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    37 37 Document Transcript

    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 1 of 48 THE HONORABLE ROBERT S. LASNIK 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 轧TESTERN DISTRICT OF W ASHINGTON 8 ATSEATTLE 9 、 - a j 、 ‘ In re: L&L ENERGY, INC. , , Case No. CII-1423-RSL10 SECURITIES LITIGA TION , 、 ‘ , / 、 CERTAIN DEFENDANTS11 ‘ , MOTION TO DISMISS / 、 ‘ , SECOND AMENDED12 / 、 ‘ CLASS ACTION COMPLAINT , / 、13 J/ ‘ , Note on Motion Calendar: 、 、‘ ,, // July 13, 201214 、 、‘ ‘, ,/ 、 J‘ , ORAL ARGUMENT REQUESTED15161718192021222324252627 CERTAIN DEFENDANTS MO Tl ON TO DISMISS LANE POWELL PC 1420 FIFTH AVENUE , SUITE4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 2 of 48 TABLE OF CONTENTS Page 卧JTRODUCTION .......................….........……...................................................…·…......... 1 RELEV ANT ALLEGATIONS ..... ...................................... ...... .... .........…..................… ..3 A. L&L and the Individual Defendants.....................................................................4 B. A Short-Seller Named Glaucus Publishes an Intemet Report Accusing L&L of Fraud that Causes L&L s Stock Price to Decline ................... 5 C. PlaintiffFiles a Class Action Lawsuit to Piggy Back on Glaucuss Allegations............................................................................................................ 6 D. PlaintiffFiles Two Amended Complaints to Include New Allegations of Fraud Published by a Different Short-Seller Named Geoinvesting ........... ...... 7 STANDARD OF REVIE明几 .............................................................................................8 A. Rule 12(b)(6) ........................................................................................................8 B. The PSLRAs Heightened Pleading Standard and Rule 9(b) …............................9 PLAINTIFFS SECTION 10(b)IRULE 10b-5 CLAIMS MUST BE DIS孔1ISSED...................................................................................................................10 A. The SAC Fails to Allege Plausible And Particularized Facts Showing that L&L and the Individual Defendants Made Any False Statements. ….......... 11 1. The Allegations of Fraud in the Glaucus Report were Erroneous and Do Not Support an Inference of Falsity .......... ............... 11 a. Alleged Differences in SEC and SAIC Filings Do Not Support a Strong or Compelling Inference ofFalsity ................ 12 b. Glaucl后 sPurported Comparison ofSEC and SAIC Financial Reports for 2009 Does Not Reveal a Falsity .............. 14 c. Glaucuss Allegation Regarding L&Ls Ownership of the Zone Lin Coking Facility Does Not Reveal a Falsity........................................... ….....................................…… 15 2. The SACs Other Allegations ofFraud Do Not Raise a Strong Inference that L&Ls SEC Filings Contain False Statements ................ 17 a. A Comparison ofthe 2010 Financial Results in L&Ls SEC Filings and the SAIC Filings Undermines Plaintiffs Allegations ofFalsity ..................................…........... 17 b. Plaintiffs Allegations Regarding Ownership ofPing Yi Do Not Create a Plausible Inference of Falsity ........….......... 19 c. Plaintiff s Allegations Regarding Ownership of Hon Shen Do Not Create a Plausible Inference of Falsity .... ............. 21CERTAIN DEFENDANTS MOTION TO DISMISS - i LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338126372.000 1/5298539.8 206 .2 23.7000 FA X: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 3 of 48 B. The SAC Fails to Allege Plausible And Particularized Facts Giving Rise to a Strong Inference That L&L or the Individual Defendants 2 Acted 矶Tith Scienter ........................................................................................... 22 3 1. The SAC Does Not Contain Particularized Allegations Regarding the Knowledge of the Individual Defendants 4 Whose Status as Executives is Insufficient to Raise an Inference of Scienter..……...............….................................… .................22 5 2. The SACs Allegations Regarding Stock Sales ofDickson 6 and Robert Lee Do Not Raise an Inference of Scienter ........... .............. 26 7 3. The SACs Allegations Regarding Director Resignations and CFO Tumover Do Not Raise an Inference of Scienter .........… ..............29 8 4. The SACs Allegations ofDickson Lees Prior and Unrelated 9 Securities Laws Violations Do Not Raise an Inference of Scienter ...................................................................................….........….3110 C. The SAC Fails to Plausibly Allege Loss Causation ...........….........… .................3211 1. The July 29, 2011 Amendment to the 2010 Form 10-K Does Not Support Loss Causation Because It Was Unrelated to12 Plaintiffs Allegations and , in Any Event, Did Not Reveal13 Any Fraud...............................................................................................32 2. The Glaucus Report Does Not Support Loss Causation14 Because It Was ItselfFalse or, at Most , Revealed Only a15 Possibility of Fraud.................. ……......................… ................................34 3. The Geoinvesting Articles Do Not Support Loss Causation16 Because They Occurred after the Class Period and, in Any17 Event, Did Not Cause a Decline in the Price ofL&Ls Stock ...............36 4. PlaintiffDoes Not and Cannot Allege That L&Ls Alleged18 False Statements Regarding Acquisition and Sale of The Hon Shen Coal Company Were the Subject of a Corrective19 Disclosure .....................................….......… .............................................3720 V. PLAINTIFFS SECTION 20(a) CLAIMS MUST BE DISMISSED................. … .........3821 VI. LEA VE TO AMEND THE SAC SHOULD BE DENIED ............................................ 4022 VII. CONCLUSION .............................................................................. ....... ......................... 402324252627 CERTAIN DEFENDANTS MOTION TO DISMISS - ii LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101.2338 126372.0001/5298539.8 206 .2 23.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 4 of 48 123 TABLE OF AUTHORITIES Page CASES 411 Allis__o__n__ ~ ~rookt:~~ ~?!?:_, 999 F.Supp. 1342 (S.D. Cal. 1998) ......................................................................................28 5 In re Apollo Group, Inc. Sec. Litig., 611 2011 矶lL 5101787 (D. Ariz. Oc t. 27 , 2011) ........… .................................................12 , 29 , 35 7 11 Ashcroft v. Iqbal , -- U.S. …-, 129 S.C t. 1937 (2009)........................................................................................9 8 9012345678901234567 In re Aspeon, Inc Sec. Litig., ‘ 168 Fed. Appx 836 (9th Ci r. 2006) …................................…...........................… .................281 且 Ba阳!in v. Occam Ne阳!orks, Inc. , 1 i 1 i 2008 矶L 2676364 (C.D. Cal. July 01 , 2008) ......................................................................39 1 i 1 i 1 i 1 In re Cadence Design 吵s. , Inc. Sec. Litig., 654 F. Supp. 2d 1037 (N.D. Cal. 2009)................. …… .........................................................29 In re Cardinal Health Inc. Sec. Litig., 426 F. Supp. 2d 688 (S.D. Ohio 2006) .................................................................................31 In re Century Aluminum Co. Sec. Litig., 且 2011 WL 830174 (N.D. Cal. Mar. 03 , 2011) .......................................................................25 t i t i ln re China Educ. Alliance, Inc. Sec. Litig., - - 2011 WL 4978483 (C.D. Cal. Oct. 11 , 2011) .................…….............................… ...............12 Cho v. Republic of Korea , 66 Fed. Appx 124 (9th Cir. 2003) ................................…… ...................................................4 呵 , , 缸 City 01 Brockton Retirement Sys. v. Shaw Group lnc. , 呵 540 F. Supp. 2d 464 (S.D.N.Y. 2008) ..................................................................................30 』 句 , 中 Coαtes v. Heαrtland Wireless Comm. , lnc. , 呵 , , 26 F. Supp. 2d 910 (N.D. Tex. 1998)................. …...............................................................28 " 叮 In re Cornerstone Propane Partners, L. P. Sec. Litig. , 』 355 F. Supp. 2d 1069 (N.D. Cal. 2005)........ …… ..................................................................29 呵 - Corrie v. Caterpillar, Inc. , q h 403 F. Supp. 2d 1019 (矶.D. Wash. 2005) .............................................................................4 呵 , , 缸 CERTAIN DEFENDANTS MOTION TO Dl SMISS - iii LANE POWELL PC 1420 FIFTH A VENUE , SUπE4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 0001/5298539.8 206.223.7000 FA X: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 5 of 48 - A Dean v. China Agritech, Inc. , 「 2011 WL 5148598 (C.D. Cal. Oct. 27 , 2011) ..............… .....................................................12 , , - 句 3 In re Downey Sec. Litig., 2009 WL 2767670 (C.D. Cal. Aug. 21 , 2009) ........................................................…… .24 , 39 411 Dura Pharms. , Inc. v. Broudo , 5 11 544 U.S. 336 (2005) ...................................................................................................9 , 32 , 37 6 11 In re Elan Corp. Sec. Litig., 543 F. Supp. 2d 187 (S.D.N. Y. 2008)..................................................................................31 7 I In re Focus Enhancements, Inc. Sec. Litig., gl!309F.Supp.2d134(D.Mass-2001)...................................................................................31 n y n u Glazer Capital Mgmt. , LP v. Mcαgistri, t···A·B·A·-EA---A - 549 F.3d 736 (9th Cir. 2008) .........….............……...................… ...............................23 , 24 , 25 In re Hansen Nat. Corp. Sec. Litig., 呵 527 F. Supp. 2d 1142 (C.D. Cal. 2007)................................................. ........................passim / 』 句 3 Howard v. Everex I钞stems, Inc. , 228 F.3d 1057 (9th Ci r. 2000)..............................................................................................38141 1 In re Immucor, Inc. Sec. Litig.,15 2011 WL 2619092 (N .D. Ga. June 30 , 2011) ......................................................................3416 11 In re Impac Mort. Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083 (C.D. Cal. 2008) ….......… .............................................................10 , 2317 In re Impax Laboratories, Inc. Sec. Litig.,18 11 2007 WL 5076983 (N .D. Cal. Jan. 03 , 2007).......................................................................3719 11 In re Intern. Recti.fi er Corp. Sec. Litig., 2008 WL 4555794 (C.D. Cal. May 23 , 2008)......................................................................29202111 KIαtz v.China Century Dragon Media, Inc. , 2011 WL 6047093 (C.D. Cal. Nov. 30 , 2011) .........…........…….......… ...........................12 , 1322 Knievel v. ESPN,23 11 393 F.3d 1068 (9th Cir. 2005) ................................................................................................324 11 Luxpro Corp. v. Apple Inc. , 2011 WL 1086027 (N .D. Cal. Mar. 24 , 2011) .......................................................................4252611 In re_ ~a::~_lif: ~~.,~~l!