I’m calling today “legal Thursday” following word of a series of shareholder lawsuits against state-run oil giant PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) and e-commerce firm LightInTheBox (NYSE: LITB), whose shares have both dropped sharply in the last 2 weeks. These lawsuits may just be the first in what’s likely to become a bigger wave of similar actions by law firms that will accuse the companies of hiding information that led to their share declines, costing investors millions of dollars. In particular, we could see a flood of similar share plunges and lawsuits at other major publicly listed state-run firms if Beijing continues its recent campaign to root out rampant corruption at many of these companies.
To put things in perspective, let’s look first at what’s happened over the last 2 weeks to shares of both LightInTheBox and PetroChina, and what that’s meant for investors. LightInTheBox shares have lost more than half their value over the last 2 weeks, wiping out about $250 million in shareholder value for anyone unlucky enough to have purchased the stock at its pre sell-off levels. PetroChina’s New York-listed shares, meanwhile, have fallen a more mild 10 percent over the same period, wiping out a much larger $20 billion in value due to the stock’s bigger market capitalization.
Reasons for the 2 sell-offs were quite different. LightInTheBox listed its shares in New York in June, and saw them rally sharply on enthusiasm about its business model of selling cheap Chinese goods over the Internet to consumers around the world. But the company hit a major obstacle when it released its first quarterly earnings and a third-quarter revenue forecast that were a major disappointment. (previous post)
PetroChina’s case was a bit more sinister, as the company became the first big state-owned firm to become entangled in a nationwide anti-corruption drive led by new President Xi Jinping. That drive began shortly after Xi took power last year, at first targeting mostly corrupt government officials. Last month it showed signs of moving to the corporate sector, with anti-corruption probes against several foreign drug makers. PetroChina became the first big state-owned firm to get sucked into the campaign this week, when 4 top officials from the listed company and its parent came under anti-corruption investigations and were forced to resign.
Following the share sell-offs, LightInTheBox has just announced it is being sued in New York, presumably for misleading investors with reports that exaggerated its prospects before its IPO. (company announcement) Meantime, 2 separate law firms have announced that they are launching their own investigations into the PetroChina sell-off, in what almost certainly will result in big class action shareholder lawsuits against the oil giant. (announcement 1; announcement 2)
Theses kinds of lawsuits are inevitable whenever a company’s share price falls quickly on unexpected bad news, so in that regard they shouldn’t come as a big surprise. The LightInTheBox case is rather routine, involving a company that probably made a few exaggerated claims to stir up investor interest in its IPO. The lawsuit and others likely to follow could put a slight damper on new IPO activity, and at the very least will lead future listing candidates to be more cautious in what they tell investors.
The PetroChina case is a bit more intriguing, because it will be interesting to see if the company ultimately agrees to pay the millions of dollars necessary to settle the coming flood of lawsuits. Big Chinese firms aren’t used to paying such penalties in general, and could resist making such payments. More broadly, I suspect this PetroChina case will be the first of many involving big state-run firms in the ongoing anti-corruption drive. If that’s true, we could be looking at many more sell-offs for similar firms in the months ahead, followed by an even bigger number of shareholder lawsuits.
Bottom line: A shareholder suit against LightInTheBox could hurt sentiment toward Chinese IPOs, and similar threats against PetroChina could auger more suits against state-run firms.