case 2:11-cv-02794-r -agr document 35 filed 09/02/11 page...

Case 2:11-cv-02794-R -AGR Document 35 Filed 09/02/11 of 45 Page ID #:374

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2 Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws 936262.1

Walsh (collectively, “Plaintiffs”), individually and on behalf of all other persons

similarly situated, by their undersigned attorneys, for their complaint against

defendants, allege the following based upon personal knowledge as to themselves

and their own acts, and information and belief as to all other matters, based upon,

inter alia, the investigation conducted by and through their attorneys, which

included, among other things, a review of the defendants’ public documents,

conference calls and announcements made by defendants, United States Securities

and Exchange Commission (“SEC”) filings, wire and press releases published by

and regarding China Electric Motor, Inc., (“CELM”, or the “Company”), securities

analysts’ reports and advisories about the Company, CELM’s filings with the State

Administration for Industry and Commerce (the “SAIC”) in the People’s Republic

of China (the “PRC”), and information readily obtainable on the Internet. Plaintiffs

believe that substantial evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

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

persons who purchased CELM common stock in, pursuant or traceable to CELM’s

two S-1 registration statements effective during the period from CELM's Initial

Public Offering (the “IPO”) on January 29, 2010 through March 20, 2011 (the

“Class Period”).

2. Plaintiffs bring claims under:

a. Section 11 of the Securities Act of 1933 (the “Securities Act’),

15. U.S.C. § 77k, on behalf of all Plaintiffs against all

defendants, other than the Underwriters (defined below), Phillip

Kempisty and Richard Rappaport.

b. Section 11 of the Securities Act against the Underwriters on

behalf of only those Plaintiffs who purchased CELM stock


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pursuant, or traceable, to the IPO Registration Statement and

Underwriters’ Prospectus for the sale of 5,750,000 CELM

shares.

c. Section 15 of the Securities Act, 15. U.S.C. § 77o, on behalf of

all Plaintiffs predicated on the underlying Section 11 violations

against each of the Individual Defendants (defined below) and

MaloneBailey, LLP.

3. CELM is a Delaware corporation that purportedly engages in the

design, production, marketing and sale of micro-motor products in the PRC.

4. Substantially all of CELM’s operations occur through its indirect

subsidiary, Shenzhen YuePengCheng Motor Co., Ltd. (“Shenzhen YPC”) - a

company organized under the laws of the PRC.

5. On January 27, 2010, CELM filed an amended registration statement

on Form S-1/A with the SEC (the “IPO Registration Statement”).

6. The IPO Registration Statement contained two preliminary

prospectuses, both of which form an integral part of the IPO Registration

Statement.

7. The first prospectus was for the sale by the Underwriters of up to

5,750,000 shares of CELM common stock (the “Underwriters’ Prospectus”) in a

firm commitment public offering.

8. The second prospectus, which incorporated by reference all relevant

parts of the Underwriters’ Prospectus and included only those pages which were

materially different from the Underwriters’ Prospectus, was to be used for the resale

by existing CELM shareholders of up to 2,455,664 shares of CELM stock

purchased by the shareholders in a series of five private placement transactions in

2009 (the “Resale Prospectus”).

9. The IPO Registration Statement was declared effective on January 28,

2010, and the Company filed the final Underwriters’ Prospectus with the SEC on


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January 29, 2010, and the final Resale Prospectus on February 4, 2010. The IPO

Registration Statement, the Underwriters’ Prospectus and the Resale Prospectus are

sometimes collectively referred to herein as the “IPO Registration Statement and

Prospectuses”.

10. WestPark Capital, Inc. and Roth Capital Partners, LLC underwrote the

IPO (collectively, the “Underwriters” or the “Underwriter Defendants”).

11. The Underwriters’ Prospectus solicited investors for a public offering

of 5,000,000 shares at $4.50 per share, and included an over-allotment option of

750,000 shares to be exercised per the Underwriter’s discretion within 45 days of

the IPO.

12. On March 2, 2010 the Company issued a press release announcing that

the Underwriters had exercised their over-allotment option, and that the expected

gross proceeds to CELM from the IPO was $25.9 million.

13. The IPO Registration Statement, the Underwriters’ Prospectus and the

Resale Prospectus contained CELM's consolidated financial statements for fiscal

years 2007, and 2008 and the first nine months of 2009 (the “Consolidated

Financial Statements”), and the audit opinion of Kempisty & Company CPAs, P.C.

(“Kempisty”), which served as the Company’s independent registered public

accounting firm and audited the Company’s financial statements for fiscal years

2007 and 2008.

14. On March 17, 2010, CELM filed a second “Reselling Registration

Statement” on Form S-1/A. This registration statement sought to register a further

1,574,982 of shares purchased privately by investors prior to the IPO.

15. The Reselling Registration Statement contained the identical

Consolidated Financial Statements for CELM and audited by Kempisty as

contained in the IPO Registration Statement and Prospectuses.

16. The Consolidated Financial Statements, and, by extension, the IPO

Registration Statement, the Underwriters’ Prospectus, the Resale Prospectus, and


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the Reselling Registration Statement and Prospectus contained untrue statements of

material fact.

17. The Consolidated Financial Statements grossly overstated the amount

of cash and cash equivalents, revenue, gross profit and net income of the Company

for the fiscal years 2007, and 2008 and the first nine months of 2009 (the “False

Financial Statements”).

18. For first nine months of fiscal year 2009, the IPO Registration

Statement and Prospectuses overstated the Company’s cash and cash equivalent by

approximately $5.0 million or 331%, it also overstated revenue generated by the

Company by more than $56.6 million or 846%; gross profit by over $16.6 million

1,395%; and net income by over $8.3 million or 18,443%.1

19. For fiscal year 2008, the IPO Registration Statement and Prospectuses

overstated the Company’s cash and cash equivalents by $2.4 million or 889%, it

also overstated revenue generated by the Company by $46.5 million or 705%; gross

profit by $13.5 million of 1,040%; and net income by $8.0 million or 44,165%.

20. For fiscal year 2007, the IPO Registration Statement and Prospectuses

overstated the Company’s cash and cash equivalents by $880,000 or 124%, it also

overstated revenue generated by the Company by $21.7 million or 350%; gross

profit by $6.7 million of 706%; and net income by $4.5 million or 5,109%.

21. The False Financial Statements are untrue because they are materially

worse than Shenzhen YPC’s audited financial statements filed with the SAIC in the

PRC.

22. As described in more detail below, the SAIC is a Chinese

governmental body charged with regulating businesses in the PRC.

1 The actual overstatements of income statement items for 2009 are about 25% greater than shown here because the 2009 financial statements in the SEC registration statements were for only the first nine months of 2009, while the SAIC figures are for the entire year.


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23. For the reasons outlined in this complaint, some of which were

discussed in the IPO Registration Statement, Shenzhen YPC’s SAIC filings indicate

the true financial condition of CELM.

24. Because the False Financial Statements in the IPO Registration

Statement and Prospectuses and the Reselling Registration Statement and

Prospectus indicate drastically higher cash and cash equivalent, revenue, gross

profit and net income for 2009, 2008 and 2007 than Shenzen YPC’s SAIC filings,

the False Financial Statements are untrue. As a result, the IPO Registration

Statement and Prospectuses and the Reselling Registration Statement and

Prospectus, which include the False Financial Statements, all contain the identical

untrue statements of material fact.

25. On March 31, 2011, CELM issued a report on Form 8-K with the SEC

indicating, among other things,

a. The Company is unable to file its Annual Report on Form 10-K

for the year ended December 31, 2010, within the prescribed

time period due to possible discrepancies concerning the

Company's banking statements that were very recently identified

by the Company's auditors in the course of their audit of the

Company's consolidated financial statements for the fiscal year

ended December 31, 2010.

26. On April 11, 2011, CELM issued another report on Form 8-K with the

SEC indicating, among other things,

a. The Company received a delisting letter from the NASDAQ

because the Company had not yet filed its Annual Report on

Form 10-K for the period ended December 31, 2010;

b. and that the SEC had initiated a formal, nonpublic investigation

into whether the Company or any of its personnel violated the

federal securities laws.


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27. A month later, director defendant G. Zhang resigned, followed by the

resignation of all of the members of the Special Committee that had been convened

to investigate possible discrepancies concerning the Company's banking statements,

because they disagreed with certain Company officers and directors as to the

appropriate scope of the investigation going forward.

