Orient Paper in $2 Million Reverse Merger Settlement

* Chinese company resolves shareholder accusations of securities fraud

* Settlement is one of the first in reverse merger cases

Orient Paper Inc said Thursday it has agreed to a $2 million settlement to resolve shareholder accusations of securities fraud.

The deal marks one of the first settlements of cases targeting Chinese companies that entered the U.S. markets via a reverse merger rather than initial public offering.

The Hebei Province-based paper products company was one of the earliest targets of lawsuits targeting Chinese companies for accounting and governance issues over the reverse mergers. The related lawsuits became more frequent starting in 2010.

In the reverse merger, the a Chinese company typically acquired a U.S. shell company that was already listed on a U.S. stock exchange.

Shareholders sued Orient Paper and various officers and directors after the research firm and short-seller Muddy Waters claimed to find fraud in the company’s financial statements. The company denied the report’s claims.

Thirty-seven lawsuits raising similar claims against Chinese companies were filed last year, roughly triple the year-earlier number, according to PricewaterhouseCoopers.

Only a few companies have settled. In 2010, China Shenghuo Pharmaceutical Holdings Inc reached an $800,000 accord.

U.S. District Judge Manuel Real in Los Angeles must approve the Orient Paper settlement, which was disclosed in a June 16 court filing. Orient Paper said the payout would be covered by its insurer.

Lawrence Rosen, a lawyer for the plaintiffs, declined to comment.

Given the timing of the lawsuits , Chinese reverse merger cases “are just now becoming ripe for settlement,” said Seth Aronson, a lawyer at O’Melveny & Myers who represents Chinese companies.

Kevin LaCroix, a management liability specialist who runs a blog discussing liability for corporate officers and directors, said settlements with U.S.-listed Chinese companies have so far been small, perhaps in part because they provide little or no insurance for their officials. Those funds typically play a significant role in financing investor settlements.

“Prior to these lawsuits coming in, they saw it as a luxury rather than being a necessity,” said LaCroix, an executive vice president at OakBridge Insurance Services.

The case is Henning v. Orient Paper, Inc., U.S. District Court of the Central District of California, 10-cv-5887.

For the plaintiffs: Laurence Rosen, The Rosen Law Firm

For Orient Paper, Inc.: Robert Weber and Perrie Weiner, DLA Piper

By Nate Raymond                 Thu Jun 21, 2012 7:26pm EDT