Photo of Bill Reid by Dave Cross.
In June, Judge Andrew Borrok of New York Supreme Court approved the largest direct-pay derivative settlement in U.S. history - $300M by Renren, the onetime aspiring Facebook of China.
Though Alphabet/Google’s #MeToo $310M price tag in 2020 was technically larger, it was structured as a non-cash fund to remedy workplace discrimination over 10 years – no cash was paid to shareholders. The Renren deal could also rise thanks to a “true up” provision.
While size matters, Renren was off the charts in degree of difficulty. It is the only recent derivative case brought under foreign law that has succeeded in holding international companies to account in U.S. courts. Plaintiff counsel filed a flurry of such claims against global behemoths over the last few years, hoping to loosen the Supreme Court’s noose around cross-border securities litigation in Morrison v. National Australia Bank Ltd. And while several such claims are pending, most have failed to achieve jurisdiction.
Winning jurisdiction is just one of three formidable mountains scaled by plaintiff counsel at Reid Collins in their successful attack on the looting of Renren by its directors, who took IPO money intended to build up a social media behemoth and invested it in the then-upstart Social Finance, now SoFi, among dozens of other ventures. The firm also won derivative standing under Cayman law in New York, one of only two such claims to ever do so. Completing the Three Summits, firm founder Bill Reid surprised even himself winning a $560M pre-judgment attachment on Renren’s assets, which were being dissipated at a rapid clip.
“Imagine you're sitting in a valley in the Himalayas, and you're like, ‘Whoa, maybe we could climb that mountain over there.’ And that mountain's Everest,” which is how Reid viewed finding a court that would accept jurisdiction in the case. “And if we did that, we looked out and there was K2, an even harder mountain to climb. That would mean we could establish derivative standing.”
Many have died on Mt. Everest and K2. Perhaps fittingly, the world’s third-highest mountain, Kangchenjunga, is off limits to climbers from the Indian side. “And that gives you some sense of the odds of us winning an attachment,” says Reid.
And yet, Reid and his team of lawyers – known for their intrepid nature, determination and technical prowess – completed all three, defying every odd to hold accountable a Chinese company based in the Cayman Islands in New York State Court. The Renren case is more than a head scratcher, it is, instead, a case study in what a talented team can do when they come together determined to right a wrong, confirming one of Reid’s guiding principles “that equities truly matter.”
And make no mistake, Renren was wrong. Very, very wrong. Perhaps it didn’t start out that way, back in 2006, when Joe Chen, a Chinese-born, American-educated entrepreneur, formed Oak Pacific Investment (OPI) to purchase a social networking site known in Mandarin as Xiaonei, or “on campus.” Primarily used by college students, it certainly held the potential to become the Facebook of China. Chen was joined in his investment by David Chao and, in 2008, by SoftBank, which invested $100M.
Facebook itself entered China in 2009, but was blocked by authorities later that year. The opportunity for Xiaonei was spectacular. Chen rebranded it as Renren, meaning “everyone” in Mandarin. He cloned the look and feel of Facebook to great result: In Dec. 2008, the site had 33M visitors, by March 2011, traffic had soared to 100M.
The growth caught the eye of many China investors, including Alex Shoghi, who started out in Asian equity sales at Lehman Brothers in Hong Kong in 2004. He joined Oasis Capital Management there in 2005. In April 2011, Renren filed to list its shares on the New York Stock Exchange as American Depositary Shares. The IPO was a huge success, raising $777M, giving Renren a market capitalization exceeding $8B.
Fittingly, Chen and Chao traveled to New York to indulge in the tradition of ringing the bell to open trading on May 4, 2011. That would prove the last Renren had to celebrate, at least as a social media company. It plummeted far and fast, dropping to 45M users on an operating loss of nearly $100M by the end of 2013.
And yet, they were sitting on so much cash. Which, the lawsuit claimed, Renren diverted to investments in other companies on a grand scale starting in 2011 – while starving the platform that helped them raise the money. Chen himself led the way, personally investing $4M in SoFi in 2011. In 2012, Renren joined its chairman, investing $240M in the fast-growing SoFi over the years. In total, Renren made more than $244.7M in long-term investments in 2014 and an additional $538.1M in long-term investments in 2015, Judge Borrok found. That Renren had morphed into an investment fund was a problem in many ways, not least of which was it should have been subject to investment oversight by the Securities and Exchange Commission.
