Chapter 15 Who is America's "Mr. Class Action"?

China's economy is developing rapidly, and more and more Chinese companies are choosing to list overseas, but some of those companies that have been listed on the road to overseas listing have encountered such a trouble - "class action", encountered " The embarrassment of the "class action" is related to unfamiliarity with the rules of the game, and various backgrounds such as national conditions and cultures. However, being targeted by "Mr. Class Action" is also an important reason that cannot be avoided.It is reported that since China.com was sued in the US court on June 29, 2001, seven Chinese companies including NetEase, China Life, UT Starcom, China Aviation Oil, Sina, and 51job have encountered class action lawsuits.Among these "class action" cases, China Life's being targeted by the "Mr. Class Action" in the United States is a typical case worth reviewing again. a blueprint.

Today, things seem to have passed, let us look back at this case. On March 16, 2004, China Life Insurance Co., Ltd., which had been listed in the United States for only three months, encountered a "class action" by shareholders and was sued in a U.S. court. The agent of the class action was an American law firm called Milberg Weiss Bershad Hynes & Lerach (hereinafter referred to as "Milberg Weiss"), which was once called "Mr.ClassAction" by Forbes, few people know that they are the top in the field of "class action" in the United States The player, according to reports, has cost US companies $30 billion. Milberg Weiss famously cost 25 of the largest insurance companies $10 billion in misleading sales techniques in the late 1990s.

In fact, long before China Life Insurance was sued by Milberg Weiss, the first Chinese company listed in the United States that Milberg Weiss targeted and succeeded was Netease (Netease.com). It mobilized shareholders to file a class action lawsuit, and finally made Netease Lost $4.35 million. The principle of "class action" was first seen in the US "Securities Act" in 1933.The establishment of this principle comes from the lessons learned from the stock market crash in the United States in 1929. Together with the principle of "defendant's proof", it aims to provide adequate protection for small and medium investors.However, because the cost of filing a class action lawsuit is very low, the profit after winning the lawsuit is surprisingly huge (in the "class action" case encountered by NetEase, Milberg Weiss received one-third of the US$4.35 million as attorney fees), and the scope of It is wider and has a huge impact, and winning the lawsuit will also make the representative lawyer famous. Therefore, it is not surprising that a large number of law firms in the United States are dedicated to securities class actions and regard "class action" as an important business.Class action lawsuits are now the norm in the United States.According to statistics, so far, about 18.4% of US listed companies have been sued, and the proportion of foreign companies listed in the US has been as high as 14%.Due to various reasons, more than 95% of the companies that encountered class action lawsuits settled by settlement. In the United States, the meaning of settlement (Settlement) is that the plaintiff and the defendant reach an agreement, and the defendant pays a certain amount of settlement money. The court does not have to decide whether the defendant has In a wrongful judgment, the defendant does not have to admit error.Such an approach is equivalent to "spending money to eliminate disasters" for the defendant, and the plaintiff has also achieved the purpose of asking for money. Therefore, for the law firm, as long as the money can be obtained.Netease chose to settle that year.For shareholders, "class action" is a game of "something is better than nothing". As long as shareholders register to participate within a period of time after winning the lawsuit, they can share the benefits. Milberg Weiss actually eats the "class action" bowl of rice. It is reported that since 1995, Milberg Weiss has handled half of the securities class actions in the United States.

In the defendant column of "Mr. Class Action" against China Life Insurance, in addition to China Life Insurance, five natural persons in the management are listed as defendants (Wang Xianzhang, chairman and general manager of China Life Insurance, independent non-executive director Long Yongtu, independent non-executive director Zhou Dexi, director and deputy general manager Miao Fuchun, and non-executive director Wu Yan), these management personnel were accused of "not reporting what they knew". "Mr. Class Action" believes that the reason for "not reporting what is known" is that the National Audit Office disclosed that the audit of China Life Insurance Company, the parent company of China Life Insurance, found that the parent company was involved in a large amount of illegal funds of up to 5.4 billion yuan .During the IPO period, the National Audit Office has completed or is about to publish negative audit results on the parent company, but China Life has committed the wrong behavior of "knowing the negative facts but not disclosing them". Their interests have been damaged, and they then pointed out that China Life did not disclose the information in the above-mentioned situation, which led to the stock price drop after the information disclosure, and it is an indisputable fact that the stock price dropped sharply. "Mr. Class Action" believes that China Life's failure to disclose information in a timely manner is a kind of misleading to shareholders. In addition to their eating habits, they follow the financial reports and news releases of listed companies anytime and anywhere, as long as there is a problem in the information disclosure. , prove that there is misleading information, that there is a loss to shareholders (mainly a drop in stock price), and there is a causal relationship between the two, they will not hesitate to initiate a lawsuit. To sue, you only need to find one or two small shareholders at random, and report them in newspapers or on the Internet. Just send out an announcement to invite shareholders of a certain period of time to join.China Life raised as much as US$3.46 billion after its listing in the United States, once becoming the world’s largest in the year, which naturally attracted their attention and was regarded as a “delicious prey”. The subsequent disclosure of China Life by the National Audit Office just provided Milberg Weiss with A wonderful opportunity to strike.It can be seen that China Life encountered a class action lawsuit, not only because of imperfect information disclosure, but also because it was targeted by an American law firm.Judging from the several class action lawsuits currently encountered by Chinese companies, the causes of action are mostly related to the disclosure of false information.In the United States, the reasons for securities class actions mainly include: information disclosure, insider trading (often related to mergers and acquisitions), short-term trading, bait-and-buy, etc. Most of the class actions are caused by improper information disclosure.Some lawyers even emphasized, "The authenticity and timeliness of information disclosure is related to the life and death of the enterprise. If you can't do it, don't say it. You might as well be more cautious in the performance forecast."