~ ~:c._~!~i? , 276 F.R.D. 87 (S.D.N.Y. 2011)............................................................................................3427 CERTA卧~ DEFENDANTS MOTION TO Dl SMISS - iv LANE POWELL PC 1420 FIFTH A VENUE , SUrTE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 6 of 48 12345 Mαtthews v. Centex Telemanα1geme时, Inc. , 1994 WL 269734 (N .D. Cal. June 8 , 19蚓 ..........................................................................28 Jn re Maxim Jntegrated Prods. , Jnc. Sec. Li邸, 639 F. Supp. 2d 1038 (N.D. Cal. 2009).......................................................................... 刀, 35 Jn re Mercury Jnteractive Corp. Sec. Litig., 2007 WL 22092278 (N.D. Cal. July 30 , 2007) .................… ................................................23 6 11 Metzler Jnv. GMBH v. Corinthian Colls. , Jnc. , 『 / 540 F .3d 1049 (9th Cir. 2008).... ………………………………………………………………………·♂αssim o o n y No. 84 Employer-Teamster Joint Counc i/ Pension Trust Fund v. Am. W Holding Corp. , n u t 320 F.3d 920 (9th Cir. 2003) ................................................................................................ 38 t Jn re Omnicom Group, Jnc. Sec. Litig.,-BEA--aa· 541 F. Supp. 2d 546 (S.D.N. Y. 2008) .................................................................................. 36 Par r i 厅., γ 切 呵 146 F.3d 699 (9th Cir. 1998)..................................................................................................3, ,-A·B·A·--A·B-A 中 句 Partingωn v. Bugliosi , 3 A 56 F.3d 1147 (9th Cir. 1995) ….............................................................................................40 叶 Jn re Peerless Systems Corp. Sec. Litig., ζ J 182 F. Supp. 2d 982 (S.D. Cal. 2002) ...................................…… .........................................241611 Jn re Read-Rite Corp. Sec. Litig. , 335 F.3d 843 (9th Cir. 2003)................................................................................................24- 叮- J-A O1 O O Redwen v. Sino Cleαn Energy, Jnc. , Y A U No. ll-CV-03936-PA, Slip Op. (C.D. Cal. Jan. 30 , 2012) ........................…… ....................12 - -且 q叮, Ronconi v. Larkin ,,缸 253 F.3d 423 (9th Cir. 2001)..........................................................................................27 , 28匀,,"呵 Scott v. ZST Digital Ne阳lorks, Jnc. ,,, 2012 矶TL 538279 (C.D. Cal. Feb. 14, 2012) ........................................................................12," ,呵 , ", 句 Sprewell v. Golden Stαte Warriors ,4 J7 A 266 F.3d 979 (9th Ci r. 2001) .................................................................................................. 9" 叶 , 气 Swartz v. KP MG LLP , 呵 , 476 F.3d 756 (9th Cir. 2007)..................................................................................................3 d 中 ζ 句 U , , Teαmsters Local617 Pension αnd Welfi !re α Funds v. Apollo Group, Jnc. , , " 句 633 F. Supp. 2d 763 (D. Ariz. 2009) .........… ..................................................................35 , 36 叮 , 』 , CERTA卧.J DEFENDANTS MOTION TO DISMISS - v LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101.2338 126372.000115298539.8 206.223 .7 000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 7 of 48 1 2 3 Tellαbs, Inc. v. 儿lakor Issues & Rights, Ltd., 4 5 6 551 U.S. 308 (2007) ....……………………………………………………………………………………·♂αssim 7 8 9 0 In the Matter 01 the Applicαtion 01 Euromepα, 8λ , 1 154 F.3d 24 (2d Ci r. 1998)............................. ………..............................................… ............13 In re Verisign , Inc. Derivative Litig., 531 F. Supp. 2d 1173 (N .D. Cal. 2007)................................................................................37 In re Washington Mut. , Inc. Sec. & ERISA Lit邸, 2010 轧TL 1734848 (矶r.D. Wash. 2010) ................................…..............................… ...........10 Weiss v. Amkor Tec h., Inc. , 527 F. Supp. 2d 938 (D. Ariz. 2007) ............................…...............… .............................17 , 20 Wright v. Associated Ins. Cos. , 1 1 1 29 F.3d 1244 (7th Cir. 1994)................................................................................................21 l 1 i 1 A 1 且 Zlotnick v. TIE Commc ns , 2 836 F.2d 818 (3d Cir. 1988) .........… .......................................................................................5 3 4 5 6 Zucco Partne时, LLC v. Digimarc Corp. , 7 8 552 F.3d 981 (9th Cir. 2009)................................................. ........................................passim 9 0 且 1 1 2 In re Zumiez Inc. Sec. Litig.,1 3 2009 WL 901934 (W.D. Wash. Mar. 30 , 2009)...................................................................27 且 4 5 6 1 7 A - STATUTES AND COURT RULES 1 - i 1 i 15 U.S.C. 78ff(a) ........................................................................................................................14 15 U.S.C. 7 句 (b) ....……………………………………………………………………………………………… ..passim 15 U.S. 巳 781(k) (l )(A) ........ .........….........… ...............................................................................14 句 』 15 U.S. 巳 78t(a) ...................................................................................................................38 , 39 ? 』 句 中 呵 15 U.S.C. 78u(d)(3)(A) ..............................................................................................................14 , , 中 「 15 U.S. c.扫加4例…..............…........................................................................................泣, 32 , 中 「 , , 17 C.F. R. 240 .1 Ob-5 ..... ..... .........................…................................................…........….....9 , 11 , 22 』 呵 , 中 Federal Rule ofEvidence 901 ......................................................................................................4 匀 』 Federal Rule of Civil Procedure 9(b) .................… ...................................................................8 , 9 Federal Rule of Civil Procedure 12(b)(6)..................................................................................... 8 CERTAIN DEFENDANTS MOTION TO DISMISS - vi LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372 , 0001/5298539 , 8 206.223 , 7000 FAX: 206 .223 , 7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 8 of 48 1. INTRODUCTION 2 11 This securities class action was spawned by "short sellers" who directed unsupported 3 11 allegations at Defendant L&L Energy, Inc. ("L&L") with the admitted goal of damaging its 411 reputation and driving down the price of its stock. When they succeeded, Plaintiffs counsel 5 11 filed this suit on behalf of L&L shareholders who lost money as a result , pointing to the short- 611 sellers so-called "report" as evidence of fraud even though the report was biased on its face, 7 11 and erroneous in fac t. Plaintiff s Second Amended Class Action Complaint ("SAC") repeats 8 11 and expands on the same faulty factual assumptions and legal fiction asserted by the short- 9 11 sellers: if information found in L&Ls SEC filings differs from information contained in10 11 reports filed with the State Administration of Industry and Commerce ("SAIC") in China, then11 11 the SEC filings must be false and , what s more , L&L and its executives must have known they1211 were false. However, as explained below, Plaintiffs allegations of falsity , scienter, and loss13 11 causation are not plausible and do not satisfy the stringent pleading standards of the Private1411 Securities Litigation Reform Act of 1995 ("PSLRA").15 11 Plaintiffs central allegation is that L&L overstated its revenue and income in its SEC1611 filings because the numbers do not match those reported to the SAIC for L&Ls Chinese17 11 subsidiaries. But Plaintiff fails to adequately allege that the SEC and SAIC filings must be the18" same or, if there 缸e not, why L&Ls SEC filings must be false. This is especially so with19 11 respect to SAIC filings prior to 2010; L&L did not acquire most of its coal mining and related20 11 assets until late 2009 and, thus, was not responsible for many of the SAIC reports Plaintiff21 11 seeks to compare. Indeed, the plausibility of Plaintiff s allegation of falsity crumbles entirely2211 when the 2010 revenue figures are compared. The revenue for L&Ls subsidiaries in the23 11 reports filed with the SAIC for 2010 (which L&L submits to the Court, because Plaintiff did24 11 not) closely aligns with the revenue it reported with the SEC. Rather than showing a $15025 11 million overstatement as Plaintiff alleges, the actual reports show that L&Ls SEC filings2611 understate the revenue reported in China by approximately $22 million-an amount that can be2711 traced to accounting methods or other differences that have nothing to do with 仕aud. CERTAIN DEFENDANTS MOTION TO DISMISS - 1 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 9 of 48 1 11 Plaintiff also claims that L&L does not actually own some of its mining facilities in 2 11 China, and th剖 L&L falsely represented its ownership of those facilities. Here too , Plaintiff 3 11 alleges that because L&L or its subsidiaries are not identified on certain SAIC reports as the 411 registered "owner" of the facility , L&Ls ownership is fictional. But Plaintiff does not and 5 11 cannot allege that failure or delay in registering a facilitys change-of-ownership with the local 611 or regional SAIC office (akin to a department of licensing) invalidates L&Ls acquisition 711 agreements (which L&L filed with the SEC) or L&Ls right to exercise equity ownership and 8 11 control of the facility , including the right to recognize revenue. It doesn t. Plaintiff apparently 9 11 recognizes that the SAIC reports do not raise a plausible inference of falsity and , thus , the SAC10 11 also contains the purported statements of two individuals who allegedly refute L&L s11 11 ownership of two facilities. That too is insufficient. The SAC lacks particularized detail to12 11 demonstrate the reliability of these individuals or the basis of their alleged knowledge. Indeed,13 11 the alleged statements of both individuals are flatly contradicted by the terms of the acquisition1411 agreements entered into between L&L and each facilitys former controlling owners.15 11 Even if Plaintiff alleged plausible falsity , there are no allegations giving rise to a strong16 11 inference of scienter, as the PSLRA demands. Unlike many securities fraud cases , there are no1711 restated financial statements , no confidential informants and no insider information. Rather , to18 11 show scienter, Plaintiff relies largely on boilerplate allegations regarding the status of1911 Defendants Dickson Lee , Ian Robinson, Shirley Kiang , Robert Lee , Dennis Bracy , and Robert2011 Okun ("Individual Defendants") as directors and executives , their purported access to21 11 information, or their signatures on SEC filings. These conclusory allegations 町e insufficient2211 under controlling Ninth Circuit law. So too is Plaintiffs reliance on insider stock sales ,23 11 director resignations and the like. There was no suspicious or even significant insider stock24 11 sell-off during the period of pu甲orted fraud (indeed, there were significant insider purchases)25 11 and the directors and executives who left did so for personal reasons. To be sure , Plaintiff弓 S26 11 vague allegations do not raise an inference of scienter remotely as plausible as a myriad of27 11 opposing , benign, and more compelling inferences one could draw 仕om the same facts. CERTAIN DEFENDANTS MOTION TO DISMISS - 2 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 10 of 48 1 11 Finally, as a separate but related basis for dismissal , the SAC fails to adequately allege 2 11 "loss causation" because Plaintiff cannot trace his alleged losses to a "corrective disclosure." 