Ho v. Duoyuan Global Water, Inc.

• Decision Date: 24 August 2012
• Docket Number: No. 10–CV–7233 (GBD).,10–CV–7233 (GBD).
• Citation: 887 F.Supp.2d 547
• Parties: Hoi Ming Michael HO, et al., Others Similarly Situated, Plaintiffs, v. DUOYUAN GLOBAL WATER, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

887 F.Supp.2d 547

Hoi Ming Michael HO, et al., Others Similarly Situated, Plaintiffs,

v.DUOYUAN GLOBAL WATER, INC., et al., Defendants.

No. 10–CV–7233 (GBD).

United States District Court, S.D. New York.

Aug. 24, 2012.

Robin Bronzaft Howald, Glancy, Binkow & Goldberg LLP (N.Y.C), Fei–Lu Qian, Jeremy Alan Lieberman, Marc Ian Gross, Pomerantz, Haudek, Block, Grossman & Gross LLP, New York, NY, Ex Kano S. Sams, II, Lionel Z. Glancy, Robert V. Prongay, Glancy, Binkow & Goldberg, LLP, Los Angeles, CA, for Plaintiffs.

Brooke S. Murphy, Bruce W. Day, Charles B. Goodwin, Harry Arthur Woods, Jr., Mack J. Morgan, III, Tara A. LaClair, Crowe & Dunlevy, P.C., Oklahoma City, OK, Susan Elizabeth Huntsman, Crowe & Dunlevy, P.C., Tulsa, OK, Thomas J. Mullaney, Leventhal, Sliney & Mullaney, LLP, Roslyn, NY, James Ancone, Joseph De Simone, Terri Ann Mazur, Mayer Brown LLP, Lea Haber Kuck, Skadden, Arps, Slate, Meagher & Flom LLP, Adam Selim Hakki, Christopher Richard Fenton, Jaculin Aaron, Shearman & Sterling LLP, Dennis H. Tracey, III, George Albert Salter, Joanna Felice Wasick, Hogan Lovells U.S. LLP, Nancy Chung, Jacqueline Gail Yecies, Peter Ian Altman, Akin, Gump, Strauss, Hauer & Feld, LLP, Michael Richard Young, Antonio Yanez, Jr., Willkie, Farr & Gallagher LLP, New York, NY, J. Christian Word, Katherine A. Schettig, Latham & Watkins, LLP, Washington, DC, Donna L. McDevitt, Frances P. Kao, Skadden, Arps, Slate, Meagher & Flom, LLP, Chicago, IL, for Defendants.

MEMORANDUM DECISION AND ORDER

GEORGE B. DANIELS, District Judge.

Named Plaintiffs, Hoi Ming Michael Ho and Joseph Sciarro (“Lead Plaintiffs”), Initial plaintiff Mingli Li, and Plaintiff Huaying Jin, individually and on behalf of all other similarly situated, commenced this class action for violations of Sections 11 & 15 of the Securities Act of 1933, and Sections 10(b) & 20(a) of the Securities Exchange Act of 1934, against (1) Duoyuan Global Water, Inc. (“DGW” or “the Company”); (2) Wenhua Guo (“Guo”), the CEO, Chairman of the Board of Directors, and controlling shareholder of DGW, and Stephen C. Park (“Park”), CFO of DGW (collectively, “Management Defendants”); (3) Christopher P. Holbert, Joan M. Larrea, Thomas S. Rooney, Jr., Yuefeng Yu, Ping Wei, and Charles V. Firlotte, directors and former directors of DGW (collectively, “Director Defendants”); (4) Piper Jaffray & Co., Oppenheimer & Co., Janney Montgomery Scott, LLC, Credit Suisse Securities (USA) LLC, Macquarie Capital (USA) Inc., and Rodman & Renshaw, LLC, the underwriters of one or both of the Company's American Depositary Shares (“ADS”) offerings (collectively, “Underwriter Defendants”); (5) Grant Thornton International Ltd. (“GTI”) and BDO Limited (successor to Grant Thornton Hong Kong), the external auditors and authors of opinion letters in connection with DGW's financial statements (collectively, “Auditor Defendants”); and (6) the Global Environmental Fund (“GEF”), a company which held, through GEEMF III Holding MU, a large portion of shares of DGW prior to its public trading. Plaintiffs allege that Defendants made misrepresentations or omissions of material facts in DGW's SEC filings and press releases, which led to the decline in the market value of the Company's ADSs, resulting in significant financial injury to the Lead Plaintiffs and the class. Defendants DGW, the management Defendants, the Director Defendants, the Underwriter Defendants, Grant Thornton International, Ltd., and the GEF Defendants each move for dismissal of the Corrected Amended Complaint (“CAC”) pursuant to Rule 8, 9(b), and 12(b)(6) of the Federal Rules of Civil Procedure. DGW also moves to dismiss certain impermissible allegations pursuant to Federal Rule of Civil Procedure 12(f).

FACTS

The Parties

Defendant DGW is a China-based manufacturer and seller of water treatment products. (Am. Compl. ¶ 4). The Company develops water treatment technologies and products which it sells for municipal, industrial, residential and agricultural water treatment throughout China. ( Id.).

Defendant Guo was Chairman of the Board of Directors and CEO of DGW. ( Id. ¶ 41). Guo was also Chairman of the Board of Directors of Duo yuan Printing, Inc. (“DYP”), an affiliated company of DGW. ( Id.). Defendant Park was CFO of DGW during the Class Period. Although he announced his resignation from the position of CFO on April 4, 2011, he had the power and authority, along with Guo, to control and correct the content of DGW's reports to the SEC. ( Id. ¶ 42–43).