28. On May 27, 2011, director James Lee resigned because he disagreed

with the approach the Company's management had taken in addressing the

investigation into possible discrepancies concerning the Company's banking

statements, and the related inquiries by the SEC and NASDAQ, including the

Company's recent termination of a forensic audit by PricewaterhouseCoopers.

29. On May 31, 2011, Heung Sang Fong resigned as Chief Financial

Officer (“CFO”) and Director of the Company.

30. On May 31, 2011, MaloneBailey resigned as the Company’s auditor.

MaloneBailey’s resignation letter (the “Resignation Letter”) indicated that:

a. the resignation was due to discrepancies noted in the Company’s

bank records during MaloneBailey’s 2010 audit, the dismissal of

PricewaterhouseCoopers’s forensic audit, and the accompanying

dissolution of the Special Committee of the Company’s Board

of Directors and the resignation of at least one member of the

Board of Directors;

b. MaloneBailey believed that the bank discrepancies may be an

indication that the accounting records of the Company were

falsified, which would constitute an illegal act;

c. the Company’s management had not provided it with a

satisfactory explanation of the discrepancies.

31. On June 3, 2011, another Director of the Company, Tony Shen,

resigned due to his disagreement with the Company’s management in addressing

the bank discrepancies and the subsequent SEC and NASDAQ inquiries.


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32. Beginning June 14, 2011, the Company’s shares were suspended from

trading on NASDAQ and thereafter a Form 25 Notification of Delisting was filed

with the SEC.

33. The contents of the Company’s March 31, 2011 Form 8-K, April 11,

2011 Form 8-K, MaloneBailey’s Resignation Letter, as well as the resignation

letters of several CELM directors, and the Order and Statement of Matters

referenced therein, further underscore that the IPO Registration Statement and

Prospectuses and Reselling Registration Statement contained untrue statements of

material fact.

34. Plaintiffs and the Class have suffered damages for reasons including,

but not limited, to the following: the IPO and Reselling Registration Statements

contained untrue statements of material fact; trading in China Electric Motor’s

stock was halted and eventually delisted from the NASDAQ; the Company’s

auditor resigned due to perceived false statements in the Company’s accounting

records and the Company’s failure to address the auditor’s concerns; the SEC

subsequently initiated proceedings against the Company; and the value of the

Company’s stock, which currently trades at $0.14 per share, has declined by nearly

97% from its IPO price of $4.50 per share.

JURISDICTION AND VENUE

35. The claims asserted herein arise under and pursuant to Sections 11 and

15 of the Securities Act (15 U.S.C. §§ 77k, and 77(o)).

36. This Court has jurisdiction over the subject matter of this action

pursuant to Section 22(a) of the Securities Act, 15 U.S.C. §77v(a).

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

the Securities Act, 15 U.S.C. § 77v(a). Pursuant to 28 U.S.C. § 1391(d), CELM

may be properly sued in any District in the United States, including the Central

District of California. The lead underwriter, Westpark, is domiciled and


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underwrote the IPO in this District. Moreover, the relative proximity of Los

Angeles to China makes it a convenient venue for defendants, the majority of which

reside in the PRC.

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

complaint, defendants, directly or indirectly, used the means and instrumentalities

of interstate commerce, including but not limited to, the United States mails,

interstate telephone communications and the facilities of the national securities

exchange.

PARTIES

39. Lead Plaintiff Mike McGee purchased 58,650 shares of CELM that are

traceable to the IPO Registration Statement and the Underwriters’ Prospectus. In

addition, at the time he purchased these shares, more than 98.4% of the shares on

the open market were shares issued in the IPO pursuant to the IPO Registration

Statement and the Underwriters’ Prospectus. (Dkt. # 8-3, at 2.) Mr. McGee held

on to 27,675 of those shares past the end of the Class Period, realizing a loss. (Id.)

To the extent any shares Mr. McGee purchased cannot be traced to the IPO

Registration Statement and Underwriters’ Prospectus, they are traceable to the

Resale Prospectus or Reselling Registration Statement.

40. Named Plaintiff Robert Walsh purchased 225 shares of CELM stock

on February 2, 2010 at $4.55 per share pursuant and traceable to the IPO

Registration Statement and IPO Prospectus. He suffered a loss as a result his

purchase of CELM stock. On the date Mr. Walsh purchased his shares, the only

publicly traded shares available to purchase were those issued by CELM and sold

by the Underwriters in the IPO on January 29, 2010 pursuant to the IPO

Registration Statement and Underwriters’ Prospectus.

41. Named Plaintiff Victor J Brancacio purchased 100 shares of CELM

stock on January 29, 2010 at $4.54 per share pursuant and traceable to the IPO

Registration Statement and Underwriters’ Prospectus. He suffered a loss as a result


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his purchase of CELM stock. On the date Mr. Brancacio purchased his shares, the

only publicly traded shares available to purchase were those issued by CELM and

sold by the Underwriters in the IPO on January 29, 2010 pursuant to the IPO


42. Named Plaintiff Melvin Younker purchased 2,000 shares of CELM on

April 13, 2010. (Id.) He held on to those shares until the end of the Class Period,

realizing a loss. (Id.) These shares are traceable to the IPO Registration Statement

and Underwriters’ Prospectus. He purchased 13,000 additional shares that are

traceable to either the IPO Registration Statement and Underwriters’ Prospectus or

the Resale Prospectus or Reselling Registration Statement.

43. Named Plaintiffs Bankim Gopani, Niranjan Kumar Das, and Mark

Stephenson, all purchased CELM shares traceable to either the IPO Registration

Statement or the Reselling Registration Statement during the Class Period. Each

has suffered losses as a result.

44. Each of the Plaintiffs’ certifications pursuant to the Private Securities

Litigation Reform Act of 1995 (the “PSLRA”) listing their relevant transactions in

CELM shares was previously filed with the Court or is attached hereto and

incorporated by reference herein.

45. Defendant CELM is a Delaware Corporation with its principal

executive offices in Guangdong Province in the PRC. CELM purports to be

engaged in the design, production, marketing and sale of micro-motor products in

China.

46. CELM signed the each of the Company’s registration statements on

which liability is based herein through its Chief Executive Officer (“CEO”),

defendant Yue Wang.

47. Defendant Yue Wang (“Y. Wang”) was at all relevant times the

Company’s CEO, and signed each of the Company’s registration statements on

which liability is based herein.


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48. Defendant Haixia Zhang (“H. Zhang”) was at all relevant times the

Company’s CFO and Corporate Secretary, until Zhang’s resignation from those

positions effective June 10, 2010. Zhang signed each of the Company’s registration

statements on which liability is based herein.

49. Defendant Heung Sang “Dexter” Fong (“Fong”) was at all relevant

times a director of the Company. Fong signed each of the Company’s registration

statements on which liability is based herein. According to the Company’s SEC

filings, Fong is a U.S. certified public accountant (CPA).

50. Defendant Fugui Wang (“F. Wang”) was at all relevant times the

Company’s Chairman of the Board, and signed each of the Company’s registration

statements on which liability is based herein. As disclosed by the Company, F.

Wang is the father of defendant Y. Wang.

51. Defendant Guoqiang Zhang (“G. Zhang”) was at all relevant times a

director of the Company, and signed each of the Company’s registration statements

on which liability is based herein.

52. Defendant Liang Tang (“Tang”) was at all relevant times a director of

the Company, and signed each of the Company’s registration statements on which

liability is based herein.

53. Defendant Shuiping Wang (“S. Wang”) was at all relevant times a

director of the Company, and signed each of the Company’s registration statements

on which liability is based herein.

54. Defendants Y. Wang, H. Zhang, Fong, F. Wang, G. Zhang, Tang and

S. Wang are collectively referred to as the “Individual CELM Defendants.”

55. Each of the Individual CELM Defendants signed the IPO Registration

Statement and signed the Reselling Registration Statement and was either a director

or an officer of the Company at the time it filed such registration statements with

the SEC.


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56. The Individual CELM Defendants and CELM are, collectively, the

“CELM Defendants”.

57. Defendant WestPark Capital, Inc. (“WestPark”) is a full service

investment banking company. WestPark’s headquarters are located at 1900 Avenue

of the Stars, Suite 310, Los Angeles, CA 90067. WestPark was an underwriter of

the IPO, selling at least 2,000,000 of the total number of shares sold in the IPO.

