Securities suits against Chinese companies listed on U.S. stock exchanges are on the rise. The majority of these suits concern suspect accounting practices – namely, allegations that the financial data reported by these Chinese companies to the SEC is vastly different from the data they report to authorities in China. The apparent unreliability of these financial statements has had predictable impacts on stock prices. See, e.g., Levy v. Fushi Copperweld, Inc., et. al., No. 11-cv-3014 (SDNY). Click here to access a copy of the complaint.

Chinese company stock frequently comes to be offered on U.S. exchanges through so-called “reverse takeovers” – mergers between dormant domestic public shell companies and private Chinese companies. The reverse takeover market and the resulting spate of securities suits involving Chinese issuers has caught the attention of domestic regulators and enforcement agencies. The SEC is cracking down on Chinese companies for slip-shod accounting practices and Congress is reportedly planning to hold hearings later this year on Chinese company accounting.

It is unlikely that institutional investors will be leading the charge on Chinese securities class actions because they are less likely to have made large initial investments in small cap Chinese companies. However, D&O insurance — or possibly the lack thereof — will be an issue in these cases. Considerations will include whether or not the subject policies cover the private Chinese company, the surviving public company, and/or the initial public shell company. The timing of the “Wrongful Acts” alleged will also be important because the policies may only cover those acts that occurred after the merger transaction took place. Finally, the policies may have exclusions for the “Wrongful Acts” of the pre-merger public shell company.