Boy with a Chinese FlagThe case of the day, Munoz v. China Expert Technologies, Inc. (S.D.N.Y. 2011), was a securities class action brought on behalf of investors who bought shares of China Expert Technology, Inc in 2006 and 2007. The claim is that CXTI reported $132 million in revenue from contracts to build e-government computer systems in China. According to the complaint, the contracts were forged and 99% of the revenue was never earned.

CXTI a Nevada corporation that did business in China, wanted discovery to proceed under the Hague Evidence Convention, but the court rejected its arguments. The lawsuit involved “securities sold in the United States and under the protection of United States laws governing United States capital markets, and implicates important United States policies and practices.” CXTI and the other defendants asserted that under Chinese law would subject them to criminal sanctions if they complied with the court’s discovery orders. Judge Hellerstein displayed the traditional American skepticism towards foreign blocking statutes in the Aerospatiale context. He focused on the balance of the national interests of the United States and China and found that US interests prevailed. The United States has “a strong interest in both regulating its domestic corporations [CXTI was incorporated in Nevada] and ensuring the integrity of its financial markets.” China’s interests, on the other hand, were uncertain. CXTI was a US public company, and so the Chinese government and Chinese parties with which CXTI did business must have known that the company was subject to US disclosure laws. But the judge indicated that he would be prepared to make rulings on particular documents that would balance “the policies of China’s laws on state secrets and [US] federal policies in relation to issuers’ and accountants’ obligations.”

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