In re Puda Coal Sec. Inc., Litig.

30 F.Supp.3d 261

In re PUDA COAL SECURITIES INC., et al. LITIGATION.

This document relates to: All Actions.

No. 11–cv–2598 KBF.

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

Signed July 14, 2014.

Kevin F. Ruf, Lionel Z. Glancy, Michael Goldberg, Michael Marc Goldberg, Glancy Binkow & Goldberg LLP, Robert Vincent Prongay, Los Angeles, CA, Michael Jonathan Wernke, Pomerantz LLP, David E. Kovel, John Brandon Walker, Kirby McInerney LLP, Joshua Lon Crowell, Labaton Sucharow, LLP, Laurence Matthew Rosen, Yu Shi, The Rosen Law Firm, P.A., Robin Bronzaft Howald, Glancy Binkow & Goldberg LLP, Sara Esther Fuks, Milberg LLP, Curtis Victor Trinko, Jennifer Elizabeth Traystman, Law Offices of Curtis V. Trinko, LLP, Jeffrey Philip Campisi, Kaplan Fox & Kilsheimer LLP, New York, NY, Louis Carey Ludwig, Pomerantz Grossman Hufford Dahlstrom & Gross LLP, Chicago, IL, Adriene O. Bell, D. Seamus Kaskela, David M. Promisloff, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, Myron Harris, Philadelphia, PA, for Plaintiffs.

William Bernard Federman, Federman & Sherwood, Oklahoma City, OK, Andrei V. Rado, Milberg LLP, Frederic Scott Fox, Sr., Kaplan Fox & Kilsheimer LLP, New York, NY, David Avi Rosenfeld, Robbins Geller Rudman & Dowd LLP, Melville, NY, Albert Yong Chang, Johnson Bottini, LLP, San Diego, CA, for Movants.

Samuel Blankenship, pro se.

Greg A. Danilow, Seth Goodchild, Weil, Gotshal & Manges LLP, Robert S. Wolf, Jason Canales, Moses & Singer LLP, Joseph Alexander Baratta, Ottavio Vincenzo Mannarino, Baratta, Baratta & Aidala LLP, Michael Vincent Cibella, Law Office of Michael V. Cibella, New York, NY, Brian James Massengill, Dana S. Douglas, Jonathan Craig Medow, Justin Adam McCarty, Mayer Brown LLP, Chicago, IL, for Defendants.

OPINION & ORDER

KATHERINE B. FORREST, District Judge:

The second consolidated amended complaint in this matter (“Compl.,” ECF No. 352) asserts claims, inter alia, against Brean Murray, Carret & Co. (“Brean Murray”) and Macquarie Capital (USA) Inc. (“Macquarie”) (collectively, the “underwriters”), the underwriters of a public stock offering by Puda Coal Inc. (“Puda”), under Sections 11 and 12 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 promulgated thereunder.

Now before the Court are the underwriters' motions to dismiss the complaint on the grounds that (1) plaintiffs fail to allege that the underwriters “made” the false statements within the meaning of Section 10(b) and Rule 10b–5, (2) plaintiffs fail to allege facts sufficient for scienter, (3) plaintiff Trellus's claims are time-barred, and (4) Trellus lacks standing. (ECF Nos. 370, 373.)

For the reasons set forth below, both motions are DENIED.

I. BACKGROUND

The Court assumes familiarity with the factual background underlying this action. This action arises from an alleged fraudulent scheme orchestrated by defendant Ming Zhao (“Zhao”) to mislead investors as to the true ownership of Puda's primary operating subsidiary, the Shanxi Puda Coal Group Co., Ltd. (“Shanxi”). Although Puda represented in public filings throughout the putative class period that it owned 90% of Shanxi Coal, Zhao (Puda's former chairman and its controlling shareholder) had secretly transferred Puda's interest in the subsidiary first to himself and then to an unrelated private equity fund, effectively leaving Puda a shell company without any assets, operations, or revenues. (Compl. ¶¶ 8, 9, 11, 13, 81, 87.)