The most sufficient disclosure of information is the first, and the second is whether to use the form of parent-subsidiary spin-off for overseas listing, but the listing must be carefully selected in the form of divesting non-performing assets.If the listing is to be spun off, the legal regulations must be improved to clearly define the property rights relationship of the parent company and the subsidiary company through the spun-off listing, so as to fundamentally improve the corporate governance structure, avoid more problems, and avoid the possibility of a spin-off listing. The parent-subsidiary relationship is not clearly defined.If the separation of mother and child is not clear, what is considered to be original sin may occur.

In the case of China Life's class action lawsuit, some people mentioned the original sin of Chinese companies, and after encountering the class action lawsuit, China Life Insurance has repeatedly drawn a clear line with the parent company, believing that the agreement signed with the parent company on September 30, 2003 The reorganization agreement has made a very clear statement on the relevant responsibility inheritance issues of the original China Life Insurance Company.They have emphasized more than once, "The object of the audit is the original China Life Insurance Company, and the audit period is 2002 and previous years. China Life was established exclusively by the original China Life Insurance Company in 2003. The original China Life Insurance Company has also It was changed to China Life Insurance (Group) Company, and the group company inherited the rights and obligations of the original China Life Insurance Company.”

However, Randall Sternmeyer, a partner at Milberg Weiss, obviously did not buy this statement: "The statement made by China Life at this moment is untenable. Regarding China Life's audit by the National Audit Office If you don’t know the question, you can read the news from China Daily on January 21, 2003, which clearly announced that the National Audit Office ‘will conduct an audit of China Life Insurance in 2003’.” He also compared that this is like the Titanic, it It had sunk halfway, and company statements still said it was in danger of hitting an iceberg and sinking.Is it accurate to state that there is only a possibility that a given fact has already occurred?In a nutshell, China's current information disclosure experience of US-listed companies is indeed pitiful.There are also many people in domestic academic circles who hold this view. It is common for listed companies to conceal their business conditions, and government supervision plays a very limited role. As a result, this style of doing things has also been brought abroad, and it turned out to be an international joke.

The experience of China Life Insurance reflects the embarrassment faced by state-owned enterprises listed overseas after restructuring.For large state-owned enterprises, special attention should be paid to the relationship between the parent company and the subsidiary company.The vague affiliation relationship between the parent company and the subsidiary company is a common problem in many companies.Before going public, Chinese companies often transfer non-performing assets to the name of the parent company, thinking that this will straighten out the relationship between the parent company and the subsidiary, and the original company will be completely divorced from the listed company.

But the SEC and Wall Street investors don't see it that way.They believe that many Chinese listed companies have inextricably linked relationships with their parent companies, and even if the divestiture is completed, it may not be completely straightened out.In order to reduce future troubles for overseas listed companies, it is necessary to prepare for financial audits before going public. The "Wall Street Journal" even bluntly expressed concerns about Chinese companies: Chinese companies do not follow US or international accounting standards; due to lack of transparency and insufficient disclosure, credit rating agencies are unable to formulate ratings for most Chinese companies listed overseas; And the relevant authorities often interfere in one way or another with most Chinese companies listed overseas.Faced with the continuous acceleration of the overseas listing of Chinese enterprises, the inherent shortcomings of enterprises have not received enough attention in this process.If the company goes public in a hurry without establishing and perfecting the corporate governance structure and standardized auditing and supervision system, the financial risk in the future may be greater than that of China Life Insurance at present.To establish and improve the corporate governance mechanism, business development mechanism, accounting system, risk management system, assessment and control mechanism, information disclosure system, and realize a major change in the concept of management requires a process that cannot be accomplished overnight.From this point of view, the problems of any overseas listed company are worth pondering by the entire group of overseas listed Chinese companies.

