* Part of recent wave of China accounting scandals to hit US
* No ruling on merits of case but judge says it can proceed
* Auditors accused of not detecting alleged $132 mln fraud
* Door opens for shareholder lawsuits vs China accountants
By Carlyn Kolker
NEW YORK, July 20 The fourth time was the charm
for shareholders suing the auditors of Shenzhen-based China
China Expert shareholders have been trying unsuccessfully
to sue the company's accounting firms for failing to detect an
alleged $132 million fraud. U.S. District Judge Alvin
Hellerstein in New York has previously dismissed the suit three
times, saying the shareholders' claims were inadequate.
But Hellerstein reversed course and on Tuesday said he
would allow the lawsuit against China Expert's outside
auditors, PKF Hong Kong, PKF New York and BDO McCabe Lo Ltd, to
"Enough has been alleged to make out a plausible claim for
relief," Hellerstein declared in a handwritten order. He did
not rule on the merits of the case, but instead simply allowed
shareholders' claims to proceed to the next phase.
A wave of accounting scandals has hit China-based companies
listed on U.S. stock exchanges in the past two years, with
allegations of fraud engulfing companies such as China
MediaExpress Holdings Inc, RINO International and Orient
Investor lawsuits alleging securities fraud in U.S. courts
have followed, and since the beginning of 2010, shareholder
lawsuits against more than 30 China-based companies have been
filed. These proposed class-actions are in the early procedural
phases. The China Expert suit dates from 2007, and is at a
slightly more advanced stage.
Hellerstein's ruling allowing investors to pursue China
Expert's auditors is one of the first of its kind and signals a
potentially lucrative channel for shareholders. The ruling was
filed on Tuesday.
Accounting firms are deep-pocketed targets that could pay
large judgments or settlements. That is in contrast to the
China-based companies themselves, which, given their shaky
finances and structures, could provide more stumbling blocks
Many China-based companies have limited insurance coverage.
Plaintiffs could also face difficulty in collecting judgments
against entities which have most of their operations in China.
Shareholders' claims against China Expert, for example, lie
dormant. The company never responded to the investor group's
allegations in court and was found to be in default in 2008.
The plaintiffs have not sought a monetary judgment against the
company, preferring to pursue their case against the former
To prove that case, the class-action plaintiffs still face
many hurdles, including showing that the auditors knew of the
In court papers, the auditors said it was likely that the
company "actively misled its auditors by concealing its alleged
Thomas Manisero of law firm Wilson Elser Moskowitz Edelman
& Dicker, who represents PKF New York, Michael Tu of Orrick,
Herrington & Sutcliffe, who represents PKF Hong Kong, and James
Farrell of law firm Latham & Watkins, which represents BDO
McCabe, did not return calls or emails seeking comment.
The case is Carlos Munoz v. China Expert Technology et al,
Southern District of New York, No. 07-10531.
(Reporting by Carlyn Kolker, editing by Matthew Lewis)