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Investor Alert Over Suspect Chinese IPO Prospectuses

Publication Date: 
February 28, 2010
Financial Times
Elizabeth Fry

The Securities Class Action Clearinghouse is mentioned in this Financial Times article regarding statistics on securities class action filings in the U.S. against foreign companies:

While Hong Kong became the world’s largest market for initial public offerings last year, the US capital markets remain first choice for many mainland China companies looking to raise capital.

Worryingly for investors though, an increasing number of Chinese companies are being sued in the US courts for allegedly supplying prospectuses that contain false or misleading information.

According to Stanford Law School’s securities class action clearinghouse, the number of securities class action filings made in the US against foreign companies has risen steadily in the past decade and last year accounted for about 20 per cent of the total.

There are currently about 16 Chinese companies facing class actions in the US – more than from any other foreign country – because their financial results following an IPO were allegedly significantly different to the financial statements provided in their prospectuses. This caused their share price to drop, damaging investors who bought in at what they consider to be an artificially high price.

The reasons cited for the lawsuits include failure to disclose that a company’s main operating assets were acquired illegally, failure to reveal difficulties in securing a sufficient supply of raw materials, the use of internal estimates in lieu of actual earnings and revenue history, and higher than expected compensation costs because key executives were not secured before the IPO.