U.S. Lawsuits Against China Companies Face Hurdles-Reuters

Good luck doing discovery or collecting if you actually win.

U.S. lawsuits against China companies face hurdles | Reuters:

GIGANTIC LOOPHOLE

A 2007 lawsuit against LDK Solar Co. Ltd. (LDK.N), a China-based solar-wafer manufacturer, is fairly typical of the genre. The suit, which settled last year for $16 million, accused the company of grossly overstating its financial performance in filings with the Securities and Exchange Commission. But when the plaintiffs attempted to subpoena documents from LDK’s outside auditor, KPMG Huazhen, they hit a wall: Because KPMG Huazhen is based in China, it is not subject to U.S. discovery rules — even though it is an affiliate of a major accounting firm based in the United States. So the plaintiffs could not obtain the sort of detailed financial information they needed to prove their claims that the company greatly overstated the value of its inventory. James Farrell, a partner at Latham & Watkins who represented LDK, declined comment.

At a hearing last June, U.S. District Judge William Alsup in San Francisco bemoaned this “gigantic loophole” and went so far as to ask the plaintiffs’ lawyer, Herbert Milstein of Cohen Milstein Sellers & Toll, to bring the issue to the attention of the SEC. “SEC ought to say that if somebody is not going to make their work papers available they cannot trade on the national exchanges,” Judge Alsup declared.

THE CHALLENGE OF COLLECTING

When plaintiffs suing Chinese entities do prevail in court, this hardly means the battle is over. While Chinese law recognizes certain judgments awarded in the United States, legal, bureaucratic and cultural barriers have stymied efforts by U.S. parties to collect on judgments in China. “To date I am not aware of a single case where a United States judgment has been enforced in China,” said Owen Nee, a Jones Day lawyer who has been practicing in China for more than 30 years.

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