Shoghi moved back to the U.S., to Austin, with Oasis in 2012. He was not alone by 2015 keeping a sharp eye on Chinese fraud and overvalued companies in which insiders were trying to take the value of the company for less than it was worth. Renren did not disappoint. Led by Chen, Renren floated a deal to take the company private at a 20 percent premium that year. Cue howling. The deal was killed, at least for the moment.
By 2017, Chen & Co. were back at it, with a new and quite brazen scheme to take private the company’s successful investment business – hiving off the valuable and still private SoFi investment, among others - and divesting itself of the old social media asset, into which it would force its minority shareholders. Specifically, it would play out, the company was internally assessing the value of its holdings at $1.3B and used a Duff & Phelps “valuation” to pass off to minority investors that the assets were worth just $500M. Among those minority investors was Shoghi, who invested in Renren after the deal was announced in April 2018 and before it closed in June, becoming the largest minority shareholder; Shoghi eventually owned 40 percent of the minority shares.
“I’m looking at a deal that stinks,” Shoghi told Reid.
Think dirty deal, done dirt cheap.
The two had met years before fundraising for their children’s school. While they had not yet brought a case together, they formed a friendship over a love of risk and reward. Reid had started his own firm in Austin in 2009 and experienced quick success. He was sponsoring an event at Scottsdale National Golf Club in April 2018. And, though Shoghi didn’t golf, had come over for the show.
Shoghi was talking to the right lawyer. And, it turns out, in a locale that would prove pivotal to the case’s remarkable outcome.
But there was a hitch (isn’t there always?).
U.S. investors have poured more than $100B into Chinese companies going public in the U.S., more than 70 percent of which are Cayman based. Under the internal affairs choice of law doctrine, all claims against those companies must be pursued under the law of the country of incorporation – meaning Cayman law governs any claims against the vast majority of those companies. And, as the Reid team was about to learn, the odds of successfully pursuing a Cayman derivative claim in a U.S. court were highly unfavorable. Of all known claims, only one other investor had ever succeeded in establishing derivative standing under Cayman law in a U.S. courtroom.
Reid turned to his partner Nate Palmer, an expert at ferreting through the most difficult problems and finding a path.
“Nate has surgeon-like technical skills. He drills down very deep on the facts and the law and finely categorizes each piece – an archeologist exploring an ancient ruin, then he reassembles them with precision in a way that very few lawyers could ever rival - he is truly masterful at putting together facts and law in a complex case,” says Reid.
A college baseball pitcher, neither the looming deadline of the deal closing nor the impossible setup phased Palmer. He focused first on finding jurisdiction. Morrison circumscribed general jurisdiction to either a company’s principal place of business or its site of incorporation. China, the former, was a nonstarter. Cayman Islands – a locale of great expertise for the Reid Collins firm – did not quite fit.
For any hope, Palmer had to find specific jurisdiction, most likely in the U.S. “You’re looking at what is the connection between the claims you’re asserting and the conduct that gives rise to them,” he says. “There has to be a connection between the two in that jurisdiction.”
He lasered on Renren’s security filings, especially the proposed take-private divestiture. California briefly glimmered when he uncovered Chen’s California driver’s license. In addition, millions in Renren assets were transferred to the San Francisco-based SoFi. But Palmer knew that individual connections would not suffice to get the company there jurisdictionally. “You have to have both, the individuals and the company.”
But wait, was that a flinch he saw at the plate from New York?
Nate [Palmer] has surgeon-like technical skills. He drills down very deep on the facts and the law and finely categorizes each piece – an archeologist exploring an ancient ruin. – Bill Reid
Just being traded on a New York exchange would also not cut it. Intrigued, he “started digging around” on New York activity. And came across a 1988 case, Kreutter v. McFadden Oil, that allowed a cross-pollination between corporate contacts and individual contacts for jurisdictional purposes. “So if you’re the CEO of the company and you’re directing your company to do actions in New York, those can be imputed to the individual,” Palmer says.
That’s an outlier to most states, which provide a fiduciary shield: If your contact with a jurisdiction is in your capacity as a corporate representative, that doesn’t establish individual contact for jurisdiction. New York rejected the fiduciary shield doctrine in Kreutter.
