2 Consolidated Class Action Complaint 08/29/2011

Case 1:11-cv-00796-LAK Document 42 Filed 08/29/11 of 127

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I. NATURE OF THE ACTION

1. This is a federal securities class action on behalf of a class consisting of all

persons or entities other than Defendants who purchased or otherwise acquired common stock of

China Valves Technology, Inc. during the period from December 1, 2009 through January 13,

2011, inclusive; and persons or entities that purchased or otherwise acquired common stock of

China Valves Technology, Inc. pursuant and/or traceable to the Company’s Registration

Statement effective December 14, 2009 and/or the Prospectus Supplements issued pursuant to

same. Plaintiffs seek to recover damages caused by Defendants’ violations of the Securities Act

of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Throughout the Class Period, Defendants issued false and misleading financial

statements in press releases and SEC filed reports that failed to disclose material adverse facts

about the nature, quality and circumstances of the Company’s major acquisitions and overstated

China Valves’ financial position and financial results. Defendants failed to disclose the material

related party nature of the transactions, and failed to disclose material facts adversely affecting

the value and quality of the acquisitions. Further, Defendants materially overstated China

Valves’ financial results and overall financial position during the Class Period.

II. JURISDICTION AND VENUE

3. The claims asserted herein arise under and pursuant to Sections 11, 12, and 15 of

the Securities Act (15 U.S.C §§77k and 77l) and Sections 10(b) and 20(a) of the Exchange Act

(15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R

§240.10b-5).

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

Section 22(a) of the Securities Act (15 U.S.C. § 77v (a)) and Section 27 of the Exchange Act (15

U.S.C. 78aa), and 28 U.S.C. §§ 1331.


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5. Venue is proper in this Judicial District pursuant to Section 22(a) of the Securities

Act and Section 27 of the Exchange Act, and 28 U.S.C. § 1391. Many of the acts and

transactions alleged herein, including the dissemination of materially false and misleading

financial and other information, occurred in substantial part in this District.

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

Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

including, but not limited to, the United States mails, interstate telephone communications and

the facilities of the NASDAQ.

III. PARTIES

7. Lead Plaintiff purchased China Valves securities at artificially inflated prices

during the Class Period and pursuant and/or traceable to the Company’s Registration Statement

declared effective on December 14, 2009 and Prospectus Supplement filed with the SEC on

January 5, 2011.

8. Defendant China Valves is a Nevada corporation with its principal executive

offices located at No. 93 West Xinsong Road, Kaifeng City, 475002 in the People’s Republic of

China. China Valves, through its operating subsidiaries, purports to engage in developing,

manufacturing, and selling low, medium and high-pressure metal valves for customers in China.

At all relevant times herein, the Company’s common stock was actively traded on the NASDAQ

under the ticker symbol “CVVT.”

9. Defendant Siping Fang at all relevant times was the Company’s Founder and

Chairman. From at least the beginning of the Class Period through October 11, 2010, he served

as the Company’s Chief Executive Officer (“CEO”). Defendant Siping Fang signed the

Company’s 2009 Form 10-K and the Company’s Registration Statement.

10. Defendant Jianbao Wang (“Wang”) served as the Company’s CEO beginning on


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October 11, 2010 continuing through the end of the Class Period.

11. Defendant Gang Wei (“Wei”) served as the Company’s Chief Financial Officer

(“CFO”) from December 16, 2010 continuing through the end of the Class Period.

12. Defendant Renrui Tang (“Tang”) served as the Company’s CFO from May 27,

2010 until December 16, 2010. He had previously served as the Company’s CFO in 2009.

13. Defendant Ichi Shih (“Shih”) served as the Company’s CFO from July 1, 2009

until her resignation on May 27, 2010. Defendant Shih signed the 2009 Form 10-K and the

Company’s Registration Statement.

14. Defendant Binjie Fang served as the Company’s Chief Operating Officer

(“COO”) from January 2008 continuing through the end of the Class Period. Binjie Fang is also

a director of the Company. Defendant Binjie Fang signed the 2009 Form 10-K and the

Company’s Registration Statement.

15. Defendant Zengbiao Yu (“Yu”) served as a director of the Company from

January 2008 continuing through the end of the Class Period. Defendant Yu signed the 2009

Form 10-K and the Company’s Registration Statement. Throughout the Class Period, Yu has

served as a member of the Audit Committee.

16. Defendant Peter Li served as a director of the Company from November 2008

continuing through the end of the Class Period. Defendant Peter Li signed the 2009 Form 10-K

and the Company’s Registration Statement. Throughout the Class Period, Peter Li has served as

Chairman of the Audit Committee.

17. Defendant William Haus (“Haus”) served as a director of the Company from

November 2008 continuing through the end of the Class Period. Defendant Haus signed the

2009 Form 10-K and the Company’s Registration Statement. Throughout the Class Period, Haus


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has served as a member of the Audit Committee.

18. The Audit Committee (members Yu, Li and Haus) is charged with overseeing

the accounting and financial reporting processes of China Valves and the audits of the

Company’s financial statements. Specifically, the Audit Committee Charter provides that:

The purpose of the Audit Committee of China Valves Technology, Inc. (the “Company”) is to represent and assist the board of directors in its general oversight of the Company’s accounting and financial reporting processes, audits of the financial statements, and internal control and audit functions.

* * * The Audit Committee serves a board level oversight role where it oversees the relationship with the independent auditor, as set forth in this charter, receives information and provides advice, counsel and general direction, as it deems appropriate, to management and the auditors, taking into account the information it receives, discussions with the auditor, and the experience of the Audit Committee’s members in business, financial and accounting matters.

* * * The Audit Committee will have the resources and authority necessary to discharge its duties and responsibilities. The Audit Committee shall have the authority to engage independent legal, accounting and other advisers, as it determines necessary to carry out its duties. 19. The audit committee plays an important part in a board of director’s oversight of

any company. The members of the audit committee are charged with superior knowledge, and

they are presumed to be knowledgeable about the basis of the financial information a company

releases to the public. According to SEC Release No. 33-8220 (April 9, 2003):

Accurate and reliable financial reporting lies at the heart of our disclosure-based system for securities regulation, and is critical to the integrity of the U.S. securities markets. Investors need accurate and reliable financial information to make informed investment decisions. Investor confidence in the reliability of corporate financial information is fundamental to the liquidity and vibrancy of our markets.

Effective oversight of the financial reporting process is fundamental to preserving the integrity of our markets. The board of directors, elected by and accountable to shareholders, is the focal point of the corporate governance system. The audit committee, composed of members of the board of directors, plays a critical role in providing oversight over and serving as a check and


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balance on a company’s financial reporting system. The audit committee provides independent review and oversight of a company’s financial reporting processes, internal controls and independent auditors. It provides a forum separate from management in which auditors and other interested parties can candidly discuss concerns. By effectively carrying out its functions and responsibilities, the audit committee helps to ensure that management properly develops and adheres to a sound system of internal controls, that procedures are in place to objectively assess management’s practices and internal controls, and that the outside auditors, through their own review, objectively assess the company’s financial reporting practices.

20. Defendant Bin Li is and was at all times throughout the Class Period a 34%

beneficial shareholder of China Valves. He is also the first cousin of Defendant Siping Fang, the

Chairman of the Board and prior to and during a substantial part of the Class Period the CEO of

the Company. Over the years Bin Li has helped facilitate various transactions by and for the

Company. See China Valves Form 10-K for the year ended December 2009 at pp. 3-4. Upon

information and belief Bin Li facilitated and helped disguise from investors and shareholders the

related party nature of multiple related party transactions entered into in 2009 and 2010

involving the Company and Bin Li’s wife, Qing Lu. See ¶¶45-53, 151, infra.

21. Collectively, Defendants Siping Fang, Wang, Wei, Tang, Shih, Binjie Fang, Yu,

Peter Li, Haus, and Bin Li are referred to hereinafter as the “Individual Defendants.”

22. Defendant Moore Stephens Wurth Frazer and Torbet, LLP (“Moore Stephens”)

and Defendant Frazer Frost, LLP (successor entity of Moore Stephens Wurth Frazer and Torbet,

LLP) (“Frazer Frost”) served as China Valves’ independent auditor throughout the Relevant

Period. Frazer Frost, LLP was created on January 1, 2010 through the merger of Frost, PLLC

and Moore Stephens Wurth Frazer Torbet, LLP. Frazer Frost, LLP recognizes itself as the

successor entity of Moore Stephens Wurth Frazer and Torbet, LLP. See China Valves’ Form 10-

K, filed March 29, 2010. Moore Stephens issued a consent letter approving the incorporation

into the Registration Statement of its audit report dated March 15, 2009, relating to the


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consolidated financial statements of the Company for the years ending December 31, 2007 and

2008, which were incorporated by reference in the Registration Statement and the Prospectus

Supplements. Frazer Frost also issued an audit report in connection with the Company’s

consolidated financial statements included in the Form 10-K for the year ending 2009.

23. Frazer Frost, located in Brea, California, was at the epicenter of the Chinese-

company reverse merger mania. In addition to China Valves, many of Frazer Frost’s other

Chinese-company “reverse merger” clients accessed the U.S. public markets to obtain investor

money. Of these companies, RINO International Corporation, Jiangbo Pharmaceuticals, Inc. and

China Energy Savings Technology, Inc. (“China Energy”), similar to China Valves, have also

been noteworthy for an abysmal lack of audit and internal financial controls. One commentator,

in discussing the implosion and massive securities fraud prevalent among Chinese-reverse

merger companies, singled out Frazer Frost as a common auditor of many such companies and

referred to Frazer Frost as “another Arthur Andersen in the making.”

24. During the Class Period, each of the Individual Defendants, as senior executive

officers, agents, major shareholders, and/or directors of China Valves, and China Valves and its

subsidiaries and affiliates, was privy to non-public information concerning the Company’s

business, finances, products, markets, and present and future business prospects, via access to

internal corporate documents, conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors meetings and committees thereof,

and via reports and other information provided to them in connection therewith. Because of their

possession of such information, Defendants knew or recklessly disregarded the fact that the

adverse facts specified herein had not been disclosed to, and were being concealed from, the

investing public.


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25. Defendants had access to and knowledge of adverse undisclosed information

about the Company’s business, operations, operational trends, financial statements, acquisitions,

transactions, and related entities via access to internal corporate documents (including the

Company’s operating plans, budgets, and forecasts and reports of actual operations compared

thereto), conversations and connections with other corporate officers and employees, attendance

at management and Board of Directors meetings and committees thereof, and via reports and

other information provided to them in connection therewith.

26. Defendants participated in the drafting, preparation, and/or approval of the

various public, shareholder, and investor reports and other communications complained of herein

and were aware of, or recklessly disregarded, the misstatements contained therein and omissions

therefrom, and were aware of their materially false and misleading nature. Because of their

relationship with China Valves, each of the Defendants had access to or actual knowledge of the

adverse undisclosed information about the Company’s financial condition and performance as

particularized herein and knew (or were in reckless disregard of the fact) that these adverse facts

rendered materially false and misleading the positive representations that were made by or about

the Company and subsequently issued or adopted by the Company.

27. Throughout the Class Period, the Defendants were able to control the content of

the various SEC filings, press releases and other public statements pertaining to the Company

during the Class Period. The Defendants had access to and knowledge of SEC filings alleged to

be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to

prevent their issuance or to cause them to be corrected. Accordingly, the Defendants are

responsible for the accuracy of the public reports and press releases detailed herein, and are

therefore primarily liable for the representations contained therein.


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IV. PLAINTIFF’S CLASS ACTION ALLEGATIONS

28. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons or entities who

purchased common stock of China Valves during the Class Period and who were damaged

thereby; and all persons and entities that purchased common stock pursuant and/or traceable to

the Company’s Registration Statement and Prospectus Supplements. Excluded from the Class are

Defendants, the officers and directors of the Company at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which Defendants have or had a controlling interest.

29. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, the Company’s common stock was actively traded

on the NASDAQ. While the exact number of Class members is unknown to Plaintiff at this time,

and can only be ascertained through appropriate discovery, Plaintiff believes that there are at

least hundreds of members in the proposed Class. Members of the Class may be identified from

records maintained by China Valves or its transfer agent, and may be notified of the pendency of

this action by mail using a form of notice customarily used in securities class actions.

30. Plaintiff’s claims are typical of the claims of the members of the Class, as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

31. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

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

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:


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a) whether the federal securities laws were violated by Defendants’ acts as alleged

herein;

b) whether statements made by Defendants to the investing public during the Class

Period misrepresented material facts about the business, operations, and management of China

Valves; and

c) to what extent the members of the Class have sustained damages, and the proper

measure of damages.

33. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to redress

individually the wrongs done to them. There will be no difficulty in the management of this

action as a class action.

V. SUBSTANTIVE ALLEGATIONS

A. Background

34. China Valves achieved listing on the Over-the-Counter-Bulletin-Board

(“OTCBB”) electronic quotation system in December 2007 through a reverse merger. A reverse

merger is a transaction in which a company merges into what is known as a “shell company” -- a

firm without meaningful assets or operations, used as a vehicle for transactions -- that is already

listed on a stock exchange. Typically, these transactions begin with a broker acquiring a shell,

which often is domiciled in a state with laws and regulations favorable to corporations such as

Delaware, Utah or Nevada. The broker then sells the U.S. shell to an operating company seeking

to trade on a U.S. exchange -- a transaction which, unlike an initial public offering, is not

overseen by regulators. The shell company and the operating company merge. The operating


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company thus becomes a publicly-traded company, with access to U.S. investors -- but without

the time, expense and regulatory scrutiny of a traditional initial public offering. In recent years,

one in three U.S. reverse mergers involved a Chinese operating company. In 2010, 260 reverse

mergers were completed, according to deal tracker PrivateRaise. Of those, 83 deals involved

operating companies in mainland China.

35. During the first half of 2011, securities class action lawsuits were filed against 24

Chinese companies which gained access to U.S. capital markets through a reverse merger.

During 2010, nine such lawsuits were filed.

36. The Public Company Accounting Oversight Board (“PCAOB”) issued a practice

alert to its members in July 2010, emphasizing the need to ensure that audits of U.S. companies

with foreign operations are completed in accordance with regulatory requirements. See PCAOB,

“Staff Audit Practice Alert No. 6,” July 12, 2010. This alert was followed by a research note

identifying 159 reverse mergers involving firms from the China region that were completed

between January 1, 2007 and March 31, 2010. See PCAOB, “Research Note # 2011-P1,” March

14, 2011. More recently, the SEC began to target certain auditors for their work on companies

that have undertaken reverse mergers. See SEC Cease-and-Desist Order, In the Matter of Moore

Stephens Wurth Frazer & Torbet, LLP and K. Dean Yamagata, CPA, December 20, 2010.

37. SEC Commissioner Luis Aguilar expressed concern over possible reverse merger

accounting deficiencies and fraud in an April 2011 speech. See speech by Luis Aguilar,

“Council of Institutional Investors Spring Meeting,” April 4, 2011. Subsequently, the SEC

issued a June 2011 investor bulletin that warned investors about the risks associated with

investing in companies that have undertaken reverse mergers. See SEC Investor Bulletin,

Reverse Mergers, June 9, 2011. Additionally, in June 2011, the NASDAQ exchange filed a


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proposed rule change with the SEC that would impose stricter listing requirements for companies

that became public through reverse merger transactions. See “Self-Regulatory Organizations; the

NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change to Adopt Additional

Listing Requirements for Reverse Mergers,” June 8, 2011

(http://www.sec.gov/rules/sro/nasdaq/2011/34-64633.pdf).

38. On February 19, 2008, the Company engaged Moore Stephens as its principal

auditor. Moore Stephens merged into Frazer Frost effective January 1, 2010 and Frazer Frost

continued as China Valves’ principal auditor throughout the Class Period.

39. In November 2009, the Company received approval to list its common stock on

the NASDAQ Global Select Market, and began trading on November 16, 2009.

B. China Valves’ History of Ineffective Controls Over Financial Reporting

40. From the outset, China Valves had severely deficient and ineffective controls over

its financial reporting function. These deficiencies existed prior to and throughout the Class

Period.

41. For instance, in the Company’s annual report for the year ended December 31,

2007, filed with the SEC on March 31, 2008, China Valves disclosed:

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure….

Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and our Chief Financial


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Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2007.

Management’s Report on Internal Control over Financial Reporting

During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2007, management identified significant deficiencies related to the following:

1. Accounting and Finance Personnel Weaknesses – US GAAP expertise - The current staff in the accounting department is relatively new and inexperienced, and needs substantial training so as to meet with the higher demands of being a U.S. public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the skills of subsidiary financial statements consolidation, are inadequate and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in an ineffective segregation of duties relative to key financial reporting functions.

2. Lack of internal audit function – The Company lacks qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the internal audit function are yet to be developed.

3. Lack of Internal Audit System - The Company lacked an internal audit department, which was ineffective in preventing and detecting control lapses and errors in the accounting of certain key areas like revenue recognition, purchase approvals, inter-company transactions, cash receipt and cash disbursement authorizations, inventory safeguard and proper accumulation for cost of products, in accordance with the appropriate costing method used by the company.

[W]ith the exception of certain additional persons hired at the end of 2007 to address these deficiencies, our current accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions. Finally, management determined that the lack of an Audit Committee of the board of directors of the Company also contributes to insufficient oversight of our accounting and audit functions.


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(Emphasis added).

42. On March 24, 2009, China Valves filed with the SEC on Form 10-K its annual

report for the year ended December 31, 2008. The Company again disclosed significant internal

control deficiencies:

Our management, with the participation of our chief executive officer and chief financial officer, Messrs. Siping Fang and Renrui Tang, respectively, evaluated the effectiveness of our disclosure controls and procedures….Based on that evaluation, Messr Siping Fang and Tang concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2008, to satisfy the objectives for which they are intended.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our chief executive officer and chief financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

• provide reasonable assurance regarding prevention or timely

detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2008, our management identified material weakness related to the following:

1. Accounting and Finance Personnel Weaknesses – US GAAP expertise. Our current accounting staff is relatively new and inexperienced, and needs substantial training to meet the higher demands of being a U.S.


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public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the skills of subsidiary financial statements consolidation, are inadequate and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in an ineffective segregation of duties relative to key financial reporting functions.

2. Lack of Internal Audit Function – We lack qualified resources to perform the internal audit functions properly. In addition, the scope and effectiveness of the internal audit function are yet to be developed.

3. Lack of Internal Audit System – We lack an internal audit department, which renders ineffective our ability to prevent and detect control lapses and errors in the accounting of certain key areas like revenue recognition, purchase approvals, inter-company transactions, cash receipt and cash disbursement authorizations, inventory safeguard and proper accumulation for cost of products, in accordance with our appropriate costing method. Management also determined that the lack of an Audit Committee of the board of directors of the Company also contributes to insufficient oversight of our accounting and audit functions.

(Emphasis added).

43. Significant internal deficiencies were again reported on March 29, 2010, when

China Valves filed with the SEC on Form 10-K its annual report for the year ended December

31, 2009. The Company disclosed:

Our management, with the participation of our chief executive officer and chief financial officer, Mr. Siping Fang and Ms. Ichi Shih, respectively, evaluated the effectiveness of our disclosure controls and procedures….Based on that evaluation, Mr. Fang and Ms. Shih concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2009, to satisfy the objectives for which they are intended.

* * * During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2009, our management identified material weakness related to the following:

Accounting and Finance Personnel Weaknesses – US GAAP expertise. Our current accounting staff is relatively new and inexperienced, and needs substantial training to meet the higher demands of being a U.S. public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the skills of subsidiary


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financial statements consolidation, are inadequate and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in ineffective top level review and anlaysis of year-end evaluation of the Company’s inventory and AR allowance.

As disclosed in our Management’s Annual Report on Internal Control over Financial Reporting filed with the 2008 Form 10-K, the Company’s management has identified the steps necessary to address the material weaknesses described above and in 2009, we continued to implement these remedial procedures.

1. Hire, as needed, additional US GAAP experienced accounting and operations personnel and outside contractors with technical accounting expertise and reorganized [sic] the accounting and finance department to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.

2. Involve, as needed, both internal accounting and operations personnel and outside contractors with technical accounting expertise early in the evaluation of our complex, non-routine transaction to obtain additional guidance as to the application of generally accepted accounting principles to such a proposed transaction.

3. Require that our senior accounting personnel and the principal accounting officer review our complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions. We will also consult experts in the event that transaction is beyond our comprehension.

4. We are currently documenting and implementing internal control over financial reporting, however, as of December 31, 2009, we did not have sufficient time to remediate all deficiencies identified in order to render current year’s internal control over financial reporting effective. We will continue monitor and improve controls over financial reporting in the coming year.

(Emphasis added).

44. Thus, prior to, and throughout the Class Period, China Valves, the Individual

Defendants and Moore Stephens/Frazer Frost were all well aware of the Company’s severe

internal control deficiencies, including the absence of accounting personnel proficient in U.S.

GAAP and a lack of qualified personnel to evaluate and approve the accounting treatment of

non-routine transactions.


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C. China Valves’ Undisclosed Related Party Transactions

1. China Valves Acquisition of Able Delight (Changsha) Valve Co., Ltd.

45. As disclosed by the Company for the first time on November 18, 2010, in

contemplation of its acquisition of Changsha Valve Co., Ltd. (“Changsha Valve”), on November

20, 2009 China Valves arranged for the formation of Able Delight Investment Limited (“Able

Delight”) by Qing Lu. As revealed for the first time after the close of the Class Period, Qing Lu

is and was the wife of Bin Li; Bin Li is and was the first cousin of Chairman and CEO Defendant

Siping Fang and a 34% shareholder of China Valves.

46. On November 18, 2010, the Company further disclosed that on December 10,

2009, the Company loaned $6.12 million to Able Delight for acquisition financing of Changsha

Valve. The loan agreement dated December 10, 2009, contemplated that, once acquired, Able

Delight -- according to Defendants an entity controlled by Qing Lu -- would sell its interest in

Changsha Valve to a wholly owned subsidiary of China Valves.

47. On December 14, 2009, Able Delight entered into an equity transfer agreement

to purchase from Watts Regulator Co., a subsidiary of Watts Water Technology, Inc. (“Watts

Water”), 100% of the equity of Watts Valve (Changsha) Co., Ltd. for a purchase price of $6.07

million, with Watts Valve (Changsha) Co., Ltd. to be renamed Able Delight Valve (Changsha)

Co., Ltd.2 Notably, according to the Chinese State AIC records and undisclosed to investors,

Defendant Siping Fang was the authorized signatory who signed the equity transfer agreement

on behalf of Able Delight, strongly suggesting that he was a principal of Able Delight at the time

of the transaction.

