With four more securities suits involving Chinese or
China-linked companies this past Friday, the phenomenon of securities class
action lawsuits against these firms has emerged as one of the most distinct
securities litigation trends so far this year. The filing trend actually first
emerged in the second half of 2010, but it has continued into 2011 and
appears to have gained significant momentum in recent weeks following recent
revelations of accounting irregularities involving Chinese companies.
The four latest suits involving Chinese-linked companies
are as follows:
1. China Electric Motor, Inc.: According
to their April 1, 2011 press release (here),
plaintiffs' lawyers have initiated a securities class action lawsuit in the
Central District of California against China Electric Motor, a Delaware
corporation with its principle place of business in China, as well as the
certain of its directors and officers and the underwriters who underwrote the
company's January 29, 2010 IPO.
According to the Complaint (here),
the lawsuit follows the company's March
31, 2011 announcement that it is forming a special committee to investigate
accounting discrepancies "concerning the Company's banking statements"
identified by the company's auditors. The company has delayed release of its
fourth quarter and year end financial statements and trading in the company's
securities has been halted.
2. Advanced Battery Technologies, Inc.: In
their April 1, 2011 press release (here),
the plaintiffs' lawyers state that they have filed a securities class action
lawsuit in the Southern District of New York against Advanced Battery and
certain of its directors and officers. According to the complaint (here),
the company is a Delaware corporation with offices in New York that, through
subsidiaries, owns two Chinese operating companies.
The complaint alleges that the company made misleading
statements about its ownership interests in certain Chinese operating companies
and that it failed to disclose or fully disclose certain related party
transactions involving the company's CEO. The complaint also alleges, relying
heavily on a securities analyst's report , that the company made false
statements about its supposed investment in a company that may not even exist.
3. China Intelligent Lighting and Electronics, Inc.:
According to the their April 1, 2011 press release (here), plaintiffs' attorneys
have filed a complaint in the Central District of California against the
company, certain of its directors and officer and the investment banks that
underwrote the company's June 18, 2010. (One of the investment banks, Westpark
Capital, was also involved in the China Electric IPO described above.) The
company is a Delaware Corporation with its principle place of business in
China. A copy of the complaint can be found here.
The lawsuit follows the company's March
29, 2011 press release in which it announced the termination of its
auditor, MaloneBailey LLP; its auditor's resignation and withdrawal of the
audit opinion it issued in connection with the prior year end financial
statement; and the formation of a special investigation committee. The press
release also discloses that the SEC has launched a formal investigation of t he
In the press release, the company also discloses that
MaloneBailey resigned "due to accounting fraud involving forging of the
Company's accounting records and forging bank records." The auditors also
allegedly stated that the "accounting records at the company have been
4. China Century Dragon Media: According
to their April 1, 2011 press release (here), plaintiffs lawyers have
filed a securities class action lawsuit against the company, certain of its
directors and officers and against its offering underwriters.(I have not yet
been able to obtain a copy of the complaint, so I don't know whether or not
these underwriters are the same as named in the China Electric and Advanced
The China Century Dragon Media lawsuit follows the
company's March 28,
2011 announcement of the resignation of its auditor, MaloneBailey LLP
(the same firm as withdrew from auditing China Intelligent Lighting, as noted
above), and the firm's withdrawal of its prior audit opinions. The press
release discloses that the auditor has resigned as a result of "irregularities"
that may indicate that the company's "accounting records have been
falsified." The discrepancies could also indicate material errors in the
company's prior financial statements. The company also disclosed that its
shares have been delisted and the SEC has commenced a formal investigation.
These four new lawsuits join the seven suits that had
previously been filed so far in 2011 against Chinese and China-linked
companies. Of these eleven total lawsuits, six have been filed just since March
18, 2011. The eleven suits against Chinese-related firms already exceed the ten
lawsuits that were filed against Chinese companies in 2010. Signs are that
there may be further suits to follow shortly, as the law firm that filed all
four of the above described lawsuits issued an April 1, 2011 press release (here)
that it is investigating possible securities law violations
involving Keyuan Petrochemicals (a Nevada corporation with its principal
place of business in China), following the company's April
1, 2011 announcement that it was delaying filing its year end financial
statements and initiating an audit committee investigation of certain
The rash of lawsuits has arisen at the same time that the
Public Company Accounting Oversight Board raised concerns in a March 14, 2011
about accounting and auditing standards at Chinese companies that have
conducted IPOs in the U.S. or that have become U.S. publicly traded companies
through reverse mergers. The report identifies a number of factors that may
undermine the ability of audit firms to complete their audit functions
completely or effectively. In light of the concerns in the PCAOB report, it
hardly comes as a surprise that accounting concerns are coming to light in
connection with some of these Chinese firms.
The allegations raised in these cases, like the
allegations in the four cases described in detail above, fall into two basic
categories: Inadequate disclosures involved related-party transactions (see
especially Tongxin [here],
China Valves Technology [here], and China
Integrated Energy [here]),
and accounting irregularities or accounting improprieties (see especially China
Media Express [here],
China AgriTech [here], ShegndaTech
[here] and NIVS
Intellimedia Technology Group [here].
Another familiar theme running through at least a few of
these cases is that the lawsuits followed the resignation of the MaloneBailey firm as the
defendant company's auditors. The audit firm's resignation preceded the
lawsuits filed against NVIS Intellimedia Technology Group, China Intelligent
Lighting and Electronics, and China Century Dragon Media. MaloneBailey is
identified in Table 8 of the PCAOB report as the U.S.-based firm with the most
Chinese reverse merger company clients. In addition, a number of the companies
named as defendants in these suits conducted offerings with the investment bank
Westpark Capital, Inc as offering underwriter.
These firms' involvement may well be purely coincidental.
The larger pattern is that there seems to be a growing number of Chinese and
China-linked companies that are announcing concerns related to the accounting
and reported financial statements. Whether these issues will continue to emerge
will remain to be seen. But for now, a securities litigation filing trend that
first developed in the second half of 2008 seems to be going strong as we head
into the second quarter of 2011.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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