58. WestPark had significant control over CELM prior to the IPO.

WestPark and its affiliates, including Westpark’s CEO, defendant Richard

Rappaport, were significant shareholders of SRKP 21, Inc. (“SRKP 21”), the shell

company that eventually became CELM through a reverse merger transaction on

May 6, 2009 (the “Reverse Merger”).2

59. After the reverse merger, the Former Shareholders, including

WestPark and its affiliates, beneficially owned 1,352,0033 CELM shares.

60. In addition, WestPark was CELM’s placement agent in a series of five

private placements in 2009 for the sale of a total of 2,051,767 CELM shares of

common stock at approximately $2.08 per share (the “Private Placement”). These

shares were to be registered and resold pursuant to the Resale, constituted an

integral part of the Company’s financing of which the IPO was a part, and were

subject to the provisions of the lock-up agreement described in the IPO Registration

Statement and Prospectus.

61. Defendant Roth Capital Partners LLC (“Roth”) is a securities broker-

dealer and underwriter, has offices in Los Angeles, California and is headquartered

2 In a reverse merger, a shell company acquires a private company, and, in exchange, the former shareholders of the private company receive a controlling share of the shell company. The general purpose of the reverse merger process is for a private company to go public, either by merging into a shell company that is already publicly traded, or fit to be publicly traded. 3 All shares counts have been adjusted for a 1.53846153846154:1 reverse stock split that took place on January 22, 2010.


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in Newport Beach, California. Roth was an underwriter of the IPO, selling at least

3,000,000 of the total number of shares sold in the IPO.

62. Defendant Richard Rappaport (“Rappaport”) is, and at all relevant

times was, the CEO of WestPark, and, as indicated by the Registration Statement

and Prospectus, the “sole owner of the membership interests in the parent of

WestPark Capital.” In other words, Rappaport is the sole owner of WestPark, and

thereby exerts complete control over WestPark. Rappaport was the President of

SRKP 21 prior to the Reverse Merger, and beneficially owned approximately

11.5% of CELM just prior to the IPO (this figure counts his indirect beneficial

ownership of CELM stock through two separate trusts and his ownership of

WestPark).

63. Defendants WestPark and Roth are the Underwriter Defendants.

64. Defendant Kempisty became the Company’s independent registered

public accountant on May 6, 2009 concurrently with the closing of the Reverse

Merger transaction.

65. Philip C. Kempisty, CPA, age 61, is the founding partner and majority

shareholder of Kempisty. He has been licensed as a CPA in the state of New York

since 1974. As majority shareholder, he exercised day to day control over

Kempisty. He also exercised complete control over its audits of CELM for 2007

and 2008.

66. Auditing firm, MaloneBailey, LLP formally acquired all of the

business and operations of Kempisty in December 2009 and is the successor in

interest to Kempisty. MaloneBailey is therefore responsible for all legal obligations

and liabilities of Kempisty. Following MalonBailey’s acquisition of Kempisty,

Phillip Kempisty worked as a partner in MaloneBailey. Upon its acquisition of all

of the business and operations of Kempisty, MaloneBailey became a control person

of Kempisty.


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67. On the date each registration statement herein was declared effective,

MaloneBailey had assumed the business of Kempisty and was responsible for

Kempisty’s actions. As successor in interest to Kempisty, MaloneBailey is liable

for the conduct of Kempisty, including any judgment that may be entered in this

lawsuit.

68. On February 17, 2010 the Company filed a Form 8-K with the SEC

announcing that it had dismissed Kempisty as its auditor, and that the Company had

appointed Malone & Bailey, PC (“MB”) as the Company’s new auditor.

69. The IPO Registration Statement and Prospectuses and the Reselling

Registration Statement contained an audit report by Kempisty (the “Auditor’s

Report”), which indicated that it had audited the consolidated balance sheets of

CELM for fiscal years 2007 and 2008 (with fiscal years ending December 31), and

the consolidated statements of operations and comprehensive income, changes in

shareholders’ equity and cash flows for fiscal years 2008, and 2007. The Auditor’s

Report stated that: “In our [Kempisty’s] opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Electric Motor, Inc. at December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2008 in conformity with accounting principles generally accepted in the in the United States of America.”

70. The IPO Registration Statement and Prospectuses and Reselling

Registration Statement, under a section heading entitled “Experts,” indicated that: “The (i) consolidated financial statements of China Electric Motor, Inc. as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007, and 2006 (ii) and the condensed parent-only balance sheet of China Electric Motor, Inc. as of December 31, 2008 and 2007 and the related condensed parent-only statements of operations and cash flows for the year ended December 31, 2008 and the period October 11, 2007 (inception) to December 31, 2007 included in footnote 21 to the Consolidated Financial Statements of China Electric Motor, Inc., each


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appearing in this prospectus and registration statement have been audited by Kempisty & Company Certified Public Accountants PC, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.” [emphasis added]

BACKGROUND

71. CELM was incorporated in Delaware on October 11, 2007, as SKRP

21, Inc. As indicated by the serial number, this was one of a series of financing

vehicles created by WestPark to permit closely-held companies to “go public,” i.e.,

to have their shares traded on U.S. exchanges, and therefore to have access to U.S.

capital markets through capital offerings.

72. Typically, each of these serially-numbered entities would acquire the

closely-held company at issue; in return, the closely-held company’s shareholders

would receive most – but not all – of the entity’s shares. After the acquisition, the

entity becomes a holding company that holds the closely-held company. The entity

would then change its name to reflect that of the closely-held company.

73. The entity would then sell shares of its stock in a private placement.

The goal of the private placement would be to fund the entity through to its IPO.

The persons or entities who made the private placement would then sell their shares

onto the open market following the IPO.

74. On March 3, 2009, CELM entered into a share exchange agreement

with Attainment Holdings Limited and Excel Profit Global Group Ltd. Pursuant to

the terms of the share exchange, CELM acquired all of the shares of Attainment

from Excel; in return, Excel and its designees received 10,892,893 shares, or

approximately 68%, of CELM’s issued and outstanding common stock.

75. Attainment, through a series of subsidiaries, held Shenzen YPC --

CELM’s sole operating asset.


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76. The following chart shows CELM’s corporate structure:

77. CELM then proceeded to prepare itself for its IPO.

THE MARKET FOR CELM’S SHARES

78. After the Reverse Merger, the former shareholders of Excel held

10,892,893 shares of CELM. This Complaint refers to these shares as the Excel

Shares.

79. In addition, the former shareholders of SKRP 21, Inc., (i.e. WestPark)

still held 5,126,067 CELM shares. This Complaint refers to these shares as the

WestPark Shares. The holders of WestPark Shares agreed that they would not

resell any of their shares until at least eight months after CELM traded on the

NASDAQ Global Market.

80. The Excel Shares were not registered at the time of the reverse merger.

Therefore, the Excel Shares could not be publicly traded.

81. In the Private Placements in 2009, CELM sold an aggregate of

2,051,767 CELM shares at approximately $2.08 per share. These shares were to be

registered and resold pursuant to the Resale Prospectus. This Complaint refers

collectively to all these shares as the Private Placement Shares. At the time of the


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Private Placements, the Private Placement Shares were not registered, meaning that

they could not be publicly traded.

82. The subscribers in the Private Placements agreed to either of two lock-

up provisions. The subscribers holding an aggregate of 954,326 shares agreed not

to sell their shares until ninety days after CELM’s common stock began to be

traded on the NASDAQ Global Market, when one tenth of their shares would

become eligible for resale. Every thirty days thereafter, an additional tenth of their

shares would be released for resale.

83. The remaining investors in the Private Placements, holding an

aggregate of 1,097,441 shares, agreed to a lock-up preventing them from selling

their shares until six months after CELM’s common stock began trading on the

NASDAQ Global Market.

84. The purpose of the Private Placements was to provide CELM with

sufficient funds to allow it to prepare itself for its IPO

85. On January 27, 2010, CELM filed the IPO Registration Statement on

Form S-1/A.

86. On January 29, 2010, CELM filed the Underwriter’s Prospectus for

sale of 5,750,000 CELM shares by the Underwriters.

