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Whistleblowing As an Art of War

Whistleblowing As an Art of War

 

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China Armcometals, or China Armco Metals, is virtually an international power. Trading on the New York Stock Exchange as CNAM, it was recently rocked by charges that would have decimated more modest companies. In late September, 2010, CNAM was brought into federal district court, Nevada (United States District Court-Nevada, Case No:2:10-cv-1581).

CNAM, however, is no mere BP, for example. Yet, new rules of whistle-blowing may dictate some ironic protections toward the companies…a classic Catch-22, where directors harm the company, hide that harm to take their profits, then see investors essentially cannibalize the remnants of the company. There is always the risk, as well, that whistle blowing will take the brunt of legislative ‘reform’ to change these risks.

Recent congressional reforms have added to the uncertainty.

CNAM may become the model of what goes wrong, when shareholders lose valuation in a whistle blower case. Consider the attractiveness of CNAM shares in the wake of allegations that would swamp most other companies:

“What are your thoughts on taking a low-risk ride on the gravy train thanks to investor Andrew Worden?” He’s aggressively been snatching up incredibly inexpensive shares of China Armco Metals(CNAM). He’s bought so much that he’s become an insider. Glen Bradford in GlobalSpeculation.com

At the heart of the allegations against CNAM are charges of deception by the CEO and a majority of the CNAM board. As with many whistle blower charges regarding stock transfers and insider sales, the effect of the alleged fraud was to dilute the value of those not privy to a corporation’s levers of power.

The CNAM case devolves into a battle over the meaning of full disclosure, versus adequate disclosure. Ironically, the board of directors is even accused of doing the right thing…at least: at first. Suspicious of CEO Yao’s attempts to sell his personal shares, the board initiated a full investigation. The Board determined, allegedly, that Yao had indeed failed to adequately disclose the actual level of his intended stock sales. Yao is said to have grossly underestimated the total amount of his sales…incorrectly stating an actual sale of Yao’s more than 9% of company shares as being only 1.9%.

The board, after being informed of this apparent fraud, decided to conceal the facts. CNAM also maintains control over a slew of other companies…not named in the investigation:

  • The Armco Metals Logo
  • Henan Armco Trading Company, Ltd.
  • Armet Renewable Resource Company, Ltd.

Whistleblowers are now armed with hopefully powerful language in the Dodd/Frank Act (an SEC enforcement section dubbed the ‘Wall Street Tip-off law’), passed in Spring, 2010. Whistleblowers may now be eligible for a formulaic payoffs, between 10 and 30% of all moneys over $1M recovered as a result of the whistler’s direct actions.

As with many metals industries, now very reliant on public stock sales to maintain competitiveness, CNAM promotes its investment diversity heavily on-line. A new wrinkle for many companies may be the level of uncertainty it admits to in these public forums. In light of the investigation into its CEO and board failures to communicate, CNAM ironically comments that:

“The materials contained on this website are offered for informational purposes only and may contain inaccuracies and errors. China Armco Metals,Inc. (“Armco”) does not warrant the accuracy or completeness of the materials or the reliability of any advice, opinion, statement or other information displayed or distributed through the site. Any reliance on any such opinion, advice, statement, memorandum, or information shall be at your sole risk.”

The recent upheaval in international markets has created a new sense of obligation meeting opportunity for whistle blowers. When dealing with a major international company, the perception of fiscal responsibility is increasingly suspect. The outcome of the likely protracted CNAM trial may serve to advance other disclosure rules in the volatile metals market.

Source:
“China Armcometals, Inc. Sued for Securities Fraud, Receiver Sought, No 8K Filed 22 Days Running !” http://www.newswire.net/newsroom/index.php/permalink/69177.html

 
 
 

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