction, the acquired schools set up

20 fake e-learning login accounts to disguise and facilitate the recording of tuition

21 revenue as online software revenue. If for example a school had 50 million RMB

of traditional tuition revenue, since each e-learning account typically generated 22

revenue of about 5,000 RMB (US$758), the school would create 1,000 fake e- 23

learning account log-ins. This created a pretext for Ambow to record on its 24

consolidated financial statements e–learning software revenue of 50 million RMB 25

or 5,000 RMB for each fake e-learning account. While Ambow headquarters 26 recorded the 50 million RMB revenue as e-learning software revenue, the school 27 recorded the revenue on its books as revenue from tuition. 28



142. The April 10, 2013 Securities Times China article also reported that

according to a person familiar with the matter, Ambow inflated its software sales by

transferring revenue from slow growth student tuition, in order to fulfill the

criterion that software sales must comprise more than 35% of annual revenue, and

to receive above mentioned preferential tax treatments.

143. The Registration Statement reported software revenue of 141,582 RMB for

fiscal 2009.

144. Ambow’s annual report on 20-F for fiscal year ended December 31, 2010

filed on April 14, 2010 reported 141,582 RMB and 229,161 RMB for software

sales in fiscal 2009 and 2010 respectively. 14

145. In truth, according to the Ambow Vice President in charge of the Career

Enhancement Division, Ambow’s software sales never exceeded 30-40 million

RMB in any of fiscal years 2009 through 2011. Thus, Ambow materially

overstated its revenue from software sales in the Registration Statement and each

quarterly and annual report following the IPO.

AMBOW’S POST-IPO FINANCIAL STATEMENTS MISREPRESENTED

REVENUE, INCOME AND ACCOUNTS RECEIVABLE

146. On April 14, 2011, Ambow filed its Annual Report on Form 20-F with the

SEC for the 2010 fiscal year. The Company stated its revenue recognition policy as

follows:

Revenue recognition

Revenue for education program and services and sales of products are

recognized when all four of the following criteria are met: (i) pervasive

evidence that an arrangement exists; (ii) delivery of the products and/or

services has occurred and risks and rewards of ownership have passed to the

14 Ambow’s quarterly reports on 6-K similarly misrepresented the amount of software revenue.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27


28


1 customer; (iii) the selling price is both fixed and determinable; and (iv)

2 collection of the resulting receivable is reasonably assured. If a sales

3 contract stipulates more than one deliverable and the deliverables are

4 considered as multiple accounting units in accordance with ASC Topic 605,

5 Revenue, the total revenue on such arrangements is allocated among the

6

individual deliverables based on their relative fair values. For example, the

7

Company has arrangement where sales of product are bundled with sales of

8 educational services. In such arrangement, the product is delivered initially

9

before the provision of services. If sufficient vendor-specific objective

10 evidence of fair value does not exist for the allocation of revenue, the fee for

11 the entire arrangement is recognized ratably over the term of the

12 arrangement. Revenue is recorded net of business tax and surcharges.

13 (Emphasis added).

14 147. Additionally, the Company's 2010 Annual Report on Form 20-F filed with

15 the SEC on April 14, 2011, in relevant part, described a recent change in the

16 Company's sales model as well as the key terms of sales to its distributors:

17 Effects of change in our sales model

18 In 2007, we provided services through sales agents to students attending our

19 partner schools where we did not control the facilities or teachers. In May

20 2008, we began to change our sales model and started to cease providing

21 services directly to students where we did not control the facilities or

teachers. Our new business model focuses on providing services to students 22

attending our directly operated centers and schools and, to a lesser extent, on

23 the sale of stand-alone software products to distributors.

24

25 Under our old sales model, we delivered the learning materials we had

26 developed through courses to students attending our partner schools with the

27 help of sales agents, and we remained responsible for the delivery of the 28



1 services to students. As a result, the net revenues we recognized were the

2 gross amounts paid by students for our services, and we incurred significant

3 costs relating to the services we were responsible to provide under this sales

4 model. Our gross margin in 2008, when a substantial majority of our net

5 revenues were recognized pursuant to our old sales model, was 35.6%.

6

Under our new business model, our directly-operated tutoring centers,

7 schools, career enhancement centers and colleges generate revenues from

8

tuition fees, education services fees and, to a much lesser extent, stand-alone

9 software products. Our new sales model for selling software products is

10

focused on selling these products to our distributors. The distributors are

11 responsible for the delivery of services that incorporate our software products

12 or for selling the software products on a stand-alone basis with no further

13 service obligation. Under the new product sales model, we contract directly

14 with distributors and have no direct contact with schools or their students.

15 We also have no further obligation to the schools or students in terms of the

16 delivery of services. As a result, for sales of software products under the new

17 sales model, we recognize less revenue for each sale compared to the old

18 sales model but recognize a higher gross margin as we are no longer

19 responsible for the cost of delivering the services to schools or students or for

20 sales agent costs.

21 Sales through our distributors

22 For the years ended December 31, 2008, 2009 and 2010, an estimated 4.0%,

23 15.0% and 10.9%, respectively, of our net revenues were generated by sales

24 through our distributors. We expect net revenues generated on sales through

25 distributors as a percentage of total net revenues to fluctuate from period to

26 period. 27

28



1 The following are the key terms of sales to our distributors, the nature of

2 support services provided by our distributors to their customers and our basis

3 for estimating returned products from distributors.

4 Terms of sales

5 In 2009, we generally sold software products to our distributors on a prepaid

6

basis. Sales with credit terms require special approval by our management.

7

While not significant in 2010, we have extended credit terms to our two key

8

distributors. We do not give refunds and only offer replacements to the extent

9 of product defaults. We provide secondary support in rare instances when the

10

distributors cannot answer end users' questions. This support is available for

11 a short period after the sales of the software product and has been immaterial

12

for all periods presented.

13

14 How we estimate amounts of returned products

15 We do not give refunds and only offer replacements to the extent of

16 product defaults within 30 days after delivery. Based on our past

17 experience and quality control procedures performed before products are

18 shipped out, the number of returns is minimal and we, therefore, do not

19 expect any significant returns in the future.

20 (Emphasis in original).

21 148. Beginning in second quarter 2011, Ambow adopted an improper revenue

recognition policy that masked the worsening in payment conditions by rapidly 22

expanding its credit sales by over 450% without making any corresponding 23

absolute or percentage increases in its allowance for doubtful accounts even though 24

the customers it was providing credit to were new, untested and had no proven 25

payment history. 26

27

28



1 149. On May 18, 2011 the Company issued a press release entitled, "Ambow

2 Education Announces Strong First Quarter 2011 Unaudited Financial Results."

3 Therein, the Company, in relevant part, stated:

4 Financial Highlights for the Quarter Ended March 31, 2011:

5 • Total net revenues increased 29.6% to $51.5 million from $39.7

6 million for the same period in 2010. Existing business contributed 24.2%

7 growth, while 5.4% came from acquisitions

8 • Tutoring revenues increased 24.6% to $25.3 million from $20.3

9 million for the same period in 2010.

10 • Career Enhancement revenues increased 116.2% to $11.8 million

11

from $5.5 million for the same period in 2010.

12 • Net income increased 151.6% to $1.5 million from $0.6 million for the

13 same period in 2010.

14 • Operating income increased 86.5% to $2.8 million from $1.5 million

15 for the same period in 2010.