87. On February 4, 2010, CELM filed the Resale Prospectus for the resale

of 2,455,664 CELM shares by selling shareholders. The Resale Shares included all

of the Private Placement Shares and 403,897 of the shares held by WestPark

Capital and the Private Placement Shares. However, these shares were registered

pursuant to a lock-up agreement, meaning that the selling shareholders would not

be able to sell any of their shares until July 28, 2010.

88. The IPO Registration Statement was declared effective on January 28,

2010, meaning that the Private Placement Shares and the IPO Shares could be

publicly traded beginning from that date. In addition, the underwriters exercised an

overallotment option to sell an additional 750,000 shares.


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89. The two prospectuses included in the IPO Registration Statement

involved a single plan of financing. The Private Placement Shares were sold for the

express purpose of giving CELM sufficient funds to arrange its IPO.

90. The two prospectuses included in the IPO Registration Statement

involved the same class of security.

91. The two prospectuses in the IPO Registration Statement were made

simultaneously. Indeed, they were made as part of the same document.

92. The two prospectuses in the IPO Registration Statements involved the

same kind of consideration, i.e., they sold the same types of shares at the same

price.

93. On March 17, 2010, CELM filed a second “Reselling Registration

Statement” on Form S-1/A. This registration statement sought to register a further

1,574,982 of the Private Placement Shares and the WestPark Shares. However,

these shares were subject to a lock-up agreement, meaning that none of the reselling

shareholders could trade them until September 29, 2010.

94. Other than the absence of underwriters, the March 17, 2010 Reselling

Registration Statement was identical to the IPO Registration Statement in all

material respects. It was signed by the same Individual CELM Defendants. It

included the same false and misleading fiscal 2007 and 2008 financial statements

audited by Kempisty, and CELM’s director roster was the same.

95. On March 19, 2010, the Reselling Registration Statement was declared

effective.

96. On August 17, 2010, CELM filed with the SEC a registration

statement on Form S-8 seeking to register 3,000,000 shares that would be issued in

the future pursuant to CELM’s employee stock ownership plan.

97. Other than the absence of underwriters, the August 17, 2010 S-8 ESOP

Registration Statement was identical to the IPO Registration Statement in all

material respects. It included the same false and misleading fiscal 2007 and 2008


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financial statements audited by Kempisty, and CELM’s director roster was the

same.

98. CELM never issued any shares pursuant to the August 17, 2010 S-8

ESOP Registration Statement and none of these registered shares entered the

market.

99. On December 3, 2010, CELM filed an “S-3 Registration Statement

and Prospectus” on Form S-3. The registration statement sought to register several

classes of securities in a “shelf registration”.

100. On April 25, 2011, CELM filed a letter with the SEC withdrawing the

S-3 Registration Statement and Prospectus “on the grounds that such withdrawal is

consistent with the public interest and the protection of investors.”

101. CELM stated in the April 25, 2011 letter that the Company “confirms

that no securities were issued or sold pursuant to the [S-3] Registration Statement.”

102. The following chart describes the aftermarket for CELM’s shares:4

Registration

statement/date

January 28 to

April 29

April 28 to

September 29

September 29

onwards

IPO Shares Yes Yes Yes

Private Placement

Shares

No Some Some

WestPark Shares No No Some

103. Therefore, between January 28, 2010, and April 29, 2010, the

aftermarket consisted solely of shares registered pursuant to the IPO Registration

4 CELM also filed a so-called Shelf Offering on Form S-3 on December 3, 2010, and that Shelf Offering was declared effective on January 1, 2011. However, CELM later confirmed that no shares were sold pursuant to this registration statement.


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Statement. Therefore, every shareholder who purchased shares between January

28, 2010, to April 28, 2010, can trace his, her, or its shares to the IPO Registration

Statement and the Underwriters’ Prospectus.

104. In addition, between April 29 and July 29, 2010, the aftermarket for

CELM’s shares consisted almost entirely of shares traceable to the IPO Registration

Statement and Underwriters: Prospectus. For those months, Private Placement

shares were released for resale at the rate of 95,433 shares per month. The

following chart shows the composition of the aftermarket for CELM’s shares

between April 29, 2010, and July 29, 2010:

April 29 - May

28

May 29 to June

28

June 29 to July

28

IPO Shares 5,750,000 5,750,000 5,750,000

Private

Placement Shares

95,433 190,866 286,299

Total Shares 5,845,433 5,940,866 6,036,299

%of total shares

from IPO

98.4% 96.7% 95.3%

105. On July 28, 2010, an additional 1,097,441 Private Placement Shares

were released for resale.

106. No shares of CELM, other than those registered pursuant to the IPO

Registration Statement and the Reselling Registration Statement, were publicly

tradable during the Class Period. In particular, the Excel Shares were subject to a

lock-up agreement for the entire Class Period, and, therefore, could not be publicly

traded.


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DEFENDANTS’ UNTRUE STATEMENTS IN THE

REGISTRATION STATEMENT AND PROSPECTUS

Veracity of Shenzhen YPC’s SAIC Filings

107. As Shenzhen YPC is the only entity controlled by CELM that has

operations in the PRC, and because CELM operates solely through Shenzhen YPC

in the PRC, Shenzhen YPC’s operations did and do constitute all of CELM’s

operations.

108. Since CELM has no operations outside of Shenzhen YPC, Shenzhen

YPC is the sole source of revenue for CELM.

109. Thus, as CELM has no source of revenue or income outside of that

earned by Shenzhen YPC, CELM’s yearly figures for revenue, gross profit and net

income cannot, and should be the same as those of Shenzhen YPC.

110. The SAIC (State Administration for Industry and Commerce) is the

Chinese government body that regulates industry and commerce in the PRC. It is

primarily responsible for business registrations, issuing and renewing business

licenses and acts as the government supervisor of corporations.

111. All Chinese companies are required to file with the SAIC financial

statements audited by a certified public accountant pursuant to Chinese generally

accepted accounting principles (“Chinese GAAP”) annually or bi-annually.

Chinese GAAP are substantially the same as U.S. GAAP. In particular, accounting

principles governing revenue recognition are substantially the same.

112. Shenzhen YPC’s filings with the SAIC accurately reflect its true

financial condition for the following reasons:

a. Under PRC law, penalties for filing false SAIC filings include

fines and revocation of the entity’s business license.5

b. If an entity’s business license is revoked, the People’s Bank of 5 “Measures for the Annual Inspection of Enterprises” issued on February 24, 2006, Article 20.


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China6 requires all bank accounts of that entity be closed.7

c. Without a business license the entity cannot legally conduct any

business.

113. Furthermore, the IPO Registration Statement and Prospectus indicate

the importance of accurate SAIC filings, and the severe penalties for inaccurate

filings: Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers our present business of the production and marketing of micro-motor products and relevant components. Prior to expanding our business beyond that of our business license, we are required to apply and receive approval from the PRC government. [emphasis added]

False Financial Statements

114. Shenzhen YPC’s filings with the SAIC are accurate because, inter

alia, Shenzhen YPC would lose its business license if its SAIC filings were

inaccurate. If Shenzhen YPC lost its business license, it would no longer be able to

conduct any operations in the PRC, which by extension comprises CELM’s sole

business operations. Thus, the loss of Shenzhen YPC’s business license would

effectively halt all business operations by the Company.

115. The following chart details: (1) CELM’s consolidated cash and cash

equivalent, revenue, gross profit, and net income for fiscal years ended December

31, 2009, 2008 and 2007, which were reported in the Consolidated Financial

Statements contained in the Company’s Registration Statement and Prospectus, and

partly audited by Kempisty (the “False Financial Statements”); (2) the cash and

cash equivalent, revenue, gross profit, and net income for Shenzhen YPC as

reported in its SAIC filings for fiscal years ended December 31, 2009, 2008 and

6 People’s Bank of China in PRC is equivalent to the Federal Reserve in the U.S. 7 “Measures for the Administration of RMB Bank Settlement Accounts” issued in April 2003. (No.5 [2003]), Article 49.


