Yet another U.S.-traded Chinese-based company has been hit with an accounting fraud securities class action lawsuit. The latest lawsuit, involving Longtop Financial Technologies Limited, comes after a series of stunning announcements from the company earlier this week.
Longtop’s ADRs trade on the NYSE and until recently the company had a market cap in excess of $1 billion. Unlike many of U.S.-listed Chinese companies, it did not obtain its U.S. listing through a reverse merger, but instead it became public through a conventional IPO in 2007. Its financial statements were audited by the Chinese arm of Deloitte. Questions involving Longtop first arose when Citron Research published an April 26, 2011 online report critical of the company. Among other things, the report questioned the company’s “unconventional staffing model,” alleged prior undisclosed “misdeeds” involving management, and referenced “non-transparent” stock transactions involving the company’s chairman, among other things. Other critical research coverage followed.
Longtop’s problems took another turn for the worse when, in advance of the recent high profile IPO of Chinese social networking company, Renren Network, Longtop’s CFO, who sat on Renren’s board as chair of the audit committee, resigned to prevent the questions at Longtop from affecting Renren’s IPO.
The company defended itself from the charges (refer for example here). Nevertheless, NYSE halted trading in its shares last week pending news, a development that garnered an article in the May 18, 2011 Wall Street Journal (here).
Then on May 23, 2011, in a filing with the SEC on Form 8-K, the company announced that both its CFO and its outside auditor, Deloitte Touche Tomatsu (DTT) had resigned. In its accompanying press release (here), the company said that DTT stated that it in its May 22, 2011 letter of resignation that it was resigning as a result of, among other things,
(1) the recently identified falsity of the Company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue); (2) the deliberate interference by certain members of Longtop management in DTT’s audit process; and (3) the unlawful detention of DTT’s audit files.
DTT further stated that it was “no longer able to rely on management’s representation’s in relation to prior period financial reports, and that continued reliance should no longer be place on DTT’s audit reports on the previous financial statements.”
In the same press release, the company announced that it has been advised that by the SEC that the agency is conducting an inquiry; and that the company’s audit committee had retained U.S. counsel and authorized the retention of forensic accountants to investigate the matters in DTT’s resignation letter.
In their May 23, 2011 press release (here), plaintiffs’ counsel announced that they had filed a securities class action lawsuit against the company and certain of its directors and officers in the Central District of California. According to the press release, the complaint specifically references the resignation of DTT as Longtop’s auditor and the resignation of the company’s CFO.
With this latest lawsuit, there have now been a total of 22 securities class action lawsuits filed against Chinese and China-liked companies in 2011, out of a total of about 93 securities lawsuits that have filed so far this year — meaning that the suits against Chinese companies represent about 23% of all securities lawsuits filed so far this year.
Signs are that the onslaught of accounting fraud lawsuits against Chinese companies will continue, as plaintiffs’ lawyers have also announced recently that they are “investigating” yet other Chinese companies (refer for example, here and here), which usually presages lawsuit filings.
The Latest in Securities Class Action Lawsuit Settlement Funding?: As I noted at the time in July 2010, there was just “one little problem” with the Ohio Attorney General’s announcement that the pending AIG securities class action lawsuit had been settled for $725 million — specifically, “AIG doesn’t have the money to pay for the settlement. The plan, such as it is, is that AIG is going to fund the first $175 million following the settlement’s preliminary approval. Then, AIG is going to try to conduct a stock offering to raise the remaining $550 million.”
According to AIG’s July 16, 2010 filing on Form 8-K, the settlement is conditioned on the company’s "having consummated one or more common stock offerings raising new proceeds of at least $550 million prior to court approval."
Although I was skeptical at the time that investors would be interested in making an equity investment in order to provide securities class action litigation funding, with yesterday’s sale of AIG shares, the company may in fact be in a position to fulfill the outstanding settlement condition. According to a May 24, 2011 Bloomberg article entitled “AIG Share Sale Aids Ohio Firefighters Burned By Stock Losses Before Rescue” (here), AIG intends to use $550 million from the share sale to pay for the settlement announced last July. Assuming that there were no glitches involving with the offering that would interfere, or that the fact that the share sale came in at the low end of the anticipated pricing range is not a barrier, it looks as if AIG will now be able to fund the remainder of the settlement.
Even though if the funding mechanism worked here, I doubt that equity financing as a way to raise funds for securities class action lawsuit settlements is likely to catch on as a general matter.
Subprime Lawsuit Dismissal Motion Rulings: There have been a couple more dismissal motion rulings in subprime-related securities class action lawsuits.
First, in a May 10, 2011 ruling (here), Southern District of New York Judge John G. Koeltl granted in part and denied in part the defendants’ motion to dismiss the complaint in the J.P. Morgan Acquisition Corp. Mortgage Pass-Through Certificate securities class action lawsuit. He granted the motion to dismiss for lack of standing as to ten of the eleven offerings reference in the complaint in which the named plaintiffs had not purchased securities. However, he denied the motion to dismiss as to the remaining offering, finding that the plaintiffs had adequately alleged securities law violations in connection with that offering.
Second, in a May 23, 2011 ruling (here), Southern District of New York Judge John F. Keenan granted the defendants’ motion to dismiss, without prejudice, in the Manulife Financial subprime related securities class action lawsuit, finding that the plaintiffs’ complaint did not meet the heightened pleading standard under the PSLRA and ignored "the massive economic and political changes taking place during the Class Period" in attempting to plead that the defendants acted with scienter. David Bario’s May 24, 2011 Am Law Litigation Daily article about the Manulife decision can be found here.
I have added these decisions to my running tally of the subprime lawsuit dismissal motion rulings, which can be accessed here.
Flash from the Past: Call it nostalgia for an earlier time, or simply mild interest that these kinds of cases are still kicking around, but I was interested to note that Fossil Inc. announced in a May 20, 2011 filing on Form 8-K that it had settled the options backdating –related derivative lawsuit that had been filed against the company, as nominal defendant, and certain of its directors and officers. According to the accompanying settlement documents, in order to settle the case, the company’s D&O insurers had agreed to pay $8.666 million. It appears that insurance will be funding the entire amount of the settlement.
I guess there may be a number of these cases still kicking around, but this settlement sure does seem like a vestige from another time in place. In any event, I have added the settlement to my running tally of options backdating-related case resolutions, which can be accessed here.