16 • Adjusted EBITDA increased 28.9% to $8.6 million from $6.7 million

17 for the same period in 2010.

18 • Total student enrollments increased 16% year-over-year to 234,000.

19 150. The same day, Ambow filed with the SEC the press release on Form 6-K

20 along with financial statements that materially overstated revenue by $4.6 million

21 or 9.8%; and it overstated gross profit by $501,000 or 7.1%. The complete details

of the overstatement are attached hereto as Exhibit 2-4. 22

151. On August 25, 2011, the Company came out with more good earnings news, 23

issuing a press release entitled, "Ambow Education Announces Second Quarter 24

2011 Unaudited Financial Results." Therein, the Company, in relevant part, stated:

25 Financial Highlights for the Quarter Ended June 30, 2011:

26 • Total net revenues increased 26.1% to $77.8 million from $61.7

27 million for the same period in 2010. 28



1

2 o Tutoring revenues increased 20.3% to $33.7 million from $28.0


4 o Career Enhancement revenues increased 90.0% to $20.8 million

5

from $11.0 million for the same period in 2010.

6 o The growth layer, which consists of Tutoring and Career

7

Enhancement, achieved 39.9% year-over-year revenue growth.

8

Excluding revenue of $6.2 million from acquisition, our organic

9 growth is 24.0%.

10 • EBITDA increased 27.3% to $25.2 million from $19.8 million for the


12 • Operating income increased 33.3% to $20.4 million from $15.3


14 • Net income increased 22.2% to $16.7 million from $13.6 million for

15 the same period in 2010.

16 • Diluted non-'GAAP net income per adjusted ADS attributable to

17 Ambow increased to $0.24 as compared to $0.22 for the same period in 2010.

18

19 Financial Highlights for the Six Months Ended June 30, 2011:

• Total net revenues increased 27.5% to $130.0 million from $102.0 20


o Tutoring revenues increased 22.1% to $59.3 million from $48.6 22

million for the same period in 2010.

23 o Career Enhancement revenues increased 98.8% to $32.8 million

24 from $16.5 million for the same period in 2010.


26 Enhancement, achieved 41.5% year-over-year revenue growth. 27

28



1 Excluding revenue of $8.3 million from acquisition, our organic

2 growth is 28.8%.

3 • EBITDA increased 28.0% to $32.9 million from $25.7 million for the


5 • Operating income increased 38.1% to $23.3 million from $16.9


7 • Net income increased 27.7% to $18.2 million from $14.2 million for

8

the same period in 2010.

9 • Diluted non-GAAP net income per adjusted ADS attributable to

10

Ambow increased to $0.27 as compared to $0.25 for the same period in 2010.

11 152. That same day, Ambow filed with the SEC the press release on Form 6-K


13 or 11.4%; it overstated gross profit by $5.2 million or 12.3%; it overstated

14 operating income by $2.6 million or 14.8%; it overstated income from continuing

15 operations by $2.8 million or 20%. The complete details of the overstatement are

16 attached hereto as Exhibits 2-4.

17 153. On November 15, 2011, the Company issued another press release and filed

18 it with the SEC on Form 6-K touting its positive results entitled, "Ambow

19 Education Announces Third Quarter 2011 Unaudited Financial Results." Therein,

20 the Company, in relevant part, stated:

21 Financial Highlights for the Third Quarter Ended September

30, 2011: 22

• Total net revenue increased 42.6% to $72.8 million from $51.1 million

23 for the same period in 2010 and organic growth increased 25.0% year-

24 over-year.

25 o Tutoring revenue increased 32.7% to $33.9 million from $25.5

26 million for the same period in 2010. 27

28



1 o Career Enhancement revenue increased 88.7% to $23.0 million



4 Enhancement, achieved 50.8% year-over-year revenue growth, of

5 which organic growth was 26.9%.

6 • Non-GAAP operating income increased to $10.3 million from $8.1


8 • Non-GAAP net income increased to $7.3 million from $6.6 million for

9

the same period in 2010.


11

Ambow increased to $0.097 as compared to $0.091 for the same period in

12 2010.

13 • Total student enrollments increased to 301,000 from 246,000 for the


15 o The growth layer's student enrollments increased 26.6% to

16 267,000 from 211,000 for the same period in 2010.

17

18 Financial Highlights for the Nine Months Ended September 30, 2011:

19 • Total net revenue increased 32.5% to $204.5 million from $154.4

20 million for the same period in 2010 and organic growth increased 23.1 %

21 year-over-year.

o Tutoring revenue increased 25.7% to $94.0 million from $74.7 22

million for the same period in 2010.

23 o Career Enhancement revenue increased 94.5% to $56.2 million


25

26

27

28




2 Enhancement, achieved 44.9% year-over-year revenue growth, of

3 which organic growth was 31.1 %.

4 • Non-GAAP operating income increased to $36.1 million from $27.5


6 • Non-GAAP net income increased to $28.0 million from $23.4 million

7

for the same period in 2010.


9

Ambow increased to $0.372 as compared to $0.338 for the same period in

10

2010.

11 • The growth layer's student enrollments increased 20.0% to 729,000

12

from 608,000 for the same period in 2010.



15 or 7.7%. In addition, Ambow overstated accounts receivable by $16.5 million or

16 96% because it recognized revenue from customers with no payment history and

17 failed to record any dollar or percentage increase in its allowance for doubtful

18 accounts even though its accounts receivable (sales on credit) doubled between

19 June 30, 2011 and September 30, 2011. The complete details of the misstatements

are attached hereto as Exhibits 2-4. 20

21 155. On March 5, 2012, the Company issued a press release entitled, "Ambow

Education Announces Record Fourth Quarter and Full-Year 2011 “Unaudited 22

Financial Results." Therein, the Company, in relevant part, stated: 23

24 Financial Highlights for the Fourth Quarter Ended December 31, 2011:

25 • Total net revenue from continuing operations increased 58.5% to $89.2

26 million from $56.2 million for the same period in 2010 and organic growth

27 increased 42.6 % year-over-year. 28



1

2 o The growth assets from continuing operations, which consists of

3 Tutoring and Career Enhancement, achieved 77.7 % year-over-year

4 revenue growth, of which organic growth was 54.9%.

5 o Tutoring revenue from continuing operations increased 47.6% to

6

$35.7 million from $24.2 million for the same period in 2010, of which

7 organic growth was 35.0%.

8 o Career Enhancement revenue from continuing operations

9

increased 126.7% to $33.8 million from $14.9 million for the same

10 period in 2010, of which organic growth was 87.2%.

11 • Non-GAAP operating income from continuing operations increased

12 41.2% to $21.6 million from $15.3 million for the same period in 2010.

13 • Non-GAAP net income from continuing operations increased over

14 54.6% to $18.4 million from $11.9 million for the same period in 2010.

15 • Diluted non-GAAP net income from continuing operations per

16 adjusted ADS attributable to Ambow increased to $0.25 as compared to

17 $0.16 for the same period in 2010.

18 • Total student enrollments from continuing operations increased 40% to

19 341,000 from 243,000 for the same period in 2010.

20 o The student enrollments from continuing operations for growth

21 assets increased 46.5% to 312,000 from 213,000 for the same period in

2010. 22

23 Financial Highlights for the Full-Year 2011:

24 • Total net revenue from continuing operations increased 44.4% to

25 $279.3 million from $193.4 million in 2010 with 39.3% increase year-over-

26 year from organic growth. 27

28



1 o The growth assets from continuing operations, which consists of

2 Tutoring and Career Enhancement, achieved 58.3% year-over-year

3 revenue growth, of which organic growth was 38.7%.