3 11 Plaintiff relies primarily on the publication of a short-seller report by Glaucus Research Group , 411 but that report cannot serve as a corrective disclosure because it did not reveal the "truth"; the 5 11 report itself is demonstrably false and , at most , contained unreliable speculation about a risk of 6 11 fraud-which is insufficient to show loss causation. Regardless , the Glaucus Report did not 7 11 address , much less disclose , most of the aIleged fraud Plaintiff would later assert in the SAC. 8 11 Thus , the market s adverse reaction to the report (which was Glaucuss admitted objective) and 9 11 Plaintiffs alleged losses are totally unrelated to the bulk of Plaintiffs aIlegations. For similar10 11 reasons , Plaintiff飞 reliance on later short-seller articles by Geoinvesting cannot support loss11 11 causation because they were published months after the end of the class period and q斤er12 11 Plaintiff飞 counsel filed this action. And , just as important, L&L s stock price did not go down13 11 in response to the Geoinvesting articles; it went up. Plaintiff s alleged losses simply c缸mot be14 11 traced to the allegations contained in the Geoinvesting report , and later grafted onto the SAC.15 11 The PSLRA was enacted to protect companies and individuals 仕om frivolous and1611 extortionate securities fraud lawsuits. See H.R. Conf. Rep. 104-369, 1995 U.S.C. C.A. N. 730-17 11 31. This is precisely the kind of lawsuit the PSLRA was intended to prevent. L&L and the18 11 lndividual Defendants therefore ask this Court to dismiss Plaintiff s SAC with prejudice.19 11. RELEVANT ALLEGATIONS2011 This Court may consider not only the SACs factual allegations , but also any document21 11 Plaintiff refers to or relies on一-including the Glaucus short-sellers so-caIled "Glaucus Report ,"2211 as weIl as SEC and SAIC filings. Knievel v. ESPN, 393 F.3d 1068 , 1076 (9th Cir. 2005). This23 11 rule "[p]revents plaintiffs from surviving a Rule 12(b)(6) motion by deliberately omitting2411 references to documents upon which their claims are based." Parr切25 11 699 , 706 (9th Ci r. 1998). This Court may also consider facts that are subject to judicial notice.2611 Swartz v. KPMG LLP , 476 F.3d 756 , 763 (9th Cir. 2007). As explained below, this Courts27 11 consideration of "documents incorporated in the complaint by reference , and matters of which a CERTAIN DEFENDANTS MOTION TO DISMISS - 3 LANE POWELL PC 1420 FIFTH AVENUE , SU汀E4100 NO.2:11-cv-01423-RSL SEATTLE, WASHlNGTON 98101-2338 1263 72. 0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 11 of 48 1 11 court may take judicial notice," is essential because, to survive dismissal, Plaintiffs allegations 2 11 must raise an inference of fraud "at least as compelling as any opposing inference one could 3 11 draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 , 322- 411 23 (2007). L&L and the Individual Defendants have submitted a Request for ludicial Notice 5 11 ("R肘"), and they refer to the documents attached thereto throughout this Motion. 1 611 A. L&L and the Individual Defendants. 711 Defendant L&L Energy, Inc. is a Nevada corporation with its principal headquarters in 811 Seattle, Washington. SAC ~ 3 1. L&L is engaged in coal mining operations in the Peoples 9 11 Republic of China ("PRC"). Id. 句 2. L&L , through its Chinese subsidiaries and affiliates , owns10 11 all or portions of several coal mines, coal washing and coking plants, and related wholesaling11 11 and distributing operations in China, and its products include washed coal and metallurgical12 11 coke primarily used for steel manufacturing. Id. 啊 2 , 31. The common stock of L&L s13 11 predecessor began trading on an over-the-counter bulletin board in August 2008 and , following1411 a merger of related entities, L&Ls stock began trading on the NASDAQ Global Market15 11 exchange under the ticker LLEN in February 2010. Id. 啊 32 , 33.16 11 L&L and its subsidiaries acquired the company s China-based operations in a series of17 11 transactions. In May 2008, L&L acquired a 60% equity interest in the DaPuAn mine and the1811 SuTsong mine, which it increased to 80% in August 2009. Throughout 2009, L&L acquired a1911 93% equity interest in the Hon Shen coal washing facilities; L&L would later sell its interest in2011 Hon Shen in 2010. In early 2010, L&Ls subsidiaries TNI and KMC acquired the Zone Lin21 11 coal coking factory and the Ping Yi coal mine respectively, both with an effective date of22 11 November 1, 2009, and similarly, L&L acquired the Hong Xing coal washing factory, also with23 11 an effective date of November 2009. Finally, in March 2011 , L&L acquired a controlling匀 4567』呵 1 That some of these documents are in Chinese is no impediment to this rule. A court may- consider properly authenticated and translated copies. See Cho v. Republic of Korea , 66 Fed. Appx呵, 124, 125-26 (9th Cir. 2003) (Korean document); Corrie v. Caterpillar, Inc. , 403 F. Supp. 2d 1019, 1026," (W.D. Wash. 2005) (Israeli court claim); Luxpro Corp. v. Apple Inc. , 2011 WL 1086027, *3 (N.D. Cal.叮,中 Mar. 24 , 2011) (Taiwanese and German court orders); see also Fed. R. Evid. 90 l. Where necessary , the RJN includes authenticated English translations. CERTAIN DEFENDANTS MOTION TO DISMISS - 4 LANE POWELL PC 1420 FIFTH AVENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 12 of 48 1 11 interest ofthe DaPing coal mine. RJN Ex. 1 at 5-7 (July 29, 2011 L&L Form 10-K). 211 lndividual Defendant Dickson Lee is L&Ls founder, CEO and Chairman of its Board 3 11 of Directors. SAC 句 35. lndividual Defendant Robinson is L&Ls CFO, a director and a 411 former member of its audit committee. I d. ~ 37. lndividual Defendants Robert Lee, Kiang, 5 11 Bracy and Okun are all current or former L&L directors who served on the companys audit 6 11 committee during the class period and signed all or some of the Form 10-Ks at issue. Id. 啊 38- 711 41 , 44-46. Defendant Jung Mei (Rosemary) Wang was the companys acting CFO from June 811 2009 until her resignation in January 2011; she also signed several ofL&Ls 10-Ks. I d. ~ 36. A Short-Seller N amed Glaucus Publishes an Internet Report Accusing L&L of 911 B Fraud that Causes L& L s Stock Price to Decline. On August 2, 2011 , an intemet-based outfit called "Glaucus Research Group" published- 叮 various unsupported and speculative allegations regarding L&L on the intemet. SAC 啊 17 ,At - 句 138-140. Glaucuss motives were hardly benevolent, nor its perspective objective. Glaucus is且 3 A 1 an unabashed short-seller, whose principals stand to profit when its allegations, whether well- 1 1 吁 i , 1 2 i 1 i 3 founded or bogus, cause the stock price of its targets to decline. The very first sentence of this 1 i t A 瓦 "Glaucus Report" cautioned investors to use its "research at your own risk ," and to assume U 7 0 Glaucus "has a direct or indirect short position in the stock . . . covered herein, and therefore 0 0 / A stands to realize significant gains in the event that the price of stock declines." R刑 Ex. 2 at 1. u - - q Although the Glaucus Report perfunctorily stated th剖 "[t]o the best of our ability and belief, all 呵 information contained herein is accurate and reliable ," the Report actually disclaimed just that: 』 "Glaucus . . . makes no representation, express or implied, as to the accuracy , timeliness or 呵 , , " 「 completeness of any such information[.]" I d. Glaucus further refused to "undertake to update , 半 , 句 』 斗 or supplement this report or any ofthe information contained herein." I d. 中 3 A 呵 , 中 句 『 - , 「 、 2 "Short selling is accomplished by selling stock that the investor does not yet own; normally , J 中 this is done by borrowing shares from a broker at an agreed upon fee or rate of interest. . . . The short 呵 , , seller is obligated , however, to buy an equivalent number of shares in order to retum the borrowed , " 瓦 U shares. In theory, the short seller makes this covering purchase using the funds he received from selling the borrowed stock. Herein lies the short sellers potential for profit: if the price of the stock declines 叮 I after the short sale, he does not need all the funds to make his covering purchase; the short seller then pockets the difference." Zlotnick v. TIE Commc ns , 836 F.2d 818 , 820 (3d Cir. 1988). CERTA卧~ DEFENDANTS MOTION TO DISMISS - 5 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206 .2 23 .7 107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 13 of 48 The Glaucus Report purported to "c町ve through the companys SEC financial 211 statements and highlight many suspicious features ofthe companys ostensible record . . . ." I d. 3 11 at 2. Among other things , Glaucus accused L&L of falsely stating that it owned the Zone Lin 411 coking factory when, according to Glaucus, SAIC filings in China showed that Dickson Lee, 511 L&Ls CEO and Chairman, was the sole owner of Zone Lin一-not L& L. I d. at 2-4. Glaucus 611 boldly asserted that "[h]olding assets acquired with corpor剖e funds in a sole proprietorship is at 7 11 best a material omission of a related party transaction from SEC financials and at worst 811 textbook 仕aud." I d. at 4. Glaucus also opined th剖 L&Ls financial performance was simply 911 "too good to be true." I d. at 9. Based on a pu甲orted comparison of SEC and SAIC filings for1011 calendar year 2009 , Glaucus asserted that "[t]he companys Chinese SAIC filings show th剖11 11 [L&L s] revenues and net income are much smaller than reported and its assets are much less1211 valuable than the company claims in its SEC financials." I d. at 11-12.13 11 Glaucuss self-interested "investigation" and report had the desired effect. From1411 August 2 through August 4, 2011 , L&Ls stock price fell more than $0.84 per share, or 17.3%.1511 SAC ~ 14 1. On August 5, 2011 , L&L issued a detailed press release denying and refuting1611 Glaucuss unfounded allegations. RJN Ex. 3. In it, L&L stated that it "reaffirms its ownership17 11 and equity rights , and points to a recent legal opinion provided by a large and reputable firm in1811 China, which provided confirmation of ownership to the Companys independent auditor ," and1911 吁ejects any claims that the validity of the audited financial statements . . . are in any way2011 materially inaccurate." I d. True to its word , however, Glaucus made no effort to update or21 11 supplement its "research" in response.2211 c. Plaintiff Files a Class Action Lawsuit to Piggy Back on Glaucuss Allegations.23 11 While L&L s repudiation of the Glaucus Report may have assuaged the market , it did24 11 not mollify Plaintiff飞剖tomeys. Just weeks later, on August 26, 2011 , they filed a bare bones25 11 class action complaint on behalf of all persons who purchased L&L stock between August 13 ,2611 2009 (the date of L&Ls 2009 Form 10-K) and August 2 , 2011 (the date of the Glaucus2711 Report). Dkt. 1. The complaint relied exclusively on Glaucuss allegations; Plaintiffs LANEP。