The new management team at Libsyn is facing a lingering legal headache that stretches across two continents. Libsyn on Friday filed a lawsuit in U.S. District Court in Denver asking a federal judge to cancel the stock held by a group of Chinese shareholders – three former executives including former company Chairman Zhang Hongcheng and five Chinese venture capital firms – that Libsyn alleges schemed to steal millions of dollars from its former parent company FAB Universal.

“While the Ponzi scheme defendants’ wrongdoing set forth by this complaint goes back a number of years, Libsyn through its investigation and due diligence only recently has discovered the full scope and extent of it as well as the devastating harm and injury that it is causing to Libsyn and its shareholders,” it told the court in a 36-page lawsuit. 

The case dates to 2012 when a Libsyn predecessor company known as Wizzard Software Corporation merged with the China-based Digital Entertainment International Ltd (DEI). As part of the merger, it issued shares to the group it is now suing. That stock was worth approximately $30.8 million, giving the Chinese shareholders a 49% stake.

But DEI was not what it seemed and what had been sold as a thriving digital media company was merely a distributor of pirated music, films, games, mobile phone software and education

materials. Eventually Libsyn said it uncovered “massive fraud” at the Chinese operations. When former CEO Christopher Spencer and CFO John Busshaus went to China to investigate they found the business abandoned and that the CEO had been detained by the Chinese authorities. Later, DEI executives were arrested by Chinese authorities, charged with various crimes, and found guilty. Seven Chinese nationals, including three of those named in the Libsyn lawsuit, eventually were sentenced to prison. 

But doing business in China can be opaque and it was only last month when Libsyn’s new management team – lead by President and Chief Operating Officer Laurie Sims and CFO Richard Heyse – learned about and obtained an English translation of a criminal judgment entered in China against the group that the extent of the wrongdoing became clear. 

What Libsyn Wants

Today the group of Chinese investors, some of whom are in prison, hold about 27% of Libsyn’s outstanding stock. And what has prompted the company to go to court is that it has learned a number of those sent to jail as part of the Ponzi scheme will soon be released from Chinese jails. 

Libsyn is asking U.S. District Judge Daniel Domenico to cancel the stock held by the Chinese nationals, totaling 7,177,350 shares. It is a move that would benefit other shareholders by reducing its total number of outstanding shares from 26,588,220 to 19,410,870 and boost the Libsyn stock price by about 37%.

The company is also asking the court to block the Chinese share owners from participating in any votes if or when stockholder approval is needed. The complaint said that one of Libsyn’s current business strategies is to explore buying other podcast companies and “other strategic alternatives” to “continue to remain competitive” with Spotify and iHeartMedia. It is worried the Chinese stock owners could block a sale or other deal from winning approval.

Libsyn also said the group has been enjoying a “creeping takeover” as the company has reduced its share count to stock repurchases. That has meant that their stake has grown from 24.5% in January to the current 27% combined interest.

Summons have been issued but serving them in China will probably be difficult. Libsyn said in the suit that most of the names and addresses for the shareholders were fictitious, saying they appeared to be “merely aliases and front names.”

Libsyn Regains Compliance

While the court case could take months or years to resolve, Libsyn has disclosed that it regained compliance with its loan agreement with First Commonwealth Bank. Libsyn told investors last month that as part of its effort to “normalize” its tax situation it had been out of compliance with the terms of the loan agreement since March 31. The problem was more of an on-paper issue however since Libsyn has more than enough money in the bank to pay off the remaining $3.6 million balance on the loan that will mature in December 2023.