4 o Tutoring revenue from continuing operations increased 35.2%

5 to $127.9 million from $94.6 million in 2010, of which organic growth

6 was 27.3%.

7 o Career Enhancement revenue from continuing operations

8

increased 109.0% to $90.1 million from $43.1 million for the same

9 period in 2010, of which organic growth was 63.6%.

10 • Non-GAAP operating income from continuing operations increased

11

52.1 % to $58.1 million from $38.2 million in 2010.

12 • Non-GAAP net income from continuing operations increased 49.0% to

13 $46.2 million from $31.0 million in 2010.

14 • Diluted non-GAAP net income from continuing operations per

15 adjusted ADS attributable to Ambow increased to $0.61 as compared to

16 $0.44 in 2010.

17 • The student enrolments from continuing operations in the growth

18 assets increased 27.3% to 1,034,000 from 812,000 in 2010.

19


21 along with financial statements for both the quarterly and annual period ended

December 31, 2011. The complete details of the overstatement are attached hereto 22

as Exhibit 2-4. 23

157. For the quarter ended December 31, 2011, Ambow materially overstated 24

revenue by $12.95 million or 17%; it overstated gross profit by $13.2 million or 25

30.8%; it overstated operating income by $18.96 million or 1,632%; it overstated 26 net income from continuing operations by $13.4 million or 837%. 27

28



1 158. For the year ended December 31, 2011, Ambow materially overstated

2 revenue by $14.1 million or 5.3%; it overstated gross profit by $16.2 million or

3 10.7% it overstated operating income by $20.1 million or 61.5%; it overstated net 4 income from continuing operations by $14.5 million or 67.2%; and overstated net 5 income by $14.5 million or 563%. 6 159. In addition, Ambow overstated accounts receivable as of 12/31/ 2011 by

7 $16.6 million or 96% because it recognized revenue from customers with no

8 payment history and failed to record any dollar or percentage increase in its

9 allowance for doubtful accounts since 12/31/2010 even though its accounts

10 receivable (sales on credit) doubled between June 30, 2011 and September 30, 2011

11 and increased by 450% from December 31, 2010 to December 31, 2011.

12 160. The rosy financial picture Ambow portrayed of itself in each quarterly

13 financial statement for fiscal 2010 and in its full fiscal year 2010 financial statement

14 masked serious and known problems with customer payments and collectability of

15 accounts receivable, among other things, and concealed from investors the true

16 condition of the Company.

17 161. Indeed, the statements contained above about the Company’s revenue and

18 operations were materially false and/or misleading when made because defendants

19 failed to disclose or indicate the following: (1) that certain of the Company's

20 distributors did not have an adequate history of timely payment; (2) that, as such,

21 the collection of resulting receivables from· these distributors was not reasonably

assured; (3) that, as a result, the Company was improperly recognizing revenue on 22

sales to these distributors; (4) that the Company was improperly accounting for 23

certain business acquisitions; (5) that, as a result of the foregoing, the Company's 24

financial results were misstated during the Class Period; (6) that the Company 25

lacked adequate internal and financial controls; and (7) that, as a result of the 26 above, the Company's financial results were materially false and misleading at all 27 relevant times. 28



1 162. The true facts about Ambow slowly began to emerge bit-by-bit in April

2 2012.

3 163. On April 30, 2012, Ambow filed a Notification of Late Filing on Form 13b- 4 25 with SEC. Therein, the Company, in relevant part, stated: 5

Ambow Education Holding Ltd. (the "Company") is unable to file its Annual 6

Report on Form 20-F within the prescribed time period without unreasonable

7 effort or expense, because the compilation and review of the information

8 required to be in the annual report has not been finalized and will not be

9 complete before the filing deadline.

10

11

The Company expects that it will file it Form 20-F for the fiscal year ended

12 December 31, 2011 within the fifteen-day extension provided by Rule 12b-

13 25.


15 close on April 30, 2012 at $7.06 per share, on unusually heavy volume.

16 165. On May 1, 2012, the Company issued a press release entitled, "Ambow

17 Expects to File 20-F." Therein, the Company, in relevant part, stated:

18

19 BEIJING, May 1, 2012 - Ambow Education Holding Ltd. ("Ambow" or

20 the "Company") (NYSE: AMBO), a leading national provider of

21 educational and career enhancement services in China, today announced

that it has filed with the United States Securities and Exchange 22

Commission, Form 12b-25 Notification of Late Filing for its Annual 23

Report on Form 20-F for the year ended December 31, 2011. The Form 24

12b-25 will allow the Company an additional 15 calendar days to file the 25

Form 20-F which is otherwise due on April 30, 2012. The Company 26 expects to be able to file by May 15, 2012, which is within the additional 27 time allowed by the Form 12b-25. 28



1

2 166. On May 16, 2012, the Company issued a press release entitled, "Ambow

3 Education Announces Delay in Filing 2011 Annual Report on Form 20-F: Identifies 4 Preliminary Adjustments to Previously Announced 2011 Financial Results." 5 Therein, the Company, in relevant part, stated: 6

7

BEIJING, May 16, 2012, Ambow Education Holding Ltd., ("Ambow" or the

8

"Company") (NYSE: AMBO), a leading national provider of educational and

9 career enhancement services in China, today announced that the filing of its

10

2011 annual report on Form 20-F (the "2011 Annual Report") is delayed

11

beyond the end of the 15 day extension period provided by the rules of the

12 U.S. Securities and Exchange Commission (the "SEC") because the

13 Company requires additional time to complete the audit of its 2011 financial

14 statements. The Company is working to complete the audit as soon as

15 practicable and expects to file the 2011 Annual Report with the SEC within

16 one month.

17

18 The Company also announced that it has identified certain preliminary

19 adjustments to the 2011 unaudited financial results included in the

20 Company's press release dated March 5, 2012, which was included as an

21 exhibit to the Company's Form 6-K furnished to the SEC on March 5, 2012

(the "Form 6-K"). In connection with its annual audit, which has yet to be 22

completed, the Company expects to make the following adjustments: 23

1. The Company will change the revenue recognition method in respect 24

of sales of the Company's educational services and software products to 25

certain distributors. For those distributors with a proven payment history, the 26 Company will continue to recognize revenue upon delivery of services and 27 products. For those distributors without adequate history of timely payment, 28



1 the Company will defer the recognition of revenue until cash is collected.

2 Accordingly, the Company expects that between US$13.5 million (RMB85

3 million) and US$15.1 million (RMB95 million) of revenue previously

4 recognized in 2011 will be reversed and recognized in the future when cash

5

is collected from certain distributors. This adjustment does not impact

6 revenue in 2010. As of the date of this press release, the Company has

7 collected approximately US$12.2 million (RMB77 million) of the cash

8 associated with the revenue to be deferred as of December 31, 2011, which

9 collected revenue (together with any additional collections before June 30,

10

2012) will be recognized by the Company in the first half of 2012. Any

11 remaining balance will be recognized when collected. All future sales to

12

distributors without adequate history of timely payment will be recognized

13 on the cash basis until such time as a proven payment history is established.