可VELLpc CERTA卧J DEFENDANTS MOTION TO DISMISS - 6 1420 FIFTH A VENUE , SUITE 41 00 No. 2: ll-cv-O 1423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206 .2 23.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 14 of 48 1 11 attomeys did not pu叩ort to undertake any independent investigation or review of the relevant 2 11 SAIC filings in China. The complaint did not rely on the statements of confidential witnesses 3 11 or other inside information. I d. Moreover, although the complaint alleged that L&Ls 2009 , 411 2010 and 2011 Form 10-Ks and 10-Qs were "materially false and misleading ," it did not 5 11 identify what aspects of those statements were purportedly false. I d. On December 15 , 2011 , 6 11 Plaintiff、 s attomeys were appointed Lead and Liaison Counsel. Dkt. 26. Plaintiff Files Two Amended Complaints to Include New Allegations of Fraud 711 D Published by a Different Short-Seller Named Geoinvesting. Nearly five months after the lawsuit was filed , on January 13 , 2012 , a different short- 1 012345678901234567- accusing L&L of fraud. seller outfit named Geoinvesting published another intemet article 1 i 1 A 1 SAC 啊 20 , 143. Like Glaucus , Geoinvesting sold L&Ls stock short and readily disclaimed all "wa:ηanties , express or implied, as to the accuracy , adequacy or completeness of any of the information contained in the website." RJN Ex. 4 at 2. The a:rticle stated that "the GeoTeam 且 1 recently uncovered evidence that appears to indicate that [L&L] does not own and never A 1 acquired the Ping Yi mine." I d. at 1. Similar to the Glaucus Report, Geoinvesting based its 且1 speculation on a purported review of Chinese SAIC filings that , it said, "clearly show[] that1TIti-- [L&L] is not the owner of the Ping Yi Mine and that the current owners of the Ping Yi Mine are Mr. Zhang Bauguo (40%) , Mr. Hu Shiwei (30%) , Mr. Liu Shuangyou (16%) and Mr. Chen Honglin (1 4%)." I d. According to Geoinvesting, "this is the first instance that anyone has呵 challenged [L&L s] ownership interest in the Ping Yi Mine." I d. Geoinvesting published,马句中 follow-up a:rticles on January 19 and February 16, 2012一the latter of which attached a斗中匀,& statement allegedly made by Shiwei Hu, one of the purported owners of the Ping Yi mine ,呵,,, denying that L&L had acquired any rights to the Ping Yi mine. SAC 啊 20-21 , 143."呵』 As it did with the Glaucus Report , L&L did not respond to the Geoinvesting a:rticles by呵,,," restating its financials , but by publicly repudiating the allegations. RJN Ex. 5. In its press呵, release , L&L stated that "it reaffirms its ownership rights in Ping Yi Mine" and , going further: As the Company has disclosed in its most recent 10-K, "effective November4 1, 2009 , KMC (a wholly owned subsidiary of L&L) through its subsidi a:ry LANEPO呐ELLpc CERTAIN DEFENDANTS MOTION TO DISMISS-7 1420 FIFTH A VENUE. SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE. WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 15 of 48 l23456789012345678901234567 Boaxing Co. , entered into an agreement to acquire 100% of Ping Yi mine operations." The disclosure is consistent with both legal opinion (issued by a large and reputable law firm in China) and audit opinion (issued by an independent auditing firm after its FY 2011 year-end audit on the Company). I d. To Geoinvestings dismay , the market did not react to its allegations the way it hoped. On the contrary, the price of L&Ls stock actually went up immediately a白er the publication of Geoinvesting articles. RJN Ex. 6 (stock prices for Jan. 12-17; Jan. 18-20; and Feb. 15-17). Although the Geoinvesting articles were published five months into the lawsuit, were unrelated to the Glaucus Report, and did not cause a decline in L&Ls stock price , Plaintiffs attorneys (twice) amended their complaint to incorporate Geoinvestings allegations, and to add-- new allegations of fraud not previously raised by either Glaucus or Geoinvesting. Plaintiff now1ι1111 alleges that L&L overstated revenue and income on its 2009 , 2010 and 2011 10-Ks and 10-Qs.i1i1ιt SAC ,-r,-r 50-86 , 110-120. Further, contrary to Glaucuss allegation that the Zone Lin facilityiti-- was actually owned by Dickson Lee , Plaintiff now alleges that no one affiliated with L&L ever owned the facility. Id. 啊 101-109 , 116-119. Plaintiff next cri bs Geoinvesting s claim that L&L does not own the Ping Yi mine and , along the same lines (and for the first time) , alleges that L&L never owned the Hon Shen Coal Company either. Id. 啊 87-99 , 116-118 , 126-130. Because there still 缸e no confidential witnesses or inside information , Plaintiff pleads scienter exclusively through boilerplate allegations regarding the Individual Defendants high-level positions in the company, and a grab bag of "motive and opportunity" allegations regarding 「 stock sales , resignations and the like. Id. 句句 16 , 24-25 , 121-125 , 132-135 , 160-16 1. , 中 呵 』 111. STANDARD OF REVIE刑1 匀 , " 呵 This Courts review of the sufficiency of the SACs allegations is guided not only by , & 叮 the well-established standards of Rule 12(b)(哟, but also by the heightened pleading standards 』 句 , ofthe PSLRA and Rule 9(b). The SACs allegations are deficient on all counts. 中 呵 , 中 呵 A. Rule 12(b)(6). Pursuant to Rule 12(b)(哟, the SAC must be dismissed if it fails to state a claim upon 』 which relief can be granted. "[A] complaint must contain sufficient factual matter . . . to state CERTAIN DEFENDANTS MOTION TO DISMISS - 8 LANE POWELL PC 1420 FIFTH A VENUE, SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 16 of 48 1 11 a claim for reliefthat is plausible on its face." Ashcroft v. lqbal , --- U.S. 一, 129 S.Ct. 1937, 211 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544 , 570 (2007)). "A claim has 3 11 facial plausibility when the plaintiff pleads factual content that allows the court to draw the 4 11 reasonable inference th剖 the defendant is liable for the misconduct alleged." l d. In applying 5 11 this standard, a court must accept factual allegations as true , but it does not credit "mere 611 conclusory statements" or "threadbare recitals of the element of a cause of action." l d. 711 Similarly, the court need not accept allegations as true if they are contradicted by documents 8 11 referenced in the complaint or matters of judicial notice. Sprewell v. Golden St,α te Warriors , 911 266 F.3d 979 , 988 (9th Cir. 2001). In a private securities fraud action , the plaintiff、 s claim10 11 must also satisfy the particularized pleading requirements of the PSLRA and Rule 9(b).1111 B. The PSLRAs Heightened Pleading Standard and Rule 9(b).12 11 The elements of Plaintiff、 s securities fraud claim are: (1) material misrepresentation or13 11 omission of fact , (2) scienter, (3) a connection with the purchase or sale of a security ,1411 (4) transaction and loss causation, and (5) economic loss. Zucco Partners, LLC v. Digimarc1511 Corp. , 552 F.3d 981 , 990 (9th Cir. 2009); see also Durα Pharms. , lnc. v. Broudo , 544 U.S. 336 ,1611 341 (2005). "At the pleading stage , a complaint stating claims under section 10(b) and Rule1711 10b-5 must satisfy the dual pleading requirements of Federal Rule of Civil Procedure 9(b) and1811 the PSLRA." Zucco , 552 F.3d 剖 990. Prior to the PSLRA, courts construed Rule 9(b) to19 11 require only "falsity" to be pled with particul町ity, not "scienter." l d. The PSLRA, however,20 11 "significantly altered [the] pleading requirements in securities 仕aud cases ," and "amended the21 11 Securities Exchange Act to require that a complaint "plead with particularity both falsity and2211 scienter." l d. (quoting Gompper v. VISX, lnc. , 298 F.3d 893 , 895 (9th Cir. 2002)).23 11 To plead falsity , Plaintiff must "specify each statement alleged to have been misleading,24 11 the reason or reasons why the statement is misleading, and , if an allegation regarding the25 11 statement or omission is made on information and belief, . . . state with particularity all facts on2611 which that belief is formed." l d. at 990-91 (quoting 15 U.S.C. S 78u-4 (b) (1)). To plead2711 scienter, Plaintiff must "state with particularity facts giving rise to a strong inference that the CERTAIN DEFENDANTS MOTION TO DISMISS - 9 LANE POWELL PC 1420 FIFTH A VENUE, SUITE 4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539ι 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 17 of 48 1 11 defendant acted with the required state of mind." Id. 剖 991 (quoting 15 U.S.C. 978u--4 (b)(2)). 2 11 That showing requires "allegations of specific contemporaneous statements or conditions that 3 11 demonstrate the intentional or the deliberately reckless false or misleading nature of the 411 statements when made." Metzler Inv. GMBH v. Corinthian Colls. , Inc. , 540 F.3d 1049, 1066 5 11 (9th Cir. 2008) (quotation marks and citation omitted). While the conduct of an individual 6 11 defendant may be imputed to a co叩orate defendant in certain circumstances , the reverse is not 7 11 true. "Group pleading" is not enough; Plaintiff must state sufficient facts to show that each 8 11 individual defendant made an allegedly false statement with the requisite state of mind. In re 9 11 Impac Mort. Holdings, Inc. Sec. Lit邸, 554 F. Supp. 2d 1083 , 1092 (C.D. Cal. 2008); In re10 11 Hansen Nat. Coψ. Sec. Litig., 527 F. Supp. 2d 1142, 1153-55 (C.D. Cal. 2007); but see In re11 11 Washington Mut. , Inc. Sec. & ERISA Litig., 2010 WL 1734848 ,巧 (W.D. Wash. 2010).1211 These are rigorous standards. In conducting its inquiry, "the court must consider all13 11 reasonable inferences to be drawn from the allegations , including inferences unfavorable to the1411 plaintiffs." Metzler , 540 F.3d at 1061 (quoting Gompper , 298 F.3d at 897). "A complaint will15 11 survive... only if a reasonable person would deem the inference of scienter cogent and at least1611 as compelling as any opposing inference one could draw from the facts alleged." Tellabs , 5511711 U.S. at 324. In other words , "[a] court must compare the malicious and innocent inferences18 11 cognizable 企om the facts pled in the complaint, and only allow the complaint to survive a19 11 motion to dismiss if the malicious inference is at least as compelling as any opposing innocent20 11 inference." Zucco , 552 F.3d at 99 1. Whether viewed individually or holistically, the SA C s21 11 allegations , on their face , do not raise a strong inference that L&L or the Individual Defendants2211 made any false statement, much less did so with deliberate recklessness. When those23 11 allegations are considered in light of the actual facts of which this Court may take judicial24 11 notice , it is clear that Plaintiff飞 claims are baseless.25 11 IV. PLAINTIFFS SECTION 10(b)IRULE 10b-5 CLAI岛1S MUST BE DISMISSED26 11 Plaintiff飞 securities fraud claim must be dismissed because the SAC , on Îts face and in27 11 light of the facts and documents of which this Court can take judicial notice , fails to adequately CERTAIN DEFENDANTS MOTION TO DISMISS - 10 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 000 1/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 18 of 48 1 11 plead three necessary elements of a Section 1O(b) and Ru1e 10b-5 claim. The SAC does not 211 (a) allege particularized facts showing that L&L or the Individual Defendants made any false 3 11 statements , (b) state with particularity facts giving rise to a strong inference that L&L or the 4 11 Individual Defendants acted with the requisite scienter, or (c) plead facts showing "loss 5 11 causation" linking Plaintiffs purported loss to a "corrective disclosure" of the alleged fraud. 