DGW's Board of Directors was comprised of experts from a variety of fields. Defendant Holbert joined the Board in September 2008. He has been a Certified Public Accountant for more than ten years. ( Id. ¶ 44). In addition, Holbert “founded a financial consulting firm providing advice for those doing business in China and served as the Director of Sarbanes Oxley compliance at Chinadotcom Corporation.” ( Id.). While serving on the Board, Holbert was a member of the Compensation Committee, as well as the Nominating and Corporate Governance Committee. ( Id.). Holbert resigned from the DGW's board on August 26, 2009, and was replaced by Defendant Wei. ( Id. ¶ 48). Wei had an “extensive” background in accounting, including several positions at private auditing firms. ( Id.). Wei also was a Certified Public Accountant and a Chartered Accountant. ( Id.). Wei resigned from the Board on April 20, 2011. ( Id.).

Defendant Larrea joined DGW's Board on February 5, 2008, and resigned on April 20, 2011. ( Id. ¶ 45). While on the Board, Larrea also was managing director at GEF. ( Id.). In fact, Larrea was appointed to the DGW Board as a designee of Defendant GEEMF III Holdings MU, an affiliate of GEF. ( Id.). Prior to joining DGW's Board, Larrea served as a “principle investment officer of International Finance Corporation (a member of the World Bank), which focuses upon financing private-sector investment in emerging markets.” ( Id.).

Defendant Rooney joined the DGW Board in June 2008 and resigned on January 1, 2010. ( Id. ¶ 46). While on the Board, Rooney served as a member of DGW's Audit, and the Nominating and Corporate Governance Committee, and as the Chair of the Compensation Committee. ( Id.) Prior to joining DGW's Board, Rooney served as a CEO to a private company that rehabilitated water and sewer piping. ( Id.).

In November 2009, Defendant Firlotte replaced Defendant Rooney, and assumed all of his Board and Committee member responsibilities. ( Id. ¶ 49). Prior to joining DGW, Firlotte served in a myriad of positions related to water management, and is currently the CEO of the largest private water utility in New England. ( Id.).

Defendant Yu joined the Board in August 2008. ( Id. ¶ 47). Prior to joining DGW's Board, Yu served as a Vice President to a nonprofit organization. ( Id.). According to DGW's IPO Form F–1 Defendant Yu is still serving as a DGW Board member. ( Id.).

Grant Thornton International, Ltd. (“GTIL”) is an umbrella organization comprised of independent registered public accounting firms world-wide. ( Id. ¶ 58). Plaintiff alleges that GTIL signed, and therefore, represented that it had audited DGW's “financial statements as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007, and 2006 included in the prospectus.” ( Id.). Plaintiffs further allege that GTIL “is currently DGW's outside auditor, through its member firm, Jingdu Tianhua, also known as ‘GT–China.’ ” ( Id.). According to the Complaint, during the relevant time period, ‘GT–Hong Kong’ (“GT–HK”) also served as an outside auditor to DGW. ( Id. ¶ 59). Plaintiffs allege that GT–HK “acted as an agent of GTI[L], in that GTI [L] requires a commitment of each member firm to the ‘standards and values represented by the [GTIL] brand.’ ” ( Id.).

Defendant GEF is a “pioneer in the area of private equity investment in innovative ‘green’ businesses.” ( Id. ¶ 61). In February 2008, GEF invested $30.2 million in DGW to acquire a 20% stake in the Company. The acquisition was made through the use of Defendant GEEMF III Holdings MU, a private investment company. ( Id.).

The Underwriter Defendants, Piper Jaffray & Co., Oppenheimer & Co., Jamey Montgomery Scott, LLC, Credit Suisse Securities (USA) LLC, Macquarie Capital (USA) Inc., and Rodman & Renshaw, LLC, are each either investment banks or financial services and investment firms. ( Id. ¶¶ 51–56). The Underwriters each participated in negotiating the offering price of DGW ADSs in the IPO and/or SPO and solicited and sold shares to investors. ( Id. ¶ 57).

Alleged Material Misstatements by DGW and Defendants

Plaintiffs allege that between June 24, 2009 and April 5, 2011 (the “Class Period”), Defendants materially misled investors regarding the financial circumstances of DGW through oral statements by executives, as well as misstatements in disclosure forms. On June 1, 2009, DGW filed a Form F–1 Registration Statement with the SEC so that it could commence a public offering. ( Id. ¶ 72). The IPO took effect on June 24, 2009, and the Company filed the Prospectus June 25, 2009. ( Id.).¹ The IPO Documents contained several financial disclosure forms in which Plaintiffs allege DGW misstated financial figures and overstated the number of its distributors and employees.² ( Id. ¶¶ 76–83). On June 24, 2009, DGW commenced its initial public offering (“IPO”) of 5,500,000 ADSs. ( Id. ¶ 5). Each ADS represented two DGW ordinary shares, and were priced at $16.00 on the New York Stock Exchange (“NYSE”). ( Id. ¶¶ 5–6).

After the IPO, in August of 2009, DGW reported its Q2'09 results: nearly a 50% increase in year-over-year net income and a gross margin of nearly 50%. ( Id. ¶ 8). Around this time, DGW's ADSs traded for nearly doubled their initial IPO price. ( Id.). In November 2009, Defendant Guo announced the Q3'09 results: increases in year-over-year revenue, operating income of more than 30%, gross margins near 50%, as well as an increased demand for all of DGW's products. (...