"Defense lawyers like to tell you [the China cases are not lucrative], but 15 cents on the dollar is a very average settlement rate," he says. And while he acknowledges that it’s harder to enforce judgments in China, he contends that many Chinese companies have subsidiaries based outside the country, as well as U.S.–based directors who can be held responsible.
The glut of lawsuits has also resulted in collateral damage for investment banks that took U.S.–listed Chinese companies public and for the auditors that performed checks on disclosure. Plaintiffs lawyers have sought compensation from these outside advisers, many of which are based in the U.S. and are more accessible targets. “Basically anyone who has signed on the SEC filings can be held accountable,” says Yang.
In December, audit firm Ernst & Young, represented by Morrison & Foerster, agreed to pay $118 million to settle class action claims arising from the work it performed for Sino-Forest Corp., the now-bankrupt Canadian-listed company that is perhaps the best-known Chinese reverse merger company to have been accused of putting forward falsified disclosures.
The trouble is not over for Ernst & Young and other major accounting firms. Last month the Securities and Exchange Commission brought civil charges against the China affiliates of five large U.S. accounting firms—BDO China Dahua Co. Ltd., Deloitte Touche Tomatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming, KPMG Huazhen, and PricewaterhouseCoopers Zhong Tian CPAs Ltd.—over their refusal to produce audit work papers and other documents related to Chinese companies under investigation by the SEC for fraud. Most of the audit firms have said they are cooperating with the government, The New York Times has reported.
The volume of litigation has no doubt given Chinese companies second thoughts about listing in the U.S. In fact, more than 50 have delisted in the past two years. Several of those have relisted in Asian markets such as Hong Kong or Shanghai.
But certain Chinese companies, especially in the technology sector, may still see greater liquidity in the U.S., thanks to the larger U.S. investor and analyst community. It’s also still easier to list in America than Asia, where the major exchanges have lengthy track record requirements. For those reasons, Yang and Prosser think Chinese companies won’t be deterred from America for long.
But they also believe that it may take longer for American investors to regain confidence in Chinese companies.
"How receptive is the U.S. market going to be to Chinese listings? That’s the real question," says Prosser.
This article originally appeared in The Asian Lawyer.
This article originally appeared in The Asian Lawyer under the headline “The Wave Recedes.”