“That was the piece of the puzzle that helped me bring it all together as far as tying the individuals in the company to a jurisdiction where preparatory work and key components of the transaction went through New York,” Palmer says.
As for the company itself, well, you know that saying ‘the devil is in the details’? After Renren, companies should check their hubris when hiring lawyers, financiers and others assuming they can retain the world’s best talent and profit from the world’s leading financial market while escaping accountability when bad actors run amok.
The stinky Renren steal was structured by New York lawyers and New York bankers who required notices and transfers galore to their Big Apple offices. Financial wires and legal documents circled through Times Square and Hudson Yards like LaGuardia on Friday night - paper airplanes seeking somewhere to land. Preferably near Wall Street.
The “evil genius” behind the Renren steal was that Chen, Chao and Softbank would not have to pay anything out of their own pockets to create the new subsidiary. To accomplish this, they instead declared a cash dividend that qualified investors could waive and take shares in the new subsidiary. If an investor failed to qualify or did not want to move into the spinoff with the guys who were ripping them off, he would be stuck taking the dividend and remaining in the shell of the old social media company whose traffic had tanked to such an extent that used-car sales were among its strongest prospects.
The Reid Collins team built their plea for a New York court to find jurisdiction around that unfair “Hobson’s choice” paired with a due process argument that some court somewhere needed to stop the looting.
Partner Michael Yoder worked with Palmer to shape their theories in what became a series of increasingly incriminating complaints. “I went back through history to build out the jurisdictional argument by tracing the cash. And the cash they raised in New York in 2011 all the way through to the ultimate investments they made with it and then through the divestiture created our argument,” he says. Palmer and Yoder created the initial complaint almost exclusively through publicly available information.
From the specter of thousands of legal and financial documents flying about Manhattan, they focused on four areas of extensive involvement between Renren’s leaders and its transactions in New York: 1) the IPO; 2) the separation of the investment company and the social media assets; 3) the private placement of the investment assets into the spun-off entity; and 4) the cash dividend payment.
“All these little pieces of the puzzle - how people elected their shares by sending a communication to New York; if you were going to get cash, the wires had to go to New York banks and come out of New York banks,” says Palmer.
Their jurisdictional dig exhumed the contracts from Renren’s 2011 IPO, when it listed on the NYSE with American depository shares. And, they learned, that with an ADS, the individual investor doesn’t really own a share in the company. Instead, he owns an ADS that says, “‘I really own 15 shares of actual Renren shares but I don’t hold the shares in my own name,’” Palmer explains. To issue the ADSs, Renren entered into an agreement with a New York bank – Citibank – to hold the shares in trust. All the dividends and related transactions related to the IPO flowed through the deposit agreement – in which, by the way, Renren agreed to submit to jurisdiction in New York.
In the divestiture and spin-off transaction, whatever an investor chose – shares in the spun-off company or to cash out - she had to send her election to Skadden’s Manhattan office. The cash dividends had to be wired from a New York bank. The loan Renren needed to cash out the minority shareholders came in the form of a loan from California-based SoftBank - which wired the funds to Citibank in New York. Citibank used those funds to pay the special dividend out of its New York bank accounts.
Even with all that, Reid says, “Were we 100 percent confident this would give us jurisdiction in New York? No. Our jurisdictional argument was more death by a thousand cuts. But we felt pretty strong there was no other place this transaction occurred.”
The “if not here, then where” due process element of the argument spoke to Borrok. In his May 2020 ruling, Borrok found long-arm jurisdiction over the company “comported” with due process.
“Plaintiffs have alleged that Renren raised $777 million through its IPO from New York’s capital markets, used the proceeds from the IPO to make several investments and effectively form a de facto venture capital fund (which it was prohibited from doing pursuant to the Underwriting Agreement and the Investment Company Act), and then improperly divested those investments through the Separation, which was effectuated in New York and governed by New York law,” Borrok wrote.
“By tapping into New York’s capital markets to conduct the IPO, electing to do a transaction that necessarily required the use of New York’s regulatory and banking system to effectuate the Separation, and agreeing that New York law would govern the controlling agreements, Renren purposefully availed itself of the privileges and protections of doing business in New York. Based on these contacts, Renren certainly should reasonably anticipate being haled into court here in connection with the Transaction.”
