On November 24, 2014, Kessler Topaz secured a rare jury verdict in favor of damaged investors in the Longtop Financial Technologies Limited Securities Litigation, against Longtop’s former Chief Financial Officer, Derek Palaschuk. This was just the 14th securities fraud case to be tried to a jury verdict in the past 20 years, following the 1995 passage of the Private Securities Litigation Reform Act, the statute under which the case was brought.
After hearing all the evidence, it took the eight-member jury, sitting in federal court in New York, less than three hours to find Mr. Palaschuk liable for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) for all eight of his alleged misstatements. Moreover, because the jury found Mr. Palaschuk primarily liable under Section 10(b), it did not need to reach plaintiffs’ claims that he was secondarily liable under Section 20(a) for Longtop’s fraud, as a control-person of the Company.
The case concerned a massive accounting fraud perpetrated by the Company to manipulate its 2010 and 2011 financial results, which were the penultimate responsibility of its CFO, Mr. Palaschuk. Lead Plaintiffs Pension Fund of Local One I.A.T.S.E. and Danske Invest Management A/S represented the Class, which consisted of all persons who purchased or otherwise acquired American Depositary Shares (“ADSs”) of Longtop between February 10, 2010 and May 17, 2011 (the “Class Period”). Kimberly Justice and Gregory Castaldo led the trial team for Kessler Topaz, assisted by Michelle Newcomer and Margaret Onasch.
At trial, plaintiffs presented evidence showing that the Company had been a fraud since 2004 and, contrary to its reported financial results, had never really made a profit. Plaintiffs also introduced evidence demonstrating that Mr. Palaschuk had been confronted with numerous red flags throughout his tenure as CFO that should have suggested to him a “culture of fraud” existed at Longtop and that the Company’s financial results might be misstated. Despite numerous warning signs, Mr. Palaschuk publicly signed and certified fraudulent financial results quarter after quarter, financial results that were built on a “foundation of lies,” Ms. Justice told the jury in her opening statement. Upon discovering this massive fraud, Longtop’s auditor publicly resigned, citing the “recently identified falsity” of Longtop’s financial records, and the New York Stock Exchange suspended trading of the Company’s ADSs. The stock never resumed trading and investors lost hundreds of millions of dollars.
The jury found Mr. Palaschuk reckless in making these statements and awarded the Class the full amount of damages sought at trial — ranging from $11.89 to $19.27 per share throughout the Class Period. As required under the Exchange Act, the jury also was asked to apportion liability amongst the three named defendants: Longtop, its former Chief Executive Officer, Lian Weizhou (“Lian”) and Derek Palaschuk. While the jury found Mr. Palaschuk responsible for just one percent of its damage award, prior to trial, Kessler Topaz already had obtained a default judgment of $882 million plus interest against Longtop and Lian, each of whom failed to appear and defend in the action. Efforts to collect that judgment are underway and papers are presently being prepared for the court’s approval to allow Kessler Topaz to provide notice to the Class regarding the jury’s verdict and instructions for submitting claims. Once all claims have been processed, the aggregate amount of damages for which Mr. Palaschuk is liable will be determinable.