14 2. The Company expects to make a bad debt provision of between

15 US$2.1 million (RMB13 million) and US$2.4 million (RMB 15 million).

16


18 close on May 16, 2012 at $4.65 per share on unusually heavy volume, and further

19 declined $0.30 per share, or 6.45%, to close on May 17, 2012 at $4.35 per share,

20 also on unusually heavy volume.

21 168. On May 29, 2012 Ambow filed its 2011 Annual Report on Form 20-F,

confirming adjustments to its 2011 financial results. In its Annual Report, the 22

Company stated that it reached a conclusion on certain discussions included in its 23

press release dated May 16, 2012 (the “May 16 Press Release”), regarding the 24

preliminary adjustments to the Company’s 2011 unaudited annual financial results 25

included in the Company’s press release dated March 5, 2012 (the “March 5 Press 26 Release”), which was included as an exhibit to the Company’s Form 6-K furnished 27 to the SEC on March 5, 2012. The Company determined: 28



1

2 1. For those distributors with a proven payment history, the Company

3 will continue to recognize revenue upon delivery of services and

4 products. For those distributors without adequate history of timely

5 payments, the Company will recognize revenue at the later of cash

6 collection or the delivery of services and products. Accordingly, the

7

Company determined that US$14.1 million(1) (RMB88.8 million) of

8 revenue previously recognized in 2011 should be reversed and

9 recognized in the future when cash is collected from certain

10

distributors without a proven history of timely payments. The related

11 account receivables have also been removed from the balance sheet.

12 This adjustment does not impact revenue in 2010. As of the date of

13 this press release, the Company has collected approximately US$12.2

14 million (RMB77 million) of the cash associated with the revenue to be

15 deferred as of December 31, 2011, which collected revenue (together

16 with any additional collections before June 30, 2012) will be

17 recognized by the Company in the first half of 2012. Any remaining

18 balance will be recognized when collected. All future sales to

19 distributors without adequate history of timely payment will be

20 recognized on the cash basis until such time as a proven payment

21 history is established.

22 2. The Company determined to make a bad debt provision of US$2.2

23 million (RMB14.0 million).

24 ...

25

26 DEFENDANTS’ VIOLATIONS OF GAAP AND SEC RULES 27

28



1 169. During the Class Period, Defendants represented that Ambow’s financial

2 statements were prepared in conformity with Generally Accepted Accounting

3 Principles (“GAAP”), which are recognized by the accounting profession and the 4 SEC as the uniform rules, conventions and procedures necessary to define accepted 5 accounting practice at a particular time. However, in order to artificially inflate the 6 price of Ambow’s stock, Defendants used improper accounting practices in

7 violation of GAAP and SEC reporting requirements to falsely inflate the

8 Company’s revenues, earnings, assets, and stockholders’ equity during the Class

9 Period.

10 170. Ambow’s materially false and misleading financial statements resulted from

11 a series of deliberate senior management decisions designed to violate GAAP and

12 SEC rules in order to misrepresent and conceal the truth regarding Ambow’s actual

13 financial position and operating results. The Defendants violations of GAAP and

14 SEC rules caused the Company to among other things:

15 1) Improperly overstate the Company’s revenues and gross

16 profit; and

17 2) Improperly overstate the Company’s accounts receivables.

18 171. As set forth in Financial Accounting Standards Board (“FASB”) Statements

19 of Concepts (“Concepts Statement”) No. 1, one of the fundamental objectives of

20 financial reporting is to provide accurate and reliable information concerning an

21 entity’s financial performance during the period being presented. Concepts

Statement No. 1, paragraph 42, states: 22

Financial reporting should provide information about an 23

enterprise’s financial performance during a period. Investors 24

and creditors often use information about the past to help in 25

assessing the prospects of an enterprise. Thus, although 26 investment and credit decisions reflect investors’ and creditors’ 27 expectations about future enterprise performance, those 28



1 expectations are commonly based at least partly on evaluations

2 of past enterprise performance.

3

4 172. SEC Rule 4-01(a) of SEC Regulation S-X provides that: “Financial 5 statements filed with the [SEC] which are not prepared in accordance with [GAAP] 6 will be presumed to be misleading or inaccurate.” 17 C.F.R. § 210.4-01(a)(1).

7 Management is responsible for preparing financial statements that conform to

8 GAAP. As stated in the professional standards adopted by the AICPA:

9

10

[F]inancial statements are management’s responsibility . . . .

11

[M]anagement is responsible for adopting sound accounting

12 policies and for establishing and maintaining internal control

13 that will, among other things, record, process, summarize, and

14 report transactions (as well as events and conditions) consistent

15 with management’s assertions embodied in the financial

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

17 liabilities and equity are within the direct knowledge and control

18 of management . . . . Thus, the fair presentation of financial

19 statements in conformity with Generally Accepted Accounting

20 Principles is an implicit and integral part of management’s

21 responsibility.

22 173. Defendants violated GAAP and SEC regulations by engaging in improper

23 revenue recognition practices, as a result of recording revenue from certain of the

24 Company’s distributors that did not have an adequate history of timely payment and

25 as such, the collectability of resulting receivables from these distributors was not

26 reasonably assured, thus overstating Ambow revenues, gross profit and earnings 27 during the Class Period. 28



1 174. In addition, by transferring revenue from traditional tutoring services to

2 online e-learning software sales, and by engaging in fake “round-trip” transactions

3 by which the acquisition price of schools was returned to Ambow in the form of 4 software product sales, defendants violated GAAP 5 175. GAAP permits the recognition of revenue only if the following criteria are 6 met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred;

7 (iii) the vendor’s fee is fixed or determinable; and (iv) collectability is probable.

8 SEC Staff Accounting Bulletin (“SAB”) No. 104. Moreover, in order for revenue

9 to be recognized, it must be earned and realized or realizable. Concepts Statement

10 No. 5, Recognition and Measurement in Financial Statements of Business

11 Enterprises, ¶ 83, ASC § 605-10-25-1(a) 15 . Revenues are earned when the

12 reporting entity has substantially accomplished what it must do to be entitled to the

13 benefits represented by the revenues. Id. Revenues are realizable when related

14 assets received or held are readily convertible to known amounts of cash or claims

15 to cash. Id. If collectability is not reasonably assured, revenues should be

16 recognized on the basis of cash received. Concepts Statement No. 5, ¶ 84g; see

17 also Accounting Research Bulletin No. 43 (“ARB 43”), Ch. 1A, ¶ 1 (June 1943);

18 ASC § 605-10-25-1; Accounting Principles Board Opinion No. 10 (“APB 10”)

19 Omnibus Opinion-1966 ¶ 12 (Dec. 1966). If payment is subject to a significant

20 contingency, revenue recognition is improper. Statement of Financial Accounting

21 Standards (“SFAS”) No. 5, Accounting for Contingencies (Mar. 1975); ASC § 450-

30-25-1. 22

23

15 With the issuance of FASB Statement No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles , the FASB approved the Codification (“ASC”) as the source of authoritative US GAAP for non-governmental entities for interim and annual periods ending after September 15, 2009. The FASB Accounting Standards Codification , hereinafter cited as “ASC .”