48. On February 8, 2010, China Valves announced it had acquired 100% of the

2 This information is based on filings made with the Chinese State Administration for Industry and Commerce (“AIC”).


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assets of Able Delight (Changsha) Valve for $15 million. The announcement omitted the fact

that Able Delight had acquired the entity -- Changsha Valve -- for only $6.07 million. On

November 18, 2010, China Valves disclosed that in connection with the acquisition, China

Valves made a $50,000 payment to Qing Lu. China Valves did not disclose that Qing Lu was

the wife of Bin Li who was and is 34% shareholder of China Valves and first cousin of

Defendant Siping Fang.

49. China Valves failed to disclose these multiple material related party transactions

in its shelf Registration Statement, Prospectus Supplements, annual report on Form 10-K and

quarterly reports on Forms 10-Q filed with the SEC throughout the Class Period in violation of

GAAP (Accounting Standards Codification (“ASC”) 850-10-50-1, Related Party Disclosures)

and SEC Rules and Regulations (Regulation S-X, Rule 4-08(k)(1) and Regulation S-K, Item 404

(a)). See ¶¶183-235, infra.

50. Moreover, according to Watts Water’s Form 10-Q filed with the SEC on

November 4, 2009, Watts Water decided, amid potential violations of the Foreign Corrupt

Practices Act, to “dispose of its investment in Watts Valve (Changsha) Co., Ltd. (CWV), an

indirect wholly-owned subsidiary of the Company located in China” in September 2009. The

Form 10-Q explained, in part:

As previously disclosed, we have received information that employees of CWV made payments to employees of state-owned agencies. Such payments may violate the Foreign Corrupt Practices Act, or FCPA. We are conducting an investigation utilizing outside counsel and voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. If violations are found, we may be subject to criminal and/or civil sanctions, including substantial fines. Negotiated dispositions of these types of violations also often result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms agreed upon with the Department of Justice and the Securities and Exchange Commission to review and monitor current and future business practices with the goal of assuring future FCPA compliance. The amount of any fines or monetary penalties which could be


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assessed would depend on, among other factors, findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of Watts or its affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided to the government authorities during the investigation. Any determination that we have violated the FCPA could result in sanctions that could have a material adverse effect on our business prospects, operations, financial condition and cash flow.

* * *

In September 2009, the Company’s Board of Directors approved the sale of its investment in CWV….

The Company evaluated the classification of CWV and concluded that the net assets qualified as discontinued operations. The Company evaluated the fair value of the net assets of CWV and recorded an estimated pre-tax loss of approximately $5.9 million. The Company estimated the fair value of the net assets based on the likely proceeds to be received in the sale process….

* * *

Condensed operating statements for discontinued operations are summarized below:

* * * Third Quarter Ended

September 27,

2009 September 28,

2008 (in millions) Operating income (loss) — CWV $ (0.9) $ 0.7

* * *

Write down of net assets — CWV (5.9) —

* * * Nine Months Ended

September 27,

2009 September 28,

2008 (in millions)

Operating income (loss) — CWV (1.3) 1.4

* * *

Write down of net assets — CWV (5.9) —

51. The AIC filings for Watts Valve (Changsha) Co., Ltd (CWV) reveal the


20

following financial results for the entity:

RMB 2008 2009 Revenue ¥111,663,906.13 ¥89,068,627.96 Cost of revenue ¥72,264,471.95 ¥57,628,874.16 Gross profit ¥23,257,287.20 ¥12,130,069.05 Net Income ¥12,100,925.89 (¥5,873,455.28)

USD 2008 2009 Revenue $16,136,402.62 $13,040,794.72 Cost of revenue $10,442,842.77 $8,437,609.69 Gross profit $3,360,879.65 $1,775,998.40 Net Income $1,748,688.71 ($859,949.53)

52. The fact that Able Delight (Changsha Valve) was, in origin, Watts Valve

(Changsha Valve), a subsidiary of Watts Water, and that Able Delight had only paid $6.07

million for the acquisition of same was not disclosed by the Company until November 18, 2010.

The dismal financial results of the acquired entity for the two years immediately preceding the

acquisition were never disclosed by China Valves to investors.

53. In addition to violating specific affirmative SEC disclosure and GAAP

requirements, Defendants omitted material facts concerning the Able Delight related transactions

which rendered Defendants’ statements concerning same materially misleading. In summary,

Defendants failed to disclose, for some or all of the Class Period: (i) that Able Delight was a

related party, funded by the Company, used as an intermediary in the purchase of Changsha

Valve from Watts Water; (ii) the roles of Defendant Siping Fang and Defendant Bin Li’s wife in

the transaction; (iii) the true purchase price; and (iv) the true financial condition of Changsha

Valve at the time of the deal.

2. China Valves’ Acquisition of Hanwei Valve

54. On February 11, 2010, China Valves signed a letter of intent to purchase 100%

ownership of Shanghai Pudong Hanwei Valve Co., Ltd. (“Hanwei Valve”).

55. On April 9, 2010 the Company filed with the SEC a Form 8-K, signed by


21

Defendant Siping Fang, announcing the completion of the Company’s acquisition of Hanwei

Valve. The Form 8-K explained that the Company had acquired 100% of the assets of Hanwei

Valve “for a total cash consideration of U.S. $21 million pursuant to an Asset Transfer

Agreement, dated April 8, 2010” among the equity owners of Hanwei Valve.

56. It was not until January 13, 2011, however, that the related party nature of the

Hanwei Valve acquisition was brought to light. On that day, Citron Research issued a report

disclosing troubling discrepancies between the Company’s SEC filings and its AIC filings in

China. Indeed, China Valves’ AIC records reveal that Henan Tanghai Fluid Equipment Co. Ltd.,

a wholly owned subsidiary of China Valves, acquired 100% ownership of Shanghai Hanhuang

Valve on March 1, 2010 for a price of RMB 15 million ($1.81 million). Shanghai Hanhuang

Valve was one of two 50% owners of Hanwei Valve at the time of the transaction. As a result,

China Valves became the owner of 50% of Hanwei Valve as of March 1, 2010, making the

eventual acquisition of Hanwei Valve by China Valves a related party transaction. Thus, China

Valves acquired Hanwei Valve from an affiliate entity and yet never disclosed that the

acquisition was a related party transaction in the SEC filings and financial statements in violation

of ASC 850-10-50-1 (formerly FAS No. 57) and Rule 4-08(k)(1) of Regulation S-X and Item

404(a) of Regulation S-K. See ¶¶183-235, infra.

57. Further examination of China Valves’ AIC records reveals that the equity owners

of Hanwei Valve (one of which was China Valves’ wholly owned subsidiary, Henan Tanghai

Fluid Equipment Co. Ltd.), did not transfer ownership interest of Hanwei Valve to the Company

until October 30, 2010, not on April 8, 2010 as disclosed in the Company’s SEC filings.

Moreover, and significantly, according to the AIC records, the October 30, 2010 transfer was

completed for a total price of RMB 50 million (approximately $7.47 million) -- not the $21


22

million cash consideration represented by Defendants -- pursuant to an Equity Transfer

Agreement that was filed with the AIC on October 15, 2010. Thus, not only did China Valves

fail to disclose the related party nature of the Hanwei Valve acquisition, but the inconsistencies

in the Company’s disclosures indicate that the Company may have committed a concerted fraud

on investors. The $7.47 million acquisition cost, stated in the Company’s filings with Chinese

authorities, is considerably less than the $21 million cash consideration cited in China Valves’

Form 8-K filed on April 9, 2010. These undisclosed large discrepancies are particularly

suspicious and suggest that certain China Valves’ officers may have used approximately $14

million in corporate funds for personal profit rather than for the acquisition of Hanwei Valve.

58. In addition to violating specific affirmative SEC disclosure and reporting

requirements and U.S. GAAP, Defendants omitted material facts concerning the Hanwei Valve

related transactions which rendered Defendants’ statements concerning same materially

misleading.

3. China Valves’ Binjie Fang Receivable

59. According to the AIC records, Zhenghou City ZD Valve Co. Ltd. (“ZD Valve”),

a wholly owned subsidiary of China Valves, recorded at the 2009 year end a receivable of RMB

$2.16 million (approximately $322,725) from Binjie Fang, who was a director and COO of

China Valves and the son of Defendant Siping Fang. At the time of the AIC disclosure the

amount was owed to ZD Valve for less than one year, as shown in the following excerpt from

AIC records:

Other receivable: Total amount RMB $16,326,728.18, as follows:

Name Amount How long the Company has been owed?


23

Binjie Fang RMB $2,155,351.63 Less than 1 year

60. On information and belief, this is a short-term loan to Binjie Fang, which was not

properly disclosed in the SEC filings and financial statements in violation of ASC 850-10-50-1

and Rule 4-08(k)(1) of Regulation S-X and Item 404(a) of Regulation S-K. See ¶¶183-235,

infra.

D. Defendants’ False and Misleading Statements Under the Exchange Act

61. On December 1, 2009, the Company filed a shelf Registration Statement with the

SEC on Form S-3 (the “Registration Statement”).3 Defendants Siping Fang, Shih, Yu, Peter Li,

Haus, and Binjie Fang each signed the Registration Statement. The Registration Statement was

declared effective by the SEC on December 14, 2009. In the Registration Statement, China

Valves incorporated the following reports filed with the SEC:

• Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed March 19, 2009, as amended by the Form 10-K/A filed on March 24, 2009;

• Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009, filed on May 15, 2009;

• Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2009, filed on August 14, 2009;

• Our Current Report on Form 8-K, filed with the SEC on January 7, 2009;

• Our Current Report on Form 8-K/A, filed with the SEC on February 23, 2009;

• Our Current Report on Form 8-K, filed with the SEC on March 9, 2009;

• Our Current Report on Form 8-K, filed with the SEC on April 21, 2009;

• Our Current Report on Form 8-K, filed with the SEC on July 1, 2009;


• Our Current Report on Form 8-K, filed with the SEC on August 18, 2009; and

3 See ¶¶122-127, infra, for a brief discussion of shelf registration statements and SEC form S-3.


24

• The description of our common stock, $0.001 par value per share, contained in our Registration Statement on Form 8-A, filed on November 12, 2009 pursuant to Section 12(b) of the Exchange Act.

62. Defendant Moore Stephens consented to the incorporation into the Registration

Statement of its unqualified audit report dated March 15, 2009 related to the consolidated

financial statements of China Valves for the years ended December 31, 2007 and 2008.

63. The statements made in the Registration Statement were materially false or

misleading for the reasons that Defendants failed to disclose the proposed (at least by November

20, 2009) related party transaction involving Able Delight and Qing Lu and the terms of that

transaction. Consequently, the Registration Statement violated Item 404(a) of Regulation S-K

(requiring disclosure of any “currently proposed” transaction in an amount exceeding

$120,000.00, in which any related party had or will have a direct or indirect material interest).

See ¶¶201-206, infra. In further violation of Item 404(a) (requiring disclosure of related party

transactions of officers and directors and children of officers and directors) and GAAP and SEC

Rule 4-08(K)(1) (both requiring disclosure of related party transactions in the financial

statements), the Registration Statement failed to disclose that the Company made a related party

loan to Defendant Binjie Fang (COO and son of Chairman and CEO Defendant Siping Fang) --

AIC records reveal a year ending 2009 receivable from Defendant Binjie Fang in the amount of

approximately $322,725.00. Moreover, the Registration Statement incorporated financial

statements that were materially false and misleading. Specifically, in the Company’s Form 10-

K/A for the year ended December 31, 2008, Defendants materially misrepresented that the

Company had recognized $65,947,615 in revenue and $25,865,463 in gross profit while China

Valves’ AIC financial reports reveal that the Company had revenue of only $55,598,826 and

gross profits of $15,567,721 for the year 2008.


25

64. On December 29, 2009, the Company filed a Prospectus Supplement on Form

424(b)(5) pursuant to the shelf Registration Statement filed by China Valves on December 1,

2009 and declared effective on December 14, 2009. Pursuant to the Registration Statement and

Prospectus Supplement, China Valves offered and sold 333,334 shares of its common stock at

the price of $9.00 per share for an aggregate price of approximately $3 million.

65. On January 4, 2010, the Company filed a second Prospectus Supplement on

Form 424(b)(5) pursuant to the shelf Registration Statement filed by China Valves on December

1, 2009 and declared effective on December 14, 2009. Pursuant to the Registration Statement

and Prospectus Supplement, China Valves offered and sold 2,414,113 shares of its common

stock at the price of $9.00 per share for an aggregate price of approximately $21.7 million.

66. The statements made in the Prospectus Supplements, including the SEC filed

documents incorporated therein, were materially false or misleading and in violation of Item

404(a) of Regulation S-K for the reasons that Defendants failed to disclose: (i) the proposed

acquisition of Able Delight, a related party and the terms of that transaction; (ii) the Company’s

December 10, 2009 $6.12 million loan to Able Delight, a related party entity controlled by Qing

Lu, the wife of Defendant Bin Li -- 34% shareholder of China Valves and first cousin of

Defendant Siping Fang -- and/or Defendant Siping Fang himself; (iii) the contemplated payment

of $50,000 to Qing Lu in connection with the proposed related party transaction; and (iv) the

Company’s related party loan to Defendant Binjie Fang (COO and son of Chairman and CEO

Defendant Siping Fang) -- AIC records show that the Company had an outstanding receivable

from Defendant Binjie Fang of approximately $322,725 for the year ended 2009. Moreover, the

Prospectus Supplements incorporated financial statements, audited and given an unqualified

audit opion by Moore Stephens that were materially false and misleading. Specifically, in the


26

Company’s Form 10-K/A for the year ended December 31, 2008, Defendants materially

misrepresented that the Company had recognized $65,947,615 in revenue and $25,865,463 in

gross profit while China Valves’ AIC financial reports reveal that the Company had revenue of

only $55,598,826 and gross profits of $15,567,721 for the year 2008.

67. On January 12, 2010, the Company issued a press release announcing the signing

of a letter of intent to acquire Able Delight (Changsha) Valve Co. for $15 million. The

announcement stated in relevant part:

China Valves Technology, Inc. Signs Letter of Intent to Acquire Able Delight (Changsha) Valve Co., Ltd.

2010-01-12 21:00

KAIFENG, China, Jan. 12 /PRNewswire-Asia/ -- China Valves Technology, Inc. (Nasdaq: CVVT) (“China Valves” or the “Company”), a leading metal valve manufacturer with operations in the People’s Republic of China (the “PRC”), today announced that the Company has signed a letter of intent to acquire 100% ownership in Able Delight (Changsha) Valve Co., Ltd., (“Able Delight”), a leading valve manufacturing enterprise that specializes in manufacturing valves for the water supply and power supply industries. Consideration for the acquisition is approximately $15 million and the Company expects to complete the acquisition during the first quarter of 2010.

* * * “We are extremely pleased with the progress we have made so far in our negotiations with Able Delight, as we believe this acquisition will improve our position in key end-user markets in the water supply and power generation industries, in addition to strengthening our distribution network,” said Mr. Siping Fang, Chairman and CEO of China Valves. “We hope to finalize our internal due diligence by the end of this month and complete the acquisition during the first quarter of 2010.”

68. On February 8, 2010, the Company filed a Form 8-K with the SEC, signed by

Defendant Siping Fang. The Form 8-K stated in relevant part:

On February 3, 2010, China Fluid Equipment Holdings Limited (“China Fluid”), a wholly-owned subsidiary of China Valves Technology, Inc. (the “Company”), entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Able Delight Investment Limited to purchase all of the assets of Able Delight


27

(Changsha) Valve Co., Ltd. (“Able Delight”) for a cash price of approximately $15 million.

69. The asset purchase agreement attached to the February 8, 2010 Form 8-K lists

only two parties to the agreement: “Party A: Able Delight Investment Limited” and “Party B:

China Fluid Equipment Holdings Limited:”

ENGLISH TRANSLATION OF ASSET PURCHASE AGREEMENT

Party A: Able Delight Investment Limited

Party B: China Fluid Equipment Holdings Limited

Whereas upon friendly consultation, Party A agrees to sell all of its ownership of the assets of Able Delight (Changsha) Valve Co., Ltd. (“Able Delight”) to Party B. The parties hereby reach the following agreement (the “Agreement”):

Section 1. Transfer Price and Method of Payment

1. Party A agrees to sell all of the assets of Able Delight that it owns to Party B for a consideration of $15 million (subject to the Appraisal Report).

Section 2. Representations and Warranties

1. Party A represents that Able Delight’s tangible and intangible assets (including but not limited to land, buildings, equipment and intellectual property rights) are not subject to any collateral, pledge, lien or any third party claims. Party A will take all responsibilities arising out of any claims if the representations are not accurate. Party A will assist Party B to obtain property ownership certificates of the buildings.

2. Party A represents that it will not be directly or indirectly engaged in any business that may be competitive with Able Delight, its technology or products in ten years from the execution of the Agreement. Party A is prohibited from counterfeiting any product of Able Delight.

3. Any cash in Able Delight’s accounts before the execution of the Agreement belongs to Party B.

4. Any matters not covered in this Agreement are subject to further negotiation between the parties.

Section 3. Execution

The Agreement becomes effective upon execution by the parties.


28

Section 4. Other Matters

1. Each Party shall hold one executed copy of this Agreement.

2. Any breach of this Agreement shall be submitted to the jurisdiction of the Intermediate Court of Zhengzhou City, Henan Province.

Party A: Able Delight Investment Limited (Seal)

Party B: China Fluid Equipment Holdings Limited (Seal)

Date: February 3, 2010

70. In a press release issued that same day, and attached to the February 8, 2010

Form 8-K, the Company touted that Able Delight’s financial results would be consolidated with

the Company’s and that Able Delight would contribute approximately $20.5 million in revenue

and $5 million in net income to the Company’s results for the fiscal year 2010. The


China Valves Technology, Inc. Completes the Acquisition of Able Delight (Changsha) Valve Co., Ltd.

2010-02-08 21:00

KAIFENG, China, Feb. 8 /PRNewswire-Asia/ -- China Valves Technology, Inc. (Nasdaq: CVVT) (“China Valves” or the “Company”), a leading metal valve manufacturer with operations in the People’s Republic of China (the “PRC”), today announced that on Feb 3, 2010, the Company has completed the transaction to acquire 100% asset ownership in Able Delight (Changsha) Valve Co., Ltd., (“Able Delight”), a leading valve manufacturing enterprise that specializes in manufacturing valves for the water supply and power supply industries. Consideration for the acquisition is approximately $15 million in cash, which the Company will pay in full by the end of February. As result of this acquisition, Able Delight became a wholly- owned subsidiary of China Valves.

China Valves will consolidate Able Delight’s operations into its financial results effective February 2010. For fiscal year 2010, the Company expects Able Delight to contribute approximately 140 million RMB ($20.5 million) in revenue and 34 million RMB ($5.0 million) in net income. Able Delight expects to deliver its current backlog of orders valued at approximately 90 million RMB ($13.2 million) by the end of 2010.

Able Delight, located in Changsha, Hunan Province, is a leading producer of butterfly valves, check valves and ball valves for hydropower plants, thermal


29

power plants, nuclear power plants and water and sewage treatment applications. Able Delight has the capability to produce the largest butterfly valves in China with a maximum diameter of 5.5 meters. As a result of this acquisition, Able Delight will transfer all its active patents to China Valves.

“We are very pleased with the timely close of this acquisition and we welcome Able Delight to the China Valves family,” said Mr. Siping Fang, Chairman and CEO of China Valves. “Able Delight’s established customer relationships with water treatment facilities and thermal power plants in Hunan province and high-quality manufacturing practices make it a powerful addition to our existing operations. Able Delight’s product portfolio consists mainly of high-end valves, and it is the only manufacturer in China with capacity to produce large butterfly valves with a maximum diameter of 5.5 meters, which help us move up the value curve.”

71. The statements made in ¶¶67-70 about the nature and quality of the Company’s

acquisition of Able Delight (Changsha) Valve were materially false or misleading when made.

AIC filings have shown, and China Valves’ eventual admission confirms, that the actual

purchase price by Able Delight to acquire Changsha Valve was $6.07 million, far less than the

aforementioned $15 million. Defendants also omitted the following material adverse facts,

which were known to Defendants or recklessly disregarded by them, but of which disclosure was

necessary to prevent Defendants’ statements from being materially misleading: (i) the

Company’s acquisition of Able Delight (Changsha) Valve was, in reality, a related party

transaction involving Qing Lu, the wife of Defendant Bin Li -- 34% shareholder of China Valves

and first cousin of Defendant Siping Fang -- and/or Defendant Siping Fang himself; (ii) in

connection with the acquisition, the Company had made a payment of $50,000 to related party

Qing Lu; (iii) Able Delight was actually a shell company for Watts Valve (Changsha) Co., Ltd.,

which was under investigation for violation of the Foreign Corrupt Practices Act; and (iv) Watts

Valve (Changsha) Co., Ltd.’s net income for 2009 was actually a loss of approximately

$859,949, suggesting the Defendants’ asserted expectation that the subsidiary would contribute

$5 million in net income for fiscal year 2010 lacked a reasonable basis.


30

72. On February 11, 2010, the Company issued an announcement that it had signed a

letter of intent to purchase 100% equity ownership of Shanghai Pudong Hanwei Valve Co., Ltd.

and that consideration for the acquisition would be approximately $20 million. The


China Valves Technology, Inc. Signs Letter of Intent to Acquire Shanghai Pudong Hanwei Valve Co., Ltd.

KAIFENG, China, Feb. 11 /PRNewswire-Asia/ -- China Valves Technology, Inc. (Nasdaq: CVVT) (“China Valves” or the “Company”), a leading metal valve manufacturer with operations in the People’s Republic of China (the “PRC”), today announced that that the Company has signed a letter of intent to purchase 100% equity ownership in Shanghai Pudong Hanwei Valve Co., Ltd. (“Hanwei Valve”), a valve manufacturing enterprise with several patents for high-tech valve specifications in the petrochemical and bioengineering industries.

