What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing more than four years after theranose was exposed as a fraud. Founder elizabeth holmes is finally answering for her alleged crimes in court. Theranow scammed, hundreds of millions of dollars from unsuspecting investors by claiming their biotechnology could run a broad range of medical diagnostics with only a fingerprint of blood. Of course, it was all smoke and mirrors and investors lost everything while theranos is the largest and most high profile.

Medical fraud of the past decade, it is by no means the only one in this video we're taking a look at a chinese-based medical company that stole more than 600 million dollars, mostly from unsuspecting us investors. The ceo and cfo who masterminded the fraud are still at large and are evading justice as international fugitives, we're talking about the massive fraud of china, medical technologies, inc hereafter referred to as seamed. In 2004, rue xiao dong incorporated cmed as a fast growing and innovative medical technology company and appointed samson sang as chief financial officer. It was headquartered in beijing, but they registered it in the cayman islands.

Under the variable interest entity or vie structure. Registering a shell company in the cayman islands was necessary for their plan to raise hundreds of millions of dollars from the u.s capital markets in 2005. They ipoded on nasdaq under the ticker symbol cmed through the ipo proceeds and bond issuance. They raised 677 million dollars mainly from u.s investors and who could blame them for buying shares, based on all the financial and business information that cmed showed on their prospectus.

The investment looked like a slam dunk, they developed a revolutionary non-invasive cancer treatment, called high-intensity focus, ultrasound or hifu, which can treat cancerous tumors in the liver, breasts, kidneys, pelvic, cavity and bones. They also developed a cutting edge in vitro diagnostic system, which could diagnose a wide range of diseases by analyzing blood samples and they'd, already proven the value of their technology in the marketplace. In 2005, their revenue almost doubled from 110 million chinese rmbs to 217 million. They were extremely profitable, making a net profit margin of more than 50 percent.

These levels of net margins are almost unheard of in the medical device industry. For example, blue chip, medical device maker danahar made a 16 net margin in 2020.. Cmed was a once in a generation investment opportunity. It was perhaps the only company growing revenues at 100, while the same time recording industry-leading profit margins.

Of course, these reported financials were a fantasy fabricated up by the ceo and cfo to make the company look as attractive as possible to prospective investors, but there is no reason to suspect anything was amiss. Cmed went through a rigorous ipo underwriting process with the prestigious union bank of switzerland in their financial statements. All passed audits from the big four accounting firm kpmg cmed was able to raise 677 million dollars from investors who thought they were buying a stick and perhaps the most innovative and profitable medical company in the world and for the first few years everything seemed to be Going well for the company, they continued to grow at a fast pace, with revenue exceeding 900 million rmb and net profit exceeding 300 million rmb in 2008.. They ipo'd in 2005 for about 15 dollars per share.

Given the continued strong performance of the company, investors bid up the share price to a high of 57 in 2008, giving the company a market cap of one and a half billion dollars. Investors, who bought in at the ipo were sitting on a roughly 300 percent gain, but behind the scenes the company was not doing as well as it appeared to investors. In 2009, cmed's auditor kpmg received an anonymous letter, probably from a short seller. The letter alleged that cmed senior executives were engaged in a highly sophisticated scheme to book hundreds of millions of dollars worth of fake revenues and profits right under the noses of the auditors.

The scheme worked as follows: cmed would transfer hundreds of millions of dollars of cash to shell companies controlled by chairman and ceo wu xiaodong. These transactions were not reported in cmed's financial statements. The shell companies would then transfer the money back to cmed, which they would then proceed to record as revenue. This was a classic case of the right hand.

Feeding the left hand, no actual medical devices were changing hands as a result of these transactions. This can explain their unusually high profitability, since their revenue was fake. They could assign any profit margin that they wanted, as it turns out, their actual business operations barely even existed. The supposed miracle cancer treating ultrasound machine was completely fabricated.

