He v. China Zenix Auto Int'l Ltd.
| Decision Date | 12 June 2020 |
| Docket Number | Civ. No. 2:18-15530 (KM-JAD) |
| Parties | ZHENGYU HE, individually and on behalf of all others similarly situated, Plaintiff, v. CHINA ZENIX AUTO INTERNATIONAL LIMITED, JIANHUI LAI, and MARTIN CHEUNG, Defendants. |
| Court | U.S. District Court — District of New Jersey |
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The plaintiffs have filed a putative class action alleging securities fraud against China Zenix Auto International Limited ("China Zenix" or the "Company") and certain of its senior officials (See 1AC (DE 23)).1 The allegations stem from purportedly false or materially misleading statements and omissions made by the defendants in various public disclosures, as well as an alleged stock manipulation scheme. Plaintiffs assert that these false and materially misleading statements violated Section 10(b) and Section 20(a) of the Exchange Act, and that the manipulation scheme violated Section 9(a) of the Exchange Act.
Currently before the Court is Defendants' motion to dismiss the first amended complaint for failure to state a claim and for lack of personaljurisdiction. See Fed. R. Civ. P. 12(b)(6); 12(b)(2). For the reasons stated below, the motion to dismiss is granted in part and denied in part.
In considering a motion to dismiss, the Court is required to treat the facts alleged in the complaint as true and to draw all reasonable inferences in the plaintiffs' favor. I summarize those allegations as follows:
A. Relevant Parties and Participants
The plaintiffs, ITENT EDV Dienstleistungs GmbH and Ing. Richard Deutner Softwaeentwicklung & Beratung, seek to represent a class consisting of all those (other than the Defendants and their affiliates) who purchased publicly traded securities issued by Defendant China Zenix from October 2, 2015 through June 14, 2018 (the "Class Period"). (1AC ¶ 1). Plaintiffs purchased such securities during the Class Period. (Id. ¶ 16).
Defendant China Zenix is based in the People's Republic of China and incorporated under the laws of the British Virgin Islands. (Id. ¶ 18). It designs, manufactures, and sells wheels for commercial vehicles. (Id.). In 2011, China Zenix completed an initial public offering of American Depository Shares ("ADS"), each of which represented four of the Company's ordinary shares. (Id. ¶ 19). The ADS traded on the New York Stock Exchange ("NYSE") from May 11, 2011 until June 14, 2018, and currently trade on the over-the-counter market. (Id.).
Defendant Jianhui Lai is the Company's founder. (Id. ¶ 20). During the Class Period, he served as CEO and Chairman of the Company's Board of Directors. (Id.). Defendant Martin Cheung has served as the Company's Chief Financial Officer since March 2014. (Id. ¶ 21).
Lai beneficially owns approximately 70% of the Company's ordinary shares through his sole ownership of Newrace Limited, China Zenix's Virgin Islands-based holding company. (Id. ¶ 28). Additionally, multiple members of his family are involved with the Company, serving as directors or officers of theCompany's operating subsidiary. (Id. ¶ 29). Indeed, the Company "operates much like a family business." (Id. ¶ 30). Lai's substantial ownership is unique; no other director or executive officer of the Company holds more than 1% of its total outstanding ordinary shares. (Id. ¶ 32).
B. Alleged Material Omissions
Plaintiffs' allegations center on an NYSE regulation requiring the average closing price of a security traded on the exchange to be greater than or equal to $1.00 over a period of 30 trading days. (Id. ¶ 35). If the price dips below $1.00 for a given period, the NYSE notifies the company and allows it a six-month cure period to raise the price. (Id.). If, at the end of the cure period, the price has remained below $1.00 for the previous 30 trading-days, then the NYSE is permitted to delist the company. (Id.).
On August 18, 2015, China Zenix issued a press release revealing that the Company had been notified it was in violation of this policy. (Id. ¶ 36). On October 2, 2015, the Company issued a press release announcing that it had cured the violation and raised the price above the applicable threshold, bringing it into compliance with "all NYSE continued listing requirements . . . ." (the "October 2015 Press Release"). (Id. ¶ 39).
Plaintiffs allege that the October 2015 Press Release was misleading because it failed to disclose three facts: (1) that the Company knew its employees and others were trading the ADS in an improper manner following the notification from the NYSE; (2) that this improper trading was the true reason the Company was able to comply with the $1.00 price requirement; and (3) that the Company faced a material risk of being delisted by the NYSE because of this improper trading and its knowledge thereof. (Id. ¶ 40).
