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Hongli Clean Energy Kept Impairments Off Balance Sheets Securities Class Action

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Coking Image from Hongli Website

The complaint for this class action begins its section on substantive allegations by discussing and reproducing a series of consolidated balance sheets from the filings of Hongli Clean Energy Technologies Corporation. The idea is that the company did not take impairments when it should have and concealed material information, in violation of Securities Exchange Act of 1934.

The class for this action is all persons and entities who acquired the publicly-traded securities of Hongli between October 13, 2015 and April 7, 2017.

Hongli is a vertically-integrated producer of coal and coke with a  base in Henan Province, in the People’s Republic of China.

The consolidated balance sheets in the complaint begin with a page from the company’s Form 10-K for the fiscal year ended on June 30, 2015, filed at the beginning of the class period, on October 13, 2015 and include pages from its first-, second-, and third-quarter 2015 filings. The complaint claims that these documents were false and misleading because the company did not properly record the impairment of certain of its assets, making the statements false and misleading.

On April 7, 2017, NASDAQ halted trading in the company’s securities.

Two weeks later, on April 21, Hongli filed a Form 8-K saying that it had dismissed its independent auditor, KSP Group, Inc. The company insisted that it had not had any differences on accounting matters with KSP nor any “adverse opinions, qualifications, disagreements or reportable events within the meaning set forth in Item 304(a)(1)(ii), (iv), or (v) of Regulation S-K.”

However, it followed this by saying that the company “provided KSP with a copy of the disclosures contained herein and requested that KSP furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not KSP agrees with its statements in this Item 4.01.” It then announced the hiring of another company in place of KSP.

On April 26, the company filed another Form 8-K disclosing that it had in fact had a disagreement with KSP, about “whether certain assets reflected in the financial statements … were properly valued at the time of acquisition and net of impairment during subsequent periods.” Attached to the form was KSP’s letter, which stated that it did not believe that a loss of over $106 million occurred in the nine months to which the company had assigned it, but that impairment had occurred earlier. It therefore believed that prior filings of financial statements should be reevaluated.

At the time of filing of this class action, May 8, 2017, Hongli’s securities remained suspended from trading, which the complaint said made them worthless.

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