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2007 (the “True Financial Statements”); and (3) the discrepancy between (1) and

(2) as a percentage of (2).8

(1) False Financial Statements filed with SEC (in thousand USD)

USD in thousands

Nine Months ended

Sept. 30, 20099 2008 2007

Cash and Cash Equivalent $6,459 $2,656 $1,589

Revenue $63,294 $53,073 $27,855

Gross Profit $17,833 $14,787 $7,618

Net Income $8,337 $8,015 $4,631

(2) True Financial Statements filed with SAIC (in thousand USD)

Cash and Cash Equivalent $1,497 $269 $708

Revenue $6,691 $6,593 $6,196

Gross Profit $1,193 $1,297 $946

Net Income $45 $18 $89

(3) Percentage of overstatement

Cash and Cash Equivalent 331%10 889% 124%

Revenue at least 846% 705% 350%

Gross Profit at least 1395% 1040% 706%

Net Income at least 18443% 44165% 5109%

8 All figures are USD in thousands; assume an exchange rate of 7.60 for the year ended December 31, 2007, 6.92 for the year ended December 31, 2008, and 6.83 for the year ended December 31, 2009; parentheses signify loss. 9 The SAIC figures are for the full year of 2009. Therefore the extent of the overstatement of revenue and income figures is approximately 25% greater than is shown here. 10 The Company’s 2009 10-K filed with the SEC on March 31, 2010 indicates that the Company has a positive cash flow. Thus its cash and cash equivalent should increase in the last three months, and there should be more cash and cash equivalent by December 31, 2009 than September 30, 2009.


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116. The True Financial Statements are taken from Shenzhen YPC’s SAIC

filings, which are accurate for the reasons enumerated above. Due to the nature of

CELM’s corporate structure, the consolidated cash and cash equivalent, revenue,

gross profit, and net income reported by CELM cannot, and should not be higher

than those reported by Shenzhen YPC. Thus, the False Financial Statements are

untrue because they report materially higher consolidated cash and cash equivalent,

revenue, gross profit, and net income for China Electric Motor than Shenzhen YPC

reported to the SAIC.

117. The False Financial Statements formed a part of the Consolidated

Financial Statements that were audited and certified by Kempisty (i.e., fiscal years

2007 and 2008). The False Financial Statements were contained in CELM’s IPO

Registration Statement and Prospectuses and the Reselling Registration Statement

and Prospectus. As a result, the IPO Registration Statement and Prospectuses and

Reselling Registration Statement and Prospectus contain untrue statements of

material fact.

Other Facts Suggesting the Registration Statements Contained

False Statements of Material Facts

118. On March 31, 2011, CELM issued a current report on Form 8-K. The

current report commented on possible discrepancies in CELM’s banking statements

identified by MaloneBailey in its audit of CELM’s financial statements. CELM

also announced that it had launched an internal investigation into MaloneBailey’s

claims. CELM announced that it had retained PriceWaterhouseCooper to perform a

forensic audit.

119. That same day, CELM filed a Form 12b-25 indicating that it would be

unable to timely file its annual report on Form 10-K because of the discrepancies

identified by MaloneBailey.


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120. On April 11, 2011, CELM issued a press release later attached as an

Exhibit to a current report on Form 8-K. The press release disclosed that CELM

had been notified by the SEC that the SEC had undertaken a formal investigation to

determine whether CELM or any of its personnel had violated the securities laws.

The press release also disclosed that the SEC had served CELM with a subpoena

regarding this investigation on April 7, 2011.

121. On May 20, 2011, CELM disclosed that it had received a letter from

the NASDAQ indicating the NASDAQ’s intention to delist CELM. The NASDAQ

cited, among other concerns, public interest factors.

122. On May 28, 2011, James Lee resigned as Director of CELM. Lee

cited his disagreement with CELM’s approach to the investigation of

MaloneBailey’s claims. Lee stated that he disagreed with the decision to terminate

PriceWaterhouseCoopers’s engagement to conduct a forensic audit. Notably,

CELM had not previously disclosed that it had terminated

PriceWaterhousCoopers’s engagement.

123. On May 31, 2011, Heung Sang Fong resigned as CFO and Director of

the Company.

124. On June 1, 2011, MaloneBailey resigned as the Company’s auditor.

MaloneBailey’s resignation letter stated in relevant part:

Effective May 31, 2011, we will cease our services as your Independent Registered Public Accounting Firm due to discrepancies noted in the bank records during our 2010 audit, and the dismissal of PWC’s forensic audit, which led to the dissolution of the Special Committee and the resignation of at least one Board member. These events illustrate management’s unwillingness to take appropriate actions with regard to the bank discrepancies identified during our audit, and an unwillingness to cooperate with the Securities & Exchange Commission and Nasdaq. We believe that the bank discrepancies may be an indication that the accounting records have been falsified, which would constitute an illegal act. The


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company’s management has not provided us with a satisfactory explanation of these discrepancies. In addition, the discrepancies noted above and management’s unwillingness to take steps necessary to properly resolve the issues surrounding the bank discrepancies could indicate a material error in previously issue financial statements. As a result, we are unable to rely on management’s representation as they relate to previously issued financial statements and we can no longer support our opinion dated March 30, 2010 related to our audit of the consolidated financial statements of China Electric Motor, Inc. and Subsidiaries (the “Company”) as of December 31, 2009; and our opinion dated March 30, 2010 related to our audit of the Parent Only financial statements of China Electric Motor, Inc. and Subsidiaries as of December 31, 2009, both of which were included in the Form 10-K filed with the SEC on March 31, 2010. Pursuant to the above, the Company is required to file a Form 8-K with the SEC disclosing the matters specified in Item 304(a)(1) of Reg. S-K, including the fact that we resigned and the date; and that the previously issued financial statements cannot be relied upon and our opinion was withdrawn [emphasis added] 125. On June 3, 2011, Director Tony Shen resigned due to his disagreement

with CELM’s management in addressing the bank discrepancies and the subsequent

SEC and NASDAQ inquiries.

126. On June 13, 2011, CELM received notification that the NASDAQ

would delist its securities on opening of business on June 14, 2011.

Kempisty’s Negligence 127. In each of the Registration Statements, Kempisty certified that “we

have conducted our audit in accordance with standards of the Public Company

Accounting Oversight Board (United States). Those standards require that we plan

and perform the audit to obtain reasonable assurances about whether the financial

statements are free of material misstatements [...] We believe that our audit

provides a reasonable basis for our opinion. [Paragraph break]. In our opinion, the

consolidated financial statements referred to above present fairly, in all material

respects, the financial position of China Electric Motors, Inc.”


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128. Kempisty consented to have this opinion used in all of the Registration

Statements.

129. Generally Accepted Auditing Standards (“GAAS”) requires that the

auditor understand the client’s industry and business, and be knowledgeable about

matters that relate to the nature of the entity’s business, its organization, and

operating characteristics. AU 310.07.

130. For financial statements prior to December 15, 2010, “GAAS requires

that sufficient competent evidential matter is to be obtained through inspection,

observation, inquiries, and confirmations to afford a reasonable basis for an opinion

regarding the financial statements under audit.” AU 150.02.3.

131. Auditing Standard No. 15 ¶ 10 provides that “[w]hen using

information produced by the company as audit evidence, the auditor should [...]

[t]est the accuracy and completeness of the information.”

132. Auditing Standard No. 15 ¶ 22 requires auditors to “design[]

substantive tests of details and tests of controls [to] determine the means of

selecting items for testing from among the items included in an account or the

occurrences of a control.”

133. Upon information and belief, Kempisty neglected to obtain sufficient

evidential matter to support their audit opinion regarding the financial statements.

Since CELM only had a very small fraction of the revenue it claimed in its SEC

filings, a competent audit would have uncovered evidence that sales CELM claimed

happened never took place.

134. Auditor Standard No. 12 ¶ 9 requires the auditor to “obtain an

understanding of relevant industry, regulatory, and other external factors [...]

including the legal and political environment.” Auditing Standard No. 12 ¶ 11

provides that “the auditor should consider [...] [r]eading public information about

the company relevant to the likelihood of material financial statement

misstatements.”


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135. Upon information and belief, Kempisty did not consult and was

therefore negligent in not consulting CELM’s subsidiary’s publicly available,

audited financial statements filed with the SAIC.

136. If Kempisty did consult CELM’s subsidiary’s publicly available,

audited financial statements filed with the SAIC, it was negligent in failing to note

the discrepancies between SAIC and SEC filings.