In reality, their only technology was outdated and their patents had long since expired. In response to the allegations, kpmg commissioned an independent law firm to investigate the company they conducted on-site visits interviewed cmed employees. They connected internal company documents, as the investigation went on. It became increasingly apparent that cmed was a fraud from the beginning.

They said they would use the money raising the ipo and debt issuances to invest in acquisitions as well as new technologies. In reality, they never had any intention of doing this. In 2006, just one year after the ipo, ceo wu, xiaodong and cfo samson tang started transferring cash from cmed to entities that they controlled. They knew the fraud couldn't last forever.

As early as 2008, they were making preparations to eventually disappear with the money. Ceo wu, xiao dong's wife started making frequent trips to the bellagio casino in las vegas, where she would spend tens of millions of dollars that were expropriated from cmed. She used the casino as a form of money laundering. She would play the slot machines in whatever money she won.

She could report as legitimate gambling winnings this cleaned the money and allowed her to transfer it out of the country through the traditional banking system. This was an extremely inefficient form of money laundering, as the casino took a huge cut of the money that she put in, but it was a price that they were willing to pay, as it enabled them to launder tens of millions of dollars by 2010. The investigations were still ongoing and the company denied the allegations, but people were starting to get suspicious and short sellers started piling into the stock. The share price had fallen from a high of 57 dollars in 2008 to less than 20 dollars in 2010.

by 2012. The ceo and cfo had finished looting cmed of all of its cash. They stopped filing financial reports to the sec, stopped paying interest payments on the company's debts and disappeared. The company ceased its operations and filed for chapter 15 bankruptcy.

The shares were delisted from the nasdaq and investors lost everything. In 2017, the u.s attorney's office in the eastern district of new york officially charged the ceo and cfo with securities fraud. It's estimated that they stole at least 400 million dollars and possibly as much as 670 million dollars from shareholders and bondholders, but the masterminds have long since left the country to the best of our knowledge. They remain international fugitives and have never faced justice for their crimes.

They probably changed their names and are currently living a life of luxury, with the hundreds of millions of dollars that they stole from investors. The story of china. Medical technologies can serve as a cautionary tale to all investors, especially those who invest in china. China is the world's second largest economy, and there are plenty of legitimate chinese companies which have made tremendous gains for their shareholders, but they also have more than their fair share of frauds.

A big reason for this is the variable interest entity or vie structure. Chinese companies use to list on the us exchanges. It is technically illegal for foreign investors to directly own a stake in a chinese company, so they create shell companies, usually based in the cayman islands. Foreign investors can indirectly own a stake in the chinese companies by owning shares in the shell companies, because these cayman island vies are owned mostly by foreign investors.

The chinese government doesn't expend very much resources regulating these companies. Sometimes unscrupulous agents take advantage of the situation to defraud american investors. In the case of cmit, the most basic due diligence investors should have done was to see whether or not the company was even a real business. If you look up china, medical technology, company on chinese search engine baidu between 2003 and 2007, the only thing you can find is the company's own website, a search for their predecessor.

Company ydme beijing turns up no relevant results for a company that supposedly developed a revolutionary new cancer treatment. You should expect at least some local media coverage. The company probably never existed as a real business in any significant capacity. This just goes to show how little due diligence that ubs did when they underwrote the ibo process, as well as investors, who bought hundreds and millions of dollars worth of their equity and debt.

Their auditor kpmg signed off on their fake financial statements for years before an anonymous short seller took them off. Had they been left to their own devices, the fraud could have gone undetected for many more years, alright, guys that wraps it up for this video. What do you think about the cmed fraud? Do you think kpmg was negligent in their capacity as an auditor? Let us know in the comments section below, if you want to support our work check out our patreon page link in the description below. In addition to making these videos possible, our patrons get access to our main stock portfolio, the database of all new york stock exchange and nasdaq listed stocks with dual share class structures, as well as other benefits.

As always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.