The Rosen Law Firm, which is making a cottage industry of suing Chinese companies embroiled in accounting scandals, is on a bit of a roll. On Wednesday, Los Angeles federal judge Valerie Baker Fairbank ruled that the firm's securities fraud case against Orient Paper Inc. can proceed.
Fairbank's rejection of Orient's motion to dismiss comes on the heels of a July 19 order by Manhattan federal judge Alvin Hellerstein that allows the Rosen firm to pursue securities fraud claims against the former auditors of China Expert Technology, a Shenzhen-based technology company. China Expert, which never responded to Rosen's 2007 complaint, was declared in default in 2008, so if auditors PKF Hong Kong, PKF New York, and BDO McCabe Lo Ltd. had gotten the case tossed, shareholders would have had essentially no way to recover.
The August 2010 Orient Paper shareholder class action complaint accuses the Chinese paper producer and its current and former directors of misstating revenue and failing to disclose related-party transactions with its primary supplier. The company, represented by DLA Piper, argued in its motion to dismiss that the plaintiffs didn't plead sufficient allegations to proceed under the Tellabs standard.
Fairbank found the complaint contained enough specific allegations to proceed. She also didn't seem to buy Orient Paper's argument that its own internal investigation found no reason to question the company's revenue numbers. "This investigation was conducted by ONP's own audit committee, with no public or signed statement by any of the outside firms ONP hired to assist it in its efforts," wrote Fairbank. The veracity of the report - and of short sellers' allegations that Orient Paper's numbers are a sham - is a factual dispute best left to be resolved at another stage of the litigation, the judge said. Orient Paper counsel Caryn Schectman of DLA didn't return a call seeking comment.
The Rosen firm's complaint also names Davis Accounting, the now-disbarred and defunct Utah-based firm that audited Orient Paper's books. Davis hasn't been served yet, so it is not covered by Wednesday's ruling.
"We are pleased with the courts' rulings and we think they are appropriate," said Phillip Kim, a Rosen lawyer, referring to both the Orient Paper and China Expert rulings. "We are going to move forward aggressively on to the next phases, including discovery," he said.
The Rosen firm may want to savor these moments of victory. Shareholders of China-based, U.S.-listed companies still have plenty of hurdles to surmount even after they get by defense motions to dismiss. Just try to get discovery in a country where the subpoena power that U.S. plaintiffs lawyers love is just little more than wishful thinking.
(Reporting by Carlyn Kolker)