Photo provided by DLA Piper
Perrie Weiner first took an interest in the securities markets at the age of 13, when he would listen to his father and older brother (both lawyers) talk shop. It’s an interest that has served him well: Weiner is international co-chair of the securities litigation practice at DLA Piper, where he also serves as managing partner of the Century City office and as a member of the firm’s executive and policy committees.
Weiner is kept busy and energized jumping from one cutting-edge trend of securities litigation to the next. Most recently, Weiner has focused on defending class-action suits and regulatory actions against Chinese-based companies that entered the U.S. markets through “reverse mergers” – a controversy that has received significant news coverage in recent months. DLA even formed a “China Securities Litigation Rapid Response Team” to help manage the workload.
Lawdragon: For readers less familiar with this topic, what are reverse mergers?
Perrie Weiner: Reverse mergers are where private companies, i.e., the operating companies located in China, merge with a U.S. public shell company as a way of going public in the U.S. Before the reverse merger transaction, the public shell company no longer has substantive operations, but its public company registration remains in effect. After the private business merges into the public shell, the shell company survives and the former shareholders of the private business end up controlling the surviving entity.
The transaction gives the formerly private China based company the credibility of being registered as a public company in the U.S. and access to capital, without the usual robust vetting from underwriters and investors that companies typically undergo in the U.S. when they perform a traditional IPO. It’s a faster, perhaps the fastest, road to the public markets in the U.S.
Since January of 2007, there have been over 600 reverse mergers. Over 159 of these have been by companies from China and the China region.
LD: Why are they posing these regulatory complications?
PW: While there is nothing inherently problematic with Chinese Reverse Mergers, indeed the vast majority of them are sound, the U.S. Securities and Exchange Commission (SEC) has identified two primary regulatory complications. The first relates to the quality of the auditing and financial reporting. In particular, according to a report by the staff of the Public Company Accounting Oversight Board (PCAOB), there is a concern that U.S. auditing firms in certain instances may be issuing audit opinions on the financials of these companies, but not engaging in much or any of their own work. Instead, the U.S. firms may be issuing an opinion based almost entirely on work performed by Chinese audit firms.
In short, the PCAOB staff is concerned that some U.S. registered accounting firms may not be conducting audits of companies with operations in China in accordance with PCAOB standards. The PCAOB views this as significant if true, primarily because the PCAOB so far has not been permitted to inspect audit firms in China. (The PCAOB and SEC are sending eight representatives to Beijing this month to meet with China’s Ministry of Finance and the China Securities Regulatory Commission, in order to attempt to arrive at some form of cooperative agreement allowing the PCAOB some access).
The other regulatory complication raised and acknowledged by the SEC, is that even though these companies are registered in the U.S., there are limitations on the ability to enforce securities laws, and for investors to recover their losses if disclosures are ever found to be untrue.
LD: Why has there been such an uptick in the lawsuits filed against these types of defendants?
PW: The primary reason for the uptick in lawsuits is simply this – the intentionally false or reckless negative analytical reports being publicly disseminated by self-proclaimed “analysts” who are shorting the stock in the very companies about which they are reporting.
Plaintiffs’ class action lawyers, then, essentially re-publish those reports by cutting and pasting them into securities class action or derivative action complaints. Those unverified accusations and conclusions commonly form the basis of the purported fraud allegations in the complaints.
It’s a very profitable cottage industry that has developed over night, for both analysts and plaintiffs’ class action lawyers, alike.
LD: Can you give a flavor of the cases you and your group are working on?
PW: Yes, we are handling more than 12 matters, variously including early “crisis” counseling of these companies on risk management issues when negative analyst reports are first released; and/or the representation of companies and/or their officers and directors being sued in securities class action and/or derivative action matters; and/or their representation in SEC and/or FINRA investigations; and/or representation of the companies with respect to delisting issues; and/or representation of the underwriters (who took these companies public via reverse merger) that also are named in these actions as co-defendants; and/or representation of the audit committees of these companies for purposes of conducting a voluntary internal investigation of the company. These are the matters you are reading about in the media.
The volume of matters has grown so significantly that we formed DLA Piper’s China Rapid Response Team, with our China offices (in Shanghai, Beijing and Hong Kong) working seamlessly with our U.S. offices, depending on where the litigation is pending and the various needs of our clients.