Consideration for the acquisition is approximately RMB 137 million (approximately $20 million). The Company expects to close the acquisition in the first quarter of 2010.

Hanwei Valve, located in Shanghai, was established in 1992 and produces more than 20 series of valve products in over 6,000 different sizes ranging from 0.38 inches to 116 inches in diameter. Its main products include ball valves, check valves, butterfly valves, gate valves and other general purpose valves for a variety of applications, including oil refineries, chemical production and transport, electric power plants, and water supply. Hanwei Valve owns patents for a 24-way rotary valve used in simulating moving bed molecular sieve absorption-separation units in large-scale petrochemical equipment, for chromatogram separation units used in bioengineering, and for fully welded ball valves used in long distance gas pipelines. Hanwei Valve is the sole producer in China of the fully-welded ball valve and 24-way rotary valve.

* * * “We are very excited about the addition of Hanwei Valve to China Valves, as we believe the sophisticated products and patented applications will improve our position in key end-user markets such as the petrochemical industry and bioengineering, while strengthening our distribution network in our core industries of water supply and power generation. For example, the 24 way rotary valve is a truly unique product as it performs duties that would require 144 valves from competitors, and therefore this product commands a very attractive unit price,” said Mr. Siping Fang, Chairman and CEO of China Valves. “We are currently in the process of finalizing our internal due diligence, and hope to provide more updates to the market regarding the expected revenue and net income contribution of this acquisition after its completion.”


31

73. The statements made in ¶72 were materially false or misleading when made.

Defendants materially misrepresented that the Company would pay approximately $20 million as

consideration for the acquisition of Hanwei Valve, yet AIC records show that China Valves paid

only approximately $7.47 million for the Hanwei Valve acquisition. Moreover, Defendants failed

to disclose the related party transaction involving Shanghai Hanhuang Valve and the terms of

that transaction.

74. On March 29, 2010, the Company filed with the SEC its 2009 annual report on

Form 10-K, signed by Siping Fang, Shih, Peter Li, Haus, Yu, and Binjie Fang. The financial

statements in the Company’s 2009 Form 10-K were audited by Frazer Frost, and the 10-K

included an unqualified audit report from Frazer Frost. The Company reported that sales

revenue increased $28.8 million, or 43.2%, to $95.4 million in 2009 from $66.6 million in 2008.

The Company further reported that gross profit increased $20.3 million to $46.8 million in 2009

from $26.5 million in 2008. Gross profit as a percentage of net sales revenue increased to 49.1%

from 39.8% for the same period in 2008. According to the Company, this increase resulted

primarily from lower cost of sales and the increase volume of high-end products sales.

75. With respect to the Able Delight acquisition, the Form 10-K stated:

On Feb 3, 2010, we consummated the acquisition of all of the assets of Able Delight (Changsha) Valve Co., Ltd. (“Able Delight”), a leading valve manufacturing enterprise that specializes in manufacturing valves for the water supply and power supply industries. As result of this $15 million cash acquisition, Able Delight became a wholly-owned subsidiary of China Valves.

Able Delight, located in Changsha, Hunan Province, is a leading producer of butterfly valves, check valves and ball valves for hydropower plants, thermal power plants, nuclear power plants and water and sewage treatment applications. Able Delight produces the largest butterfly valves in China with a maximum diameter of 5.5 meters. As a result of this acquisition, Able Delight has transferred all its active patents to China Valves.

76. In the audited financial statements contained in the Form 10-K, the Company


32

made certain disclosures concerning its acquisitions and its expenditures related thereto stating,

in relevant part:

Note 8 – Deposits for acquisition

As described in Note 17, deposits for acquisitions consist of acquisition of the following companies as of December 31, 2009:

Acquisition Deposit

Amount Completion

Date

Yangzhou Rock Valve Lock Technology., Ltd $ 7,261,650 January 13, 2010

Able Delight (Changsha) Valve Co., Ltd 3,020,000 February 3, 2010

Shanghai Pudong Hanwei Valve Co., Ltd* 2,934,000 In Process Total deposit for acquisitions $ 13,215,650

77. In the financial statements (“Note 13 – Related Party Transactions”) contained in

the Form 10-K, China Valves made certain, but not all, disclosures concerning its related party

transactions required by GAAP (ASC 850-10-50-1 (formerly FAS No. 57)) and SEC Rule 4-

08(k)(1).

78. In the non-financial portion of the Form 10-K (“Item 13, Certain Relationships

and Related Transactions, and Director Independence”), the Company included certain, but not

all, disclosures required by Item 404(a) of Regulation S-K.

79. Notably, in violation of each of the GAAP and SEC Rules and Regulations

referenced in ¶¶183-235, the Company failed to disclose the multiple related party transactions

in connection with the Able Delight acquisition or the related party loan to Defendant Binjie

Fang.

80. The statements contained in ¶¶74-79 were materially false and misleading when

made for the following reasons: (i) Defendants misrepresented that, in relation to the Able

Delight acquisition, the Company had only expended $3.02 million as an investment deposit as


33

of December 31, 2009 when, in fact, the Company had made a $6.12 million related party loan

on December 10, 2009 to Able Delight to facilitate the acquisition; (ii) Defendants materially

omitted that the Able Delight acquisition was, in fact, a related party transaction involving Qing


Defendant Siping Fang and/or Siping Fang; (iii) Defendants materially omitted that in

connection with the Able Delight acquisition, the Company had made a payment of $50,000 to

related party Qing Lu; (iv) Defendants materially omitted that on March 1, 2010, the Company

became a 50% equity owner of Hanwei Valve, making the proposed Hanwei Valve acquisition a

related party transaction; (v) Defendants materially misrepresented for the year ended December

31, 2009 that the Company had recognized $95,370,012 in revenue, $46,842,676 in gross profits

and $23,353,093 in net income while China Valves’ AIC financial reports reveal that the

Company had received revenue of only $67,604,985, gross profits of $17,421,555, and net

income of $5,647,195 for the year 2009; (vi) Defendants materially misrepresented that the

Company purchased Able Delight (Changsha) Valve for $15 million -- however, AIC records

show, and China Valves’ eventual admission confirms, that the actual purchase price paid by

Able Delight to Watts Regulator to acquire Changsha Valve was $6.07 million; (vii) Defendants

materially omitted that Able Delight was actually a shell company for Watts Valve (Changsha)

Co., Ltd., which was under investigation for violation of the Foreign Corrupt Practices Act; and

(viii) Defendants materially omitted that the Company made a related party loan to Defendant

Binjie Fang (COO and son of Chairman and CEO Defendant Siping Fang) -- AIC records

demonstrate that the Company had an outstanding receivable from Defendant Binjie Fang of

approximately $322,725 at year end 2009. These facts were required to be disclosed pursuant to

GAAP (Accounting Standards Codification (“ASC”) 850-10-50-1, Related Party Disclosures)


34

and SEC Rules and Regulations (Regulation S-X, Rule 4-08(k)(1) and Regulation S-K, Item 404

(a)), which require disclosure of related party transactions on the face of the financial statements.

See ¶¶183-235, infra. Disclosure of these facts was also necessary to prevent Defendants’

statements from being materially misleading.

81. The Form 10-K contained financial statements audited by Moore Stephens, along

with Moore Stephen’s unqualified opinions concerning those financial statements:

We have audited the accompanying consolidated balance sheets of China Valves Technology, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and other comprehensive income (loss), shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2009. China Valves Technology, Inc. and subsidiaries’ management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Valves Technology, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.


35

82. The statements made by Moore Stephens in their audit reports were materially

false and misleading because China Valves’ financial statements did not present fairly the

Company’s financial position in accordance with GAAP. Moreover, Moore Stephens did not

conduct its audits in accordance with GAAS.

83. Defendants Siping Fang and Shih signed certifications pursuant to Sections 302

and 906 of the Sarbanes-Oxley Act in which they certified that the Form 10-K did not contain

materially false and misleading statements and that China Valves’ internal controls over

financial reporting were effective. In particular the Section 302 certification provided:

1. I have reviewed this annual report on Form 10-K of China Valves Technology, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be


36

designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

84. The Section 906 certifications provided:

In connection with the Annual Report of China Valves Technology, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and


37

2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

85. These certifications of Defendants Siping Fang and Shih were materially false or

misleading when made for the following reasons: (i) the certifications falsely asserted that the

10-K did not include material misrepresentations or omissions when, in fact, the 10-K materially

misrepresented and omitted the adverse facts identified in ¶80, supra; and (ii) the certifications

falsely stated that the Company had designed and implemented reasonably efficient internal

controls over disclosure and financial reporting despite these Defendants having recognized

material weaknesses in the Company’s internal control over financial reporting. See ¶41-43,

supra.

86. On April 9, 2010, the Company filed with the SEC a Form 8-K, signed by

Defendant Siping Fang, announcing the completion of the Company’s acquisition of Hanwei

Valve. The announcement stated in relevant part:

ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

On April 8, 2010, Henan Tonghai Fluid Equipment Co., Ltd., a Chinese corporation (the “Subsidiary”), a wholly-owned subsidiary of China Valves Technology, Inc. (the “Company”), acquired 100% assets of Shanghai Pudong Hanwei Valve Co., Ltd. (“Hanwei Valve”), for a total cash consideration of U.S. $21 million pursuant to an Asset Transfer Agreement, dated April 8, 2010, among the Subsidiary and the equity owners of Hanwei Valve (the “Asset Transfer Agreement”). The Company issued a press release on April 9, 2010 announcing the acquisition of Hanwei Valve. A copy of the press release is furnished as Exhibit 99.1 and is incorporated herein by reference.

Hanwei Valve was established in 1992 and produces more than 20 series of valve products in over 6,000 different sizes ranging from 0.38 inches to 116 inches in diameter. Its main products include ball valves, check valves, butterfly valves, gate valves and other general purpose valves for a variety of applications, including oil refineries, chemical production and transport, electric power plants, and water supply. Hanwei Valve owns patents for a 24-way rotary valve used in simulating moving bed molecular sieve absorption-separation units in large-scale petrochemical equipment, for chromatogram separation units used in


38

bioengineering, and for fully welded ball valves used in long distance gas pipelines. Hanwei Valve is the sole producer of the fully-welded ball valve and 24-way rotary valve in China. For fiscal year 2010, the Company expects Hanwei Valve to contribute $20 million in revenue and $5 million in net income to the Company.

87. Attached to the April 9, 2010 8-K was the Asset Transfer Agreement referenced

in the Form 8-K. The Asset Transfer Agreement identified four parties to the agreement: “Party

A: Henan Tonghai Fluid Equipment Co., Ltd.”; “Party B: Shanghai Pudong Hanwei Valve Co.,

Ltd. (“Hanwei Valve”)”; “Party C: Shanghai Hanhuang Valve Co., Ltd”; and “Party D: Hong

Kong Hanxi Investment Co., Ltd.” The Agreement states:

ASSET TRANSFER AGREEMENT

Party A: Henan Tonghai Fluid Equipment Co., Ltd. Party B: Shanghai Pudong Hanwei Valve Co., Ltd. (“Hanwei Valve”) Party C: Shanghai Hanhuang Valve Co., Ltd Party D: Hong Kong Hanxi Investment Co., Ltd.

Party C and Party D established Hanwei Valve on January 23, 2002 to be a manufacturer of high-end valves used in petroleum chemical industry. Upon friendly consultation, Party A, B, C and D have reached the following agreement (the “Agreement”) on April 8, 2010:

Section 1. Transfer Price

Party B, C and D agree to sell all of the assets of Hanwei Valve to Party A for a consideration of $21 million (the price may be adjusted upon the asset evaluation).

Section 2. Representations and Warranties

1. Party C and Party D represent that the tangible and intangible assets of Hanwei Valve (including but not limited to land, buildings, equipment and intellectual property) are not subject to any collateral, pledge, lien or any third party claims. Party C and Party D will take all responsibilities arising out of any claims if the representations are not accurate.

2. Party C and Party D represent that they will not be directly or indirectly engaged in any business that may be competitive with Hanwei Valve, its technology or products in ten years from the execution of the Agreement.

3. Any cash in Hanwei Valve’s accounts before the execution of the Agreement belongs to Party C and Party D.


39

4. The parties will further discuss any matters not covered in this Agreement.

Section 3. Execution

The Agreement becomes effective upon execution by all the parties.

Section 4. Miscellaneous

1. Each party keeps one copy of the executed Agreement for record.

2. Any dispute shall be brought to Henan Zhengzhou Middle Court.

Party A: /s/ Legal Representative of Henan Tonghai Fluid Equipment Co., Ltd. Party B: /s/ Legal Representative of Shanghai Pudong Hanwei Valve Co., Ltd. Party C: /s/ Legal Representative of Shanghai Hanhuang Valve Co., Ltd. Party D: /s/ Legal Representative of Hong Kong Hanxi Investment Co., Ltd. 88. The statements made in ¶¶86-87 about the nature and quality of the Company’s

disclosures concerning its acquisition of Hanwei Valve was materially false or misleading when

made. Defendants materially misrepresented that: (i) the acquisition of Hanwei Valve was

completed on April 8, 2010 -- the Company’s AIC filings, however, reveal that the equity

owners of Hanwei Valve did not transfer interest of Hanwei Valve until October 30, 2010; and

(ii) consideration for Hanwei Valve was $21 million -- yet the Company’s AIC filings depict that

the actual purchase price for Hanwei Valve was RMB 50 million (approximately $7.47 million).

The statement also materially omitted the following material adverse facts, which were known to

Defendants or recklessly disregarded by them: (i) Henan Tanghai Fluid Equipment Co. Ltd., a

wholly owned subsidiary of China Valves, acquired 100% ownership of Shanghai Hanhuang

Valve on March 1, 2010 for a price of RMB 15 million ($1.81 million); and (ii) therefore, the

eventual Hanwei Valve acquisition was a related party transaction. These material

misrepresentations and omissions rendered the statements made in ¶¶86-87 materially false

and/or misleading.


40

89. On May 14, 2010, China Valves filed with the SEC its quarterly report on Form

10-Q for the first quarter ending March 31, 2010. The Form 10-Q was signed by Defendant

Shih.

90. The Form 10-Q contained unaudited financial statements of China Valves. With

respect to same, the Company reported revenues of $26.784 million and net income of $6.616

million for the three month period ending March 31, 2010.

91. China Valves further reported the following with respect to the Company’s

recent acquisitions:

On February 3, 2010, China Fluid Equipment Holdings Limited (“China Fluid”), entered into an asset purchase agreement with Able Delight Investment Limited to purchase all of the assets of Able Delight (Changsha) Valve Co., Ltd. (“Able Delight”) for a cash price of approximately $15.0 million. Able Delight (Changsha) Valve became an operating subsidiary. Recent Developments On April 8, 2010, China Fluid acquired 100% assets of Shanghai Pudong Hanwei Valve Co., Ltd., or Hanwei Valve, for a total cash consideration of $21.0 million pursuant to an Asset Transfer Agreement, dated April 8, 2010, among Henan Tonghai Fluid and the equity owners of Hanwei Valve. Hanwei Valve was established in 1992 and produces more than 20 series of valve products in over 6,000 different sizes ranging from 0.38 inches to 116 inches in diameter. Its main products include ball valves, check valves, butterfly valves, gate valves and other general purpose valves for a variety of applications, including oil refineries, chemical production and transport, electric power plants, and water supply. Hanwei Valve owns patents for a 24-way rotary valve used in simulating moving bed molecular sieve absorption-separation units in large-scale petrochemical equipment, for chromatogram separation units used in bioengineering, and for fully welded ball valves used in long distance gas pipelines. Hanwei Valve is the sole producer of the fully-welded ball valve and 24-way rotary valve in China. For fiscal year 2010, the Company expects Hanwei Valve to contribute $20.0 million in revenue and $5.0 million in net income to the Company. 92. The Form 10-Q and the financial statements contained therein were materially

false and misleading because, among other things, Defendants misrepresented details regarding

the Company’s acquisitions of Able Delight (Changsha) Valve and Hanwei Valve. Specifically,


41

Defendants materially misrepresented the following facts, which were known to Defendants or

recklessly disregarded by them: (i) that the consideration price for acquiring Able Delight

(Changsha) Valve was $15 million -- yet the AIC filings show, and China Valves’ admission

confirms, that the actual purchase price paid to Watts Regulator for Changsha Valve was $6.07

million; (ii) the acquisition of Hanwei Valve was completed on April 8, 2010 -- the Company’s

AIC filings, however, reveal that the equity owners of Hanwei Valve did not transfer interest of

Hanwei Valve until October 30, 2010; and (iii) consideration for Hanwei Valve was $21 million

-- though the Company’s AIC filings show that the actual purchase price for Hanwei Valve was

RMB 50 million (approximately $7.47 million). Defendants also materially omitted the

following adverse facts, which were known to Defendants or recklessly disregarded by them: (i)

the Company had made a $6.12 million loan on December 10, 2009 to Able Delight, a related

party, to facilitate the acquisition of Changsha Valve; (ii) the Company’s acquisition of Able

Delight was, in reality, a related party transaction involving Qing Lu, the wife of Defendant Bin

Li -- 34% shareholder of China Valves and first cousin of Defendant Siping Fang -- and/or

Defendant Siping Fang himself; (iii) in connection with the acquisition, the Company had made

a payment of $50,000 to related party Qing Lu; (iv) Able Delight was actually a shell company

for Watts Valve (Changsha) Co., Ltd., which was under investigation for violation of the

Foreign Corrupt Practices Act; (v) the Company made a related party loan to Defendant Binjie

Fang (COO and son of Chairman and CEO Defendant Siping Fang) -- AIC records show that

the Company had an outstanding receivable from Defendant Binjie Fang of approximately

$322,725 at year end 2009; (vi) Henan Tanghai Fluid Equipment Co. Ltd., a wholly owned

subsidiary of China Valves, acquired 100% ownership of Shanghai Hanhuang Valve on March

1, 2010 for a price of RMB 15 million ($1.81 million), making the Hanwei Valve acquisition a


42

related party transaction. These facts were required to be disclosed pursuant to GAAP

(Accounting Standards Codification (“ASC”) 850-10-50-1, Related Party Disclosures) and SEC

Rules and Regulations (Regulation S-X, Rule 4-08(k)(1) and Regulation S-K, Item 404 (a)),

which require disclosure of related party transactions on the face of the financial statements.



93. Defendants Siping Fang and Shih signed certifications pursuant to Sections 302

and 906 of the Sarbanes-Oxley Act in which they certified that the Form 10-Q did not contain

materially false and misleading statements and that China Valves’ internal controls over

financial reporting were effective. In particular the Section 302 certification provided:

1. I have reviewed this quarterly report on Form 10-Q of China Valves Technology, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


43

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design

or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

94. The Section 906 certifications provided:

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (the “Report”), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

95. These certifications of Defendants Siping Fang and Shih were materially false or



44

10-Q did not include material misrepresentations or omissions when, in fact, the 10-Q materially




material weaknesses in the Company’s internal control over financial reporting. See ¶¶41-43,

supra.

96. On August 11, 2010, China Valves filed with the SEC its quarterly report on

Form 10-Q for the second quarter ending June 30, 2010. The Form 10-Q was signed by

Defendant Tang.



million for the three month period ending June 30, 2010.



On February 3, 2010, China Fluid Equipment Holdings Limited (“China Fluid”), entered into an asset purchase agreement with Able Delight Investment Limited to purchase all of the assets of Able Delight (Changsha) Valve Co., Ltd. (“Able Delight”) for a cash price of $15.0 million. Able Delight (Changsha) Valve became an operating subsidiary. See Note 16- business combinations for details. On April 8, 2010, the Company acquired 100% assets of Shanghai Pudong Hanwei Valve Co., Ltd (“Hanwei Valve”), which is the sole producer of the fully-welded ball valve and 24-way rotary valve in China, for a total cash consideration of approximately $19.6 million pursuant to an Asset Transfer Agreement. See Note 16 – business combination for details. 99. The Form 10-Q and the financial statements contained therein were materially




45



(Changsha) Valve was $15 million – yet the AIC filings show that the actual purchase price

paid by Able Delight to Watts Regulator for Changsha Valve was $6.07 million; (ii) the

acquisition of Hanwei Valve was completed on April 8, 2010 -- the Company’s AIC filings,

however, reveal that the equity owners of Hanwei Valve did not transfer interest of Hanwei

Valve until October 30, 2010; and (iii) consideration for Hanwei Valve was $21 million --

though the Company’s AIC filings depict that the actual purchase price for Hanwei Valve was













$322,725 at year end 2009; and (vi) Henan Tanghai Fluid Equipment Co. Ltd., a wholly owned




46







100. In addition, Defendants Siping Fang and Tang signed certifications, identical to

those set forth in ¶¶93-94, above, pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act

in which they certified that the Form 10-Q did not contain materially false and misleading

statements and that China Valves’ internal controls over financial reporting were effective.

101. These certifications of Defendants Siping Fang and Tang were materially false or







supra.

102. On November 15, 2010, China Valves filed with the SEC its quarterly report on

Form 10-Q for the third quarter ending September 30, 2010. The Form 10-Q was signed by

Defendant Tang.


47



million for the three month period ending September 30, 2010.



On February 3, 2010, China Fluid Equipment Holdings Limited (“China Fluid”), entered into an asset purchase agreement with Able Delight Investment Limited to purchase all of the assets of Able Delight (Changsha) Valve Co., Ltd. (“Able Delight”) for a cash price of $15.0 million. Able Delight (Changsha) Valve became an operating subsidiary. See Note 16- business combinations for details. On April 8, 2010, the Company acquired 100% assets of Shanghai Pudong Hanwei Valve Co., Ltd (“Hanwei Valve”), which is the sole producer of the fully-welded ball valve and 24-way rotary valve in China, for a total cash consideration of approximately $19.6 million pursuant to an Asset Transfer Agreement. See Note 16 – business combination for details.

* * * Able Delights acquisition

On February 3, 2010, a subsidiary of the Company completed the acquisition of 100% of the assets of Able Delight for a total cash consideration of $15.0 million. The acquisition was accounted as a business combination in accordance to the terms of the purchase agreement. Assets acquired included the following:

Able Delight Fair Value Assumed by the Company Inventory $ 4,944,755 $ 4,944,755 Buildings and equipment 10,113,703 10,113,703 Total assets 15,058,458 15,058,458 Total liabilities - - Net assets $ 15,058,458 $ 15,058,458

The Company allocated the purchase price based on the fair value of the assets acquired and recorded a gain of approximately $0.02 million in other income in the current period.