24

25

26

27


28


176. Defendants represented that the Company’s accounting for revenue

recognition was consistent with GAAP. For example, in the Company’s 2010 20-F

filed on April 14, 2011 16, Defendants represented the following:

Revenue recognition

Revenue for education program and services and sales of

products are recognized when all four of the following criteria

are met: (i) pervasive evidence that an arrangement exists; (ii)

delivery of the products and/or services has occurred and risks

and rewards of ownership have passed to the customer; (iii) the

selling price is both fixed and determinable; and (iv) collection

of the resulting receivable is reasonably assured. If a sales

contract stipulates more than one deliverable and the

deliverables are considered as multiple accounting units in

accordance with ASC Topic 605, Revenue, the total revenue on

such arrangements is allocated among the individual

deliverables based on their relative fair values. For example, the

Company has arrangement where sales of product are bundled

with sales of educational services. In such arrangement, the

product is delivered initially before the provision of services. If

sufficient vendor-specific objective evidence of fair value does

not exist for the allocation of revenue, the fee for the entire

arrangement is recognized ratably over the term of the

arrangement. Revenue is recorded net of business tax and

surcharges.

16 The Company did not include footnote disclosures in the quarterly 6-Ks filed during the Class Period. Defendants, however, represented that the Company “prepared the unaudited consolidated financial information on the same basis as its audited consolidated financial statements.”

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1

2 a) Educational programs and services

3

4 Educational programs and services mainly consist of primary

5 and secondary curriculum education, university curriculum

6 education, tutoring programs that supplement primary and

7 secondary curriculum education and career enhancement and

8 other corporate training programs that are provided directly or

9

indirectly to customers, where the Group is responsible for

10

delivery of the programs and services. For the curriculum

11 education programs, the tuition revenue, including

12 accommodation, is recognized on a straight-line basis over the

13 length of the course, which is typically over a period of a

14 semester. For tutoring programs, tuition revenue is recognized

15 on a straight-line basis over the period during which tutoring

16 services are provided to students. Educational materials revenue,

17 which is immaterial and has not been disclosed separately,

18 relates to the sales of books, course materials, course notes for

19 which the Group recognizes revenue when the materials have

been delivered to students. 20

21 b) Sales of products:

22

23 Product revenues relate to revenues from the sale of educational

24 compact disks ("CDs") or downloaded through the internet. The

25 sales arrangements do not include post customer support

26 services and the Group does not provide customers with

27 upgrades. The Group recognizes revenue for these products in 28



1 accordance with US GAAP guidance on software revenue

2 recognition .

3

4 (Emphasis added). 5

6 177. In addition, pursuant to GAAP, revenues and gains are realizable when

7 related assets received or held are readily convertible to known amounts of cash or

8 claims to cash. Concepts Statement No. 5, ¶ 83(a); ASC § 605-10-25-1. Readily

9 convertible assets have (i) interchangeable (fungible) units and (ii) quoted prices

10 available in an active market that can rapidly absorb the quantity held by the entity

11 without significantly affecting the price. Id. However, by engaging in the

12 recording of revenue from certain of the Company’s distributors that did not have

13 an adequate history of timely payment, defendants improperly recognized revenue

14 and earnings because, among other things, the foregoing transactions were not

15 readily convertible to known amounts of cash or claims to cash due to the

16 uncertainty of collectability. Accordingly, as a result of improperly recording the

17 revenue from certain of the Company’s distributors, defendants overstated the

18 Company’s revenue and earnings during the Class Period.

19 Ambow’s Overstated Materially its Accounts Receivable

20

21 178. Ambow’s reported financial results during the Class Period were materially

22 false and misleading by overstating its accounts receivables, as a result of recording

23 revenue from certain of the Company’s distributors that did not have an adequate

24 history of timely payment and as such, the collectability of resulting receivables

25 from these distributors was not reasonably assured.

26 179. Defendants represented in the Company’s public filings the following:

27 Accounts receivable mainly represent the amounts due from the 28



customers or students of the Company’s various subsidiaries and

VIEs. An allowance for doubtful accounts is recorded in the

period in which a loss is determined to be probable based on an

assessment of specific evidence indicating doubtful collection,

historical experience, account balance aging and prevailing

economic conditions. Accounts receivable balances are written

off after all collection efforts have been exhausted and the

potential for recovery is considered remote.

180. GAAP provides that an estimated loss from a loss contingency, such as the

collectability of receivables, “shall be accrued by a charge to income” if: (i)

information available before the financial statements are issued indicates that it is

probable that an asset had been impaired or a liability had been incurred at the date

of the financial statements; and (ii) the amount of the loss can be reasonably

estimated. ASC §450-20-25-2 17 .

181. In addition, Accounting Research Bulletin (“ARB”) No. 43, Chapter 3,

Section 9 provides that the objective of providing for reserves against receivables is

to assure that, “[a]ccounts receivable net of allowances for uncollectible accounts . .

. are effectively stated as the amount of cash estimated as realizable.

182. Defendants disclosed in the Company’s 2010 20-F that:

In 2009, we generally sold software products to our distributors

on a prepaid basis. Sales with credit terms require special

approval by our management. While not significant in 2010, we

have extended credit terms to our two key distributors.

17 With the issuance of FASB Statement No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles , the FASB approved the Codification as the source of authoritative US GAAP for non-governmental entities for interim and annual periods ending after September 15, 2009. The FASB Accounting Standards Codification , hereinafter cited as “ASC § __.”

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1

183. Defendants, however, failed to disclose that in 2011 the Company had begun

to extend credit beyond its “two key distributors,” causing a fundamental change in

the Company’s business model. In this regard, the Company’s 2011 20-F,

defendants disclosed that “[f]rom 2010, we started to offer credit terms to certain

distributors.” GAAP states that “[t]he conditions under which receivables exist

usually involve some degree of uncertainty about their collectability.” ASC § 310-

10-35-6. Despite the increased risk inherent in the Company’s receivables,

resulting from extending credit to distributors which had no payment history,

defendants maintained a minimal allowance. Not until the restatement on May 29,

2012 did the Company finally record bad debt provisions consistent with the

inherent risks in its burgeoning accounts receivable, as a result of extending credit

to distributors with no proven credit history.

184. On May 16, 2012, the Company disclosed that it “expects to make a bad debt

provision of between US$2.1 million (RMB13 million) and US$2.4 million

(RMB15 million).”

185. The Company’s 20-F filed on May 29, 2012, reflects a total allowance for

bad debt of $2.3 million (RMB14.6 million). RMB U.S.$

Accounts receivable ¥122,886 $19,525 a Less: allowance for doubtful accounts

Balance at beginning of year

Additional provision for bad debt Balance at end of year Accounts receivable, net

Ambow 20-F at F-22 (May 29,

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13

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15

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25

26

27

(458)

(73)

(14,181)

(2,253)

(14,639)

(2,326)

¥108,247 $17,199


28


1 2012) aConverted to USD at 6.2938.

186. Accordingly, the Company failed to record adequate, if any provisions,

during the Class Period for bad debt, as evidenced by the belated provision

disclosed on May 16, 2012.

