Earlier this summer, at a roundtable forum of securities litigators, one topic was raised time and again—the dramatic rise in securities litigation involving Chinese-domiciled companies.
Anecdotally, American litigators explained that their caseload has increasingly been dominated by securities cases involving companies domiciled in China. A July 26 study by NERA Economic Consulting, “Recent Trends in Securities Class Action Litigation: 2011 Mid-Year Review,” substantiated this anecdotal evidence. It shows an explosion of securities litigation in the U.S. involving companies domiciled in China.
NERA reports that in the first half of 2011, over 20 percent of all securities suits filed in the U.S. involved firms domiciled in China. The data show that more U.S. securities suits were filed involving firms domiciled in China in the first six months of 2011 than in the previous nine years combined. Whereas suits involving issuers based in China represented less than 9 percent of all U.S. securities class actions against foreign domiciled companies from 1996 through 2010, in the first half of 2011, over 60 percent of all U.S. suits against foreign-domiciled companies were filed against those based in China.
According to these data, the greatest number of securities suits in the first half of 2011 against issuers domiciled in China involve challenges to companies’ financial reporting and accounting practices. These suits often challenge the accounting treatment of receivables or inventory.
Anecdotally, practitioners have observed that past securities litigation involving issuers based in Asia focus on allegations of bribery or other forms of alleged kick-backs from overseas operations. Therefore, it appears that in addition to a quantitative difference in securities litigation involving issuers domiciled in China, the first half of 2011 has seen a qualitative difference in such litigation as well.
Even beyond the securities suits that challenge the accounting of companies domiciled in China whose stock is traded in the U.S., securities suits are increasingly filed against American-domiciled companies that do business overseas. For example, Yahoo! was sued in June for allegedly misstating the value of a strategic partnership it entered into with a Chinese company. Plaintiffs allege that the chairman of Yahoo!’s strategic partner misappropriated the company’s most valuable asset for his own use. The complaint alleges that Yahoo! concealed material facts about this arrangement from U.S. investors.
It is too early in the life of these recently filed suits to determine their likely outcomes. But given the cost of litigation, and the disruption to business operations that can come with class-action suits, these developments warrant the close attention of in-house counsel of public companies, regardless whether the company is domiciled in China, or is based in the U.S. that does business overseas.