Hanwei Valve acquisition

On April 8, 2010, the Company acquired 100% assets of Shanghai Pudong Hanwei Valve Co., Ltd. (“Hanwei Valve”), which is the sole producer of the fully-welded ball valve and 24-way rotary valve in China, for a total cash


48

consideration of approximately $19.6 million pursuant to an Asset Transfer Agreement

Assumed by the Hanwei Valve Fair Value Company Inventory $ 1,814,810 $ 1,814,810 Non current assets 6,692,795 6,692,795 Goodwill purchased 11,102,425 11,102,425 Total assets 19,610,030 19,610,030 Total liabilities - - Net assets $ 19,610,030 $ 19,610,030

The Company allocated the purchase price based on the fair value of the assets acquired and recorded a goodwill of approximately $11.1 million in the current period.

105. The Form 10-Q and the financial statements contained therein were materially





(Changsha) Valve was $15 million -- yet the AIC filings show that the actual purchase price

paid by Able Delight to Watts Regulator for Changsha Valve was $6.07 million; (ii) the

acquisition of Hanwei Valve was completed on April 8, 2010 -- the Company’s AIC filings,

however, reveal that the equity owners of Hanwei Valve did not transfer interest of Hanwei

Valve until October 30, 2010; and (iii) consideration for Hanwei Valve was $21 million --

though the Company’s AIC filings depict that the actual purchase price for Hanwei Valve was







49








$322,725 at year end 2009; and (vi) Henan Tanghai Fluid Equipment Co. Ltd., a wholly owned









106. In addition, Defendants Siping Fang and Tang signed certifications, identical to

those set forth in ¶¶93-94, above, pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act

in which they certified that the Form 10-Q did not contain materially false and misleading

statements and that China Valves’ internal controls over financial reporting were effective.

107. These certifications of Defendants Siping Fang and Tang were materially false or




50





supra.

108. On November 18, 2010, the Company filed with the SEC a Form 8-K/A, signed

by Defendant Wang, amending its February 8, 2010 Form 8-K, and revealing for the first time,

some but not all, of the previously undisclosed material facts concerning the Able Delight

(Changsha) Valve acquisition and raising serious doubts about the true value of Able Delight.

The November 18, 2010 8-K/A revealed that Able Delight was purchased from a subsidiary of

the billion dollar NYSE listed company, Watts Water Technologies (“Watts Water”). The

November 18, 2010 8-K/A also revealed that the actual price paid by Able Delight to Watts

Regulator for the acquisition of Changsha Valve was only $6.07 million. The Form 8-K/A states

in relevant part:

China Valves Technology, Inc. is filing this amendment to its current report on Form 8-K, which was originally filed with the Securities and Exchange Commission on February 8, 2010, to more fully explain the timeline and facts surrounding its acquisition of Changsha Valve (as defined below).

ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

On February 8, 2010, China Valves Technology, Inc. (the “Company”) filed a Current Report on Form 8-K to disclose that its wholly-owned subsidiary, China Fluid Equipment Holdings Limited (“China Fluid”), acquired 100% of the outstanding equity interests of Able Delight (Changsha) Valve Co., Ltd., a PRC company (“Changsha Valve”), from Able Delight Investment Limited, a Hong Kong company (“Able Delight”). The purchase price paid by China Fluid for Changsha Valve was $15 million.

On January 12, 2010, prior to the closing of the China Fluid acquisition of Changsha Valve, Able Delight registered with the Changsha Industrial Bureau


51

(the “Registration”) its acquisition of Changsha Valve (the “Able Delight Acquisition of Changsha Valve”) from Watts Regulator Co. (“Watts Regulator”), a party controlled by Watts Water Technologies, Inc. (“Watts”). The Registration indicates that the consideration paid by Able Delight for Changsha Valve was $6.07 million. The Registration also approved the name change from Watts Valve (Changsha) Co., Ltd. to Able Delight (Changsha) Valve Co., Ltd. Watts disclosed in its Form 10-Q for the period ended March 31, 2010 that it generated $5.1 million of net cash from investing activities of discontinued operations in the first three months of 2010 primarily from cash received from the sale of Watts Valve (Changsha) Co., Ltd.

Watts Regulator required, as a condition of the sale of Changsha Valve, that the purchasing party be a company whose registered owner was not the Company or any of its affiliates. Therefore, the Company arranged for the formation of Able Delight by a third party, Qing Lu, on November 20, 2009 in contemplation of the Company’s ultimate acquisition of Changsha Valve through its subsidiary China Fluid. Thereafter, on December 10, 2009, China Fluid and Able Delight entered into a loan agreement (the “Loan Agreement”) pursuant to which China Fluid loaned $6.12 million (the “Loan”) to Able Delight as acquisition financing for the contemplated acquisition of Changsha Valve from Watts Regulator. The loan agreement is filed as exhibit 10.1 to this Form 8-K/A. When Able Delight acquired Changsha Valve and before China Fluid acquired Changsha Valve, Jianbao Wang, the Company’s current CEO and the then General Manager of China Fluid, was appointed director and legal representative of Changsha Valve and Huifeng Chen, the controller of the Company, was appointed as the controller of Changsha Valve.

The $15 million purchase price paid by China Fluid for Changsha Valve was $8.93 million more than the purchase paid by Able Delight for Changsha Valve. The additional $8.93 million is accounted for as follows:

Amount of payment Explanation of payment (amount in millions*) Payment of accounts payable to Watts’

Shanghai subsidiary $1.17 (approx) Payment of accounts payable to Watts’ Tianjin

subsidiary $1.17 (approx) Payment of accounts payable to third parties $2.27 (approx) Payment to Changsha Valves sales personnel for

unpaid sales commission $2.20 (approx) Payment to employees of Changsha Valve for

unpaid salaries and year-end bonuses $0.66 (approx) Payment to employees of Changsha Valves for

severance payments $0.88 (approx) Payment of legal fees for due diligence and

documentation $0.53 (approx) Payment of compensation to Able Delight $0.05


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TOTAL $8.93 million

* Calculated based on the average exchange rate of RMB 6.8269 to $1 issued by People’s Bank of China on February 2, 2010.

Accordingly, when the $6.07 million purchase price paid by Able Delight to Watts Regulator is added to the aggregate amounts paid by China Fluid to Able Delight for the accounts payable and other expense items described in the table above, the total is equal to $15 million.

The following illustration provides a timeline of the events leading up to the China Fluid Acquisition of Changsha Valve.


53

Although Able Delight was controlled by Qing Lu at the time of the Able Delight Acquisition of Changsha Valve, pursuant to the Loan Agreement, Able Delight would be funded by the Company and act as the Company’s agent or nominee in acquiring Changsha Valve, as evidenced in part by the appointment of Company personnel to management positions at Changsha Valve prior to the China Fluid Acquisition of Changsha Valve on February 3, 2010.

Qing Lu received $50,000 for acting as the sole stockholder of Able Delight on behalf of the Company and the remaining balance of $15 million paid by China Fluid in the China Fluid Acquisition of Changsha Valve was used to cover costs of the acquisition, including the payment of various accounts payable as discussed


54

above.

109. Attached to the Form 8-K/A was a copy of the December 10, 2009 loan

agreement between the China Valve subsidiary China Fluid Equipment Holding Co., Ltd. and

Able Delight Investment Limited:

Loan Agreement

Party A: China Fluid Equipment Holding Co., Ltd. (Hong Kong)

Party B: Able Delight Investment Limited (Hong Kong)

Whereas Party B is in need of funds to acquire equities in Watts Valve (Changsha) Co., Ltd. (hereinafter referred to “Changsha Company”), upon consultation, Party A has agreed to lend and Party B has agreed to borrow funds in an amount of Six Million One Hundred and Twenty Thousand US Dollars (US$6,120,000). Party A and Party B hereby agree as follows:

Article 1. Loan amount: Six Million One Hundred and Twenty Thousand US Dollars (US$6,120,000).

Article 2. The loan interest rate of the loan shall be implemented in accordance with the loan interest rate of a commercial bank for the corresponding period.

Article 3. The term of this loan is six (6) months, commencing from the date on which the Party A remits first batch of funds into the account of Party B.

Article 4. Upon the acquisition of Changsha Company in whole by Party B and after Party B sells to Party A all its controlled tangible and intangible assets of Changsha Company at a reasonable price evaluated by an evaluation firm acknowledged by both parties, Party A may be exempted from performing the obligations under Article 2 above and this agreement shall be terminated. Party A may offset its payment obligation owed to Party B under Party A’s proposed acquisition of all assets of Changsha Company by using of the borrowed funds as ascribed under this agreement.

Article 5. If Party B and Party A fail to reach any intent for the acquisition of Changsha Company, Party A may exercise its rights subject to Article 1, Article 2, and Article 3 above of this agreement.

Article 6. This agreement is executed in two (2) copies, one copy for each party.

Article 7. Any unconcerned matters shall be solved between parties through friendly consultations.


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Article 8. If any of the parties is in breach of this agreement, the non-breaching party may have the right to file a lawsuit to Henan Zhengzhou Intermediate People’s Court.

Party A: China Fluid Equipment Party B: Zhuo Yu Investment Co., Ltd. Holdings Co., Ltd. Representative: Representative: December 10, 2009 December 10, 2009 110. The November 18th announcement was a partial corrective disclosure. This

announcement caused the Company’s stock price to fall $1.61 per share, or 15%, on November

19, 2010.

111. The statements made in the November 18, 2010 Form 8-K/A were, nevertheless,

materially misleading. Although ten (10) months after the acquisition and its initial

announcement, the Company partially corrected itself to disclose the $6.12 million loan to Able

Delight and the $50,000 payment to Qing Lu, China Valves failed to explain the related party

nature of these transactions. Instead, the Company stated that Able Delight had been formed “by

a third party,” Qing Lu. Accordingly, China Valves failed to disclose that Qing Lu was a related

party, making Able Delight a related party. The Company failed to disclose that Qing Lu was

the wife of Defendant Bin Li -- the first cousin of Siping Fang and 34% shareholder of China

Valves. The Company also failed to disclose Defendant Siping Fang’s relationship with Able

Delight, yet he signed the asset transfer agreement on behalf of Able Delight in connection with

Able Delight’s acquisition of Changsha Valve from Watts Regulator. Defendants were clearly

aware of all these material facts and circumstances concerning the Able Delight (Changsha)

acquisition, but deliberately chose not to disclose them thereby continuing to mislead investors.


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112. On December 27, 2010, the Company issued a press release touting the

Company’s anticipated engagement of a Big Four audit firm to replace Frazer Frost starting with

the first quarter 2011 review. The press release stated in relevant part:

ZHENGZHOU, China, Dec. 27, 2010 /PRNewswire-Asia-FirstCall/ -- China Valves Technology, Inc. (Nasdaq: CVVT) (“China Valves” or the “Company”), a leading Chinese metal valve manufacturer, today announced it has approved to replace Frazer Frost LLP with one of Big Four audit firms as its new independent auditor. Frazer Frost LLP continues to serve as the Company’s auditor until Form 10-K for the fiscal year 2010 is filed. The decision to change the Company’s independent auditor was recommended, authorized and approved by China Valves’ board of directors on December 27, 2010. In addition to making progress with the shift to one of Big Four audit firms, the Company has committed to improving its internal controls by strengthening its internal audit and financial reporting function by hiring two qualified financial personnel with Big Four auditing background. The Company has met and received proposals from select Big Four audit firms, and is in advanced stages of negotiation with one of them. Both parties are proceeding with signing the letter of engagement in due course. “We are committed to establishing the highest standards of financial transparency and believe that a transition to a Big Four audit firm is a required next step for us,” said Mr. Jianbao Wang, the Chief Executive Officer of China Valves. “We fully appreciate the professional services rendered by the audit team of Frazer Frost LLP in the past.” “We are pleased a Big Four audit firm will be engaged as our new independent auditor and look forward to working with them in the future,” commented Mr. Siping Fang, the Chairman of China Valves. “As disclosed before, we just hired a new CFO with rich experience in overseas listed companies. I believe Dr. Wei will make a great contribution to the communication with the new audit firm to improve our transparency in the investing community.”

(Emphasis added).

113. The above press release contained statements that were materially false and

misleading when made. Defendant Wang falsely stated that the Company maintains “the highest

standards of financial transparency” -- yet the Company has consistently demonstrated its lack of

transparency and was, at the time of the statement’s issuance, in concealing numerous related


57

party transactions including the related party acquisitions of Hanwei Valve and Able Delight as

well as the related party loans to Defendant Binjie Fang and Qing Lu. Defendants stated that the

Company was in “advanced stages of negotiation” with one of the firms and further stated that a

“Big Four audit firm will be engaged as our new independent auditor” -- however, no such

auditor was ever engaged by the Company, and China Valves, instead, continues to use Frazer

Frost as its independent auditor. The Company’s inability to engage a Big Four audit firm, if it

ever actually intended to or had a desire to do so, further evidences China Valves’ inextricably

deficient internal controls and procedures over financial reporting and that the audit risk

presented by China Valves was so high that none of the “Big Four” were willing to take on the

engagement. There is a strong inference that these material misrepresentations were

intentionally disseminated so as to artificially bolster confidence in the Company’s stock in

preparation of the Company’s take down of the shelf offering in January 2011.

114. On January 5, 2011, China Valves filed a Prospectus Supplement on Form



Prospectus Supplement, China Valves offered and sold 1,000,000 shares of its common stock at

the price of $10.00 per share at an aggregate price of $10 million.

115. In the Prospectus Supplement, China Valves incorporated the following

previously issued financial statements:

• Our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed March 29, 2010;




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• Our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, filed on November 15, 2010;


• Our Current Report on Form 8-K/A, filed with the SEC on January 8, 2010;



• Our Current Report on Form 8-K, filed with the SEC on February 8, 2010;


• Our Current Report on Form 8-K, filed with the SEC on May 27, 2010;

• Our Current Report on Form 8-K, filed with the SEC on October 12, 2010;

• Our Current Report on Form 8-K/A, filed with the SEC on November 18, 2010;

• Our Current Report on Form 8-K, filed with the SEC on December 21, 2010; and


116. The consolidated financial statements incorporated in the Prospectus Supplement

were audited by Frazer Frost, LLP who issued an unqualified opinion.

117. The SEC filings incorporated in the Prospectus Supplement, including the

financial statements included therein, contained statements that were materially false and

misleading when made. Specifically, the Prospectus Supplement, or the incorporated

documents, materially omitted the following adverse facts, which were known to Defendants or

recklessly disregarded by them: (i) the Company’s acquisition of Able Delight was, in reality, a

related party transaction involving Qing Lu, the wife of Defendant Bin Li -- 34% shareholder of

China Valves and first cousin of Defendant Siping Fang -- and/or Defendant Siping Fang

himself; (ii) in connection with the acquisition, the Company had issued a payment of $50,000 to


59

related party Qing Lu; (iii) Defendants materially omitted that the Company made a related party

loan to Defendant Binjie Fang (COO and son of Chairman and CEO Defendant Siping Fang) --

AIC records show that the Company had an outstanding receivable from Defendant Binjie Fang

of approximately $322,725 at year end 2009; and (iv) Henan Tanghai Fluid Equipment Co. Ltd.,

a wholly owned subsidiary of China Valves, acquired 100% ownership of Shanghai Hanhuang

Valve on March 1, 2010 for a price of RMB 15 million ($1.81 million), making the Hanwei

Valve acquisition a related party transaction. Accordingly, the Prospectus Supplement violated

ASC 850-10-50-1 (formerly FAS No. 57), Rule 4-08(k)(1) of Regulation S-X, and Item 404(a)

of Regulation S-K, which provide that registration statements and financial statements shall

include disclosures of material related party transactions.

118. Moreover, the Prospectus Supplement incorporated financial statements that

were otherwise materially false and misleading. Specifically, in the Company’s Form 10-K/A

for the year ended December 31, 2008, Defendants materially misrepresented that the Company

had recognized $65,947,615 in revenue and $25,865,463 in gross profit while China Valves’

AIC financial reports reveal that the Company had revenue of only $55,598,826 and gross profits

of $15,567,721 for the year 2008. Similarly, in the Company’s Form 10-K for the year ended

December 31, 2009, incorporated into the Prospectus, Defendants materially misrepresented that

the Company had recognized $95,370,012 in revenue and $46,842,676 in gross profits while

China Valves’ AIC financial reports reveal that the Company had received revenue of only

$67,604,985 and gross profits of $17,421,555 for the year 2009. Disclosure of these facts was

necessary to prevent Defendants’ statements from being materially misleading.

1. Motive and Opportunity

119. Defendants had a motive to conceal the related party nature of, and specific

details concerning, the Able Delight (Changsha Valve) and Hanwei Valve related transactions in


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that their purpose appears to be, at least in part, to enrich themselves and/or their immediate

family members at the expense of shareholders. At the least Defendants had a motive to conceal

the true facts and circumstances concerning these transactions because they were highly

suspicious and would raise the ire of analysts and investors. These include the price

discrepancies between what the Company reported in its SEC filings and AIC filings that it paid

for Hanwei Valve ($21 million versus $7.47 million, respectively), the fact the Company

purportedly acquired Able Delight (Changsha) Valve for $15 million while Able Delight

acquired Changsha Valve for only $6.07 million, and the vague and general itemized list of

obligations and expenses that the Company claimed represented the approximately $9 million

difference. In fact shareholders did react negatively when some of these negative facts were

revealed on November 18, 2010 and January 13, 2011 as reflected in the decline in the

Company’s stock price upon such revelations. See ¶110, supra, ¶150, infra.

120. Defendant Siping Fang also had a motive to inflate the Company’s financial

results in order to obtain the release of common stock that was being held in escrow and

releasable to him only upon the Company’s achievement of certain financial targets. In

particular as set forth in the Company’s SEC filings:

Make Good Escrow Agreement

In connection with the Company’s private placement on August 26, 2008, the Company entered into a Make Good Escrow Agreement, under which the 12,583,032 shares of the Company’s common stock held by Bin Li, the Company’s major shareholder, were placed in escrow. Of these shares, 12,150,000 are the subject of the Earn-In Agreement between Bin Li and Siping Fang and Bin Li entered into the Make Good Escrow Agreement on behalf of Siping Fang. For each of the calendar years 2008, 2009 and 2010, 4,194,344 shares will be released to the investors or returned to Bin Li, depending on the fulfillment of specified earnings targets. The specified earnings target for calendar 2008 was net income of $10,500,000, for calendar 2009 the target is net income of $23,000,000 and fully diluted earnings per share of $0.738 and for calendar 2010 the target is net income of $31,000,000 and fully diluted earnings per share of $0.994. On August 14, 2009, the parties to the Make Good Escrow Agreement


61

entered into an amendment pursuant to which for calendar 2009 the target was amended to $21,000,000 and fully diluted earnings per share of $0.668 and for calendar 2010 the target was amended to net income of $34,000,000 and fully diluted earnings per share of $1.082. The Company had met the specified earnings targets and accordingly, 4,194,344 shares were released from escrow and returned to Bin Li for each of the year ended December 31, 2009 and 2008, respectively.

121. The financial results for the years ended 2008 and 2009 reported by the

Company in its SEC filings were sufficient to achieve the earnings targets established by the

Make Good Escrow Agreement and, therefore, to allow the release of escrowed shares to

Defendant Siping Fang. For instance, net income reported in the Company’s 2010 10-K for the

year ended December 31, 2009 was $23,353,093 while net income reported in the Company’s

AIC records for that reporting period was $5,647,195.4

E. Defendants’ False and Misleading Statements in Violation of the Securities Act

1. The Offering Documents

122. China Valves January 5, 2011 on Form S-3 was effective pursuant to a shelf

registration statement, base prospectus and prospectus supplements pursuant to SEC Rule 415

(commonly known as the Shelf Registration Rule).

123. A shelf registration statement is a filing with the SEC to register a public

offering, usually where there is no present intention to immediately sell all the securities being

registered. A shelf registration statement permits multiple offerings based on the same

registration. With an effective shelf registration statement, when the issuer wants to offer

securities, it takes them “off the shelf.” These “shelf takedowns” usually are offered with a base

4 Excluding $14,998,974 in non-cash stock compensation expense recognized by the Company in 2008 related to the release of China Valves shares to Siping Fang, SEC reported net income for China Valves for the year ended 2008 was $10,762,129. The Company determined that it was not required to recognize compensation expense in connection with the release of shares to Siping Fang for the year ended 2009.


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prospectus and a prospectus supplement or supplements.

124. A “base” prospectus is filed in order to comply with the applicable disclosure

requirements to have a shelf registration statement declared effective by the SEC staff, with more

information to follow. Under SEC Rule 430B and 430C, prospectus supplements are deemed

part of, and included in, the registration statement containing the base prospectus to which the

prospectus supplement relates as if specified dates (generally the earlier of the date the

prospectus supplement is first used or the date of the first contract of sale for securities in the

offering described in the prospectus supplement). For liability purposes of the registrant and any

underwriter, rule 430B and Rule 430C prescribe that date will be deemed the new effective date

of the registration statement relating to the securities to which that prospectus relates.

125. Form S-3 is a streamlined registration form available only to certain well-

capitalized and widely followed issuers about which a significant amount of public information

is already available. A registrant on Form S-3 accomplishes disclosure in part by incorporating

in the prospectus by referencing its most recent Form 10-K and interim Forms 10-Q and other

documents filed pursuant to the Securities Exchange Act.

126. Item 11(a) to Form S-3 requires that the issuer (registrant) describe in the portion

of the registration statement comprising the prospectus:

any and all material changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for which certified financial statements were included in the latest annual report to security holders and which have not been described in a report on Form 10-Q…or Form 8-K…filed under the Exchange Act.

(emphasis added).

127. The primary purpose of the “material changes” disclosure requirement of Item

11(a) is to ensure that the prospectus provides investors with an update of the information

required to be disclosed in the incorporated Exchange Act filings, including the information


63

provided in those filings concerning related party transactions (SEC Regulation S-K, Item 404

(17 CFR §229.404) and Rule 4-08(k)(1) of Regulation S-X).

2. False and Misleading Statements

128. The claims alleged in this Section are based on principles of negligence and strict

liability only. Lead Plaintiff repeats and realleges each and every allegation, above, exclusive of

allegations that contain facts necessary to prove any elements not required to state a claim under

Sections 11, 12, or 15 of the Securities Act.

