Case 1:10-cv-07233-GBD Document 88 Filed 10/04/11 Page 1 of...

Case 1:10-cv-07233-GBD Document 88 Filed 10/04/11 of 147

CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS- 1 -

Lead Plaintiffs Hoi Ming Michael Ho and Joseph Sciarro (“Lead Plaintiffs”), Initial Plaintiff

Mingli Li, and Plaintiff Huaying Jin, by and through their attorneys, allege the following upon

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

personal knowledge. Plaintiffs’ information and belief are based upon, among other things,

Plaintiffs’ counsel’s investigation, which includes without limitation: (a) review and analysis of

regulatory filings in the United States and China made by Defendant Duoyuan Global Water, Inc.

(“Duoyuan Global Water” or “DGW” or the “Company”), its affiliates, and non-party Duoyuan

Printing, Inc. (“Duoyuan Printing” or “DYP”); (b) review and analysis of press releases and media

reports issued by and disseminated by DGW and DYP; (c) review of other publicly available

information concerning DGW and DYP; (d) site investigations; and (e) review of applicable

accounting pronouncements.

NATURE OF THE ACTION AND OVERVIEW

1. This is a class action on behalf of purchasers of DGW’s American Depositary Shares

(“ADSs”) between June 24, 2009 and April 5, 2011, inclusive (the “Class Period”), seeking to

pursue remedies against various persons and entities under the Securities Act of 1933 and/or the

Securities Exchange Act of 1934. The Defendants, by category, are: (1) the Company; (2) Wenhua

Guo (“Guo”), the Company’s Chief Executive Officer, Chairman of the Board of Directors, and

controlling shareholder, and Stephen C. Park, the Company’s Chief Financial Officer, who

announced his resignation on April 4, 2011(“Management Defendants”); (3) Christopher P. Holbert,

Joan M. Larrea, Thomas S. Rooney, Jr., Yuefeng Yu, Ping Wei, and Charles V. Firlotte, directors

or former directors of DGW who executed the Registration Statement filed in conjunction with one

or both of DGW’s ADS offerings (“Director Defendants”); (4) Piper Jaffray & Co., Oppenheimer

& Co., Inc., Janney Montgomery Scott, LLC, Credit Suisse Securities (USA) LLC, Macquarie



Capital (USA) Inc., and Rodman & Renshaw, LLC, the underwriters of one or both of DGW’s ADS

offerings (“Underwriter Defendants”); (5) Grant Thornton International, Ltd. and BDO Limited

(successor to Grant Thornton Hong Kong), the outside auditors who issued opinion letters in

connection with DGW’s financial statements, including those filed in conjunction with its ADS

offerings (“Auditor Defendants”); and (6) the Global Environment Fund which (through GEEMF

III Holdings MU), was a large pre-IPO shareholder of DGW. As described herein, each set of actors

played a role in causing the tremendous financial injuries sustained by investors in DGW.

2. Although DGW had all of the outward appearances of being a healthy and growing

company, with stellar operating figures and no debt, less than two years after its initial public

offering (“IPO”), investors sadly found out that there was far less to DGW than met the eye. As a

direct result of the securities law violations herein alleged, investors purchased the securities of a

company whose actual value is very much in doubt. In fact, the Company’s shares have not traded

since April 20, 2011, and the Company has indefinitely delayed the release of its first quarter 2011

(“Q1’11”) results, originally due out in early May.

3. A series of increasingly-disturbing partial disclosures over the past nine months have

thus completely grounded the once high-flying company. Although DGW was hailed as one of the

most successful IPOs of 2009 — with so much momentum that a secondary offering followed

within a mere seven months of the IPO — it has now become apparent that the Company is

completely, or in good part, a sham.

4. Defendant Duoyuan Global Water purports to be a China-based domestic water

treatment equipment supplier. The Company claims to have developed scores of advanced water



treatment technologies and products which it sells, through a network of distributors, for use in

municipal, industrial, residential and agricultural water treatment throughout China.

5. On June 24, 2009, pursuant to a Registration Statement and Prospectus (collectively,

the “IPO Registration Statement” or “IPO Offering Documents”), the Company commenced its

initial public offering of 5,500,000 ADSs, priced at $16.00 per share, and the ADSs began trading

on the New York Stock Exchange (“NYSE”) under the symbol “DGW.” Thereafter, during the

Class Period, on January 28, 2010, pursuant to a Registration Statement and Prospectus

(collectively, the “SPO Registration Statement” or “SPO Offering Documents”) filed with the SEC

that day, the Company commenced a follow-on secondary public offering (the “SPO”), of 3,545,000

ADSs at $29.50 per share.

6. Each ADS represents two Duoyuan Global Water ordinary shares, par value

$0.000033 per share. Deutsche Bank Trust Company Americas is the depositary for the Company’s

ADSs. The ADSs are evidenced by American Depositary Receipts ("ADRs") issuable by Deutsche

Bank Trust Company Americas, as depositary, pursuant to a Deposit Agreement. Each ADS

represents ownership of two shares deposited with the office in Hong Kong of Deutsche Bank AG,

Hong Kong Branch, as custodian for the depositary. Each ADS also represents ownership of any

other securities, cash or other property which may be held by the depositary. The depositary’s

corporate trust office at which the ADSs are administered is located at 60 Wall Street, New York,

NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New

York, NY 10005, USA.

7. A confluence of factors — including new water regulations, concerns about the

ecological safety of major bodies of water, and increasing potable water needs in China’s emerging



economy — all combined to make DGW a company “in the right place at the right time.” DGW

boasts scores of products designed to serve three distinct water needs — circulating water treatment,

water purification, and waste water treatment. Much excitement surrounded the IPO.

8. DGW hit the ground running. By early August, 2009, when DGW announced its

Q2’09 earnings — including a 49.7% increase in year-over-year net income and a gross margin of

49.6% — DGW’s ADSs rose to double their IPO price. The following month, DGW participated

in a management summit in Beijing in mid-September and in a Healthcare & Industrial Tour held

by defendant Oppenheimer & Co. during the week of September 21, 2009.

9. Announcing the results for Q3’09, reported in November 2009, Chairman and CEO

Wenhua Guo touted increased demand for products in every segment of the business. With year-

over-year revenue and operating income increases of over 30% and gross margins near 50%, DGW’s

ADSs traded in the $30s.

10. As the year came to a close, DGW remained a Wall Street darling, listed as one of

the top IPOs of 2009 by CNBC, The Street.com and The Motley Fool. Taking advantage of this

momentum, on January 11, 2010, DGW filed the initial Registration Statement for the SPO. On

January 19, 2010, in anticipation of soon pricing the follow-on offering, DGW announced

preliminary results for Q4’09. Revenues were reported as being in the range of 191.9-195.8 million

RMB, ahead of estimates of 190.55 million RMB.

11. On January 28, 2010, DGW announced the SPO, in which 3,545,000 ADSs would

be offered at a price of $29.50 per ADS. Unlike the IPO, in which all ADSs were sold by the

Company, the SPO also allowed DGW’s initial outside investor, the Global Environment Fund

(“GEF”), to capitalize on its investment in DGW: on February 5, 2008, GEF acquired a 20% equity



stake in the company for $30.2 million; its sale of 785,000 ADSs less than two years later — a little

more than a quarter of its total — reaped proceeds of $23,157,500.

12. From the outset, DGW appeared to have brought both water industry and accounting

and finance expertise to its Board of Directors, including:

(a) Director Joan Larrea, GEF’s appointee, who spent 10 years as the principal

investment officer at International Finance Company (“IFC”) before

becoming a managing director at GEF. She also serves or served on the

boards of other Chinese companies: Deqingyuan Agricultural Technology

Co., Ltd., a large egg producer, and UPC Renewables, a wind-power energy

company, companies in which, like DGW, her then-employer had invested;

(b) Director Pei Weng, a CPA (US) and CA (Canada), who joined DGW in

August 2009, bringing to her position as Chair of the Audit Committee,

according to DGW Chairman Wenhua Guo, “years of extensive experience

in international finance, accounting and auditing,” having served as a senior

officer at several public companies following seven years as an auditor with

both Deloitte (Toronto) and Arthur Andersen (Beijing);

(c) Charles V. Firlotte, who joined the Board and a number of its committees,

including the Audit and Nominating and Corporate Governance Committees,

in November 2009. Mr. Firlotte is the President and CEO of Aquarion, the

largest private water utility company in New England. Aquarion is partially

owned by an Macquarie Essential Assets Partnership, an affiliate of SPO

underwriter Macquarie Capital. Firlotte has more than 20 years of



experience in the water supply business, both in the United States and

England. Having both a strong background in both the human resources and

service aspects of the business, Chairman Guo touted Firlotte’s “experience

with improving operational efficiencies and service delivery in the water

industry;” and

(d) David Nickols joined DGW’s Board in March 2010, bringing with him

“almost 30 years of experience in international infrastructure planning,

engineering and construction with specific expertise in the water sector.”

Nickols was praised by Chairman Guo for his “proven leadership in

executing all aspects of international water infrastructure projects.”

13. The same day as DGW announced Mr. Nickols’s addition to the Board — March 8,

2010 — the Company announced its 2009 operating results. The highlights included a 32.2% jump

in revenues, operating income of $27.6 million, and diluted earnings per ADS of $0.92. Revenue

guidance for the quarter, Q1’10, was projected to be 157 million RMB ($23 million USD).

14. During the first half of 2010, the Underwriter Defendants were showcasing DGW to

investors. In early March, DGW announced it would appear at Rodman & Renshaw’s Annual China

Investment Conference in Beijing later that week. The following week, DGW announced that it

would participate in Credit Suisse’s 13th Asian Investment Conference, to be held in Hong Kong

later that month. A month later, DGW announced that it would appear at the Macquarie’s China

Conference 2010, to be held the last week of April in Hong Kong. In early June, DGW announced

that it would appear at the Fifth Annual Piper Jaffray Europe Conference in London in late June.



15. DGW looked to have every reason to show well at the various conferences, as 2010

appeared to be shaping up as another banner year for DGW. On May 12, 2010, the Company

announced that it exceeded its revenue guidance for Q1’10, taking in revenues of 160.5 million

RMB ($23.5 million USD). On August 18, 2010, the Company reported that it exceeded

expectations yet again in Q2’10, with revenues of $43.4 million USD and earnings of $0.45 per

ADS, compared to analysts’ estimates of $40.88 million and $0.36, respectively.

16. Less than one month later, DGW’s pristine image began to tarnish, with the first in

a series of devastating disclosures. First, on September 13, 2010, serious accounting problems

rocked DGW’s sister company, DYP.

17. Although in a different business, DGW, primarily through Chairman Guo, maintains

a substantial connection with non-party DYP. DYP is another China-based, publicly-traded

company on the NYSE, which purports to manufacture commercial offset printing presses in China,

and is expressly identified by DGW as an “affiliated company.” Aside from the similar names,

examples of the companies’ close ties include, among others: (1) Defendant Guo served as Chairman

of both Boards during the Class Period ; (2) Defendant Guo is the beneficial owner of 100% of the

equity interest in DGW’s majority shareholder, Duoyuan Investments Limited, which also owns a

controlling interest in DYP; (3) DGW and DYP share the same headquarters at No. 3 Jinyuan Road,

Daxing Industrial Development Zone, Beijing 102600, People’s Republic of China (“PRC”); (4)

Defendant Holbert served as both a Director of DGW and as the CEO of DYP; and (5) Xiqing Diao,

Holbert’s replacement as CEO of DYP, in September 2010, previously held several senior positions

as DGW.



18. On September 13, 2010, DYP announced a series of alarming management changes,

including the resignation of at least four members of its Board of Directors, and its CEO (defendant

Holbert) and CFO, following the dismissal of DYP’s independent registered public accounting firm

Deloitte Touche Tohmatsu CPA Ltd. (“Deloitte”). Although this news specifically concerned events

at DYP, it raised red flags relating to both companies and had serious implications for DGW.

19. Michael Cox of Piper Jaffray, previously DGW’s most bullish supporter, instantly

reversed his position. During morning trading on September 13, 2010, Piper Jaffray decreased its

price target from $34.00 down to $9.00 per ADS, an astounding 73.53%, based upon the corporate

governance and accounting issues raised by DYP’s announcement and the significant ties that bind

DGW with DYP.

20. Investors reacted, with DGW ADSs declining $8.60 per share, or 41.55%, to close

on September 13, 2010, at $12.10 per share, on unusually heavy volume.

21. After the sharp sell-off, to reassure investors that none of DYP’s troubles were shared

by DGW, on September 14, 2010, DGW announced a “pre-emptive” review of its accounting,

internal controls and corporate governance to “ensure the highest level of transparency and

accountability.” This announcement temporarily stopped the bleeding, and DGW’s ADS price

actually rose by $0.51 (4.1%). However, that same day, another analyst affiliated with an

underwriter of the ADS offerings, Janney Capital Markets, warned investors not to rely upon its

prior rating, fair value, and earnings estimates and suspended coverage of DGW, due to “lack of

clarity” and the fact that the “third party review will likely take months.”

22. On September 28, 2010, eager to reassure investors, DGW announced that the

international law firm, Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates (“Skadden”) had



been engaged by the Audit Committee to conduct a review to verify the integrity of DGW’s

accounting, internal controls and corporate governance. Skadden’s report was expected out within

one to four months. (Source: Rodman & Renshaw March 23, 2011, report). On this news, DGW’s

price jumped significantly, nearly a dollar, to close at $12.85, and continued to rise the following

day on active trading.

23. On October 25, 2010, a research note was issued by Auriga, following a visit to

China to meet with DGW management and to tour the facilities. Although the report itself was not

widely disseminated and is difficult to obtain, highlights were disclosed to the market that morning.

Unrelated to the questions raised by DYP’s accounting woes, the note raised three areas of concern:

(1) why is the Company undertaking a large capital expenditure program when the facilities are only

about 50% utilized; (2) the capital expansion plans could drain the balance sheet; (3) the equipment

was not modern; and (4) only 10 of 109 products purportedly produced were available for

inspection. Investors responded to this troubling news, with the ADS price tumbling by more than

5.5%, to close at $12.83.

24. On March 23, 2011, Chairman Guo announced very positive fiscal year (“FY’10”)

2010 results, touting revenues of over 1 billion RMB. Because the Audit Committee and Skadden

had not yet obtained access to documents requested for the review, the Board announced that it was

unwilling to approve or otherwise ratify the presentation of the Q4’10 or FY’10 operating results.

However, DGW indicated that the review could be completed by the end of Q2’11, provided that

the Audit Committee and Skadden obtain access to the requested documents. In response to this

public airing of concerns by the Board, the ADSs fell 11.7% on heavy trading volume.

25. On April 4, 2011, a number of significant, related events occurred:


1 The AIC is the Chinese government body that regulates industry and commerce in China. It isprimarily responsible for business registration, business licenses, issuing and renewing, and acts asthe government supervisor of corporations. All Chinese companies are required to file financialstatements with the Chinese government annually or bi-annually.


(a) Muddy Waters, a research group that bills itself as one that “sees through

appearances to a Chinese company’s true worth,” issued a scathing report

valuing DGW’s shares — trading at $5.49 on April 1, 2011 — at less than a

dollar. Attaching various documents, Muddy Waters accused DGW of, inter

alia, replacing the actual 2009 audit report for DGW’s manufacturing arm

(“DGW Langfang”) on file with the local Administration for Industry and

Commerce (“AIC”)1 with a phony version (containing the figures reported

to investors) and forging its auditors’ name and seal on the latter report. As

a result of the purported chicanery, revenues of $800 thousand (USD), at

most, in 2009 and 2010, were astronomically-inflated and reported to the

market at $114.8 million in 2009 and $154.4 million in 2010. The report

stated that DGW’s auditors, Grant Thornton International, Ltd.’s Hong Kong

member firm — which was later asked to leave GTI — were “inattentive”

and “sloppy” with respect to specific items in its audit: such dereliction of

duty ultimately allowed DGW to perpetrate a “massive fraud.” (The Muddy

Waters, LLC, April 4, 2011, Research Report, entitled “Clean Water, Dirty

Money” is hereinafter referred to as “Muddy Waters Rpt.”);

(b) Muddy Waters posted a video on YouTube demonstrating lack of operating

telephones at the numbers listed for various of DGW’s sales offices;



(c) CFO Park announced that he was leaving DGW “to pursue another

professional opportunity.”

26. Over the next two trading days, April 4th and 5th, investors dumped their holdings

in droves; DGW’s ADSs lost more than 41.5% of their value. Specifically, an extraordinary volume

— nearly 16 million — of the Company’s ADSs changed hands, with DGW closing at $3.99 on

April 4, 2011, and only $3.21 on April 5, 2011.

27. On April 6, 2011, trading of DGW was halted (at $3.21), with “news pending.” The

same day, the Board of Directors expanded Skadden’s as-of-yet uncompleted review, with the

assistance of an independent accounting firm, into a “more thorough and exhaustive third-party

investigation,” adding business practices and finances to its scope. A five-member Special

Investigation Committee (“SIC”) was formed, with Defendant Larrea as its chair; Larrea planned

to devote herself to the on-site investigation. Shares rebounded by 10% the next day, once trading

resumed.

28. On April 20, 2011, trading was once again halted with “news pending” and ADSs

trading at $3.88. No news was released. However, investors learned several weeks later that four

independent members of the Board of Directors — including SIC Chair Larrea — resigned on April

20, 2011, in protest because the two investigations had been completely stymied by management.

Additionally, as also revealed only weeks later, Skadden withdrew as special counsel to the Audit

Committee and the SIC, effective April 21, 2011.

29. On May 4, 2011, with trading still suspended, DGW finally broke its silence,

announcing the resignation of the four independent directors (their letter of resignation, detailing

management’s refusal to provide access to the information required for the investigations, is



discussed below), the appointment of replacement directors, and the action of the newly-

reconstituted SIC to hire Baker & McKenzie (“Baker”) as its special counsel — with Baker, in turn,

to retain an accounting firm to assist in the investigation.

30. DGW’s Q1’11 results, due out the week of May 9, 2011, have not yet been

announced and trading has not yet resumed.

31. As a result of Defendants’ acts and omissions alleged herein, and the precipitous

decline in the market value of the Company’s ADSs, Lead Plaintiffs and other Class Members have

suffered significant losses and damages.

JURISDICTION AND VENUE

32. The claims asserted herein arise under Sections 11 and 15 of the Securities Act of

1933 (15 U.S.C. §§77k, 77(o)), Sections 10(b), 20(a) of the Exchange Act (15 U.S.C. §§78j(b),

78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R. § 240.10b-5).

33. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§1331, Section 22 of the Securities Act (15 U.S.C. §77v), and Section 27 of the Exchange Act (15

U.S.C. §78aa).

34. Venue is proper in this Judicial District pursuant to 28 U.S.C. §1391(b), Section 22

of the Securities Act (15 U.S.C. §77v), and Section 27 of the Exchange Act (15 U.S.C. §78aa).

Many of the materially false and/or misleading statements, were made in or issued from this District.

35. In connection with the acts, transactions, and conduct alleged herein, Defendants

directly and indirectly used the means and instrumentalities of interstate commerce, including the

United States mail, interstate telephone communications, and the facilities of a national securities

exchange.


2 DGW’s Website so states, but also states that DGW was founded in 1989 and has “more than 20years experience” producing circulating water treatment products. See http://ir.duoyuan-hq.com/phoenix.zhtml?c=230632&p=irol-homeProfile and http://www.duoyuan-hq.com/Press.html.


PARTIES

36. Hoi Ming Michael Ho and Joseph Sciarro, as previously set forth in the certifications

supporting their motion to be appointed as Lead Plaintiffs, incorporated by reference herein, and

Initial Plaintiff Mingli Li, as set forth in the certification filed with this Plaintiff’s initial complaint,

incorporated by reference herein, purchased Duoyuan Global Water ADSs pursuant to and/or

traceable to the IPO and its Registration Statement and Prospectus (“IPO Offering Documents”).

37. Lead Plaintiff Hoi Ming Michael Ho also purchased DGW’s ADSs pursuant to and/or

traceable to the SPO and its Registration Statement and Prospectus (“SPO Offering Documents”).

38. Plaintiff Huaying Jin, as set forth in the attached certification, purchased DGW’s

ADSs pursuant to and/or traceable to the SPO Offering Documents.

39. Plaintiffs were damaged when the partial disclosures of the true condition of DGW’s

financial operations and results, which were previously materially misstated in the challenged

statements herein, caused the price of DGW ADSs to drop.

40. Defendant Duoyuan Global Water was incorporated in 2007 under the laws of the

British Virgin Islands and maintains its principal executive offices at No. 3 Jinyuan Road, Daxing

Industrial Development Zone, Beijing 102600, People’s Republic of China. DGW’s SEC filings

indicate that the Company was initially founded in 1992.2

41. Defendant Guo was, at all relevant times, Chairman of the Board of Directors and

CEO of Duoyuan Global Water. Additionally, Guo was, at all relevant times, Chairman of the

Board of Directors of DYP. Guo executed a number of documents filed with the SEC in conjunction



with the Company’s two ADS offerings, including: DGW’s IPO Form F-1 Registration Statement,

filed June 1, 2009, and the amendments thereto (effective June 24, 2009); a Form F-1MEF, filed

June 24, 2009, registering additional ADSs for sale pursuant to the F-1 Registration Statement; a

Form F-6 and an amendment thereto, on June 11, 2009 and June 15, 2009, registering the depositary

shares of DGW evidenced by American Depositary Receipts; DGW’s SPO Form F-1, filed January

8, 2010, and the amendments thereto (effective January 27, 2010), and periodic reports on Form 6-K,

filed August 3, 2009, November 12, 2009, and January 19, 2010, and incorporated into the SPO

Offering Documents. Guo also executed additional Class Period documents on behalf of DGW,

including, but not limited to, the Company’s 2009 Annual Report filed on Form 20-F on June 18,

2010, as well as Form 6-Ks filed with the SEC on January 28, 2010, March 8, 2010, May 12, 2010,

August 18, 2010, September 14, 2010, September 28, 2010, November 17, 2010, December 27,

2010, and March 23, 2011.

42. Defendant Stephen C. Park (“Park”) was, at all relevant times, the CFO of Duoyuan

Global Water. Although he announced his resignation on April 4, 2011, Park indicated that he

would remain with DGW until the conclusion of the third-party review or June 30, 2011, whichever

is earlier. Hired by DGW in June 2007, two years prior to the IPO, Defendant Park is a American-

educated CPA and MBA who had worked, inter alia, at Deloitte and was held out to investors as

“experienced in U.S. GAAP and Securities and Exchange Commission reporting.” Park executed

a number of documents filed with the SEC in conjunction with the Company’s two ADS offerings,

including: DGW’s IPO Form F-1 Registration Statement, filed June 1, 2009, and the amendments

thereto (effective June 24, 2009); a Form F-6 and an amendment thereto, on June 11, 2009, and June

15, 2009, registering the depositary shares of DGW evidenced by American Depositary Receipts;



a Form F-1 MEF, filed June 24, 2009, registering additional ADSs for sale pursuant to the F-1

Registration Statement; and DGW’s SPO Form F-1, filed January 8, 2010, and the amendments

thereto (effective January 27, 2010). Defendant Park also signed Correspondence filed with the SEC

on October 28, 2010.

43. Defendants Guo and Park are collectively referred to hereinafter as the “Management

Defendants.” The Management Defendants, because of their positions within the Company,

possessed the power and authority to control the contents of Duoyuan Global Water’s reports to the

SEC. Each Management Defendant had the ability and opportunity to prevent their issuance or

cause them to be corrected. The Management Defendants are liable for the misstatements pleaded

herein, as those statements were each “group-published” information, the result of the collective

actions of the Management Defendants.

44. Defendant Holbert, a Certified Public Accountant with more than a dozen years of

experience, joined the Board of Directors of DGW in September 2008. Prior to his association with

DGW, inter alia, Holbert founded a financial consulting firm providing advice for those doing

business in China and served as the Director of Sarbanes Oxley compliance at Chinadotcom

Corporation. According to a Form 6-K filed on August 26, 2009, Holbert resigned from the

Company’s Board of Directors and as the Company’s Audit Committee Chairperson, effective

August 26, 2009, to become the chief executive officer of Asian Financial Inc., “an affiliate of

Duoyuan.” During his tenure as a Director, Holbert also served on the Board’s Compensation

Committee and Nominating and Corporate Governance Committee. During the Class Period,

Holbert was also the CEO of DYP; a position he resigned on September 13, 2010. Holbert signed

DGW’s IPO Form F-1 Registration Statement, filed June 1, 2009, and the amendments thereto



(effective June 24, 2009); a Form F-6 and an amendment thereto, on June 11, 2009, and June 15,

2009, registering the depositary shares of DGW evidenced by American Depositary Receipts; and

a Form F-1 MEF, filed June 24, 2009, registering additional ADSs for sale pursuant to the F-1

Registration Statement.

45. Defendant Larrea, prior to becoming a managing director of an affiliate of the Global

Environment Fund, spent nearly ten years as the principal investment officer of International

Finance Corporation (a member of the World Bank), which focuses upon financing private-sector

investment in emerging markets. According to the IPO Form F-1, Larrea was appointed to DGW’s

Board as a designee of Defendant GEEMF III Holdings MU, an affiliate of Global Environment

Fund, pursuant to a February 5, 2008, Voting Agreement. Larrea resigned from the Board on April

20, 2011. Larrea signed the Company’s Form F-1 Registration Statements and amendments thereto

filed in connection with the IPO and SPO; a Form F-6 and an amendment thereto, on June 11, 2009,

and June 15, 2009, registering the depositary shares of DGW evidenced by American Depositary

Receipts; and a Form F-1 MEF, filed June 24, 2009, registering additional ADSs for sale pursuant

to the F-1 Registration Statement.

46. Defendant Rooney, who holds both a BS in Civil Engineering and an MBA, joined

DGW’s Board of Directors in June 2008. From 2003 until 2007, Rooney served as the CEO of

Insituform, a company specializing in the rehabilitation of, inter alia, water and sewer piping. While

at DGW, Rooney served as a member of its Audit Committee, Nominating and Corporate

Governance Committee, and as Chair of the Compensation Committee. Rooney resigned from the

Board as of January 1, 2010. Rooney signed the Company’s Form F-1 Registration Statement filed

in connection with the IPO and amendments thereto; a Form F-6 and an amendment thereto, on June



11, 2009, and June 15, 2009, registering the depositary shares of DGW evidenced by American

Depositary Receipts; and a Form F-1 MEF, filed June 24, 2009, registering additional ADSs for sale

pursuant to the F-1 Registration Statement.

47. Defendant Yu, according to the Company’s IPO Form F-1, joined DGW as a Director

in August 2008 and continues to serve in this capacity. Since June of 2007, Yu served as the Vice

President of China Association of Environmental Protection Industry, a nonprofit organization under

the direct management of the Ministry of Environmental Protection of the PRC. Yu signed the

Company’s Form F-1 Registration Statements and amendments thereto filed in connection with the

IPO and SPO; a Form F-6 and an amendment thereto, on June 11, 2009, and June 15, 2009,

registering the depositary shares of DGW evidenced by American Depositary Receipts; and a Form

F-1 MEF, filed June 24, 2009, registering additional ADSs for sale pursuant to the F-1 Registration

Statement.

48. Defendant Wei replaced Defendant Holbert as a Director on August 26, 2009, and

assumed his Board committee assignments, including as Chair of the Audit Committee, in light of

her status as an “audit committee financial expert” (as defined in the SEC rules), a status also held

by Holbert. Wei’s financial and accounting background is extensive. In addition to being both a

Certified Public Accountant and a (Canadian) Chartered Accountant, Wei received a BA in

international accounting from the Central University of Banking and Finance in Beijing, in 1993.

