Resh v. China Agritech, Inc.

• Decision Date: 24 May 2017
• Docket Number: No. 15-55432,15-55432
• Citation: 857 F.3d 994
• Parties: Michael H. RESH, On Behalf of Himself and All Others Similarly Situated; William Schoenke ; Heroca Holding, B.V.; Ninella Beheer, B.V., Plaintiffs-Appellants, v. CHINA AGRITECH, INC. ; Yu Chang, Company 's CEO, President, Secretary, and Chairman of the Board; Yau-Sing Tang, aka Gareth Tang, Company 's Chief Financial Officer; Gene Michael Bennett, Director of CAGC; Xiao Rong Teng, Director of CAGC; Ming Fang Zhu; Lun Zhang DaI, Director of CAGC; Charles Law, aka Charles C. Law, aka Charles Chien-Lee Law, aka Charles Chien-Lee Loh, aka Chien-Lee C. Loh, Director of CAGC; Zheng Wang, Director of CAGC, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

857 F.3d 994

Michael H. RESH, On Behalf of Himself and All Others Similarly Situated; William Schoenke ; Heroca Holding, B.V.; Ninella Beheer, B.V., Plaintiffs-Appellants,
v.
CHINA AGRITECH, INC. ; Yu Chang, Company 's CEO, President, Secretary, and Chairman of the Board; Yau-Sing Tang, aka Gareth Tang, Company 's Chief Financial Officer; Gene Michael Bennett, Director of CAGC; Xiao Rong Teng, Director of CAGC; Ming Fang Zhu; Lun Zhang DaI, Director of CAGC; Charles Law, aka Charles C. Law, aka Charles Chien-Lee Law, aka Charles Chien-Lee Loh, aka Chien-Lee C. Loh, Director of CAGC; Zheng Wang, Director of CAGC, Defendants-Appellees.

No. 15-55432

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 5, 2016, Pasadena, California
Filed May 24, 2017

Matthew M. Guiney (argued), Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York; Betsy C. Manifold, Francis M. Gregorek, Rachele R. Rickert,

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and Marisa C. Livesay, Wolf Haldenstein Adler Freeman & Herz LLP, San Diego, California; David A.P. Brower, Brower Piven, New York, New York; for Plaintiffs-Appellants.

Seth Aronson (argued), Brittany Rogers, and Michelle C. Leu, O'Melveny & Myers LLP, Los Angeles, California; Abby F. Rudzin, O'Melveny & Myers LLP, New York, New York; for Defendants-Appellees.

Before: Stephen Reinhardt, William A. Fletcher, and Richard A. Paez, Circuit Judges.

OPINION

W. FLETCHER, Circuit Judge:

Plaintiffs bring a would-be class action alleging that China Agritech, Inc. ("China Agritech") and its managers and directors violated the Securities Exchange Act of 1934 ("Exchange Act"). Plaintiffs were unnamed plaintiffs in two earlier would-be class actions against many of the same defendants based on the same underlying events. Class action certification was denied in both cases. Under American Pipe & Construction Co. v. Utah , 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974), and Crown, Cork & Seal Co. v. Parker , 462 U.S. 345, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983), the statute of limitations was tolled during the pendency of these two suits for plaintiffs' individual claims. There is thus no time bar preventing plaintiffs from bringing the present suit as joined individual claims rather than as a class action. The question before us is whether plaintiffs are time-barred from pursuing their suit as a class action.

For the reasons that follow, we hold that plaintiffs are not time-barred from bringing a class action.

I. Background

China Agritech is a holding company incorporated in Delaware with its principal place of business in Beijing, China. The company claims to operate through various subsidiaries that manufacture and sell organic compound fertilizers and related products to farmers in twenty-eight Chinese provinces. China Agritech began listing its shares on the NASDAQ Stock Exchange in 2005. In a 2009 filing with the U.S. Securities and Exchange Commission ("SEC"), China Agritech reported a net revenue of $76 million, which was triple the $25 million in revenue it reported for 2005.

On February 3, 2011, LM Research, a market research company, published a report entitled "China Agritech: A Scam" ("LM Report"). The report, written by individuals who held a short position in China Agritech stock, asserted that China Agritech was "not a currently functioning business that [was] manufacturing products," but instead was "simply a vehicle for transferring shareholder wealth from outside investors into the pockets of the founders and inside management." Alleging idle factories, minimal investments, and fictitious contracts, the report concluded that China Agritech had "grossly inflated its revenue, failed to account for tens of millions of investor dollars, and [had] virtually no product in the market." Upon release of the LM Report, China Agritech's shares declined from $10.78 per share on February 2, 2011, to $9.85 per share on February 3, 2011.