6 11 Each of these deficiencies provides an independent and separate ground for dismissal. The SAC Fails to Allege Plausible And Particularized Facts Showing that L&L 711 A and the Individual Defendants Made Any False Statements. The SAC alleges that L&Ls SEC filings contain the following false statements: 1 。 (i) L&L overstated its revenue/income in its SEC filings based on a comparison with SAIC 1 1 U 1 1 1 A 1 1 1 filings (SAC 句句 50-86 , 110-120); (ii) L&L never owned the Zone Lin coking facility (i d. 1 i 1 1 1 1 1 叫 啊 101-109 , 116-119); (iii) L&L never owned the Ping Yi mine (id. 啊 87-99 , 116-118); and 1 1 4 i 1 d (iv) L&L never acquired or sold an interest in the Hon Shen coal company (id. ~~ 126-130).3 1 1 A As discussed in Section IV.C below, Plaintiff can rely only on L&Ls alleged false statements 『 气P regarding revenue/income for calendar year 2009 and ownership of Zone Lin because only J r O those allegations were mentioned in the Glaucus Report and , thus , on1y those statements could 寸 support a showing of "loss causation." Regardless , for the reasons discussed below, none of O O O Plaintiff s allegations raise a plausib1e or particularized inference of falsity. J A U 1 4 1. The Allegations of Fraud in the Glaucus Report were Erroneous and Do Not Support an Inference of Falsity.呵,, The allegations in the Glaucus Report-which Plaintiff says revealed the "truth,""「,, "shocked the market" and caused Plaintiffs economic loss (SAC 啊 17 -18)-do not support a缸呵, 斗中 中呵 句 plausible inference that L&L misstated its financia1 results for 2009 or its ownership of the,中呵 J A, 3 The SAC also includes a one-off suggestion that L&L misstated its ownership interest in its,"呵 『 KMC subsidiary. SAC 咱 13 l. This 剖 legation can be rejected out-of-hand. Li ke Ping Yi and Hon Shen,, ,中 the KMC allegation does not satisfy the "loss causation" element of 9 1O(b) because it was never the句, 3 subject of a corrective disclosure. Further, this allegation is founded on the same assumption that,"呵 underlies all of Plaintiff、 s c1aims: that out-of-date SAIC filings equate to a falsity in a SEC dis c1 osure.,中 瓦 u That assumption is wrong. In any event, L&L disclosed in its March 2010 Form 10-Q that it had not yet 7 · completed the process of registering its ownership in KMC. RJN Ex. 7 at 47 ("Despite the fact that the entire registration process has not been completed, the Company has received approval from the Chinese govemmental for L&Ls ownership ofKMC Inc. as of January 31 , 2010."). CERTAIN DEFENDANTS MOTION TO DISMISS - 11 LANU~~~L!-_~~ 1420 FIFTH AVENUE, No. 2: ll-cv-OI423-RSL SEATTLE. wAsfiiNGTÓN-98101~2338 1263 72. 0001/5298539.8 206.223.7000 FAX: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 19 of 48 1 11 Zone Lin facility. Glaucuss "investigation" was not only biased and unreliable , its conclusions 2 11 were factually erroneous. Because the Glaucus Report did not illlCOVer any 仕aud, Plaintiff 3 11 cannot satisfy either the "falsity" or "loss causation" elements of his claim. See ln re Apollo 411 Group, lnc. Sec. Litig., 2011 WL 5101787 , *18 (D. Ariz. Oc t. 27 , 2011) ("Ifthe GAO report 5 11 incorrectly revealed fraudulent activities to the market that Defendants were not actually 6 11 engaged in, those false reports cannot possibly have revealed a real fraud to the investors. "). 叮 I O O a. Al1eged Differences in SEC and SAIC Filings Do Not Support a Q Strong or Compelling Inference of Falsity. J O U 1 The Glaucus Reports spurious findings were based on an assumption that ifthere were A T apparent differences between SAIC filings and L&Ls SEC filings , the SEC filings were false. i - - t i t R开~ Ex. 2 at 11-12. Plaintiffrelies on the same assumption throughout the SAC. See SAC 咱 6 i - - - i 1 i 叫 ("L&L kept two sets of books , an accurate set for the Chinese authorities . . . and another set 1 i 4 1 i t l 句 filed with the SEC materially overstating the Companys true financial condition."). As shown 3 A below, the alleged inconsistencies between SEC and SAIC filings are illusory. Regardless , 吁 气 Plaintiff fails to adequately allege in the first instance that the SEC and SAIC filings must be d 瓦 identical or, if there are discrepancies , why this Court must infer that the SEC filings are false. U 句 Courts have refused to infer falsity based on alleged differences between SEC and SAIC filings O O Q in cases identical to this one. Katz v. China Century Dragon Media, lnc. , 2011 WL 6047093 , J O U 1 *4 (C.D. Cal. Nov. 30 , 2011) ("Although Plaintiffs plead that the SAIC numbers differ from the 呵 SEC numbers , this . . . does not suffice to make that claim plausible"); Redwen v. Sino Clean , 中 ? " Energy, lnc. , No. ll-CV-03936-PA, Slip Op. , at 4-5 (C.D. Cal. Jan. 30 , 2012) ("Plaintiffmust 呵 且 , 呵 , , plead with greater specificity to make plausible the claim that the SEC numbers , not theh "q 1h d A [Chinese] numbers , are false.") (RJN Ex. 8). This Court should do the s缸ne.4「 4 Several courts have found alleged discrepancies between SEC and SAIC filings sufficient to, 『中 ,呵 infer falsity , but only in combination with other facts giving rise to an inference that the SEC numbers,马 3 were false. See Sc ott v. ZST Digital Networks , Inc. , 2012 WL 538279 (C.D. Cal. Feb. 14, 2012)呵, (company gave ambiguous and allegedly false explanation of SEC/SAIC differences in Form 10- KlA);中句 瓦 U Dean v. China Agritech. Inc. , 2011 WL 5148598 (C.D. Cal. Oct. 27, 2011) (companys factories either,马 sat idle with no production or operated substantially below capacity); In re China Educ. Alliance, Inc. 叮 J Sec. Litig. , 2011 WL 4978483 (C.D. Ca l. Oct. 11 , 2011) (companys principal websites did not work and its primary training center was a sham). There are no such "corroborative" facts pled here. CERTAIN DEFENDANTS MOTION TO DIS如nss - 12 LANEPOWELLpc FTH AVENUE, SUI No.2:l l-cv-01423·RSL SEATTLE WASH刑GTON 98101-2338 126372.0001/5298539.8 206 .223.7000 FAX 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 20 of 48 - A Plaintiff alleges that the SEC and SAIC filings should be identical because SAIC filings 呵 , 牛 are audited according to Chinese GAAP which, Plaintiff claims , "is substantially the s缸ne as 句 3 A U.S. GAAP." SAC 啊 68-79. But Plaintiff concedes that only financial statements filed by 『 "certain of L&Ls subsidiaries . . . with the SAIC are required to be audited" (emphasis , 、 J added)-namely those filed by L&Ls direct subsidiaries , like KMC and TNI. Id. 咱 68&n.12. 瓦 U Plaintiff does not allege that the statements filed by L&L s indirect subsidiaries-一including the 叮 I O DaPuAn, Su Tsong, Zone Lin, Ping Yi , and Hong Xing coal mining and related facilities,企om O Q J O U which L&L derives most of its revenue-were prepared or audited according to Chinese - - GAAP. See SAC ~ 34. Thus , even assuming that U.S. and Chinese GAAP were the same , no - A 1 1 plausible inference of falsity can be gleaned from comparing L&L s audited SEC financial 1 1 1 statements with unaudited SAIC filings prepared for L&Ls subsidiaries in China. 5 Stripped of 1 I t i t i - 呵 - 1 1 1 ,- ,1 legal conclusions , the SAC alleges only that there were two different statements prepared by 1 d A different entities for different agencies in different countries pursuant to different standards. 『 This kind of apples-to-oranges comparison, therefore , ignores the real possibility that , 、 J ζ L&L relied on different financial information to prepare its SEC filings than was used to U prepare the SAIC filings -e specially since some of the SAIC filings that Glaucus and Plaintiff 『 , , purported to review relate to periods before L&L acquired the facilities at issue. Here too , the O O Q SAC is deficient. Plaintiff does not allege that L&L relied on the financial data used to prepare J O V 1 the SAIC filings in preparing its SEC filings. See Katz , 2011 WL 6047093 , at *4 (allegation of A句,, falsity not plausible where plaintiff did not allege "that Defendants relied on the same缸叮 underlying financial data in preparing the SEC and SAIC reports"). Indeed, as shown below,』句 呵,中 , 中 Glaucuss comparison of SEC and SAIC filings for calendar year 2009 was f1 awed because ,呵, 2," J A 缸nong other things , it omitted several SAIC reports from its tally. And the apples-to-apples匀 『』叮 , 、 5 This Court is not required to accept the truth of Plaintiff飞 legal conclusion regarding U.S. and中呵 J Chinese GAAP. In the Mt. αtter of the Application of Euromepa, S. A. , 154 F .3 d 24 , 28 (2d Cir. 1998), ζ中 U (courts need not accept contentions of parties about foreign law as true). Suffice it to say , there has呵, been significant debate on this issue , with many in the investment community noting一in the context of中 SAIC filings一-that it is common for SEC and SAIC numbers to diverge because of GAAP and other 叮 I reporting differences. See http://usnyvc.blogspot. co mJ ("SAIC filings have no relevance to the credibility of a companys public filings filed with the SEC"). CERTAIN DEFENDANTS MOTION TO DISMISS - 13 LANE POWELL PC 1420 FIFTH AVENUE, SUITE 4100 NO.2:11-cv-OI423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 000 1/5298539.8 206.223.7000 FA X: 206 .22 3. 7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 21 of 48 1 11 comparison for calendar year 2010 shown below discloses no material divergence. 211 Finally, even had Plaintiff sufficiently alleged that the SEC and SAIC filings must be 3 11 identical , but were not , the SAC contains no plausible allegation that it was the SEC filings-as 411 opposed to the SAIC filings一-that were misstated. On this key issue , Plaintiff alleges only that 5 11 L&L had a "strong incentive" to make accurate representations to the SAIC because the SAIC 611 would shut down L&Ls businesses "if it was caught filing false financial statements." SAC 711 ~I咱 62-65. 6 But Plaintiff ignores the fact th副 L&L has an equally great incentive to be accur剖e 8 11 in its SEC filings. 轧T ere L&L to violate the federal securities laws , the SEC could halt the 9 11 trading of L&L s stock, seek disgorgement and monetaηT penalties , and the Department of1011 Justice could bring a criminal action against L&L and its executives. 