Wei served as an auditor with both Deloitte and Arthur Andersen before taking a series of senior

management jobs as controller and/or CFO for a number of public companies. Wei resigned from

the Board on April 20, 2011. Wei signed the Company’s Form F-1 Registration Statement filed in

connection with the SPO and amendments thereto.



49. Defendant Firlotte joined DGW’s Board in November of 2009, replacing Thomas

Rooney and assuming his Board Committee posts. Firlotte brought to DGW extensive experience

in water company management, having served various roles within the industry since the 1980s.

Firlotte is CEO of Aquarion, the largest private water utility in New England. At the time he joined

the Board, Aquarion was partially owned by an affiliate of Macquarie, one of the SPO underwriters.

Firlotte resigned from the Board on April 20, 2011. Firlotte signed the Company’s Form F-1

Registration Statement filed in connection with the SPO and amendments thereto.

50. Defendants Holbert, Larrea, Rooney, Yu, Wei, and Firlotte are collectively referred

to hereinafter as the “Director Defendants.” The Director Defendants, because of their positions

within the Company, possessed the power and authority to control the contents of Duoyuan Global

Water’s IPO Offering Documents and/or SPO Documents, having authorized and signed such

documents, and failed to carry out their duties in a reasonable manner. Each Director Defendant had

the ability and opportunity to prevent their issuance or cause them to be corrected. The Director

Defendants are liable for the misstatements pleaded herein, as those statements were each

“group-published” information, the result of the collective actions of the Director Defendants.

51. Piper Jaffray & Co. (“Piper Jaffray”) is a “leading middle market investment bank

and asset management firm serving clients in the U.S. and internationally.” Piper Jaffray served as

the sole book running manager of DGW’s IPO and acted as a joint book running manager, along

with Credit Suisse Securities (USA) LLC for the Company’s SPO. Piper Jaffray acted as a financial

advisor to DGW in connection with both the IPO and SPO, helping to draft and disseminate the IPO

and SPO Offering Documents.



52. Oppenheimer & Co. (“Oppenheimer”) is “a leading investment bank and full-service

investment firm that provides financial services and advice to high net worth investors, individuals,

businesses and institutions.” Oppenheimer served as a co-managing underwriter of DGW’s IPO.

Oppenheimer acted as a financial advisor to DGW in connection with the IPO, helping to draft and

disseminate the IPO Offering Documents.

53. Janney Montgomery Scott, LLC (“Janney”) is “a full-service financial services firm,

providing comprehensive financial advice and superior service to individual, corporate and

institutional investors.” Janney served as a co-managing underwriter for both DGW’s IPO and SPO.

Janney acted as a financial advisor to DGW in connection with both the IPO and SPO, helping to

draft and disseminate the IPO Offering Documents and SPO Offering Documents.

54. Credit Suisse Securities (USA) LLC (“Credit Suisse”) is “a world-leading financial

services company, advising clients in all aspects of finance.” Credit Suisse served a joint book

running manager, along with Piper Jaffray, for the Company’s SPO. Credit Suisse acted as a

financial advisor to DGW in connection with the SPO, helping to draft and disseminate the SPO

Offering Documents.

55. Macquarie Capital (USA) Inc. (“Macquarie”) is “a diversified financial services

provider...offering corporate advisory and capital raising services, cash equities and equity

derivatives and structured products, debt and equity financing, credit sales and trading, foreign

exchange, funds management, wholesale lending and specialist finance...” Macquarie served as a

co-managing underwriter for DGW’s SPO. Macquarie acted as a financial advisor to DGW in

connection with the SPO, helping to draft and disseminate the SPO Offering Documents.

56. Rodman & Renshaw, LLC (“Rodman & Renshaw”) is “a full-service investment

bank dedicated to providing corporate finance, strategic advisory and related services to public and



private companies across multiple sectors and regions...Rodman & Renshaw’s China coverage team

provides growth companies in China...a complete package of Investment Banking and Capital

Market Advisory services...[Rodman & Renshaw’s] China focused investment bankers possess

experience across a range of industries, sectors and geographies and provide every client with

Corporate Finance and M&A Advisory services exemplified by a proven track record of deal

execution.” Rodman & Renshaw served as a co-managing underwriter for DGW’s SPO. Rodman

& Renshaw acted as a financial advisor to DGW in connection with the SPO, helping to draft and

disseminate the SPO Offering Documents.

57. The Underwriter Defendants negotiated the initial public offering price and/or

secondary public offering price of DGW ADSs and, in addition, solicited and sold shares to

investors. According to DGW’s Form 424B4, filed with the SEC in connection with the IPO, at

page 164, the Underwriter Defendants “offer the ADSs to the public at $16.00 per ADS. The

underwriters propose to offer the ADSs to certain dealers at the same price less a concession of not

more than $0.67 per ADS.” Similarly, the Prospectus for the SPO, at page 150, stated that the

underwriters for the SPO “offer the ADSs to the public at the public offering price set forth on the

cover page of this prospectus and to dealers at that price less a concession not in excess of $0.84 per

ADS.”

58. Grant Thornton International, Ltd. (“GTI” or “Grant Thornton”) is a world-wide

organization of independent registered public accounting firms. According to DGW’s IPO

Registration Statement, “Grant Thornton” audited the “financial statements as of December 31, 2008

and 2007, and for the years ended December 31, 2008, 2007 and 2006 included in this prospectus.”

“Grant Thornton” also audited DGW’s 2009 financial statements, filed on Form 20-F in June 2010.

GTI consented to the inclusion of its opinions with respect to the Company’s combined and


3 GTI’s website “www.gti.org”, explains that “correspondent firms” are “not ... member firms ofGrant Thornton International. They are not allowed to use the Grant Thornton name.” Seehttp://www.gti.org/Member-firms/Correspondent-firm.asp. Here, the operative financial statementswere issued by an entity only described as “Grant Thornton.” Based upon Park’s representations,it is unclear whether GT-China, GT-Hong Kong or an amalgam of the work of both entities, underthe auspices of GTI, performed the work at issue.


consolidated financial statements, in both the Form 20-F and the IPO and SPO Registration

Statements and Prospectuses. GTI is currently DGW’s outside auditor, through its member firm ,

Jingdu Tianhua, also known as “GT-China.”

59. At all times relevant to the instant action, the accounting firm JBPB & Co., then also

known as GTI member firm “GT-Hong Kong,” also served as DGW’s outside auditor. During a

conference call with investors on November 17, 2010, DGW’s CFO, Defendant Park indicated that

DGW had, “up to this point ... been working actually with both offices,” i.e., GT-China and GT-

Hong Kong.3 GT-Hong Kong acted as an agent of GTI, in that GTI requires a commitment of each

member firm to the “standards and values represented by the Grant Thornton International brand”

and, should that commitment be breached, GTI has the authority to discipline or expel member firms

from the organization.

60. BDO International Limited (“BDO”) is the fifth-largest worldwide network of public

accounting firms. On September 20, 2010, GTI gave notice to GT-Hong Kong that it had to leave

the organization, which it did effective November 23, 2010. GT-Hong Kong announced that it

would thereafter “merge its practice with BDO Limited, the Hong Kong member firm of the global

BDO network” in December 2010. BDO Limited Hong Kong (also referred to herein at “GT-Hong

Kong”) is named as the successor entity to GT-Hong Kong.

61. Defendant Global Environment Fund (“GEF”) whose corporate offices are in Chevy

Chase, Maryland, is a pioneer in the area of private equity investment in innovative “green”


4 According to the SPO Form F-1, at 122, the Investment Committee of GEEMF was comprised ofH. Jeffrey Leonard, Bruce H. MacLeod and Wendell W. Robinson, two of whom are part of GEF’ssenior “corporate team.” The third, MacLeod, is or has been affiliated with GEF ManagementCorporation and GEF Finance.


businesses. GEF has investments worldwide, including in many emerging markets. GEF, which

currently has $1 billion in aggregate capital under management, invested $30.2 million in DGW in

February 2008, taking a 20% stake in the company, using an vehicle known as Global Environment

Emerging Market Fund III Holdings MU (“GEEMF”), a private investment company organized

under the laws of the Republic of Mauritius.

62. DGW’s Form F-1, filed January 8, 2010, describes Defendant GEEMF as an

“affiliate” of GEF.4

CLASS ACTION ALLEGATIONS

63. Plaintiffs bring 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

Duoyuan Global Water’s ADSs between June 24, 2009 and April 5, 2011, inclusive (the “Class”),

seeking to pursue remedies under the Securities Act of 1933 and the Securities Exchange Act of

1934. Excluded from the Class are Defendants, the officers and directors of all Defendant

companies, 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.

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

impracticable. Throughout the Class Period, Duoyuan Global Water’s ADSs were actively traded

on the NYSE. While the exact number of Class Members is unknown to Plaintiffs at this time and

can only be ascertained through appropriate discovery, Lead Plaintiffs believe that there are

hundreds or thousands of members in the proposed Class. Millions of Duoyuan Global Water ADRs



(representing DGW’s ADSs) were traded publicly during the Class Period on the NYSE. Record

owners and other members of the Class may be identified from records maintained by Duoyuan

Global Water or its transfer agent and may be notified of the pendency of this action by mail, using

the form of notice similar to that customarily used in securities class actions.

65. Plaintiffs’ claims are typical of the claims of the members of the Class as all members

of the Class are similarly affected by Defendants’ negligent and/or wrongful conduct in violation

of federal law that is complained of herein.

66. Lead Plaintiffs will fairly and adequately protect the interests of the members of the

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

67. 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:

(a) Whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

(b) Whether statements made by Defendants to the investing public in the IPO

and SPO Offering Documents and in addition representations during the Class Period omitted and/or

misrepresented material facts about the business, operations, and prospects of Duoyuan Global

Water; and

(c) To what extent the members of the Class have sustained damages and the

proper measure of damages.

68. 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 makes it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

COUNT I Violation of Section 11 of the Securities Act

(Against All Defendants)

69. Plaintiffs bring this claim on behalf of themselves and other members of the Class

who purchased DGW’s ADSs pursuant to or traceable to the IPO and/or SPO. Each Class Member

acquired shares pursuant to or traceable to the Offering Documents filed in conjunction with the IPO

and/or SPO. As a result of materially false and/or misleading statements in and/or omissions from

these documents, Plaintiffs and the Class purchased DGW’s ADSs at artificially inflated prices.

DGW’s price declined significantly in response to a series of disclosures, each of which partially

revealed adverse facts concerning DGW’s business and/or financial condition that Defendants

negligently misstated, thereby causing damages to Plaintiffs and the Class.

70. Defendants’ liability under this Count is predicated on the negligence of each

Defendant in conducting DGW’s IPO and SPO pursuant to the Registration Statement, which

contained untrue statements and omissions of material fact, and in failing to recognize and correct

those misstatements and omissions. This claim is brought pursuant to Section 11 of the Securities

Act and does not contain any allegations sounding in fraud. For the purposes of Count I, Plaintiffs

and the Class affirmatively state that they do not allege that Defendants engaged in intentional or

reckless conduct or that they acted with scienter or fraudulent intent.

71. Plaintiffs incorporate herein by reference ¶¶ 1-2, 4-68.

Materially False and Misleading Statements Issued During the Class Period

72. On June 1, 2009, the Company filed a Form F-1 Registration Statement with the SEC

for its initial public offering. Following several amendments, the IPO became effective on June 24,



2009, and the Prospectus, dated June 24, 2009, was filed the following day. (These filings are

collectively referred to as the “IPO Registration Statement” or the “IPO Offering Documents.”)

73. On June 24, 2009, DGW announced that it had priced its IPO at $16 per ADS (with

each ADS representing two ordinary shares) and sold 5.5 million ADSs. The underwriters exercised

their over-allotment for an additional 825,000 ADSs. According to DGW’s SPO Form F-1, the net

proceeds from the IPO, after deducting a total of $8,607,669 of underwriting discounts, commissions

and offering expenses, was $92,592,301.

74. The IPO Offering Documents contained the following audited financial statements:

the Consolidated Balance Sheets of DGW and its subsidiaries at December 31, 2007, and December

31, 2008; Combined and Consolidated Statements of Income for the years ended December 31,

2006, December 31, 2007, and December 31, 2008; Combined and Consolidated Statements of Cash

Flows for the years ended December 31, 2006, December 31, 2007, and December 31, 2008; and

the Combined and Consolidated Statements of Shareholders’/Owners’ Equity for the years

December 31, 2006, December 31, 2007, and December 31, 2008. The IPO Offering Documents

also included the following unaudited reports for Q1’09: Consolidated Balance Sheets as of March

31, 2009; Consolidated Statements of Income for the Three Months Ended March 31, 2008 and

2009; Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2009;

and Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2009.

75. On page 170 of both the Form F-1 and Form 424B4, under the heading “Experts,”

the following statement with respect to DGW’s financial reports appears: “The financial statements

as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006

included in this prospectus have been audited by Grant Thornton, an independent registered public

accounting firm, as stated in their report appearing elsewhere in this prospectus, and have been so



included in reliance upon the report of this firm given upon their authority as experts in accounting

and auditing.”

76. Included as Exhibit 23.1 to the IPO Registration Statement is a document entitled

“Consent of Independent Registered Public Accounting Firm,” executed in Hong Kong on June 1,

2009 (the date of the filing). Exhibit 23.1 states as follows: “We have issued our report dated March

3, 2009, except for Note 20, as to which the date is June 1, 2009, accompanying the consolidated

and combined and consolidated financial statements contained in the Registration Statement and

Prospectus. We consent to the use of the aforementioned report in the Registration Statement and

Prospectus, and to the use of our name as it appears under the caption ‘Experts.’”

77. Included in the financial information provided in the IPO Offering Documents, at

Note 14 to the Financial Statements, under the heading “Segment Reporting” are tables setting forth

by both year, 2006-2008, and subsidiary, “Duoyuan Beijing” and “Duoyuan Langfang”, Income

Statement information for various line items. See Form F-1, filed June 1, 2009, at F-24 through F-

26. Based upon the information provided by DGW in the official financial documents on file for

these two subsidiaries at the local AICs in China, a number of key financial metrics appear to have

been vastly overstated in DGW’s SEC filings in the United States, to wit:

(a) Duoyuan Langfang figures misstated for 2008 include:

Revenues Operating Income

SEC Form F-1 (U.S.) 424,449,531 RMB 96,253,974 RMB

AIC (China) 1,931,433 RMB 1,931,433 RMB



(b) Duoyuan Beijing figures misstated for 2008 include:



AIC (China) 3,638,904 RMB 690,600 RMB

(c) Duoyuan Langfang figures misstated for 2007 include:



AIC (China) 3,202,784 RMB 1,889,088 RMB

(d) Duoyuan Beijing figures misstated for 2007 include:



AIC (China) 1,864,374 RMB 269,260 RMB

(e) Duoyuan Langfang figures misstated for 2006 include:



AIC (China) 0 RMB -621,545 RMB

(f) Duoyuan Beijing figures misstated for 2006 include:



AIC (China) 2,163,644 RMB -13,460,386 RMB

78. Included in the financial information provided in the IPO Offering Documents were

net income figures for DGW from 2006 to 2008. See Form F-1, filed June 1, 2009, at 51. Although


5 Muddy Waters noted that it is unclear whether DGW Langfang, which is reported as contributingapproximately 75% of revenues, is consolidated into the AIC filing for the headquarters, DGWBeijing, or reported separately. This uncertainty is demonstrated in the SEC filings as well. See,e.g., F-1, filed June 1, 2009, at F-35 (“Elimination” line item in “Revenues” category for the entireamount of Duoyuan Langfang’s revenue).


it is unclear whether Duoyuan Langfang’s results are incorporated in Duoyuan Beijing’s results (see

n.3, infra), both reported net losses for 2006 through 2008, not net income as reported to the SEC:

Net Income of DGW

2006 2007 2008

DGW SEC Form F-1 (U.S.) 52,812,000 RMB 82,208,000 RMB 133,767,000 RMB

Duoyuan Langfang AIC(China)

-621,545 RMB -6,536,537 RMB -3,341,131 RMB

Duoyuan Beijing AIC (China) -13,019,697 RMB -8,676,476 RMB -7,530,776 RMB

79. Included in the financial information provided in the IPO Offering Documents for

the last full fiscal year prior to the IPO — 2008 — are figures representing DGW’s cash flows from

operations. The cash flows from operations figure was incorrectly stated in at least one respect:

Defendant Guo repaid loans for 43.8 million RMB, which amounts, in accordance with Statement

of Financial Accounting Standards No. (“FAS”) 95, ¶16(a), should have been classified as cash

flows from financing activities, not operating activities. See Form F-1, at F-6.

80. Included in the financial information in the IPO Offering Documents is a revenue

figure for Q1’09 of 120,645,698 RMB, or $17,656,586. According to Plaintiffs’ investigation,

revenue figures reported to the AICs for all of FY’09 were only 3,250,535 RMB (Duoyuan Beijing)

and 2,327,492 RMB Duoyuan Langfang — 3,250,535 RMB if Duoyuan Beijing incorporates

Duoyuan Langfang or 5,578,027 RMB if they are to be considered separately — approximately

$820,000.5 (Similarly, the Muddy Waters Rpt., which claimed to have attached the auditor’s


6 Muddy Waters claims that the original 2009 report it viewed in February and March 2011 wasreplaced with a fake report thereafter. In April 2011, Plaintiffs’ investigator copied original imagesof financial documents from the local files for all Duoyuan subsidiaries for the years 2005-2009, butwas unable to find the original images for the Duoyuan Langfang financial statements for 2008 and2009 — the fake report reports were apparently removed from the files after the Muddy Waters Rpt.was issued — and was forced to copy a digital table that stood in their place in the registration files.

7 DGW’s June 1, 2009, Form F-1 stated: “In 2006, 2007 and 2008 and the three months ended March31, 2009, sales to distributors accounted for 97.9%, 100%, 100% and 100% of our revenue,respectively.”


original report, indicated that total revenues for all of 2009, as initially reported to the respective

local AICs, were approximately 3.3-5.6 million RMB, or $500,000 to $800,000.6) Therefore, the

figure set forth in the Form F-1 for only a single quarter of FY’09 revenue is clearly overstated.

81. Included in the IPO Offering Documents is the repeated representation that DGW

sells its products exclusively7 via a network of “over 80 distributors throughout China in 28

provinces.” Plaintiffs are informed and believe, and based thereon allege, that this is a material

overstatement of DGW’s actual distributor network for the following reasons:

(a) The IPO Offering Documents mention no distributor by name and no one

distributor was reported to be responsible for more than 3% of DGW’s sales

in any given year;

(b) Despite the Company’s purported exclusive reliance upon its distributors, no

template of the annually-renewed contract, executed with the more than 80

distributors, was attached as an Exhibit to the Form F-1;

(c) DGW’s main website does not list a single distributor from whom products

can be purchased, nor do the websites to which one can hyperlink to the

various subsidiaries and/or product divisions;



(d) According to the Muddy Waters Rpt., when posing as potential customers,

it was difficult for investigators to locate DGW distributors, despite asking

DGW sales and marketing personnel to provide their names. A third-party

investor provided Muddy Waters with the name of a single distributor, who

indicated that DGW’s products were high-priced and not in demand and that

the Company did a poor job of marketing and promotion. This distributor

had the impression that DGW’s main focus was to make money selling its

ADSs. Also, an investigator for Muddy Waters was told that there was

neither a sales office nor a distributor in Shanghai – China’s most populous

city.

82. The IPO Registration Statement overstated the number of people employed by DGW

at the time of the IPO:

(a) DGW stated that it had 796 employees as of December 31, 2006, 756

employees as of December 31, 2007, and 927 employees as of December 31,

2008. (In its subsequent SPO Registration Statement, filed on January 11,

2010, DGW repeated these same numbers for year-end 2007 and 2008, and

added that it had 1,166 employees as of December 31, 2009.);

(b) However, during a conference call with investors to discuss DGW’s Q4’10

and FY’10 results, Guo stated that there were 580 employees at DGW’s sole

manufacturing facility in Langfang (170 worked the night shift);

(c) The Muddy Waters Rpt. described surveillance on the Duoyuan Langfang

factory conducted on several occasions between January and April 2011.



This surveillance included a period of constant observation for approximately

80 consecutive hours in March 2011. Despite the fact that Langfang includes

large factory buildings, Muddy Waters observed “few signs of human

activity” and “witnessed no trucks entering or exiting the factory.” Muddy

Waters counted only approximately 240 employees entering and exiting the

facility during daytime hours, and no employees at night (when the factory

and its grounds were completely dark). Several DGW employees on site told

Muddy Waters that the Langfang facility had about 200 employees; and

(e) Plaintiffs’ investigator visited Duoyuan Beijing and Duoyuan Langfang in

early April 2011. Duoyuan Beijing is located, along with DYP, on the top

two floors of a modest five-story office building. The Duoyuan Langfang

site visited by Muddy Waters, Plaintiffs’ investigator determined, is also the

home of two of the three newer DGW subsidiaries, Duoyuan Centrifuge and

Duoyuan Aeration (Duoyuan Water Conservation’s site is apparently under

construction). Plaintiffs are informed and believed, and based thereon

allege, that DYP also houses some of its manufacturing at DGW’s Langfang

site. Plaintiffs’ investigator interviewed a manager of DGW Mr. Wang, who

indicated that DGW was not hiring – a surprise given the amount of

expansion planned as set forth in the IPO Offering Documents.

83. In light of the sharp increase in production in the fiscal years surrounding the IPO

— year-over-year revenues increased more than 30% from 2009 to 2010, 32% from 2008 to 2009,

and new subsidiaries were formed in 2009 — it appears highly unlikely that the Company employed



927 workers in 2008 but only 580 by year-end 2010. Therefore, the figure in the IPO Offering

Documents was overstated.

84. On January 8, 2010, the Company filed a Form F-1 Registration Statement with the

SEC for its secondary public offering. Following several amendments, the SPO became effective

after the close of trading on January 27, 2010, and the Prospectus, dated January 27, 2009, was filed

on January 29, 2010. (These filings are collectively referred to as the “SPO Registration Statement”

or the “SPO Offering Documents.”)

85. On January 28, 2010, DGW announced that it had priced its SPO at $29.50 per ADS

(with each ADS representing two ordinary shares) and planned to sell 3.545 million ADSs. Of this

amount, 2.76 million ADSs were being sold by the Company and 785,000 ADSs were being offered

by a selling shareholder, GEEMF, an affiliate of the GEF. GEEMF, which had originally purchased

20% of DGW in February 2008 for $30.2 million, was selling approximately 25% of its stake for

$23,157,500.

86. According to DGW’s Form 20-F, on February 2, 2010, the Company completed its

secondary offering of 2.76 million ADSs (representing 5,520,000 ordinary shares) at a price of

$29.50 per ADS. Net proceeds to DGW, after deducting a total of $4,612,571 of underwriting

discounts, commissions and offering expenses, totaled $76,807,429.

87. The SPO Offering Documents contained the following audited financial statements:

the Consolidated Balance Sheets of DGW and its subsidiaries at December 31, 2007, and December

31, 2008; Combined and Consolidated Statements of Income for the years ended December 31,

2006, December 31, 2007, and December 31, 2008; Combined and Consolidated Statements of Cash

Flows for the years ended December 31, 2006, December 31, 2007, and December 31, 2008; and



the Combined and Consolidated Statements of Shareholders’/Owners’ Equity for the years

December 31, 2006, December 31, 2007, and December 31, 2008. The SPO Offering Documents

included the following unaudited reports for 2009: Consolidated Balance Sheets as of September

30, 2009; Consolidated Statements of Income for the Three Months Ended September 30, 2008 and

2009; Consolidated Statement of Shareholders’ Equity for the Three Months Ended September 30,

2009; and Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2008

and 2009.

88. On page 156 of the Form F-1 and page 158 of the Prospectus, under the heading

“Experts,” the following statement with respect to DGW’s financial reports appears: “ The financial

statements as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and

2006 included in this prospectus have been audited by Grant Thornton, an independent registered

public accounting firm, as stated in their report appearing elsewhere in this prospectus, and have

been so included in reliance upon the report of this firm given upon their authority as experts in

accounting and auditing.”

89. Included as Exhibit 23.1 to the SPO Registration Statement is a document entitled

“Consent of Independent Registered Public Accounting Firm,” executed in Hong Kong on January

8, 2009 (the date of the filing). Exhibit 23.1 states as follows: “We have issued our report dated

March 3, 2009, except for Note 20, as to which the date is June 1, 2009, accompanying the

consolidated and combined and consolidated financial statements contained in the Registration

Statement and Prospectus. We consent to the use of the aforementioned report in the Registration

Statement and Prospectus, and to the use of our name as it appears under the caption ‘Experts.’”



90. Included in the financial information provided in the SPO Offering Documents, at

Note 14 to the Financial Statements, under the heading “Segment Reporting” are tables setting forth

by both year, 2006-2008, and subsidiary, “Duoyuan Beijing” and “Duoyuan Langfang”, Income

Statement information for various line items. See Form F-1, filed January 11, 2010, at F-21 through

F-23. Based upon the information provided by DGW in the official financial documents on file for

these two subsidiaries at the local AICs in China, a number of key financial metrics appear to have

been vastly overstated in DGW’s SEC filings in the United States, to wit:

(a) Duoyuan Langfang figures misstated for 2008 include:



AIC (China) 1,931,433 RMB 1,931,433 RMB

(b) Duoyuan Beijing figures misstated for 2008 include



AIC (China) 3,638,904 RMB 690,600 RMB

(c) Duoyuan Langfang figures misstated for 2007 include:



AIC (China) 3,202,784 RMB 1,889,088 RMB

(d) Duoyuan Beijing figures misstated for 2007 include:





AIC (China) 1,864,374 RMB 269,260 RMB

(e) Duoyuan Langfang figures misstated for 2006 include:



AIC (China) 0 RMB -621,545 RMB

(f) Duoyuan Beijing figures misstated for 2006 include:



AIC (China) 2,163,644 RMB -13,460,386 RMB

91. Included in the financial information provided in the IPO Offering Documents were

the net income figures for DGW from 2006-2008. See Form F-1, filed June 1, 2009, at 51.

Although it is unclear whether Duoyuan Langfang’s results are incorporated into Duoyuan Beijing’s

results (see n.3, infra), both reported net losses for 2006-2008, not net income as reported to the

SEC:

Net Income of DGW

2006 2007 2008

DGW SEC Form F-1 (U.S.) 52,812,000 RMB 82,208,000 RMB 133,767,000 RMB

Duoyuan Langfang AIC(China)

-621,545 RMB -6,536,537 RMB -3,341,131 RMB

Duoyuan Beijing AIC (China) -13,019,697 RMB -8,676,476 RMB -7,530,776 RMB


8 DGW’s January 11, 2009, Form F-1 stated: “In 2006, 2007 and 2008 and the nine months endedSeptember 30, 2009, sales to distributors accounted for 97.9%, 100%, 100% and 100% of ourrevenue, respectively.”


92. Included in the financial information provided in the SPO Offering Documents for

the last full fiscal year prior to the IPO — 2008 — are figures representing DGW’s cash flows from

operations. The cash flows from operations figure was incorrectly stated in at least one respect:

Defendant Guo repaid loans for 43.8 million RMB, which amounts, in accordance with Statement

of Financial Accounting Standards No. (“FAS”) 95, ¶ 16(a), should have been classified as cash

flows from financing activities, not operating activities. See Form F-1, at F-6.

