In re Petrochina Co. Ltd. Sec. Litig., Master File No. 13–cv–6180 (ER).
| Decision Date | 03 August 2015 |
| Docket Number | Master File No. 13–cv–6180 (ER). |
| Citation | 120 F.Supp.3d 340 |
| Parties | In re PETROCHINA COMPANY LTD. SECURITIES LITIGATION. |
| Court | U.S. District Court — Southern District of New York |
Thomas Andrew Paskowitz, Alfred Robert Pietrzak, Benjamin Francis Burry, Joel M. Mitnick, Sidley Austin LLP, New York, NY, for In re PetroChina Company Ltd. Securities Litigation.
This consolidated class action arises from an alleged bribery scheme at the Chinese oil and gas company, PetroChina Company, Ltd. ("PetroChina" or "the Company") during the period between April 26, 2012 and December 17, 2013 (the "class period"). According to the Second Amended Class Action Complaint ("SAC"), during the class period, PetroChina falsely claimed to have adequate internal controls, while representing that it was complying with applicable laws and regulations and maintaining high standards of corporate governance and ethics. Lead Plaintiffs Jeffrey Klein and Samuel Ayoub (collectively, "Plaintiffs") filed the instant action individually and on behalf of those who purchased PetroChina securities during the class period. Plaintiffs assert claims against PetroChina, and three of its officers: (1) Jiang Jiemin ("Jiang"), the Company's former Chairman and acting Chief Executive Officer; (2) Li Hualin ("Li"), the Company's former Vice President and Secretary to the Board of Directors; and (3) Ran Xinquan ("Ran"), the Company's former Director and Vice–President (collectively, "Individual Defendants").1 Count One of the SAC alleges violations of § 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b–5 against all Defendants. Count Two asserts a claim under § 20(a) of the Exchange Act against the Individual Defendants.
PetroChina moves to dismiss Count One of the SAC under Rule 12(b)(6) of the Federal Rules of Civil Procedure.2 For the reasons set forth below, PetroChina's motion to dismiss is GRANTED.
PetroChina is the largest oil and gas producer and distributor in the People's Republic of China ("PRC"). SAC ¶ 2. PetroChina's American Depositary Shares ("ADS") have been listed on the New York Stock Exchange since April 6, 2000. Id. The SAC identifies China National Petroleum Corporation ("CNPC") as PetroChina's parent company.4 Id. Zhou Yongkang ("Yongkang") was CNPC's General Manager between 1988 and 2002. Id. ¶ 21. Before becoming chairman of PetroChina in 2007, Jiang worked at CNPC, where he rose from working at several subsidiaries, to becoming Vice President, and finally the Director in 1999. Id.
The class period begins on April 26, 2012, when the Company filed its annual report ("2011 annual report") with the SEC on Form 20–F, which was signed by Li. Id. ¶ 47. The Company's 2011 annual report stated that the Chairman evaluated the effectiveness of PetroChina's disclosure controls and procedures and concluded that the Company's "disclosure controls and procedures were effective to ensure that material information required to be disclosed in the reports ... is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and regulations and that such information is accumulated and communicated to [the] company's management ... as appropriate, to allow timely decisions regarding required disclosure." Id. The report also stated that the Company evaluated the effectiveness of its internal control over financial reporting and determined that its financial reporting was effective as of December 31, 2011. Id. The effectiveness of the Company's internal control was audited by PricewaterhouseCoopers. Id.
The report also contained a required Sarbanes–Oxley Act of 2002 ("SOX") certification, signed by Jiang. Id. ¶ 54. As part of the SOX certification, Jiang swore that the annual report did not contain any "untrue statement of a material fact." Id. Jiang attested to the fact that he and the other certifying officer had put into place and evaluated PetroChina's disclosure controls and procedures to ensure that material information is made known and the reliability of financial reporting is assured. Id. Jiang also certified that, based on the "most recent evaluation of internal control over financial reporting," he had disclosed to the Company's auditors two items of information: (1) "all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;" and (2) "any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting." Id.
