Brown v. China Integrated Energy, Inc.

• Decision Date: 12 July 2012
• Docket Number: Case No. CV 11–2559 MMM (PLAx).
• Citation: 875 F.Supp.2d 1096
• Parties: Larry BROWN, individually and on behalf of all others similarly situated, Plaintiff, v. CHINA INTEGRATED ENERGY, INC., Gao Xincheng, Albert C. Pu, and Li Gaihong, Defendants.
• Court: U.S. District Court — Central District of California

875 F.Supp.2d 1096

Larry BROWN, individually and on behalf of all others similarly situated, Plaintiff,

v.CHINA INTEGRATED ENERGY, INC., Gao Xincheng, Albert C. Pu, and Li Gaihong, Defendants.

Case No. CV 11–2559 MMM (PLAx).

United States District Court,

C.D. California.

July 12, 2012.

Mark John Geragos, Geragos & Geragos, Jeff S. Westerman, Milberg LLP, Laurence M. Rosen, Rosen Law Firm, Lionel Zevi Glancy, Michael M. Goldberg, Peter A. Binkow, Glancy Binkow and Goldberg LLP, Justin B. Farar, Kaplan Fox and Kilsheimer LLP, Los Angeles, CA, Ian D. Berg, Abraham Fruchter & Twersky LLP, San Diego, CA, Thomas C. Bright, Gold Bennett Cera & Sidener, Laurence D. King, Linda M. Fong, Kaplan Fox & Kilsheimer LLP, San Francisco, CA, for Plaintiffs.

Amanda J. Sherman, Loeb and Loeb LLP, Century City, CA, Eugene R. Licker, John Piskora, Loeb and Loeb LLP, New York, NY, Walter Allan Edmiston, Loeb and Loeb LLP, Los Angeles, CA, for Defendants.

ORDER DENYING MOTION TO DISMISS

MARGARET M. MORROW, District Judge.

This is a putative securities fraud class action under the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). On August 21, 2011, the court consolidated a number of actions filed by plaintiffs seeking to represent individuals who purchased the common stock of China Integrated Energy.¹ On December 20, 2011, lead plaintiff Puerto Rico Teachers Retirement System (“Puerto Rico TRS”) and plaintiff Bristol Investment Fund, Ltd. (collectively “plaintiffs”) filed a consolidated class action complaint against defendants China Integrated Energy, various officers and directors of the company, and accounting firm Sherb & Co. ² On February 22, 2012, defendant China Integrated Energy moved to dismiss the consolidated class action complaint.³ Plaintiffs have opposed the motion.⁴

I. BACKGROUND

A. Plaintiffs' Complaint

Plaintiffs seek to represent a class of individuals who purchased or otherwise acquired the common stock of China Integrated Energy (“China Integrated”) betweenMarch 31, 2010 and April 21, 2011.⁵ China Integrated is an energy company that sells finished oil products, heavy oil products, and biodiesel fuel. It also operates retail gas stations.⁶

Plaintiffs allege that the class period began on March 31, 2010, when China Integrated reported its 2009 financial results.⁷ They assert that the report released that day was materially false and misleading, and overstated the company's 2009 revenue and net income.⁸ The complaint asserts that defendants created and maintained two sets of financial statements: (1) a presumably accurate set of financial records filed with China's State Administration for Industry and Commerce (“SAIC”) and (2) false and misleading statements filed with the Securities and Exchange Commission (“SEC”).⁹ They contend that the SEC filings vastly overstated China Integrated's sales revenue, income from operations, and net income.¹⁰

On March 16, 2011, analyst firm Sinclair Upton published a report concerning China Integrated, in which it alleged that the company had reported significantly lower revenues, fixed assets, and net income for 2009 and 2010 in the documents it had filed with Chinese regulators than it had in reports filed with the SEC.¹¹ Sinclair Upton asserted that the company had been funneling money to corporations owned by the son of defendant Xincheng Gao, the company's chief executive officer.¹² The Sinclair Upton report allegedly caused an immediate 16% drop in the price of China Integrated's shares.¹³ Stock prices purportedly fell another 24.6% on March 17, 2011, when analysts at Roth Capital Partners confirmed the inconsistencies reported by Sinclair Upton.¹⁴ Although China Integrated issued a letter to shareholders on March 23, 2011, attempting to rebut the charges of financial improprieties, additional damaging information was purportedly revealed on March 28, 2011, when analyst firm Alfred Little issued a detailed report calling China Integrated a “complete hoax.” ¹⁵ Alfred Little allegedly relied on a lengthy investigation of the company's Tongchuan and Chongqing Tianrun biodiesel factories, which revealed that there was no meaningful production activity at either facility.¹⁶ The investigation purportedly contradicted assertions made by China Integrated that biodiesel production accounted for a significant portion of its total reported sales, and that the Tongchuan facility was operating at full capacity.¹⁷