On April 28, 2016, the Company filed its annual report for the fiscal year ending December 31, 2015 with the Securities and Exchange Commission ("SEC") on Form 20-F (the "2015 Annual Report"). (Id. ¶ 41). The 2015 Annual Report was accompanied by a certification filed pursuant to the Sarbanes-Oxley Act of 2002, signed by Lai and Cheung (the "2015 SOX"). (Id. ¶ 42). Eachsignatory certified that the 2015 Annual Report was accurate, that it did not contain any untrue statement of a material fact, and that he had disclosed to the Company's auditor and audit committee any fraud involving Company management or employees with a significant role in controlling the Company's financial reporting. (Id.). These statements were allegedly misleading for the same reasons as the October 2015 Press Release. (Id. ¶ 45).
On May 27, 2016, the Company issued a press release stating that it had again been notified by the NYSE that it was not in compliance with the minimum price threshold. (Id. ¶ 44). On September 2, 2016, it issued a press release announcing that it was back in compliance the NYSE's minimum price requirements (the "September 2016 Press Release"). (Id. ¶ 46). This announcement, like the October 2015 Press Release, was allegedly misleading because the Company omitted its knowledge of the improper trading that had produced the increase in the share price. (Id. ¶ 47).
On April 28, 2017, the Company filed its annual report for the fiscal year ending December 31, 2016 (the "2016 Annual Report"), as well as a certification signed by Lai and Cheung (the "2016 SOX"). (Id. ¶¶ 48, 49). These statements were allegedly misleading for the same reasons as the 2015 Annual Report and 2015 SOX. They were additionally misleading because there had been additional improper trading following the May 2016 notification from the NYSE that the Company was not meeting the minimum price threshold. (Id. ¶ 50).
Finally, on April 27, 2018, the Company filed its annual report for the fiscal year ending December 31, 2017 (the "2017 Annual Report"). The 2017 Annual Report was accompanied by another certification signed by Lai and Cheung (the "2017 SOX"). (Id. ¶¶ 51, 52). These were allegedly misleading for the same reasons as the 2016 Annual Report and the 2016 SOX. (Id. ¶ 53). This time, the Company disclosed that in July of 2017, the NYSE had requested information regarding the Company's "knowledge of the trading conducted by certain persons, including a number of Company employees, in the Company'sstock during certain periods in 2015 and 2016." (Id. ¶ 54). That disclosure warned that "[i]f the NYSE believes it is warranted, it can remove the Company's stock from listing on its exchange." (Id.). Plaintiffs allege that this statement is misleading for the same reasons as the 2016 and 2017 Annual Reports and SOX certifications: i.e., the Company's knowledge that improper trading had occurred and that this trading had created a material risk of delisting. (Id. ¶ 55).
C. Subsequent Developments
On June 14, 2018, the NYSE commenced delisting proceedings against the Company. (Id. ¶ 56). The NYSE announced the delisting in a press release:
The determination to delist the Company was based on an investigation conducted by NYSE Regulation that brought to light the existence of events that made further dealings or listing of the securities on the Exchange contrary to the public interest and not in keeping with sound public policy, pursuant to Section 802.01D of the Listed Company Manual.
(Id. ¶ 56).
The next day, the Company issued its own press release announcing its intent to appeal the NYSE delisting decision (the "June 2018 Press Release"):
The delisting decision was made by the NYSE staff in relation to a review of the trading of the Company's stock during certain periods in 2015 and 2016 when its stock price fell below the NYSE minimum price requirement. The Company was disappointed by the decision of the NYSE staff and disagrees with their factual findings. The Company has decided to appeal against the NYSE delisting decision. In the meantime, the Company will apply for its common stock to be quoted and traded on the OTCQX.
(Id. ¶ 60).
On June 18, 2018, the Company resumed trading, now on the over-the-counter exchange, under a new stock ticker symbol. (Id. ¶ 58). On the first day of trading, the price fell 42% from the previous closing price. (Id.). On December 11, 2018 the Company issued a press release announcing that a committee of the Board of Directors of the NYSE had affirmed the exchange's decision to delist the Company's ADS. (Id. ¶ 62).
D. Procedural History
Plaintiffs assert the following causes of action:
The original complaint was filed by Zhengyu He on October 31, 2018. (DE 1). On February 17, 2019, Magistrate Judge Dickson...
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