A monumental legal accomplishment, to be sure. But as those who climb mountains know, it’s only when you’ve summited one that you can appreciate with renewed clarity how high the next peak looms.
Winning derivative standing under Cayman law to pursue a claim in New York courts would be even more difficult than surmounting jurisdiction. It had only been done once before in a U.S. courtroom.
A derivative claim for breach of fiduciary duty can only be pursued by the company – not its shareholders - against its own board, generally speaking. To overcome that requirement under U.S. law, a plaintiff shareholder must show that it would be futile to demand the board bring such an action. However, the rules were a bit different for Renren, because both it and its now spun-off successor were Cayman based. English law largely applies in Cayman, requiring the claim to be pursued under the law of the country of incorporation, Cayman.
The team had to travel back in time a bit, to 1843, to understand how to build derivative standing. That’s when an English court was presented with a battle over the development of Victoria Park in Manchester, and, in Foss v. Harbottle, established the “proper plaintiff rule” – that for any harm alleged to have been done to a company, the proper plaintiff is the company itself. Foss set forth four exceptions to the rule, including “wrongdoer control,” which allows a minority shareholder to bring a derivative action against the company.
“Getting derivative standing under Cayman law is exceedingly difficult, far more so than U.S. law. As far as we can tell, this is only the second case in any U.S. court in which plaintiffs have been able to get derivative jurisdiction under Cayman law. And there have been dozens and dozens and dozens of failed efforts,” says Yoder.
To meet the standard of “wrongdoer control,” the team highlighted the self-dealing by Renren’s leaders. They argued that the transaction would be more properly viewed as an “asset-looting transaction” that allowed the principals to pay themselves kickbacks while keeping ownership of the spun-off company.
“The defendants were standing on both sides of the deal so we argued that the transaction should be recharacterized not as an ordinary spinoff, but rather as an eluding transaction involving self-dealing. That’s how you pigeonhole it into a derivative claim that belongs to the company,” says Yoder.
Getting derivative standing under Cayman law is exceedingly difficult, far more so than U.S. law. And there have been dozens and dozens and dozens of failed efforts. – Michael Yoder.
The Renren steal closed in June 2018. Just under two years later – and three months into the Covid lockdown – Reid faced off in the first hearing in the Renren battle with a face he remembered from 1992. That’s the year he graduated from St. John’s Law School, moving to Texas for a Fifth Circuit judicial clerkship that would set him on the path to become a prosecutor, talented trial lawyer and owner of his own high-flying firm.
His opponent defending Renren and seeking to have the case against it dismissed was Skadden partner Chris Malloy, who Reid remembered as a nice guy way back when. Malloy, who served as editor in chief of the St. John’s Law Review in 1993, had ascended the ranks to become a litigation partner tasked with notching a win for Renren, but also implicitly defending his firm, which had done much of the deal work under scrutiny.
Certainly it was a proud day for St. John’s, and perhaps less so for Skadden.
For the Reid Collins team, it was a celebration. A reckoning when Borrok ruled the shareholders had found jurisdiction in his court and specific standing to pursue their derivative claims. He left little doubt of his assessment, ruling that “allegations of deliberate and dishonest breaches of duty” by the defendants at the expense of Renren’s minority shareholders “leap off the pages of the Amended complaint”
Borrok’s ruling opened the door to discovery beyond what the team could find in public financial documents. The team dug in, per usual, with hatchets and switchblades. Their dig yielded information that led Duff & Phelps to be added as a defendant for Bates stamping Renren’s heavily understated valuation; targeted SoftBank, whose role in the steal was far greater than publicly disclosed and which had come to dominate and control the Renren board; and focused on the majority control wielded by Chen, Chao and SoftBank.
The Reid team, which grew to include 16 timekeepers, reviewed anesthesia-grade discovery, much of it in Mandarin and Japanese. Working late one night, first-year associate Aaron Brown stopped cold when he found a spreadsheet from April 2018 – titled “Exit Strategy”; (seriously, you can’t make this up). It proved while Renren’s majority shareholders were publicly proclaiming the spun-off assets to be worth $500M, and they were asking their special committee to approve the deal with that same $500M valuation, that they actually valued Renren's holdings on a line-item basis at $1.3B.