187. As a result of recording revenue from certain of the Company's distributors

that did not have an adequate history of timely payment, Ambow accumulated

millions of dollars of aging receivables on its balance sheet. In this regard, the

Company’s receivables at June 30, 2011 grew to $14.8 million or 73 percent. And

at September 30, 2011, receivables grew by almost $19 million or 128 percent. At

At March At June At At in thousands December 31, 30, September December in USD 31, 2010 2011 2011 30, 2011 31, 2011 Accounts receivable, $

7,374 $8,560 $14,774 $ 33,739 $ 33,820 net

USD in 000's

188. A quarter by quarter analysis of Ambow accounts receivable and allowance Restated

12/31/09 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11 2011

for doubtful accounts demonstrates that Ambow’s CFO and CEO knew that Total Accts. Receivable $ 3,203 $ 7,444 $ 8,633 $ 14,847 $ 33,812 $ 33,893 $ 19,525

Allow. DoubtAccts. 54 73 73 73 73 73 Ambow had failed to properly record accounts receivable and a corresponding Increase bad debt provis. 51 16 2,253

allowance and bad debt expense in each quarter and at year end during fiscal 2011. Net Accounts Receivable $ 3,152 $ 7,374 $ 8,560 $ 14,774 $ 33,739 $ 33,820 $ 17,199

Allowance / Receivables 1.6% 0.9% 0.8% 0.5% 0.2% 0.2% 11.9%

Exchange rate RMB:Dollar 6.83 6.55 6.52 6.41 6.31 6.31 6.31

23

24 189. The above analysis shows that Ambow reduced allowance for doubtful

25 accounts as a percentage of accounts receivable and did not increase the allowance

26 by any dollar amount during 2011 even though its credit sales (accounts receivable) 27 ballooned by over 450%.

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28



1 190. On May 16, 2012, defendants admitted that the Company’s accounts

2 receivable at December 31, 2011 was overstated by $16.6 million or 96 percent. In

3 connection with the overstated receivables the Company disclosed that it “expects 4 that between US$13.5 million (RMB85 million) and US$15.1 million (RMB95 5 million) of revenue previously recognized in 2011 will be reversed and recognized 6 in the future when cash is collected from certain distributors.” The Company’s

7 failure to properly account for and disclose Ambow’s accounts receivables was

8 materially misleading to investors. Accordingly, in order to falsely and materially

9 inflate earnings during the Class Period, defendants violated GAAP and SEC rules

10 by failing to record adequate provisions for uncollectible receivables in its financial

11 statements related to its uncollectible accounts.

12

13 The Accounting Improprieties were Material to Ambow’s

14 Financial Statements as Evidenced by the Restatement

15

16 191. The above-described fraudulent transactions had a material impact on

17 Ambow’s financial statements.

18 192. According to GAAP, a retroactive restatement of financial statements is

19 reserved for material accounting errors “resulting from mathematical mistakes,

20 mistakes in the application of GAAP, or oversight or misuse of facts that existed at

21 the time the financial statements were prepared.” SFAS No. 154, Accounting

Changes and Error Corrections, ¶ 2h (May 2005); ASC § 250. 22

193. Since GAAP allows only to restate financial statements for correction of 23

errors that are “material,” resulting from “mistakes in the application of GAAP . . . 24

that existed at the time,” by acknowledging their intent to restate the Company’s 25

financial statements, defendants have admitted the materiality of the errors in its 26 previously issued financial statements. 27

28



1 194. On May 16, 2012, the Company announced in a 6-K that it would be delayed

2 in filing its 2011 Annual report on Form 20-F. The Company also disclosed that it

3 had “identified certain preliminary adjustments to the 2011 unaudited financial 4 results included in the Company’s press release dated March 5, 2012, which was 5 included as an exhibit to the Company’s Form 6-K furnished to the SEC on March 6 5, 2012 . . . .” In the 6-K, the Defendants also disclosed that:

7

[T]he Company expects to make the following adjustments:

8

9

1. The Company will change the revenue recognition method

10

in respect of sales of the Company’s educational services and

11 software products to certain distributors. For those distributors

12 with a proven payment history, the Company will continue to

13 recognize revenue upon delivery of services and products. For

14 those distributors without adequate history of timely payment,

15 the Company will defer the recognition of revenue until cash is

16 collected. Accordingly, the Company expects that between

17 US$13.5 million (RMB85 million) and US$15.1 million

18 (RMB95 million) of revenue previously recognized in 2011 will

19 be reversed and recognized in the future when cash is collected

20 from certain distributors. This adjustment does not impact

21 revenue in 2010. As of the date of this press release, the

Company has collected approximately US$12.2 million 22

(RMB77 million) of the cash associated with the revenue to be 23

deferred as of December 31, 2011, which collected revenue 24

(together with any additional collections before June 30, 2012) 25

will be recognized by the Company in the first half of 2012. 26 Any remaining balance will be recognized when collected. All 27 future sales to distributors without adequate history of timely 28



1 payment will be recognized on the cash basis until such time as

2 a proven payment history is established.

3

4 2. The Company expects to make a bad debt provision of

5

between US$2.1 million (RMB13 million) and US$2.4 million

6

(RMB15 million).

7

8

3. In addition to the 10 new tutoring centers opened in the

9

fourth quarter of 2011 as described in the Form 6-K, an

10 additional 12 centers began operations in late December 2011,

11

bringing the total number of newly opened centers to 22 in the

12

fourth quarter of 2011. As a result, depreciation and other

13 expense is expected to increase by between US$0.5 million

14 (RMB3 million) and US$0.6 million (RMB3.5 million).

15

16 195. The adjustments materially reduced the Company’s previously reported year

17 end results. For example, the adjustments reduced, among other things, previously

18 reported revenues and net income by $14.1 million or 5 percent, and $14.5 million

19 or 81 percent, respectively. In addition, accounts receivable were reduced $104.6

20 million or 49 percent.

21 196. The Company’s quarterly results reported on Form 6-K were also materially

misstated and required correction in each quarterly report in each quarterly period 22

during fiscal 2011. 23

197. As reflected in the schedules attached as Exhibits 2-4, the restatements 24

materially reduced the Company’s net revenues during the first three quarters of 25

2011 – 9 percent for the quarter ended March 31, 2011; 10 percent for the quarter 26 ended June 30, 2011; and 7 percent for the quarter ended September 30, 2011. 27 Additionally, the restatements adversely impacted net income. Net income was 28



1 reduced by 2 percent for the quarter ended June 30, 2011; and 14 percent for the

2 quarter ended September 30, 2011. Miraculously, despite the 9 percent downward

3 revision in revenues in the first quarter 2011, net income was not impacted. 4

5

CLASS ACTION ALLEGATIONS 6

7 198. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

8 Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who

9 purchased Ambow's ADS between August 5, 2010 and February 27, 2013 inclusive

10 (the "Class Period") and who were damaged thereby (the "Class"). Excluded from

11 the Class are Defendants, the officers and directors of the Company, at all relevant

12 times, members of their, immediate families and their legal representatives, heirs,

13 successors or assigns and any entity in which Defendants have or had a controlling

14 interest.

15 199. The members of the Class are so numerous that joinder of all members is

16 impracticable. Throughout the Class Period, Ambow's ADSs were actively traded

17 on the New York Stock Exchange (the "NYSE"). While the exact number of Class

18 members is unknown to Plaintiff at this time and can only be ascertained through

19 appropriate discovery, Plaintiff believes that there are hundreds or thousands of

20 members in the proposed Class. Millions of Ambow ADSs were traded publicly

21 during the Class Period on the NYSE. During the Class Period, there were more

than 10 million Ambow ADS outstanding. Record owners and other members of 22

the Class may be identified from records maintained by Ambow or its transfer agent 23

and may be notified of the pendency of this action by mail, using the form of notice 24

similar to that customarily used in securities class actions. 25

200. Plaintiffs’ claims are typical of the claims of the members of the Class as all 26 members of the Class are similarly affected by Defendants' wrongful conduct in 27 violation of federal law that is complained of herein. 28



1 201. Plaintiff will fairly and adequately protect the interests of the members of the

2 Class and has retained counsel competent and experienced in class and securities

3 litigation. 4 202. Common questions of law and fact exist as to all members of the Class and 5 predominate over any questions solely affecting individual members of the Class. 6 Among the questions of law and fact common to the Class are:

7

(a) whether the federal securities laws were violated by Defendants'

8 acts as alleged herein;

9

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

10

during the Class Period omitted and/or misrepresented material facts about

11 the business, operations, and prospects of AMBO; and

12

(c) to what extent the members of the Class have sustained

13 damages and the proper measure of damages.