93. Included in the financial information in the SPO Offering Documents is a revenue

figure for the nine months ended 589,579,085 RMB, or $86,370,028. According to Plaintiffs’

investigation, revenue figures reported to the AICs for all of FY’09 were only 3,250,535 RMB

(Duoyuan Beijing) and 2,327,492 RMB Duoyuan Langfang — 3,250,535 RMB if Duoyuan Beijing

incorporates Duoyuan Langfang or 5,578,027 RMB if they are to be considered separately —

approximately $820,000. (As alleged above, the Muddy Waters Rpt., which claimed to have

attached the auditor’s original report, indicated that total revenues for all of 2009, as initially

reported to the respective local AICs, were approximately 3.3-5.6 million RMB, or $500,000 to

$800,000.) Therefore, the figure set forth in the Form F-1 for three quarters of FY’09 revenue is

clearly overstated.

94. Included in the SPO Offering Documents is the repeated representation that DGW

sells its products exclusively8 via a network of “over 80 distributors throughout China in 28

provinces.” Plaintiffs are informed and believe, and based thereon allege, that this is a material

overstatement of DGW’s actual distributor network for the following reasons:



(a) The IPO Offering Documents mention no distributor by name and no one

distributor was reported to be responsible for more than 3% of DGW’s sales

in any given year;

(b) Despite the Company’s purported exclusive reliance upon its distributors, no

template of the annually-renewed contract executed with the more than 80

distributors was attached as an Exhibit to the Form F-1;

(c) DGW’s main website does not list a single distributor from whom products

can be purchased, nor do the websites to which one can hyperlink to the

various subsidiaries and/or product divisions;

(d) According to the Muddy Waters Rpt., when posing as potential customers,

it was difficult for investigators to locate DGW distributors, despite asking

DGW sales and marketing personnel to provide their names. A third-party

investor provided Muddy Waters with the name of a single distributor, who

indicated that DGW’s products were high-priced and not in demand and that

the Company did a poor job of marketing and promotion. This distributor

had the impression that DGW’s main focus was to make money selling its

ADSs. Also, an investigator for Muddy Waters was told that there was

neither a sales office nor a distributor in Shanghai – China’s most populous

city.

95. The SPO Registration Statement overstated the number of people employed by DGW

at the time of the SPO:



(a) DGW stated that it had 796 employees as of December 31, 2006, 756

employees as of December 31, 2007, 927 employees as of December 31,

2008, and 1,166 employees as of December 31, 2009 – 813 of whom were

employed in “production” operations;

(b) However, during a conference call with investors to discuss DGW’s Q4’10

and FY’10 results, Guo stated that there were 580 employees at DGW’s sole

manufacturing facility in Langfang (170 worked the night shift);

(c) The Muddy Waters Rpt. described surveillance on the Duoyuan Langfang

factory conducted on several occasions between January and April 2011.

This surveillance included a period of constant observation for approximately

80 consecutive hours in March 2011. Despite the fact that Langfang includes

large factory buildings, Muddy Waters observed “few signs of human

activity” and “witnessed no trucks entering or exiting the factory.” Muddy

Waters counted only approximately 240 employees entering and exiting the

facility during daytime hours, and no employees at night (when the factory

and its grounds were completely dark). Several DGW employees on site told

Muddy Waters that the Langfang facility had about 200 employees; and

(e) Plaintiffs’ investigator visited Duoyuan Beijing and Duoyuan Langfang in

early April 2011. Duoyuan Beijing is located, along with DYP, on the top

two floors of a modest five-story office building. The Duoyuan Langfang

site visited by Muddy Waters, Plaintiffs’ investigator determined, is also the

home of two of the three newer DGW subsidiaries, Duoyuan Centrifuge and



Duoyuan Aeration (Duoyuan Water Conservation’s site is apparently under

construction). Plaintiffs are informed and believed, and based thereon

allege, that DYP also houses some of its manufacturing at DGW’s Langfang

site. Plaintiffs’ investigator interviewed an employee who indicated that

DGW was not hiring any new employees — a surprise given the amount of

expansion planned as set forth in the SPO Offering Documents.

96. Contrasting the on-site investigation of Plaintiffs’ investigator and Muddy Waters

with the sharp increase in reported production in the fiscal years surrounding the SPO — year-over-

year revenues increased more than 30% from 2009 to 2010, 32% from 2008 to 2009, and new

subsidiaries were formed in 2009 — it appears highly unlikely that the Company employed 1,166

workers by year-end 2009 but only 580 by year-end 2010. Therefore, the figure in the SPO Offering

Documents was overstated.

The True Facts Begin to EmergeThrough a Series of Partial Disclosures

97. On September 13, 2010, DYP issued a press release entitled, “Duoyuan Printing

Announces Management Reorganization and Change of Auditor.” Therein, DYP, in relevant part,

stated:

BEIJING, September 13, 2010 – Duoyuan Printing, Inc. (NYSE: DYP) (“DuoyuanPrinting” or the “Company”), a leading offset printing equipment supplier in China,today announced several management changes as well as the dismissal of DeloitteTouche Tohmatsu CPA Ltd.(“Deloitte”) as its independent registered publicaccounting firm. The Company is currently in discussion with an auditing firm toreplace Deloitte.

Effective immediately, Mr. Xiqing Diao has been appointed Duoyuan Printing’sCEO. Previously the Company’s COO, Mr. Diao has been with the Company since2005 and served as interim CEO in 2009. Ms. Baiyun Sun has been appointed CFO.Ms. Sun has been with Duoyuan Printing since 1994 previously serving as the



Company’s controller. Mr. Wenzhong Liu, previously vice president of sales andmarketing, has been appointed COO and Mr. Lianjun Cai, a Company director, hasbeen appointed chairman of the audit committee.

Immediately subsequent to the Company’s termination of Deloitte, Mr. William Suhresigned as Duoyuan Printing’s CFO and Mr. Christopher Holbert resigned asDuoyuan Printing’s CEO. Mr Holbert will remain with the Company as vicepresident of international markets. Mr. James Zhang resigned as director andchairman of the audit committee and Ms. Naoko Hatakeyama and the HonorablePaula J. Dobriansky also subsequently resigned as directors. Mr. Xiqing Diao hasalso resigned as a director in order to maintain the required proportion ofindependent directors on Duoyuan Printing’s board.

Duoyuan Printing’s Chairman Mr. Wenhua Guo stated, “The audit committee’sdecision to change auditing firms was based on its desire to resolve open issues andfile our 10-K on a timely basis. We will work closely with our new auditors toaddress the open issues aired by Deloitte. We believe that our several internalreassignments are the best way to move the company forward and complete ourannual audit. We believe we now have the right people in important roles to executethe company’s business strategy and to meet our current reporting obligations.”

98. On September 13, 2010, DYP filed a Current Report on Form 8-K with the SEC.

Therein, DYP, in relevant part, stated:

Item 4.01 Changes in Registrant’s Certifying Accountant.

Effective as of September 6, 2010, Deloitte Touche Tohmatsu CPA Ltd. (“Deloitte”)was dismissed by the Audit Committee (the “Audit Committee”) of DuoyuanPrinting, Inc. (the “Company”) as the independent registered public accounting firmof the Company.

During the period of Deloitte’s engagement from March 2, 2010 to September 6,2010, no audit performed by Deloitte had been completed and, therefore, no auditreports had been issued that (i) contained an adverse opinion or disclaimers ofopinion or (ii) were qualified or modified as to uncertainty, audit scope or accountingprinciples.

During the period from March 2, 2010 to September 6, 2010, there were nodisagreements between the Company and Deloitte on matters of accountingprinciples or practices, financial statement disclosure or auditing scope or procedure,which disagreements, if not resolved to the satisfaction of Deloitte, would havecaused Deloitte to make reference to the subject matter of the disagreement in theirreports on the financial statements, except for the following:



• Deloitte requested that the Company provide permission to access

original bank statements to complete its audit procedures to verifythe identity of certain individuals and entities associated with thirdparty distributors and vendors. As of the time of Deloitte’sdismissal, the Company had not granted such permission becauseit believed the method and scope of the request was overly broad forthe purpose of verifying the identity of such individuals and entities.Deloitte informed the Chairman of the Audit Committee of suchdisagreement and the matter was not resolved by the time ofDeloitte’s dismissal.

During the period from March 2, 2010 to September 6, 2010, there were no“reportable events” as that term is defined in

Item 304(a)(1)(v) of Regulation S-K, except the following:

• In the course of its audit procedures, Deloitte identified supportingdocumentation for approximately RMB24 million of expensesrelated to advertising and tradeshow costs, the authenticity of whichcould not be verified to Deloitte’s satisfaction. Deloitte suggested tothe Audit Committee that it investigate these expenses. The AuditCommittee has undertaken an independent investigation. At thetime of its dismissal, Deloitte had not received subsequentinformation from the Audit Committee on the progress or outcomeof the investigation.

• In the course of its audit procedures, Deloitte received information

regarding certain distributors and vendors that appearedinconsistent with certain information that the Company hadprovided. Deloitte informed the Company and the Audit Committeeof the inconsistencies. The Company worked to address theseinconsistencies, but at the time of its dismissal, Deloitte had notreceived complete explanations from the Company to address all ofits concerns.

• Deloitte advised the Audit Committee that it was informed by the

Chief Executive Officer and Chief Financial Officer of theCompany that they felt they did not have access to the informationon the open matters referred to above nor were they in a position toassist the investigation. Deloitte expressed its concerns as to theimpact of this on its ability to rely on the future representationsfrom those members of management that it would otherwise seek toobtain as part of its normal audit procedures.



The Company has authorized Deloitte to respond fully to the inquiries of theCompany’s successor accountant concerning the subject matter of each of thedisagreement and reportable events referred to above.

The Company provided Deloitte with a copy of the disclosures it is making in thisCurrent Report on Form 8-K (the “Report”) prior to the time the Report was filedwith the Securities and Exchange Commission (the “SEC”). The Company requestedthat Deloitte furnish a letter addressed to the SEC stating whether or not it agreeswith the statements made herein. The Company will file the letter from Deloitte asan amendment to this Report within two business days of receipt.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors;Appointment of Principal Officers; Compensatory Arrangements of CertainOfficers.

(a) On September 6, 2010, following the decision to dismiss Deloitte as theindependent registered public accounting firm of the Company:

• Mr. James Zhang, Chairman of the Audit Committee tendered hisresignation from the Board of Directors of the Company (the“Board”) effective immediately over the disagreement with theCompany and the Board for dismissing Deloitte as the independentregistered public accounting firm of the Company. Mr. Zhang hadserved as the Chairman of the Audit Committee and a member of theBoard since September 2009. Mr. Zhang’s resignation letter isincluded as Exhibit 99.2 to this Current Report; and

• The Honorable Paula J. Dobriansky tendered her resignation from the

Board effective immediately, which was later followed by a formalletter. The Honorable Paula J. Dobriansky had served as a member ofthe Board since May 2010. Ms Dobriansky’s resignation letter isincluded as Exhibit 99.3 to this Current Report.

On September 8, 2010:

• Ms. Naoko Hatakeyama tendered her resignation from the Boardeffective immediately. Ms. Hatakeyama had served as a member ofthe Board since May 2010. Ms. Hatakeyama’s resignation letter isincluded as Exhibit 99.4 to this Current Report; and

• Mr. Xiqing Diao tendered his resignation from the Board effective

immediately in an effort to maintain a majority of independentdirectors on the Board to stay in compliance with relevant listing



standards. Mr. Diao had served as a member of the Board sinceNovember 2005, and will remain with the Company as its new ChiefExecutive Officer as described in more detail below.

The circumstances representing the disagreement that caused the resignation of theabove Directors, if any, are provided in their respective resignation letters, ifapplicable, which are incorporated herein by reference in their entirety.

The Company provided each of the above Directors (the “Resigning Directors”)with a copy of the disclosures it is making in the Report prior to the time the Reportwas filed with the SEC. The Company provided each of the Resigning Directors withthe opportunity to furnish a letter addressed to the Company stating whether or nothe or she agrees with the statements made herein. The Company will file the letterfrom each of Resigning Directors as an amendment to this Report within twobusiness days of receipt.

(b) Following the decision to dismiss Deloitte as the independent registered publicaccounting firm of the Company:

• On September 6, 2010, Mr. William D. Suh tendered his resignationfrom the position of Chief Financial Officer of the Company effectiveimmediately. Mr. Suh had served as the Chief Financial Officer of theCompany since October 2008; and

• On September 8, 2010, Mr. Christopher Patrick Holbert tendered his

resignation from the position of Chief Executive Officer of theCompany effective September 8, 2010 18:00 p.m. Beijing Time. Mr.Holbert had served as the Chief Executive Officer of the Companysince August 2009.

(c) On September 8, 2010, the Board also made the following changes:

• Mr. Lianjun Cai was elected as Chairman of the Audit Committeeeffective immediately. In making this election, the Board determinedthat Mr. Lianjun Cai had sufficient accounting and related financialmanagement expertise to serve as the Chairman of the AuditCommittee.

• Mr. Xiqing Diao was appointed as the Chief Executive Officer of the

Company effective September 8, 2010 18:00 p.m. Beijing Time. Atthe same time, Mr. Diao stepped down from the position of the ChiefOperating Officer of the Company. Mr. Diao has served as a Directorand the Chief Operating Officer of the Company since November2005. Mr. Diao also served as the interim Chief Executive Officer of



the Company from July 9, 2009 to August 26, 2009. He served asvice general manager of Duoyuan Clean Water TechnologyIndustries (China) Co., Ltd. (“Duoyuan Water”) from August toNovember 2005, assistant general manager of Duoyuan Electric(Tianjin) Auto Water Pump Co., Ltd., an automobile partsmanufacturer, from January to July 2005, and general manager ofOperations of Duoyuan Electric Group from January 2003 toDecember 2004. From May 2001 to December 2002, Mr. Diao servedas general manager of No. 1 Division of Duoyuan Water. He was alsocertified as an ISO9001:2000 Internal Auditor and an ISO14000Internal Auditor in 2004. Mr. Diao received a bachelor’s degree inmechanics from Tianjin Textile Technology Institute, China.

• Ms. Baiyun Sun was appointed as the Chief Financial Officer of the

Company effectively immediately. Ms. Sun served as the Controllerof the Company from October 1, 2008 to September 8, 2010. Prior tothat, she served as interim Chief Financial Officer of the Companyfrom December 20, 2007 to March 1, 2008 and from May 21, 2008to October 1, 2008. Prior to that, she served as the Chief FinancialOfficer of the Company from October 6, 2006 to July 18, 2007, aDirector and vice president of the Company between June 2001 andApril 2007 and chief accountant of Duoyuan Electric Group fromJanuary 1994 to May 2001. Ms. Sun received a bachelor’s degree inaccounting from Beijing Finance and Commerce Institute, China.

• Mr. Wenzhong Liu was appointed as the Chief Operating Officer of

the Company effectively immediately. Mr. Liu has served as vicepresident of sales and marketing of the Company since November2005. He served as assistant general manager of sales at DuoyuanDigital Press Technology Industries (China) Co., Ltd. (“DuoyuanChina”) from July to October 2005, interim general manager of salesat Duoyuan China from November 2004 to June 2005, and salesrepresentative at Duoyuan China from January 2001 to October 2004.Mr. Liu received a bachelor’s degree in science from LuoyangEngineering Institute, China.

• Mr. Christopher Patrick Holbert was appointed as Vice President of

International Markets effective immediately.

(Emphasis added).

99. Just as the market was opening on the morning of September 13, 2010, Piper Jaffray,

the IPO’s lead underwriter, downgraded DGW from “overweight” to “neutral.” Less than an hour



later, citing DYP’s management departures and corporate governance issues (discussed in the prior

paragraph) as a reason, Piper Jaffray issued a further downgrade, to “underweight,” and lowered

its price target from $34 — affirmed as recently as June 2, 2010, following a visit with management

— to only $9 per ADS. Whereas, according to some, Michael Cox of Piper Jaffray was the analyst

most bullish on DGW, a downgrade based upon the mere hint of an accounting risk was enough to

trigger a sell-off. In fact, the price of DGW’s ADSs plummeted that day, from a close of $20.70 on

September 10, 2010, to $12.10 on September 13, 2010, on extraordinary trading volume.

100. DGW understood that investors sold their DGW ADSs on September in reaction to

the alarming news about DYP. In a press release issued the following day, DGW explained some

of the reasons that the news about DYP caused investors to believe that serious accounting and

corporate governance problems existed at DGW:

Beijing, China, September 14, 2010 — Duoyuan Global Water Inc. (NYSE: DGW)(“Duoyuan” or the “Company”), a leading China-based domestic water treatmentequipment supplier, today announced that the Company’s Board of Directors hasinstructed the audit committee of the Board of Directors to initiate a pre-emptiveindependent third party review of the accounting, internal controls and corporategovernance of the Company, as may be necessary, to confirm that the Company’sstandards are in accordance with the standards expected of an NYSE-listed company.

The Board of Directors voted unanimously to take proactive action following arecent announcement by Duoyuan Printing, Inc. (“Duoyuan Printing”), that mayhave been perceived to involve the Company [which is an affiliate of DuoyuanPrinting], as Wenhua Guo (the Company’s Chairman and CEO) is also DuoyuanPrinting’s Chairman of the Board and its largest shareholder. While there arepresently no known accounting or corporate governance issues to be reviewed andthe Company consistently has received unqualified audits from Grant Thornton, aninternational accounting firm, for four successive years, the Company’s Board ofDirectors is of the opinion that the appointment of an independent third party isnecessary to ensure the highest level of transparency and accountability.

(Emphasis added).



101. The announcement of proactive measures to verify the accuracy of DGW’s financial

reporting and the adequacy of both its internal controls and its corporate governance mechanisms

comforted investors — such that DGW ADS price suffered no more erosion and, in fact, slightly

rebounded, by 51 cents.

102. However, Janney Capital Markets suspended coverage of DGW on September 14,

2010, stating:

...[L]ack of clarity around the situation, coupled with the fact that the third partyreview will likely take months, will likely lead to heightened level of volatility inDGW shares in the near-term as investors speculate on whether control issues existor not.

As a result of these developments, and pending further information including theoutcome of the independent accounting review, we are suspending our coverage ofDuoyuan Global Water at this time, including our rating, fair value, and earningsestimates. The last published rating, fair value, and earnings estimates of thiscompany should not be relied on in the future.

Duoyuan Global Water(DGW) is a client of Janney Montgomery Scott. The firmprovided investment banking services.

103. With Oppenheimer & Co. also counseling investors that day to “stay away from the

turmoil,” on September 14, 2010, half of DGW’s underwriters had sought to distance themselves

from DGW within a day of the initial announcement of trouble at a sister company. Shares

languished for the next two weeks as investors awaited word of DGW’s next move.

104. On September 28, 2010, investors were heartened by the news that the Skadden law

firm was retained to perform the independent investigation. Shares rose substantially, nearly a dollar

(7.76%) in response and continued to rise on heavy trading, closing nearly 60 cents higher, at

$13.44, the following day as well.

105. Nearly a month later, with DGW’s price having stabilized, new disclosures — this



time concerning DGW itself — hit the market. During the trading day, Tate Dwinnell of

Greenstocks Central, posted an article entitled: “Auriga Visits Duoyuan Global Water (DGW) &

Comes Away With Concerns.” Dwinnell wrote:

Auriga issued a research note this morning on Duoyuan Global Water (DGW) whichwas hammered recently after accounting irregularities were discovered at DuoyuanPrinting (DYP). What’s the connection? The Chairmen of DYP happens to be theCEO of DGW, so the thought was that there are accounting concerns at DGW aswell. Auriga had a chance to visit with DGW management recently and tour themanufacturing facilities. They walked away with several concerns unrelated to theaccounting concerns.

- Why is the company undertaking a big big capital expenditure program whencurrent facilities are only about 50% utilized?- The capital expansion plans may drain the balance sheet- Lack of modern equipment and Auriga could only verify 10 of the 109 productssaid to be manufactured at the facility.

My question to Auriga is why management wasn’t asked about the number ofproducts verified, the utilization rate and the modernization of the facility? I’m surethese are answers investors would want to know and perhaps they will be answeredon the next conference call.

I think it goes without saying that there are a lot of questions and concerns. With thetechnical melt down in the stock, it’s best to stay away until some of these questionsare answered. DGW is down about 5% today with significant volume and looks likeit may want to retest the lows of the correction in the coming days.

106. The Auriga research note is not available on the Internet and, Plaintiffs are informed

and believe, is only sold to Auriga’s institutional clients. Nevertheless, in addition to Dwinnell’s

posted article, there was a reference to the Auriga report on DGW’s Yahoo! message board as an

explanation for the 5% sell off. The Auriga report achieved sufficient exposure for DGW ADSs to

suffer a significant lost, shedding 5.5% of their value to close at $12.83.

107. On November 17, 2010, the Company announced strong Q3’10 results, and buoyed

investor confidence by assuring the public that DGW was “fully cooperating with Skadden” and the



audit committee in an effort to “ensure the highest level of transparency and accountability.” DGW

ADSs temporarily rose in value to $13.00 based on these reassurances, but investors slowly lost

confidence in DGW as the Company released little information for the next few months — other

than the late December announcement that GTI (through member firm GT-China) would continue

to serve as DGW’s auditors after GT-Hong Kong left GTI to join BDO Limited Hong Kong. In fact,

fear that FY’10 results would not be released caused shares to drop more than a dollar on February

9, 2011, with the price rebounding slightly thereafter when, several days later, a March date was

finally announced for the Q4’10 and FY’10 results.

108. On March 22, 2011, after the close of the market, DGW released its Q4’10 and FY’10

operating results. The first item in the Company’s press release, however, was the status of the

independent investigation. The news was disappointing:

As previously disclosed in September 2010, the Audit Committee retained advisors andcommenced an internal review into whether the Company’s internal controls and processesmet the standards required of a NYSE-listed company. Provided that the Audit Committeeand its advisors receive complete access to requested documents, the review can beconcluded by the end of the second quarter of 2011. Accordingly, the Board of Directorsis not in a position to approve or otherwise ratify the Company’s presentation of theunaudited results for the fourth quarter and fiscal year ended December 31, 2010 at thistime. The Company’s unaudited results for the fourth quarter and fiscal year endedDecember 31, 2010 are subject to change pending the completion of the audit and theinternal review.

(Emphasis added).

109. Starting with after-hours trading and continuing into the next trading day, investors

dumped shares as the Board of Directors itself was now expressing doubt about the legitimacy of

DGW’s current financial and operating results. The price of the ADSs fell nearly a dollar, from

$8.18 to $7.22.

110. On March 23, 2011, following the discouraging Q4’10 news, the Company hosted



an earnings call with Defendants Guo and Park. During the call, the Management Defendants

confirmed the news that the Board of Directors would not ratify or approve the Q4’10 or FY’10

financial results. Further, Defendant Guo failed to assuage shareholders when announced that the

SEC was investigating DYP, and that DGW had “no comment” on the DYP “situation.”

111. When the Company was questioned by analysts as to why the third-party review was

taking so long to complete, Defendant Guo evasively responded to an analyst from Defendant

Rodman & Renshaw that the content for the scope of the review was “determined and overseen

separately,” and that he was “not in a position to determine what should be reviewed.” When further

prodded by an analyst from Freelum LLC (that was not involved in any of DGW’s ADS offerings)

as to whether the auditors would sign off on the financial statements, Defendant Guo simply stated

“I’m not in a position to speak out for the auditors.”

112. Following the Company’s earnings call, despite reporting, yet again, year-over-year

revenue growth, the price of DGW’s ADSs continued to fall throughout the day.

113. On March 24, 2011, yet another analyst affiliated with an underwriter, Rodman &

Renshaw, downgraded DGW from “market outperform” to “market perform” citing uncertainty due

to the Company’s pending internal review.

114. On April 4, 2011, less than two weeks later, with shares trading at $5.49, Muddy

Waters initiated coverage with a “sell” recommendation, accused management of engaging in a

“massive fraud” and of replacing filed financial reports for Duoyuan Langfang for 2009 at local

AICs with forged reports, and leveled charges of “inattentive” and “sloppy” work at DGW’s auditors

for errors and questionable transactions in the 2008 financial reporting. Muddy Waters also posted



a YouTube video purporting to show that calls to sales offices listed on DGW’s Website were either

unanswered or made to disconnected numbers.

115. That day, DGW issued a press release announcing that CFO Park would be resigning

to “pursue another professional opportunity.” However, the DGW noted that he would remain with

the Company until the investigation was completed or until June 30, 2011 — whichever is earlier.

116. DGW ADSs price crashed in extraordinarily heavy trading on April 4th and 5th, falling

nearly 32% and 22%, respectively, to close at $3.21 on April 5, 2011.

Violations of GAAP In The IPO and SPO Registration Statements

117. The financial statements contained in the Registration Statements and Prospectuses

on file with the SEC and disseminated to investors in connection with the IPO and SPO misstated

DGW’s true financial condition and results, as such information was not prepared in conformity with

Generally Accepted Accounting Principles (“GAAP”), nor was the financial information a fair

presentation of the Company’s operations due to the Company’s improper accounting for, inter alia,

its revenues, operating income, and net income, in violation of GAAP rules.

118. 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. Regulation S-X (17 C.F.R. § 210.4-01(a)(1)) states that financial statements filed with the

SEC which are not prepared in compliance with GAAP are presumed to be misleading and

inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP,

with the exception that interim financial statements need not include disclosure which would be

duplicative of disclosures accompanying annual financial statements. 17 C.F.R. § 210.10-01(a).



119. The fact that DGW filed sets of financial statements in the United States with the

SEC, in particular those financial statements filed as part of the IPO and SPO Offering documents,

and contemporaneously filed substantially and materially different financial statements for the exact

same periods with the AICs in China, is strong evidence that the financial statements filed with the

SEC did not comply with GAAP.

120. Given these accounting irregularities, the Company reported financial results for

2006, 2007, 2008 and for periods in 2009 that were in violation of the following GAAP principles

are, inter alia:

(a) The principle that “interim financial reporting should be based upon the same

accounting principles and practices used to prepare annual financial

statements” See Accounting Principles Board Opinion No. (“APB”) 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.” See Financial

Accounting Standards Board Statement of Concepts No. (“CON”) 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.” See CON 1, ¶ 40;

(d) The principle that “financial reporting should provide information about an

enterprise’s financial performance during a period.” See CON 1, ¶ 42;



(e) The principle 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.” See

CON 1, ¶ 50;

(f) The principle that “financial reporting should be reliable in that it represents

what it purports to represent.” See CON 2, ¶¶ 58-59; and

(g) The principle that “completeness, meaning that nothing is left out of the

information that may be necessary to insure that it validly represents

underlying events and conditions.” See CON 2, ¶ 79;

121. The overstated financial results detailed above violated Item 303 of Regulation S-K

under the federal securities laws, because Defendants failed to disclose the Company’s true financial

condition and the results of the Company’s operations in connection with the IPO and SPO. See 17

C.F.R. § 229.303.

122. Moreover, DGW failed to comply with the most basic accounting rules governing

revenue recognition, including SEC Staff Accounting Bulletin (“SAB”) 104, SEC Codification of

Staff Accounting Bulletins, Topic 13; Revenue Recognition, as amended, and SAB 101, Revenue

Recognition in Financial Statements. SAB 104 and the other SEC pronouncements concisely and

clearly state that revenue is realized or realizable and earned only if and when all of the following

criteria are met:

(a) “Persuasive evidence of an arrangement exists,” with the term “arrangement”

meaning the final understanding between the parties as to the specific nature

and terms of the agreed-upon transaction;



(b) “Delivery has occurred or services have been rendered”;

(c) “The seller’s price to the buyer is fixed or determinable”; and

(d) “Collectibility is reasonably assured.”

123. By recognizing revenue on the sale of products that appear to never have existed, let

alone been sold to customers, DGW expressly violated SABs 104 and 101 and the SEC Codification

of Staff Accounting Bulletin, Topic 13 criterion that “[d]elivery has occurred or services have been

rendered” before revenue can be recognized.