137. Auditing Standard No. 12 ¶ 65 provides that “the auditor should

evaluate whether the information gathered from the risk assessment procedures

indicates that one or more fraud risk factors are present and should be taken into

account [...] Fraud risk includes (1) an incentive or pressure to perpetrate fraud, (2)

an opportunity to carry out the fraud.”

138. AU 316.85A.2 provides o that auditors should consider fraud risk

where “[s]ignificant operations [are] located or conducted across international

borders in jurisdictions where differing business environments and cultures exist.”

139. Kempisty failed to consider, among other things, that the PRC-based

Defendants were effectively beyond the reach of the SEC and DOJ’s enforcement

of the securities laws, and could therefore violate the securities laws without fear of

civil or criminal enforcement from the SEC or DOJ, respectively.

140. Auditing Standard No. 15 ¶ 29 provides that “[i]f audit evidence

obtained from one source is inconsistent with that obtained from another, or if the

auditor has doubts about the reliability of information to be used as audit evidence,

the auditor should perform the audit procedures necessary to resolve the matter.”

141. Upon information and belief, the auditors never conducted the audit

work necessary to resolve the discrepancy between CELM’s SAIC filings and its

SEC filings, or the discrepancy that would have arisen had the auditor consulted

with a significant proportion of CELM’s customers.


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PROOF OF RELIANCE IS UNNECESSARY 142. Neither Plaintiffs nor the Class need prove reliance. Section 11(a) of the

Securities Act specifically provides that plaintiffs need not show reliance “if the issuer has

not made available an earnings statement covering a period of at least twelve months

beginning after the effective date of the registration statement.” 15 U.S.C. §77k(a). In

this case, this would be CELM’s annual report for the year ending December 31, 2010, on

Form 10-K. This annual report was never released. Therefore, proof of reliance is

unnecessary. PLAINTIFF’S CLASS ACTION ALLEGATIONS

143. Pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3),

Plaintiffs bring this action as a class action on behalf of themselves and all others

who purchased CELM common stock pursuant or traceable to the IPO Registration

Statement or the Reselling Registration Statement during the period from January

29, 2010 through March 30, 2011.

144. Excluded from the Classes are Defendants, all current and former

officers and directors of the Company, members of their immediate families and

their legal representatives, heirs, successors or assigns and any entity in which such

excluded persons have or had a controlling interest.

145. The members of the Classes are so numerous that joinder of all

members is impracticable.

146. The precise number of the Classes members is unknown to Plaintiffs at

this time but it is believed to be in the thousands. Members of the Classes may be

identified from records maintained by CELM or its transfer agent and may be

notified of the pendency of this action by mail, using a form of notice customarily

used in securities class actions.

147. Plaintiffs’ claims are typical of the claims of the members of the

Classes, as all members of the Classes are similarly affected by Defendants’


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wrongful conduct in violation of federal securities laws that is complained of

herein.

148. Plaintiffs will fairly and adequately protect the interests of the

members of the Classes and have retained counsel competent and experienced in

class and securities litigation.

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

Classes and predominate over any questions solely affecting individual members of

the Class. Among the questions of law and fact common to the Classes are:

a. whether the provisions of the Securities Act were violated by

Defendants’ acts as alleged herein;

b. whether the Registration Statement and Prospectus issued by

Defendants to the investing public omitted and/or

misrepresented material facts about the Company and its

business; and

c. the extent to which members of the Class have sustained

damages, and the proper measure of damages.

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

efficient adjudication of this controversy since joinder of all members is

impracticable. Furthermore, as the damages suffered by individual Class members

may be relatively small, the expense and burden of individual litigation make it

impossible for members of the Classes to redress individually the wrongs done to

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


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FIRST CLAIM Violation of Section 11 of the Securities Act

Against All Defendants Except the Underwriters, Rappaport and Phillip Kempisty

151. Plaintiffs repeat and reallege each and every allegation contained

above as if fully set forth herein. This claim is not based on, does not allege, nor

does it sound in, fraud.

152. This Section 11 claim is asserted against all Defendants except the

Underwriters, Rappaport and Phillip Kempisty on behalf of all Plaintiffs and Class

Members.

153. Each Class Member in this count acquired his, her, or its shares in,

pursuant to and/or traceable to the IPO Registration Statement and Prospectuses or

the Reselling Registration Statement and Prospectus, each of which contained the

identical False Financial Statements. CELM is the issuer of the securities through

the registration statements and prospectuses.

154. The Individual Defendants are all signatories of the registration

statements and prospectuses.

155. Defendant Kempisty was CELM’s certified independent public

accountant at the time of the IPO, audited the Consolidated Financial Statements

for fiscal years 2007 and 2008 contained in the Registration Statements and

Prospectuses, and issued a report included in the Registration Statements and

Prospectuses, the veracity of said report being based on the authority of Kempisty

as experts in accounting and auditing.

156. MaloneBailey was the owner of Kempisty, and was the successor-in-

interest to Kempisty, at the effective dates of all of the false and misleading

Registration Statements and Prospectuses and is therefore responsible for the false

and misleading audit opinions issued by Kempisty in the Registration Statements

and Prospectuses.


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157. Each of the Defendants named in this Count owed to the purchasers of

the stock obtained through the Registration Statements and Prospectuses the duty to

make a reasonable and diligent investigation of the statements contained in the

Registration Statements and Prospectuses at the time they became effective to

ensure that such statements were true and correct and that there was no omission of

material facts required to be stated in order to make the statements contained

therein not misleading.

158. None of the Defendants named in this Count made a reasonable

investigation or possessed reasonable grounds for the belief that the challenged

statements contained in the Registration Statement and Prospectus were true or that

there was no omission of material facts necessary to make the statements made

therein not misleading.

159. Defendants named in this Count issued and disseminated, caused to be

issued and disseminated, and participated in the issuance and dissemination of,

material misstatements to the investing public that were contained in the

Registration Statements and Prospectuses, which misrepresented or failed to

disclose, among other things, the challenged facts set forth above. By reason of the

conduct alleged herein, each Defendant named in this Count violated and/or

controlled a person who violated Section 11 of the Securities Act.

160. CELM is the issuer of the stock sold via the Registration Statements

and Prospectuses. As issuer of stock, the Company is strictly liable to Plaintiffs and

the Class for the material misstatements and omissions therein.

161. At the times they purchased their shares of CELM, Plaintiffs and

members of the Class did so without knowledge of the true facts concerning the

misstatements and omissions alleged herein.

162. This action is brought within one year after discovery of the untrue

statements and omissions in the Registration Statements and Prospectuses that

should have been made and/or corrected through the exercise of reasonable


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diligence, and within three years of the effective date of the Registration Statements

and Prospectuses.

163. By virtue of the foregoing, Plaintiffs and the other members of the

Class are entitled to damages under Section 11 as measured by the provisions of

Section 11(e), from the Defendants named in this Count, and each of them, jointly

and severally.

SECOND CLAIM Violation of Section 11 of the Securities Act

Against the Underwriters 164. Plaintiffs repeat and reallege each and every allegation contained

above as if fully set forth herein. This claim is not based on, does not allege, nor

does it sound in, fraud.

165. This Section 11 claim is asserted against the Underwriters Roth and

Westpark on behalf of only those Plaintiffs and Class Members who purchased

CELM stock pursuant, or traceable, to the IPO Registration Statement and

Underwriters’ Prospectus for the sale of 5,750,000 CELM shares.

166. Each of the Defendants named in this Count owed to the purchasers of

the stock obtained through the Registration Statements and Prospectuses the duty to

make a reasonable and diligent investigation of the statements contained in the IPO

Registration Statement and Underwriters’ Prospectus at the time they became

effective to ensure that such statements were true and correct and that there was no

omission of material facts required to be stated in order to make the statements

contained therein not misleading.

167. None of the Defendants named in this Count made a reasonable

investigation or possessed reasonable grounds for the belief that the challenged

statements contained in the IPO Registration Statement and Underwriters’

Prospectus were true or that there was no omission of material facts necessary to

make the statements made therein not misleading.


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168. Defendants named in this Count issued and disseminated, caused to be

issued and disseminated, and participated in the issuance and dissemination of,

material misstatements to the investing public that were contained in the IPO

Registration Statement and Underwriters’ Prospectus, which misrepresented or

failed to disclose, among other things, the challenged facts set forth above. By

reason of the conduct alleged herein, each Defendant named in this Count violated

Section 11 of the Securities Act.