14 203. A class action is superior to all other available methods for the fair and

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

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

17 may be relatively small, the expense and burden of individual litigation makes it

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

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

APPLICABILITY OF PRESUMPTION OF RELIANCE 20

(FRAUD-ON-THE-MARKET DOCTRINE) 21

22 204. The market for Ambow's ADSs was open, well-developed and efficient at all

23 times during the Class Period permitting Plaintiffs a presumption of reliance on the

24 integrity of the market for Ambow’s ADSs.

25 205. The market for Ambow's securities was an efficient market during the Class

26 Period for the following reasons, among others: 27

28



1 ( a) Ambow's ADSs met the requirements for listing, and were listed

2 and actively traded on the NYSE, a highly efficient and automated market;

3 (b) As a regulated issuer, Ambow filed periodic public reports with

4 the SEC and/or the NYSE;

5

(c) Ambow regularly communicated with public investors via

6 established market communication mechanisms, including through regular

7

dissemination of press releases on the national circuits of major news wire

8 services and through other wide-ranging public disclosures, such as

9 communications with the financial press and other similar reporting services;

10

(d) Ambow was followed by securities analysts including Wells

11

Fargo, Macquarie Capital, Jeffries, JP Morgan and other brokerage and

12 research firms who wrote research reports about the Company, and these

13 reports were distributed widely. Each of these reports was publicly available

14 and entered the public marketplace;

15 (e) According Ambow’s Form 20-F filed with the SEC on April 14,

16 2011, Ambow had issued and outstanding 10,677,207 ADSs as of December

17 31, 2010;

18 (f) on average, approximately 3.5% of Ambow’s 10,677,207

19 outstanding ADSs were traded on a weekly basis during the Class Period;

20 (g) Ambow met the SEC requirements to file an S-3 registration

21 statement during the Class Period;

(h) Unexpected material public news concerning Ambow was rapidly 22

reflected in Ambow’s share price. 23

24 206. As a result of the foregoing, the market for Ambow's securities promptly

25 digested current information regarding Ambow from all publicly available sources

26 and reflected such information in Ambow's ADS price. 27

28



1 FIRST CLAIM

2 Violation of Section 10(b) Of The Exchange Act Against and Rule 10b-5 3 Promulgated Thereunder Against Ambow, Jin Huang and Paul Chow 4 207. Plaintiffs repeat and reallege each and every allegation contained above as if 5 fully set forth herein. 6 208. This claim is brought against Ambow, Jin Huang and Paul Chow.

7 209. During the Class Period, Defendants Ambow, Jin Huang and Paul Chow

8 carried out a plan, scheme and course of conduct which was intended to and,

9 throughout the Class Period, did: (1) deceive the investing public, including

10 plaintiff and other Class members, as alleged herein; and (2) cause plaintiff and

11 other members of the Class to purchase Ambow’s ADSs at artificially inflated

12 prices. In furtherance of this unlawful scheme, plan and course of conduct,

13 Defendants, and each of them, took the actions set forth herein.

14 210. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

15 untrue statements of material fact and/or omitted to state material facts necessary to

16 make the statements not misleading; and (c) engaged in acts, practices, and a course

17 of business that operated as a fraud and deceit upon the purchasers of the

18 Company’s common stock in an effort to maintain artificially high market prices

19 for AMBOW’s common stock in violation of Section 10(b) of the Exchange Act

20 and Rule 10b-5 thereunder. All Defendants are sued either as primary participants

21 in the wrongful and illegal conduct charged herein or as controlling persons as

alleged below. 22

211. Defendants, individually and in concert, directly and indirectly, by the use, 23

means or instrumentalities of interstate commerce and/or of the mails, engaged and 24

participated in a continuous course of conduct to conceal adverse material 25

information about the business, operations and future prospects of AMBOW as 26 specified herein. 27

28



1 212. Each of these Defendants’ primary liability, and controlling person liability,

2 arises from the following facts: (1) Jin Huang and Paul Chow were Ambow’s two

3 highest high-level executives and directors at the Company during the Class Period 4 and most senior ranking members of the Company’s management team and had

5 control thereof; (2) each of these defendants, by virtue of his or her responsibilities

6 and activities as a senior officer and/or director of the Company, was privy to and

7 participated in the creation, development and reporting of the Company’s financial

8 condition; (3) each of these defendants enjoyed significant personal contact and

9

familiarity with senior financial management and the auditors and was advised of

10 and had access to other members of the Company’s management team, internal

11 reports and other data and information about the Company’s finances, operations,

12 and sales at all relevant times; and (4) each of these defendants was aware of the

13 Company’s dissemination of information to the investing public which they knew

14 or recklessly disregarded was materially false and misleading.

15 213. By virtue of the foregoing, Defendants Ambow, Jin Huang and Paul Chow

16 have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated

17 thereunder.

18 214. As a direct and proximate result of these Defendants’ wrongful conduct,

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

20 their respective purchases and sales of the Company’s ADSs during the Class

Period. 21

215. This action was filed within two years of discovery of the fraud and within 22

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

23 action.

24

25 SECOND CLAIM

26 Violation of Section 20(a) Of

27 The Exchange Act Against the Paul Chow and Jin Huang 28



1

2 216. Plaintiffs repeat and reallege each and every allegation contained above as if

3 fully set forth herein. 4 217. Defendants Jin Huang and Paul Chow acted as controlling persons of 5 AMBOW within the meaning of Section 20(a) of the Exchange Act as alleged

6

herein. By virtue of their high-level positions, agency, and their ownership and

7 contractual rights, participation in and/or awareness of the Company’s operations

8 and/or intimate knowledge of the false financial statements filed by the Company

9 with the SEC and disseminated to the investing public, Chow and Huang had the

10 power to influence and control, and did influence and control, directly or

11

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

12

dissemination of the various statements that plaintiff contends are false and

13 misleading.

14 218. Chow and Huang were provided with or had unlimited access to copies of the

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

16 Plaintiff to have been misleading prior to and/or shortly after these statements were

17 issued and had the ability to prevent the issuance of the statements or to cause the

18 statements to be corrected.

19 219. In particular, Chow and Huang had direct and supervisory involvement in the

20 day-to-day operations of the Company and, therefore, are presumed to have had the

21 power to control or influence the particular transactions giving rise to the securities

violations as alleged herein, and exercised the same. 22

220. As set forth above, Ambow, Chow and Huang each violated Section 10(b) 23

and Rule 10b-5 by their acts and omissions as alleged in this Complaint. 24

221. By virtue of their positions as controlling persons of Ambow (and Huang as 25

controlling person of Chow), Chow and Huang are liable pursuant to Section 20(a) 26 of the Exchange Act. As a direct and proximate result of Defendants’ wrongful 27

28



1 conduct, Plaintiff and other members of the Class suffered damages in connection

2 with their purchases of the Company’s common stock during the Class Period.

