An interesting trend is emerging these last few weeks as a growing number of investors and governments use offshore venues to probe the business practices of domestic and international firms doing business in China. The latest headlines have global banking giant Morgan Stanley (NYSE: MS) and leading domestic oil producer PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) coming under investigation in the US for such potentially illegal practices. The 2 cases highlight the fact that many foreigners believe they can’t find justice in China in cases of corporate wrongdoing, and thus may increasingly take their cases to other countries where justice systems are more independent and mature.
The fact that Morgan Stanley and PetroChina are being investigated in a place like the US for their China-based practices isn’t really new. Investors and other plaintiffs have occasionally gone to US courtrooms in the past, using different tactics to argue that the US has jurisdiction in such cases. One of the most common arguments is that companies being investigated trade their stock on US exchanges, since many major state-owned enterprises are listed in New YOrk. One such case occurred earlier this year when a group of local fishermen who suffered from an oil spill in China sued ConocoPhillips (NYSE: COP) in a US courtroom. (previous post)
All that said, these latest 2 cases are quite different besides the fact that both involve US-based probes of companies relating to their business practices in China. Let’s start with Morgan Stanley, which is reportedly being probed by the US Justice Department for its hiring practices in China. (English article) The case looks like an extension of an earlier probe first exposed in August, which saw the US securities regulator investigating rival banking giant JPMorgan (NYSE: JPM) on similar grounds.
In both cases, investigators were reportedly looking into allegations that both companies curried favor with government officials in order to win lucrative business from state-owned enterprises. Such practices often involved hiring and giving business to children and other relatives of high-ranking officials. It’s unclear if the US banks did anything illegal in China, since similar “strategic hiring” is relatively common for companies throughout the world. But this case does seem aimed at reminding US companies that they need to uphold their global standards even when operating in developing markets.
From there let’s look quickly at the PetroChina case, which is even murkier than the Morgan Stanley one. In this particular instance, all we know is that PetroChina says it has been notified by a US court that 4 top company officials, including its chairman and CFO, are being investigated in connection with possible securities violations. (English article)
I suspect this case is related to a broader crackdown that has seen top officials at many state-run companies come under investigation for corruption. PetroChina was one of the first companies to see that happen, when 4 top officials were abruptly forced to resign in August after coming under investigation. (previous post) PetroChina shares fell around 10 percent after that news came out, wiping out about $20 billion in the company’s market value and sparking a series of shareholder lawsuits.
As I’ve said above, what’s most interesting about these 2 latest cases is that they could reflect an acceleration in offshore investigations of Chinese firms and multinationals that do business in China. That should be a good thing over the longer term as it will force companies to adhere to global standards when doing business in China. But it could also produce turbulence for those companies’ shares in the shorter term as investors fret about potential financial fallout from such probes.
Bottom line: Investors and regulators are increasingly using offshore locations to probe firms for their China-based practices, creating some short-term volatility for their shares.