Securities litigation filings in U.S. courts dropped 20 percent in 2012, a new study shows—largely because of a decline in the number of suits filed against Chinese companies.
A January report [PDF] from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research finds that only 10 securities suits were filed last year against Chinese companies that listed in the United States via so-called reverse mergers. Many results of such deals—in which a Chinese company acquires and merges itself into an already listed U.S. company—have been plagued by accusations of fraudulent disclosures, triggering a wave of securities litigation beginning in 2010. Some 31 suits were filed in 2011, the peak of the trend.
Despite fewer cases being filed, plenty of litigation remains in the pipeline. "New filings have been lower in 2012," says Jerome Fortinsky, a New York–based litigation partner at Shearman & Sterling, which is representing Chinese reverse-merger defendants like China MediaExpress, China Electric Motor Inc., and ZST Digital Networks in ongoing securities litigation. "But for lawyers, activity levels are still very high because the litigation process takes about two to three years."
Defense lawyers say that for most of their Chinese reverse-merger clients, the securities cases are their first time dealing with American-style litigation. “Many of these cases are filed to take advantage of Chinese companies that don’t know how to respond to litigation, especially in the U.S.,” says Samuel Williamson, a Shanghai-based partner at Kirkland & Ellis, which represented Bain Capital in settling shareholder cases brought against China Fire & Security Group Inc., a Beijing-based industrial fire safety product manufacturer that underwent a reverse merger in 2006 and that Bain acquired in 2011.
But plaintiffs attorney Lawrence Rosen, who has filed more than 30 securities suits against U.S.–listed Chinese companies over the past few years, says those defendants are hardly victims. In his view, the main issue is widespread self-dealing by Chinese executives, not mere ignorance about the U.S. legal system. “In China, CEOs can own the company’s customers, suppliers, and even the factory that sells it services,” says Rosen.
His Rosen Law Firm is currently preparing a class action against Focus Media Holdings Ltd., a Shanghai-based advertising company that has already been the target of several other lawsuits. (Focus Media has denied allegations that its accounting practices were improper.) Rosen has also filed similar suits against Perfect World Co. Ltd., a Beijing-based online gaming company; China Gerui Advanced Materials Group Ltd., a Henan-based steelmaker; and AutoChina International Ltd., a Hebei automobile investments holdings firm, whose motion to dismiss the suit was dismissed last month by the U.S. District Court for the District of Massachusetts. (Perfect World has said that it complied with all applicable U.S. securities regulations and stock exchange rules.)
Some defense lawyers say that the size of recent settlements has also been dropping, especially when compared to typical securities class settlements in the United States. Sean Prosser, a San Diego–based partner at Morrison & Foerster, says there were three China-related securities litigation settlements in 2012 for $600,000, $2 million, and $3 million. That compares to an average settlement for U.S. federal securities class actions of $31 million in 2011, according to a study by NERA Economic Consulting. And that was down from $42 million in 2009. For the first half of 2012, the average settlement was $71 million.
Mimi Yang, a Shanghai-based litigation counsel at Ropes & Gray, attributes the smaller settlements to the difficulty of litigating against Chinese companies. She calls it the "China discount," explaining, “It is very hard to enforce a U.S. judgment on China soil."
Shearman’s Fortinsky agrees. "Chinese defendants who do not have assets in the U.S. are in a position where they can think about simply not engaging in the litigations," he says. "If they only have interests in China, or have no interest in expanding in the U.S., they can simply choose not to engage in litigation."
But Rosen counters that smaller settlement amounts are to be expected, since most U.S.–listed Chinese companies have smaller market capitalizations.