15 U.S.C. 781(k)(I)(A)11 11 (authorizing SEC to suspend trading); 15 U.S.C. 78u(d)(3)(A) (authorizing SEC to seek1211 disgorgement and civil penalties); 15 U.S.C. 78ff(a) (criminal penalties). In short, differences13 11 between SEC and SAIC filings , if any , do not raise an inference of falsity "at least as1411 compelling as any opposing inference one could draw from the facts alleged." Tellabs , 5511511 U.S. at 324. Plaintifffails to adequately allege falsity for this reason too.t 瓦i U---i b. Glaucuss Purported Comparison of SEC and SAIC Financial1i I 叮 Reports for 2009 Does Not Reveal a Falsity. O O Q / The faulty premise underlying Glaucuss comparison of SEC and SAIC filings for A U - - calendar year 2009 is manifest in the Glaucus Report itself and provides an equally compelling呵 reason why the so-called Report did not disclose any falsity to the marke t. Glaucus purported,牛「, to tally income stated in SAIC filings for L&L subsidiaries KMC , DaP uAn Mine , Su Tsong中呵』呵 呵 Mine , Zone Lin and Hong Xing for calendar year 2009 with L&Ls SEC filings for roughly the, ,, 中 句"斗 S缸口e period (Feb. 2009 一 Jan. 2010). RJN Ex. 2 at 1 1. For reasons it does not explain,, 3 A,』句 Glaucuss tally does not include any revenue stated in SAIC filings for Hon Shen and Ping, 『, ," 、叮,中 J ζ句 U 6 Glaucus said the same thing, throwing in the possibility of "capital punishment" for good measure , but also noted-without any sense of inconsistency or irony一-that "Chinese courts are notoriously corrupt, [and] arbitrary . . . ." RJN Ex. 2 at 6, 12. The same, of course, cannot be said aboutJ 寸 the SEC , which provides yet another reason why it is equally (if not more) plausible that, if there was aM misstatement at all , it appeared in the Chinese SAIC reports-not in L&Ls SEC filings. CERTAIN DEFENDANTS MOTION TO DISMISS - 14 . __ __!:-~~E_P~~.~L:-_~~ 1420 FIFTH AVENUE. SUITE 4100 No.2:11-cv-OI423-RSL SEATTLE, WASHINãTóÑ-98101-2338 1263 72. 000115298539.8 206.223.7000 FAX 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 22 of 48 Yi-which were effectively owned or acquired by L&L in 2009 and were included in L&Ls 211 SEC filings. RJN Ex. 9 at 3-5 , 19-21 , 33 (J uly 28 , 2010 Forrn 10-K). For this reason, it is not 3 11 surprising that L&Ls SEC filings reflected greater revenue and income than Glaucuss tally. 411 The Glaucus Reports purported comparison of SEC and SAIC numbers was incomplete at best 5 11 and , more likely given its motives , misleading at worst. Either way , it did not reveal a falsity. 6 11 Moreover, L&L did not even own Ping Yi , Zone Lin and Hong Xing for most of 2009; 711 L&L acquired all three in early 2010 with effective acquisition dates ofNovember 2009. RJN 811 Ex. 9 at 5. L&L, therefore , was not responsible for the underlying financial data or accounting 911 methodology used by the facilities forrner owners for pu甲oses ofthe 2009 SAIC reports. The10 11 same is true with respect to the 2008 SAIC reports which-although not referenced in the11 11 Glaucus Report or any other "corrective disclosure-Plaintiff also seeks to compare in the SAC12 11 with corresponding SEC filings. SAC~.咱 57-6 1. It was not until calendar year 2010 that L&L13 11 owned all the facilities at issue and could oversee the preparation and filing of all the relevant1411 SAIC filings. In short, purported discrepancies between L&Ls SEC filings and the pre-201015 11 SAIC filings cannot raise a plausible inference of falsity when L&L was only responsible for1611 preparing, auditing and filing the forrner , but not all ofthe latter. - 叮 i f 1 1 1 o o c. Glaucuss Allegation Regarding L& L s Ownership of the Zone Lin n y Coking Facility Does Not Reveal a Falsity. o u - The other "revelation" in the Glaucus Report relied upon by Plaintiff-that L&L does 且 句 , , not own the Zone Lin coking facility一-is equally baseless in fac t. To begin with , on its face , " 呵 , & 呵 the Glaucus Report contained inconsistent allegations that underrnine its reliability and , 且 叮 - accuracy. Specifically, in the first breath, the Glaucus Report alleged that "[t]his SAIC filing4 句7- clearly shows that as of June 2, 2010 , Lao Yang , not LLEN (or its subsidiary) was the sole J A叫 owner of Zone Lin and held the business in a sole proprietorship." R开~ Ex. 2 at 3. On the very 4 『 , 、呵 next page , Glaucus asserts that "a screenshot taken yesterday from the SAIC website show[s], J』呵, 瓦 that Dickson Lee . . . is the sole owner of the Zone Lin coal-coking business and that he holds马 U呵』 叮 the business in a sole proprietorship." Id. at 4. Plainly, both assertions cant be right and , in I CERTAIN DEFENDANTS MOTION TO DISMISS - 15 LANE POWELL PC 1420 F1FTH AVENUE , SUITE 4100 NO.2:11-cv-OI423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.22 3. 7000 FAX: 206 .2 2 3. 7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 23 of 48 1 11 reality , neither is. Even if Glaucus accurately excerpted Zone Lins most cuηent SAIC filings 211 in its Report, it badly misinterpreted (or, more likely, pu甲osely distorted) their meaning. 3 11 In fact , however , the June 2 , 2010 SAIC report cut-and-pasted in the Glaucus Report 4 11 does not show Lao Yang as Zone Lin 、 "sole owner." Rather , a translated version states that 5 11 Lao Yang is the "legal representative" of Zone Lin. Rn叫 Ex. 2(a) at 1. That statement is 611 entirely consistent with L&Ls prior statements: the Acquisition Agreement between L&L and 711 Zone Lins former owner-which L&L disclosed and filed with the SEC-stated that Lao 811 Yang would be the facilitys "legal representative" after L&Ls acquisition. RJN Ex. 7 (Mar. 911 17, 2010 L&L 10-Q , Ex. 99.2 ("Company Name After Acquisition: Luoping County Zone Lin1011 Coal Coking Factory, with Legal Representative of Lao Zhong Yang . . . .")). Glaucuss11 11 characterization of the "SAIC screenshot" is similarly misleading. A translated version of the12 11 screenshot st副es that Dickson Lee is listed as "Person in Charge"-not "owner." R则 Ex.2(时13 11 at 3. Given 孔1r. Lees status as L&Ls CEO and chairman of the board, that statement is14 11 entirely true too. If anything , then , the SAIC filings excerpted in the Glaucus Report c。所rm ,15 11 rather than refute , the truth of L&L s SEC filings regarding ownership of Zone Lin.1611 In any event, the absence of L&Ls (or its subsidiarys) name on Zone Lins SAIC17 11 registration does not mean that L&L does not own Zone Lin. Like Glaucus , Plaintiff relies on18 11 the same faulty assumption throughout the SAC-with respect to Zone Lin (SAC 句 106) , Ping1911 Yi (id. 啊 89-90) , and KMC (id. 咱 131). Plaintiff alleges that if a Chinese business transfers20 11 equity ownership , Chinese law requires the business to register the change with the SAIC. I d.21 11 咱 89 n. 18. Conspicuously , however , Plaintiff does not allege that a delay or failure to register22 11 such a change invalidates the underlying transaction , or the right ofthe new owner to recognize23 11 revenue and income from the acquired business. It doesn t. Without such an allegation-2411 which Plaintiff cannot and does not make-the SAIC filing cannot raise a plausible inference25 11 of falsity. In short, even if Zone Lin has yet to update its SAIC registration , which is the only26 11 plausible fact th剖 can be gleaned from the SAC , Plaintiff has not alleged that it would nullify2711 L&Ls acquisition and ownership , or affect the truthfulness ofits SEC filings. CERTAll叫 DEFENDANTS MOTION TO DISMISS - 16 LANE POWELL PC 1420 FIFTH AVENUE , SUITE 4100 NÒ.2:11-cv-OI423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 0001/5298539.8 206 .223.7000 FAX: 206.22 3. 7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 24 of 48 Plaintiff realizes this too. The SAC eschews Glaucuss (false) assertion regarding the 211 meaning of Zone Lins SAIC reports and , instead, relies on a purported statement made by a 3 11 "Mr. Hou" to the effect 由at Lau Yang still owns Zone Lin. SAC 啊 103-105. This vague 411 hearsay is not enough. "[A]llegations attributed to [an informant] must be accompanied by 5 11 sufficient particularized detail to support a reasonable conviction in the informants basis of 611 knowledge . . . [and] substantial specificity how the [informant] came to learn of the 711 information they provide in the complaint." Weiss v. Amkor Tec h., Inc. , 527 F. Supp. 2d 938 , 811 954 (D. Ariz. 2007) (quotation marks and citation omitted). The SAC contains no statement by 9 11 Mr. Yang himself nor , critically , does it refute the fact that he signed the Zone Lin Acquisition1011 Agreement with L& L. RJN Ex. 10(a) (acquisition agreement) & 10(b) (translated). Further,11 11 Plaintiff does not provide "particularized detail" or "specificity" to show the basis or reliability12 11 of Hou s alleged knowledge. To be sure , the bare assertion that Hou is Mr. Yang s "assistant"13 11 cannot be sufficient. Plaintiffs reliance on an alleged statement by "Mr. Hou"一which is14 11 inconsistent with the express terms of the Acquisition Agreement signed by Mr. Yang and the15 11 SAIC filing excerpted in the Glaucus Report-does not support a strong inference of falsity.1 乐1 U1i1 2. The SACs Other AlIegations of Fraud Do Not Raise a Strong Inference11i 寸 that L& L s SEC Filings Contain False Statements. O O Q Apparently recognizing that the Glaucus Report alone was insufficient to support a J Q U 1 A plausible inference of falsity , Plaintiff amended the original complaint twice to add other呵 allegations of fraud. These post hoc allegations were never the subject of a corrective』呵,, disclosure and must be dismissed for lack of loss causation. But even if these new allegations,"呵, 呵 could extend the scope of Plaintiff s claim, and are considered, it would not change the resul t.中 ,呵 中, 句," 3 a. A Comparison of the 2010 Financial Resu Its in L& L s SEC Filings and the SAIC Filings Undermines Plaintiff s Allegations of Falsity.24 11 Taking Glaucuss allegations regarding 2009 a step fu口her, Plaintiff alleges that L&Ls25 11 SEC filings for calendar year 2010 (which include L&Ls 2011 Form 10-K and 2010 Form 10-26 11 Qs) were overstated when compared with the calendar year 2010 Chinese SAIC reports filed by2711 L&Ls subsidiaries. SAC 句句 112-115. Although Plaintiff does not attach the SAIC reports he CERTAIN DEFENDANTS MOTION TO DISMISS - 17 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 No.2:11-cv-OI423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 0001/5298539.8 206 .2 23.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 25 of 48 1 11 allegedly reviewed , the SAC contains a chart that purports to compare the revenue and income 211 reported in the 2010 SAIC reports with revenue and income reported in L&Ls SEC filings for 3 11 the period February 1, 2010 to January 31 , 2011. I d. ~ 114. With respect to revenue , Plaintiff 411 alleges that L&Ls subsidiaries reported only $58.60 million to the SAIC in 2010 , while 511 reporting $212.68 million to the SEC for the same period oftime-an alleged overstatement of 611 a whopping 262.9%. I d. Plaintiffs allegation is demonstrably false. 