124. In addition, DGW violated the overarching accounting principle that revenues should

not be recognized in financial statements until they are both earned and realized or realizable. CON

5, Recognition and Measurement in Financial Statements of Business Enterprises, provides, in

relevant part:

(a) “Revenues and gains generally are not recognized until realized or realizable.

Revenues and gains are realized when products (goods or services),

merchandise, or other assets are exchanged for cash or claims to cash.

Revenues and gains are realizable when related assets received or held are

readily convertible to known amounts of cash or claims to cash.” Id. at ¶

83a;

(b) “Revenues are not recognized until earned. An entity’s revenue — activities

involve delivering or producing goods, rendering services, or other activities

that constitute its ongoing major or central operations, and revenues are

considered to have been earned when the entity has substantially



accomplished what it must do to be entitled to the benefits represented by the

revenues.” Id. at ¶ 83b;

(c) “The two conditions (being realized or realizable and being earned) are

usually met by the time product or merchandise is delivered or services are

rendered to customers.” Id. at ¶ 84a.

125. Failing to follow long-standing accounting rules in DGW’s U.S. financial reporting,

Defendants appear to have accounted for fictitious sales, and in doing so, improperly recognized:

over 420 million RMB in excess revenue for FY’08, over 265 million RMB in excess revenue for

FY’07, and over 206 million RMB excess revenue for FY’06 for Duoyuan Langfang; over 589

million RMB in excess revenue for FY’08, and over 420 million RMB in excess revenue for FY’07,

and over 290 million RMB in excess revenue for FY’06 for Duoyuan Beijing.

126. The fair presentation of financial statements in conformity with GAAP is the

responsibility of company management. DGW, as well as the Management Defendants and Director

Defendants who executed the Form F-1 Registration Statements for the IPO and/or SPO are liable

for the misstated figures contained therein which violated GAAP and SEC regulations.

Specifically:

(a) The Company is the registrant for the IPO and SPO. As the issuer of the

shares that were registered and sold, the Company is strictly liable to Lead

Plaintiffs, Named Plaintiffs and members of the Class who purchased or

otherwise acquired the DGW ADSs issued in or traceable to the IPO or SPO

pursuant to the Registration Statement for the materially untrue statements

and material omissions contained therein;



(b) The Management Defendants and Director Defendants were responsible for

the contents and dissemination of the Registration Statements filed in

connection with the IPO and SPO and each owed to the purchasers of the

ADSs issued in the IPO and SPO the duty to make a reasonable and diligent

investigation of the statements contained in the Registration Statement at the

time they became effective to ensure that said statements were true and that

there were no omissions of material fact which rendered the statements

therein materially false and misleading. The Management and Director

Defendants did not make a reasonable investigation or possess reasonable

grounds to believe that the statements contained in the Registration

Statements were true and without omissions of any material facts and were

not misleading. Further, each of the Management Defendants and Director

Defendants signed the F-1 Registration Statement. As such, the each of them

issued, caused to be issued, and participated in the issuance of the

Registration Statements, which contained untrue statements of material fact

and omitted other facts necessary to make the statements not misleading, and

failed to disclose material facts as set forth herein; and

(c) As underwriters of the IPO and/or SPO, each of the Underwriter Defendants

owed to the purchasers of the ADSs issued in the IPO and SPO the duty to

make a reasonable and diligent investigation of the statements contained in

the Registration Statement at the time it became effective to ensure that said

statements were true and that there were no omissions of material fact which


9 AU 316 states that fraud is a broad legal concept, so an auditor’s interest specifically relates to actsthat result in a material misstatement of the financial statements. See AU 316.05.


rendered the statements therein materially false and misleading. Each of the

Underwriter Defendants did not make a reasonable investigation or possess

reasonable grounds to believe that the statements contained in the

Registration Statement were true and without omissions of any material facts

and were not misleading. Accordingly, each of the Underwriter Defendants

acted negligently and therefore is liable to Lead Plaintiffs and the other

members of the Class who purchased DGW ADSs issued in or traceable to

the IPO and/or SPO pursuant to the Registration Statement.

DGW’s Outside Auditors Breached Their Duties of Care to IPO and SPO Investors

Role and Responsibility ofGTI and its Agent, GT-Hong Kong, as DGW’s Outside Auditor

127. An outside auditor’s responsibilities are to (1) plan and perform an audit to obtain

reasonable assurance about whether a company’s financial statements are free of material

misstatement, whether caused by error or fraud,9 and (2) express an opinion on “the fairness with

which [such financial statements] present, in all material respects, financial position, results of

operations, and its cash flows in conformity with [GAAP].” See AU 110, Responsibilities and

Functions of the Independent Auditor (“AU 110”), .01-.02

128. The auditor’s report is the medium through which an auditor expresses an opinion.

See AU 110.01. There are several types of audit opinions that may be issued by an auditor, as

described in AU 508, Reports on Audited Financial Statements (“AU 508”). An unqualified


10 Such an opinion should be based on the auditor’s judgment as to whether, amongst other things,“…the financial statements, including the related notes, are informative of matters that may affecttheir use, understanding, and interpretation…” See AU 411.04.


opinion, such as was given by GTI and GT-Hong Kong here, “states that the financial statements

present fairly, in all material respects, the financial position, results of operations, and cash flows

of the entity in conformity with generally accepted accounting principles.”10

129. An auditor may only express an unqualified (or “clean”) audit opinion when the

auditor has formed such an opinion on the basis of an audit performed in accordance with GAAS.

See AU 508.07. Accordingly, when an auditor has failed to conduct its audit in accordance with

GAAS, it is limited to only expressing a qualified or adverse opinion, disclaiming its opinion, or

issuing no opinion at all.

130. Adherence to these standards is critical because an unqualified opinion provides

assurance to users of an entity’s financial statements that such financial statements are fairly stated,

in all material respects, in accordance with GAAP. Accordingly, auditors have been referred to as,

and considered, “gatekeepers” to the public securities markets, and “public watchdogs,” as noted

below, in relevant part:

The capital formation process hinges on the willingness of investors to makeinvestments in the securities of public companies. Investors commit their personalfunds to companies relying, at least in part, on management’s representations andthe auditor’s opinion that a company’s financial statements fairly reflect thefinancial position, results of operations, and cash flows of a company.

The federal securities laws, to a significant extent, make accountants the“gatekeepers” to the public securities markets. The Commission and its staff havealways understood and supported this proposition. These laws require, or permit theCommission to require, that independent public accountants certify financialinformation filed with the SEC. As we all know, without an opinion from anindependent auditor, a company cannot satisfy the statutory and regulatory


11 See also Remarks by SEC Chairman Arthur entitled The “Numbers Game,” NYU Center for Lawand Business, September 28, 1998: “We rely on auditors to put something like the goodhousekeeping seal of approval on the information investors receive.”); Speech by former DeputyChief Accountant of the SEC, entitled Corporate Responsibility and the Audit Committee, March21, 2000: “Perhaps the United States Supreme Court best stated this responsibility when it said: ‘Theindependent public accountant performing this special function owes allegiance to the corporation'screditors and stockholders, as well as the investing public. This public watchdog’ [sic] functiondemands that the accountant maintain total independence from the client at all times and requirescomplete fidelity to the public trust.’”). (Emphasis supplied).


requirements for audited financial statements and cannot sell its securities inthe U.S. markets.

…While the Commission staff reviews filings, the staff is not able to review in detailall financial statements filed with the Commission. Therefore, the Commission mustrely heavily on the accounting profession to be primarily responsible for the largevolume of financial information that undergirds the Commission’s full disclosuresystem.

…This trust in management accountants and independent auditors forms thefoundation of the financial reporting process. The resulting disclosure provided bythese financial professionals forms the bedrock of our financial markets.

(Source: October 26, 2001, speech entitled Accountants as Gatekeepers – Adding Security and

Value to the Financial Reporting System, by Isaac C. Hunt, Jr., former Commissioner of the SEC)

(emphasis in original removed; emphasis added).11

131. Given the circumstances described herein, there is no rational basis by which GTI

and GT-Hong Kong could have issued an unqualified opinion on DGW’s 2008 financial statements

(incorporated into the IPO Offering Documents and SPO Offering Documents) given that DGW

appears not to be operating in any significant capacity (as discussed in the Muddy Waters Rpt.) let

alone sufficiently to support the results of operations expressed in its financial statements for 2008

(and other years expressed in the aforementioned filings and upon which GTI and GT-Hong Kong

also issued clean opinions).



132. GTI and GT-Hong Kong issued unqualified audit opinions on DGW’s 2008

consolidated financial statements. GTI’s and GT-Hong Kong’s unqualified audit opinion

communicated GTI’s and GT-Hong Kong’s conclusions that (1) DGW’s consolidated financial

statements were fairly presented, in all material respects, in conformity with GAAP, and (2) their

audits had been conducted in accordance with GAAS and/or the standards of the PCAOB (defined

herein).

133. GTI’s and GT-Hong Kong’s audit opinions were, however, false and misleading as

issued, because (1) DGW’s consolidated financial statements for the relevant time frame were

materially misstated and, therefore, not in conformity with GAAP (for the reasons set forth herein),

and (2) GTI’s and GT-Hong Kong’s audits could not have been conducted in accordance with

GAAS and/or the standards of the PCAOB (discussed below). These false and misleading opinions

were communicated to investors in the IPO Offering Documents and SPO Offering Documents, in

which “Grant Thornton” was expressly referenced as an “Expert.”

134. Had GTI and GT-Hong Kong performed audits in accordance with GAAS, exercised

an appropriate level of professional care and professional skepticism, and sufficiently considered

and assessed information that was available and known to GTI and GT-Hong Kong, they would

have: (1) modified the nature and extent of its audit procedures; (2) recommended significant audit

adjustments to, and additional disclosure in, DGW’s consolidated financial statements, and/or (3)

issued a qualified or adverse opinion, disclaimed their opinion, or issued no audit opinions at all.

GTI’s and GT-Hong Kong’s failure to perform any of the foregoing, in light of information known

to GTI and GT-Hong Kong and in violation of GAAS, resulted in the issuance of false and

misleading financial statements by DGW.


12 Language added by AU 230, Due Professional Care in the Performance of Work, ¶ 1, as amendedby AU 316 (SAS 82).


135. GAAS represents the guidelines by which an audit must be planned and performed,

See AU 150.01. The ten general, fieldwork, and reporting standards approved and adopted by the

membership of the Auditing Standards Board (“ASB”) of the AICPA, and which must be followed

throughout all audits, are as follows:

General Standards

1. The audit is to be performed by a person or persons having adequate technicaltraining and proficiency as an auditor.

2. In all matters relating to the assignment, an independence in mental attitude is to bemaintained by the auditor or auditors.

3. Due professional care is to be exercised in the [planning and12] performance of theaudit and the preparation of the report.

Standards of Field Work

1. The work is to be adequately planned and assistants, if any, are to be properlysupervised.

2. A sufficient understanding of internal control is to be obtained to plan the audit andto determine the nature, timing, and extent of tests to be performed.

3. Sufficient competent evidential matter is to be obtained through inspection,observation, inquiries, and confirmations to afford a reasonable basis for an opinionregarding the financial statements under audit

Standards of Reporting

1. The report shall state whether the financial statements are presented in accordancewith [GAAP].

2. The report shall identify those circumstances in which such principles have not beenconsistently observed in the current period in relation to the preceding period.

3. Informative disclosures in the financial statements are to be regarded as reasonablyadequate unless otherwise stated in the report.


13 By the time GTI and GT-Hong Kong audited DGW’s financial reporting for the year endedDecember 31, 2008, the PCAOB had implemented six authoritative standards meant to bolster, edit,amend, and/or replace existing standards within GAAS, referred to individually and colloquially asan Auditing Standard (“AS”). The PCAOB standards have left much of GAAS intact, but forchanges in an auditor’s obligations surrounding the examination of internal controls, thedocumentation of this work and, more recently, standards related to the auditor’s assessment of andresponse to risks in the audit. For clarity, all references to GAAS refer to the auditing standards inexistence prior to the PCAOB (and as described in AU 150) as well as the standards issued by thePCAOB.


4. The report shall either contain an expression of opinion regarding the financialstatements, taken as a whole, or an assertion to the effect that an opinion cannot beexpressed. When an overall opinion cannot be expressed, the reasons therefor[e]should be stated. In all cases where an auditor’s name is associated with financialstatements, the report should contain a clear-cut indication of the character of theauditor’s work, if any, and the degree of responsibility the auditor is taking.

AU 150.02.

136. The PCAOB was established by the Sarbanes-Oxley Act of 2002, and is responsible

for the establishment of auditing and related professional practice standards that must be followed

by registered public accounting firms and by auditors when performing audits of the financial

statements of public and registered filers. On April 16, 2003, the PCAOB adopted, as its interim

standards, GAAS, as summarized in AU 150, and related interpretations in existence on that date.

Accordingly, an auditor’s reference to “the standards of the Public Company Accounting Oversight

Board (United States)” in its audit opinions includes a reference to GAAS in existence as of April

16, 2003, to the extent such GAAS has not been expressly superseded by standards established by

the PCAOB. (References to GAAS in an auditor’s opinion, therefore, are no longer appropriate or

necessary, when the standards of the PCAOB are applicable. See Auditing Standard No. (“AS”) 1,

References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight

Board (“AS-1”), .01-.03, .05, n. 1).13



137. In light of the allegations set forth herein and the revelations contained in the Muddy

Waters Rpt., GTI and GT-Hong Kong violated many of the aforementioned GAAS standards in the

conduct of their audit of DGW’s 2008 consolidated financial statements. The overarching

deficiency in GTI’s and GT-Hong Kong’s audit was, clearly, their failure to exercise due

professional care and professional skepticism, and to act in good faith, in all phases of their audits,

including, but not limited to, their failures to: (1) obtain or attempt to obtain sufficient competent

evidence to support their audit opinions, particularly with respect to DGW’s purported revenue,

operating income, net income, and cash flows from operating activities; and (2) appropriately

respond to the presence of known fraud risk factors and inherent risks whose consideration are

required by the auditing literature (i.e., the lack of work-in-process inventory at the balance sheet

date).

138. A prudent auditor who was acting in good faith could not have conducted an audit

in accordance with GAAS and, in connection therewith, concluded that DGW’s financial statements

were without material misstatement and were, therefore, fairly presented, in all material respects,

in accordance with GAAP. GTI’s and GT-Hong Kong’s audits for the relevant time frame were so

deficient and were such a significant departure from GAAS that they effectively equated to no audit

at all of the financial statement areas at issue in this case. Therefore, it was improper for GTI and

GT-Hong Kong to have issued clean audit opinions relating to DGW’s 2008 financial statements.



Standards of Due Care ConcerningConsideration of Potential for Material

Misstatements or Fraud

139. Overarching obligations that an auditor must adhere to when performing procedures

to allow him or her to express an audit opinion are the exercise of due professional care and

professional skepticism.

140. As previously noted, the third general standard of GAAS requires that due

professional care be exercised in all phases of an audit, including the planning and performance of

the audit, as well as in the preparation of the audit report, i.e., due professional care requires the

auditor to observe the standards of field work and reporting. See AU 230, .01-.02, .08.

141. AU 230 defines due professional care as “the degree of skill commonly possessed”

by other auditors which requires an auditor to exercise “reasonable care and diligence” and

“professional skepticism” (AU 230.05, .07), as described in the following manner, in relevant part:

Professional skepticism is an attitude that includes a questioning mind and a criticalassessment of audit evidence. The auditor uses the knowledge, skill, and abilitycalled for by the profession of public accounting to diligently perform, in good faithand with integrity, the gathering and objective evaluation of evidence…

Gathering and objectively evaluating audit evidence requires the auditor to considerthe competency and sufficiency of the evidence. Since evidence is gathered andevaluated throughout the audit, professional skepticism should be exercisedthroughout the audit process.

The auditor neither assumes that management is dishonest nor assumes unquestionedhonesty. In exercising professional skepticism, the auditor should not be satisfiedwith less than persuasive evidence because of a belief that management is honest.

See AU 230.07-.09.

142. The exercise of due professional care and professional skepticism underlies all phases

of an auditor’s process for carrying out his/her responsibilities of planning and performing an audit



to obtain reasonable assurance about whether such financial statements are free of material

misstatement (as described by AU 316 — discussed later herein), whether caused by error or fraud.

Due professional care and professional skepticism are particularly critical, since judgment is

typically required in an auditor’s efforts to (1) determine areas to be tested, and the nature, timing,

and extent of such tests to be performed; (2) interpret the results of audit testing; and (3) evaluate

audit evidence. See AU 230.11.

143. The requirement to exercise professional skepticism is particularly critical in the

context of the auditor’s consideration of the risk of material misstatement due to fraud, as described

in AU 316, which states, in relevant part:

Because of the characteristics of fraud, the auditor’s exercise of professionalskepticism is important when considering the risk of material misstatement due tofraud. Professional skepticism is an attitude that includes a questioning mind and acritical assessment of audit evidence. The auditor should conduct the engagementwith a mindset that recognizes the possibility that a material misstatement dueto fraud could be present, regardless of any past experience with the entity andregardless of the auditor’s belief about management’s honesty and integrity.Furthermore, professional skepticism requires an ongoing questioning ofwhether the information and evidence obtained suggests that a materialmisstatement due to fraud has occurred. In exercising professional skepticism ingathering and evaluating evidence, the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest. (e.g., AU 316.13)

(Emphasis added).

144. AU 316 requires the auditor to use professional judgment in its determination of

whether fraud risk factors are present and, if such fraud risk factors are, in fact, present, its response

in modifying its audit procedures. See AU 316.32. AU 316 provides numerous examples of fraud

risk factors to be considered by an auditor as part of his/her assessment of the risk of material

misstatement in an entity’s financial statements due to fraud. Although fraud risk factors may exist,


14 CFO Park explained this to the SEC in a letter filed on October 28, 2010: “In order to more easilyand accurately value the year-end inventory, starting in 2008, the Company elected to completeproduction of then existing work in process and suspend manufacturing of all further work inprocess prior to the inventory count cut-off dates of December 31, 2008 and 2009. As December andJanuary are typically low production periods for the Company, our operations are not materiallyimpacted by annually suspending work in process during this period.”


to some extent, in any number of legitimate businesses, they trigger, in the context of a financial

statement audit, heightened scrutiny on the part of the auditor.

145. Response to identified risks include changing the nature of the procedures performed,

e.g., to obtain evidence that is more reliable or to obtain additional corroborative information from

independent sources outside the entity, the timing of the testing, e.g., closer to the period end, to

avoid intentional manipulation after mid-period testing, or the extent of the procedures applied —

to best reflect the assessment of the risks of material misstatement due to fraud. See AU 316.52.

146. In the case of GTI and GT-Hong Kong and their audits of DGW, recognition that

the balance sheet as of December 31, 2008, reflected zero work-in-process inventory — pursuant

to a purportedly new policy to suspend all manufacturing for two entire months14 — for an entity

that was purportedly doing hundreds of millions of dollars of sales, should have been an obvious red

flag that would have triggered heightened skepticism on the part of the auditors and modification

of procedures to ensure the material accuracy of inventory assets (among other areas of reporting)

presented in the Company’s financial statements. GTI and GT-Hong Kong appear not to have dug

deeper.

147. Specifically, the third GAAS standard of fieldwork requires auditors to obtain

sufficient competent evidential matter to afford them a reasonable basis for the audit opinion. See

AU 150.02; AU 326.01, .22. Accordingly, AU 326 discusses the types of information that must be


15 AU 326 provides examples of corroborating evidential matter, including: “…both written andelectronic information such as checks; records of electronic fund transfers; invoices; contracts;minutes of meetings; confirmations and other written representations by knowledgeable people;information obtained by the auditor from inquiry, observation, inspection, and physical examination;and other information developed by, or available to, the auditor which permits him or her to reachconclusions through valid reasoning.” See AU 326.17.


requested and obtained by an auditor during the course of its audits, noting that “[e]vidential matter

supporting the financial statements consists of the underlying accounting data and all corroborating

information available to the auditor.”15 See AU 326.15.

148. “The evidential matter obtained should be sufficient for the auditor to form

conclusions concerning the validity of the individual assertions embodied in the components of

financial statements.” See AU 326.13. To do so, “[t]he independent auditor should be thorough

in his or her search for evidential matter and unbiased in its evaluation. In designing audit

procedures to obtain competent evidential matter, he or she should recognize the possibility that the

financial statements may not be fairly presented in conformity with [GAAP]…” See AU 326.25.

149. As evidenced by the Muddy Waters Rpt. and the allegations set forth herein, GTI and

GT-Hong Kong failed to obtain and analyze, during at least the audit for 2008 and most likely

throughout the engagement by DGW, the validity, sufficiency, and competency of evidential matter

required by AU 326, as set forth above. GTI’s and GT-Hong Kong’s failure to validate, through

evidential matter, the existence of machinery, equipment, inventory, receivables and cash, as well

as to support representations of sales and revenues, employee counts and compensation expense,

and/or income by the Company, during the relevant time frame, left their audits sufficiently lacking

with respect to the obligations of GAAS.


16 A “significant deficiency” is “a deficiency, or a combination of deficiencies, in internal controlthat is less severe than a material weakness, yet important enough to merit attention by those chargedwith governance.” See AU 325.07.


Accounting for Risk When InternalControl Problems Are Present

150. GTI’s and GT-Hong Kong’s failure to properly discharge their duties under GAAS

is underscored by the circumstances present here: (1) the audit was in conjunction with an IPO of

a foreign company seeking access to the U.S. capital markets for the first time; and (2) potential

problems with respect to DGW’s internal controls to ensure the accuracy and reliability of its

financial reporting already existed.

151. Public investors, creditors, and others rely on independent, registered public

accounting firms to audit financial statements and assess internal controls when deciding whether

to invest in or do business with a public company. Recognizing the importance of reliable internal

financial controls to the accuracy of financial statements – and therefore to investors – Congress

enacted Section 404 of the Sarbanes-Oxley Act, requiring audits of internal financial controls (“SOX

404”). SOX 404 requires external auditors such as GTI and GT-Hong Kong to audit and express

an opinion on the effectiveness of their public company clients’ internal financial controls.

Sarbanes-Oxley also requires public accounting firms that audit public companies to register with

the PCAOB and to adhere to professional standards established by the PCAOB for audits of public

companies.

152. Although DGW would not be required to file a management report pursuant to SOX

404 until FY’10, as noted in the IPO Offering Documents, a number of significant deficiencies16 and


17 A “material weakness” is “a significant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of the financial statements willnot be prevented or detected by the entity’s internal control.” See AU 325.06.


material weaknesses17 in the Company’s systems of internal controls had been identified during

audits conducted in the years prior to 2008. The Form F-1, filed June 24, 2009, at 26, noted the

following as “previously identified material weaknesses”: (1) An ability to timely identify disputed

balances or unpaid aged balances or revenue and accounts receivable; (2) differences and errors in

the recording of cost of revenue and inventory; (3) a lack of effective controls over the financial

reporting process due to an insufficient complement of personnel with an appropriate level of

accounting knowledge, experience and training in the application of U.S. GAAP commensurate with

financial reporting requirements; and (4) inadequate retention and maintenance of legal and

accounting documents. Additionally, “[p]reviously observed significant deficiencies included: (1)

errors in the classification of expenses and (2) related party transactions not entered into on

arms-length basis.”

153. Put bluntly, the Company’s internal controls were sufficiently lacking in nearly all

of the areas primary to its operations as a manufacturer — inventory, revenue, accounts receivable,

and in the actual reporting of associated financial results. The Company also failed to retain

documents sufficient to support its financial statements, which would appear to have made the

auditors’ task of obtaining sufficient competent evidential matter — as required of it by GAAS —

particularly difficult in its 2008 (and prior) audit(s). Finally, in light of the number of interrelated

companies associated with DGW and its principal owner, Defendant Guo, improper related-party

transactions raise significant red flags with respect to the possibility of materially misstated financial

reporting.



154. The IPO Offering Documents set forth two material weaknesses identified in

connection with the 2008 audit concerning DGW’s “failure to implement a month-end process to

properly accrue expenditures at period-end and record purchases and sales following the closing of

our books and proper review of these items.” Additionally, two significant deficiencies were

identified in connection with the 2008 audit: (1) failure to record inventory balances at the time of

delivery rather than after inspection; and (2) sales tax rebates paid without corresponding official

receipts. Thus, although DGW undertook some efforts to rectify past problems, fundamental

internal control problems remained.

155. AS 5, ¶¶ 10-12, discusses the direct correlation between an increased risk of internal

control problems, particularly those presented by more complex organizations, and the amount of

scrutiny required during an audit:

10. Risk assessment underlies the entire audit process described bythis standard, including the determination of significant accountsand disclosures and relevant assertions, the selection of controls totest, and the determination of the evidence necessary for a givencontrol.

11. A direct relationship exists between the degree of risk thata material weakness could exist in a particular area of thecompany’s internal control over financial reporting and theamount of audit attention that should be devoted to that area. Inaddition, the risk that a company’s internal control over financialreporting will fail to prevent or detect misstatement caused by fraudusually is higher than the risk of failure to prevent or detect error. Theauditor should focus more of his or her attention on the areas ofhighest risk. On the other hand, it is not necessary to test controlsthat, even if deficient, would not present a reasonable possibility ofmaterial misstatement to the financial statements.

12. The complexity of the organization, business unit, or process,will play an important role in the auditor’s risk assessment and thedetermination of the necessary procedures.


18 Indeed, none of DGW’s press releases since the IPO announce a new sales contract or a specificcustomer. See http://ir.duoyuan-hq.com/phoenix.zhtml?c=230632&p=irol-news.

19 Duoyuan Centrifuge and Duoyuan Water Conservation had registered capital of $15 million andDuoyuan Aeration only had registered capital of $4 million. Form F-1, filed January 8, 2010, at 45.


(Emphasis in original) (emphasis added).

156. Here, as noted in the Muddy Waters Rpt.: “Until October 2009, DGW’s corporate

structure was simple — DGW Langfang produced all of DGW’s products at its facility at 6

Xiangyundao Road. It then sold the products to DGW Beijing, which in turn sold them to DGW’s

distributors ... DGW’s corporate structure became significantly more complicated post-IPO in order

to make it easier to drain investor funds.” With the formation of Duoyuan Centrifuge, Duoyuan

Aeration and Duoyuan Water Conservation in the fall of 2009, DGW’s structure became much more

complicated just prior to the SPO.

157. The Muddy Waters report also noted five red flags which should have raised GTI’s

and GT-Hong Kong’s level of skepticism in conducting the audit:

(a) Exclusively selling to purported distributors rather than end-user customers: (1)

makes it easier for auditors to confirm receivables and revenues; and (2) alleviates

the need to come up with new customers to support increasing sales;18

(b) CFO Park had no work experience in China and did not speak Chinese;

(c) The formation of three small subsidiaries after raising money in the IPO,19 to add

complexity and to evade regulation;

(d) Very aggressive capital expenditures were planned without a demonstrated need for

the additional production capacity; and

(e) Complex property swapping transactions among related parties.



158. None of the Defendants made a reasonable investigation or possessed reasonable

grounds for the belief that the financial figures contained in the IPO Offering Documents and the

SPO Offering Documents, as set forth above, were true. This is apparent in light of the fact that both

Plaintiffs’ investigation and that of Muddy Waters uncovered the actual financial statements filed

by Duoyuan Beijing and Duoyuan Langfang at the local AIC offices.

159. Defendants issued and disseminated, caused to be issued and disseminated, and

participated in the issuance and dissemination of materially false and misleading statements to the

investing public that were contained in the IPO Offering Documents and the SPO Offering

Documents, which negligently overstated, inter alia, the true operating results for DGW as set forth

above. None of the untrue statements or omissions alleged herein were forward-looking statements

but, rather, concerned pre-IPO and pre-SPO financial results. In any event, Defendants did not

properly identify any of these statements as forward-looking statements and did not disclose

information that undermined the validity of those statements.

