NEW YORK, July 26 (Reuters) - Accounting debacles at
U.S.-listed Chinese companies have prompted a surge of
securities fraud lawsuits, but investors might have trouble
recouping their losses even if they win.
More than one-fourth of the 94 U.S. securities fraud
lawsuits seeking class-action status and filed from January to
June related to so-called Chinese reverse mergers, according to
a study released on Tuesday by the Stanford Law School
Securities Class Action Clearinghouse and Cornerstone Research
This reflects a shift away from more traditional lawsuits
accusing U.S. companies of inflating balance sheets or stock
prices, or entering into bad mergers.
According to the study, the number of these cases is on
pace in 2011 to be the fewest since federal law on class-action
litigation was overhauled in 1995.
In a typical reverse merger, a Chinese company buys a U.S.
"shell" company and takes over its stock ticker. That
effectively lets it raise money without going through the
regulatory reviews typical of companies going public.
Since March, more than two dozen U.S.-listed Chinese
companies that underwent reverse mergers announced auditor
resignations or other accounting problems.
Last month, the Securities and Exchange Commission issued a
bulletin urging investors to "thoroughly research" such
companies before investing.
According to the Stanford study, 24 securities fraud
class-action lawsuits targeted Chinese reverse mergers in the
first half of the year, compared with nine for all of 2010.
But Joseph Grundfest, a Stanford law professor and former
SEC commissioner, said investors might have trouble recovering
losses, citing the "very little" historic success in enforcing
federal court judgments to recover assets of Chinese citizens
living in China.
"There is a big difference between winning a lawsuit and
collecting money because you won a lawsuit," Grundfest said in
The United States has no extradition treaty with China and
state secrets laws make it difficult to gather evidence about
alleged wrongdoing that originates there.
That limits the effectiveness of the 2002 Sarbanes-Oxley
reforms developed to root out accounting fraud following Enron
Corp's collapse the prior year.
Grundfest said investors might still have recourse against
the auditors of Chinese companies or other intermediaries, but
it still could be an uphill fight.
"The way many insurance policies are written, they won't
cover situations involving fraud," he said. "It makes it
entirely possible that at the end of the day, there may be very
little effective recovery."
The 94 lawsuits allege $48.3 billion of market value was
lost between the trading day immediately preceding the end of a
class period and the trading day immediately after the end.
Among the other 70 lawsuits in the first half, 21 targeted
mergers. Just two related to the credit and financial crises,
compared with 13 in 2010, 54 in 2009 and 80 in 2008.
(Reporting by Jonathan Stempel)