The 2011 annual report indicated that the Company adopted two codes of ethics, one for its senior management, and a separate one for its employees. Id. ¶ 50. The report acknowledged that the Company did not currently have a code of business conduct and ethics for directors and that its directors were required to comply with the Model Code for Securities Transactions by Directors of Listed Companies, pursuant to the Hong Kong Stock Exchange ("HKSE") Listing Rules. Id. Finally, the report stated that, under PRC Company Law and HKSE Listing Rules, the CEO of PetroChina is not required to certify to the NYSE each year that he is not aware of any violation by the company of NYSE corporate governance listing standards and therefore would not be submitting such a certification. Id.
The code of ethics for employees at PetroChina, prohibited them from accepting "any valuable gratuity that may affect their decision-making and disturb their independent judgment, or allow their relatives or any third party to accept this kind of gratuity." Id. ¶ 51. Similarly, PetroChina's code of ethics for senior management prohibited the acceptance of gifts "of a value that may tend to influence business decisions or compromise independent judgment" by senior management, along with their close family members. Id. Employees and senior management alike were required by the code of ethics to comply with local laws and regulations. Id. Meanwhile, the Company's website separately stated that PetroChina has "always and conscientiously complied with the requirements of the China Securities Regulatory Commission, the Stock Exchange of Hong Kong ... the New York Stock Exchange, Inc. and the United States Securities and Exchange Commission as well as other regulatory requirements[.]" Id. ¶ 52. The website also stated that the Company "has been regulating its internal management and operations in a strict manner" and "provided all the market participants and regulatory authorities with timely, accurate, complete and reliable information of the Company, striving to enhance the company value." Id.
On April 26, 2013, the Company filed a second annual report with the SEC on Form 20–F ("2012 annual report"), which contained the same language about the Company's internal controls and compliance. Id. ¶ 55. Once again, Li certified the 2012 annual report. See Paskowitz Decl., Doc. 44, Ex. A at 10.5 However, Zhou Jiping ("Jiping")—who was performing the functions of the CEO and is identified in the SAC as PetroChina's Chairman—signed the accompanying SOX certification. Id. at 13; see also SAC ¶ 46.
Under the leadership of the PRC's current president, the government began "cracking down" on corruption in state-owned enterprises, such as PetroChina.6 SAC ¶ 19. On March 18, 2013, Jiang resigned from PetroChina and began working as Director of the State-owned Assets Supervision and Administration Commission ("SASAC"). Id. ¶ 22. Chinese news outlets reported that Jiang was "promoted" to SASAC director so that PRC authorities could conduct their corruption investigation of PetroChina officials "without interference from Jiang." Id. According to the SAC, Jiang was Yongkang's "protégé." Id. ¶ 20. Yongkang has been under house arrest by the PRC since 2013, after the government seized over $14.5 billion of his assets in connection with a corruption investigation.7 Id.
The SAC claims that the corruption at PetroChina consisted of "bribery, political corruption, and undisclosed related party transactions." Id. ¶ 23. On August 26, 2013, the PRC Ministry of Supervision Company announced that CNPC Vice President Wang Yongchun was also under investigation for "gross violation [sic] of party discipline." Id. ¶ 26. On August 27, 2013, PetroChina announced that SASAC had launched an investigation Li, Ran, and PetroChina chief geologist Wang Daofu for "severe breaches of discipline."8 Id. ¶ 27. PetroChina's announcement further stated that all three officials had resigned from the Company. Id.
In early September 2013, the PRC news media reported that one of PetroChina's suppliers, Wison Engineering Services, was under investigation for corruption. Id. ¶ 29. The investigation resulted in the PRC freezing the supplier's bank accounts, the CFO stepping down, and the Chairman and controlling shareholder being arrested. Id. ¶ 30. During this time, the media also reported that a second PetroChina supplier, Mingxing Cable ("Mingxing"), was also under investigation in connection with the Company. Id. ¶ 31.
Several of Mingxing's senior officials "disappeared from the public" and its Vice President "coincidentally" passed away. Id. The following month, on October 18, 2013, a PRC news outlet quoted a source at PetroChina who claimed that the Company was involved in a corrupt bidding program at an Indonesian oilfield, wherein PetroChina bribed another company $800 million in order to expand its business in the region.9 Id. ¶ 24. Finally, on December 17, 2013, Bloomberg LP reported that PRC authorities had taken Wen Qingshan ("Qingshan"), a PetroChina Supervisor, into custody in...
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