160. Plaintiffs and the Class acquired their DGW ADSs pursuant to, traceable to, and in

reliance upon the IPO Offering Documents and/or SPO Offering Documents, without knowledge

concerning the misstatements alleged herein and could not have reasonably discovered these facts

on their own. The value of DGW’s ADSs sold in the IPO and SPO has declined substantially

subsequent to and due to Defendants’ violations of Section 11 of the Securities Act. Had Plaintiffs

known the material adverse information not disclosed by Defendants named herein, or been aware

of the truth behind Defendants’ misstatements, they would not have purchased DGW’s ADSs, or

would not have purchased the ADSs at artificially-inflated prices.

161. Plaintiffs and the Class sustained damages when the value of DGW ADSs declined

when the truth began to partially emerge in the September 13, 2010 through April 5, 2011 period



(the full truth has still not been disclosed), concerning the Company’s adverse financial and

business condition concealed by Defendants’ negligent misstatements in the IPO Offering

Documents and SPO Offering Documents.

162. Less than one year elapsed from the time that Lead Plaintiffs discovered or

reasonably could have discovered the facts upon which this Complaint is based to the time that the

first Complaint was filed asserting claims arising out of the falsity of the Registration Statement.

Less than three years elapsed from the time that the ADSs upon which this Count is brought were

bona fide offered to the public to the time that the first Complaint was filed asserting claims arising

out of the falsity of the Registration Statement.

COUNT II Violation of Section 15 of the Securities Act

(Against the Management Defendants, the Director Defendants GEF, and GEEMF)

163. Plaintiffs incorporate by reference as though set forth in full, the allegations contained

in ¶¶ 1-2, 4-162, above.

164. This Count is brought against Defendants Guo, Park, Holbert, Larrea, Rooney, Yu,

Wei, Firlotte, GEF and GEEMF by investors who purchased DGW ADSs in or traceable to the IPO

and/or SPO pursuant to the IPO Offering Documents and/or the SPO Offering Documents.

165. This Count does not sound in fraud and is not based on any knowing or reckless

misconduct by any of the Defendants named in this Count. Any allegations of fraud, fraudulent

conduct, motive and/or intent, set forth elsewhere herein are specifically excluded from this Count,

as they are not elements of a Section 15 claim.

166. At all times relevant herein Guo and Park were controlling persons of DGW within

the meaning of Section 15 of the Securities Act. Both before and after the IPO and SPO, they were

executive officers of DGW and participated in the day-to-day operations of DGW’s business affairs.



Guo and Park had the power to influence, and did so influence, DGW’s unlawful actions in

connection with the IPO and SPO as alleged herein. In addition to owning a controlling interest in

DGW, through Duoyuan Investments, Ltd., Guo was the CEO and Chairman of the Board of DGW.

Park was the CFO of DGW, and held that position for two years prior to the IPO.

167. During the time in which they served on the Board of Directors, Defendants Holbert,

Larrea, Rooney, Yu, Wei and Firlotte were controlling persons of DGW:

(a) Holbert served as the Chairman of the Audit Committee and on the

Compensation Committee and the Nominating and Corporate Governance

Committee at the time of the IPO. Additionally, as the CEO of DYP, Holbert

had extensive business experience with Duoyuan Investments, Ltd. and

Defendant Guo;

(b) Defendant Larrea, a senior executive at GEF, which had invested in DGW

in February 2008 and was intimately familiar with its operations and

finances, was GEF’s appointee to DGW’s Board and, as such, exercised

GEF’s veto power (described below) over various actions up to the time of

the IPO. Larrea served as GEF’s board nominee at the time of the IPO and

SPO;

(c) Defendant Rooney served on the Audit Committee and Nominating and

Corporate Governance Committee, and as Chairman of the Compensation

Committee at the time of the IPO;

(d) Defendant Yu served on Audit Committee and Compensation Committee,

and as Chairman of the Nominating and Corporate Governance Committee

at the time of the IPO and SPO;


20 GEF publicly claims to have invested in DGW. On GEF’s Website, in the “Investment History”section, GEF states: “Since 1998 we have made the following investments . . . 2008: DuoyuanGlobal Water Inc.” See http://www.globalenvironmentfund.com/.


(e) Defendant Wei, an accounting expert, replaced Defendant Holbert in his

committee assignments, including as the Chairwoman of the Audit

Committee. Wei served in these capacities at the time of the SPO;

(f) Replacing Defendant Rooney, Defendant Firlotte served on the Audit

Committee and Nominating and Corporate Governance Committee, and as

Chairman of the Compensation Committee at the time of the SPO.

168. The Director Defendants referenced in the prior paragraph were each participants in

the violations of §11 of the Securities Act alleged in Count I above, based on their negligence,

having signed the IPO Offering Documents and/or SPO Documents and having otherwise

participated in the process which allowed the IPO and/or SPO to be successfully completed without

discharging their duties in a reasonable manner.

169. Shareholder/Investor GEF, through GEEMF,20 controlled DGW and Defendant

Larrea. Pursuant to a Voting Agreement executed on February 5, 2008, GEEMF appointed Larrea

to DGW’s Board of Directors. An Investors’ Rights agreement executed the same day, by

Defendant Guo and Defendant Larrea, in her capacity as a Managing Director of GEF, not only

provided that GEEMF would receive monthly financial reporting from DGW and premises access

for inspections it sought to conduct, but the approval of GEEMF’s appointee to DGW’s Board of

Directors was required before DGW could undertake a variety of actions. The Investors’ Rights

agreement (Ex. 4.4 to the F-1 filed on June 1, 2009) also provided that the parties thereto would

“identify and nominate a candidate of CEO of the Company with international operating experience



and knowledge of the PRC domestic water treatment industry.” Should that not occur within 15

months, GEEMF was afforded a 15-month period to select the CEO. No one so qualified was

selected to replace Guo — either before or after the 15 months elapsed (in early May 2009).

170. GEF, through GEEMF, sold and/or solicited sales of DGW ADSs in the IPO and

sales of ADSs offered by both GEF/GEEMF and the Company in the SPO. Following its investment

in DGW, GEF helped position the Company for the IPO and the road show that preceded it.

According to GEF’s CEO Jeffrey Leonard: “We helped them write a road map for the company’s

future.” In fact, commenting upon the success of the road show and IPO, James Castanino, a GEF

Vice President stated: “The company really succeeded on the strength of the story — and the

strength of the company itself.”

COUNT IIIViolation of Section 10(b) of the Exchange Act

(Against Defendants DGW, the Management Defendants, the Auditor Defendants, GEFand GEEMF)


in ¶¶ 1-170, above.

172. This Count is brought by Plaintiffs on behalf of themselves and all persons who

purchased DGW ADSs during the Class Period at artificially-inflated prices. The price of DGW

ADSs declined significantly, resulting in damages to Plaintiffs and Class Members, when the truth

began to be partially revealed about the Company’s true business operations and financial condition,

facts that previously had been concealed by the misrepresentations, omissions, and other deliberately

reckless conduct of the defendants named in this Count.



173. The allegations in this Count against the Auditor Defendants are only made with

respect to the misrepresentations in or omissions from audited financial statements, to wit, those

contained in the IPO Form F-1, the SPO Form F-1, and the Form 20-F.

174. The allegations in this Count as to GEF and GEEMF are made only with respect to

the misstatements or omissions in the IPO Offering Documents.

The IPO Offering Documents

175. The misstatements of financial figures and other information in the IPO Offering

Documents set forth in ¶¶ 72-83, above, were made with scienter because DGW, the Management

Defendants, the Auditor Defendants, GEF, and GEEMF knew or should have known that the

financial reports contemporaneously filed at the local AICs for Duoyuan Langfang and Duoyuan

Beijing contained figures for, inter alia, revenues, operating income, and net income, that were

radically different from, and in fact a mere fraction of, the vastly-inflated figures filed with the SEC

in the United States. Therefore, these Defendants knew or but for their recklessness would have

known that the Company’s financial reporting, as well as the extent of the Company’s

manufacturing and production, its distribution network, and the number of employees on its payroll

were all materially overstated.

The SPO Offering Documents

176. The misstatements in the SPO Offering Documents set forth in ¶¶ 84-96, above, were

made with scienter because DGW, the Management Defendants, the Auditor Defendants, GEF and

GEEMF knew or but for their recklessness would have known that the financial reports



contemporaneously filed at the local AICs for Duoyuan Langfang and Duoyuan Beijing contained

figures for, inter alia, revenues, operating income, and net income, that were radically different

from, and in fact a mere fraction of, the vastly-inflated figures filed with the SEC in the United

States. Therefore, DGW, the Management Defendants, the Auditor Defendants, GEF and GEEMF

knew or but for their recklessness, would have known that the Company’s financial reporting, as

well as the extent of the Company’s manufacturing and production, its distribution network, and the

number of employees on its payroll were all materially overstated.

Other Class Period Misstatements and Omissions

177. On August 3, 2009, the Company issued a press release entitled, “Duoyuan Global

Water Inc. Reports Second Quarter 2009 Financial Results.” Therein, the Company, in relevant part,

stated:

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated, “Weare pleased with our second quarter financial results and our first quarter reporting asa public company. Our growth in revenue across all three product lines and ouroperational performance in the second quarter of 2009 demonstrate the strength of ourbusiness model and our unique competitive position. Despite the global economicenvironment, China’s water treatment industry continues to create strong demand forour products. Our new product introductions, our low cost manufacturing base andextensive distribution network all contributed to our strong quarterly financial resultstoday.”

* * *

Second Quarter 2009 Financial Highlights

-- Revenue in the second quarter of 2009 was RMB213.7 million ($31.3 million(1)),an increase of 32.4% from RMB161.4 million in the comparable period of 2008.-- Non-GAAP gross margin increased to 49.6% in the second quarter of 2009 from45.9% in the comparable period of 2008.-- Non-GAAP net income was RMB65.3 million ($9.6 million), an increase of 49.7%from RMB43.7 million in the comparable period of 2008.-- Non-GAAP diluted earnings per ADS(2) were $0.63. Each ADS represents twoordinary shares of the Company.



Second Quarter 2009 Financial Performance

Second quarter 2009 revenue increased 32.4% to RMB213.7 million ($31.3 million)from RMB161.4 million in the comparable period of 2008, reflecting growth acrossall three product categories. Revenue from wastewater treatment equipment increased47.6%, to RMB87.2 million ($12.8 million) in the second quarter of 2009 comparedto RMB59.1 million in the second quarter of 2008, particularly reflecting increaseddemand for Duoyuan’s belt filter press machines, online testing equipment andultraviolet shelving disinfection systems. Revenue from circulating water treatmentincreased by 19.8% to RMB79.9 million ($11.7 million) in the second quarter of 2009compared to RMB66.7 million in the second quarter of 2008, driven by increaseddemand for the Company’s new fully automatic filters and circulating water centralprocessors. Revenue from water purification equipment increased by 26.5% toRMB43.3 million ($6.3 million) in the second quarter of 2009 compared to RMB34.2million in the prior year period, as the Company’s newly introduced models forcentral water purifiers, ozone generators and ultraviolet water purifiers were wellreceived by the marketplace.

* * *

For the second quarter of 2009, non-GAAP gross profit increased by 43.1% toRMB106.1 million ($15.5 million) from RMB74.1 million in the prior year’s period.Non-GAAP gross margin for the second quarter of 2009 was 49.6%, compared to45.9% in the second quarter of 2008, primarily due to a decrease in raw materialcosts.

Non-GAAP operating income increased by 52.2% to RMB88.3 million ($12.9million) in the second quarter of 2009, from RMB58.0 million in the comparableperiod of 2008. Non-GAAP operating margins increased to 41.3% in the secondquarter of 2009, from 35.9% in the prior year period. As a percentage of revenue,research and development, selling expenses and general and administrative expenses,excluding non-cash share-based compensation expense, decreased as a percentage ofrevenue in the second quarter of 2009 compared to the second quarter of 2008.

Provision for income taxes in the second quarter of 2009 increased to RMB22.9million ($3.4 million), an effective tax rate of 25.0%, from RMB10.7 million, aneffective tax rate of 20.2%, in the second quarter of 2008. The increase in taxprovision primarily reflects the increase in the Company’s profits by 62.2% over thesame period of 2008, and the termination of a tax exemption for Duoyuan Langfang,one of the Company’s subsidiaries on December 31, 2008.

Non-GAAP net income increased 49.7% to RMB65.3 million ($9.6 million) in thesecond quarter of 2009, from RMB43.7 million in the prior year’s second quarter.Non-GAAP basic and diluted earnings per share increased to RMB2.16 ($0.32) in thesecond quarter of 2009, from RMB1.46 in the second quarter of 2008. During this



year over year period, non-GAAP basic and diluted earnings per ADS increased toRMB4.31 ($0.63) from RMB2.91, respectively.

The Company had approximately 30.3 million weighted average number of dilutedshares outstanding as of June 30, 2009, compared to 30.0 million weighted averagenumber of diluted shares outstanding as of June 30, 2008.

As of June 30, 2009, the Company had cash and bank deposits of RMB936.4 million($137.1 million), compared to RMB198.5 million as of December 31, 2008, mostlyreflecting net proceeds from the Company’s initial public offering. Cashflowsprovided by operating activities for the six months ended June 30, 2009 wereapproximately RMB122.9 million ($18.0 million), compared to approximatelyRMB142.1 million in the prior year period. The Company had notes payable ofapproximately RMB20.0 million ($2.9 million) at the close of the second quarter of2009.

First Half 2009 Financial Performance

For the six months ended June 30, 2009, revenue increased by 34.7% to RMB334.4million ($49.0 million) from RMB248.2 million for the first six months of 2008.During this same time period, non-GAAP gross profit increased by 47.7% toRMB160.5 million ($23.5 million) from RMB108.7 million. Non-GAAP operatingincome increased by 64.0% to RMB127.9 million ($18.7 million) in the first sixmonths of 2009 from RMB78.0 million in the first six months of 2008, andnon-GAAP net income increased 60.6% to RMB94.3 million ($13.8 million), orRMB3.14 ($0.46) per share, from RMB58.7 million, or RMB1.96 per share, in theserespective periods. Non-GAAP net income per ADS was RMB6.28 ($0.92) in the firstsix months of 2009, up from RMB3.91 in the first six months of 2008. Weightedaverage number of diluted shares outstanding were approximately 30.0 million for thefirst six months of 2009 and 2008.

(Emphasis in original).

178. The statements with respect to revenues, operating income, and net income in the

preceding paragraph were false and/or materially misleading because, according to the financial

documents filed with the local AICs for Duoyuan Langfang and Duoyuan Beijing for fiscal 2009,

the Company was generating substantially less revenue, operating income, and net income during

2009 than it led investors to believe. Pointedly, the Company had generated less operating income

and revenue over the entire year of 2009 than it reported earning in Q2’09 alone. Specifically,



FY’09 revenues for Duoyuan Langfang were a mere 2.33 million RMB and Duoyuan Beijing 3.25

million RMB (5.78 million RMB if properly combined) — nowhere near the 213.7 million RMB

figure DGW and the Management Defendants reported to investors. Furthermore, the Company

actually had negative net income for the entire year of 2009, while it presented a glowing report

for Q2’09.

179. The above statements by the Company and the Management Defendants in the

August 3, 2009 press release were made with scienter because these Defendants knew or but for

their recklessness would have known that the correct figures presented to the local authorities in

China demonstrated very modest revenues and that Company’s operations were losing money or,

at best (given the ultimate results for FY’09), barely breaking even in Q2’09. The fact that these

Defendants touted the positive and profitable growth of the Company instead, and the sheer

magnitude of the difference between the financial results reported to the local Chinese authorities

and those reported to the U.S. investing public, weighs heavily in showing the statements were made

with scienter.

180. On November 9, 2009, the Company issued a press release entitled, “Duoyuan Global

Water Inc. Reports Third Quarter 2009 Financial Results.” Therein, the Company, in relevant part,

stated:

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated,“We are pleased with the Company’s third quarter financial results, which reflectincreased demand across all three product lines, our comprehensive and high qualityproduct offering, as well as our low cost manufacturing base, extensive distributionnetwork and strong competitive position. All of these factors contributed to ourquarterly financial results today and lay the groundwork for continued growth in thefuture.”

* * *

Third Quarter 2009 Financial Highlights



-- Revenue increased 30.9% to RMB255.2 million ($37.4 million(1)) from RMB195.0 million in the prior year period. -- Gross margin increased to 49.5% from 46.8% in the prior year period. -- Operating income increased 31.1% to RMB95.7 million ($14.0 million) from RMB73.0 million in the prior year period. -- Net income increased 23.1% to RMB73.4 million ($10.8 million) from RMB59.6 million in the comparable period of 2008. -- Diluted earnings per ADS(2) was $0.49. Each ADS represents two of the Company’s ordinary shares.

* * *

Operating income increased by 31.1% to RMB95.7 million ($14.0 million) in thethird quarter of 2009, from RMB73.0 million in the comparable period of 2008.Operating margin was 37.5% in the third quarter of 2009, essentially flat from 37.4%in the prior year period. Selling expenses increased 82.5% to RMB19.2 million ($2.8million) in the third quarter from RMB10.5 million in the prior year’s period. Theincrease primarily reflects advertising activities initiated in the third quarter of 2009to enhance national brand recognition.

* * *

Net income increased 23.1% to RMB73.4 million ($10.8 million) in the third quarterof 2009, from RMB59.6 million in the prior year’s third quarter. Diluted earnings pershare was RMB1.67 ($0.25) in the third quarter of 2009, compared to RMB1.99 inthe third quarter of 2008. During this year over year period, diluted earnings perADS was RMB3.35 ($0.49) compared to RMB3.97, respectively.

* * *

For the nine months ended September 30, 2009, revenue increased 33.0% toRMB589.6 million ($86.4 million) from RMB443.2 million for the first nine monthsof 2008. During this same time period, gross profit increased by 42.8% to RMB285.5million ($41.8 million) from RMB200.0 million. Operating income decreased by11.8% to RMB133.2 million ($19.5 million) for the first nine months of 2009 fromRMB151.0 million for the first nine months of 2008, and net income decreased34.8% to RMB77.2 million ($11.3 million), or RMB2.22 ($0.33) per diluted share,from RMB118.3 million, or RMB3.94 per diluted share, for these respective periods.Net income per diluted ADS was RMB4.44 ($0.65) for the first nine months of 2009,down from RMB7.89 for the first nine months of 2008. Weighted average numberof diluted shares outstanding was approximately 34.8 million for the first ninemonths of 2009, compared to 30.0 million weighted average number of dilutedshares outstanding for the first nine months of 2008.




181. The statements with respect to revenues, operating income, and net income in the

preceding paragraph were false and/or materially misleading because, according to the financial

documents filed with the local AICs for Duoyuan Langfang and Duoyuan Beijing for fiscal 2009,

the Company was generating substantially less revenue, operating income, and net income during

2009 than it led investors to believe. Pointedly, the Company had generated less operating income

and revenue over the entire year of 2009 than it reported earning in Q3’09 alone. Specifically,

FY’09 revenues for Duoyuan Langfang were a mere 2.33 million RMB and Duoyuan Beijing 3.25

million RMB (5.78 million RMB if properly combined) — nowhere near the 255.2 million RMB

figure DGW and the Management Defendants reported to investors. Furthermore, the Company

actually had negative net income for the entire year of 2009, while it presented a glowing report for

Q3’09.

182. The above statements made by the Company and the Management Defendants in the

November 9, 2009 press release were made with scienter because DGW and the Management

Defendants knew or but for their recklessness would have known that the correct figures presented

to the local authorities in China demonstrated very modest revenues and that the Company’s

operations were losing money or, at best (given the ultimate results for FY’09), barely breaking even

in Q3’09. The fact that DGW and the Management Defendants touted the positive and profitable

growth of the Company instead, and the sheer magnitude of the difference between the financial

results reported to the local Chinese authorities and those reported to the U.S. investing public,

weighs heavily in showing the statements were made with scienter.

183. To attract investor interest for the soon-to-be priced SPO, on January 19, 2010, the

Company issued a press release entitled “Duoyuan Global Water Inc. Announces Preliminary Fourth

Quarter and Full Year 2009 Results.” Therein, the Company stated, in relevant part: “For the full



year, the Company believes revenue will be RMB781.5 million to RMB785.3 million and net

income will be RMB113.0 million to RMB116.8 million. For the fourth quarter, the Company

believes revenue will be RMB191.9 million to RMB195.8 million and net income will be RMB35.8

million to RMB39.6 million.”

184. The statements in the preceding paragraph were false and/or materially misleading

because, according to the financial documents filed with the local AICs for Duoyuan Langfang and

Duoyuan Beijing for fiscal 2009, the Company generated substantially less revenue and net income

during 2009 than it led investors to believe. Pointedly, the Company had generated revenue and net

income over the entire year of 2009 than it reported earning in Q4’09 alone. Specifically, FY’09

revenues for Duoyuan Langfang were a mere 2.33 million RMB and Duoyuan Beijing 3.25 million

RMB (5.78 million RMB if properly combined) — nowhere near the range of 191.9-195.8 million

RMB for Q4’09, let alone the astronomical FY’09 estimated range of 781.5 - 785.3 million RMB.

Moreover, the Company actually had negative net income for the entire year of 2009, losses of

6,549,346 RMB at Duoyuan Langfang and losses of 30,457,760 RMB at Duoyuan Beijing —

nowhere near either the Q4’09 initial estimates of positive 35.8 - 39.6 million RMB for Q4’09 and

positive 113.0 - 116.8 million RMB for FY’09.


January 19, 2010 press release were made with scienter because DGW and the Management


to the local authorities in China demonstrated very modest revenues and that the Company’s

operations lost money in 2009 (and thus, at best, could have broken even in Q4’09). The fact that

DGW and the Management Defendants touted the positive and profitable growth of the Company

instead, and the sheer magnitude of the difference between the financial results reported to the local



Chinese authorities and those reported to the U.S. investing public, weighs heavily in showing the

statements were made with scienter. Another fact indicative of scienter is that DGW and the

Management Defendants released very preliminary figures (reported in a range rather than an

estimate) to drum up investor interest by presenting DGW as a growing company just in advance

of the SPO to be commenced by the end of the month.

186. On March 8, 2010, the Company issued a press release entitled, “Duoyuan Global

Water Inc. Reports Fourth Quarter and Full Year 2009 Financial Results.” Falling within the

preliminary revenue estimate range announced on January 19, 2010, and exceeding the high end of

the net income range for Q4’09, DGW’s last quarter and full year report of operations was extremely

positive. The Company, in relevant part, stated:

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated,“We are pleased with the Company’s fourth quarter and full year financialresults, which reflect increased demand across all three product lines, driven byour comprehensive and high quality product offering, our low costmanufacturing base, extensive distribution network and our focus oncontinually developing new products. We plan to launch 36 products throughoutthe remainder of this year. We are confident that our competitive strengths andformidable cash position enable us to capitalize on the compelling marketopportunities at hand.”

Fourth Quarter 2009 Financial Highlights

* Revenue increased 29.6% to RMB193.8 million ($28.4 million(1)) fromRMB149.5 million in the prior year period.* Gross margin increased to 47.3% from 44.1% in the prior year period.* Operating income increased 114.5% to RMB55.0 million ($8.1 million) fromRMB25.6 million in the prior year period.* Net income increased 157.5% to RMB39.8 million ($5.8 million) from RMB15.5million in the comparable period of 2008.* Diluted earnings per ADS(2) was $0.27. Each ADS represents two of theCompany’s ordinary shares.



Fourth Quarter 2009 Financial Performance

Fourth quarter 2009 revenue increased 29.6% to RMB193.8 million ($28.4 million)from RMB149.5 million in the comparable period of 2008, reflecting growth acrossall three product categories. Revenue from wastewater treatment equipment increased 50.4%, to RMB78.6million ($11.5 million) in the fourth quarter of 2009 compared to RMB52.3 millionin the fourth quarter of 2008, due to increased demand for Duoyuan’s online testingequipment, ultraviolet shelving disinfection system, water decanter and sludge screwproducts.

Revenue from water purification equipment increased by 25.3% to RMB44.5 million($6.5 million) in the fourth quarter of 2009 compared to RMB35.5 million in theprior year period, as the Company’s central water purifiers, industry pure waterequipment and ozone generators continued to be well-received by the marketplace.

Revenue from circulating water treatment increased by 10.6% to RMB67.7 million($9.9 million) in the fourth quarter of 2009 compared to RMB61.2 million in thefourth quarter of 2008, driven by increased demand for the Company’s circulatingwater central processors and electronic water conditioners.

Demand for the Company’s products increased across all three product lines,driven by the Company’s established distribution network, market recognitionof the high quality, durability and effectiveness of its products as well as the successof the Company’s promotion and marketing strategies.

Demand for the Company’s wastewater treatment equipment continued to outpacedemand for circulating water treatment equipment and water purification equipmentdue to intensified government efforts to monitor wastewater discharge.

For the fourth quarter of 2009, gross profit increased by 39.1% to RMB91.7 million($13.4 million) from RMB65.9 million in the prior year period. Gross margin for thefourth quarter of 2009 was 47.3%, compared to 44.1% in the fourth quarter of 2008,and 49.5% in the third quarter of 2009. The fluctuation of gross margin reflected thefluctuation of raw material costs as well as increased depreciation expensesassociated with the Company’s continuous investments in manufacturing facilities,which amounted to approximately $5.0 million in 2009.

Operating income increased by 114.5% to RMB55.0 million ($8.1 million) in thefourth quarter of 2009 from RMB25.6 million in the comparable period of 2008.Operating margin was 28.4% in the fourth quarter of 2009, up from 17.1% in theprior year period. Selling expenses, up 153.6% to RMB27.4 million ($4.0 million),reflected approximately RMB15.6 million ($2.3 million) of TV advertising expenses



in the fourth quarter of 2009. As the Company continues to invest in its brand, itexpects to incur similar levels of TV advertising expense in the first and secondquarters of 2010. Excluding a one-time cost of approximately RMB20.5 million inthe fourth quarter of 2008 associated with the Company’s initial public offering,general and administrative expenses increased by 10.5% to RMB4.7 million ($0.7million) in the fourth quarter of 2009 from RMB4.2 million in the fourth quarter of2008.

* * *

Net income increased 157.5% to RMB39.8 million ($5.8 million) in the fourthquarter of 2009, from RMB15.5 million in the prior year’s fourth quarter. Dilutedearnings per share was RMB0.91 ($0.13) in the fourth quarter of 2009, compared toRMB0.52 in the fourth quarter of 2008. Diluted earnings per ADS was RMB1.81($0.27) in the fourth quarter of 2009, compared to RMB1.03 per ADS in the priorperiod.

* * *

Full Year 2009 Financial Performance

For the year ended December 31, 2009, revenue increased 32.2% to RMB783.4million ($114.8 million) from RMB592.7 million for the year ended December31, 2008. During this same period, gross profit increased by 41.9% to RMB377.2million ($55.3 million) from RMB265.9 million. Operating income increased 6.5%to RMB188.1 million ($27.6 million) from RMB176.7 million in 2008. Excludingshare-based compensation of approximately RMB91.3 million ($13.4 million), or$0.36 per diluted share, non-GAAP operating income increased 58.2% to RMB279.4million ($40.9 million) from RMB176.7 million in the prior year. Non-GAAP netincome increased 55.7% to RMB208.3 million ($30.5 million), or RMB 5.62 ($0.82)per diluted share, from RMB133.8 million, or RMB4.46 per diluted share, in theprior year. Non-GAAP net income per ADS was RMB11.24 ($1.65) for the full yearof 2009, up from RMB8.92 in 2008. Weighted average number of diluted sharesoutstanding was approximately 37.1 million in 2009, up from 30.0 million in 2008.