Some experts have profound views on the issue of information disclosure, pointing out the differences in auditing standards between my country and foreign countries. "The defect of the so-called information disclosure procedure is that the two auditing standards are not treated differently." Professor Hao Yansu, director of the Insurance Department of the Central University of Finance and Economics, believes that "the state auditing agency's audit work on enterprises is mainly for state-owned or state-controlled enterprises. Accounting firms have different financial auditing standards for enterprises, and there is a big difference with international financial auditing standards. At the same time, auditing agencies have the same auditing standards for some projects of state-owned enterprises as state agencies, and do not distinguish the different natures of enterprises and agencies. Because The differences in auditing standards lead to the problems found in the routine audit process of state-owned enterprises, which are not problems at all in enterprises controlled by non-state-owned capital or in foreign-funded and Sino-foreign joint ventures.”In China, auditing is routine. The National Audit Office conducts routine audits on state-owned enterprises, financial institutions and government agencies every year, and the people can accept the audit information very calmly.But Americans believe that the use of national auditing must be a major problem with the company, just like the Enron incident.Among the many violations pointed out by the National Audit Office of China Life Insurance, the illegal use of insurance funds and illegal operation are the two most serious problems.American investors naturally do not understand the background.

Therefore, various domestic organizations, groups and departments should establish and improve an institutionalized information disclosure rule as soon as possible.Relevant government management departments should achieve a kind of coordination and cooperation, and this coordination and cooperation must be based on a basic, compliant, scientific, fair and just platform.Only in this way can similar incidents be avoided and help Chinese state-owned enterprises to list overseas.At the same time, in the face of the complex situation of overseas markets, the formulation, introduction and promulgation of policies must be carried out in accordance with international practices.Only in this way can the policy effect be optimized.This should be the lesson we have learned from the China Life incident.In addition, for Chinese companies to list overseas, in addition to continuing the existing and internationally accepted practice, they should also strengthen communication with overseas investors.For example, the research department should have more research reports for overseas investors to understand.It's definitely good for the company. Now that there is a wave of class action lawsuits, Chinese companies planning to go to the United States must not imagine that they can get away with it. The securities regulatory industry in the United States is highly developed. There are a group of senior law firms specializing in the financial securities industry, which specialize in monitoring the "loopholes" in financial transactions. .The China Life incident should become an 'indicative' sign of China's financial system reform.The overseas listing process of other large-scale enterprises should be more in line with international standards. It is necessary to straighten out various relationships, resolve various conflicts, and prepare various financial data.Hidden dangers often mean disasters. Before going public, ask yourself whether a situation similar to China Life exists in your company, and how to ensure that your company will not have such a situation?China Life is a lesson learned. On August 3, 2001, Schiffrin & Barroway LLP announced that it had recently filed a lawsuit against CDC for violating federal securities laws. Schiffrin & Barroway LLP's indictment stated that the content statement submitted by China.com to the US Securities and Exchange Commission (SEC) on July 12, 1999 contained major errors and was suspected of misleading investors. On August 31, 2001, NetEase announced that it would revise its financial report for the full year of fiscal 2000, because a total of US$4.3 million in revenue was misreported. On October 23 and 24, 2001, two American law firms successively announced that they filed a class action against NetEase on behalf of the purchasers who purchased NetEase shares from July 3, 2000 to August 31, 2001.The targets of the prosecution include Netease's top executives and its stock underwriters. On March 18, 2004, China Life was hit by a "class action" by small and medium-sized investors in the United States, causing the company's stock price to fluctuate sharply.The suit alleges that the company violated securities laws by failing to disclose the investigation in its prospectus. In November 2004, the Lerach Coughlin Stoia Geller Rudman & Robbins LLP (LCSGR & RLLP) law firm in the United States represented investors who purchased UT Starcom (UTStarcom) common stock from April 16 to August 11 of that year. Sued in the District Court for the Northern District of California. LCSGR&RLLP stated in the indictment that UT Starcom and some of its high-level officials were suspected of violating the "Securities Exchange Act" issued by the United States in 1934.The reason is that during the period from April 16 to August 11 this year, UT Starcom misled investors by publishing false financial report information, which led to a sharp rise in the company's stock price. In November 2004, Kongzhong, which had just been listed on NASDAQ in the United States, faced a class action lawsuit from American stockholders due to information disclosure issues.Investors believe that Kongkong concealed China Mobile's decision to punish 22 SPs in China, including it, when it went public. On January 21, 2005, the US law firm Schiffrin & Barroway issued a statement saying that 51job shareholders had filed a collective lawsuit in the US District Court for the Southern District of New York, arguing that 51job violated securities trading regulations and did not truthfully disclose their own personal information to investors. Market performance and market expectations. According to the statement of the Schiffrin & Barroway law firm, 51job Chairman Donald Lucas, President and CEO Zhen Ronghui, and 51job Senior Vice President and CFO Kathleen Chien are all sued.The statement said 51job violated the U.S. Securities Exchange Act of 1934 by "improperly increasing the company's advertising revenue in the third quarter" in terms of disclosure. On February 16 and February 24, 2005, a law firm successively filed a class action lawsuit against Sina, accusing Sina CEO Wang Yan and CFO Cao Guowei of violating the US Federal Securities Exchange Act of 1934, publishing false information to mislead investors, and failing to disclose a lot of information or incomplete disclosure.