3 222. This action was filed within two years of discovery of the fraud and within 4 five years of each Plaintiff’s purchases of securities giving rise to the cause of 5 action.

6

THIRD CLAIM

7

Violation of Section 11 of the Securities Act Against All Defendants

8

9 223. Plaintiffs repeat and reallege every allegation contained above as if fully set

10 forth herein.

11 224. This claim is not based on fraud, does not allege fraud, and does not sound in

12 fraud.

13 225. This claim is asserted on by Plaintiffs against all Defendants by, and on

14 behalf of all persons who acquired shares of the Company’s securities pursuant

15 and/or traceable to the IPO Registration Statement.

16 226. Each of the Individual Defendants signed the IPO Registration Statement.

17 227. Each of the Individual Defendants was officers or directors of Ambow at the

18 time of the filing of the Registration Statement and sale of Ambow ADSs in the

IPO. 19

20 228. None of the Defendants made a reasonable investigation or possessed

21 reasonable grounds for the belief that the statements contained in the Registration

Statement were true or that there was no omission of material facts necessary to 22

make the statements therein not misleading. 23

229. As a direct and proximate result of Defendants’ acts and omissions in 24

violation of the Securities Act, the market price of Ambow’s ADSs sold in the 25

Offering was artificially inflated and Plaintiffs and the Class suffered substantial 26 damage in connection with their purchase of Ambow ADSs pursuant to the 27 Registration Statement. 28



1 230. Ambow is the issuer of the ADSs sold via the Registration Statement.

2 231. As issuer of the securities, the Company is strictly liable to Plaintiffs and the

3 Class for the material misstatements and omissions therein. 4 232. At the times they obtained their shares of Ambow, Plaintiffs and members of 5 the Class did so without knowledge of the facts concerning the misstatements or 6 omissions alleged herein.

7 233. This action is brought within one year after discovery of the untrue

8 statements and omissions in the Registration Statement which should have been

9 made through the exercise of reasonable diligence, and within three years of the

10 effective date of the Registration Statement.

11 234. By virtue of the foregoing, Plaintiffs and the other members of the Class are

12 entitled to damages under Section 11 as measured by the provisions of Section

13 11(e), from the defendants and each of them, jointly and severally.

14

15 FOURTH CLAIM

16 Violations of section 15 of the Securities Act Against Huang and Chow

17

18 235. Plaintiffs repeat and reallege each and every allegation contained above as if

19 fully set forth herein.

20 236. This claim is asserted on behalf of Plaintiffs and all Class members against

21 Jin Huang and Paul Chow, each of whom was a control person of the primary

violator liable under Section 11 during the Class Period. 22

237. The primary violator liable under Section 11 for purposes of this claim under 23

Section 15 is Ambow and Huang. 24

238. Huang and Chow both controlled Ambow and Huang also controlled Chow 25

at all times during the Class Period. 26 239. Neither Chow nor Huang made a reasonable investigation or possessed 27 reasonable grounds for the belief that the statements contained in the Registration 28



1 Statement and Prospectus were accurate and complete in all material respects. Had

2 they exercised reasonable care, they should have known of the material

3 misstatements and omissions alleged herein. 4 240. This claim was brought within one year after the discovery of the untrue 5 statements and omissions in the IPO Registration Statement and Prospectus and 6 within three years after Ambow ADS was sold the class in connection with the

7 public offering.

8 241. By reason of the misconduct alleged herein, the Individual Defendants are

9 jointly and severally liable with and to the same extent as Ambow pursuant to

10 Section 15 of the Securities Act.

11

12 PRAYER FOR RELIEF

13 WHEREFORE , Plaintiff prays for relief and judgment, as follows:

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

15 Plaintiff as class representative under Rule 23 of the Federal Rules of Civil

16 Procedure and Plaintiff’s counsel as Class Counsel;

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

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

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

20 trial, including interest thereon;

21 (c) Awarding Plaintiff and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; 22

(d) Awarding rescissory damages; and 23

(d) Such other and further relief as the Court may deem just and proper. 24

JURY TRIAL DEMANDED 25

Plaintiff hereby demands a trial by jury. 26

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Dated: May 3, 2013 Respectfully submitted,

THE ROSEN LAW FIRM, P.A.

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

Counsel Plaintiffs



1

CERTIFICATE OF SERVICE

2 I hereby certify that this document filed through the ECF system will be sent

3

4 electronically to the registered participants as identified on the Notice of Electronic

5 Filing (NEF) and paper copies will be sent to those indicated as non-registered

6 participants on May 3, 2013.

7

8 Dated: May 3, 2013 /s/ Laurence Rosen

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Name & Address: Laurence M. Rosen, Esq(SBN 219683) THE ROSEN LAW FIRM, P.A. 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071


Individually and on behalf of all Others Similarly CASE NUMBER

Situated

PLAINTIFF(S)

12-cv-5062 p6 1AZT14)

V. Ambow Education Holdings LTD, Jin Huang, Paul Chow, Xuejun Xie, Mark Rob ert.Harris, Lisa Lo,. Daniel Phillips, Tao Sun and Sasha Chang SUMMONS

DEFENDANT(S).

TO: DEFENDANT(S):

A lawsuit has been filed against you.

Within _2 days after service of this summons on you (not counting the day you received it), you must serve on the plaintiff an answer to the attached U complaint Ff Second amended complaint U counterclaim Elcross-claim or a motion under Rule 12 of the Federal Rules of Civil Procedure. The answer or motion must be served on the plaintiff's attorney, Laurence Rosen , whose address is 355 South Grand Avenue, Suite 2450 Los Angeles, California 90071 . If you fail to do so, judgment by default will be entered against you for the relief demanded in the complaint. You also must file your answer or motion with the court.

Dated: MAY - 32013

Clerk, U.S. trict Court

By: )'

Deputy C;,

0/') (Seal of the

[Use 60 days if the defendant is the Untied States or a United Slates agency, or is an officer or employee of the United States. Allowed 60 days by Rule 12(a) (3)].

CV-01A (10/11 StThIi\4ONS


Name & Address: Laurence M. Rosen, Esq (SBN 219683) THE ROSEN LAW FIRM, P.A. 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071


Individually and on behalf of all Others Similarly CASE NUMBER

Situated

12-cv-5062 f:c;: (Att ?J PLAINTIFF(S)

V.

Ambow Education Holdings LTD, Jin Huang, Paul Chow, Xuejun Xie, Mark RobertHarris, Lisa Lo,. Daniel Phillips, Tao Sun and Sasha Chang SUMMONS

DEFENDANT(S).

TO: DEFENDANT(S):

A lawsuit has been filed against you.

Within 21 days after service of this summons on you (not counting the day you received it), you must serve on the plaintiff an answer to the attached U complaint Pe_Second amended complaint U counterclaim U crossclaim or a motion under Rule 12 of the Federal Rules of Civil Procedure. The answer or motion must be served on the plaintiff's attorney, Laurence Rosen , whose address is 355 South Grand. Avenue, Suite 2450 Los Angeles, California 90071 If you fail to do so, judgment by default will be entered against you for the relief demanded in the complaint. You also must file your answer or motion with the court.

Dated: 1A - 3 2013

Clei

IN

[Use 60 days if the deftndant is the United States or a United States agency, or is an officer or employee of the United States. Allowed 60 days by Ride 12"a)(3)J.

CV-01A(10/11 SUMMONS

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