* * *

Mr. Stephen C. Park, the Chief Financial Officer of Duoyuan, stated, “We areexcited to move forward into 2010 in a highly flexible financial position. As demandcontinues to increase for water treatment equipment driven by stringent governmentregulations and the ongoing need for advanced water treatment equipment forcommercial, industrial and residential uses, we believe we are well-positioned tocapture the growing market opportunities.”

“We intend to use the proceeds to continue to expand our manufacturing facilities,to increase in-house production of key components used in existing or new product



offerings, and to launch new products. The final phase of our Langfang expansionproject is expected to be completed and fully operational by the end of the secondquarter of 2010. We will also break ground in March this year on a new facility inDaxing, Beijing, where our headquarters are located, to address the growing demandfor our products in 2011 and beyond.”

“Additionally, we remain focused on enhancing our R&D capabilities, evidenced byour plan to build a new R&D center in the third quarter of this year. We look forwardto executing our near-term growth strategies with a considerably strong cashposition.”

(Emphasis added).

187. The statements with respect to revenues, operating income and net income in the

preceding paragraph were false and/or materially misleading, and made with scienter because, DGW

and the Management Defendants knew or but for their recklessness would have known that the

Company would file with the AICs in China an accurate portrayal of DGW’s financial position and

results of operations for FY’09 far different from the above-quoted stellar financial results publicly

presented to investors. These financial statements show the stark contrast between what DGW

revealed to its U.S. investors and its true state of affairs:

DGW’s 2009 Year End Financial Results

Revenues Operating Income Net Income

DGW SEC Form 20-F(U.S.)

783,411,447 RMB 188,137,522 RMB 116,995,002 RMB

Duoyuan LangfangAIC (China)

2,327,492 RMB 400,908 RMB -6,549,346 RMB

Duoyuan Beijing AIC(China)

3,250,535 RMB -29,620,373 RMB -30,457,761 RMB

188. Because DGW’s actual revenues for all of 2009 did not reach even $1 million USD,

the statement made by the DGW and the Management Defendants in the March 8, 2010 press

release, that “[d]emand for the Company’s products increased across all three product lines, driven



by the Company’s established distribution network” was false and/or materially misleading because

there was neither a demand for DGW products nor a “established distribution network,” repeatedly

described as 80 distributors across 28 provinces, as set forth in ¶¶ 81, 94 above.


March 8, 2010 press release were made with scienter because DGW and the Management


to the local authorities in China demonstrated very modest revenues for FY’09, no more than 5.578

RMB, which did not represent an increase in demand for DGW’s products over the 5.57 RMB

revenue figure (if properly combined) reported to the local AICs for FY’08, 3,638,904 RMB for

Duoyuan Beijing and 1,931,433 RMB for Duoyuan Langfang.

190. On May 12, 2010, the Company issued a press release entitled, “Duoyuan Global

Water Inc. Reports First Quarter 2010 Financial Results.” Therein, the Company, in relevant part,

stated:

First Quarter 2010 Financial Highlights

-- Revenue increased 33.0% to RMB160.5 million ($23.5 million)(1) fromRMB120.6 million in the prior year period.-- Gross profit increased 37.4% to RMB 74.9 million ($11.0 million) from RMB54.5million in the prior year period.-- Gross margin increased to 46.6% from 45.1% in the prior year period.-- Diluted earnings per ADS was $0.17. Each ADS represents two of the Company’sordinary shares.

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated,“Our first quarter results continue to demonstrate our sustained growth andpresence in China’s water treatment industry, with revenue growing 33% yearover year. These encouraging results attest to the increasing recognition of theDuoyuan brand and our reputation as a high quality and top value manufacturer. Ourperformance also reflects growing demand for our products across all productlines, driven by our comprehensive and high quality product offering, our lowcost manufacturing base, extensive distribution network and our focus on



continually developing new products. We remain on schedule to launch 36 newproducts during 2010, eight of which have already been launched, consisting of twoproducts in our water purification product category and six products in ourwastewater treatment product category. We look forward to building upon thismomentum as we enhance the diversity of our product portfolio throughout 2010.We are confident that we’ll capitalize on the opportunities created by intensifiedgovernment efforts to monitor wastewater discharge and the growing consumerawareness of water quality concerns in China.”

Guo continued, “We are pleased to announce significant progress in several of ourgrowth initiatives. We continue to move forward in our expansion at Langfang andin the coming weeks we are installing a new aerator production line imported fromGermany. We also finalized the land use rights for our new manufacturing facilitiesin Daxing and progress continues there as we focus on significantly enhancing ourproduction capacity for our existing and new market products over the next twoyears.”

Guo then remarked, “We are also excited to announce that we are in the process ofnegotiating two licensing opportunities. These opportunities would expand ourportfolio offerings into the drip irrigation and high-end membrane technologymarket. Today, we already have more than 100 products in our portfolio and movingforward, we will continue to grow the depth and breadth of our offerings. As demandcontinues to increase for water treatment equipment, we believe we arewell-positioned and uniquely diversified across the sector to capture compellingmarket opportunities.”

* * *

First Quarter 2010 Financial Performance

First quarter 2010 revenue increased by 33.0% to RMB160.5 million ($23.5 million)from RMB120.6 million in the comparable period of 2009. Revenues were calculatednet of sales rebates, which were RMB0.5 million ($0.1 million) in the first quarterof 2010, up from RMB0.4 million in the prior year period.

Revenue from wastewater treatment equipment increased by 35.1% to RMB62.7million ($9.2 million) in the first quarter of 2010 compared to RMB46.4 million inthe first quarter of 2009, due to increased demand for the Company’s UV shelvingdisinfection systems, online testing equipment, sludge screws and belt filter pressmachines.

Revenue from water purification equipment increased by 32.7% to RMB35.8 million($5.2 million) in the first quarter of 2010 compared to RMB27.0 million in the prioryear period, as the Company’s ozone generators, central water purifiers and UVwater purifiers continued to be well-received in the marketplace.



Revenue from circulating water treatment increased by 30.6% to RMB59.1 million($8.7 million) in the first quarter of 2010 compared to RMB45.2 million in the firstquarter of 2009, driven by increased demand for the Company’s circulating centralwater processors, fully automatic filters and electronic water conditioners.

Revenue from spare parts increased by 41.3% to RMB3.5 million ($0.5 million) inthe first quarter of 2010 compared to RMB2.5 million in the first quarter of 2009.

For the first quarter of 2010, gross profit increased by 37.4% to RMB74.9 million($11.0 million) from RMB54.5 million in the prior year period. Gross margin for thefirst quarter of 2010 was 46.6%, compared to 45.1% in the first quarter of 2009. Thefluctuation of gross margin reflected the fluctuation of raw material costs as well asincreased depreciation expenses associated with the Company’s continuousinvestments in manufacturing facilities.

Operating income decreased by 6.2% to RMB37.2 million ($5.5 million) in the firstquarter of 2010 from RMB39.7 million in the comparable period of 2009, primarilyreflecting increased expenses resulting from the Company’s efforts to build brandequity through a national advertising campaign.

* * *

Net income was RMB27.3 million ($4.0 million) in the first quarter of 2010,compared to RMB28.9 million in the prior year’s first quarter. Diluted earningsper share was RMB0.58($0.08) in the first quarter of 2010, compared to RMB0.96in the first quarter of 2009. Diluted earnings per ADS was RMB1.16($0.17) in thefirst quarter of 2010, compared to RMB1.93 per ADS in the prior year period. TheCompany had approximately 47.3 million weighted average diluted sharesoutstanding as of March 31, 2010, compared to 30.0 million weighted averagediluted shares outstanding as of March 31, 2009.

* * *

As of March 31, 2010, the Company had cash and bank deposits of RMB1.4 billion($211.0 million), compared to RMB918.7 million as of December 31, 2009. Cashflows provided by operating activities for the period ended March 31, 2010 wereapproximately RMB17.0 million ($2.5 million), compared to approximatelyRMB49.7 million in the prior year period as a result of increases in accountsreceivables and inventory and lower taxes payable. Depreciation and amortizationexpense was RMB3.7 million ($0.5 million) for the first quarter of 2010, comparedto RMB2.6 million in the first quarter of 2009. There were no cash flows related toinvesting activities for the period ended March 31, 2010. Cash flows provided byfinancing activities were approximately RMB504.3 million ($73.9 million),reflecting RMB524.3 million ($76.8 million) raised in a follow-on offering of the



Company’s ADSs as well as RMB20 million ($2.9 million) of debt repaid during thefirst quarter.

(Emphasis added).

191. Also on May 12, 2010, the Company and the Management Defendants hosted a

conference call with investors to discuss the Company’s Q1’10 earnings. The Company and

Management Defendants reiterated the statements and financial results reported in DGW’s press

release. In addition, Defendant Park stated that the Company had 82 distributors in China and

Defendant Guo did not correct that statement.

192. DGW’s and the Management Defendants’ reporting of DGW’s unaudited Q1’10

revenues, operating income, and net income figures, was false and/or materially misleading and

made with scienter. Plaintiffs are informed and believe, and based thereon allege, that these figures

are not accurate because:

(a) As the documentation uncovered by Plaintiffs’ investigator and Muddy

Waters indicates, DGW vastly inflated these same figures for fiscal 2006,

2007, 2008 and 2009. Thus, the need to portray growth in 2010 caused

DGW and the Management Defendants to report false year-over-year figures;

(b) By late March 2011, the Audit Committee and third-party investigator

Skadden had not been granted access to the books and records necessary to

verify the accuracy of DGW’s financial reporting. On March 23, 2011, the

Board of Directors announced that until the independent review of DGW’s

internal controls and processes was complete, it was “not in a position to

approve or otherwise ratify the Company’s presentation of the unaudited

results for the ... fiscal year ended December 31, 2010.”



193. For the reasons set forth in ¶188, supra, the statement made by DGW and Park and

not corrected by Guo, that DGW had 82 distributors, was made with scienter because DGW and the

Management Defendants knew or should have known that DGW had few distributors.

194. On June 18, 2010, the Company filed its Annual Report with the SEC on Form 20-F

for the 2009 fiscal year. At page F-3, DGW, the Management Defendants and the Auditor

Defendants set forth the false and materially misleading FY’09 revenue, operating income, and net

income figures set forth in the table at ¶ 187 above as well as the false and materially misleading

FY’07 and 2008 revenue, operating income, and net income figures set forth at ¶¶ 77(a)-(d) and 78

above.

195. Defendant Guo executed the Form 20-F, at page 93, on behalf of DGW, and, in so

doing, attested to the accuracy of the information contained therein.

196. Defendant Guo also executed Exhibit 12.1 thereto, entitled “Certificate of Principal

Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002,” which stated:

I, Wenhua Guo, certify that:

1. I have reviewed this annual report on Form 20-F of Duoyuan Global WaterInc. (the “Company”);

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

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

4. The Company’s other certifying officer and I are responsible for establishing

and maintaining disclosure controls and procedures (as defined in ExchangeAct 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 theCompany and have:

(a) Designed such disclosure controls and procedures, or causedsuch disclosure controls and procedures to be designed underour supervision, to ensure that material information relatingto the Company, including its consolidated subsidiaries, ismade known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, orcaused such internal control over financial reporting to bedesigned under our supervision, to provide reasonableassurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposesin accordance with generally accepted accounting principles.

(c) Evaluated the effectiveness of the Company’s disclosurecontrols and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controlsand procedures, as of the end of the period covered by thisreport based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internalcontrol over financial reporting that occurred during theperiod covered by the annual report that has materiallyaffected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theCompany’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in thedesign or operation of internal control over financial reportingwhich are reasonably likely to adversely affect theCompany’s ability to record, process, summarize and reportfinancial information; and

(b) Any fraud, whether or not material, that involvesmanagement or other employees who have a significant rolein the Company’s internal control over financial reporting.

By: /s/ WENHUA GUO



Wenhua Guo Chief Executive Officer Dated: June 18, 2010

197. Defendant Guo also executed Exhibit 13.1 thereto, entitled: “Certification Pursuant

to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,”

which stated:

In connection with the Annual Report on Form 20-F of Duoyuan Global Water Inc.(the “Company”) for the fiscal year ended December 31, 2009 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, WenhuaGuo, Chief Executive Officer of the Company, certify to my knowledge, pursuantto Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of theSecurities 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.

By: /s/ WENHUA GUO Wenhua Guo Chief Executive Officer

Dated: June 18, 2010

198. The revenue, operating income and net income figures set forth in the Form 20-F

filed with the SEC as well as Defendant Guo’s various certifications of their accuracy were false

when made, and thus made by Guo with scienter, because Defendant Guo knew or but for his

recklessness would have known that the actual figures were far smaller, as reported by DGW to the

local AICs in China for FY’07, 2008 and 2009. Furthermore, Defendant Guo’s certifications under

the Sarbanes-Oxley Act were false when made and made with scienter because Guo knew or but for

his recklessness would have known that reporting figures to the SEC that are vastly different from

those reported to the local AICs is evidence of both a failure of internal controls and potential fraud.



199. Defendant Park executed Exhibit 12.2 to DGW’s Form 20-F, entitled “Certificate of

Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002,” which stated:

I, Stephen C. Park, certify that:

1. I have reviewed this annual report on Form 20-F of Duoyuan Global WaterInc. (the “Company”);

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

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

4. The Company’s other certifying officer and I are responsible for establishing

and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theCompany and have:

(a) Designed such disclosure controls and procedures, or causedsuch disclosure controls and procedures to be designed underour supervision, to ensure that material information relatingto the Company, including its consolidated subsidiaries, ismade known to us by others within those entities, particularlyduring the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, orcaused such internal control over financial reporting to bedesigned under our supervision, to provide reasonableassurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposesin accordance with generally accepted accounting principles.

(c) Evaluated the effectiveness of the Company’s disclosurecontrols and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controlsand procedures, as of the end of the period covered by thisreport based on such evaluation; and



(d) Disclosed in this report any change in the Company’s internalcontrol over financial reporting that occurred during theperiod covered by the annual report that has materiallyaffected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theCompany’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in thedesign or operation of internal control over financial reportingwhich are reasonably likely to adversely affect theCompany’s ability to record, process, summarize and reportfinancial information; and

(b) Any fraud, whether or not material, that involvesmanagement or other employees who have a significant rolein the Company’s internal control over financial reporting.

By: /S/ STEPHEN C. PARK

Stephen C. Park Chief Financial Officer Dated: June 18, 2010

200. Defendant Park executed Exhibit 13.2 thereto, entitled: “Certification Pursuant to 18

U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,”

which stated:

In connection with the Annual Report on Form 20-F of Duoyuan Global Water Inc.(the “Company”) for the fiscal year ended December 31, 2009 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, StephenC. Park, Chief Financial Officer of the Company, certify to my knowledge, pursuantto Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of theSecurities 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.

By: /s/ STEPHEN C. PARK



Stephen C. Park Chief Financial Officer

Dated: June 18, 2010

201. The revenue, operating income and net income figures set forth in the Form 20-F

filed with the SEC as well as Defendant Park’s various certifications of their accuracy were false

when made, and thus made by Park with scienter, because Park knew or but for his recklessness

would have known that the actual figures were far smaller, as reported by DGW to the local AICs

in China for FY’07, FY’08 and FY’09. Furthermore, Defendant Park’s certifications under the

Sarbanes-Oxley Act were false when made and made with scienter because, as DGW’s CFO and a

Certified Public Accountant, Park knew or but for his recklessness would have known that reporting

figures to the SEC that are vastly different from those reported to the local AICs is evidence of both

a failure of internal controls and potential fraud.

202. Page F-1 of the Form 20-F contained the “Report of Independent Registered Public

Accounting Firm,” which provided investors with the following assurances:

Board of Directors and ShareholdersDuoyuan Global Water Inc.

We have audited the accompanying consolidated balance sheets of Duoyuan GlobalWater Inc. (a British Virgin Islands corporation) and its subsidiaries (the Company)as of December 31, 2009 and 2008, and the related statements of income,stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2009. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements 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 financialreporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness



of the Company’s internal control over financial reporting. Accordingly, we expressno such opinion. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve 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 Duoyuan Global Water Inc. and itssubsidiaries as of December 31, 2009 and 2008, and the results of their operationsand cash flows for each of the three years in the period ended December 31, 2009 inconformity with accounting principles generally accepted in the United States ofAmerica.

/s/ GRANT THORNTONHong KongJune 18, 2010

203. In addition, Exhibit 23.1 to the Form 20-F, entitled “Consent of Independent

Registered Public Accounting Firm,” contained the following statement:

We hereby consent to the use of our name and the use of our opinion dated June 18,2010 on the consolidated financial statements of Duoyuan Global Water Inc. (the“Company”) for the year ended December 31, 2009 included in its Annual Reporton Form 20-F being filed by the Company, for the fiscal year ended December 31,2009 and its incorporation by reference into Registration Statement on Form S-8(No: 333-160255, effective June 26, 2009).

/s/ GRANT THORNTONHong KongJune 18, 2010

204. As set forth herein, the revenue, operating income, and net income figures set forth

in the Form 20-F filed with the SEC were false at the time of the filing. For the reasons set forth in

¶¶ 127-157, the Auditor Defendants apparently did not discover DGW’s true financial condition

because they utterly failed to craft and implement their audits of DGW with any measure of

diligence, despite their knowledge of DGW’s internal control problems. In short, their complete

dereliction of duty amounted to no audit at all. The Auditor Defendants were thus reckless in


21 E.g., an August 2010 article noted: “Over the past few months ... I and other critics haveadvocated that AIC filings are important data points in determining whether [companies] arefalsifying their SEC financial statements. In cases where AIC-reported revenue, profit and assets aresubstantially lower than SEC-reported financial figures, we’ve claimed that this provides materialevidence that the companies in question are fabricating their SEC financials.” Seehttp://seekingalpha.com/article/223068-china-biotics-vs-spreadtrum-communications-why-aic-filings-matter.


issuing an opinion certifying the accuracy of DGW’s financial reporting for 2007-2009 and for

allowing that opinion to be used in the Form 20-F. In addition to failing to follow GAAS, the

Auditor Defendants were reckless because:

(a) As Hong Kong auditors familiar with the filing and reporting requirements

of the PRC, the Auditor Defendants knew or should have known to check the

local AIC filings for Duoyuan Beijing and Duoyuan Langfang to compare the

figures contained in those reports to the figures provided by management for

filing with the SEC on Form 20-F;

(b) By the summer of 2010, the Auditor Defendants knew or should have known

that a number of Chinese companies were filing an accurate set of figures

with the local AIC branches in China — under whose legal purview the

companies and their management operated — and another set with the SEC,

regulators in a jurisdiction with no punitive authority over Chinese

companies and their management; 21 and

(c) DGW’s already-existing internal controls problems raised a red flag that the

Auditor Defendants should employ heightened scrutiny to verify the accuracy

of DGW’s SEC reporting.



205. On August 18, 2010, the Company issued a press release entitled, “Duoyuan Global

Water Inc. Reports Second Quarter 2010 Financial Results.” Therein, the Company, in relevant part,

stated:

Second Quarter 2010 Financial Highlights

-- Revenue increased 37.4% to RMB293.6 million ($43.3 million) from RMB213.7million in the prior year period.-- Gross profit increased 34.1% to RMB140.4 million ($20.7 million) fromRMB104.7 million in the prior year period.-- Gross margin was 47.8% compared to 49.0% in the prior year period.-- Diluted earnings per ADS was $0.45. Each ADS represents two of the Company’sordinary shares.

* * *

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated,“Our second quarter results demonstrate our sustained growth and presence inChina’s water treatment industry as well as contributions from our new, highermargin product launches. We will continue to drive growth through new productsdeveloped through both our research and development efforts as well as partnershipagreements and opportunities. Moving forward, we are confident in our ability tomaintain our growth trajectory through our comprehensive and high qualityproduct offerings, our low cost manufacturing base, our extensive distributionnetwork and our focus on continually developing new products.”

Second Quarter 2010 Financial Performance

Second quarter 2010 revenue increased by 37.4% to RMB293.6 million ($43.3million) from RMB213.7 million in the comparable period of 2009. Revenueswere calculated net of sales rebates, which were flat compared to the prior yearperiod at RMB0.9 million ($0.1 million) in the second quarter of 2010.

Revenue from water reuse equipment, which includes wastewater treatmentequipment, increased by 45.3% to RMB126.6 million ($18.7 million) in the secondquarter of 2010 compared to RMB87.2 million in the second quarter of 2009, due toincreased demand for the Company’s UV shelving disinfection systems, onlinetesting equipment, sludge screws, flocculant [sic] preparation systems and belt filterpress machines.

Revenue from water purification equipment increased by 36.2% to RMB59.0 million($8.7 million) in the second quarter of 2010 compared to RMB43.3 million in the



prior year period, as the Company’s ozone generators, central water purifiers and UVwater purifiers continued to be well-received in the marketplace.

Revenue from water conservation equipment, which includes circulating watertreatment equipment, increased by 28.4% to RMB102.6 million ($15.1 million) inthe second quarter of 2010 compared to RMB79.9 million in the second quarter of2009, driven by continued demand for the Company’s circulating central waterprocessors, fully automatic filters and electronic water conditioners.

Revenue from spare parts increased by 48.1% to RMB6.3 million ($0.9 million),which was 2.2% of revenue in the second quarter of 2010, compared to RMB4.3million, which was 2.0% of revenue in the second quarter of 2009.

For the second quarter of 2010, gross profit increased by 34.1% to RMB140.4million ($20.7 million) from RMB104.7 million in the prior year period. Grossmargin for the second quarter of 2010 was 47.8%, compared to 49.0% in the secondquarter of 2009 and 46.6% in the first quarter of 2010. These gross margins may beattributed to changing raw material costs as well as fluctuations in the Company’smix of products sold as new higher margin products are introduced.

Operating income was RMB100.7 million ($14.8 million) in the second quarterof 2010 compared to a loss from operations of RMB2.2 million in thecomparable period of 2009, primarily reflecting RMB90.5 million of non-cashshare-based compensation expense in the prior year period.

* * *

During the second quarter of 2010, the Company recorded non-cash share-basedcompensation expense of approximately RMB0.9 million ($0.1 million), orapproximately $0.01 per ADS, compared to RMB90.5 million in the second quarterof 2009. Excluding share-based compensation, non-GAAP net income increasedby 16.6% to RMB76.2 million ($11.2 million) in the second quarter of 2010,from non-GAAP net income of RMB65.3 million in the second quarter of 2009...

* * *

Six Months Ended June 30, 2010 Financial Performance

For the six months ended June 30, 2010, revenue increased by 35.8% toRMB454.1 million ($67.0 million) from RMB334.4 million for the six monthsended June 30, 2009. During this same period, gross profit increased by 35.3% toRMB215.3 million ($31.7 million) from RMB159.2 million in the prior year period.Operating income increased to RMB137.9 million ($20.3 million) fromRMB37.5 million in the prior year period. Net income was RMB102.6 million



($15.1 million) compared to RMB3.8 million in the prior year period. Dilutedearnings per share was RMB2.12($0.31) in the six months ended June 30, 2010,compared to RMB0.13 in the six months ended June 30, 2009. Diluted earnings perADS was RMB4.24($0.63) in the six months ended June 30, 2010, compared toRMB0.25 per ADS in the prior year period.

For the six months ended June 30, 2010, the Company recorded non-cashshare-based compensation expense of approximately RMB1.9 million ($0.3 million),or approximately $0.01 per ADS, compared to RMB90.5 million in the prior yearperiod. Excluding share-based compensation, non-GAAP net income increased by10.8% to RMB104.4 million ($15.4 million) from RMB94.3 million in the prior yearperiod. Non-GAAP diluted earnings per share was RMB2.16($0.32) for the first sixmonths of 2010, compared to RMB3.13 in the prior year period. Non-GAAP dilutedearnings per ADS was RMB4.32($0.64) for the first six months of 2010, comparedto RMB6.25 in the prior year period. Please refer to the non-GAAP presentationprovided below for a period-to-period comparison excluding non-cash share-basedcompensation expense. Weighted average diluted shares outstanding wasapproximately 48.3 million for the six months ended June 30, 2010, up from 30.2million in the prior year period.

(Emphasis added).





(a) As the documentation uncovered by both Plaintiffs’ investigator and Muddy






verify the accuracy of DGW’s financial reporting. In a March 23, 2011



filing, the Board of Directors announced that until the independent review of

DGW’s internal controls and processes was complete, it was “not in a

position to approve or otherwise ratify the Company’s presentation of the

unaudited results for the ... fiscal year ended December 31, 2010.”

207. Also on August 18, 2010, the Company and the Management Defendants hosted a

conference call with investors to discuss the Company’s Q2’10 earnings. The Company and

Management Defendants reiterated the false and materially misleading statements of financial results

reported in DGW’s press release, making these misrepresentations with scienter for the reasons set

forth in the previous paragraph.

208. During the conference call, Defendant Park confirmed an incorrect statement by an

analyst from Defendant Rodman & Renshaw, that the Company has been operating “cash flow

positive,” and stated that the Company expected “to produce positive cash flows from operating

activities in the next two quarters.” Given the Company’s lack of profitable operations since at least

2006, Defendant Park’s statements concerning DGW being and remaining “cash flow positive” were

false and materially misleading when made. Defendant Park lacked any reasonable basis in fact for

such a statement.

209. Defendant Park’s false and materially misleading statement, uncorrected by

Defendant Guo, was made with scienter because DGW and the Management Defendants knew or

should have known, based upon the Company’s financial statements on file with the local AIC

branches, that from fiscal 2006 forward, DGW had not been cash flow positive and would not be

cash flow positive during the remainder of 2010.

210. On November 17, 2010, DGW issued a press release entitled “Duoyuan Global Water

Inc. Reports Third Quarter 2010 Financial Results,” which stated, in relevant part:



Third Quarter 2010 Financial Highlights

-- Revenue increased 35.1% to RMB344.7 million ($51.5 million(1)) from RMB255.2million in the prior year period.-- Gross profit increased 25.7% to RMB158.8 million ($23.7 million) fromRMB126.4million in the prior year period.-- Gross margin was 46.1% compared to 49.5% in the prior year period.– Diluted earnings per ADS was $0.55. Each ADS represents two of the Company’sordinary shares.

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated,“We are pleased to announce strong third quarter results, which demonstrate anotherquarter of sustained growth and presence in China’s water treatment industry. Thisquarter’s revenue increased due to strong demand from all three product segments,which was partially due to a change in the timing of sales as some customers shiftedfourth quarter purchases to the third quarter in order to meet the completiondeadlines of China’s 11th Five Year Plan. From a business perspective, we are alsoexcited to have signed three new licensing agreements so far this year that will notonly complement and enhance our existing product portfolio, but also extend ourreach into new areas of technology so we may further diversify our high-qualityproduct offerings. Moving forward, we are confident in our ability to drivelong-term growth through our comprehensive and high-quality product offerings, ourlow cost manufacturing base, our extensive distribution network and our focus oncontinually developing new products.”

Third Quarter 2010 Financial Performance

Third quarter 2010 revenue increased by 35.1% to RMB344.7 million ($51.5million) from RMB255.2 million in the comparable period of 2009. Revenues werecalculated net of sales rebates, which were flat compared to the prior year period atRMB2.1 million ($0.3 million) in the third quarter of 2010.

* * *For the third quarter of 2010, gross profit increased by 25.7% to RMB158.8 million($23.7 million) from RMB126.4 million in the prior year period. Gross margin forthe third quarter of 2010 was 46.1%, compared to 49.5% in the third quarter of 2009and 47.8% in the second quarter of 2010. The year-over-year decline in gross marginmay be attributed to increased raw material costs, partially offset by fluctuations inthe Company’s mix of products sold as new higher margin products are introduced.