Allegedly in the wake of these revelations, China Integrated announced that it had retained the law firms of Pillsbury Winthrop Shaw Pittman, LLP and King & Wood, as well as accounting firm Deloitte Financial Advisory Services LPP, to advise its audit committee in connection with an internal investigation of the allegations made by Sinclair Upton and Alfred Little. ¹⁸ Plaintiffs assert that only a few weeks after this announcement, however, China Integrated reported that the chairman of its audit committee had resigned due to management's unwillingness to cooperate with the investigation, that another member of the audit committee had resigned, and that the chief financial officer and the two law firms hired to assist with the investigation had also resigned.¹⁹ The company's independent auditor—KPMG—later resigned as well.²⁰ KPMG's resignation letter stated that no one should rely on its audit report or internal controls opinion filed with China Integrated's 2010 Form 10–K due to “inconsistenc[ies] between management's representation” that it would fully cooperate with the investigation and management's conduct during the investigation. KPMG also stated that “management's conduct during the investigation” raised doubts concerning management's representations to KPMG in connection with the 2010 audit and evaluation of internal controls.²¹

On April 20, 2011, NASDAQ halted trading in China Integrated stock after the close of trading until China Integrated could “satisfy” NASDAQ's request for additional information. The stock closed that day at $1.84 per share. Plaintiffs' class period ends the following day, on April 21, 2011.²² They assert that NASDAQ delisted China Integrated on November 21, 2011; as justification for this decision, NASDAQ noted “the Company's obstruction of the board's independent investigation into recent allegations made by various individuals.” ²³

Plaintiffs assert claims for violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 as well as violation of § 11 of the Securities Act of 1933.²⁴

II. DISCUSSION

A. Legal Standard Governing Motions To Dismiss

A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint. A Rule 12(b)(6) dismissal is proper only where there is either a “lack of a cognizable legal theory,” or “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir.1988). The court must accept all factual allegations pleaded in the complaint as true. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th Cir.1996); Mier v. Owens, 57 F.3d 747, 750 (9th Cir.1995). The court need not, however, accept as true conclusory legal allegations cast in the form of factual allegations. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 553–56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do”). Thus, a plaintiff's complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Twombly, 550 U.S. at 545, 127 S.Ct. 1955 (“Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)” (citations omitted)); Moss v. United States Secret Service, 572 F.3d 962, 969 (9th Cir.2009) (“[F]or a complaint to survive a motion to dismiss, the non-conclusory ‘factual content,’ and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief,” citing Iqbal and Twombly ).

1. Legal Standard Governing Plaintiffs' Section 11 Claim

Section 11 of the Securities Act provides a private right of action for purchasers of a security if the issuer publishes a registration statement in connection with the security that “contain[s] an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). To prevail on a section 11 claim, a plaintiff must prove “(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment.” In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir.2005) (internal quotation marks omitted); see also Rubke v. Capitol Bancorp Ltd, 551 F.3d 1156, 1161 (9th Cir.2009).

Not all Section 11 claims are subject to the heightened pleading requirements of Rule 9(b). Rubke, 551 F.3d at 1161;In re CBT Group PLC Securities Litigation, No. C–98–21014–RMW, 2000 WL 33339615, *3–4 (N.D.Cal. Dec. 29, 2000). “Rule 9(b) applies when (1) a complaint specifically alleges fraud as an essential element of a claim, (2) when the claim ‘sounds in fraud’ by alleging that the defendant engaged in fraudulent conduct ... and (3) to any allegations of fraudulent conduct, even when none of the claims in the complaint ‘sound[s] in fraud.’ ” F.T.C. v. Lights of America, Inc., 760 F.Supp.2d 848, 852 ...