China Agritech denied the allegations in an eight-page letter to shareholders. On February 15, 2011, Bronte Capital, a hedge fund that also held a short position in China Agritech, responded to China Agritech's letter in an article sarcastically titled, "China Agritech: China's amazing productivity levels" ("BC Article"). The BC

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Article contended that photos released by China Agritech in its letter did not show the most basic equipment required for operations of the magnitude that China Agritech claimed. For example, the pictures showed 40 kg fertilizer bags being moved manually by individual human laborers rather than with forklifts, calling into question how a factory reported to manufacture 100,000 tons of granular fertilizer annually could possibly operate as depicted. China Agritech's stock value declined to $7.44 per share the next day.

On March 13, 2011, China Agritech announced the formation of a Special Committee of its Board of Directors to investigate the allegations of fraud. The next day, China Agritech dismissed its independent auditor, Ernst & Young Hua Ming ("E&Y"), and publicly disclosed that E&Y had insisted, in December 2010, that the board commence an investigation of accounting problems it had previously identified. Also on March 14, 2011, NASDAQ halted trading in China Agritech stock and initiated delisting proceedings. On October 17, 2012, the SEC issued an enforcement order revoking the registration of China Agritech stock.

II. Procedural History

A. The Dean Action

On February 11, 2011, Theodore Dean, on behalf of himself and all others similarly situated, filed a would-be class action against China Agritech and several of its managers and directors. See Dean v. China Agritech, Inc ., Case No. 2:11-cv-1331-RGK-PJW, 2011 WL 607174 (C.D. Cal.) (the " Dean Action"). Dean alleged that China Agritech had materially misstated its net revenue and income for the third quarter in 2009 on its SEC Form 10-Q filing, and had materially misstated its net revenue and income for fiscal years 2008 and 2009 in its 2009 SEC Form 10-K filing. The complaint was filed eight days after release of the LM Report. The case was assigned to Judge Klausner in the Central District of California.

On the same day that the Dean Action was filed, Dean's counsel notified China Agritech shareholders of the class action through two global media platforms, Business Wire and GlobeNewswire, inviting shareholders to come forward and serve as lead plaintiff. He repeated the notification a week later. See 15 U.S.C. § 78u-4(a)(3)(A)(i). On April 12, 2011, pursuant to § 21D(a)(3)(B) of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I), six shareholders sought appointment as lead plaintiff and approval of lead counsel. On May 16, 2011, the district court denied without prejudice these motions as premature.

On June 22, 2011, Dean filed an Amended Complaint with four additional named plaintiffs and two additional defendants. The amended Dean Action alleged claims for violations of: (1) Section 10(b) of the Exchange Act and SEC Rule 10b-5 by China Agritech and all individual defendants; (2) Section 20(a) of the Exchange Act by the individual defendants; (3) Section 11 of the Securities Act of 1933 ("Securities Act") by all defendants; and (4) Section 15 of the Securities Act by the individual defendants. On October 27, 2011, the district court granted China Agritech's motion to dismiss the Dean plaintiffs' Securities Act claims but denied its motion to dismiss the Exchange Act claims.

On January 6, 2012, the Dean plaintiffs moved for class certification on behalf of all persons or entities that had acquired China Agritech stock between November 12, 2009 and March 11, 2011. On May 3, 2012, the district court denied their motion. The court concluded that although the Dean plaintiffs had satisfied all four requirements of Rule 23(a), they failed to establish the predominance requirement of

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Rule 23(b)(3). Reliance is a required element for Section 10(b) securities fraud cases. The district court found that individual issues predominated because the Dean plaintiffs had failed to establish a fraud-on-the-market presumption of reliance. A fraud-on-the-market theory requires a showing of market efficiency, which, in the view of the district court, plaintiffs had not made. The court therefore held that plaintiffs had to establish individualized reliance to support their claims.

The Dean plaintiffs appealed the denial of certification under Rule 23(f). On August 8, 2012, we affirmed. See Dean v. China Agritech, Inc. , Case No. 12-80120 (9th Cir.), Dkt. No. 5. The Dean plaintiffs continued litigating their cases as individuals. They settled their individual claims on September 14, 2012. Based on the settlement, their individual claims were dismissed with prejudice on September 20, 2012.

B. The Smyth Action

On October 4, 2012, three weeks after the Dean Action settled, Kevin Smyth filed an almost identical class-action complaint on behalf of the same would-be class against China Agritech in federal District Court for the District of Delaware. See Smyth v. Chang , Case No. 1:12-cv-01262-RGA, 2012 WL 4963062 (D. Del.) (the " Smyth Action"). The Smyth and D...