129. On December 1, 2009, the Company filed its Shelf Registration Statement with

the SEC on Form S-3 (the “Registration Statement”). Defendants Siping Fang, Shih, Yu, Peter

Li, Haus, and Binjie Fang each signed the Registration Statement. The Registration Statement

was declared effective by the SEC on December 14, 2009. In the Registration Statement, China

Valves incorporated the following reports previously filed with the SEC:










• Our Current Report on Form 8-K, filed with the SEC on August 18, 2009; and


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130. In the Registration Statement, Defendant Moore Stephens consented to the

incorporation of its unqualified audit report dated March 15, 2009 related to the consolidated

financial statements of China Valves for the years ended December 31, 2007 and 2008.

131. The statements made in the Registration Statement were materially false or

misleading for the reasons that Defendants failed to disclose the proposed (at least by November

20, 2009) related party transaction involving Able Delight and Qing Lu and the terms of that

transaction. The Registration Statement further materially failed to disclose that the Company

made a related party loan to Defendant Binjie Fang (COO and son of Chairman and CEO

Defendant Siping Fang) -- AIC records demonstrate that the Company had an outstanding

receivable from Defendant Binjie Fang of approximately $322,725 at year end 2009. Moreover,

the Registration Statement incorporated financial statements that were materially false and

misleading. Specifically, in the Company’s Form 10-K/A for the year ended December 31,

2008, Defendants materially misrepresented that the Company had recognized $65,947,615 in

revenue and $25,865,463 in gross profit while China Valves’ AIC financial reports reveal that

the Company had revenue of only $55,598,826 and gross profits of $15,567,721 for the year

2008.

132. On December 29, 2009, the Company filed with the SEC a Form 8-K

announcing an agreement to sell 333,334 shares of common stock pursuant to its shelf

registration statement. The Form 8-K stated, in pertinent part:

Item 1.01. Entry into a Material Definitive Agreement


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On December 27, 2009, China Valves Technology, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with a certain purchaser (the “Purchaser”) pursuant to which the Company will sell a total of 333,334 shares (the “Shares”) of common stock, par value $0.001 per share (the “Common Stock”), for an aggregate purchase price of $3,000,006.00 (the “Purchase Price”). The Shares are priced at $9.00 per share. The Purchaser will also receive a warrant to purchase an aggregate of 50,000 shares (the “Warrant Shares”) of Common Stock (subject to adjustment in certain circumstances) at an exercise price of $9.00 (the “Warrant”). The Warrant is exercisable for 30 days beginning on the date of the initial issuance of the Warrant. The Shares and the Warrant Shares are to be sold pursuant to a shelf registration statement (the “Registration Statement”) declared effective by the Securities and Exchange Commission (the “SEC”) on December 14, 2009. A prospectus supplement related to the offering will be filed with the SEC and delivered to the Purchaser. The transaction closed on December 28, 2009.

Also, on December 27, 2009, the Company entered into a placement agency agreement (the “Placement Agency Agreement”) with Rodman & Renshaw, LLC (the “Placement Agent”) in which the Placement Agent agreed to act as placement agent in connection with this offering. The Placement Agent has no obligation to buy any securities from the Company.

133. That same day, the Company filed its Prospectus Supplement on Form 424(b)(5)

pursuant to the shelf Registration Statement filed by China Valves on December 1, 2009 and

declared effective on December 14, 2009. Pursuant to the Registration Statement and Prospectus

Supplement, China Valves offered and sold 333,334 shares of its common stock at the price of

$9.00 per share and common stock purchase warrants to purchase up to 50,000 shares of

common stock at an exercise price of $9.00 per share.


previously issued reports filed with the SEC:



• Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2009,

filed on August 14, 2009;


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• Our Current Report on Form 8-K, filed with the SEC on August 18, 2009;


• The description of our common stock, $0.001 par value per share, contained in

our Registration Statement on Form 8-A, filed on November 12, 2009 pursuant to Section 12(b) of the Exchange Act.


were audited by Moore Stephens for which Moore Stephens rendered an unqualified opinion.

136. The Prospectus Supplement contained statements that were materially false and

misleading when made and in violation of Item 404(a) of Regulation S-K. Specifically, the

Prospectus Supplement materially omitted that the Company had made a $6.12 million loan to

Able Delight. This loan was a related party transaction involving Qing Lu, the wife of

Defendant Bin Li -- 34% shareholder of China Valves and first cousin of Defendant Siping Fang.

The Prospectus Supplement further materially failed to disclose that the Company made a related

party loan to Defendant Binjie Fang (COO and son of Chairman and CEO Defendant Siping

Fang) -- AIC records show that the Company had an outstanding receivable from Defendant

Binjie Fang of approximately $322,725 at year end 2009. Moreover, the financial statements

incorporated in the Prospectus Supplement were materially false and misleading. Specifically, in


67

the Company’s Form 10-K/A for the year ended December 31, 2008, Defendants materially

misrepresented that the Company had recognized $65,947,615 in revenue and $25,865,463 in

gross profit -- while China Valves’ AIC financial reports reveal that the Company had revenue of

only $55,598,826 and gross profits of $15,567,721 for the year 2008.

137. On December 31, 2009 the Company filed with the SEC a Form 8-K announcing

an agreement to sell 2,414,113 shares of common stock pursuant to its shelf registration

statement. The Form 8-K stated, in relevant part:

Item 1.01. Entry into a Material Definitive Agreement

On December 30, 2009, China Valves Technology, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain purchasers (the “Purchasers”) pursuant to which the Company will sell a total of 2,414,113 shares (the “Shares”) of common stock, par value $0.001 per share (the “Common Stock”), for an aggregate purchase price of $21,727,017 (the “Purchase Price”). The Shares are priced at $9.00 per share. The Purchasers will also receive warrants to purchase an aggregate of 362,116 shares (the “Warrant Shares”) of Common Stock (subject to adjustment in certain circumstances) at an exercise price of $9.00 (the “Warrants”). The Warrants are exercisable for 30 days beginning on the date of the initial issuance of the Warrants. The Shares and the Warrant Shares are to be sold pursuant to a shelf registration statement (the “Registration Statement”) declared effective by the Securities and Exchange Commission (the “SEC”) on December 14, 2009. A prospectus supplement related to the offering will be filed with the SEC and delivered to the Purchasers. The transaction is expected to close on or before January 5, 2010.

Also, on December 30, 2009, the Company entered into an amendment agreement, dated as of December 28, 2009 (the “Placement Agency Agreement Amendment”) to its placement agency agreement (the “Placement Agency Agreement”) with Rodman & Renshaw, LLC (the “Placement Agent”) in which the Placement Agent agreed to act as exclusive placement agent in connection with this offering. The Placement Agency Agreement Amendment extended the term of the Placement Agency Agreement through December 31, 2009, increased the maximum aggregate offering amount that the Placement Agent may place from 333,334 shares of Common Stock to 3,333,334 shares of Common Stock, and increased the aggregate exercise price of warrants that may be placed from $50,000 to $4,500,000. The price per share of shares and exercise price per share of warrants that may be placed by the Placement Agent remains $9.00. The Placement Agent is permitted to place the foregoing securities with investors in two or more closings and pursuant to two or more securities purchase agreements. No other terms of the Placement Agency Agreement were modified, including


68

that the Placement Agent has no obligation to buy any securities from the Company. The Placement Agent will receive a commission equal to 5.0% of the gross proceeds of this offering.

138. On January 4, 2010, the Company filed its Prospectus Supplement on Form




the price of $9.00 per share and common stock purchase warrants to purchase up to 362,116

shares of common stock at an exercise price of $9.00 per share.


previously issued SEC filed reports:



• Our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2009,

filed on August 14, 2009;








• Our Current Report on Form 8-K, filed with the SEC on August 18, 2009;

• Our Current Report on Form 8-K, filed with the SEC on December 29, 2009;


69


• The description of our common stock, $0.001 par value per share, contained in

our Registration Statement on Form 8-A, filed on November 12, 2009 pursuant to Section 12(b) of the Exchange Act.


were audited by Moore Stephens who issued an unqualified audit opinion of same.

141. The statements made in the Prospectus Supplement, including the SEC filed

documents incorporated therein, were materially false or misleading and in violation of Item

404(a) of Regulation S-K for the reasons that Defendants failed to disclose: (i) the proposed

acquisition of Able Delight, a related party and the terms of that transaction; (ii) the Company’s

December 10, 2009 $6.12 million loan to Able Delight, a related party entity controlled by Qing


Defendant Siping Fang -- and/or Defendant Siping Fang himself; (iii) the contemplated payment

of $50,000 to Qing Lu in connection with the proposed related party transaction; and (iv) the

Company’s related party loan to Defendant Binjie Fang (COO and son of Chairman and CEO

Defendant Siping Fang) -- AIC records show that the Company had an outstanding receivable

from Defendant Binjie Fang of approximately $322,725 at year end 2009.


were materially false and misleading. Specifically, in the Company’s Form 10-K/A for the year

ended December 31, 2008, Defendants materially misrepresented that the Company had

recognized $65,947,615 in revenue and $25,865,463 in gross profit -- yet China Valves’ AIC

financial reports reveal that the Company had revenue of only $55,598,826 and gross profits of

$15,567,721 for the year 2008.

143. On January 5, 2011, the Company issued a press release announcing that it had


70

entered into a definitive agreement with certain purchasers to sell in a registered direct offering

an aggregate of 1,000,000 shares of its common stock at $10.00 per share pursuant to its shelf

Registration Statement declared effective December 14, 2009. The press release stated, in

pertinent part, the following:

ZHENGZHOU, China, Jan. 5, 2011 /PRNewswire-Asia-FirstCall/ -- China Valves Technology, Inc. (Nasdaq: CVVT) (“China Valves” or the “Company”), a leading Chinese metal valve manufacturer, today announced that the Company has entered into a definitive agreement with certain purchasers to sell in a registered direct offering an aggregate of 1,000,000 shares of its common stock at a price of $10.00 per share for gross proceeds of approximately $10 million. The net proceeds of the financing will be used to build a manufacturing facility for big size ball valves used for nuclear power plants. In addition, the Company will issue to the purchasers warrants to purchase an aggregate of 250,000 shares of common stock at an exercise price of $10.00 per share, exercisable for 180 days beginning on the date of the initial issuance of the warrant.

The transaction is expected to close on January 7, 2011, subject to the satisfaction of customary closing conditions.

Rodman & Renshaw, LLC, a wholly owned subsidiary of Rodman & Renshaw Capital Group, Inc. (Nasdaq: RODM), acted as the exclusive placement agent in connection with the offering.

The shares in this offering are being issued under a shelf registration statement (File No. 333-163418), which was declared effective by the Securities and Exchange Commission on December 14, 2009. A prospectus supplement related to the public offering will be filed with the Securities and Exchange Commission. Copies of the final prospectus supplement and accompanying prospectus relating to the offering may be obtained from Rodman & Renshaw, LLC by request at [email protected] or by calling (212) 356-0549. An electronic copy of such prospectus is also available on the web site of the Securities and Exchange Commission (the “SEC”) at http://www.sec.gov.

For more detailed information on this financing, please refer to the Form 8-K and related exhibits to be filed with the Securities and Exchange Commission.

“With the $10 million raised in this transaction, we plan to build a manufacturing facility for big size ball valves used for nuclear power plants,” said Mr. Jianbao Wang, Chief Executive Officer of China Valves.

144. Also on January 5, 2011, China Valves filed its Prospectus Supplement on Form



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the price of $10.00 per share and common stock purchase warrants to purchase up to 250,000

shares of common stock.


previously issued financial statements:

• Our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed March 29, 2010;








• Our Current Report on Form 8-K, filed with the SEC on February 8, 2010;


• Our Current Report on Form 8-K, filed with the SEC on May 27, 2010;

• Our Current Report on Form 8-K, filed with the SEC on October 12, 2010;

• Our Current Report on Form 8-K/A, filed with the SEC on November 18, 2010;




72


were audited by Frazer Frost/Moore Stephens who gave unqualified audit opinions of same.

147. The Prospectus Supplement contained statements that were materially false and

misleading when made. Specifically, the Prospectus Supplement materially omitted the


the Company’s acquisition of Able Delight and the loan to Able Delight in connection with same

were, in reality, related party transactions involving Qing Lu, the wife of Defendant Bin Li --

34% shareholder of China Valves and first cousin of Defendant Siping Fang -- and/or Defendant

Siping Fang himself; (ii) in connection with the acquisition of Able Delight, the Company had

made a payment of $50,000 to related party Qing Lu; (iii) Henan Tanghai Fluid Equipment Co.

Ltd., a wholly owned subsidiary of China Valves, acquired 100% ownership of Shanghai

Hanhuang Valve on March 1, 2010 for a price of RMB 15 million ($1.81 million), making the

Hanwei Valve acquisition a related party transaction; (v) Defendants materially misrepresented

that consideration for Hanwei Valve was $21 million -- yet the Company’s AIC filings depict

that the actual purchase price for Hanwei Valve was RMB 50 million (approximately $7.47

million); and (vi) omitted that the Company made a related party loan to Defendant Binjie Fang

(COO and son of Chairman and CEO Defendant Siping Fang) -- AIC records show that the

Company had an outstanding receivable from Defendant Binjie Fang of approximately $322,725

at year end 2009. Accordingly, the Prospectus Supplement violated ASC 850-10-50-1 (formerly

FAS No. 57), Rule 4-08(k)(1) of Regulation S-X, and Item 404(a) of Regulation S-K and GAAP,

which provide that financial statements shall include disclosures of material related party

transactions.



73

were materially false and misleading. Specifically, in the Company’s Form 10-K/A for the year

ended December 31, 2008, Defendants materially misrepresented that the Company had

recognized $65,947,615 in revenue and $25,865,463 in gross profit while China Valves’ AIC

financial reports reveal that the Company had revenue of only $55,598,826 and gross profits of

$15,567,721 for the year 2008. Similarly, in the Company’s Form 10-K for the year ended

December 31, 2009, Defendants materially misrepresented that the Company had recognized

$95,370,012 in revenue, $46,842,676 in gross profits, and $23,353,093 in net income while

China Valves’ AIC financial reports reveal that the Company had received revenue of only

$67,604,985, gross profits of $17,421,555, and net income of $5,647,195 for the year 2009.

149. Lead Plaintiff purchased 100,000 shares of common stock at a price of $10.00

per share pursuant to the Registration Statement effective December 14, 2009 and Prospectus

filed on January 5, 2011.

VI. THE TRUTH IS REVEALED

150. On January 13, 2011, just days after the January 5, 2011 take-down of the shelf

offering closed, Citron Research issued a report (the “Citron Report”), which revealed multiple

problems with China Valves and its previous representations. In response to the adverse

information, the price of the Company’s stock fell from $8.72 per share to close at $7.15 per

share on January 13, 2011. The stock price fell still further on January 14, 2011, for a 52-week

low of $6.60 per share, before closing at $6.87 per share.

A. Able Delight

151. The Citron Report uncovered numerous discrepancies relating to the Company’s

representations of its acquisition of Able Delight (Changsha) Valve, including the fact that the

Able Delight acquisition was an undisclosed related party transaction involving the wife of

Defendant Bin Li, a 34% shareholder of China Valves and a cousin of CEO and Chairman


74

Defendant Siping Fang. The Citron Report stated in relevant part:

Able Delight — The Myth

The Company first reported its intention to acquire the assets of Able Delight for 15 million USD on January 12, 2010, a few weeks after closing a 22 million USD private placement. The press release described Able Delight as a leading producer of valves. The transaction was completed on February 3rd, 2010. In CVVT’s February 8-K, the assets purchased in this transaction included 4.94 million USD of Inventory and 10.11 million USD of PP&E [property, plant and equipment]. ....which seems simple enough.

But then something happened in November. Whether an SEC inquiry or pressure from the auditors we don’t yet know, but the company amended the 8-K and disclosed something closer to the truth.

In the amended 8-K on November 18th, 2010, the company reveals for the first time that Able Delight was in fact a subsidiary of billion-dollar Watts Water Technologies, (NYSE:WTS). The SEC filings of Watts paint a very different picture of the operating profile of the company than described by CVVT.

According to Watts’ 10-Q and 10-K, Able Delight (Changsha) Valve lost 5.3 million USD in 2009. Worse, the subsidiary was under foreign corrupt practices investigation and Watts shut it down as a result of that.

However, under ownership of China Valves, we are to believe an instant turnaround had happened. CVVT estimated the subsidiary to contribute 20.5 million USD of revenue, twice of the previously reported revenue number by Watts, and 5 million USD of net income, instantly turning around a 5.3 million USD loss in 2009....Good luck getting that past an auditor.

Worse, we learn in the amended 8-K filed in November that only 6.07 million USD was paid for the “assets” of Able Delight to Watts (who filed that they received 5 million) and an additional 8.93 million USD went to the owner of Able Delight, purportedly for a list of other tangential expenses listed as “(approx)’. So who is this mystery owner who received the bonanza?

Now this would get you “locked up” in the United States:

The November 8-K states the CVVT bought Able Delight from a “third party” Qing Lu, and the company lent Lu the money to buy the subsidiary. Yet what was not disclosed is that Qing Lu shares the same residential address and co-owns the same house as Bin Li, who’s the first cousin of Siping Fang (Chairman of CVVT) and 34% owner of the Company.

The address is 1165 Rugglestone Way — Check it out yourself [http://www.city-data.com/fulton-county/R/Rugglestone-Way-3.html]


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It is almost as if China Valve was trying to break a record with how many securities laws can be broken with a single transaction. From misstating ownership of a company, to an undisclosed related party transaction, to inflating revenue projections, and lastly hiding the actual name of the business, for this 4 in-1 disclosure failure . . . we tip our hats to their management team!

(Emphasis added).

B. Hanwei Valve Acquisition

152. The Citron Report additionally revealed that the Company’s statements about the

nature, quality, value and circumstances of its acquisition of Hanwei Valve were materially false

and misleading as they failed to disclose, among other things, the related party nature of the

parties that were involved.

153. According to Chinese regulatory filings made with the Chinese AIC cited in the

Citron Report, China Valves actually owned Party C identified in the Asset Transfer Agreement,

Shanghai Hanhuang Valve Co., Ltd., prior to the acquisition. The Citron Report states in relevant

part:

The Acquisition of Hanwei Valve

In the asset acquisition of Hanwei Valve, we see again that the Company did not do what it said in its 8-K filed on April 9th, 2010.

The “Asset Transfer Agreement” referenced in the 8-K filing contains four parties:

• Party A: Henan Tonghai Fluid Equipment Co., Ltd. (Subsid of China Valve)

• Party B: Shanghai Pudong Hanwei Valve Co., Ltd. (Acquired Company)

• Party C: Shanghai Hanhuang Valve Co., Ltd. (Owner of B)

• Party D: Hong Kong Hanxi Investment Co., Ltd. (Owner of B)

In the Company’s 8-K filed on April 9th, 2010, it clearly stated several points leading to the conclusion that Party C and D, which owned Party B (from which assets are acquired) are unrelated parties. But here is a document that tells us a different story. In another seemingly undisclosed related party transaction, this document below shows in fact that China Valve owned party C prior to the acquisition.


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Application for Change of Corporate Registration

�tems

SAIC Filing of Shanghai Hanhuang Valves

Furthermore, the company presents this transaction as an “asset sale” and goes as far as to claim that Party C and Party D represent that the tangible and intangible assets of Hanwei Valve (including but not limited to land, buildings, equipment and intellectual property) are not subject to any collateral, pledge, lien or any third party claims. Party C and Party D will take all responsibilities arising out of any clauses…the whole clauses...the whole 8-K can be read here.

http://www.sec.gov/Archives/edgar/data/1080360/000120445910000787/form8k.htm


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Yet we read as of today that CVVT did not in fact buy just the assets but rather they bought the whole company, which could easily include undisclosed liabilities. MORE IMPORTANTLY, when you buy just the assets of a company, you do not have to file financials on the acquisition but when you buy a full company, you are required to….so it’s another auditing nightmare….good luck. Below is proof that China Valve now owns all parties B, C, and D.


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C. Financial Results

154. The Citron report also questioned the veracity of China Valves’ reported

financial results:

Unless of course the numbers are completely fictional as we saw in the example of Watts Water.

Through its own filings and disclosure on the three acquisitions it completed, China Valves has been claiming an annualized 94 million USD revenue and a blended gross margin of 43.4% on these three acquisitions. They are simply too good to be true. The words “too good” is not being used lightly here.

Nothing about this company seems to make sense. • They represent gross margins that are by far the highest in a commoditized

sector, yet they make no involvement for innovation: their R&D Budget for 2010 is around $150K.

• They compare themselves to Emerson, a company 100 times larger, yet CVVT claims they have twice the operating margins….good luck explaining that to your new auditor.

• They are able to buy a competitor at P/E of 2.


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D. China Valves’ Response and Admissions

155. In a press release issued on January 14, 2011, China Valves responded to the

Citron report’s findings and conclusions:

ZHENGZHOU, China, Jan. 14, 2011 /PRNewswire-Asia-FirstCall/ -- China Valves Technology, Inc. (NASDAQ: CVVT) (“China Valves” or the “Company”), a leading Chinese metal valve manufacturer, today responded to allegations presented in an online report published on January 13, 2010 and provided clarification to investor questions related to its acquisitions and cash position.

“China Valves management categorically denies the assertions made in a report published yesterday by an online blog,” said Mr. Jianbao Wang, Chief Executive Officer of China Valves, Inc. “All of the acquisitions referenced in this report were made in the best interests of all our shareholders and we stand by the integrity of our financial reporting and the quality of the assets that we have acquired.”

The report calls into question the acquisition of China Valves Technology (Changsha) Valve Co., Ltd (“Changsha Valve”), previously known as Able Delight (Changsha ) Valve Co., Ltd., and suggests that the financial results of Changsha Valve have been overstated and that the acquisition was an improper related party transaction.

China Valves strongly disputes these assertions. Changsha Valve, which was acquired from Watts Regulator Co., has performed very well under the management of China Valves. Management had initially estimated that Changsha Valve would generate approximately $20 million in revenues in 2010, and currently estimates that 2010 revenues of Changsha Valve were approximately $30 million. This is as a result of RMB 59 million of contracts that had not been performed by Changsha Valve at the time of the acquisition due to the cessation of operations of Changsha Valve, an additional RMB 70 million of contracts transferred to Changsha Valve from China Valves to maximize business synergies, and RMB 70 million of new sales by Changsha during 2010. Given the strong demand for water treatment infrastructure in China and China Valves sales and marketing capability, management believes that the outlook for Changsha Valves’ products is robust.