“This was a smoking gun because the whole case after we won jurisdiction and standing came down to value and Renren offered up a bunch of excuses,” says Reid. "And this spreadsheet was dated the very same month that the special committee approved the deal at a value of $500M and the same month that the deal was announced.”
Brown felt lucky to have gotten pulled into the case when another team member was departing. He had worked as an investigator for the firm for a few years and knew well the priority it placed on determined digging. But he was only entering his seventh month as a lawyer when asked to dive in on 80,000 pages of documents.
“We would have names of companies that we knew were part of the transaction and then look for where there was chatter about the value of them,” says Brown of the team effort. “I just happened to type in the right name of the company and I pulled up this wonderful spreadsheet named Exit Strategy. Which was like, ‘Really? You guys named it that?’ And then coincidentally, it happened to almost exactly value the case as we had valued it, it was just $100 million over what we had said the assets were probably worth.”
The document opened the floodgates to a frenzy. Everyone was in the documents trying to find the golden nuggets because we realized, "Holy crap, the facts of this case are just getting better and better."
Double-digit days spent in the mines became the norm for most of the team, producing a third ascent that defied the odds: winning a $560M pre-judgment attachment against Renren. Drinking wine one night with another leading trial lawyer who is more than a little experienced in global chicanery and resultant legal fallout, Reid mentioned his quandary. In recent months, Palmer, Yoder & Co. had uncovered evidence of fraudulent transfers after the litigation commenced of SoFi stock held by Renren and its leaders in which Renren's holdings were being liquidated at below market prices and the proceeds were being sent to China.
In January 2021, Yoder recalls, SoFi announced it was doing a SPAC merger. They turned to its voluminous registration statement and uncovered a startling disclosure: Amidst the litigation, SoFi had essentially obtained half of OPI’s interest in SoFi for a song. OPI had 34 million shares of SoFi stock and gave SoFi options for 17 million of those shares at $8.80. “We thought it was worth $15 or $16 at the time,” says Yoder. He began to draft an amended complaint to bring in SoFi on a fraudulent conveyance theory for receiving transfers mid-litigation.
The global chicanery lawyer, who asked to not be named, suggested Reid pursue a pre-judgment attachment. The team was skeptical they could win such an extraordinary remedy, and focused instead on laying the groundwork for an injunction. They pulled together a 75-page memo on an aggressive yet legally sound path to enjoin the wholesale dissipation of SoFi stock from the spun-off entity. The team was given yet more gifts in the form of Chen & Co.’s duplicity.
Senior associate Tyler Perry had joined the crew, which also included partner Scott Saldaña and associate Dylan Jones. Perry proved a perfect addition, having spent time with Simpson Thacher in Hong Kong and New York, where he had worked on the team that defended Alibaba in securities litigation. In a twist of fate, Perry grew up in Hong Kong, attended part of his high school years in Beijing, worked at a law firm in Shanghai and even in the Beijing Olympic Village in 2008. Fluent in Mandarin, he was able to accelerate the team’s progress through documents.
“A very significant portion of the documents we ultimately got in the case were in Mandarin, whether Mandarin text messages, emails, Word documents. I became, to a certain degree, responsible for doing a lot of the Mandarin language factual research in the case,” says Perry.
“We were just trying to find a way to stop the bleeding,” says Perry. The team spent two months researching before concluding they would add a pathway for a judge to order a pre-judgment attachment in their preliminary injunction motion. “That was basically unheard of, particularly with assets held abroad,” he says.
The team built its case on the defendants’ almost complete and ongoing dishonesty throughout the litigation, most recently regarding its sale of SoFi stock, and disclosures related to that and other corporate matters.
In a delicious twist, let’s return for a moment to April 2018 at the Scottsdale National Golf Club where our saga began with Shoghi and Reid commiserating over a dirty deal. Turns out, that after claiming for years to be a resident of China, Chen actually owned property in Phoenix, about 15 miles from the Golf Club.
Chen lied about that to Borrok and the Appellate division of the New York Supreme Court. He had also lied about whether he had bank accounts in New York.
“That proved the silver bullet,” says Palmer. For all its consistent success, the Reid Collins team is not one to overplay its hand. They devoted just 400 words of their 23-page Memorandum of Law in support of a Preliminary Injunction or Prejudgment Attachment to the latter.
