15 Sep Fraud Proof Challenging in Chinese Companies’ US vs. PRC Filings

A fascinating recent piece in the New York Law Journal talks about the many dismissals of class action cases against US public companies based in China for alleged fraud. The cases say that because these companies’ regulatory financial filings in China are sometimes different than the SEC filings they make as US public companies, one should assume the US filings are wrong and fraudulent. The courts have shut down many of these cases.

The challenge, apparently, is being able to prove not only that the filings really are different, but that the US filing is the one that’s wrong. It is not easy, for example, to show that the different accounting standards in the two countries might not have yielded different looking financial statements without either being incorrect. For example, it is legitimately possible for a company to show different revenues depending on whether US or Chinese accounting rules applied. Second, the plaintiffs in these cases have to be able to show facts that the SEC filings are the incorrect ones even if there is indeed a discrepancy.

We are seeing a slow return of Chinese companies seeking a US public market, most visibly with Alibaba’s IPO which now apparently is closing within the next few days. Ideally the SEC and other governments would move to adopt international financial reporting standards that are consistent everywhere. Until that happens, it will remain a battle for shareholders of these companies to prove fraud and indeed many of these companies may have been following all the rules.