Pehlivanian v. China Gerui Advanced Materials Grp., Ltd.

153 F.Supp.3d 628

Aram J. Pehlivanian, Individually and On Behalf of All Others Similarly Situated, Plaintiff,

v.China Gerui Advanced Materials Group, Ltd., Mingwang Lu, Edward Meng, Yi Lu, Harry Edelson, J.P. Huang, Kwok Keung Wong, Yunlong Wang, and Maotong Xu, Defendants.

14 Civ. 9443 (ER)

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

Signed December 23, 2015

Carl William Margrabe, III, Curtis Victor Trinko, Jennifer Elizabeth Traystman, Law Offices of Curtis V. Trinko, New York, NY, for Plaintiff.

David M. Furbush, Pillsbury Winthrop Shaw Pittman LLP, Palo Alto, CA, Shawn Patrick Thomas, Pillsbury Winthrop Shaw Pittman, LLP, New York, NY, for Defendants.

OPINION AND ORDER

Ramos, District Judge.:

This case arises out of alleged violations of the Securities Exchange Act of 1934 (the “Exchange Act”) by China Gerui Advanced Materials Group, Ltd. (“China Gerui” or “the Company”) and eight of its current and former Directors and Officers (“Individual Defendants” and collectively, “Defendants”). The Amended Complaint alleges that Defendants made material misstatements and/or omissions relating to China Gerui's expenditure of approximately $234 million to purchase antique Chinese porcelain in violation of Sections 10(b) and 20(a) of the Exchange Act and Securities and Exchange Commission (“SEC”) Rule 10b-5.¹ Lead Plaintiff, Aram J. Pehlivanian (“Pehlivanian”), brings suit on behalf of a class of all those who purchased or otherwise acquired China Gerui securities between January 11, 2012 and September 4, 2014 (the “Class Period”), and sustained losses upon the revelation of alleged corrective disclosures (the “Class”). Pending before this Court is China Gerui's and Individual Defendant, Harry Edelson's (“Edelson”), motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and Plaintiff's motion to lift the automatic stay imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). For the reasons set forth below, China Gerui's and Edelson's motion to dismiss is GRANTED and Plaintiff's motion to lift the automatic stay is DENIED as moot.

I. Factual Background²

a. The Defendants

China Gerui is a steel processing company based in China and incorporated under the laws of the British Virgin Islands that produces high-end, high-precision, ultra-thin, high-strength, cold-rolled steel products for sale internationally and domestically. Am. Compl. ¶¶ 2, 14.

As of the date of this Order, the only Individual Defendant that has been served is Edelson. See Docs. 9, 37 (extending the time to serve the Individual Defendants, excluding Edelson, until February 1, 2016). Edelson has been a director of China Gerui since 2009 and previously served as Chief Executive Officer and Chairman of the Board of Directors of China Gerui's predecessor corporation. Am. Compl. ¶ 18. Edelson has received $10,000 a month from China Gerui since 2010 for his services promoting awareness of the Company within the investment community, participating in road shows and investor conferences, and providing the Company with office space and communications facilities. Id.

The other seven Individual Defendants are: (1) Mingwang Lu (“Lu”), Chairman of China Gerui's Board of Directors and Chief Executive Officer; (2) Edward Meng (“Meng”), China Gerui's Chief Financial Officer and previously its Director of Investor Relations; (3) Yi Lu (“Y. Lu”), China Gerui's Chief Operating Officer and a Director; (4) J.P. Huang (“Huang”), a China Gerui Director who serves on the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee; (5) Kwok Keung Wong (“Wong”), a former China Gerui Director who served on the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee; (6) Yunlong Wang (“Wang”), a China Gerui Director who took Wong's place on the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee; and (7) Maotong Xu (“Xu”), a China Gerui Director and the Chair of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Id. ¶¶ 15-23.

b. The Chinese Steel Market

In 2010, the Chinese steel industry was the largest in the world, accounting for 45.7% of global steel output. Id. ¶ 24. However, years of growth lead to a “glut of capacity.” Id. As a result of these capacity problems, heavy losses in the steel industry were anticipated and did occur in late 2010. Id. In addition to the capacity issues, the Chinese steel industry was unable to negotiate favorable pricing on the raw materials required to make steel because of its heavy fragmentation. Id. The Chinese government announced a five year plan to reduce capacity, decrease pollution, and improve China's bargaining position in an attempt to bolster the steel industry. Id. ¶ 25.

c. China Gerui's Allegedly False and Misleading Statements

Plaintiff contends that Defendants made false and misleading statements, discussed in detail below, regarding China Gerui's growth strategy, fiscal strategy, and unrestricted cash holdings when it failed to disclose its intention to use a significant portion of its cash holdings to allegedly acquire a collection of Chinese porcelain (the “Collection”). Id. ¶ 8.

