Last week, Orient Paper (ONP) announced it would retain Loeb & Loeb to conduct an independent investigation into the issues raised by Muddy Waters LLC.
While I welcome the third-party investigation, Loeb & Loeb is not the right firm for the job. I don’t intend to discredit Loeb & Loeb’s credentials. But given their active involvement in the Chinese Reverse Takeover (RTO) space, they are neither independent nor objective when it comes to whether a Chinese RTO is defrauding investors. Rather, they are firmly entrenched in the “club” of service providers that earn substantial fees from Chinese companies that have listed publicly in the United States through reverse takeovers of U.S. shell companies.
A service provider such as Loeb & Loeb is financially incentivized to conclude that Orient Paper is not making up its numbers. Failing confidence in Chinese RTOs could lead to materially reduced revenue for the firm's Chinese securities practice.
I’m not alleging any past, present or future wrongdoing on the part of Loeb & Loeb. I’m merely saying that Loeb & Loeb is not a genuinely independent party; they are not the appropriate law firm to perform a third party investigation into whether Orient Paper is falsifying its financial statements; and I and other critics are unlikely to be satisfied with an investigation led by Loeb & Loeb that exempts ONP from wrongdoing.
If Orient Paper is serious about having third parties investigate critics’ claims, they should hire a law firm that is not actively involved in the Chinese RTO space, and can act as a more objective investigator. I provide dozens of potential law firms at the bottom of this article.
Loeb & Loeb’s Active Involvement in Chinese RTOs
Loeb & Loeb is one of the leading law firms in providing legal counsel to Chinese companies that undergo RTOs, or merge with SPACs, to become public in the United States. They are also one of the top firms that provide legal counsel to the investment banks and PIPE investors who provide banking services or capital to these companies.
As they write in their website, “In 2009, Loeb & Loeb LLP’s Corporate Securities practice, notable for taking many of the first private Chinese companies public on U.S. stock exchanges, completed 33 major transactions totaling approximately $2.1 billion in 2009”. For press releases from Loeb & Loeb discussing their strength in Chinese RTOs, see here and here.
Loeb & Loeb is a sponsor of many conferences that focus on Chinese RTOs. They sponsored CCG's China Rising Conference this year and last year. They are sponsoring the Roth China Conference this year, and sponsored the 2009 and 2008 Roth conferences as well. They sponsored The Dealflow Reverse Merger 2010 Conference in June.
The lead partner of the China practice, Mitch Nussbaum, is a regular on the China RTO circuit. He speaks on panels regularly with other key service providers of Chinese RTOs - see here, here and here. In this link, for instance, Nussbaum speaks at a 2:15pm panel moderated by Crocker Coulson, ONP's investor relations representative. Two hours earlier, ONP board member Drew Bernstein gave his own speech at the event. It's difficult to imagine a scenario where Loeb & Loeb accuses ONP of fraud, when Bernstein has called the allegations "categorically false and without merit" and Coulson has been coordinating ONP's public responses to the charges of fraud.
Nor has Loeb been able to sidestep some of the controversies among Chinese RTOs. For the September equity offering for China Natural Gas (CHNG), which was alleged to be a fraud by the blog “Worthless Pennies”, Loeb & Loeb was legal counsel to the underwriters. For the April equity offering for Lihua International (LIWA), which has been flagged by Chimin Sang and Steve Chapski as potentially falsifying its financial statements, Loeb & Loeb was legal adviser to the company.
A Genuinely Independent Third Party should Be Picked Instead
I don’t think Loeb & Loeb should be chosen to investigate the serious allegations of fraud that have been charged against Orient Paper. A law firm with a Chinese office that is not actively involved with Chinese RTOs should be selected to conduct the investigation. Loeb & Loeb is not sufficiently independent. They generate substantial fees from Chinese companies that have undertaken RTOs to become publicly listed in the United States. They have a vested financial interest in seeing that Chinese RTOs are cleared of wrongdoing, generally speaking.
- Baker & McKenzie
- Clifford Chance LLP
- Freshfields Bruckhaus Deringer
- O’Melveny & Myers LLP
- Shearman & Sterling LLP
- Skadden, Arps, Slate, Meagher & Flom LLP
- Allen & Overy LLP
- DLA Piper
- Gide Loyrette Nouel A.A.R.P.I.
- Herbert Smith LLP
- Paul, Hastings, Janofsky & Walker LLP
- Paul, Weiss, Rifkind, Wharton & Garrison LLP
- Sidley Austin LLP
- Simpson Thacher & Bartlett LLP
- Sullivan & Cromwell LLP
- Weil, Gotshal & Manges
- Davis Polk & Wardwell
- Dechert LLP (Beijing Representative Office)
- Jones Day
- Latham & Watkins LLP
- Lovells LLP
- Mallesons Stephen Jaques
- Morrison & Foerster
Some of these firms, like DLA Piper, also play active roles in Chinese RTOs. But many in this list do not. ONP should select a law firm from this list that is not regularly involved in Chinese RTOs to conduct the investigation.
Disclosure: Author is short ONP amd CHNG