Chinese government initiates corruption investigation
Days later, putative shareholder class action follows
The filing of a shareholder class action has become routine following a drop in stock price after the revelation of adverse news about a company. Allegations of corruption at a public company are proving to be no different, as the recently filed putative shareholder class action against oil and gas company PetroChina Company Ltd demonstrates.
Evidencing the Chinese government's continued campaign against graft, on August 27 2013 the Communist Party's Central Commission for Discipline Inspection reportedly disclosed its investigation into the alleged "severe disciplinary violations" of a deputy general manager of China National Petroleum Corporation, PetroChina's controlling shareholder.(1) In China, a 'severe disciplinary violation' is considered to be a euphemistic term for corruption.(2) That same day, PetroChina filed a Form 6-K with the US Securities and Exchange Commission (SEC), announcing that three PetroChina senior executives were under investigation by "relevant PRC authorities".(3) PetroChina stated that all three had resigned from their respective positions, effective immediately, "due to personal reasons".(4) The three executives were a vice president of both PetroChina and China National Petroleum Corporation, an executive director, vice president and head of PetroChina's Changqing oil field, and a chief geologist.(5)
Three days later, Hong Kong newspaper South China Morning Post reported that "[t]op Communist Party leaders" had agreed to initiate a corruption investigation into the conduct of a former China National Petroleum Corporation senior manager, who was also a former member of the Politburo Standing Committee and a purported ally of Bo Xilai (whose own trial for corruption recently concluded after public hearings and intense public interest).(6) In addition, as of September 1 2013, the Central Commission for Discipline Inspection appears to have extended its investigation to include the former chairman of PetroChina and China National Petroleum Corporation,(7) resulting in his removal on September 2 2013 as head of the State-Owned Assets Supervision and Administration Commission, which is charged with oversight of China's state-owned companies.(8)
There is speculation in the global press that the Chinese investigation may trigger the interest of US regulatory authorities.(9) PetroChina's controlling shareholder, China National Petroleum Corporation, is a state-owned entity. Thus, US regulators would view the relevant executives as 'foreign officials' under the Foreign Corrupt Practices Act. At the same time, those same foreign officials are executives of an 'issuer', subject to jurisdiction under the act, because PetroChina's American depository shares trade on the New York Stock Exchange.
Just days after announcement of the Chinese corruption investigation, on September 4 2013 a putative shareholder class action was filed against PetroChina and four of its existing and former officers in the Southern District of New York. The complaint alleges violations of the Securities Exchange Act 1934 and SEC regulations.
The crux of the complaint is that the purported corruption-related activities of PetroChina's senior executives render false and misleading several of PetroChina's public statements regarding the executives' compliance with US securities laws and with PetroChina's ethical and corporate governance codes. These are precisely the types of allegation that one would expect following disclosure of corruption-related issues – that is, allegations that the company and its directors and officers made false and misleading statements or omissions by failing properly to disclose the corruption issues, or by affirmatively stating that the company was in compliance with securities laws and company codes of conduct.(10)
PetroChina is not the first China-based company with stock listed on a US exchange to face a shareholder class action alleging failure to disclose corruption, further evidencing that Chinese companies have been, and remain, on the radar of the US securities plaintiffs' bar.(11)
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(1) Gordon G Chang, "Will China Political Infighting Trigger SEC Probe of PetroChina?", Forbes, September 1 2013.
(2) Id. See also Wayne Ma and Yvonne Lee, "China Extends Graft Probes to PetroChina", The Wall Street Journal, August 27 2013.
(5) Ma & Lee, supra note 2. See also Eric Ng, "Three More CNPC Officials Under Investigation", South China Morning Post, August 29 2013.
(6) Zhou Yongkang, "Former Security Tsar Linked to Bo Xilai Faces Corruption Probe", South China Morning Post, August 30 2013.
(8) Michael Forsythe, "China State-Assets Head Removed as Graft Inquiry Gains Pace", Bloomberg, September 3 2013.
(9) See, for example, Chang, supra note 1 (suggesting that the Chinese authorities' corruption probe may trigger parallel probes by the SEC and Department of Justice); Tom Han Shih, "US Market Watchdog Likely to Ratchet Up Pressure on PetroChina", South China Morning Post, September 4 2013.
(10) See, for example, In re Syncor Int'l Corp Sec Litig, 239 F App'x 318, 320 (9th Cir 2007); City of Pontiac Gen Emps Ret Sys, No 5:12-cv-05162 (WD Ark February 20 2013); In re SciClone Pharms Sec Litig, No 5:10-cv-03584 (ND Cal December 1 2010); Johnson v Siemens AG, No 1:09-cv-05310 (EDNY March 31 2011); Deccan Value Advisers Fund LP v Panalpina World Transport (Holding) Ltd, No 5:09-cv-00080 (SD Tex September 3 2010); In re Willbros Grp, Inc Sec Litig, No 4:05-cv-01778 (SD Tex February 15 2007); In re InVision Techs Sec Litig, No 3:04-cv-03181 (ND Cal August 31 2006); In re Immucor, Inc Sec Litig, No 1:05-cv-02276 (ND Ga September 26 2007); In re Nature's Sunshine Prods Sec Litig, No 2:06-cv-00267 (D Utah February 10 2010); In re FARO Tech, Inc Sec Litig, No 6:05-cv-01810 (MD Fla October 3 2008); McBride v Titan Corp, No 3:04-cv-00676 (SD Cal December 20 2005); In re Syncor Int'l Corp Sec Litig, No 2:02-cv-08560 (CD Cal December 3 2008).
(11) See amended consolidated complaint at 29-35, In re China Valves Tech Sec Litig, No 1:11-cv-00796 (SDNY September 26, 2012) (alleging, for example, that Foreign Corrupt Practices Act violations may artificially inflate revenue and expose the company or acquirer to substantial penalties and liability). By way of background, the defendants moved to dismiss the lead plaintiff's original consolidated complaint, which had alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act 1934, where the lead plaintiff's claims relied in part on alleged failures to disclose purported Foreign Corrupt Practices Act violations. On September 12 2012 the district court granted the defendants' motions, but permitted the lead plaintiff leave to amend the consolidated complaint (the amended consolidated complaint was filed on September 26 2012). See memorandum opinion at 20-21, 25, In re China Valves Tech Sec Litig, No 1:11-cv-00796 (SDNY September 12 2012). The defendants subsequently moved to dismiss the amended consolidated complaint, but at the time of writing, the district court has not yet ruled on the defendants' motion.
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