Pope Investments and Jayhawk Private Equity Fund are suing DeHeng Law Offices and a former partner Helen Lv in New York, along with five other claimants.

Complex structure

The funds worked with DeHeng in a 2008 purchase of a Chinese-based medical equipment company, Shanghai Atrip Medical Technology. Their $12.5 million investment was channelled through a complex variable interested entity structure, which funnelled the money through a series of offshore vehicles and a wholly-owned foreign enterprise in China.
Now the funds are claiming that $1.4 million allegedly went to pay professional fees, including an unstated amount to DeHeng, which was instructed as Chinese counsel with Ms Lv leading. They are also claiming they were misled over the ownership of one of the vehicles involved in the transaction, Kamick Assets, which is controlled by Shao Ganghua, who the plaintiffs discovered in a 2008 investigation to be Helen Lv’s husband. They claim that shortly after the deal closed in April 2008, Mr Shao used his control over Kamick to wipe out the bank account with the funds’ $10 million investment.

Lack of accountability

According to report in the Asian Lawyer magazine, commentators suggest the case underscores a relative lack of accountability that is endemic to much of China’s legal profession. State-controlled bar groups don’t play an active disciplinary role and the ability to uncover fraud is difficult.
‘The lack of ability to use criminal and civil processes there has been frustrating,’ Jim McMullan, a partner at Kansas-based law firm Shapiro & McMullen, which is representing Jayhawk, told the magazine.
Neither DeHeng nor Ms Lv commented, although the magazine cited its motion to dismiss from last year, which said: ‘[The plaintiffs] have alleged no facts that should have raised any “red flags” or otherwise would have put the law firm on notice that anyone was intending to embezzle the ... investor’s money.’