For several years, Friday has been the day when the
latest bank closures are announced (about which see further below). More
recently, Friday also seems to be the day when the latest securities class
actions involving Chinese companies are announced. This past Friday alone,
three more securities suits involving Chinese companies were announced. Signs
are that there are more to come. A brief description of the three latest cases
Puda Coal: The first of the
three latest Chinese suits involves Puda Coal, Inc., an NYSE company that is a
Delaware corporation but which has its headquarters in Shanxi Province in China. There
have actually been two separate lawsuits filed against Puda, one in the
Southern District of New York (refer to the complaint here), and one in
the Central District of California (here).
As reflected in plaintiffs' counsel's press release (here),
the allegation is that Puda's assets were transferred to a subsidiary of
which Puda's Chairman of the Board obtained control through a series of
transactions, enabling the Chairman to profit personally from the sale
of a minority interest in the subsidiary to a private equity firm.
Following an internet website's disclosures of the transactions, the company's
share price declined. In an April 11, 2011 press release (here),
the company announced that its board had adopted the recommendation of the
company's audit committee to investigate the Chairman's "unauthorized"
transactions involving the subsidiary.
Subaye, Inc.: According
to their April 15, 2011 press release (here),
plaintiffs' lawyers have initiated a securities class action lawsuit in the
Southern District of New York against Subaye, Inc. and certain of its directors
and officers. Subaye is a Delaware Corporation with its headquarters in Guangdong, China.
According to the press release, the complaint (which can
be found here)
was filed in the wake of the company's April 7, 2011 announcement
that its auditor PricewaterhouseCoopers Hong Kong had withdrawn and that
prior to its resignation the audit firm had identified matters that might
affect the fairness of the company's previously issued financial statements.
The press release states that
PwC's was unable to obtain information and supporting documentation
to verify: (a) cash settlements from sales agents to Subaye, (b) the end
customer subscriptions for the Company's services and the services rendered to
the end customers, (c) marketing and promotion activities performed by sales
agents in return for fees paid to such agents and recorded as expenses of the
Company. PwC also stated that Subaye provided insufficient explanations
regarding commonalities between certain customers and vendors. Lastly, PwC
could find no evidence of any business tax payments by the Company for services
rendered in China.
Universal Travel Group:
According to their April 15, 2011 press release (here),
plaintiffs' lawyers have filed a securities class action lawsuit in the
District of New Jersey against Universal Travel Group and certain of its
directors and officers. Universal Travel is a Nevada corporation based in Shenzen, China.
The Universal Travel group lawsuit follows a March 2011
securities analyst's report raising questions about the company's business, its
reported cash balances and revenues, and its relationship with an online travel
service. The report stated that there were large differences between the
revenues that a newly acquired subsidiary had reported to Chinese authorities
and the revenues that Universal Travel reported.
In an April 14, 2011 press release (here),
the Company announced that it had hired a new auditor after its prior auditor
resigned because "it was no longer able to complete the audit process" due to
"the Company's management and/or the Audit Committee being non-responsive,
unwilling or reluctant to proceed in good faith and imposing scope limitations
on [the auditor's] audit procedures."
These three new securities class action lawsuits follow
closely on the heels of the four accounting-related lawsuits involving
Chinese companies filed earlier this month, as I noted in a prior blog post (here).
With these three latest lawsuits, there have now been a total of 14
securities class action lawsuits filed against Chinese and China-liked
companies in 2011, out of a total of about 61 securities lawsuits that have
filed so far this year, meaning that the suits against Chinese companies
represent about 23% of all securities lawsuits filed so far this year. Ten of
these have been filed just in the last 30 days.
The signs are that this recent outburst of new
lawsuit filings involving Chinese companies will likely continue. Plaintiffs'
law firms continue to publish press releases that they are "investigating"
still other Chinese companies (refer for example, here
and here) For
that matter, the cascade of news raising questions about accounting practices
involving some Chinese companies shows no signs of abating.
As Walter Pavlo notes on his White-Collar Crime
blog on Forbes.com (here),
many of the Chinese companies involved in this rash of lawsuits obtained
their U.S. listings through reverse mergers with a publicly traded U.S. shell
company. In a later post (here),
he also noted that many of these firms have the same auditors and used the same
investment bank in their reverse merger transaction.
In an April 4, 2011 speech (here), SEC
Commissioner Luis Aguilar noted that the problems arising involving Chinese
companies that have obtained U.S. listing are a serious concern and that the SEC
in cooperation with other organizations including the PCAOB is investigating
the concerns that have arisen. Among other things, he noted that "a growing
number" of these companies "are proving to have significant accounting
deficiencies or being vessels of outright fraud."
According to Commission Aguilar, since January 2007 over
150 Chinese companies have obtained U.S. listings using what he characterized
as "backdoor registrations." While not all of these companies are engaged in
the kinds of activities described in the case summaries above, there definitely
seems to be a pattern of involvement in conflicts of interest or accounting
issues. The rash of recent resignations of the outside auditors from these
companies suggests that the audit firms have had their consciences raised about the dangers of becoming associated with these kinds of
firms and accounting issues they may be having.
In any event, it seems likely that there will be further
lawsuits involving these Chinese companies. David Bario's April 4, 2011 Am
Law Litigation Daily article profiling the plaintiffs' lawyer behind many
of these lawsuits can be found here.
Bank Failures Not Over Yet: Speaking
of bank failures (as I was at the outset of this post), it now appears that my recent
prediction that the bank failure wave may finally be over might have been
premature. This past Friday night, the FDIC closed six more
banks, bringing the year to date total number of bank closures to 34. While
that is fewer than the 49 banks that had been closed at this point last year,
the closure of six banks at one time does cut against the suggestion that the
FDIC is winding down its bank closure activities.
With the addition of the latest six bank closures, the
total number of banks that have failed since January 1, 2008 stands at 356. Of
this total, 51 involve banks located in Georgia (including two of the six banks
closed this past Friday night). After a while you do start to wonder if there
how there could be any banks left in Georgia.
As I have noted
elsewhere, the FDIC has still only brought a total of six lawsuits
involving former directors and officers of the bank. However, on April 13,
2011, the FDIC did update the
Professional Liability Lawsuits page on its website, to indicate the number
of persons against who lawsuits have been authorized has been increased by 187
(up from the prior month's total of 158). However, the six lawsuits filed to
date involved only 42 individual defendants, which suggests that there are
quite a number of lawsuit in the pipeline and yet to be filed. The updated page
also notes that the FDIC has also authorized "11 fidelity bond, attorney
malpractice, and appraiser malpractice lawsuits."
Special thanks to the loyal readers who alerted me to the
most recent bank closures and to the recent update to the FDIC website.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
For more information about LexisNexis
products and solutions connect with us through our corporate site.