7 711 This Court can take judicial notice of the authenticated SAIC reports filed for L&Ls 811 subsidiaries and facilities for calendar year 2010 , which L&L obtained from the SAIC. Rn叫 911 Ex. 11-17; Edmund Moy Decl.,何 6. As shown in the following charts, those reports refute any1011 inference of falsity and show little variance between the revenue of L&Ls subsidiaries11 11 reported to the SAIC and that reported by L&L to the SEC:1211 REVENUES REPORTED TO SAIC FOR CALENDAR YEAR 201013 L&L Subsidiary or Revenue in Chinese Revenue in $USD9 Fac i1ity .RMB 814 Ping Yi 525 ,280 ,000 $77 ,020 ,527.8615 Zone Lin 194 ,770 ,000 $28 ,558 ,651.0316 Hong Xing 413 ,880 ,000 $60 ,686 ,217.01 BaoXing 75 ,714 ,600 $11 , 101 ,847.5117 K孔1C 80 , 115 ,817 $11 ,747 , 187.2618 SuTsong 92 ,640 ,000 $13 ,583 ,577.71 DaPuAn 218 ,630 ,000 $32 ,057 ,184.7519 气 S A:IC Total Revenue . $234~755,l93二13 飞飞 叶飞 气2021 7 No comparison ofrevenue totals can be made for 2011 because , as Plaintiffacknowledges , the「, 叮 , SAIC reports for calendar year 2011 (which are prepared and filed in April-June 2012) for the various, 中 L&L subsidiaries and facilities have not yet been filed with the SAIC. See SAC ~ 114 n. 24." 气匀 o As is customary in most Chinese financial documents and noted on the SAIC filings, 3 A" themselves , with the exception of KMC , all of the SAIC reports abbreviate the revenue figure by 10,000斗牛 Chinese Yuan or Renminbi ("RMB"). 阳N Exs. 11-17 (SAIC reports); 11(a)-17(a) (translated呵 叶,, excerpts). To avoid confusion, L&L has provided unabbreviated revenue figures in the chart.缸竹 Z ~ Using the most conservative approach , L&L has used an exchange rate of 6.82 RMB to 1 U.S. J马 f句 O dollar, which was the approximate conversion ratio at the beginning of calendar year 2010. RJN Ex. 18. Exchange rates are not static and the RMB actually appreciated versus the U.S. dollar over the course of』 2010. Id. Accordingly , if an average or lower exchange rate were applied , it would result in an 叮 I increased understatement of revenue on L&Ls SEC filings relative to the SAIC filings. In any event, Plaintiffprovided no exchange rate for any ofthe purported comparison charts contained in the SAC. CERTAIN DEFENDANTS MOTION TO DISMISS - 18 LANE_P~V~L!-P~ o FIFTH AVENUE. SUITE 4100 No. 2: ll-cv-O 1423-RSL SEATTLE. WASHINGTÓN 98101-2338 126372.0001/5298539.8 206.223.7000 FAX 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 26 of 48 REVENUES REPORTED TO SEC FOR FEB. 2010 - JAN. 2011 句 s , , QuafterlfPeriod 0 RevelÌ1l e in SUSD " 句 3 Feb. 2010 - Apri12010 (7128/10 10-K) $34 ,033 ,849.00 A May 2010 - July 2010 (9/9/10 10-Q) $55 , 329 , 939.0。 『 严 Aug.2010 一 Oct. 2010 (1 2/1 0/10 10-Q) $57 ,417 ,686.00 、 J Nov. 2010 - Jan. 2011 (3 /1 4/11 10-Q) $65 , 894 , 584.0。 ζ U 」 SEC Total ReVen1lê $212,676,058.00 句 R刀..r Exs. 11-17 (SAIC reports); 11(a)-17(a) (translated excerpts); R刀叫 Exs. 9 at 53; 19 at 4; I O O O 20 at 4; & 21 at 4 (SEC filings).10 Rather than L&Ls SEC filings overstating revenue by $154 Y A U - - million or 263% as compared to the SAIC filings , as Plaintiff alleges , the actual reports show · an understαtement of around $22 million一less than a 10% divergence. That divergence can · · 且 · · · A easily be accounted for by the one-month difference in the periods compared or, more likely , · B · A · - - 「 the fact that L&L s SEC filings eliminate revenue from inter-company transactions-as A · , · · , 』 Plaint江f SAC 啊 60 , 61 & nn. 7, 8. Regardless , better than anything else, 且 · · 句 concedes. See · 且 3 · A · · A Plaintiff s bald misstatements regarding the alleged disparity between the 2010 SAIC and SEC 『 , 、 filings should cast doubt on the plausibility of the SAC as a whole. J 瓦 b. Plaintiff s Allegations Regarding Ownership of Ping Yi Do Not U Create a Plausible Inference of Falsity.17 11 In its effort to profit from L&Ls demise , short-seller Geoi盯esti吨 accused L&L of18 11 falsely claiming ownership of the Ping Yi coal mine. Rn、~ Ex. 4. Echoing Glaucu内 similar19 11 allegations regarding Zone Lin , Geoinvesti吨 alleged that the "SAIC file we obtained .20 11 clearly shows that LLEN is not the owner of the Ping Yi Mine and that the current owners are21 11 M r. Zhang Baoguo (40%) , M r. Hu Shiwei (30%) , Mr. Liu Shuangyou (16%) and Mr. Chen2211 Honglin (14%)." I d. The SAC repeats the allegation wholesale. SAC 啊 20, 89-90 , 94 ("The23 10 Although Plaintiff purports to compare "net income" figures from the SEC and SAIC filings ,24 unlike revenue , no viable comparison of net income is possible because the expenses for each individual呵, ζ J subsidiary and facility in China, such as taxes , depreciation , employee wages & benefits , selling and马 r administration expenses, and interest differ dramatically from similar expenses incurred by L&L in the呵 O,缸 United States. Nevertheless , a quick comparison of the aggregate "Total Annual Profit Amount" from匀 the SAIC filings for calendar year 2010 with the "Net Income" figures in L&Ls SEC filings for the』 叮 I period Februarγ2010 to January 2011 reveals a difference of only $1 ,576 ,972-nothing remotely like the $45.76 million difference cited in the SAC (at ~ 114). CERTA孙~ DEFENDANTS MOTION TO DISMISS - 19 LANE POWELL PC 1420 FIFTH A VENUE, SUITE 4100 No. 2: ll-cv-OI423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000 1/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 27 of 48 1 11 SAIC registration filings for Ping Yi show that the registered owners are Honglin Chen, Shiwei 211 Hu , Shuangyou Liu and Baoguo Zhang from at least May 2008 to the present."). Plaintiffs 3 11 reliance on a SAIC filing does not raise a plausible allegation of falsity. As explained above , 411 Plaintiff does not allege that, under Chinese law, a failure to update Ping Yis SAIC filings to 5 11 reflect L&Ls acquisition invalidates L&Ls ownership or undermines the truthfulness of its 611 SEC disclosures. Put differently , even if true , Plaintiffs allegation raises a far greater 711 inference that the SAIC filings are simply out-of-date than that L&Ls SEC filings were false. 8 11 Here too , Plaintiff apparently recognizes that the SAIC filings are not inconsistent with 911 L&Ls ownership of Ping Yi. So , also like Zone Lin, Plaintiff drums up a witness statement.10 11 The SAC claims that "Mr. Shiwei Hu , Ping Yi s legal representative . . . and one of its listed11 11 owners . . . told Plaintiffs counsels investigator that L&Ls statement about acquiring and1211 owning Ping Yi Mine is false." SAC 咱 91. In a move that reflects the symbiotic relationship13 11 between Plaintiffs counsel and the short-sellers , a follow-up Geoinvesting article attached a14 11 purported declaration from "Mr. Hu" to the same effect-which the SAC , in tum, incorporates15 11 by reference. Id. 啊 21-22 , 95-96. But even ifHus statements are taken at face value , there is1611 no plausible inference of falsity. Plaintiff concedes that Hu was only a minority owner of Ping1711 Yi , but neither the SAC nor Geoinvestings articles contain any corroborating statement 仕om18 11 the former m哼iority owners , Baoguo Zhang , Honglin Chen or Shuanguou Liu. See id. 句句 90-91 ,19 11 95-96 & Ex. 1. Just as glaring , although Hu denies that a deal was "closed," he does not20 11 explain-much less re臼te the validity 0ι一the January 21 , 2010 Acquisition Agreement signed21 11 by L&L and Ping Yis Baoguo Zhang. RJN Exs. 22 (acquisition agreement) & 22(时2211 (translated). The SACs lack of any "particularized detail ," Weiss , 527 F. Supp. 2d at 954 ,2311 showing Hus knowledge and authority is reason alone to reject Plaintiffs allegation offalsity.2411 But theres more. This Court can take notice ofthe fact that Ping Yis former majority25 11 owners have expressly confirmed the sale of the Ping Yi mine to L& L. In a Letter of2611 Affirmation, Ping Yis former majority owners , Baoguo Zhang , Honglin Chen and Shuanguou27 11 Liu, state unequivocally that they "were the controlling owners . . . of Ping Yi Coal Mine ," and CERT AIN DEFENDANTS MOTION TO DISMISS - 20 LANE POWELL PC 1420 FJFTH AVENUE , SUπE4100 No. 2: ll-cv-O 1423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 28 of 481 11 that they "authorized Mr. Baoguo Zhang to sell the Ping Yi Mine to [L&L s subsidiary] .2 11 pursuant to an acquisition agreement dated 1121/2010 . . . ." R刑 Ex. 23. The Affirmation is3 11 signed by all three former owners , contains the official seal of the Ping Yi Mine , and attaches a4 11 copy of the L&LlP ing Yi Acquisition Agreement. Id. 11 Even if Hu could renege on the sale of5 11 his interest, it would not undermine L&Ls acquisition of Ping Yi or the truth of L&Ls SEC6 11 disclosures; under settled accounting principles , which Plaintiff acknowledges , financial711 statements should be consolidated whenever a company owns a controlling financial interest in8 11 another company. SAC 句 100(a); see ARB No. 51 , amended by SFAS No. 94. Plaintiffs9 11 allegation that L&L did not acquire Ping Yi is implausible for this reason as well.-All--1111122222222 o u t c. Plaintiff s Allegations Regarding Ownership of Hon Shen Do Not - Create a Plausible Inference of Falsity. 句 Lastly, Plaintiff alleges that it was "impossible" for L&L to acquire Hon Shen Coal , 中 句 Company in July 2009 because the business license of another entity, Luxi Shenshen Hon3A Coking Factory ("Shenshen Hon") , was cancelled in January 2009 , and equally "impossible" 『 , 、 for L&L to sell Hon Shen to Guangxi Liuzhou Lifu Machinery Co. ("Lifu Machine") in April J r O 2010 because Lifu Machines business license was revoked in February 2010. SAC 啊 126- 叮 130. Similar to the allegations regarding Zone Lin and Ping Yi, this allegation is based solely I O O Q / on Plaintiff s purported review of unspecified PRC records and a legal fiction that, if something O V 1 is not reflected in a "governmental database ," it never happened. For the same reasons stated above , the bare allegation that Shenshen Hons or Lifu Machines owners failed to keep their SAIC registrations current---o r even had their licenses canceled一-does not undermine the truth 且 呵 , of L&Ls statements regarding the purchase and sale of Hon Shen. Moreover, and critically, - 1 J A Plaintiff does not allege that the Hon Shen business was a sham, nor does he allege that L&L 『 门 This Court can take judicial notice of the Letter of Affirmation because it authenticates the , Acquisition Agreement between L&L and Ping Yi. SAC ~ 87. See Wright v. Associated Ins. Cos. , 29 、 J F.3 d 1244, 1248 (7th Cir. 1994) (district court properly considered agreement and affidavit 瓦 authenticating agreement attached to defendants motion to dismiss , where plaintiff飞 complaint referred U to agreement in the complaint). Moreover, Plaintiff should not be permitted to have its cake and ωit 7 too. Having incorporated Mr. Hus statement into the pleadings as a means ofimplicitly questioning the validity of the Acquisition Agreement, Plaintiff should not be heard to object to this Courts consideration ofthe statement ofthe mines three other former owners on the same issue. CERTA卧J DEFENDANTS MOTION TO DISMISS - 21 LANE POWELL PC 1420 FIFTH A VENUE, SUITE 4100 NO.2:11-cv-OI423-RSL SEATTLE, WASHll证GTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 29 of 48 1 11 did not actually buy or sell an interest in Hon Shen according to the terms ofthe acquisition and 2 11 sale agreements th剖 L&L duly filed with the SEC. See R则 Exs. 24-27 (Form 8-Ks). Plaintiff 3 11 does not allege plausible falsity here eithe r. The SAC Fails to AlI ege Plausible And Particularized Facts Giving Rise to a 411 B Strong Inference That L&L or the Individual Defendants Acted 明Tith Scienter. Even if this Court accepts Plaintiff、 s implausible allegation that the Glaucus Report 叮 revealed the "truth," and that L&L overstated its revenue from or ownership in its Chinese J O O Q mining operations, the PSLRAs stringent pleading standard requires Plaintiff to "state with J O U 1 A particularity facts giving rise to a strong inference that the defendant acted with" intent or - A deliberate recklessness. Zucco, 552 F.3d at 991; 15 U.S.C. S 78u-4 (b)(2). To show scienter, - 1 - the SAC relies on (a) the Individual Defendants status as company directors and executives 叮 with access to undisclosed information; (b) the Lees stock sales during the class period; (c) the 且 4 1 句 resignations of certain L&L directors and officers; and (d) Dickson Lees prior regulatory 1 3 1 A i 1 citations. For the reasons that follow , viewed both individually and holistically , none of these 吨 , 气 allegations raise a "cogent" inference of scienter that is at least as "compelling" as the opposing 且 J1 瓦 innocent inferences. Tellabs , 551 U.S. at 324. The SAC must be dismissed on this basis alone. 