Comparing Lychees

Securities class actions brought against China-based companies often allege discrepancies between the company’s Chinese regulatory filings and SEC filings. In that type of case, the plaintiff must allege at least some facts to support that (1) the SEC figures, and not the Chinese figures, are false, and (2) any variation is not attributable to variations in reporting rules or accounting standards.

In In re Silvercorp Metals, Inc. Sec. Lit., 2014 WL 2839440 (S.D.N.Y. June 23, 2014), the court addressed allegations that Silvercorp materially misrepresented three important metrics at its key Chinese mine. As alleged in the complaint, “the metrics reported in the SEC filings were dramatically different from those filed with Chinese authorities under the well-developed legal and regulatory regimes established by the Chiese central government and by Henan province, which are strictly implemented.” The defendants argued that the plaintiffs were comparing “apples and oranges” because the Chinese filing covered only part of the mine’s output.

The court disagreed, finding that whether the Chinese filing “is apple, orange, or lychee, plaintiffs have adequately pleaded that it uses the same denominator as the SEC filings, i.e., the whole of the [Chinese] mine.” Indeed, “the Court may not prematurely determine the truth of plaintiffs’ allegation that the comparison is proper, though it expects to be aided by affidavits from dueling experts in Chinese mining law if summary judgment is sought.”

Holding: Motion to dismiss denied as to corporate defendant.

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