Operating income increased by 30.3% to RMB124.7 million ($18.6 million) in thethird quarter of 2010 from RMB95.7 million in the comparable period of 2009.

* * *



Net income increased 23.2% to RMB90.5 million ($13.5 million) from RMB73.4million in the prior year period. Diluted earnings per share was RMB1.84 ($0.27) inthe third quarter of 2010, compared to RMB1.67 in the third quarter of 2009. Dilutedearnings per ADS was RMB3.67 ($0.55) in the third quarter of 2010, compared toRMB3.35 per ADS in the prior year period.

During the third quarter of 2010, the Company recorded non-cash share-basedcompensation expense of approximately RMB0.9 million ($0.1 million), orapproximately $0.01 per ADS, compared to RMB1.1 million in the third quarter of2009. Excluding share-based compensation, non-GAAP net income increased by22.7% to RMB91.4 million ($13.7 million) in the third quarter of 2010, fromnon-GAAP net income of RMB74.5 million in the third quarter of 2009. Non-GAAPdiluted earnings per share was RMB1.85 ($0.28) in the third quarter of 2010,compared to RMB1.70 in the third quarter of 2009. Non-GAAP diluted earnings perADS was RMB3.71 ($0.55) in the third quarter of 2010, compared to RMB3.40 inthe prior year period.

Nine Months Ended September 30, 2010 Financial Performance

For the nine months ended September 30, 2010, revenue increased by 35.5% toRMB798.8 million ($119.4 million) from RMB589.6 million for the nine monthsended September 30, 2009. During this same period, gross profit increased by 31.0%to RMB374.1 million ($55.9 million) from RMB285.5 million in the prior yearperiod. Operating income increased to RMB262.6 million ($39.2 million) fromRMB133.2 million in the prior year period. Net income was RMB193.0 million($28.8 million) compared to RMB77.2 million in the prior year period. Dilutedearnings per share was RMB3.97 ($0.59) in the nine months ended September 30,2010, compared to RMB2.22 in the nine months ended September 30, 2009. Dilutedearnings per ADS was RMB7.93 ($1.19) in the nine months ended September 30,2010, compared to RMB4.44 per ADS in the prior year period.

For the nine months ended September 30, 2010, the Company recorded non-cashshare-based compensation expense of approximately RMB2.8 million ($0.4 million),or approximately $0.01 per ADS, compared to RMB91.6 million in the prior yearperiod. Excluding share-based compensation, non-GAAP net income increased by16.0% to RMB195.8 million ($29.3 million) from RMB168.8 million in the prioryear period. Non-GAAP diluted earnings per share was RMB4.02 ($0.60) for thefirst nine months of 2010, compared to RMB4.85 in the prior year period.Non-GAAP diluted earnings per ADS was RMB8.05 ($1.20) for the first ninemonths of 2010, compared to RMB9.71 in the prior year period.

(Emphasis added).













verify the accuracy of DGW’s financial reporting. On March 23, 2011, the

Board of Directors announced that until the independent review of DGW’s

internal controls and processes was complete, it was “not in a position to

approve or otherwise ratify the Company’s presentation of the unaudited

results for the ... fiscal year ended December 31, 2010.”

212. Also on November 17, 2010, the Company and the Management Defendants hosted

a conference call with investors to discuss the Company’s Q3’10 earnings. The Company and

Management Defendants reiterated the false and materially misleading statements of financial results

reported in DGW’s press release, making these misrepresentations with scienter for the reasons set

forth in the previous paragraph.

213. Knowing that a major concern on the mind of investors was the status of the

independent review of DGW’s accounting and corporate governance, Defendant Guo started his

remarks with a comment about the investigation. He stated: “We have been working with Skadden



Arps Slate Meagher & Flom LLP & Affiliates to review our standards and policies regarding

accounting and corporate governance ... Our Board of Directors determined that the appointment

of an independent third party is appropriate to ensure the highest level of transparency and

accountability. We’re fully cooperating with Skadden and will continue to do so.”

214. During the question and answer period, Defendant Guo was asked to provide more

detail about the investigation. He explained that it was a three-step process: collection of materials

and data, face-to-face interviews, and “the relevant teams will carry out investigations and research.”

Guo further indicated that the investigation process, the investigation time-line, and the release of

the results of the investigation are all to be determined by the audit committee and that “[o]ur role

is to fully cooperate with the third party review.”

215. Later in the call, Defendant Guo once again stated that the independent directors on

the Audit Committee were taking “the dominant role in this internal review” and that “our job is to

do everything we can do to support the third party review process and we have been told whatever

we are required to do and we will fulfill our requirements.”

216. The statements referenced in ¶¶ 213-215 were false and materially misleading and

made with scienter because Defendant Guo knew or should have known that DGW’s executive

management was not cooperating with the Audit Committee and had no intention to ever do so,

despite repeatedly professing its willingness to do what was necessary to ensure total transparency.

Defendant Park likewise should have been aware of the problems with the third-party investigation,

but did not correct the statements made by Defendant Guo.

217. To wit, upon their resignations on April 20, 2011, the four independent directors

provided a detailed account of their frustration with DGW management during the period from

September 28, 2010 until April 20, 2011:



“[W]e have come to believe that the actions of DGW management have becomeinconsistent with the best interests of the company and the public shareholders.Despite our best efforts, management’s conduct has made it impossible for eachof us to carry out our duties as an independent director.

In September 2010, after the disclosure of particular events by Duoyuan Printing, theBoard of Directors authorized the Audit Committee to conduct an independentreview to determine whether the company’s internal controls are what should beexpected of a NYSE-listed entity.

The Audit Committee carefully planned its review and investigation to ensure thatappropriate and sufficient steps would be undertaken to adhere to the Board’smandate. The Committee’s planning reflected advice provided by experienced legalcounsel and other expert advisors. Once the Audit Committee commenced its work,progress was hampered because among other things, management:

• failed to meet requested deadlines to provide all the requested documents tothe review team;

• declined to permit the forensic auditor appropriate unfettered access to thefinancial data;

• further delayed when follow-up information was sought by the review teamand delayed the start of the forensic accounting work on the grounds thatdocument gathering needed to be completed;

• withdrew financial information from the forensic accounting team becausethe team was taking notes during its review work.

After each of the above incidents (as well as other incidents), members of the AuditCommittee, at the review team’s request, would spend significant amounts of timeto resolve the impasse created by management. Each time management promisedfuture cooperation; however, each time when the review team recommenced itswork, full cooperation was not forthcoming and new issues would arise.

(Emphasis added).

218. On April 4, 2011, after management dug in its heels, suggesting the investigators

sought to exceed the approved scope of the review, the Board of Directors voted to expand the scope

of the internal investigation and appointed a Special Investigation Committee (“SIC”). Although

the Board directed management to work with the SIC’s Chair, Defendant Larrea, and she traveled

to China to work with management on-site, when she and her team arrived, she discovered that no

documents had been gathered, no information would be provided, and no cooperation would be


22 Defendant Guo gave a similarly evasive answer when asked how — in comparison with DGW’sother expenses – R&D expenses could be so low when so many new products were beingintroduced: new products came primarily from licensing others’ technology or upgrading existingproducts. The unnamed analyst was not convinced, in light of gross margins consistently reported“in the 40s,” following up: “Is it basically you guys are that good, you’re that efficient on costcutting and operations?” Guo replied that although much manual labor was currently required, grossmargins would actually decline after production was automated because of Chinese governmentsalary regulations. And on that obfuscating note, the conference call terminated.


forthcoming from management. “Indeed, management threatened to resign if the Special Committee

did not discharge the forensic accounting expert that had been working on the matter.” (Ex. 99.2

to DGW’s 6-K, dated May 4, 2011). Instead, because management left the SIC “unable to conduct

a full, fair, independent and transparent investigation” the four outside directors tendered their own

resignations.

219. Also during the November 17, 2010, conference call, perhaps concerned about

Auriga’s observation the prior month — that massive capital expenditures for expansion were

unnecessary, given only 50% utilization of the current manufacturing facilities — Piper Jaffray’s

Michael Cox asked Defendant Guo to comment about DGW’s utilization rate. Guo evaded the

question. Instead he replied that the Company operated at maximum capacity at the beginning of

the year and slowed later in the year, that a manually operating factory was being transformed into

an automated assembly line and, that “we are transforming our facility from a multi-product line into

a professional diversified product-based portfolio operation.” For these reasons, Guo concluded,

“I feel it is very hard for me to give you a positive number to describe the utilization ratio...”22

220. Defendant Guo’s response was false and/or materially misleading because the

following facts support Auriga’s observation that Duoyuan Langfang’s facility was not operating

at capacity – either in the fall or at any other time of year:



(a) The modest revenue figures on file with the local AICs — showing less than

$1 million in yearly revenues — support Auriga’s finding of under-utilization

of the current facility; and

(b) The lack of activity Muddy Waters observed during multi-day surveillance

of the plant, to wit: hundreds of fewer employees arrived on site than

reported as working on production, no trucks came to deliver raw materials

or to take away shipments of finished products from the plant, and the

absence of night lighting despite Guo’s statement statement that 170 workers

were on the night shift.

221. Defendant Guo’s false and misleading statements referenced in ¶ 219 were made with

scienter because he knew or should have known the actual utilization ratio of the Duoyuan Langfang

plant, DGW’s sole manufacturing facility. Moreover, Defendant Park also should have been aware

of the under-utilization of the Duoyuan Langfang plant, but he failed to correct or clarify the false

and misleading statements made by Defendant Guo.

222. Because the Management Defendants falsely assured investors that they would

comply with the independent review — implying that DGW had nothing untoward to hide — and

Guo successfully deflected questions which could have shined a harsh light on inconsistencies in

the DGW success story, investors were temporarily reassured and DGW’s ADS price rose nearly

a dollar on November 17, 2010.

223. Other than confirming that the Company would remain with GT-China after GT-

Hong Kong left GTI and merged with BDO Limited Hong Kong, DGW did not issue a press release

during the remainder of 2010 or early 2011. The Skadden report, expected by year-end or in



January, was not released. By March 22, 2010, when (after hours) DGW reported its results for

Q4’10 and FY’10, investors were eager for news.

224. On March 22, 2011, after the market closed, DGW issued a press release entitled:

“Duoyuan Global Water Reports Fourth Quarter and Full Year 2010 Financial Results,” which

stated, in relevant part:

As previously disclosed in September 2010, the Audit Committee retained advisorsand commenced an internal review into whether the Company’s internal controls andprocesses met the standards required of a NYSE-listed company. Provided that theAudit Committee and its advisors receive complete access to requested documents,the review can be concluded by the end of the second quarter of 2011. Accordingly,the Board of Directors is not in a position to approve or otherwise ratify theCompany’s presentation of the unaudited results for the fourth quarter and fiscal yearended December 31, 2010 at this time. The Company’s unaudited results for thefourth quarter and fiscal year ended December 31, 2010 are subject to changepending the completion of the audit and the internal review.

Fourth Quarter 2010 Financial Highlights

* Revenue increased 13.7% to RMB220.4 million ($33.4 million)(1) fromRMB193.8 million in the prior year period.

* Gross profit increased 0.9% to RMB92.6 million ($14.0 million) from RMB91.7million in the prior year period.

* Gross margin was 42.0% compared to 47.3% in the prior year period. * Diluted earnings per ADS was $0.30. Each ADS represents two of the Company’s

ordinary shares.

Mr. Wenhua Guo, the Company’s Chairman and Chief Executive Officer, stated,"We are pleased to have achieved full year 2010 revenue of over one billion RMB.This landmark achievement demonstrates our ability to deliver sustained growth andour continued strong presence in China’s water treatment industry. We recognize thatour fourth quarter performance reflects expected seasonality as well as the shift intiming of revenue that we mentioned last quarter.

* * *

Full Year 2010 Financial Performance

For the full year ended December 31, 2010, revenue increased by 30.1% to RMB1.0billion ($154.4 million) from RMB783.4 million for the full year ended December31, 2009. During this same period, gross profit increased by 23.7% to RMB466.7



million ($70.7 million) from RMB377.2 million in the prior year period. Operatingincome increased by 74.5% to RMB328.3 million ($49.7 million) from RMB188.1million in the prior year period. Net income was RMB241.3 million ($36.6 million)compared to RMB117.0 million in the prior year period. Diluted earnings per sharewas RMB4.95($0.75) in the full year ended December 31, 2010, compared toRMB3.16 in the full year ended December 31, 2009. Diluted earnings per ADS wasRMB9.90($1.50) in the full year ended December 31, 2010, compared to RMB6.31per ADS in the prior year period.


225. DGW’s and the Management Defendants’ reporting of DGW’s unaudited Q4’10 and

FY’10 revenues, operating income, and net income figures, was false and/or materially misleading

and made with scienter. Plaintiffs are informed and believe, and based thereon allege, that these

figures are not accurate because:





(b) Management’s announcement of the financial results was accompanied by

the following extraordinary statement, indicating a serious rift between the

Board and the Management Defendants:

As previously disclosed in September 2010, the AuditCommittee retained advisors and commenced an internalreview into whether the Company’s internal controls andprocesses met the standards required of a NYSE-listedcompany. Provided that the Audit Committee and its advisorsreceive complete access to requested documents, the reviewcan be concluded by the end of the second quarter of 2011.Accordingly, the Board of Directors is not in a position toapprove or otherwise ratify the Company’s presentation ofthe unaudited results for the fourth quarter and fiscal yearended December 31, 2010 at this time. The Company’s


23 An SEC investigation of DYP was also disclosed, but Defendant Guo refused to comment on it.CORRECTED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

- 113 -

unaudited results for the fourth quarter and fiscal yearended December 31, 2010 are subject to change pendingthe completion of the audit and the internal review.

(Emphasis added).

226. On March 23, 2011, the Company and the Management Defendants hosted a

conference call with investors, before the market opened, to discuss the Company’s Q4’10 and

FY’10 earnings. The Company and Management Defendants reiterated the false and materially

misleading statements of financial results reported in DGW’s press release, making these

misrepresentations with scienter for the reasons set forth in the previous paragraph.

227. Also during the conference call Defendant Park explained that slightly missed

expectations for Q4’10 were due to seasonality (as manufacturing ceases during the taking of

inventory), increased raw materials costs, and higher-than-expected Q3’10 ordering having pulled

sales into that quarter.

228. However, the big news was still the internal investigation — the fact that it was not

yet complete and, due to the fact that it would not be complete until the end of Q2’11, neither the

Q4’10 nor the FY’10 results could be relied upon.23 The following statements were made:

(a) Defendant Guo began his comments by giving an update to the effect that

Skadden’s review is not complete but “that with complete access to requested

documents, the review can be concluded by the end of the second quarter of

2011”;

(b) The Board of Directors “is not in a position to approve the unaudited results

for the fourth quarter and full year ended December 31, 2010. This is due to



the pending completion of the third-party review and correspondent audit of

our full year financials.”;

(c) When asked why the review, which had been estimated to take between one

and four months, would not be completed until the end of Q2’11, nine

months after it started, Defendant Guo stated: “The reason is that the content

for the scope of the review is determined and monitored or overseen by the

Audit Committee under the Board of Directors. It is determined and

overseen separately, independently by the Audit Committee. So I’m not in

a position to determine what should be reviewed through the third-party

process.”;

(d) When asked whether the auditor approval of the Q4’10 and FY’10 financial

statements was dependent upon a favorable outcome of the internal review

or was independent thereof, Defendant Guo responded: “I am not in a

position to speak out for the auditors and I cannot control their work.”

229. These statements are false and/or materially misleading because they imply, building

on Defendant Guo’s prior statements, that DGW management is cooperating with the Audit

Committee and Skadden but that the latter two, not the Management Defendants, are in charge of

the review and are causing it to take more than twice as much time as originally thought.

230. These statements were made with scienter because Defendant Guo knew or should

have known that the Management Defendants actually blocked the progress of the independent

review at every juncture — as detailed in the resignation letter of the four independent directors who

resigned. Thus, Guo knew or should have known that it was management’s complete lack of

cooperation — not auditor and Audit Committee independence and thoroughness — that caused



the delay. Moreover, Defendant Park also knew or should have known that the statements made by

Guo regarding the delay of the third-party review were false and/or materially misleading, and he

failed to correct those statements.

231. The next day, following a sharp drop of nearly a dollar during heavy trading on

March 23, 2011, analyst Amit Dayal from Rodman & Renshaw revised DGW’s rating downward

from “Market Outperform” to “Market Perform.” The lead headline on the report was: “DGW:

Internal Review Overhang Still in Place.” In fact, Dayal noted: “Though the stock still continues

to report healthy operational execution, we believe the stock will only reflect this in the form of an

appropriate multiple once Skadden reports its findings. We will revisit our rating upon the

completion of the internal review.” While the market was thus worried, and the ADS price reflected

skepticism creeping in, investors still did not know that Skadden and the Audit Committee were

being completely stymied to keep the truth about DGW’s actual state of affairs from coming to light.

Partial Revelations of the True Facts

232. On September 13, 2010, DYP issued a press release entitled, “Duoyuan Printing

Announces Management Reorganization and Change of Auditor.” Therein, DYP, in relevant part,

stated:

BEIJING, September 13, 2010 – Duoyuan Printing, Inc. (NYSE: DYP) (“DuoyuanPrinting” or the “Company”), a leading offset printing equipment supplier in China,today announced several management changes as well as the dismissal of DeloitteTouche Tohmatsu CPA Ltd.(“Deloitte”) as its independent registered publicaccounting firm. The Company is currently in discussion with an auditing firm toreplace Deloitte.

Effective immediately, Mr. Xiqing Diao has been appointed Duoyuan Printing’sCEO. Previously the Company’s COO, Mr. Diao has been with the Company since2005 and served as interim CEO in 2009. Ms. Baiyun Sun has been appointed CFO.



Ms. Sun has been with Duoyuan Printing since 1994 previously serving as theCompany’s controller. Mr. Wenzhong Liu, previously vice president of sales andmarketing, has been appointed COO and Mr. Lianjun Cai, a Company director, hasbeen appointed chairman of the audit committee.

Immediately subsequent to the Company’s termination of Deloitte, Mr. William Suhresigned as Duoyuan Printing’s CFO and Mr. Christopher Holbert resigned asDuoyuan Printing’s CEO. Mr Holbert will remain with the Company as vicepresident of international markets. Mr. James Zhang resigned as director andchairman of the audit committee and Ms. Naoko Hatakeyama and the HonorablePaula J. Dobriansky also subsequently resigned as directors. Mr. Xiqing Diao hasalso resigned as a director in order to maintain the required proportion ofindependent directors on Duoyuan Printing’s board.

Duoyuan Printing’s Chairman Mr. Wenhua Guo stated, “The audit committee’sdecision to change auditing firms was based on its desire to resolve open issues andfile our 10-K on a timely basis. We will work closely with our new auditors toaddress the open issues aired by Deloitte. We believe that our several internalreassignments are the best way to move the company forward and complete ourannual audit. We believe we now have the right people in important roles to executethe company’s business strategy and to meet our current reporting obligations.”

233. On September 13, 2010, DYP filed a Current Report on Form 8-K with the SEC.

Therein, DYP, in relevant part, stated:

Item 4.01 Changes in Registrant’s Certifying Accountant.

Effective as of September 6, 2010, Deloitte Touche Tohmatsu CPA Ltd. (“Deloitte”)was dismissed by the Audit Committee (the “Audit Committee”) of DuoyuanPrinting, Inc. (the “Company”) as the independent registered public accounting firmof the Company.

During the period of Deloitte’s engagement from March 2, 2010 to September 6,2010, no audit performed by Deloitte had been completed and, therefore, no auditreports had been issued that (i) contained an adverse opinion or disclaimers ofopinion or (ii) were qualified or modified as to uncertainty, audit scope or accountingprinciples.

During the period from March 2, 2010 to September 6, 2010, there were nodisagreements between the Company and Deloitte on matters of accountingprinciples or practices, financial statement disclosure or auditing scope or procedure,which disagreements, if not resolved to the satisfaction of Deloitte, would have



caused Deloitte to make reference to the subject matter of the disagreement in theirreports on the financial statements, except for the following:

• Deloitte requested that the Company provide permission to access original

bank statements to complete its audit procedures to verify the identity ofcertain individuals and entities associated with third party distributors andvendors. As of the time of Deloitte’s dismissal, the Company had notgranted such permission because it believed the method and scope of therequest was overly broad for the purpose of verifying the identity of suchindividuals and entities. Deloitte informed the Chairman of the AuditCommittee of such disagreement and the matter was not resolved by thetime of Deloitte’s dismissal.

During the period from March 2, 2010 to September 6, 2010, there were no“reportable events” as that term is defined in

Item 304(a)(1)(v) of Regulation S-K, except the following: • In the course of its audit procedures, Deloitte identified supporting

documentation for approximately RMB24 million of expenses related toadvertising and tradeshow costs, the authenticity of which could not beverified to Deloitte’s satisfaction. Deloitte suggested to the Audit Committeethat it investigate these expenses. The Audit Committee has undertaken anindependent investigation. At the time of its dismissal, Deloitte had notreceived subsequent information from the Audit Committee on the progressor outcome of the investigation.

• In the course of its audit procedures, Deloitte received information

regarding certain distributors and vendors that appeared inconsistent withcertain information that the Company had provided. Deloitte informed theCompany and the Audit Committee of the inconsistencies. The Companyworked to address these inconsistencies, but at the time of its dismissal,Deloitte had not received complete explanations from the Company toaddress all of its concerns.

• Deloitte advised the Audit Committee that it was informed by the Chief

Executive Officer and Chief Financial Officer of the Company that theyfelt they did not have access to the information on the open mattersreferred to above nor were they in a position to assist the investigation.Deloitte expressed its concerns as to the impact of this on its ability to relyon the future representations from those members of management that itwould otherwise seek to obtain as part of its normal audit procedures.



The Company has authorized Deloitte to respond fully to the inquiries of theCompany’s successor accountant concerning the subject matter of each of thedisagreement and reportable events referred to above.

The Company provided Deloitte with a copy of the disclosures it is making in thisCurrent Report on Form 8-K (the “Report”) prior to the time the Report was filedwith the Securities and Exchange Commission (the “SEC”). The Company requestedthat Deloitte furnish a letter addressed to the SEC stating whether or not it agreeswith the statements made herein. The Company will file the letter from Deloitte asan amendment to this Report within two business days of receipt.

Item 5.02 Departure of Directors or Principal Officers; Election of Directors;Appointment of Principal Officers; Compensatory Arrangements of CertainOfficers.

(a) On September 6, 2010, following the decision to dismiss Deloitte as theindependent registered public accounting firm of the Company: • Mr. James Zhang, Chairman of the Audit Committee tendered his resignation

from the Board of Directors of the Company (the “Board”) effectiveimmediately over the disagreement with the Company and the Board fordismissing Deloitte as the independent registered public accounting firm ofthe Company. Mr. Zhang had served as the Chairman of the AuditCommittee and a member of the Board since September 2009. Mr. Zhang’sresignation letter is included as Exhibit 99.2 to this Current Report; and

• The Honorable Paula J. Dobriansky tendered her resignation from the Board

effective immediately, which was later followed by a formal letter. TheHonorable Paula J. Dobriansky had served as a member of the Board sinceMay 2010. Ms Dobriansky’s resignation letter is included as Exhibit 99.3 tothis Current Report.

On September 8, 2010: • Ms. Naoko Hatakeyama tendered her resignation from the Board effective

immediately. Ms. Hatakeyama had served as a member of the Board sinceMay 2010. Ms. Hatakeyama’s resignation letter is included as Exhibit 99.4to this Current Report; and

• Mr. Xiqing Diao tendered his resignation from the Board effective

immediately in an effort to maintain a majority of independent directors onthe Board to stay in compliance with relevant listing standards. Mr. Diao hadserved as a member of the Board since November 2005, and will remain with



the Company as its new Chief Executive Officer as described in more detailbelow.

The circumstances representing the disagreement that caused the resignation of theabove Directors, if any, are provided in their respective resignation letters, ifapplicable, which are incorporated herein by reference in their entirety.

The Company provided each of the above Directors (the “Resigning Directors”)with a copy of the disclosures it is making in the Report prior to the time the Reportwas filed with the SEC. The Company provided each of the Resigning Directors withthe opportunity to furnish a letter addressed to the Company stating whether or nothe or she agrees with the statements made herein. The Company will file the letterfrom each of Resigning Directors as an amendment to this Report within twobusiness days of receipt.

(b) Following the decision to dismiss Deloitte as the independent registered publicaccounting firm of the Company: • On September 6, 2010, Mr. William D. Suh tendered his resignation from the

position of Chief Financial Officer of the Company effective immediately.Mr. Suh had served as the Chief Financial Officer of the Company sinceOctober 2008; and

• On September 8, 2010, Mr. Christopher Patrick Holbert tendered his

resignation from the position of Chief Executive Officer of the Companyeffective September 8, 2010 18:00 p.m. Beijing Time. Mr. Holbert hadserved as the Chief Executive Officer of the Company since August 2009.

(c) On September 8, 2010, the Board also made the following changes: • Mr. Lianjun Cai was elected as Chairman of the Audit Committee effective

immediately. In making this election, the Board determined that Mr. LianjunCai had sufficient accounting and related financial management expertise toserve as the Chairman of the Audit Committee.

• Mr. Xiqing Diao was appointed as the Chief Executive Officer of the

Company effective September 8, 2010 18:00 p.m. Beijing Time. At the sametime, Mr. Diao stepped down from the position of the Chief OperatingOfficer of the Company. Mr. Diao has served as a Director and the ChiefOperating Officer of the Company since November 2005. Mr. Diao alsoserved as the interim Chief Executive Officer of the Company from July 9,2009 to August 26, 2009. He served as vice general manager of DuoyuanClean Water Technology Industries (China) Co., Ltd. (“Duoyuan Water”)from August to November 2005, assistant general manager of DuoyuanElectric (Tianjin) Auto Water Pump Co., Ltd., an automobile parts



manufacturer, from January to July 2005, and general manager of Operationsof Duoyuan Electric Group from January 2003 to December 2004. From May2001 to December 2002, Mr. Diao served as general manager of No. 1Division of Duoyuan Water. He was also certified as an ISO9001:2000Internal Auditor and an ISO14000 Internal Auditor in 2004. Mr. Diaoreceived a bachelor’s degree in mechanics from Tianjin Textile TechnologyInstitute, China.

• Ms. Baiyun Sun was appointed as the Chief Financial Officer of the

Company effectively immediately. Ms. Sun served as the Controller of theCompany from October 1, 2008 to September 8, 2010. Prior to that, sheserved as interim Chief Financial Officer of the Company from December 20,2007 to March 1, 2008 and from May 21, 2008 to October 1, 2008. Prior tothat, she served as the Chief Financial Officer of the Company from October6, 2006 to July 18, 2007, a Director and vice president of the Companybetween June 2001 and April 2007 and chief accountant of Duoyuan ElectricGroup from January 1994 to May 2001. Ms. Sun received a bachelor’sdegree in accounting from Beijing Finance and Commerce Institute, China.

• Mr. Wenzhong Liu was appointed as the Chief Operating Officer of the

Company effectively immediately. Mr. Liu has served as vice president ofsales and marketing of the Company since November 2005. He served asassistant general manager of sales at Duoyuan Digital Press TechnologyIndustries (China) Co., Ltd. (“Duoyuan China”) from July to October 2005,interim general manager of sales at Duoyuan China from November 2004 toJune 2005, and sales representative at Duoyuan China from January 2001 toOctober 2004. Mr. Liu received a bachelor’s degree in science from LuoyangEngineering Institute, China.

