In its comments about the elevated level of filings against U.S.-listed Chinese companies during the first months of 2011 in its mid-year report on securities class action litigation (here), Cornerstone Research noted both that the total number of such companies is relatively small and even made second-half projections based on the assumption that there would be no further litigation in the year’s final six months involving Chinese companies that had obtained their U.S. listings by way of a reverse merger. But as the year’s second half has progressed, lawsuits involving U.S.-listed Chinese companies have continued to be filed. Signs are that there will be even more filings ahead.
The latest U.S- listed Chinese company to be targeted is SinoTech Energy Ltd. According to news reports, on August 19, 2011, plaintiffs’ filed a securities class action lawsuit in the Southern District of New York against the company, its directors and officers, and its offering underwriters. The company was the subject of an August 16, 2011 Internet post by the online research firm (and short seller) Alfred Little. Among other things, the report claimed that the company, its largest customers and suppliers “are likely nothing more than empty shells with little or no sales or income.”
In an August 17, 2011 response, the company said that its board of directors is “not aware of inaccuracy with respect to material facts or material omission contained in its previous public reports and filings with the United States Securities and Exchange Commission,” and called the Alfred Little report “inaccurate and defamatory.” The company also noted that as a short seller, Alfred Little stands to profit by driving down the company’s share price.
In its August 19, 2011 press release (here), the plaintiffs’ firm that filed the lawsuit said that the complaint references assertions in the Alfred Little report that:
(a) SinoTech Energy’s five largest subcontracting customers appear to be shell companies with unverifiable operations and minimal revenues; (b) SinoTech Energy’s sole chemical supplier appears to be an empty shell, with little or no revenues, a deserted office and no signs of production activity; (c) SinoTech’s audited financial statements filed with Chinese authorities confirm the Company’s negligible business operations; and (d) other facts showing that Company’s business operations are smaller than it represents in SEC filings.
Many of the U.S.-listed Chinese companies have been hit with U.S. securities class action lawsuits obtained their U.S. listings through a reverse merger with a publicly traded shell company. Indeed, the Cornerstone Research mid-year litigation study reports that 24 of the 25 securities class actions filed during the first half of 2011 against U.S.-listed Chinese companies involved companies that obtained their listings through a reverse merger. However, as the Alfred Little report notes, SinoTech is not a reverse merger company. Rather, SinoTech (like Longtop Finanical, which is also caught up in allegations of financial misstatements and in securities litigation, as discussed here) obtained its U.S. listing through a standard IPO, underwritten by UBS and Lazard Capital Markets. SinoTech also has a big 4 auditor, E&Y. If nothing else, it is clear that the online analysts are not going to limit their Internet commentary about Chinese companies to reverse merger companies.
Moreover, it is clear that the various online commentators that are targeting U.S.-listed Chinese companies are going to be continuing to keep the plaintiffs’ law firms supplied with material for still more lawsuits. Indeed, press releases from the plaintiffs’ firm that filed the SinoTech lawsuit indicate that the firm is “investigating” other U.S.-listed Chinese companies, and in each case, the company involved has been the subject of a negative online report.
For example, in an August 4, 2011 press release, the law firm has said that it is investigating allegations that L & L Energy, a coal company with its principal operations in China, “may have issued materially inaccurate financial statements to the investing public.” The press release cites an August 2, 2011 online report about the company issued by Glaucus Research questioning whether the company actually owns some of its most important assets and claiming that corporate funds were used to procure assets on behalf of company principals. L & L apparently obtained its U.S. listing by way of a reverse merger.
In a separate August 4, 2011 press release the law firm has also said that it is investigating Lihua International. The press release cites an August 1, 2011 report by Absaroka Capital and an August 4, 2011 report from Karrisdale Capital to the effect that “had engaged in a series of undisclosed self-dealing and related party transactions that diminished the value of the Company.”
It should be noted that many of the companies targeted in the online reports contend, as SinoTech contends, that the reports are nothing more than financially motivated attacks lacking any basis, as I discussed in an earlier post, here.
With the arrival of the lawsuit against SinoTech Energy, there have now been five securities class action lawsuits filed against U.S. listed Chinese companies so far in the year’s second half, bringing the year to date total to 29. The law firm’s “investigation” press releases suggest that there may well be more suits yet to come. It appears that as long as the online commentators continue their barrage of negative reports about the Chinese companies, the plaintiffs’ lawyers will have a steady supply of lawsuit fodder. To be sure, eventually the wave of lawsuits against U.S.-listed Chinese companies will play itself out. It just seems that for now the lawsuit filing phenomenon still has further to run.
An August 21, 2011 Business Insurance article (here) discusses the current challenging D&O insurance market for Chinese reverse merger companies. A recent Client Advisory that I co-authored and that can be accessed here discusses the critical D&O insurance issues facing these U.S.-listed Chinese companies.
Who Would Talk to the Fisherman If He Could Talk to the Fish?: Because the fish and the other animals have quite a bit to say, and it turns out they are pretty entertaining to listen to.