On October 17, 2011, China Gerui's Chairman of the Board, Lu, issued the 2010 Annual Report Letter to Shareholders. Id. ¶ 26; Affirmation of Shawn P. Thomas in Support of Defendants' Motion to Dismiss (“Thomas Aff.”) Ex. 1. The letter reported the Company's strong performance while also acknowledging the declining Chinese steel industry. Am. Compl. ¶ 26. Lu stated that it was his belief that the high-precision, cold-rolled, narrow-strip steel market China Gerui supplied did not have capacity issues and that demand would continue to grow with the Chinese economy. Id. The Company disclosed that it expected to increase its steel capacity by the end of 2011. Id. China Gerui's 2010 Annual Report, which accompanied the shareholder letter, stated that as of December 31, 2010, China Gerui held $119.5 million in unrestricted cash and $66.5 million in restricted cash and that it was reserving the use of its cash for its capital expansion program. Id. ¶ 27; Thomas Aff. Ex. 1.

Three months later, on January 11, 2012, Edelson allegedly touted China Gerui's “growing cash trove of $225 million” and its seemingly minimal downside, high upside, and “inevitable” higher ratio of price to earnings in an article titled “Warren Buffet Would Love Special Situation Company China Gerui” published on the website Seeking Alpha. Am. Compl. ¶ 28; Thomas Aff. Ex. 19.

On October 18, 2012, China Gerui issued its 2011 Annual Report Letter to Shareholders from Lu. Am. Compl. ¶ 29; Thomas Aff. Ex. 2. The 2011 letter disclosed declines in China Gerui's average sales price and volume as a result of the slowing Chinese economy. Id. ¶ 29. To address these concerns, China Gerui discussed its efforts to diversify its outputs, including by increasing its output of chromium-plated products, and indicated that its expansion into these products “would improve its ability to service existing customers, acquire new customers, and, presumably, weather the economic headwinds [.]” Id. China Gerui also stated that it would diversify its revenue stream by expanding to overseas markets in order to “overcome the challenging environment.” Id. The 2011 Annual Report, which again accompanied the shareholder letter, disclosed that as of December 31, 2011, the Company held $246.6 million in unrestricted cash, $118.1 in restricted cash, and $3.2 million in certificates of deposits and again stated that it reserved this cash for use in its capital expansion program. Id. ¶ 30; Thomas Aff. Ex. 2.

On May 13, 2013, the Company issued a press release disclosing that had it entered an agreement with Cambelle-Inland, LLC (“Cambelle”) on May 1, 2013 for Cambelle's assistance in developing and executing “a global growth, operational and acquisition strategy” for China Gerui. Am. Compl. ¶¶ 31, 32; Thomas Aff. Ex. 5. China Gerui explained that it planned to “globalize [its] business through accretive acquisitions[,]” noting that it had long communicated that acquisitions or potential joint ventures were part of the Company's long-term growth strategy to capture market share and broaden its end-user applications, but that it would also “continu[e] to focus on organic growth opportunities.” Am. Compl. ¶ 32.

On October 31, 2013, China Gerui issued its 2012 Annual Report Letter to Shareholders from Lu. Id. ¶ 33; Thomas Aff. Ex. 3. The letter disclosed decreases in the Company's revenue, gross profit, and gross margin from 2011 to 2012. Am. Compl. ¶ 33. Despite these decreases, China Gerui reiterated its plan to evolve into higher-margin sectors and to build new product pipelines of laminated and chromium-plated products to obtain a larger product mix, a more diversified customer base, and to expand its international business. Id. China Gerui also stated that it would continue investigating potential acquisitions and joint ventures as a way to “more rapidly diversify[ ] its product mix and gain[ ] market share.” Id. China Gerui's 2012 Annual Report, attached to the shareholder letter, also disclosed that as of December 31, 2012, the Company had $228.9 million in unrestricted cash, $145.4 million in restrict cash, and $19.6 million in certificates of deposit. Id. ¶ 34; Thomas Aff. Ex. 3.

On March 20, 2014, China Gerui held a “Fourth Quarter Fiscal Year 2013 Results conference call,” lead by Lu and the Company's Chief Financial Officer, Meng, to discuss its declining financial performance and its efforts to address the decline. Am. Compl. ¶ 35; Thomas Aff. Ex. 16. Lu characterized China Gerui's presumably negative fourth quarter results as reflective of “slow economic growth, overcapacity, and the ongoing weak demand for steel products in China.” Am. Compl. ¶ 35. Despite these results, the Company disclosed that as of December 31, 2013 it held...