169. At the times they purchased their shares of CELM, Plaintiffs and

members of the Class did so without knowledge of the true facts concerning the


170. This action is brought within one year after discovery of the untrue

statements and omissions in the IPO Registration Statement and Underwriters’

Prospectus that should have been made and/or corrected through the exercise of

reasonable diligence, and within three years of the effective date of the IPO


171. By virtue of the foregoing, Plaintiffs and the other members of the

Class are entitled to damages under Section 11 as measured by the provisions of

Section 11(e), from the Defendants named in this Count, and each of them, jointly

and severally.

THIRD CLAIM

Violations of Section 15 of the Securities Act Against All Individual Defendants and MaloneBailey

172. Plaintiffs repeat and reallege each and every allegation contained

above as if fully set forth herein. This claim is not based on, and does not allege,

nor does it sound in, fraud.

173. This claim is asserted against:


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(i) each of the Individual CELM Defendants, Y. Wang, H. Zhang, Fong,

F. Wang, G. Zhang, Tang and S. Wang, each of whom was a control

person of CELM during the relevant time period;

(ii) Defendant Rappaport, who was a control person of Defendant

WestPark during the relevant time period;

(iii) Defendant Phillip Kempisty who was a control person of Kempisty;

and

(iv) MaloneBailey who was a control person of Kempisty beginning in

December of 2009 when it acquired all of the business and operations

of Kempisty.

174. This claim is asserted by all Plaintiffs and Class Members.

175. For the reasons set forth above and pursuant to the first claims, the

Individual CELM Defendants, Phillip Kempisty, and MaloneBailey are liable to the

Plaintiffs and the members of the Class who purchased CELM common stock

during the Class Period based on the untrue statements and omissions of material

fact contained in the IPO Registration Statement and Prospectuses and the

Reselling Registration Statement and Prospectuses, under Section 11 of the

Securities Act.

176. The Individual CELM Defendants were control persons of CELM by

virtue of, among other things, their positions as senior officers, directors and/or

controlling shareholders of the Company. Each was in a position to control and did

in fact control CELM and the issuance of the false and misleading statements and

omissions contained in the Registration Statement and Prospectus.

177. Defendant Rappaport was a control person of WestPark during the

relevant time period because, as alleged above, Rappaport was the sole owner and

CEO of WestPark, overseeing all of Westpark’s investment banking operations,

including the CELM IPO during the relevant time period.


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178. Phillip Kempisty was the majority shareholder of Kempisty during the

relevant time period and oversaw all of the audit work done for CELM.

179. MaloneBailey is a control person of Kempisty because it acquired all

of Kempisty’s business, operations and personnel in December 2009.

180. Neither the Individual CELM Defendants, Phillip Kempisty,

MaloneBailey, nor Rappaport made reasonable investigation or possessed

reasonable grounds for the belief that the statements contained in the Registration

Statement and Prospectus were accurate and complete in all material respects. Had

they exercised reasonable care, they could have known of the material


181. This claim was brought within one year after the discovery of the

untrue statements and omissions in the IPO Registration Statement and

Prospectuses and within three years after China Electric Motor common stock was

sold to the Class in connection with the IPO.

182. By reason of the misconduct alleged herein, for which CELM,

Kempisty and WestPark are primarily liable, as set forth above, the Individual

CELM Defendants, Phillip Kempisty, MaloneBailey and Rappaport are jointly and

severally liable with and to the same extent pursuant to Section 15 of the Securities

Act.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

a. Determining that this action is a proper class action, and

certifying Plaintiffs herein as class representatives under Rule

23 of the Federal Rules of Civil Procedure and designating

Plaintiffs’ counsel as Class Counsel;

b. Awarding damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, together

with interest thereon;


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c. Awarding Plaintiffs and the Class 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.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury. Dated: Dated: March 29, 2011 Dated: September 1, 2011 Respectfully submitted,

THE ROSEN LAW FIRM, P.A.

Laurence M. Rosen, Esq. (SBN 219683) THE ROSEN LAW FIRM, P.A. 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071 Telephone: (213) 785-2610 Facsimile: (213) 226-4684 Email: [email protected] Counsel for Plaintiffs and the Class


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Rosen, Laurence

From: [email protected]: Tuesday, May 17, 2011 8:53 AMTo: [email protected]: Confirmation of Receipt of Certification

Dear Robert p Walsh, We have received your certification in the China Electric Motor, Inc. class action litigation. Thank you for submitting your information. Below is a copy of your certification - please retain it for your records. If you have any questions, please feel free to contact us at 1-866-rosenlegal (866-767-3653) or via e-mail at [email protected]. With increasing frequency, we find that our new clients were victimized by more than one company. If you think you may have lost monies in the market due to the dishonest acts or statements of a different company and would like it to be investigated, free of charge, please email us at [email protected]. Sincerely, The Rosen Law Firm P.A. -------- CERTIFICATION Certification and Authorization of Named Plaintiff Pursuant to Federal Securities Laws The individual or institution listed below (the "Plaintiff") authorizes and, upon execution of the accompanying retainer agreement by The Rosen Law Firm P.A., retains The Rosen Law Firm P.A. to file an action under the federal securities laws to recover damages and to seek other relief against China Electric Motor, Inc.. The Rosen Law Firm P.A. will prosecute the action on a contingent fee basis and will advance all costs and expenses. The China Electric Motor, Inc. Retention Agreement provided to the Plaintiff is incorporated by reference, upon execution by The Rosen Law Firm P.A. First name: Robert Last name: Walsh Address: 31 Andrew st #29 City: Manchester State, Zip: nh, 03104 Email: [email protected] Phone: 6033219780 The Plaintiff Certifies that:


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1. Plaintiff has reviewed the complaint and authorized its filing. 2. Plaintiff did not acquire the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action or any other litigation under the federal securities laws. 3. Plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary. 4. Plaintiff represents and warrants that he/she/it is fully authorized to enter into and execute this certification. 5. Plaintiff will not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court. 6. Plaintiff has made no transaction(s) during the Class Period in the debt or equity securities that are the subject of this action except those set forth below: Shares Purchased: Purchase Date(s): 2/2/2010 Number of shares: 225 Price per Share: 4.55 Shares Sold: 7. During the three years prior to the date of this Certification, Plaintiff has not sought to serve or served as a representative party for a class in an action filed under the federal securities laws except if detailed below: I declare under penalty of perjury, under the laws of the United States, that the information entered is accurate: yes By clicking on the button below, I intend to sign and execute this agreement: yes Clicked to Submit Certification in the China Electric Motor, Inc. Action Signed pursuant to California Civil Code Section 1633.1, et seq. - Uniform Electronic Transactions Act ------------- Confidential Information The information in this e-mail message is privileged and confidential information intended only for the use of


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the individual or entity named above. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify us by telephone (866-767-3653) and return the original message to the above e-mail address. Thank you. -------------

Retention Agreement

The Rosen Law Firm P.A., has thoroughly and extensively investigated this matter, and believes that there is a valid legal and factual basis to prosecute this action against the defendants listed in the complaint. If our continuing investigation uncovers additional wrongs by the named defendants or if we uncover actionable wrongdoing by additional persons or entities, we will amend the complaint to add them as defendants, and send the Client a copy of the amended complaint. The following is an outline of the terms under which The Rosen Law Firm, individually or in combination with other counsel, will represent you (the "Client") as a lead plaintiff.

By executing this Retainer Agreement ("Agreement") and the attached Certification the Client agrees to serve as a lead plaintiff, pursuant to the terms and undertakings set forth in the attached Certification incorporated by reference herein, if so appointed.

1. Pursuant to this retainer agreement, The Rosen Law Firm agrees to represent the Client and other class members in this litigation on a fully contingent basis with respect to its fees. In addition, The Rosen Law Firm and other plaintiffs' counsel will advance all costs and expenses that plaintiffs' counsel deem necessary to prosecute the case. If the lawsuit generates a fund for the class, plaintiffs' counsel will seek their fees, costs, and expenses by application to the Court.

2. On behalf of the class and as a class representative, the Client acknowledges that plaintiffs' counsel may apply for a fee of up to 33 1/3% of the recovery plus disbursements, subject to court approval. "Disbursements" shall include but not be limited to costs of travel expenses, telephone, copying, fax transmission, depositions, investigators, messengers, mediation expenses, computer research fees, court fees, expert fees, other consultation fees and paralegal expenses. Any recovery in the litigation shall first be used to reimburse disbursements. In the event that the litigation is resolved by settlement under terms involving any "in-kind" payment, such as stock, the contingent fee agreement shall apply to such "in-kind" payment.

