Companies Could Face New Liabilities after ChinaCast Decision

Hong Kong-based ChinaCast was sued by shareholders after its CEO was found to have committed $120 million in fraud and misrepresented the state of the company’s finances. The case was initially dismissed by a Pasadena federal judge, who ruled ChinaCast was not responsible for the CEO’s actions.

But in October, a panel of judges in the 9th Circuit Court of Appeals created an “exception to the exception” that a company cannot be held liable for an executive’s actions if those actions go against the company’s interest when it ruled that the company can be held liable in certain cases where an “innocent third party” is adversely affected.

Business Insurance reports that the ruling may give “more ammunition” to plaintiffs in securities lawsuits and that they are likely to continue attempts to hold businesses liable for rogue executives’ fraud.

Furthermore, Litigation partner Sarah Good says, the decision may mean plaintiffs continue to tests the limits of a company’s liability.

“Where does it go from here? Are the plaintiffs lawyers going to try to push the envelope and have this apply to management in positions other than the CEO position?” she said.

Read the full Business Insurance article here (subscription required).