As many readers will recall, a couple of years ago there was an intense barrage of securities litigation class action lawsuit filings against U.S.-listed Chinese companies. Many of the cases involved Chinese companies that obtained their U.S. listings by way of a reverse merger with publicly traded shell, and almost all of the cases involved alleged accounting improprieties or violations. The wave of Chinese reverse merger case filings diminished in last year and seemed to have come to an end
However if the suit recently filed in the Southern District of New York against PetroChina Company, Ltd. and four of its directors and officers is any indication, a new round of securities lawsuits against U.S.-listed Chinese companies could be in the offing, this time involving corruption allegations. Indeed, given the sequence of events involved and the growing global focus on anti-corruption investigation and enforcement, the trend might not be limited just to Chinese companies.
As well-detailed in a September 6, 2013 memo from the Morrison Foerster law firm entitled “Corruption Allegations in China Lead to a Shareholder Class Action in the U.S.” (here),, the company itself, the Chinese government and various media sources have recently disclosed a corruption investigation involving several PetroChina officials, as well as officials affiliated with China National Petroleum Corporation (CNPC), PetroChina’s controlling shareholder. Among persons implicated in the apparent corruption investigation is a former CNPC senior manager who was a purported ally of Bo Xilai, the disgraced former Chinese politician whose own corruption trial was just completed. Subsequent reports suggested that the investigation had been extended to the former Chairman of PetroChina and CNPC.
According to their September 3, 2013 press release, (here), plaintiffs’ lawyers filed an action in the Southern District of New York against the company and four of its officials. According to the press release, the plaintiffs’ complaint, a copy of which can be found here, alleges that the defendants made misled investors by failing to disclose that:
(1) the Company’s senior officials were in non-compliance with the Company’s corporate governance directives and code of ethics; (2) as a result, the Company was subject to investigation and disciplinary action by various governmental and regulatory authorities; (3) the Company’s financial statements were materially false and misleading as they contained direct references to the Company’s Code of Ethics, and statements regarding its compliance with regulations and internal governance policies; (4) the Company lacked adequate internal and financial controls; and (5), as a result of the foregoing, the Company’s financial statements were materially false and misleading at all relevant times.
The law firm memo points out that there have been prior securities class action lawsuits against U.S.-listed Chinese companies containing corruption allegations. But perhaps more significant is the fact China is in the midst of a campaign, led by its new Premier Xi Jingping, against public corruption. The lawsuit against PetroChina shows that “Chinese companies have been, and remain, on the radar screen of the U.S. securities plaintiffs’ bar.” As China’s campaign against corruption continues, the potential liability extends not only to heightened regulatory scrutiny, but also includes the possibility that shareholders will “seek to hold companies and their executives accountable for shareholder losses as a result of the alleged corruption and its fallout.”
According to the law firm memo, it is not just China’s government that is focusing on corrupt activities; governments around the world are stepping up enforcement of anti-bribery laws. As this enforcement activity expands, so too does the possibility of follow on civil litigation against companies involved in a corruption investigation in their home country whose shares trade in the U.S. This possibility of follow on civil litigation seems to include in particular the possibility of further suits against U.S.-listed Chinese companies caught up in the current campaign against public corruption.
Continued Heightened U.S. Securities Suit Filing Activity Against Non-U.S. Companies: One of the more interesting phenomena in the U.S class action securities arena has been the level of filings targeting non-U.S. companies. Following the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, there was much speculation that filings against non-U.S. companies were likely to decline. As it turned out, though, in 2011 and 2012, largely driven by the flood of lawsuits against Chinese reverse merger, the percentage of all securities suits involving non-U.S companies was well above historical norms. Indeed, in 2011 33% of all filings involved non-U.S. companies as did 21% of all 2012 filing, both figures above any prior year in percentage terms, as shown here.
In the first half of 2013, it seemed that the rate of filings against non-U.S. companies declined compared to 2011 and 2012 – although still well above historical levels –with about 14.9% of first half filings involving non-U.S. companies. But so far in the year’s second half, the pace of filings against non-U.S. companies seems to have picked up again. Of the roughly 36 new securities lawsuits filed since June 30, 2013, seven have involved non-U.S. companies, or about 20% –roughly on par with the percentage of 2012 filings that involved non-U.S. companies.
The 17 securities class action lawsuits filed so far during 2013 against non-U.S. have involved companies from nine different countries, but the country with the most companies sued in U.S. securities class action lawsuits is China, with five so far this year. (As well as one more from Taiwan.) Coming in a close second behind China is Canada, with four. As the case discussed above shows, though new filings associated with the Chinese reverse merger companies have died down, Chinese companies continue to attract the attention of the U.S. plaintiffs’ securities bar.