• Mr. Christopher Patrick Holbert was appointed as Vice President of

International Markets effective immediately.

(Emphasis added).

234. Just as the market was opening on the morning of September 13, 2010, Piper Jaffray,

the IPO’s lead underwriter, downgraded DGW from “overweight” to “neutral.” Less than an hour

later, citing DYP’s management departures and corporate governance issues (discussed in the prior

paragraph) as a reason, Piper Jaffray issued a further downgrade, to “underweight,” and lowered

its price target from $34 — affirmed as recently as June 2, 2010, following a visit with management

— to only $9 per ADS. Whereas, according to some, Michael Cox of Piper Jaffray was the analyst



most bullish on DGW, a downgrade based upon the mere hint of an accounting risk was enough to

trigger a sell off. In fact, the price of DGW ADSs plummeted that day, from a close of $20.70 on

September 10, 2010, to $12.10 on September 13, 2010, on extraordinary trading volume.

235. DGW understood that investors sold their DGW ADSs on September in reaction to

the alarming news about DYP. In a press release issued the following day, DGW explained some

of the reasons that the news about DYP caused investors to believe that serious accounting and

corporate governance problems existed at DGW:

Beijing, China, September 14, 2010 — Duoyuan Global Water Inc. (NYSE: DGW)(“Duoyuan” or the “Company”), a leading China-based domestic water treatmentequipment supplier, today announced that the Company’s Board of Directors hasinstructed the audit committee of the Board of Directors to initiate a pre-emptiveindependent third party review of the accounting, internal controls and corporategovernance of the Company, as may be necessary, to confirm that the Company’sstandards are in accordance with the standards expected of an NYSE-listed company.

The Board of Directors voted unanimously to take proactive action following arecent announcement by Duoyuan Printing, Inc. (“Duoyuan Printing”), that mayhave been perceived to involve the Company [which is an affiliate of DuoyuanPrinting], as Wenhua Guo (the Company’s Chairman and CEO) is also DuoyuanPrinting’s Chairman of the Board and its largest shareholder. While there arepresently no known accounting or corporate governance issues to be reviewed andthe Company consistently has received unqualified audits from Grant Thornton, aninternational accounting firm, for four successive years, the Company’s Board ofDirectors is of the opinion that the appointment of an independent third party isnecessary to ensure the highest level of transparency and accountability.

(Emphasis added).

236. In addition to the reasons as stated by DGW, this announcement by DYP was

significant to shareholders of DGW and evidenced potential financial fraud at DGW as well because:

(a) The CEO and CFO resigned their positions, along with three independent

directors, due to the fact that outside auditor Deloitte was discharged — and

not replaced with another Big Four auditor — while in the middle of an



investigation of (along with special counsel, Latham & Watkins) of “several

financial irregularities and management control weakness;”

(b) The CEO and CFO informed Deloitte that they lacked access to the

information necessary — including original bank account records — to

assist Deloitte in addressing open audit issues related to: inconsistent

information provided to Deloitte concerning various distributors and vendors;

the identities of certain third-parties associated with distributors and vendors;

and 24 million RMB in expenses, the support for which appeared inauthentic;

(c) Like DGW, DYP claimed to make all of its sales exclusively through a

network of more than 80 distributors in 28 of China’s provinces. Deloitte’s

inability to obtain needed information to determine the identities of persons

and entities associated with certain distributors and the provision of

inconsistent information to Deloitte concerning distributors called into

question the legitimacy of the vendor networks responsible for all sales for

both companies;

(d) One of the directors who resigned expressed concern over Defendant Guo’s

statement explaining why the investigation into internal control irregularities

first raised by Deloitte in August 2010 had not progressed in a month, despite

the Audit Committee’s immediate engagement of Latham & Watkins to

investigate: “cross culture differences between US style work and maybe

because of the second tier management don’t fully understand the US listing

requirements.”



(e) The Registration Statements filed with respect to the IPO and SPO detailed

elements of the complex inter-relationship between Defendant Guo, DGW

and DYP. For example, Guo is the Chairman of both DGW and DYP and

devotes his business time to the two companies; Duoyuan Beijing leased

office space located at its No. 3 Jinyuan Road headquarters to Duoyuan

Digital Printing Technology Industries (China) Co. Ltd., or Press China, an

entity controlled by Defendant Guo; and, with respect to an inter-company

loan, when Guo assumed personal responsibility for repayment of Beijing

Huiyuan’s outstanding balance to Duoyuan Beijing, Defendant Guo’s

obligation to pay the outstanding balance was secured by a pledge of his

shares of Duoyuan Printing, Inc., a public company.

237. Despite this disturbing news from DYP, the announcement by DGW of its enacting

proactive measures to verify the accuracy of DGW’s financial reporting and the adequacy of both

its internal controls and its corporate governance mechanisms appeased investors — such that

DGW’s ADS price suffered no more erosion and, in fact, slightly rebounded, by 51 cents.

238. However, Janney Capital Markets suspended coverage of DGW on September 14,

2010, stating:

...[L]ack of clarity around the situation, coupled with the fact that the third partyreview will likely take months, will likely lead to heightened level of volatility inDGW shares in the near-term as investors speculate on whether control issues existor not.

As a result of these developments, and pending further information including theoutcome of the independent accounting review, we are suspending our coverage ofDuoyuan Global Water at this time, including our rating, fair value, and earningsestimates. The last published rating, fair value, and earnings estimates of thiscompany should not be relied on in the future.



Duoyuan Global Water(DGW) is a client of Janney Montgomery Scott. The firmprovided investment banking services.

239. With Oppenheimer & Co. also counseling investors that day to “stay away from the

turmoil,” on September 14, 2010, half of DGW’s underwriters had sought to distance themselves

from DGW within a day of the initial announcement of trouble at a sister company. Shares

languished for the next two weeks as investors awaited word of DGW’s next move.

240. On September 28, 2010, investors were heartened by the news that the Skadden law

firm was retained to perform the independent investigation. Shares rose substantially, nearly a dollar

(7.76%) in response and continued to rise on heavy trading, closing nearly 60 cents higher, at

$13.44, the following day as well.

241. Nearly a month later, with DGW’s price having stabilized, new disclosures — this

time concerning DGW itself — hit the market. During the trading day, Tate Dwinnell of

Greenstocks Central, posted an article entitled: “Auriga Visits Duoyuan Global Water (DGW) &

Comes Away With Concerns.” Dwinnell wrote:

Auriga issued a research note this morning on Duoyuan Global Water (DGW) whichwas hammered recently after accounting irregularities were discovered at DuoyuanPrinting (DYP). What’s the connection? The Chairmen of DYP happens to be theCEO of DGW, so the thought was that there are accounting concerns at DGW aswell. Auriga had a chance to visit with DGW management recently and tour themanufacturing facilities. They walked away with several concerns unrelated to theaccounting concerns.

- Why is the company undertaking a big big capital expenditure program whencurrent facilities are only about 50% utilized?- The capital expansion plans may drain the balance sheet- Lack of modern equipment and Auriga could only verify 10 of the 109 productssaid to be manufactured at the facility.

My question to Auriga is why management wasn’t asked about the number ofproducts verified, the utilization rate and the modernization of the facility? I’m surethese are answers investors would want to know and perhaps they will be answeredon the next conference call.



I think it goes without saying that there are a lot of questions and concerns. With thetechnical melt down in the stock, it’s best to stay away until some of these questionsare answered. DGW is down about 5% today with significant volume and looks likeit may want to retest the lows of the correction in the coming days.

242. The Auriga research note is not available on the Internet and, Plaintiffs are informed

and believe, is only sold to Auriga’s institutional clients. Nevertheless, in addition to Dwinnell’s

posted article, there was a reference to the Auriga report on DGW’s Yahoo! message board as an

explanation for the 5% sell off. The Auriga report achieved sufficient exposure for DGW ADSs to

suffer a significant lost, shedding 5.5% of their value to close at $12.83.

243. On November 17, 2010, the Company announced strong Q3’10 results, and buoyed

investor confidence by assuring the public that DGW was “fully cooperating with Skadden” and the

audit committee in an effort to “ensure the highest level of transparency and accountability.” DGW

ADSs temporarily rose in value to $13.00 based on these reassurances, but investors slowly lost

confidence in DGW as the Company released little information for the next few months — other

than the late December announcement that GTI would continue to serve as DGW’s auditors after

GT-Hong Kong left GTI to join BDO Limited Hong Kong. In fact, fear that FY’10 results would

not be released caused shares to drop more than a dollar on February 9, 2011, with the price

rebounding slightly thereafter when, several days later, a March date was finally announced for the

Q4’10 and FY’10 results.

244. On March 22, 2011, after the close of the market, DGW released its Q4’10 and FY’10

operating results. The first item in the Company’s press release, however, was the status of the

independent investigation. The news was disappointing:

As previously disclosed in September 2010, the Audit Committee retained advisors andcommenced an internal review into whether the Company’s internal controls and processesmet the standards required of a NYSE-listed company. Provided that the Audit Committee



and its advisors receive complete access to requested documents, the review can beconcluded by the end of the second quarter of 2011. Accordingly, the Board of Directorsis not in a position to approve or otherwise ratify the Company’s presentation of theunaudited results for the fourth quarter and fiscal year ended December 31, 2010 at thistime. The Company’s unaudited results for the fourth quarter and fiscal year endedDecember 31, 2010 are subject to change pending the completion of the audit and theinternal review.

(Emphasis added).

245. Starting with after-hours trading and continuing into the next trading day, investors

dumped shares as the Board of Directors itself was now expressing doubt about the legitimacy of

DGW’s current financial and operating results. The price of the ADSs fell nearly a dollar, from

$8.18 to $7.22.

246. On March 23, 2011, following the discouraging Q4’10 news, the Company hosted

an earnings call with Defendants Guo and Park. During the call, the Management Defendants

confirmed the news that the Board of Directors would not ratify or approve the Q4’10 or FY’10

financial results. Further, Defendant Guo failed to assuage shareholders when he announced that

the SEC was investigating DYP, claiming that DGW had “no comment” on the DYP “situation.”

247. When the Company was questioned by analysts as to why the third-party review was

taking so long to complete, Defendant Guo evasively responded to an analyst from Defendant

Rodman & Renshaw that the content for the scope of the review was “determined and overseen

separately,” and that he was “not in a position to determine what should be reviewed.” When further

prodded by an analyst from Freelum LLC (that was not involved in any of DGW’s ADS offerings)

as to whether the auditors would sign off on the financial statements, Defendant Guo simply stated

“I’m not in a position to speak out for the auditors.”

248. Following the Company’s earnings call, despite reporting, yet again, year-over-year

revenue growth, the price of DGW ADSs continued to fall throughout the day.



249. On March 24, 2011, yet another analyst affiliated with an underwriter, Rodman &

Renshaw, downgraded DGW from “market outperform” to “market perform” noting the Company

“continues to report healthy operations execution” but that uncertainty due to the Company’s

pending internal review prevents the ADS price from reflecting this.

250. On April 4, 2011, less than two weeks later, with shares trading at $5.49, Muddy

Waters initiated coverage with a “sell” recommendation, accused management of engaging in a

“massive fraud” and of replacing filed financial reports for Duoyuan Langfang for 2009 at local

AICs with forged reports, and leveled charges of “inattentive” and “sloppy” work at DGW’s auditors

for errors and questionable transactions in the 2008 financial reporting. Muddy Waters also posted

a YouTube video purporting to show that calls to sales offices listed on DGW’s Website were either

unanswered or made to disconnected numbers.

251. That day, DGW issued a press release announcing that CFO Park would be resigning

to “pursue another professional opportunity.” However, the DGW noted that he would remain with

the Company until the investigation was completed or until June 30, 2011 — whichever is earlier.

252. DGW ADSs price crashed on these partial disclosures in extraordinarily heavy

trading on April 4th and 5th, falling nearly 32% and 22%, respectively, to close at $3.21 on April

5, 2011.

UNDISCLOSED ADVERSE FACTS

253. The market for Duoyuan Global Water’s ADSs was open, well-developed and

efficient at all relevant times. As a result of these materially false and/or misleading statements,

and/or failures to disclose, Duoyuan Global Water’s ADSs traded at artificially inflated prices during

the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired



Duoyuan Global Water’s ADSs relying upon the integrity of the market price of the Company’s

ADSs and market information relating to Duoyuan Global Water, and have been damaged thereby.

254. During the Class Period, the Defendants named in this Count materially misled the

investing public, thereby inflating the price of Duoyuan Global Water’s ADSs, by publicly issuing

false and/or misleading statements and/or omitting to disclose material facts necessary to make

DGW’s and their own statements, as set forth herein, not false and/or misleading. Said statements

and omissions were materially false and/or misleading in that they failed to disclose material adverse

information and/or misrepresented the truth about Duoyuan Global Water’s business, operations,

and prospects as alleged herein.

255. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiffs and other members of the Class. As described herein, during the

Class Period, the Defendants named in this Count made or caused to be made a series of materially

false and/or misleading statements about Duoyuan Global Water’s financial well-being and

prospects. These material misstatements and/or omissions had the cause and effect of creating in

the market an unrealistically positive assessment of the Company and its financial well-being and

prospects, thus causing the Company’s ADSs to be overvalued and artificially inflated at all relevant

times. The materially false and/or misleading statements made by the Defendants named in this

Count during the Class Period resulted in Plaintiffs and other members of the Class purchasing the

Company’s ADSs at artificially inflated prices, thus causing the damages complained of herein.

LOSS CAUSATION



256. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused

the economic loss suffered by Plaintiffs and the Class.

257. During the Class Period, Plaintiffs and the Class purchased Duoyuan Global Water’s

ADSs at artificially inflated prices and were damaged thereby. The price of the Company’s ADSs

significantly declined when the misrepresentations made to the market, and/or the information

alleged herein to have been concealed from the market, and/or the effects thereof, were partially

revealed over a period of many months, causing investors’ losses.

ADDITIONAL SCIENTER ALLEGATIONS

258. As alleged herein, the Defendants named in this Court acted with scienter in that they

knew that the public documents and statements issued or disseminated in the name of the Company

were materially false and/or misleading; knew that such statements or documents would be issued

or disseminated to the investing public; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, these Defendants, by virtue of their receipt

of information reflecting the true facts regarding Duoyuan Global Water, his/her/its control over,

and/or receipt and/or modification of Duoyuan Global Water’s allegedly materially misleading

misstatements and/or their associations with the Company which made them privy to confidential

proprietary information concerning Duoyuan Global Water, participated in the fraudulent scheme

alleged herein.

APPLICABILITY OF PRESUMPTION OF RELIANCE(FRAUD-ON-THE-MARKET DOCTRINE)

259. The market for Duoyuan Global Water’s ADSs was open, well-developed and

efficient at all relevant times. As a result of the materially false and/or misleading statements and/or



failures to disclose, Duoyuan Global Water’s ADSs traded at artificially inflated prices during the

Class Period. On October 19, 2009, the closing price of the Company’s ADSs reached a Class

Period high of $42.03 per share. Plaintiffs and other members of the Class purchased or otherwise

acquired the Company’s ADSs relying upon the integrity of the market price of Duoyuan Global

Water’s ADSs and market information relating to Duoyuan Global Water, and have been damaged

thereby.

260. During the Class Period, the artificial inflation of Duoyuan Global Water’s ADSs was

caused by the material misrepresentations and/or omissions particularized in this Amended

Complaint causing the damages sustained by Plaintiffs and other members of the Class. As

described herein, during the Class Period, the Defendants named in this Count made or caused to

be made a series of materially false and/or misleading statements about Duoyuan Global Water’s

business, prospects, and operations. These material misstatements and/or omissions created an

unrealistically positive assessment of Duoyuan Global Water and its business, operations, and

prospects, thus causing the price of the Company’s ADSs to be artificially inflated at all relevant

times, and when disclosed, negatively affected the value of the Company ADSs. The Defendants’

materially false and/or misleading statements during the Class Period resulted in Plaintiffs and other

members of the Class purchasing the Company’s ADSs at such artificially inflated prices, and each

of them has been damaged as a result.

261. At all relevant times, the market for Duoyuan Global Water’s ADSs was an efficient

market for the following reasons, among others:

(a) Duoyuan Global Water ADSs met the requirements for listing, and were listed and

actively traded on the NYSE, a highly efficient and automated market;



(b) As a regulated issuer, Duoyuan Global Water filed periodic public reports with the

SEC and the NYSE;

(c) Duoyuan Global Water regularly communicated with public investors via established

market communication mechanisms, including through regular dissemination of

press releases on the national circuits of major newswire services and through other

wide-ranging public disclosures, such as communications with the financial press

and other similar reporting services; and

(d) Duoyuan Global Water was followed by securities analysts employed by major

brokerage firms who wrote reports about the Company, and these reports were

distributed to the sales force and certain customers of their respective brokerage

firms. Each of these reports was publicly available and entered the public

marketplace.

262. As a result, the market for Duoyuan Global Water’s ADSs promptly digested current

information regarding Duoyuan Global Water from all publicly available sources and reflected such

information in Duoyuan Global Water’s ADS price. In other words, the challenged

misrepresentations inflated the market price of the Company’s ADSs during the Class Period. In

these circumstances, Plaintiffs’ and Class Members’ reliance on the integrity of the market price of

the ADSs can be presumed.

NO SAFE HARBOR

263. 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. The

statements alleged to be false and misleading herein all relate to then-existing facts and conditions.



In addition, to the extent certain of the statements alleged to be false may be characterized as

forward looking, they were not identified as “forward-looking statements” when made and/or 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. In the

alternative, to the extent that the statutory safe harbor is determined to apply to any forward-looking

statements pleaded herein, Defendants are liable for those false forward-looking statements because

at the time each of those forward-looking statements was made, the speaker had actual knowledge

that the forward-looking statement was materially false or misleading, and/or the forward-looking

statement was authorized or approved by an executive officer of Duoyuan Global Water who knew

that the statement was false when made.

264. During the Class Period, the Defendants named in this Count 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 Plaintiffs and other Class members, as alleged herein; and

(ii) cause Plaintiffs and other members of the Class to purchase Duoyuan Global Water’s ADSs at

artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, these

Defendants, and each of them, took the actions set forth herein.

265. The Defendants named in this Count: (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 ADSs in an

effort to maintain artificially high market prices for Duoyuan Global Water’s ADSs in violation of

Section 10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary



participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged

below.

266. 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 Duoyuan Global

Water’s financial well-being and prospects, as specified herein.

267. 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 Duoyuan Global Water’s value 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 Duoyuan Global Water 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 ADSs during the Class Period.

268. Each of the Management Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) the Management Defendants were high-level executives

and/or directors at the Company during the Class Period and members of the Company’s

management team or had control thereof; (ii) each of these Defendants, by virtue of their

responsibilities and activities as a senior officer and/or director of the Company, was privy to and

participated in the creation, development and reporting of the Company’s internal budgets, plans,

projections and/or reports; (iii) each of these Defendants enjoyed significant personal contact and



familiarity with the other Defendants and was advised of, and had access to, other members of the

Company’s management team, internal reports and other data and information about the Company’s

finances, operations, and sales at all relevant times; (iv) each of these Defendants was aware of the

Company’s dissemination of information to the investing public which they knew and/or recklessly

disregarded was materially false and misleading; and (v) each of these Defendants signed, made, or

controlled the contents of the challenged statements.

269. The Defendants named in this Count 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 Duoyuan Global Water’s financial well-being and

prospects from the investing public and supporting the artificially inflated price of its ADSs. As

demonstrated by these Defendants’ overstatements and/or misstatements of the Company’s business,

operations, financial well-being, and prospects throughout the Class Period, these Defendants, if

they did not have actual knowledge of the misrepresentations and/or omissions alleged, were

reckless in failing to obtain such knowledge by deliberately refraining from taking those steps

necessary to discover whether those statements were false or misleading.

270. 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 Duoyuan Global

Water’s ADSs was artificially inflated during the Class Period. In ignorance of the fact that market

prices of the Company’s ADSs were artificially inflated, and relying directly or indirectly on the

false and misleading statements made by the Defendants named in this Count, 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 these Defendants, but not disclosed in public

statements made by these Defendants during the Class Period, Plaintiffs and the other members of

the Class acquired Duoyuan Global Water’s ADSs during the Class Period at artificially high prices

and were damaged thereby.

271. At the time of said misrepresentations and/or omissions, Plaintiffs and other members

of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs and the other

members of the Class and the marketplace known the truth regarding the problems that Duoyuan

Global Water was experiencing, which were not disclosed by the Defendants named in this Count,

Plaintiffs and other members of the Class would not have purchased or otherwise acquired their

Duoyuan Global Water ADSs, or, if they had acquired such ADSs during the Class Period, they

would not have done so at the artificially inflated prices which they paid.

272. By virtue of the foregoing, the Defendants named in this Count have violated Section

10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

273. As a direct and proximate result of these Defendants’ wrongful conduct, Plaintiffs

and the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s ADSs during the Class Period.

COUNT IVViolation of Section 20(a) of

The Exchange Act Against the Management Defendants


in ¶¶ 1-273, above.

275. The Management Defendants acted as controlling persons of Duoyuan Global Water

within the meaning of Section 20(a) of the Exchange Act as alleged herein. As officers of a public



company, these Defendants had a duty to disseminate accurate and truthful information with respect

to Duoyuan Global Waters’ financial condition and results of operations. 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 Management 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 Plaintiffs contend are false and misleading. The Management Defendants were provided with

or had unlimited access to copies of the Company’s reports, press releases, public filings and other

statements alleged by Plaintiffs 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.

276. In particular, each of these Defendants had direct and supervisory involvement in the

day-to-day operations of the Company and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same. Defendant Guo, as the indirect majority shareholder of DGW, has the power

to control the Company.

277. As set forth above, Duoyuan Global Water and the Management 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 Management Defendants are liable pursuant

to Section 20(a) of the Exchange Act. As a direct and proximate result of these Defendants’

wrongful conduct, Plaintiffs and other members of the Class suffered damages in connection with

their purchases of the Company’s ADSs during the Class Period.



PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray 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 Plaintiffs and the other Class Members

against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’

wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.


Case 1:10-cv-07233-GBD Document 28-2 Filed 06/15/11 Page 39 of 40

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·Gv.}.:CY BIKKOW & G'O'IDIIERG lLP

.' SWORN CERTIFICATiON OF P!.A!NTtFF . DUOYUAN GLO~AL WAfER., INc.. SECURITiES UTl-GATWN

I, HUrJ'flng 1 in, certify that.; .

1.

2.

3.

4 .

5.

I have rer.rie\vedtne Complaint ,md avtnoraed it>.iiling.

I oid nDt purchas.e DUO'~u<lr, G Iobz1 Water, Inc., the ~cu[ity that is the-subject crftlJis d'diem, at the direction {)f p.J-aintiff's. coun>el or III order to participate' if) any pmate d'aio n .arLsi.ng under

'th1s tWe. '.'

l am 'Iii 1J[r;g to reNe.os-a represl?r.tative· party DR behalf of a class and will testtfy at deposition al'lD triof, if r<leceSS;31Y.

~Ay tran·:sactio().S in Duo\[uan Global Water, Inc. d\Jnngthe ClasS Period set forth inthe'Compfalnt are as. foflD't'is: . .

~ bolIgh1 70 sh~res .on 2D10-02-03 fDr th~ price 0($2954 per share I bought ~OOsh;res orr 2010-02-21 f~the Pri~.~$iS..2 i"p?r share. I OOuW1t 30 s:na>res on 2D10-02-22 for the- price of $25.2:D'Iler share'

I h~e- flo:tsef\le~as. a r.epre..Q:ntatj~ party on behalf of 1I class under this- title-during th>e l~.s~ three- '}<e~~~i .

&. . I wi![ (lot aocept any peyrnentfDT serving as a represF.!l'italive party'. elrC:e~t t~ recei'le-lT1r'pro rai:ll $ltare- r.>f a~ recDvi!ry Dr as i)rdererl·or oDprOYe.d by. the-coon;, induclir;~:"I:he award to il ".

rep resentatiVe plain trff of rea sonabl e- costs and e:.tpenseS· (indudir;g los.t w-a.!les.) directly 'rela tiog to the representatil>r,.ofthe- class.

r-de>:lare uooer pe,naftyof p~jur1(thatthe iore.!ioin,g are-true and correct stat'i!menti .

. ~ . [Please. Sign ~ovei

HU,tI,YINGJIN

29 Cmp-ai Hill a W51:mor.t,ll6D5S-!l: Tel: 630-55!r9789 lZD~8@'{Q:hco,com .

Ra'URNIHIS. FORl'lt TO: Glancy Binmw &. Goldb.=7g LLj>~ j8()1 "'venue of the Stan, Sllite 3lJrlos ~es, C~ 90C67 "'AX! 9:lO-201~llin;. Tcl;3:1D-2D:f-9jS(J; ~rner@glanC'fl<!)IJ.oom


AO 440 (Rev. 12/09) Summons in a Civil Action (Page 2)

Civil Action No.

PROOF OF SERVICE

(This section should not be filed with the court unless required by Fed. R. Civ. P. 4 (l))

This summons for (name of individual and title, if any)

was received by me on (date) .

’ I personally served the summons on the individual at (place)

on (date) ; or

’ I left the summons at the individual’s residence or usual place of abode with (name)

, a person of suitable age and discretion who resides there,

on (date) , and mailed a copy to the individual’s last known address; or

’ I served the summons on (name of individual) , who is

designated by law to accept service of process on behalf of (name of organization)

on (date) ; or

’ I returned the summons unexecuted because ; or

’ Other (specify):

.

My fees are $ for travel and $ for services, for a total of $ .

I declare under penalty of perjury that this information is true.

Date:Server’s signature

Printed name and title

Server’s address

Additional information regarding attempted service, etc:


ATTACHMENT TO SUMMONS ON AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

DEFENDANTS’ ADDRESSES:

DEFENDANTS DUOYUAN GLOBAL WATER, INC., WENHUA GUO, STEPHEN C. PARK, THOMAS S. ROONEY, JR., YUEFENG YU, PING WEI, CHARLES V. FIRLOTTE, JOAN M. LARREA, AND CHRISTOPHER P. HOLBERT:

No. 3 Jinyuan Road Daxing Industrial Development Zone Beijing 102600 People’s Republic of China

DEFENDANT PIPER JAFFRAY & CO.:

Corporate Headquarters 800 Nicollet Mall Suite 800 Minneapolis, MN 55402

DEFENDANT OPPENHEIMER & CO., INC.:

Corporate Headquarters 125 Broad Street New York, NY 10004

DEFENDANT JANNEY MONTGOMERY SCOTT, LLC:

Corporate Headquarters 1801 Market Street Philadelphia, PA 19103-1675

DEFENDANT CREDIT SUISSE SECURITIES (USA) LLC: Corporate Headquarters (USA) 11 Madison Avenue New York, NY 10010-3643 DEFENDANT MACQUARIE CAPITAL (USA) INC.:

Corporate Headquarters (USA) 125 West 55th Street New York, NY 10019


DEFENDANT RODMAN & RENSHAW, LLC:

1251 Avenue of the Americas 20th Floor New York, NY, 10020

DEFENDANT GRANT THORNTON INTERNATIONAL: Corporate Headquarters (USA) 175 West Jackson Boulevard Chicago, IL 60604 DEFENDANT BDO LIMITED:

Beijing Office, 9th Floor 7th Building, No. 16 West Fourth Ring Middle Road Haidian District Beijing 100039

DEFENDANTS GLOBAL ENVIRONMENT FUND AND GLOBAL ENVIRONMENT EMERGING MARKET FUND III HOLDINGS MU:

5471 Wisconsin Avenue, Suite 300 Chevy Chase, MD 20815


Case 1:10-cv-07233-GBD Document 88 Filed 10/04/11 Page 1 of...

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