3. If there is no recovery for the class, there will be no obligation on the Client's part to pay any legal fees. If no recovery is obtained, the Client will owe nothing for costs and other expenses. In the event that an order is entered awarding costs and expenses in favor of defendants, The Rosen Law Firm will be responsible for such costs and expenses, not the Client. If the Court does not permit the case to proceed as a class action, we will mutually decide whether, and on what basis, the case will continue.

4. The Client understands that The Rosen Law Firm may seek Court approval to appoint the Client, in conjunction with possibly others who have made similar requests, as lead plaintiff(s) in the action which we propose to file on the Clients behalf, or in connection with subsequently filed actions arising out of the same facts.

5. The Rosen Law Firm is given the authority to opt the Client out of any class action proceeding relating to the claims authorized herein and/or pursue the Client claim individually in a group action, if the Client is not appointed Lead Plaintiff and The Rosen Law Firm is not appointed Class Counsel.


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Rosen, Laurence

From: [email protected]: Saturday, April 02, 2011 1:06 AMTo: [email protected]: Confirmation of Receipt of Certification

Dear Victor J Brancacio, We have received your certification in the China Electric Motor, Inc. class action litigation. Thank you for submitting your information. Below is a copy of your certification - please retain it for your records. If you have any questions, please feel free to contact us at 1-866-rosenlegal (866-767-3653) or via e-mail at [email protected]. With increasing frequency, we find that our new clients were victimized by more than one company. If you think you may have lost monies in the market due to the dishonest acts or statements of a different company and would like it to be investigated, free of charge, please email us at [email protected]. Sincerely, The Rosen Law Firm P.A. -------- CERTIFICATION Certification and Authorization of Named Plaintiff Pursuant to Federal Securities Laws The individual or institution listed below (the "Plaintiff") authorizes and, upon execution of the accompanying retainer agreement by The Rosen Law Firm P.A., retains The Rosen Law Firm P.A. to file an action under the federal securities laws to recover damages and to seek other relief against China Electric Motor, Inc.. The Rosen Law Firm P.A. will prosecute the action on a contingent fee basis and will advance all costs and expenses. The China Electric Motor, Inc. Retention Agreement provided to the Plaintiff is incorporated by reference, upon execution by The Rosen Law Firm P.A. First name: Victor Last name: Brancacio Address: PO Box 882 City: Mercer Island State, Zip: WA, 98040 Email: [email protected] Phone: (206) 724-8236 The Plaintiff Certifies that:


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1. Plaintiff has reviewed the complaint and authorized its filing. 2. Plaintiff did not acquire the security that is the subject of this action at the direction of plaintiff's counsel or in order to participate in this private action or any other litigation under the federal securities laws. 3. Plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary. 4. Plaintiff represents and warrants that he/she/it is fully authorized to enter into and execute this certification. 5. Plaintiff will not accept any payment for serving as a representative party on behalf of the class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court. 6. Plaintiff has made no transaction(s) during the Class Period in the debt or equity securities that are the subject of this action except those set forth below: Shares Purchased: Purchase Date(s): 1/29/2010 Number of shares: 100 Price per Share: 4.54 Shares Sold: 7. During the three years prior to the date of this Certification, Plaintiff has not sought to serve or served as a representative party for a class in an action filed under the federal securities laws except if detailed below: I declare under penalty of perjury, under the laws of the United States, that the information entered is accurate: yes By clicking on the button below, I intend to sign and execute this agreement: yes Clicked to Submit Certification in the China Electric Motor, Inc. Action Signed pursuant to California Civil Code Section 1633.1, et seq. - Uniform Electronic Transactions Act ------------- Confidential Information The information in this e-mail message is privileged and confidential information intended only for the use of


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the individual or entity named above. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this communication in error, please immediately notify us by telephone (866-767-3653) and return the original message to the above e-mail address. Thank you. -------------

Retention Agreement

The Rosen Law Firm P.A., has thoroughly and extensively investigated this matter, and believes that there is a valid legal and factual basis to prosecute this action against the defendants listed in the complaint. If our continuing investigation uncovers additional wrongs by the named defendants or if we uncover actionable wrongdoing by additional persons or entities, we will amend the complaint to add them as defendants, and send the Client a copy of the amended complaint. The following is an outline of the terms under which The Rosen Law Firm, individually or in combination with other counsel, will represent you (the "Client") as a lead plaintiff.

By executing this Retainer Agreement ("Agreement") and the attached Certification the Client agrees to serve as a lead plaintiff, pursuant to the terms and undertakings set forth in the attached Certification incorporated by reference herein, if so appointed.

1. Pursuant to this retainer agreement, The Rosen Law Firm agrees to represent the Client and other class members in this litigation on a fully contingent basis with respect to its fees. In addition, The Rosen Law Firm and other plaintiffs' counsel will advance all costs and expenses that plaintiffs' counsel deem necessary to prosecute the case. If the lawsuit generates a fund for the class, plaintiffs' counsel will seek their fees, costs, and expenses by application to the Court.

2. On behalf of the class and as a class representative, the Client acknowledges that plaintiffs' counsel may apply for a fee of up to 33 1/3% of the recovery plus disbursements, subject to court approval. "Disbursements" shall include but not be limited to costs of travel expenses, telephone, copying, fax transmission, depositions, investigators, messengers, mediation expenses, computer research fees, court fees, expert fees, other consultation fees and paralegal expenses. Any recovery in the litigation shall first be used to reimburse disbursements. In the event that the litigation is resolved by settlement under terms involving any "in-kind" payment, such as stock, the contingent fee agreement shall apply to such "in-kind" payment.

3. If there is no recovery for the class, there will be no obligation on the Client's part to pay any legal fees. If no recovery is obtained, the Client will owe nothing for costs and other expenses. In the event that an order is entered awarding costs and expenses in favor of defendants, The Rosen Law Firm will be responsible for such costs and expenses, not the Client. If the Court does not permit the case to proceed as a class action, we will mutually decide whether, and on what basis, the case will continue.

4. The Client understands that The Rosen Law Firm may seek Court approval to appoint the Client, in conjunction with possibly others who have made similar requests, as lead plaintiff(s) in the action which we propose to file on the Clients behalf, or in connection with subsequently filed actions arising out of the same facts.

5. The Rosen Law Firm is given the authority to opt the Client out of any class action proceeding relating to the claims authorized herein and/or pursue the Client claim individually in a group action, if the Client is not appointed Lead Plaintiff and The Rosen Law Firm is not appointed Class Counsel.


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CERTIFICATE OF SERVICE

I, Laurence M. Rosen, pursuant to 28 U.S.C. § 1746, hereby declare under

penalty of perjury as follows:

I am managing partner of the Rosen Law Firm, P.A. I am over the age of eighteen. On September 1, 2011, I served the following AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS by E-mail to counsel of record for all defendants at the address listed below. On September 2, 2011, I also served the following AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS by U.S. mail to counsel of record for all defendants at the addresses listed below: Stephen D Hibbard Shearman & Sterling LLP 4 Embarcadero Center Suite 3800 San Francisco, CA 94111 Counsel for Defendants China Electric Motor, Inc., Yu Wang, Haixia Zhang, Fugui Wang, Heung Sang fong, and WestPark Capital, Inc. Julia B Strickland Stroock Stroock & Lavan LLP 2029 Century Park East 18th Floor Los Angeles, CA 90067-3086 Counsel for Defendants WestPark Capital, Inc., Roth Capital Partners, LLC

Joseph A Escarez Stroock & Stroock & Lavan LLP 2029 Century Park East 16th Floor Los Angeles, CA 90067 Counsel for Defendants WestPark Capital, Inc., Roth Capital Partners, LLC


I declare under penalty of perjury under the laws of the United States of

America that the foregoing is true and correct. I declare that I am employed in the

office of a member of the bar of this Court at whose direction the service was

made.

Executed on September 2, 2011, in New York, New York.

___________________ Laurence M. Rosen


case 2:11-cv-02794-r -agr document 35 filed 09/02/11 page...

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