Able Delight Investment Limited was used as a transitory vehicle to facilitate the acquisition from Watts Regulator Co. on behalf of China Valves as Watts Regulator Co., a party controlled by Watts Water Technologies, preferred not to transact with a public company buyer.

Qing Lu, who arranged the formation of Able Delight Investment Limited, is the wife of Bin Li, the first cousin of Mr. Siping Fang, the Chairman of China


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Valves, and a majority shareholder of the Company. China Valves entrusted Qing Lu to set up Able Delight Investment Limited as an acquisition vehicle and own it during the transitory period prior to the formal transfer to China Valves. To facilitate the transaction, China Valves also loaned Able Delight Investment Limited the funds required to complete the transaction. As was previously disclosed, Qing Lu received a total of $50,000 for acting as the sole stockholder of Able Delight on behalf of the Company, the consideration paid by Able Delight for the acquisition of Changsha Valve was $6.07 million, and the remaining balance of $8.88 million paid in the acquisition of Changsha Valve was used to cover costs of the acquisition, including assumed liabilities. With regards to the structure of the acquisition of Changsha Valve, a detailed explanation of the compensation paid as part of the total $15 million acquisition cost was provided in the company’s 8-K/A filing with the SEC on November 18, 2010.

China Valves’ management started to negotiate with two shareholders, Shanghai Hanhuang Valve Co., Ltd (“Hanhuang”) and Hong Kong Hanxi Investment Co., Ltd. (“Hanxi”), of Shanghai Pudong Hanwei Valve Co., Ltd (“Hanwei Valve”) in November 2009. There were a number of competitors who wanted to buy Hanwei Valve at the same time. The Company signed a due diligence agreement with Hanwei Valve on December 5, 2009 and paid RMB 10 million as a deposit on December 10, 2009. After conducting due diligence, management decided to acquire Hanwei Valve. China Valves paid all acquisition costs of $19.5 million before March 3, 2010 and since the purchase price was already paid in full the control of Hanhuang and Hanxi was transferred to China Valves pending the documentation of the acquisition which was concluded on April 8, 2010, the date of the signing of the Asset Transfer Agreement.

The accusation against [sic] that China Valve’s management paid too little when China Valves paid $7.3 million to acquire the assets of Yangzhou Rock is baseless. The Company sees no issue with acquiring assets at favorable valuations.

The report impugns China Valves’ gross margins as being “too good to be true” because they are the highest in a “commoditized sector.” China Valves management encourages any serious analysts to visit our facilities and speak with our customers so as to better understand the performance characteristics of our highly advanced products serving sectors including nuclear power generation and large scale water infrastructure.

Finally, the report asserts that China Valves’ is running short of cash and will be pressured to complete a secondary offering. China Valves had approximately $28.9 million in cash as of December 31, 2010. The Company recently completed a $10 million registered direct offering, the proceeds of which will be used to construct a manufacturing facility for big size ball valves used for nuclear power plants.


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“China Valves is focused on becoming the largest and most sophisticated supplier of advanced industrial valves in China,” said Mr. Jianbao Wang, CEO of China Valves. “In order to support our future growth and development we have significantly strengthened our finance and accounting team in 2010 with hiring of several senior managers with Big Four accounting backgrounds, and the recent appointment of Mr. Gang Wei as our CFO. With this strong team in place, we expect to announce the appointment of a Big Four auditor in the near future and I have every confidence that the transition will be smooth and successful. Our balance sheet is strong and we have the financial resources available to us to execute our growth plan.”

“I hope our shareholders will trust their initial judgment, and not allow irresponsible rumors to ruin their interests,” added Mr. Wang.

China Valves plans to hold a conference call to respond to investor questions. The details will be released separately.

(Emphasis added).

156. Thus, China Valves admitted that the $6.12 million loan by the Company to

Able Delight and the Able Delight (Changsha) Valve acquisition were previously undisclosed

related party transactions involving the wife of Defendant Bin Li, the first cousin of the CEO and

Chairman of China Valves Defendant Siping Fang, and 34% shareholder of China Valves.

157. On March 16, 2011, China Valves admitted that, just like in the previous three

years, see ¶¶41-43, supra, the Company’s internal control over financial reporting had remained

ineffective throughout the Class Period. China Valves’ Form 10-K for the year ended December

31, 2010, disclosed in pertinent part:

Our management, with the participation of our chief executive officer and chief financial officer, Mr. Jianbao Wang and Mr. Gang Wei, respectively, evaluated the effectiveness of our disclosure controls and procedures….Based on that evaluation, Mr. Wang and Mr. Wei concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2010, to satisfy the objectives for which they are intended.

* * * During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2010, our management identified material weakness related to the following:


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Control Environment - The Company’s control environment did not sufficiently promote effective internal control over financial reporting. Specifically, the Company did not conduct a comprehensive risk assessment during the year with all of its major transactions. In addition, the lack of oversight from top management also results in incomplete disclosure on its acquisitions.

Accounting and Finance Personnel Weaknesses – US GAAP expertise. Our current accounting staff is relatively new and inexperienced, and needs substantial training to meet the higher demands of being a U.S. public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the skills of subsidiary financial statements consolidation, are inadequate and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in ineffective top level review and analysis of year-end evaluation of the Company’s inventory and AR allowance.

As disclosed in our Management’s Annual Report on Internal Control over Financial Reporting filed with the 2009 Form 10-K, the Company’s management has identified the steps necessary to address the material weaknesses described above and in 2010, we continued to implement these remedial procedures.

1. Hire, as needed, additional US GAAP experienced accounting and operations personnel and outside contractors with technical accounting expertise and reorganized the accounting and finance department to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.

2. Involve, as needed, both internal accounting and operations personnel and outside contractors with technical accounting expertise early in the evaluation of our complex, non-routine transaction to obtain additional guidance as to the application of generally accepted accounting principles to such a proposed transaction.

3. Require that our senior accounting personnel and the principal accounting officer review our complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions. We will also consult experts in the event that transaction is beyond our comprehension.

4. We are currently documenting and implementing internal control over financial reporting, however, as of December 31, 2010, we did not have sufficient time to remediate all deficiencies identified in order to render current year’s internal control over financial reporting effective. We will continue monitor and improve controls over financial reporting in the coming year.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of China Valves Technologies, Inc

We have audited China Valves Technologies, Inc.’s and Subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

* * * A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable


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possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.

Control Environment - The Company’s control environment did not sufficiently promote effective internal control over financial reporting. Specifically, the Company did not conduct a comprehensive risk assessment during the year with all of its major transactions. In addition, the lack of oversight from top management also result in incomplete disclosure on its acquisitions. These control deficiencies by themselves do not directly result in a material misstatement to the financial statements; however, deficiencies in the control environment are pervasive in nature.

Accounting and Finance Personnel Weaknesses – US GAAP expertise. The Company’s current accounting staff is relatively new and inexperienced, and needs substantial training to meet the higher demands of being a U.S. public company. The accounting skills and understanding necessary to fulfill the requirements of U.S. GAAP-based reporting, including the skills of subsidiary financial statements consolidation, are inadequate and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in ineffective top level review and analysis of year-end evaluation of the Company’s inventory and AR allowance. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2010 financial statements, and this report does not affect our report dated March 16, 2011 on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related statements of income and other comprehensive income, shareholders’ equity, and cash flows of the Company, and our report dated March 16, 2011 expressed an unqualified opinion on those financial statements.

/s/ Frazer Frost, LLP

(Emphasis added).

158. As set forth above, the Company admitted and Frazer Frost concurred that during

the Class Period, the Company made “incomplete disclosure on its acquisitions,” blaming it on


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the Company’s ineffective internal controls that had been present and known by the Defendants

for at least three years.

159. Finally, on July 15, 2011, the Company filed a Form 8-K with the SEC

announcing the appointment of Frazer Frost to continue to serve as the Company’s independent

registered public accounting firm for 2011. Thus, contrary to the Company’s earlier assurance

that a Big Four audit firm would be engaged to review China Valves’ 2011 financial results, the

Company ultimately remained with Frazer Frost.

E. The Truth Behind the Material Misrepresentations and Omissions

160. The Citron Report revealed for the first time that the Able Delight transaction

was, in fact, a related party transaction -- Defendants then admitted as much in the Company’s

response to the Citron report on January 14, 2011. Moreover, as admitted by Defendants, ¶108,

supra, the acquisition had been decided upon at least as early as November 20, 2009.

161. In reality, the sole shareholder of Able Delight was Qing Lu, the wife of

Defendant Siping Fang’s first cousin and 34% shareholder, Defendant Bin Li. On December 14,

2009, Able Delight entered into an equity transfer agreement to purchase from Watts Regulator

Co. 100% of the equity of Watts Valve (Changsha) Co., Ltd. for a purchase price of $6.07

million, and Watts Valve (Changsha) Co., Ltd. was to be renamed Able Delight Valve

(Changsha) Co., Ltd.5 Notably, according to the Chinese AIC records, Defendant Siping Fang

was the authorized signatory who signed the equity transfer agreement on behalf of Able

Delight, indicating that at the time of the transaction he was a principal of Able Delight.

162. To fund the acquisition, the Company lent Able Delight $6.12 million on

December 10, 2009. In connection with the acquisition, the Company also made a payment of

5 This information is based on filings made with the Chinese State AIC.


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$50,000 to related party Qing Lu, the wife of Defendant Siping Fang’s first cousin and 34%

shareholder of China Valves, Defendant Bin Li. These related party transactions were not

disclosed to shareholders,6 and were not included in the Company’s Form 10-K for the year

ended December 31, 2009, the interim Forms 10-Q or the Registration Statement and Prospectus

Supplements.

163. Additionally, the Citron Report revealed that China Valves had materially

overstated the value, and potential revenue infusion to be created by the acquisition, of Able

Delight (Changsha) Valve. Indeed, the Watts Water’s SEC filings provide a much different

picture of Able Delight (Changsha) Valve, referred to by Watts Water as Watts Valve

(Changsha) Co., Ltd (CWV), than did China Valves. See ¶¶45-53, supra.

164. The Company’s announcements regarding the acquisition of Able Delight

contained material misrepresentations and/or omissions because the Company: (i) failed to

disclose that the loan and subsequent acquisition were, in fact, related party transactions; (ii)

overstated the projected revenues and net income that Able Delight would be expected to

provide; (iii) failed to disclose that Able Delight was actually a shell company for Watts Valve

(Changsha) Valve Co., Ltd., which was under investigation for violations of the Foreign Corrupt

Practices Act; (iv) failed to disclose that the $50,000 payment to Qing Lu was a related party

transaction; and (v) failed to timely disclose that Changsha Valve had been acquired by Able

6 Although, on November 18, 2010, ten (10) months after the acquisition and its initial announcement, the Company partially corrected itself to disclose the $6.12 million loan to Able Delight and the $50,000 payment to Qing Lu, China Valves failed to explain the related party nature of these transactions. Instead, the Company stated that Able Delight had been formed “by a third party,” Qing Lu. Accordingly, China Valves failed to disclose that Qing Lu was a related party, making Able Delight a related party. The Company failed to disclose that Qing Lu was the wife of Bin Li -- the first cousin of Siping Fang and 34% shareholder of China Valves. The Company also failed to disclose Defendant Siping Fang’s relationship with Able Delight, yet he signed the asset transfer agreement on behalf of Able Delight in connection with Able Delight’s acquisition of Changsha Valve.


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Delight for only $6.07 million.

165. Moreover, the AIC records establish that Henan Tanghai Fluid Equipment Co.

Ltd., a wholly owned subsidiary of China Valves, acquired 100% ownership of Shanghai

Hanhuang Valve (Party C to the transaction) on March 1, 2010 for a price of RMB 15 million

($1.81 million). Shanghai Hanhuang Valve was a 50% owner of Hanwei Valve (Party B to the

transaction) at the time of this acquisition. Thus, China Valves was the owner of 50% of Hanwei

Valve as of March 1, 2010. The reported April 8, 2010 acquisition was, therefore, in part, of a

company that China Valves already co-owned. No press release or SEC filing was issued to

reflect the March 1, 2010 acquisition of Shanghai Hanhuang Valve, nor did the Company’s

disclosures about the Hanwei Valve acquisition in any way suggest such a relationship.

166. The Citron Report further suggests that China Valves’ financial position may not

be as has been reported by the Company. The Citron Report charges that Defendant Frazer

Frost, the Company’s auditor, “has become the poster child for bad auditing of Chinese

[companies]” and cites to Frazer Frost’s recent sanction by the SEC for its lack of oversight of

China Energy Saving Technology Corporation (“China Energy”). Indeed, last December, the

SEC instituted cease-and-desist proceedings against Frazer Frost for its violations of professional

due care and professional standards in connection with China Energy’s materially overstated

revenues and net income. The Citron Report also referenced Piper Jaffray China’s investment

study for which China Valves ranked 63rd out of 70 companies for its poor corporate governance.

167. When these adverse details contained in the Citron Report began to enter the

market, the price of China Valves stock fell, damaging investors.

168. In addition to the aforementioned indicia of fraud identified by the Citron

Report, an examination of the Company’s financial filings reveals a stark contrast between its


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AIC consolidated financial results and those reported in the Company’s SEC filings. For the

year ended December 31, 2008, the Company reported in its Form 10-K/A, filed with the SEC

on March 24, 2009, that it had recognized $65,947,615 in revenue and $25,865,463 in gross

profit. In contrast, China Valves’ AIC financial reports for 2008 show yearly revenue of

$55,598,826 and gross profit of $15,567,721. A similar disparity is also present for the

financials results filed for the year ended December 31, 2009. In China Valves’ 2009 Form 10-

K, filed with the SEC on March 29, 2010, it reported revenue of $95,370,012,gross profits of

$46,842,676, and net income of $23,353,093 for the year 2009. However, the Company’s AIC

financial reports filed in China depict revenue of $67,604,985, gross profits of $17,421,555, and

net income of $5,647,195 for that same year. These incongruent financial results, upon

information and belief, demonstrate that Defendants overstated the Company’s financial results

so as to artificially inflate the price of the Company’s stock.

169. Further examination reveals other inconsistencies between the Company’s SEC

filings and the filings made with Chinese regulators. For instance, China Valves disclosed in

SEC filings that the acquisition of Hanwei Valve was completed on April 8, 2010, yet AIC

records indicate that ownership was not transferred until October 30, 2010 following an Equity

Transfer Agreement signed on October 15, 2010. The AIC records additionally show that China

Valves paid RMB 50 million ($7.47 million) for acquiring Hanwei Valve. The $7.47 million

acquisition cost is considerably less than the $21 million in cash consideration cited in China

Valves’ Form 8-K filed on April 9, 2010. The large discrepancies in purchase price in

conjunction with the undisclosed ownership of Shanghai Hanhuang Valve are particularly

suspicious and suggest that certain China Valves’ executives may have been lining their pockets


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with corporate funds. At the very least, such information was certainly material and should have

been disclosed to investors.

170. Moreover, a review of the Company’s AIC filings further reveals that during the

Class Period, the Company failed to disclose yet another related party transaction. According, to

the Company’s AIC filings, China Valves made what appears to be a loan to Defendant Binjie

Fang, China Valves’ Chief Operating Officer and director and the son of Defendant Siping Fang,

in 2009 in the amount of RMB 2,155,351.63. See ¶¶59-60, supra. However, this transaction

was not disclosed in the Company’s SEC filings, including the Company’s 2009 10-K, which

were signed by Defendants Siping Fang, Shih, Peter Li, Haus, Yu, and Binjie Fang and audited

by Frazer Frost, the Company’s Registration signed by Defendants Siping Fang, Shih, Yu, Peter

Li, Haus, and Binjie Fang, the Prospectus Supplements, or the year 2010 interim 10-Qs. See ¶¶

74-78, 128-148, supra.

F. Defendants Rushed to Conduct the January 5, 2011 Offering Before the Citron Report was Published

171. Plaintiff Springline Advisors LLC (“Springline”) was a purchaser of China

Valves common stock during the Class Period. Through its managing member, Steven

Braverman (“Braverman”), Springline was in contact with Defendants during the Relevant

Period.

172. On or about January 3, 2011, Braverman and his then-partner Michael Castleman

called Crocker Coulson (“Coulson”), the Company’s outside investor relations representative

from the firm CCG Investor Relations. Colson told Braverman in that conversation that there

was “no need for the company to raise capital” and that it would not make sense to do so at the

prices at which the Company’s stock then traded. The following day, the Company began its

take-down offering.


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173. On or about January 26, 2011, Braverman spoke to Defendant Haus, the

Company’s only American director, by telephone. Defendant Haus assured Braverman that the

price of the stock was low in comparison to Haus’s view of its value. Defendant Haus went so

far as to say that if the price dropped two dollars, he would resign his position on the Board of

Directors so that he could take a larger ownership position in the Company. Defendant Haus

then suggested that Braverman speak with the Company’s outside counsel, Louis Bevilacqua

(“Bevilacqua”) of Pillsbury Winthrop Shaw Pittman LLP.

174. On or about February 2, 2011, Braverman spoke with Bevilacqua. Bevilacqua

addressed the Citron Report, which had been issued just weeks prior, and stated that he knew the

Citron Report was going to be published in advance of its actual issuance. Moreover,

Bevilacqua explained that he had received a draft of the Citron Report and had discussed it with

the author prior to its publication. Bevilacqua further disclosed that he had maintained email

correspondence with the Citron Report’s author and with the Company about the substance of

the report in advance of its publication. Lastly, Bevilacqua revealed that he had written a

memorandum to the Company about how it should deal with the Citron Report upon its

publication.

175. Rather than disclosing the materially adverse facts to the public, upon

information and belief, Defendants instead opted to quickly conduct a take-down offering before

the adverse information was disclosed by the Citron Report. Indeed, Defendants hastened to

complete the January 5, 2011 so as to benefit from the offering while the stock was artificially

inflated. Ultimately, Defendants managed to finalize the offering on just days before the Citron

Report was published and the materially adverse information therein was revealed to the public.


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G. Director Defendants Siping Fang, Binjie Fang, Peter Li, Yu, and Haus Recklessly Abandoned their Oversight Responsibilities

176. In addition to their general fiduciary duties as directors, the China Valves

Directors assumed specific duties and responsibilities as a result of their Board and/or

Committee positions.

177. The directors who served on the Audit Committee during the Class Period, Peter

Li (Chairman), Yu, and Haus, assumed even greater duties. In addition to the Board’s general

oversight of management, the Audit Committee is charged with overseeing the accounting and

financial reporting processes of China Valves and the audits of the Company’s financial

statements. These duties include oversight responsibilities regarding the integrity of the

Company’s financial statements, the Company’s compliance with legal and regulatory

requirements, the independent auditor’s qualifications and independence, and the performance of

the Company’s internal audit function and independent auditor. China Valves’ Audit Committee

was charged with overseeing the accounting and financial reporting processes of China Valves

and the audits of the Company’s financial statements. Pursuant to its Charter, the Audit

Committee is required to meet periodically with the Company’s outside auditors, including at

least once per quarter to review the accuracy and integrity of the Company’s public financial

statements for that quarter.

178. Specifically, the Audit Committee Charter provides that:

The purpose of the Audit Committee of China Valves Technology, Inc. (the “Company”) is to represent and assist the board of directors in its general oversight of the Company’s accounting and financial reporting processes, audits of the financial statements, and internal control and audit functions.

* * * The Audit Committee serves a board level oversight role where it oversees the relationship with the independent auditor, as set forth in this charter, receives information and provides advice, counsel and general direction, as it deems appropriate, to management and the auditors, taking into account the information


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it receives, discussions with the auditor, and the experience of the Audit Committee’s members in business, financial and accounting matters.

* * * The Audit Committee will have the resources and authority necessary to discharge its duties and responsibilities. The Audit Committee shall have the authority to engage independent legal, accounting and other advisers, as it determines necessary to carry out its duties. 179. The Audit Committee Charter goes on to describe the responsibilities of the

Audit Committee as follows:

Responsibilities The Audit Committee: 1. is directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor (including resolution of disagreements between management and the auditors regarding financial reporting), who shall report directly to the Audit Committee;

2. obtains and reviews annually a report by the independent auditor describing the firm’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review or peer review or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; 3. reviews and discusses with the independent auditor the written statement from the independent auditor concerning any relationship between the auditor and the Company or any other relationships that may adversely affect the independence of the auditor, and, based on such review, assesses the independence of the auditor; 4. establishes policies and procedures for the review and pre-approval by the Audit Committee of all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed by the independent auditor; 5. reviews and discusses with the independent auditor (a) its audit plans, and audit procedures, including the general audit approach, scope, staffing, fees and timing of the audit, (b) the results of the annual audit examination and accompanying management letters, and (c) the results of the independent auditor’s procedures with respect to interim periods; 6. reviews and discusses reports from the independent auditor on (a) all critical accounting policies and practices used by the Company, (b) alternative accounting treatments within GAAP related to material items that have been


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discussed with management, including the ramifications of the use of the alternative treatments and the treatment preferred by the independent auditor, and (c) other material written communications between the independent auditor and management; 7. reviews and discusses with the independent auditor the independent auditor’s judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such further matters as the independent auditors present the Audit Committee under generally accepted auditing standards; 8. discusses with management and the independent auditor quarterly earnings press releases, including the interim financial information and business discussion included therein, reviews and discusses with management and independent auditor the unaudited quarterly or interim financial statements and the management discussion and analysis in the quarterly report or the annual report, the year-end audited financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, if deemed appropriate, recommends to the board of directors that the audited financial statements be included in the Annual Report on Form 10-K for the year; 9. reviews and discusses with management and the independent auditor various topics and events that may have significant financial impact on the Company or that are the subject of discussions between management and the independent auditors; 10. reviews and discusses with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures; 11. reviews and approves related-party transactions (as defined in the relevant NASDAQ requirements); 12. reviews and discusses with management, the independent auditor, and the Company’s chief internal auditor (a) the adequacy and effectiveness of the Company’s internal controls (including any significant deficiencies and significant changes in internal controls reported to the Audit Committee by the independent auditor or management), (b) the Company’s internal audit procedures, and (c) the adequacy and effectiveness of the Company’s disclosure controls and procedures, and management reports thereon; 13. reviews annually with the chief internal auditor the scope of the internal audit program, and reviews annually the performance of both the internal audit group and the independent auditor in executing their plans and meeting their objectives; 14. reviews and concurs in the appointment, replacement, reassignment, or dismissal of any chief internal auditor of the Company;


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15. reviews the use of auditors other than the independent auditor in cases such as management’s request for second opinions; 16. reviews matters related to the corporate compliance activities of the Company; 17. establishes procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; 18. establishes policies for the hiring of employees and former employees of the independent auditor; 19. publishes the report of the Audit Committee required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement; 20. periodically reviews with the Company’s in-house and independent counsel any legal matters that could have a significant impact on the Company’s financial statements, the Company’s compliance with applicable laws and regulations, and any material reports or inquiries received from regulators or governmental agencies; 21. obtains timely reports from management and the Company’s senior internal auditing executive and counsel that the Company and its subsidiaries are in conformity with applicable legal requirements and the Company’s Code of Ethics, including disclosures of insider and affiliated party transactions; 22. advises the Board of Directors with respect to the Company’s policies and procedures regarding compliance with applicable laws and regulations and with the Company’s Code of Ethics; 23. reviews and approves the Company’s Code of Ethics, as it may be amended and updated from time to time, and ensures that management has implemented a compliance program to enforce such Code (which shall include reporting of violations of such Code to the Audit Committee); 24. reviews reported violations of the Company’s Code of Ethics; 25. reviews and approves (a) any change or waiver in the Company’s Code of Ethics for principal executives and senior financial officers and (b) any disclosures made on Form 8-K regarding such change or waiver; 26. when appropriate, designates one or more of its members to perform certain of its duties on its behalf, subject to such reporting to or ratification by the Audit


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Committee as the Audit Committee shall direct; and 27. will engage in an annual self-assessment with the goal of continuing improvement, and will annually review and reassess the adequacy of its charter, and recommends any changes to the full Board.