“When we were able to get that in front of the court, we increased our chances of getting a preliminary injunction or an attachment order granted, just because the judge saw that these guys were not necessarily acting in perfectly good faith,” said Perry. “I think that helped tip the ball in our favor a little bit.”
Reid and Palmer were cautiously optimistic about winning an injunction on May 14, 2021, when they logged on for the virtual hearing seeking an injunction or attachment. Reid had a trial starting the next Monday on his mind, but Palmer told him, “You believe in the attachment. You argue it.”
Bill Reid has emerged as one of the finest litigation talents of this generation, and one reason is he brings a well-honed appreciation for the equities of a case. He learned that from Judge Reynoldo G. Garza of the 5th U.S. Circuit Court of Appeals, for whom Reid clerked after matriculating St. John’s.
“Judge Garza always said - the equities matter more than the law,” Reid says.
And the equities spoke volumes that Chen had lied under oath to Borrok. So why should the judge trust him now, presented with abundant evidence he was selling SoFi shares below market value to relatives of SoFi board members and sending the money to China?
Reid concluded his argument feeling they had made a good case for the injunction.
Denied, Borrok said.
“What?” Reid looked at Palmer.
“I’m granting the attachment,” the judge said, before hitting the “leave meeting” button.
“Holy smokes,” Palmer thought, looking at Reid as the gravity of the moment hit them: They had won a $560M attachment that would bring the force of law enforcement to stop the bleeding of Renren and OPI’s assets that properly belonged to its shareholders.
“The root of the problem,” Borrok wrote, “is that the alleged self-dealing defendants have improperly looted Renren and its shareholders of its most valuable assets. ….”
Faced with an attachment that exceeded half a billion dollars, the settlement table appeared as the next locale in the unlikely case’s journey. While Renren filed an unsuccessful emergency appeal, the attachment required any assets Renren and its leaders sold to remain in a U.S. bank account.
“We really shut down their ability to sell anything, and their biggest investor, SoftBank, was looking for a liquidation event out of all of this,” says Palmer. “The pressure that led to the settlement was getting them stuck in the U.S. Sinking the ship for SoftBank and some of the others made it more difficult for them.”
The case was settled for $300M in October 2021, which was finalized in June. Also representing plaintiffs were Grant & Eisenhofer and Gardy & Notis. Skadden, of course, had a starring role for Renren, as did Holland & Knight and then Katten Muchin. Renren offshoot OPI was defended by McDermott. Paul Weiss, which represented Chen individually, proved critical in bringing the case to an end.
It was a signature achievement for Reid Collins, whose younger lawyers got a taste of the thrill of victory in the most unlikely scenario. “It was fun getting to hop up on the 747 full altitude and try to learn to fly a bit,” says Brown.
For Perry, the case was exactly what he was seeking after leaving Simpson Thacher seeking “the other side of the V. I really had no idea that three years later, I would actually be able to be prosecuting a comparable case, which was honestly exactly what I wanted to do.”
The partners on the team already have achieved huge financial victories on behalf of defrauded plaintiffs. But, as Yoder says, Renren stands out as a true “trailblazing” case.
“There was no roadmap, there was no governmental investigation, no parallel securities action where you could piggyback off of,” he says. “A lot of the big bankruptcy cases, you have parallel criminal actions and it's pretty well established. This one required truly building it from the ground up.”
Palmer found the case particularly satisfying because everything the team suspected – every inkling that turned into an allegation – proved, once they were able to obtain documents, to be true.
“In most cases, some of the stuff you think happened doesn't happen,” Palmer says. “That's just how it goes. There's another reason. There's something else in there, or some other contributing factor. But in this one, it was just straight up what we thought.”
As ever, Reid looks to the future as the punctuation on his team’s accomplishment
“This is the magic of Renren,” he says. “I think our jurisdictional masterpiece can now be reproduced in other going private transactions."
About the author: Katrina Dewey (email@example.com) is the founder and CEO of Lawdragon, which she and her partners created as the new media company for the world’s lawyers. She has written about lawyers and legal affairs for 30 years, and is a noted legal editor, creator of numerous lawyer recognition guides and expert on lawyer branding. She is based in Venice, Calif., and New York. She is also the founder of Lawdragon Campus, which covers law students and law schools. View our staff page.