By Nate Raymond
A lawyer for union pensioners and other investors asked a U.S. jury on Wednesday to hold a former chief financial officer of Longtop Financial Technologies liable for recklessly ignoring signs of fraud at the Chinese technology company.
In a rare example of a securities class action going to trial, jurors in Manhattan federal court heard opening statements from lawyers on both sides, as well as testimony from Derek Palaschuk, the ex-CFO who is a defendant in the civil lawsuit.
Kimberly Justice, the lawyer for the investors, told jurors Palaschuk recklessly signed off on the accuracy of fraudulent financial results for the company in 2010 and 2011.
"The price of Longtop's shares were artificially inflated on this foundation of lies," she said.
Palaschuk's lawyer said his client acted responsibly and investigated analyst questions about Longtop's accounting.
"They do not have any evidence Palaschuk made the challenged statements with reckless disregard, whether or not they were true," said John Sylvia, his lawyer.
Class action lawsuits over alleged securities fraud usually settle before trial. Only 13 such cases have reached a verdict since 1995, when the laws governing them were changed, said Adam Savett, director of class action services at Kurtzman Carson Consultants.
The lawsuit, filed in 2011, was one of several cases launched amid accounting scandals at Chinese companies trading on U.S. stock exchanges.
Based in Xiamen, China, Longtop had a $1.08 billion market value when the New York Stock Exchange halted trading in the company in May 2011.
Days later, Palaschuk resigned, followed shortly by Longtop's auditor, Deloitte Touche Tohmatsu CPA Ltd. The auditor cited "recently identified falsity" in Longtop's financial records.
Before resigning, Palaschuk spoke with Longtop chief executive Weizhou Lian, Justice told jurors. In an email memorialising the call, Palaschuk said Lian "informed me the company had been a fraud since 2004."
Danske Invest Management A/S and Pension Funds of Local No. One, IATSE, are pursuing the lawsuit on behalf of shareholders.
The investors also sued Longtop and Lian, but neither appeared in court. U.S. District Judge Shira Scheindlin entered a $882.3 million default judgment against them in 2013.
Palaschuk, who took the stand after opening statements, told jurors he certified Longtop's financial statements because they had been audited and his team had completed procedures to verify them.
"I approved them because I believed they were accurate," he said.
The case is In re Longtop Financial Technologies Limited Securities Litigation, U.S. District Court, Southern District of New York, No. 11-03658.