LD: What are the challenges of these cases separate from other securities litigation cases?
PW: Perhaps the greatest challenge is the need to bridge the cultural divide. And, that applies equally with respect to our China-based clients, as well as with the SEC, FINRA and plaintiffs’ counsel that we interface with.
Many China-based companies, and their management teams, didn’t undergo the learning process of what it means to be a public, reporting company in the U.S. before they became public. Moreover, U.S. based litigation appears to China-based companies to be incredibly invasive. Many companies in China do not understand the discovery process of U.S. based litigation, and what it takes to defend a U.S. securities class or derivative action successfully, much less an SEC and/or FINRA investigation.
The more I explain the process to new clients and hear myself speak, the more I’ve come to realize how truly invasive and burdensome the U.S. litigation process is. Too many lawyers lack the necessary empathy.
LD: In parts of your media commentary, you suggest that these concerns may be somewhat overblown and perhaps resulting from short-sellers unfairly targeting certain companies. Can you expand on that a bit?
PW: The concerns are way overblown. There is nothing inherently wrong with China-based companies that went public in the U.S. via reverse merger. Yes, there are always a few bad apples in every bushel; but, the vast majority of these China-based companies are solid companies, with real earnings and tremendous profit and/or profit potential. It would be a terrible outcome to throw the baby out with the bathwater.
I don’t view short-sellers per se as the problem, either. The typical short seller simply is following analysts’ reports, and the market’s/stock price’s immediate reaction to those reports, like the rest of the investing public.
These China-based companies are being harmed primarily not by your typical short-sellers but rather by the analysts, i.e., by the intentionally false or reckless negative reports being publicly disseminated by so-called “analysts,” who shorted the stock just before, or concurrent with, the release of their reports on these companies.
At best, there is an inherent conflict of interest in reporting about the very companies whose stock they shorted, i.e., they have a built in economic motive and opportunity to drive the value of the stock down by releasing negative information about the companies they are reporting on, as the lower the stock price goes the more they will profit from their own short positions.
At worst, and depending on the facts and circumstances, if the analyst short sells the stock and then either knowingly or recklessly injects false information in the form of negative “analyst” reports into the market place to cause the price of that company’s stock to collapse, then the analyst arguably has engaged in market manipulation. Moreover, they are front running and are engaged in rumor mongering.
LD: How long do you expect this trend to continue?
PW: I would expect this litigation to continue for the next 3 to 5 years. Eventually, the SEC will begin to investigate the analysts themselves. And, as the unfairly accused China-based companies notch some litigation wins and have the cases against them dismissed, they will turn the tables on the analysts by filing defamation actions. It would be a poor litigation strategy, however, to initiate a defamation action prematurely, as the companies would lose the benefit of the Reform Act’s automatic stay of discovery while a motion to dismiss is pending.
Once the SEC begins to turn its focus onto the analysts themselves, motions to dismiss the securities actions are granted, and defamation actions against the analysts are brought (and won), you can bet that the analysts will back off.
LD: Are there any other trends in securities litigation that you are seeing in terms of the cases you and the firm are handling?
Although we are handling all of the cutting edge types of cases in securities litigation, the growing trend, which transcends many of the securities litigation matters we are handling, concerns the uptick in SEC, FINRA, U.S. Attorney, and A.G. investigations, enforcement proceedings and the like. Because of the current intense regulatory environment, a growing number of our securities litigation cases have a significant regulatory component.
LD: Have you always practiced in securities litigation?
PW: My earliest years, following a federal judicial externship and then clerkship in the central district of California, involved handling a wide variety of cases including complex commercial, banking, products liability as well as the more traditional forms of securities litigation. I soon narrowed my focus, primarily, to securities litigation. To keep things interesting and fresh, I carved several niches in this practice area along the way, and have enjoyed an extremely diversified, broad based securities practice, including hedge fund litigation, options back dating litigation, mortgage backed securities litigation, Reserve Fund litigation, Auction Rate Securities litigation, “pay to play” litigation, as well as the more traditional “stock drop” types of securities cases, etc.
