News & Noteworthy

Case Development - Deutsch v. ZST Digital Networks Heats Up With Asset Hunt, Alleged "Go Dark" Efforts
MAY 17, 2013 | Growth Capital Investor

In a continuation of the ongoing media coverage surrounding Deutsch v. ZST Digital Networks, Inc., (ZSTN)--- a Delaware Chancery Court case of first impression --- Growth Capitalist Investor reported on May 16, 2013 about a successful asset hunt and a scuttled "go dark" buyout scheme.

Entitled "Chinese Reverse Merger Investor Succeeds in Asset Hunt, Foiling Alleged 'Go Dark' Buyout Scheme," the article quotes David Graff (alumnus) who, together with Bruce Bronster (Partner, New York), represents the U.S. investor Peter Deutsch in the rapidly developing case.

David said that repeated requests of ZSTN executives to answer routine questions about the company's performance and regulatory filings went unanswered and that he and Mr. Deutsch were accused of seeking inside information. ZSTN also claimed that a review of the books would only be granted to investors who traveled to China.

David was able to secure ex-parte orders from a New York federal judge which led to the raid of ZSTN's former CFO's home, as well as the offices of the company's investor relations firm, and the subsequent seizure of key assets. Those assets, combined with the efforts of Windels Marx and Mr. Deutsch as well as a global investigative team, have proven instrumental in validating the client's theory that fraud was taking place. The fraud involved depressing the company's stock so that it could be bought back and the company subsequently privatized. David was quoted as saying:

  • "[My client] had a high threshold to prove that [ZSTN's former CFO] had the ability to leave the jurisdiction with critical documents to get the ex-parte seizure but Judge Patterson's 'outside the box thinking' on the case made it happen."
  • "We can now see this company has lots of money...Based on a review of assets we seized, and our own investigation in China, we think we'll be able to show ZSTN has $75 million to $100 million in cash."

At this juncture, two exit strategies are under consideration: work with Chinese investment companies to offload the ZSTN assets under control and apply the proceeds to Mr. Deutsch's equity award; or, ZSTN or a third party must purchase our client's $32 million in equity. Talks are underway and David said, "Because we've been so tenacious and by virtue of the actions of the courts [around the globe], we are now in a position to be closing the matter at fair market value for my client."

Developments in this case have caused similarly situated investors in failed Chinese reverse merger deals to take notice, and David is taking those calls seriously.

Media Mentions

  • The Wall Street Journal covered the latest developments of the case in a May 3 article entitled "Receiver Gains Control of Some Assets of China's ZST: Case Is Test of Investors' Ability to Recoup Losses in Wake of Accounting Questions" (subscription applies).
  • The New York Post also covered the case in an April 19 article entitled "China chicanery".
  • The Wall Street Journal discussed the case in a March 31 article entitled "Novel Relief for China Woes" (subscription applies).
  • The Chancery Daily reported on the court's Order in its March 21 edition, saying, "This case illustrates one creative approach that a US shareholder has taken to obtain relief from a US-listed company based in China -- a challenge that an increasing number of shareholders face as many such companies have come under regulatory scrutiny, delisted their shares, and abandoned their US presence" (subscription applies).







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