(Emphasis added).

180. Throughout the Class Period, China Valves’ Board and its Audit Committee

failed to conduct little if any oversight of the Company’s internal controls over accounting, cash

flow and financial reporting and consciously disregarded their duties to monitor such controls

and accounting. These Defendants thus completely failed to perform their duties in good faith to

prevent the transfer of Company funds to related parties for unlawful personal gain and the

resulting misrepresentations in the Company’s SEC filed reports and financial statements.

H. Management Defendants Siping Fang, Wang, Wei, Tang, Shih, and Binjie Fang Recklessly Abandoned their Responsibilities

181. As explained in the Company’s Audit Committee Charter, China Valves’

management is largely responsible for ensuring accurate and comprehensive representations and

financial statements. The Charter explains:

Management is responsible for (a) the preparation, presentation and integrity of the Company’s financial statements; (b) accounting and financial reporting principles; and (c) the Company’s internal controls and procedures designed to promote compliance with accounting standards and applicable laws and regulations. 182. Defendants Siping Fang, Wang, Wei, Tang, Shih, and Binjie Fang were members

of the Company’s management during the Class Period. Despite their obligation to establish

effective internal controls over financial reporting, throughout the Class Period, Defendants

admittedly failed in this task. Each Form 10-K issued prior to, during, and after the Class Period

admitted that material weaknesses existed in the Company’s internal control over financial

reporting. See supra ¶41-43. Each Form 10-K issued prior to, during, and after the Class Period


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further admitted that the Company lacked effective disclosure control and procedures. See id.

Accordingly, Defendants Siping Fang, Wang, Wei, Tang, Shih, and Binjie Fang each failed to

perform their duties in good faith and, as control persons, are consequently liable for these

failures.

I. Defendants Violated GAAP and SEC Regulations by, Among Other Things, Failing to Disclose Related Party Transactions and Their Effect on the Company’s Financial Statements

183. GAAP are those principles recognized by the accounting profession as the

conventions, rules, and procedures necessary to define accepted accounting practice at a

particular time. Those principles are the official standards adopted by the American Institute of

Certified Public Accountants (“AICPA”), a private professional association, through three

successor groups it established: the Committee on Accounting Procedure, the Accounting

Principles Board, and the Financial Accounting Standards Board (“FASB”).

184. On July 1, 2009, the Financial Accounting Standards Board (the “FASB”),

approved the Accounting Standards Codification (“ASC” or the “Codification”) as the single

source of authoritative U.S. accounting and reporting standards, other than guidance issued by

the SEC. The Codification is effective for interim and annual periods ending after September 15,

2009. All existing accounting standards documents are superseded as described in FASB

Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of

Generally Accepted Accounting Principles. All other accounting literature not included in the

Codification is non-authoritative.

185. The Codification reorganizes the thousands of U.S. GAAP pronouncements into

roughly 90 accounting topics and displays all topics using a consistent structure. It also includes

relevant SEC guidance that follows the same topical structure in separate sections in the

Codification.


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186. The Codification does not change GAAP, it introduces a new structure -- one

that is organized in an easily accessible, user-friendly online research system.

187. GAAP and SEC regulations provide that a public company and its management

must disclose related party transactions in financial statements filed with the SEC.

188. Accounting Standards Codification (“ASC”) 850, Related Party Disclosures,

provides guidance, and requirements for, on the disclosure of transactions with related parties.

Examples of related party transactions include, among others, transactions between: (1) a parent

entity and its subsidiaries, (2) an entity and its principal owners, management, or members of

their immediate families, and (3) affiliates. ASC 850-10-05-3. Transactions between related

parties are considered to be related party transactions even though they may not be given

accounting recognition. ASC 850-10-05-5. For example, an entity may receive services from a

related party without charge and not record receipt of the services. Id. Disclosure is required in

the financial statements, nonetheless. Id.

189. Information about transactions with related parties that would make a difference

in decision making shall be disclosed so that users of the financial statements can evaluate their

significance. ASC 850-10-05-10. Relevant information is omitted if the disclosures required by

ASC 850 are not made. Id.

190. ASC 850-10-20 defines “Management” as follows:

Persons who are responsible for achieving the objectives of the entity and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management normally includes members of the board of directors, the chief executive officer, chief operating officer, vice presidents in charge of principal business functions (such as the sales, administration, or finance), and other persons who perform similar policy making functions. Persons without formal titles also may be members of management.

191. ASC 850-10-20 defines “Immediate Family” as follows:


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Family members who might control or influence a principal owner or a member of management, or who might be controlled or influenced by a principal owner or a member of management, because of the family relationship.

192. ASC 850-10-20 defines “Affiliate” as follows:

A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.

193. ASC 850-10-20 defines “Principal Owners” as follows:

Owners of record or known beneficial owners of more than 10 percent of the voting interests of the entity.

194. Finally, ASC 850-10-20 defines “Related Parties” as follows:

a. Affiliates of the entity

b. Principal owners of the entity and members of their immediate families

c. Management of the entity and members of their immediate families

d. Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests

e. Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests

195. ASC 850-10-50-1 (formerly FAS No. 57) provides that financial statements shall

include disclosures of material related party transactions, other than compensation arrangements,

expense allowances, and other similar items in the ordinary course of business. The disclosures

shall include, inter alia:

a. The nature of the relationship(s) involved

b. A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed for each of the periods for which income statements are presented, and such other information deemed necessary to an


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understanding of the effects of the transactions on the financial statements.

c. The dollar amounts of the transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period.

d. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

196. “Notes or accounts receivable from officers, employees, or affiliated entities

must be shown separately and not included under a general heading such as notes receivable or

accounts receivable.” ASC 850-10-50-2.

197. Transactions involving related parties cannot be presumed to be carried out on an

arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist.

ASC 850-10-50-5.

198. For SEC Registrants, such as China Valves, SEC Regulation S-X, Rule 4-

08(k)(1) sets forth the following additional requirements with respect to financial statements

required to be filed with the SEC:

(k) Related party transactions which affect the financial statements.

(1) Related party transactions should be identified and the amounts stated on the face of the balance sheet, income statement, or statement of cash flows.

199. In respect to the Able Delight (Changsha Valve) loan and acquisition, Able

Delight, Qing Lu and Defendant Bin Li were and are all related parties under ASC 850 and Rule

4-08(k)(1). In addition, Defendant Siping Fang, China Valves’ Chairman and CEO, who signed

the asset transfer agreement with Watts Regulator on behalf of Able Delight, is and was also a

related party. With respect to Hanwei Valve, Shanghai Hanhuang Valve was an affiliate of the

Company at the time of China Valves’ acquisition of Hanwei Valve. In addition, Defendant

Binjie Fang, the COO of China Valves and son of Defendant Siping Fang is a related party and


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was a related party at the time the Company made him a loan of approximately $322,725.

200. The audited financial statements contained in the Company’s 2009 Form 10-K,

and audited and unaudited financial statements incorporated into the Company’s Registration

Statement, base Prospectus and Prospectus Supplements did not comply with GAAP because the

financial statements materially inflated the Company’s financial results and failed to disclose

related party transactions. Specifically, Defendants misstated or failed to identify and disclose in

the Company’s financial statements included or incorporated in SEC filings, inter alia, that: (i)

China Valves’ financial results as reported in the financial statements included or incorporated in

the Company’s SEC filings and disseminated to the United States public were substantially

higher than the financial results reported to Chinese regulators and therefore materially

overstated; (ii) that the acquisitions of Hanwei Valve and Able Delight were related party

transactions; and (iii) the payment of $50,000 to related party Qing Lu; and (iv) the related party

loan by the Company to Defendant Binjie Fang.

201. SEC regulations also prescribe non-financial statement disclosure requirements

with respect to related party transactions. SEC Regulation S-K, Item 404(a) (17 CFR §229.404),

requires disclosure of certain relationships and related transactions in the non-financial-statement

portions of, among other things, registration statements filed under the 1933 Securities Act on

SEC Form S-3 and annual reports on SEC Form 10-K filed under the 1934 Securities Exchange

Act, as follows:

(a) Transactions with related persons. Describe any transaction, since the beginning of the registrant’s last fiscal year, or any currently proposed transaction, in which the registrant was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest. Disclose the following information regarding the transaction:

(1) The name of the related person and the basis on which the person is a related person.


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(2) The related person’s interest in the transaction with the registrant, including the related person’s position(s) or relationship(s) with, or ownership in, a firm, corporation, or other entity that is a party to, or has an interest in, the transaction.

(3) The approximate dollar value of the amount involved in the transaction.

(4) The approximate dollar value of the amount of the related person’s interest in the transaction, which shall be computed without regard to the amount of profit or loss.

(5) In the case of indebtedness, disclosure of the amount involved in the transaction shall include the largest aggregate amount of principal outstanding during the period for which disclosure is provided, the amount thereof outstanding as of the latest practicable date, the amount of principal paid during the periods for which disclosure is provided, the amount of interest paid during the period for which disclosure is provided, and the rate or amount of interest payable on the indebtedness.

(6) Any other information regarding the transaction or the related person in the context of the transaction that is material to investors in light of the circumstances of the particular transaction.

202. The instructions to Item 404(a) defines the term “related person” to include:

a. Any person who was in any of the following categories at any time during the specified period for which disclosure under paragraph (a) of this Item is required:

i. Any director or executive officer of the registrant;

ii. Any nominee for director, when the information called for by paragraph (a) of this Item is being presented in a proxy or information statement relating to the election of that nominee for director; or

iii. Any immediate family member of a director or executive officer of the registrant, or of any nominee for director when the information called for by paragraph (a) of this Item is being presented in a proxy or information statement relating to the election of that nominee for director, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer or nominee for director, and any person (other than a tenant or employee) sharing the household of such director, executive officer or nominee for director; and

b. Any person who was in any of the following categories when a transaction in which such person had a direct or indirect material interest occurred or existed:

i. A security holder covered by Item 403(a) (§ 229.403(a)); or


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ii. Any immediate family member of any such security holder, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such security holder, and any person (other than a tenant or employee) sharing the household of such security holder.

203. “Related parties” by virtue of their being securities holders covered by Item

403(a) (§ 229.403(a)) include “any person … who is known to the registrant to be the beneficial

owner of more than five percent of any class of the registrant’s voting securities.” Item 403(a) (§

229.403(a)).

204. The instructions to Item 404(a) defines the term “transaction” broadly:

For purposes of paragraph (a) of this Item, a transaction includes, but is not limited to, any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships.

205. Defendant Bin Li, the first cousin of Defendant Siping, is and was a 34%

shareholder of China Valves and is and was a related party under Item 404(a) to Regulation S-

K. Qing Lu, the spouse of Defendant Bin Li, is and was also a related party. As are and were

Defendants Siping Fang and Binjie Fang.

206. In violation of Item 404(a) to Regulation S-K, Defendants failed to disclose in

the Company’s Class Period SEC filed reports the fact the Able Delight loan and acquisition

and Hanwei Valve acquisition were related party transactions or all of the material information

required to be disclosed pursuant to Item 404(a). Defendants also failed to disclose the related

party loan from the Company to Defendant Binjie Fang.

207. Under ASC 850 (formerly FAS 57), the financial statements in each of China

Valves’ quarterly reports on Forms 10-Q and the 2009 annual report on Form 10-K, which were

also incorporated in the Company’s Registration Statement and Prospectus Supplements, should

have disclosed the details of China Valves’ related party transactions involving Defendant Bin


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Li, Qing Lu, Defendant Siping Fang, Able Delight, Hanwei Valve, and Defendant Binjie Fang.

208. In addition, as set forth above, SEC regulations require further disclosures of

related party transactions. Among other things, Item 404(a) of Regulation S-K requires a

description of any transactions exceeding $120,000 in which the public company is a party and

in which any director, executive officer, member of their immediate families, 5% shareholder or

immediate family of a 5% shareholder has a direct or indirect material interest. Item 404(a)

requires, among other things, disclosure of the person and the person’s relationship to the public

company, the nature of the person’s interest in the transaction, the amount of the person’s

interest in the transaction, and any other information regarding the transaction that is material to

investors in light of the circumstances of the particular transaction.

209. Under GAAP and SEC regulations, all of the transactions described previously --

including the Able Delight transaction in which the Company made a loan to and acquired a

company owned by Defendant Siping Fang and/or his first cousin and 34% China Valves

shareholder Defendant Bin Li and Bin Li’s wife Qing Lu, including the Hanwei Valve

transaction in which the Company purchased a company from an affiliate, and the Company’s

loan to Binjie Fang, the COO, and son of the CEO -- were required to be disclosed in China

Valves’ Class Period Form 10-K, Forms 10-Q, Registration Statement and Prospectus

Supplements, and the financial statements included or incorporated therein, but were not.

210. Given these, and other, accounting irregularities, including China Valves’

overstatement of its financial results in its financial statements included or incorporated into the

Company’s Registration, Prospectus Supplements, Form 10-K for the year ending December 31,

2009 and other SEC filings, the Company’s reported financial position and results were in

violation of GAAP and the following additional fundamental accounting principles and concepts:


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a. The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶ 10);

b. The principle that financial reporting should provide information that is useful to present to potential investors and creditors and other users in making rational investment, credit, and similar decisions (FASB Statement of Concepts No. 1, ¶ 34);

c. The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events, and circumstances that change resources and claims to those resources (FASB Statement of Concepts No. 1, ¶ 40);

d. The principle that financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶ 42);

e. The principles that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for the accountability to prospective investors and the public in general (FASB Statement of Concepts No. 1, ¶ 50);

f. The principle that financial reporting should be reliable in that it represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶ 58-59);

g. The principle of completeness, meaning that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions (FASB Statement of Concepts No. 2, ¶ 79); and

h. The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶ 95, 97).

211. Significantly, financial statements not in compliance with GAAP are presumed


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to be misleading. See SEC Regulation S-X, 17 C.F.R. § 210.4-01. Therefore, the Company’s

Class Period 2009 Form 10-K, the interim Forms 10-Q, Registration Statement and Prospectus

Supplements were materially misleading.

212. Moreover, the acquisition transactions were effectuated for substantially less

than was disclosed, suggesting that certain senior officers of the Company benefited from the

transactions at the expense of shareholders. The undisclosed related party transactions therefore

support a strong inference of scienter.

J. Frazer Frost/Moore Stephens Violated GAAS In Recklessly Conducting it Audits of China Valves’ Financial Statements and Falsely Certifying that Such Financial Statements Complied with GAAP

213. GAAS are ten auditing standards, developed by the AICPA consisting of general

standards, standards of field work, and standards of reporting, along with interpretations. AICPA

Codification of Statements on Auditing Standards AU 150.02.

214. Rule 202, Compliance with Standards, of the AICPA Code of Professional

Conduct, requires an AICPA member who performs an audit (the auditor) to comply with

standards promulgated by the Auditing Standards Board (“ASB”). The ASB develops and issues

standards in the form of Statements on Auditing Standards (“SAS”). The SASs are codified

within the framework of the 10 standards. AU § 150.03.

215. The nature of the 10 standards and the SASs requires the auditor to exercise

professional judgment in applying them. Materiality and audit risk also underlie the application

of the 10 standards and the SASs, particularly those related to field work and reporting. When, in

rare circumstances, the auditor departs from a presumptively mandatory requirement, the auditor

must document in the working papers his or her justification for the departure and how the

alternative procedures performed in the circumstances were sufficient to achieve the objectives

of the presumptively mandatory requirement. AU §150.04.


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216. Interpretive publications consist of auditing interpretations of the SASs,

appendixes to the SASs, auditing guidance included in AICPA Audit and Accounting Guides,

and AICPA auditing Statements of Position. Interpretive publications are not auditing standards.

Interpretive publications are recommendations on the application of the SASs in specific

circumstances, including engagements for entities in specialized industries. An interpretive

publication is issued under the authority of the ASB after all ASB members have been provided

an opportunity to consider and comment on whether the proposed interpretive publication is

consistent with the SASs. AU § 150.05.

217. The auditor should be aware of and consider interpretive publications applicable

to his or her audit. If the auditor does not apply the auditing guidance included in an applicable

interpretive publication, the auditor should be prepared to explain how he or she complied with

the SAS provisions addressed by such auditing guidance. AU § 150.06.

218. In performing its audit of China Valves’ financial statements, Defendant Frazer

Frost/Moore Stephens was required by GAAS, as stated in AU §380, to discuss, among others,

the following matters with China Valves’ Audit Committee:

• Any significant unusual transactions; and

• Any material financial statement misstatement.

219. Frazer Frost/Moore Stephens issued false and misleading unqualified audit

reports and opinions on China Valves’ financial statements, which stated that China Valves’

financial statements were presented in conformity with GAAP and that Frazer Frost’s/Moore

Stephen’s audits were performed in accordance with GAAS. These audit reports were

incorporated in China Valves’ annual report for the year ending 2009 and Registration Statement

and Prospectus Supplements. Indeed, the 2009 Form 10-K included financial statements audited

by Moore Stephens that failed to disclose and account for, inter alia, the $6.12 million loan


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made, i.e., the loan made by the Company to Able Delight on December 10, 2009, which

constituted a significant related party transaction. The audited financial statements contained in

the 2009 Form 10-K also were not in conformity with GAAP in that they materially overstated

the Company’s revenues and profits. Similarly, audited financial statements contained in the

2008 Form 10-K which were incorporated into the Company’s shelf Registration Statement

overstated financial results and were not in conformity with GAAP.

220. In issuing its unqualified audit opinions regarding China Valves’ financial

statements, Frazer Frost/Moore Stephens knew or recklessly disregarded that such financial

statements violated GAAP and were materially false and misleading in that they misrepresented

China Valves’ financial position and results and failed to disclose material related party

transactions.

221. Appropriate auditing procedures for identifying related parties and the related

disclosure requirements are contained in SAS No. 45, Related Parties (AU §334), and ASC 850-

10-50-1 (formerly FAS No. 57), Related Party Disclosures. In addition, Related Party issues are

discussed in Practice Alert No. 95-3, Auditing Related Parties and Related Party Transactions.

222. SAS No. 22, Planning and Supervision, (AICPA, Professional Standards, vol. 1,

AU §311.03) provides that in planning the audit, the auditor should consider, among other

matters, conditions that may require extension or modification of audit tests, such as the risk of

material error or fraud or the existence of related party transactions. Audit risk consists of: (a)

the risk (consisting of inherent risk and control risk) that the balance or class and related

assertions contain misstatements (whether caused by error or fraud) that could be material to the

financial statements when aggregated with misstatements in other balances or classes, and (b) the

risk (detection risk) that the auditor will not detect such misstatements. In the present case,


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significant audit risks existed in that the Company had a long history of ineffective control over

financial reporting, including an absence of accounting personnel proficient in U.S. GAAP or in

accounting for non-routine transactions. See ¶¶41-43, 157, supra.

223. SAS No. 45 (AU § 334) provides guidance on procedures that should be

considered by the auditor when he is performing an audit of financial statements in accordance

with GAAS to identify related party relationships and transactions and to satisfy himself

concerning the required financial statement accounting and disclosure.

224. The auditing interpretation to SAS No. 45 states that the “auditor’s procedures

should be sufficient to provide reasonable assurance that related party transactions are adequately

disclosed and that identified related party transactions do not contain material misstatements that,

when aggregated with misstatements in other balances or classes of transactions, could be

material to the financial statements taken as a whole. . . .The risk associated with management’s

assertions about related party transactions is often assessed as higher than for many other types

of transactions because of the possibility that the parties to the transaction are motivated by

reasons other than those that exist for most business transactions.” Moreover, when there are

significant transactions between related parties and the scope of the audit does not cover the

records of the other significant parties to the transaction (for example, an entity owned by the

President of the Company that provides management services to the Company, but is not subject

to audit), there is increased audit risk. Accounting and Auditing for Related Parties and Related

Party Transactions, A Tool Kit for Accountants and Auditors, prepared by the staff of the

AICPA.

225. SAS No. 45 (AU §334) gives examples of transactions that because of their

nature may be indicative of the existence of related parties:


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a. Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction.

b. Selling real estate at a price that differs significantly from its appraised value.

c. Exchanging property for similar property in a nonmonetary transaction.

d. Making loans with no scheduled terms for when or how the funds will be repaid.