There is a very strong regulatory component to my securities practice, as my team and I handle a large number of cases opposite the SEC, U.S. Attorneys’ Office, A.G.’s office, FINRA, etc. I also balance this with a fairly large consumer class action practice on behalf of a number of institutional clients. It’s incredibly diversified, and a true international practice.
LD: What drew you to this practice area, and what excites you about it?
PW: Growing up, beginning at age 13, I used to listen to my father and 10 year older brother discuss the securities markets, from the time my brother was in law school. My father, who is by background a lawyer, CPA, and industrial engineer, had taken a large number of companies public on the New York stock exchange. My brother, a corporate transactional securities lawyer (one of the best) who began his practice at a venerable Wall Street Firm, handled IPO’s, tender offers and mergers and acquisitions. I was riveted hearing stories of the good, the bad, and the ugly about going, and being, public. I was very interested in the interworkings of the stock market. I also was fascinated learning about complex financing structures. So, I had developed a strong interest from an early age.
While I was at Brobeck, where I practiced for the majority of my career before joining DLA Piper, I had a first row seat to not only observe, but personally experience, the boom and bust of the first historic Northern California technology cycle. Even with the bust came great opportunities for a securities litigator. I never before knew what a PIPEs (private investment in public equity) financing was, what a convertible debenture agreement was, nor what a floorless convertible was. Nor did the vast majority of lawyers at Brobeck (or any firm), and that goes for litigators and transactional lawyers alike. Yet, these were the only sorts of deals being done, at that time, in the tech market. Hedge funds were first taking off and were the primary sources of financing as the tech market was beginning to get back on its feet.
The little known complex PIPE financing structures, and emerging hedge fund industry, caught my attention. It was a very exciting time. I had developed a niche, cutting edge practice in representing hedge funds in every conceivable type of matter, running the gambit from bringing affirmative claims on their behalf against non-performing issuers in PIPE financings, to defending them in securities fraud civil litigation and RICO matters, to defending them in SEC, U.S. Attorney, A.G. and D.A. investigations and enforcement proceedings.
From there, a natural segue was to represent a number of nationally recognized broker-dealers in “naked short selling” cases (where hedge funds were alleged to have done the trading), pending in state and federal courts all around the country. We enjoyed notching win after win. With the intensive regulatory background I had developed through my handling of these various matters, and the desire to continue doing something different on the cutting edge of securities, I moved on to handling the first high profile options back dating cases, auction rate securities cases, reserve fund litigation, “pay to play” litigation, mortgaged backed securities litigation, all the while continuing to handle the more basic yet interesting “stock drop” cases. As I enjoy handling large, complex “bet the company” class action matters involving more than just securities, I balance my practice by handling a number of cutting edge consumer class actions, pending around the country.
I think that the securities markets, particularly in the U.S., are the bedrock of the U.S. economy, and of the global economy. Securities litigation is complex and interesting, but to me it is essential to step out and find the next cutting edge type of securities work to keep it real, fresh, fun and challenging. I have built what is considered to be one of the very largest, and most diversified, securities practices in the United States. And, I built it brick by brick, from the ground up. I absolutely love what I do.
LD: Anything else you want to add?
PW: To bring this Q & A full circle, I’m fascinated by the China reverse merger market. This was a natural segue for me, as I’ve represented hedge funds, which are the typical investors in China reverse mergers, commonly in the form of PIPE financings; I’ve also represented analysts in high profile SEC investigations, where there have been allegations of false negative reports and short selling; I have an intensive regulatory background, having handled a very large number of SEC and FINRA investigations and/or enforcement actions all around the U.S.; I have a public company practice as well, having handled a number of your more typical “stock drop” cases; and, I’ve represented underwriters in these and other contexts.
So, it’s no wonder that the natural evolution of my practice has brought me to this latest cutting edge area of securities, emanating from China (which combines, and to do a good job requires the knowledge gained from, each and every one of these sub-specialties). I also really enjoy the cultural aspects and nuances of these cases.
This is a global economy. I sit on the executive and policy committees, and am the international co-chair of the securities litigation group of the largest global law firm in the world. And, China is the future. I hope, through my efforts in this litigation, to demystify and give credibility back to the China reverse merger market in the U.S.; and, to help bridge the cultural divide, as the very best thing to come of this would be to re-engage the symbiotic relationship between the U.S. and China economies, the two leading economies of the world.