During the putative class period, Puda conducted two separate public offerings without disclosing the transfers. (Id. ¶ 18.) In February 2010, Puda conducted the first public offering, for which Brean Murray was the underwriter. (Id. ¶¶ 54–56.) In December 2010, Puda conducted the second public offering, for which Macquarie and Brean Murray were co-underwriters. (Id. ¶¶ 18, 42, 54–56.) In this capacity, the underwriters “served as financial advisors, assisted in the preparation and dissemination of the offering materials for the December Offering, and had ultimate authority over the content of the Prospectus; the Underwriters' names were prominently displayed on the first page of the offering prospectus as ‘Joint Bookrunning Managers.’ ” (Id. ¶ 56.) “Macquarie and Brean Murray jointly with Puda's officers drafted” the prospectus in question and delivered it to investors. (Id. ¶ 235.)

Before the December 2010 offering, Macquarie hired Kroll Inc. to assist with Macquarie's due diligence efforts, specifically to “perform background checks with respect to Puda and persons associated therewith.” (Id. ¶ 57.) On December 2, 2010, Kroll delivered to Macquarie an investigative report showing that, based upon public State Administration of Industry and Commerce (“SAIC”) records, Puda did not in fact own 90% of Shanxi Coal. (Id. ) Six days before the December offering, Kroll identified the true owners of Shanxi to Macquarie. (Id. ) The Kroll report was reviewed and disseminated among several Macquarie employees as well as legal counsel for both underwriters. (Id. ¶ 152.)

The instant motions relate primarily to registration statements and a prospectus that Puda filed with the SEC in connection with the December 2010 offering. (Id. ¶ 114.) Plaintiffs allege that these statements and prospectus were false and misleading because they represented that Puda owned 90% of Shanxi without disclosing the transfers. (Id. ¶¶ 116, 117.)

II. APPLICABLE LEGAL PRINCIPLES

A. Rule 12(b)(6) Motion to Dismiss

To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In applying that standard, the court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in plaintiff's favor, but does not credit “mere conclusory statements” or “[t]hreadbare recitals of the elements of a cause of action.” Id.

B. Section 10(b) and Rule 10b–5 of the Securities Exchange Act

To state a cause of action under Section 10(b) or Rule 10b–5, plaintiffs must set forth sufficient plausible allegations that defendants “(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.”

In re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (1998). “For purposes of Rule 10b–5, the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.” Janus Capital Grp., Inc. v. First Derivative Traders, ––– U.S. ––––, 131 S.Ct. 2296, 2303, 180 L.Ed.2d 166 (2011).

“Securities fraud claims are subject to heightened pleading requirements that the plaintiff must meet to survive a motion to dismiss.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir.2007). Of particular relevance here, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind”—that is, scienter. 15 U.S.C. § 78u–4(b)(2)(A).

Scienter is the “mental state embracing intent to deceive, manipulate, or defraud” by the maker of a statement. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). When deciding a motion pursuant to Rule 12(b)(6), the inquiry “is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter.” Id. at 322–23, 127 S.Ct. 2499 (emphasis in original). “A complaint will survive ... only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.”Id. at 324, 127 S.Ct. 2499.

The Second Circuit has “long held that the scienter element can be satisfied by a strong showing of reckless disregard for the truth. By reckless disregard for the truth, we mean conscious recklessness—i.e., a state of mind approximating actual intent, and not merely a heightened form of negligence. ” S. Cherry Street, LLC v. Hennessee Grp. LLC, 573 F.3d 98, 110 (2d Cir.2009) (emphasis in original) (citations and internal quotation marks omitted); see also Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir.2000) (explaining that recklessness is “highly unreasonable” conduct that represents “an extreme departure from the standards of ordinary care”).

C. Sections 11 and 12 of the Securities Act

“Sections 11 and 12(a)(2) of the Securities Act impose liability on certain participants in a registered securities offering when the registration statement or prospectus contains material misstatements or omissions.” Panther Partners Inc. v. Ikanos Commc'ns, Inc., 681 F.3d 114, 119 (2d Cir.2012). Section 11 imposes liability for misstatements or omissions in registration statements, whereas Section 12 imposes liability for misstatements or omissions in prospectuses. Id.

III. DISCUSSION

A. The Underwriters as “Makers” of the Statements

Defendants argue that plaintiffs have failed to allege that they were “makers” of the material misstatements at issue within the meaning of Section 10(b) of the Securities Exchange Act and Rule 10b–5. Under Janus, the “maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.... [I]n the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed.” Janus, 131 S.Ct. at 2302. Relying on Janus, several district courts have sustained Section 10(b) claims brought against...