226. AU §334 includes the following, not all-inclusive, specific audit procedures to

help determine the existence of other related parties:

a. Evaluate the company’s procedures for identifying and properly accounting for related party transactions.

b. Request from appropriate management personnel the names of all related parties and inquire whether there were any transactions with these parties during the period.

c. Review filings by the reporting entity with the Securities and Exchange Commission, and other regulatory agencies for the names of related parties and for other businesses in which officers and directors occupy directorship or management positions.

* * * g. Inquire of predecessor, principal, or other auditors of related entities

concerning their knowledge of existing relationships and the extent of management involvement in material transactions.

h. Review material investment transactions during the period under audit to

determine whether the nature and extent of investments during the period create related parties.

227. Paragraph .08 of SAS No. 45, Related Parties (AU §334), provides guidance for

both “identifying material transactions with parties known to be related and for identifying

material transactions that may be indicative of the existence of previously undetermined

relationships.” Those suggested procedures include, inter alia:

b. Review the minutes of meetings of the Board of Directors and Executive or Operating Committees for information about material transactions authorized or discussed at their meetings;


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c. Review proxy and other material filed with the Securities and Exchange

Commission and comparable data filed with other regulatory agencies for information about material transactions with related parties;

* * *

e. Review the extent and nature of business transacted with major customers, suppliers, borrowers, and lenders for indications of previously undisclosed relationships;

f. Consider whether transactions are occurring, that are not being given accounting recognition, such as receiving or providing accounting, management or other services, at no charge or a major stockholder absorbing corporate expenses;

g. Review accounting records for large, unusual or non-recurring transactions or

balances, paying particular attention to transactions recognized at or near the end of the reporting period.

* * * i. Review invoices from law firms that have performed regular or special

services for the company for indications of the existence of related parties or related party transactions.

228. SAS No. 45, Related Parties (AU §334.09), states that once related parties are

identified the auditor should apply the procedures he considers necessary to obtain satisfaction

concerning the purpose, nature, and extent of the transactions and their effect on the financial

statements. These auditing procedures should be directed toward obtaining and evaluating

sufficient appropriate audit evidence and should extend beyond inquiry of management. Id.

Procedures that should be considered include the following:

a. Obtain an understanding of the business purpose of the transaction;

b. Examine invoices, executed copies of agreements, contracts, and other pertinent documents, such as receiving reports and shipping documents;

c. Determine whether the transaction has been approved by the Board of Directors or other appropriate officials; and

d. Test for reasonableness the compilation of amounts to be disclosed, or considered for disclosure, in the financial statements.

Id.


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229. SAS No. 45 also states that when necessary to fully understand a particular

transaction, the auditor should consider the following procedures:

• Confirm transaction amount and terms, including guarantees and other significant data with the other party or parties to the transaction;

• Inspect evidence in possession of the other party or parties to the transaction;

• Confirm or discuss significant information with intermediaries such as banks, guarantors, agents or attorneys to obtain a better understanding of the transaction; and

• Refer to financial publications, trade journals, credit agencies, and other information sources when there is a reason to believe that unfamiliar customers, suppliers, or other business enterprises with which material amounts of business have been transacted may lack substance.

230. The procedures set forth in SAS No. 45 (AU 334) “should not be considered all-

inclusive.” Id.

231. Had Frazer Frost/Moore Stephens conducted even a minimum of the audit

procedures required or suggested for identifying related party transactions and properly

disclosing same in China Valves’ financial statements, it would have discovered the related party

transactions between Able Delight, Defendant Bin Li, Qing Lu, Hanwei Valve, Binjie Fang and

China Valves and the nature of same; and would have required their disclosure in the financial

statements or withheld its unqualified opinions on China Valves’ and its financial statements.

But it did not.

232. Moreover, had Frazer Frost/Moore Stephens conducted the audit procedures

required, they would have discovered China Valves’ financial results were substantially

overstated. Indeed, the audited financial statements included financial information that

drastically deviated from information provided by the Company to Chinese regulators. That

Frazer Frost/Moore Stephens failed to identify these problems demonstrates that at a minimum

they were culpably reckless in failing to conduct a diligent audit of the Company’s financial


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statements.

233. In certifying China Valves’ financial statements, Frazer Frost/Moore Stephens

falsely and recklessly represented that such financial statements presented fairly China Valves’

financial position in accordance with GAAP and that its audit was conducted in accordance with

GAAS. These statements were materially false and misleading in that the financial statements

did not comply with GAAP and the audits conducted by Frazer Frost/Moore Stephens were

knowingly or recklessly not performed in accordance with GAAS in the following respects:

a. Frazer Frost/Moore Stephens violated GAAS Standard of Reporting No. 1 that requires the audit report to state whether the financial statements are presented in accordance with GAAP. Frazer Frost/Moore Stephens’s opinion falsely represented that China Valves’ financial statements were presented in conformity with GAAP when they were not for the reasons herein alleged;

b. Frazer Frost/Moore Stephens violated GAAS Standard of Field Work No. 1 by, among other things, failing to adequately plan its audit and properly supervise the work of assistants and to establish and carry out procedures reasonably designed to search for and detect the existence of errors and irregularities which would have a material effect upon the financial statements;

c. Frazer Frost/Moore Stephens violated GAAS General Standard No. 3 that requires that due professional care must be exercised by the auditor in the performance of the audit and the preparation of the audit report;

d. Frazer Frost/Moore Stephens violated GAAS Standard of Field Work No. 2 which requires the auditor to make a proper study of existing internal controls, including accounting, financial and managerial controls, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and design the nature, timing, and extent of further audit procedures. AU §150.02. In all audits, the auditor should perform procedures to obtain a sufficient understanding of three elements of an entity’s internal control structure: the control environment, the accounting system, and control procedures. AU §319.02. The control environment, which includes management’s integrity and ethical values, is the foundation of internal control and provides discipline, structure and sets the tone of an organization. After obtaining an understanding of an entity’s internal control structure, the auditor assesses the entity’s control risk. AU §319.02. Control risk is the risk that a material misstatement in an assertion by management contained in a company’s financial


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statements will not be prevented or detected on a timely basis by an entity’s internal control structure policies or procedures. AU §319.29. The ultimate purpose of assessing control risk is to aid the auditor in evaluating the risk that material misstatements exist in the financial statements. AU §319.61. The failure of Frazer Frost/Moore Stephens to properly evaluate China Valves’ internal control procedures associated with internal control over financial reporting, controls over evaluation and accounting treatment of non-routine transactions and control environment, among others, and/or failure to employ enhanced audit procedures as a result of same, was a violation of GAAS;

e. Frazer Frost/Moore Stephens violated GAAS Standard of Field Work No. 3, which requires sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statement under audit. Frazer Frost/Moore Stephens knew or recklessly disregarded that it did not obtain sufficient appropriate audit evidence of China Valves’ related party transactions with Able Delight and Hanwei Valve and the effect those transactions had on China Valves’ financial statements - or the Company’s reported revenues and profits.

234. This is not the first time Frazer Frost/Moore Stephens has acted recklessly in

performing an audit of a Chinese company traded on a United States stock exchange. On

December 20, 2010, the SEC entered an administrative Cease and Desist order against Moore

Stephens for violations of due care and professional standards in connection with its audit of

China Energy, a China-based company that like China Valves, achieved listing on a United

States stock exchange through a reverse merger. Many of the audit risks present in the China

Valves audit were also present in the China Energy audit, including that throughout the China

Energy engagement, Moore Stephens was “aware of significant problems with China Energy’s

internal controls” and “[a]t the time, China Energy lacked accounting personnel trained in U.S.

Generally Accepted Accounting Principles….”

235. In a December 21, 2010 article published on Bloomberg, “SEC Probes Chinese

‘Reverse Mergers’ and Their Auditors,” author Joshua Gallu discussed Moore Stephens and

other auditors of Chinese “reverse merger” companies that had come under SEC scrutiny:


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Dec. 21 (Bloomberg) -- The Securities and Exchange Commission, as part of a broader probe of China-based companies listed on U.S. stock exchanges and their auditors, sanctioned a California audit firm for signing off on fraudulent financial statements made by a Chinese energy company.

Moore Stephens Wurth Frazer & Torbet LLP of Orange County is one of several firms that have fallen under the SEC’s scrutiny for signing the financial statements of China-based firms accessing U.S. capital markets through so-called reverse mergers. In a reverse merger, a closely held company acquires a publicly traded company and can then sell shares without an initial public offering.

The SEC has identified “hundreds” of such small companies “where about 100 percent, not 95 percent, 100 percent of the operations are in the People’s Republic of China” and the financial statements are signed by a small U.S. auditor, Wayne Carnall, chief accountant of the SEC’s division of corporation finance, said at a Public Company Accounting Oversight Board meeting in April.

Frazer audits several such firms, including China Advanced Construction Materials Group, Inc., China Biologic Products Inc., China Fire & Security Group Inc. and China Valves Technology Inc. Other U.S.-based auditors of China reverse mergers include Fountain Valley, California-based Kabani & Company Inc., Tarzana, California-based Goldman Parks Kurland Mohidin, LLP, and Denver-based GHP Horwath, P.C.

“You look at the size of the firm. You look at the staff involved. And you question whether any of those people on staff can speak Mandarin or Cantonese,” Carnall said.

On Site

While Frazer employees were on site to perform field work for China Energy, some audit firms subcontract a local auditor to perform work they may not be able to adequately validate.

“We’ve come across situations where an auditor may be signing a set of financial statements, but performing very little of the audit work,” PCAOB Chief Auditor Martin Baumann said at the April meeting.

Frazer “did not exercise professional skepticism and due professional care” in audits of China Energy Savings Technology Inc., which was ordered to pay about $35 million in March 2009 for overstating revenue, the SEC said in a statement yesterday. Dean Yamagata, the partner in charge of the audit, was barred from practicing as an accountant for at least two years. Frazer and Yamagata didn’t admit or deny the allegations.

To settle the SEC’s claims, Frazer and Yamagata agreed to pay $129,500 and retain an independent consultant for training in fraud detection, auditor independence and other duties related to auditing functions.


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No New Clients

The firm agreed not to accept any new issuer audit clients with operations located in China, Hong Kong or Taiwan until the firm has addressed the independent consultant’s recommendations.

Lawrence West, an attorney for Frazer and Yamagata at Latham & Watkins LLP, said “both the firm and Mr. Yamagata remain committed to conducting themselves in accordance with the highest professional standards, and look forward to working with the independent consultant to make sure that the firm’s policies and procedures are state-of-the-art.”

Frazer also signed financial statements for Rino International Corp., a Dalian, China-based maker of water-treatment equipment. Rino said Nov. 22 that its financial statements should no longer be relied on, and disclosed Dec. 2 that it was the subject of an SEC investigation.

Rino, which said there may be problems with as many as 40 percent of its sales contracts, has seen its shares drop 80 percent since Nov. 1.

The PCAOB, which was created by the Sarbanes-Oxley Act in 2002 to oversee auditors of public companies, is looking for ways to hold U.S. auditors accountable for work they outsource to China-based audit firms. The PCAOB is blocked from inspecting audit firms in China.

K. Applicability of Presumption of Reliance: Fraud-on-the-Market Doctrine

236. At all relevant times, the market for China Valves common stock was an

efficient market for the following reasons, among others:

a) The Company’s stock met the requirements for listing, and was listed and actively

traded on the NASDAQ, a highly efficient and automated market;

b) During the Class Period, on average, over several hundreds of thousands of shares

of China Valves stock were traded on a weekly basis, demonstrating a very active and broad

market for the Company’s stock and permitting a very strong presumption of an efficient market;

c) China Valves regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

on the national circuits of major newswire services and through other wide-ranging public


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disclosures, such as communications with the financial press and other similar reporting services;

d) China Valves was followed by several securities analysts who wrote reports that

were distributed to the sales force and certain customers of their respective brokerage firms

during the Class Period. Each of these reports was publicly available and entered the public

marketplace;

e) Several NASD member firms were active market-makers in China Valves stock at

all times during the Class Period; and

f) Unexpected material news about China Valves was rapidly reflected and

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

237. As a result of the foregoing, the market for the Company’s common stock

promptly digested current information regarding China Valves from all publicly available

sources and reflected such information in China Valves’ stock price. Under these circumstances,

all purchasers of the Company’s common stock during the Class Period suffered similar injury

through their purchase of China Valves’ common stock at artificially inflated prices, and a

presumption of reliance applies.

VII. NO SAFE HARBOR

238. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

Many or all of the specific statements pleaded herein were not identified as “forward-looking

statements” when made. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded

herein, Defendants are liable for those false forward-looking statements because at the time each


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of those forward-looking statements was made, the particular speaker knew that the particular

forward-looking statement was false, and/or the forward-looking statement was authorized

and/or approved by an executive officer of the Company who knew that those statements were

false when made.

FIRST CLAIM

Violation of Section 11 of the Securities Act Against Defendants China Valves, Siping Fang, Shih, Yu,

Peter Li, Haus, Binjie Fang, and Frazer Frost/Moore Stephens

239. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein exclusive of allegations that contain facts necessary to prove any elements

not required to state a claim under Section 11 of the Securities Act.

240. This claim is not based on and does not sound in fraud but is based solely on

negligent conduct or strict liability.

241. This claim is brought by Plaintiff on its own behalf and on behalf of other

members of the Class who acquired China Valves’ common stock pursuant to or traceable to the

Company’s Registration Statement and Prospectus Supplements issued in connection with the

shelf offering. Members of the Class acquired his, her, or its shares pursuant to and/or traceable

to the Registration Statement and Prospectus Supplements. China Valves is the issuer of the

securities through the Registration Statement and Prospectus Supplements. Siping Fang, Shi,

Yu, Peter Li, Haus, and Binjie Fang are signatories to the Registration Statement which included

a base prospectus. Frazer Frost/Moore Stephens was the independent auditor of, and issued

unqualified reports on, the false financial statements incorporated, with their consent, in the

Registration Statement and incorporated in the Prospectus Supplements.

242. The Registration Statement and Prospectus Supplements contained untrue


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statements of material fact and/or omitted to state material facts necessary to make statements

therein not misleading.

243. The false statements, misrepresentations and omissions identified above caused

the market price of China Valves common stock to be artificially inflated at the various times of

the offering.

244. China Valves is the issuer of the stock sold via the Registration Statement and

Prospectus Supplements. As issuer of securities, the Company is strictly liable to Plaintiff and

the Class for the material misstatements and omissions therein. The other Defendants owed to

the purchasers of the common stock acquired pursuant or traceable to the Registration Statement

and Prospectus Supplemenst the duty to make a reasonable and diligent investigation of the

statements contained in the Registration Statement and Prospectus Supplements at the time they

became effective to ensure that such statements were true and correct and that there were no

omissions of material facts required to be stated in order to make the statements contained


245. None of the Defendants made a reasonable investigation or possessed reasonable

grounds for the belief that the statements contained in the Registration Statement and Prospectus

Supplements were true or that there were no omissions of material facts necessary to make the

statements made therein not misleading.

246. The Defendants issued and disseminated, caused to be issued and disseminated,

and participated in the issuance and dissemination of, material misstatements to the investing

public that were contained in the Registration Statement and Prospectus Supplements, which

misrepresented or failed to disclose, among other things, the material facts set forth above. By

reason of the conduct alleged herein, each Defendant violated Section 11 of the Securities Act.


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247. At the times they obtained their common shares of China Valves, Plaintiff and

other members of the Class did so without knowledge of the facts concerning the misstatements

and omissions alleged herein. As a direct and proximate result of the wrongdoing of the

Defendants, Plaintiff and the other members of the Class have suffered substantial damages.

248. This claim is brought within one year after discovery of the untrue statements and

omissions in and from the Registration Statement and Prospectus Supplements that should have

been made and/or corrected through the exercise of reasonable diligence, and within three years

of the effective date of the Registration Statement and Prospectus Supplements.

249. By virtue of the foregoing, Plaintiff and the other members of the Class are

entitled to damages, under Section 11 of the Securities Act, as measured by the provisions of

Section 11(e), from the Defendants and each of them, jointly and severally.

SECOND CLAIM

Violation of Section 12 of the Securities Act Against China Valves


fully set forth herein, exclusive of allegations that contain facts necessary to prove any elements

not required to state a claim under Section 12 of the Securities Act.

251. This claim is not based on and does not sound in fraud but is based solely on

negligent conduct or strict liability.

252. This claim is brought against Defendants China Valves.

253. This claim is brought by Plaintiff on his own behalf and on behalf of other

members of the Class who acquired China Valves common stock pursuant to the Company’s

base prospectus and Prospectus Supplements issued in connection with the Company’s

Registration Statement effective December 14, 2009. Members of the Class acquired his, her, or


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its shares of China Valves through means or instruments of transportation or communication in

interstate commerce or of the mails and by means of a prospectus or oral communication. As

issuer of securities, the Company is strictly liable to Plaintiff and the Class for the material

misstatements and omissions therein.

254. On or about December 1, 2009, the Company issued its Form S-3 Registration

Statement that was filed with the SEC and declared effective December 14, 2009 in connection

with the Company’s shelf offering. On or about January 5, 2011, the Company issued its

Prospectus Supplement that provided, inter alia, for the sale of 1,000,000 shares of China Valves

common stock at the price of $10.00 per share. Lead Plaintiff purchased 100,000 shares of

common stock pursuant to the January 5, 2011 Prospectus Supplement.

255. The Registration Statement and Prospectus Supplements contained untrue

statements of material fact and/or omitted to state material facts necessary to make statements


256. The false statements, misrepresentations and omissions identified above caused

the market price of China Valves common stock to be artificially inflated at the various times of

the offering.

257. At the times they obtained their common shares of China Valves, Plaintiff and

other members of the Class did so without knowledge of the facts concerning the misstatements

and omissions alleged herein. As a direct and proximate result of the wrongdoing of the

Company, Plaintiff and the other members of the Class have suffered substantial damages.

258. By virtue of the foregoing, Plaintiff and the other members of the Class are

entitled to damages, under Section 12 of the Securities Act, as measured by the provisions of

Section 12(b), from China Valves.


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THIRD CLAIM

Violations of Section 15 of the Securities Act Against The Individual Defendants


fully set forth herein exclusive of allegations that contain facts necessary to prove any elements

not required to state a claim under Section 15 of the Securities Act. This claim is not based on

and does not sound in fraud, but is based solely on negligent conduct.

260. This claim is asserted against the Individual Defendants, each of whom was a

control person of China Valves during the relevant time period.

261. The Individual Defendants were control persons of China Valves by virtue of,

among other things, ownership and control of the Company and their positions as senior officers

and/or directors and major shareholders of the Company. They were in positions to control, and

did control, the false and misleading statements and omissions contained in the Registration

Statement and Prospectus Supplements. These Defendants had the power and authority to cause

the issuer to engage in the wrongful conduct complained of herein, including the issuance of the

false and misleading statements and omissions in the Registration Statement and Prospectus

Supplements.

262. None of the Individual Defendants made reasonable investigations or possessed

reasonable grounds for the belief that the statements contained in the Registration Statement and

Prospectus Supplements were accurate and complete in all material respects. Had they exercised

reasonable care, they would have known of the material misstatements and omissions alleged

herein.

263. This claim was brought within one year after the discovery of the untrue


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statements and omissions in the Registration Statement and Prospectus Supplements and within

three years after China Valves’ common stock was sold to the Class in connection with the

offering.

264. By reason of the misconduct alleged herein, for which China Valves is primarily

liable, as set forth above, the Individual Defendants are jointly and severally liable with and to

the same extent pursuant to Section 15 of the Securities Act.

FOURTH CLAIM

Violation of Section 10(b) of The Exchange Act and Rule 10b-5 Promulgated Thereunder

Against Defendants China Valves, Siping Fang, Wang, Wei, Tang, Shih, Yu, Peter Li, Haus, Binjie Fang, and Frazer Frost/Moore Stephens


fully set forth herein.

266. During the Class Period, Defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and

other members of the Class to purchase China Valves securities at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them,

took the actions set forth herein.

267. Defendants (i) employed devices, schemes, and artifices to defraud; (ii) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (iii) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for China Valves securities in violation of Section 10(b)

of the Exchange Act and Rule 10b-5.


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268. Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about China Valves’

financial well-being and prospects, as specified herein.

269. These Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of China Valves’ value,

financial position, results, and performance and continued substantial growth, which included the

making of, or the participation in the making of, untrue statements of material facts and/or

omitting to state material facts necessary in order to make the statements made about China

Valves and its business operations and future prospects in light of the circumstances under which

they were made, not misleading, as set forth more particularly herein, and engaged in

transactions, practices and a course of business which operated as a fraud and deceit upon the

purchasers of the Company’s securities during the Class Period.

270. Defendants had actual knowledge of the misrepresentations and/or omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

Defendants’ material misrepresentations and/or omissions were done knowingly or recklessly

and for the purpose and effect of concealing China Valves’ true financial condition and prospects

from the investing public and supporting the artificially inflated price of its securities.

271. As a result of the dissemination of the materially false and/or misleading

information and/or failure to disclose material facts, as set forth above, the market price of China

Valves’ securities was artificially inflated during the Class Period. In ignorance of the fact that


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market prices of the Company’s securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by Defendants, or upon the integrity of

the market in which the securities trades, and/or in the absence of material adverse information

that was known to or recklessly disregarded by Defendants, but not disclosed in public

statements by Defendants during the Class Period, Plaintiff and other members of the Class

acquired China Valves securities during the Class Period at artificially high prices and were

damaged thereby.

272. At the time of said misrepresentations and/or omissions, Plaintiff and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff

and the other members of the Class and the marketplace known the truth, Plaintiff and other

members of the Class would not have purchased or otherwise acquired their China Valves

securities, or, if they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

273. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

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

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s securities during the Class Period.

FIFTH CLAIM

Violation of Section 20(a) of The Exchange Act Against the Individual Defendants


fully set forth herein.

276. The Individual Defendants acted as controlling persons of China Valves within


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the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

Company’s operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had

the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which Plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Company’s reports, press releases, public

filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

277. As set forth above, China Valves and Individual Defendants each violated Section

10(b) and Rule 10b-5, by their acts and/or omissions as alleged in this Complaint. By virtue of

their positions as controlling persons, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act.

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

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

Company’s securities during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

a) Determining that this action is a proper class action under Rule 23 of the

Federal Rules of Civil Procedure;

b) Awarding compensatory damages in favor of Plaintiff and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of


2 Consolidated Class Action Complaint 08/29/2011

Documents

Transcript of 2 Consolidated Class Action Complaint 08/29/2011