In numerous prior posts, I have noted the phenomenon of securities suits following on in the wake of governmental regulatory or enforcement action. This phenomenon is well-established in the U.S. Now it apparently is catching on outside the U.S. as well. Earlier this week, an Australia plaintiffs’ law firm filed a securities suit in an Australian court against Crown Resorts, Ltd. relating to the decline in the company’s share price that followed after Chinese authorities arrested several company employees on gambling- related charges.
According to the relevant page on the plaintiffs’ law firm’s website, the firm said it has filed a class action lawsuit in Federal Court of Australia on behalf of shareholders who purchased the Crown stock between February 6, 2015 and October 16, 2016. The company’s share price declined 14 percent on October 17, 2016 after Chinese authorities confirmed that they had detained a number of Crown employees for suspected gambling charges. A December 4, 2017 Wall Street Journal article describing the lawsuit can be found here.
Other than in Macau, gambling is illegal in China, and foreign companies are not allowed to market their casinos, but they can advertise their resorts more generally. The criminal charges reported related to Crown’s efforts to woo Chinese VIPs for its casinos. In June, several current and former Crown employees, including the head of Crown’s international VIP operations, pleaded guilty to charges of illegally promoting gambling on the Chinese mainland. Five individuals received ten-month sentences and 11 others were given nine-month sentences.
The new lawsuit, which was filed on behalf of hundreds of shareholders that have registered to participate, alleges that the company should have alerted investors that its efforts to court high-end Chinese gamblers were risky, particularly given that Chinese authorities had arrested South Korean casino operators in mid-2015.
The law firm’s website says with respect to the allegations in the lawsuit that “there is a compelling set of events suggesting that the company knew or should have known of the risks the Chinese environment posed to the Company’s revenue streams, and therefore shareholders should have been apprised of those risks which should have been factored in to the share price.”
In a December 4, 2017 article in The Guardian about the lawsuit (here), one of the attorneys from the plaintiffs’ law firm is quoted as saying “Chinese authorities could not have made the risks of marketing gambling any plainer to Crown or other casino operators, yet Crown ignored these warnings” and did not disclose the risks to investors, allegedly in violation of the company’s legal disclosure obligations. The attorney added, with respect to the disclosure obligations, that “those legal obligations are what underpins the integrity of the entire market – it is how investors can make properly informed decisions about how to allocate capital where it is most deserving.”
In a brief December 4, 2017 news release (here), the Company said it will “vigorously defend the proceeding.”
Follow-on securities suits have long been a factor in securities litigation in the U.S. I have frequently noted on this site that civil lawsuits often follow in the wake of the announcement of FCPA investigations or enforcement actions. A recent example of this kind of bribery investigated-related suit is the action filed earlier this year against USANA Health Sciences after the company announced that it had self-reported possible anti-bribery violations in the company’s Chinese operations.
These kinds of lawsuits often follow after announcements of other kinds of governmental regulatory or enforcement action as well. For example, earlier this year the construction equipment company Caterpillar was hit with a securities lawsuit after news that the company was the subject of a tax evasion investigation. BofI Holdings was hit with a securities suit after media reports the company was under investigation for possible involvement in money laundering.
These kinds of lawsuits have long been a factor in U.S. securities litigation filings trends, and they are an important factor in the significant increase in the number of U.S. securities class action lawsuit filings during 2017.
There previously have been follow on securities suits outside the U.S. For example, VW shareholders have filed lawsuits against the company and its executives in Germany and elsewhere in connection with the reports that the company is under investigation for its use of so-called defeat devices that made it appear that the company’s diesel engine vehicles met applicable environmental standards.
The lawsuit filed this week against Crown Resorts lawsuit represents a significant additional example of the follow-on civil lawsuit outside the U.S. It of course remains to be seen how the new lawsuit will fare. It also remains to be seen whether or not the phenomenon of follow-on civil lawsuits will been a significant factor in securities suit filings outside the U.S. If nothing else, the new Crown Resorts lawsuit highlights the fact the investors are ready to file these kinds of lawsuits at least under certain circumstances.