且 U 1 叮 1. The SAC Does Not Contain Particularized AlIegations Regarding the i 1 F i t l O O Knowledge of the Individual Defendants Whose Status as Executives is Q J Insufficient to Raise an Inference of Scienter. n v 1 The SAC asserts Section 1O(b) and Rule 10b-5 liability against Defendants L&L , 叮 L Dickson Lee , Wang and Robinson, but-other than the anecdotes regarding Mr. Lee discussed 呵 , 且 separately below一-contains no particularized allegations of scienter directed to these , 匀 , , " 句 " 句 individuals or any other director or officer. That omission is fatal to Plaintiffs claims against , 中 叮 4 J Mr. Lee , Ms. Wang and Mr. Robinson , as well as to the claim against L&L. As noted , A T q 句 d Plaintiff s a忧empt to rely on "group pleading" is unavailing. Instead, the SAC must allege , , , " 呵 specific facts giving rise to a strong inference that Mr. Lee , Ms. Wang and Mr. Robinson each , , , 缸 瓦 U acted with deliberate recklessness. Hansen , 527 F. Supp. 2d at 1153-55. And , because the 叮 , , 』 叮 / SAC lacks sufficient allegations to raise a strong inference of scienter with respect to any 呵 , 牛 CERTAIN DEFENDANTS MOTION TO DISMISS - 22 LANE POWELL PC 1420 FIFTH A VENUE, SUITE 4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 30 of 48 1 2 3 individua1 , scienter cannot be imputed to the company as a who1e under a "collective scienter" 4 5 6 7 theoη . See Glazer Capital 儿命mt. , LP v. Magistri, 549 F.3d 736 , 74~5 (9th Cir. 2008) (if 8 9 0 1 "collective scienter" doctrine is viab1e , it requires particu1ar allegations to the effect that "at 1east some co叩orate officia1 knew of the fa1sity") (citation omitted) (emphasis in origina1); In re Mercury Interactive Coψ. Sec. Litig., 2007 WL 22092278 , *10 (N .D. Cal. Ju1y 30 , 2007) ("to the extent the Comp1aint fai1s to p1ead scienter with respect to any of the individua1 defendants , it a1so fai1s to p1ead scienter with respect to [the company] ,,).12 There is not a sing1e allegation in the SAC that raises an inference that the Individua1 Defendants (or anyone at L&L) knew that the information contained in the companys SEC 1 i 1 i filings was fa1se or mis1eading. There are no facts alleged showing that the Individua1 t - - i t - - 且 Defendants were (i) responsib1e for or even aware of the contents of the re1evant SAIC fi1ings , i 1 i 1 2 i t 3 4 (ii) aware of Chinese 1aw, Chinese GAAP or SAIC fi1ing requirements , (iii) aware that the - - 1 5 6 7 8 SAIC fi1ings were alleged1y inconsistent with L&Ls SEC filings , (iv) responsib1e for L&Ls 9 0 1 acquisition of Zone Lin, Ping Yi or Hon Shen, (v) aw缸e that L&L cou1d not recognize revenue 2 3 4 5 6 from its Chinese faci1ities , or, indeed, (vi) aware of any dispute regarding ownership when 7 L&L issued the financia1 statements at issue. On the contrary, the SAC recognizes that M r. Hu (regarding Ping Yi) and Mr. Hou (regarding Hon Shen) made purported statements challenging L&Ls ownership on1y after the Form 10也 were issued , after the G1aucus Report was pub1ished , and q如 the end of the class period. SAC 啊 21-23 , 91-96 , 103-105. Of course ,句,, when these allegations c缸ne to 1ight, L&L not on1y refused to restate its financia1s , but it』句,品 pub1icly denied and refuted G1aucuss and Geoinvestings allegations. RJN Exs. 3 & 5.叮,,缸呵 Instead of alleging specific facts to create a compelling inference that the Individua1,中匀,, 12 "Collective scienter" refers to a doctrine that allows a strong inference of scienter as to a"呵 corporation, even though the allegations fail to raise a strong inference as to any individual acting on the,& corporations behalf. Glazer , 549 F.3d at 743. "Group pleading" allows a strong inference of scienter as「, to individuals on the basis of allegations that co叩orate statements may be imputed to "individuals with,』呵 direct involvement in the ev町day business ofthe company." I d. As noted , the overwhelming majority,马 of courts hold that "group pleading" did not survive passage of the PSLRA. See In re Impαc Mortgage Holdings , Inc. Sec. Litig. , 554 F. Supp. 2d 1083 , 1092 (C.D. Ca l. 2008) ("The two circuit courts to consider the question , as well as the majority of district courts within the Ninth Circuit, have concluded that group pleading is no longer viable under the PSLRA."). CERTAIN DEFENDANTS MOTION TO Dl SMISS - 23 LANE POWELL PC 1420 FIFTH AVENUE, SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000 1/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 31 of 48 1 11 Defendants acted with scienter, Plaintiff relies on a single conclusory allegation that each 211 individual knew L&Ls SEC filings were false simply because they "were high-level 3 11 executives , directors , and or agents of the Company" and , thus , "had access to other members 4" ofthe Companys management te缸n, intemal reports and other data and information about the 511 Companys finances , operations , and sales at all relevant times." I d. ~ 160. Thats it, and it s 6" not enough. It is well-settled that , "general allegations of defendants ‘ hands-on management 711 style , their interaction with other officers and employees , their attendance at meetings , and their 8 11 receipt of unspecified . . . reports are insufficient to create a strong inference of scienter." 9" Glazer , 549 F.3d at 746 (citation and quotation marks omitted); see also Zucco , 552 F .3 d at10" 1000-01 ("[a]llegations that . . . management had access to the pu甲ortedly manipulated11 " quarterly accounting numbers , or that the management analyzed the inventory numbers closely,12" do not support the inference th剖 management" knew the data was false); In re Peerless Systems13" Corp. Sec. Litig., 182 F. Supp. 2d 982 , 993 (S.D. Cal. 2002) ("a complaint does not adequately14" plead scienter by claiming that key officers knew the true facts by virtue of their ‘ hands-on15" positions and involvement in the day-to-day management of the company"); In re Downey Sec.16" Litig., 2009 WL 2767670 , *12 (C.D. Cal. Aug. 21 , 2009) ("the lndividual Defendants high-1711 level positions within Downey, [and] their access to non-public information" are insufficient).13 1 O i t O i Q J O 13 In Zucco , the court reiterated that "we have previously found inadequate complaints alleging V i that ‘ facts critical to a businesss core operations or an important transaction generally are so apparent句,4 that their knowledge may be attributed to the company and its key officers." 552 F.3d at 1000 (quoting In re Read-Rite Corp. Sec. Litig., 335 F .3 d 843 , 848 (9th Cir. 2003). However, the Zucco court notedh, 「 队IVO exceptions to the Read-Rite rule , but only "under certain naηow circums tances " Id. 剑 旷qL 缸闵阴 臼 e xc epti on permits general allegations about mana gement s role in a ∞ orate structure and the 吨 旧 cO叩 饨q 匀 , importance of the co叩orate information about which management made false or misleading statements , " to create a strong inference of scienter when these allegations are buttressed with detailed and spec伊c 句丰 3 allegations about managements exposure to factual information within the company." Id. (emphasis A呵 added and intemal citation omitted). The second exception permits an inference of scienter where "the 『 defendants ‘ must have known about the falsity of the information they were providing to the public』 ,呵 、 because the falsity of the information was obvious 企om the operations of the company[.]" I d. at 100 1.,, J Neither exception applies here. The SAC fails to plead any "detailed and specific allegations about"「, management s exposure to factual information within the company." As noted , apart from boilerplate," 瓦 U conclusions , the SAC is devoid of any factual allegations , from confidential witnesses or otherwise ,匀 regarding managements knowledge of any information that would reveal a falsity. Nor does the SAC』 寸 , plausibly allege any information in L&Ls SEC filings that was false , including its financial statements, much less so patently false that the Individual Defendants must have been aware of its falsity. CERTAIN DEFENDANTS MOTION TO DISMISS - 24 LANEPOWELLpc 1420 FIFTH A VENUE, SUITE 4100 No. 2: ll-cv-01423-RSL SEATTîi WASHÏÑGióÑ~98ïoi~2338 1263 72. 0001/5298539.8 206.223.7000 FAX: 206.22 3. 7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 32 of 48 1 11 The decision in Hansen is particularly instructive. There , like here , the plaintiff 211 a忧empted to show scienter by alleging that the individual defendants had "positions of control 3 11 and authority as officers and/or directors of the Company ," and "had access to adverse 411 undisclosed information about the Companys business . . . via access to intemal co甲orate 5" documents. . . , conversations and connections with other co叩orate officers and employees." 611 Hansen , 527 F. Supp. 2d at 1159. The court concluded that these bare allegations were 7 11 insufficient because "Plaintiff cannot base an inference of scienter on unspecified documents 8 11 and conversations ," but must allege "specifics with respect to information gained by the 9 11 Individual Defendants due to their access" to undisclosed company information. Id. (citing In1011 re Splash Tec h. Holdings, Inc. Sec. Litig., 160 F. Supp. 2d 1059, 1079-80 (N .D. Cal. 2001)).11 11 The bare-bones "scienter-by-job-title" allegations in the SAC mirror those in Hansen. Like the口l 2" district ∞ c ourt in Hα nsen, 仰 叽 凡 1 this Court should likewise conclude 由剖 that口1 311 any 如臼 时 创 tωothe role or knowledge of any ofthe Individual Defendants . . . in the alleged tact s r elated 肌 趾1411 [仕aud] is fatal to Plaintiffs showing of scienter both with respect to the Individual Defendants15 11 and with respect to [the company]." I d. at 1157.1611 Whats left then? Only Plaintiffs boilerplate allegations that Lee, Wang and Robinson1711 signed all or some ofthe challenged Form 10-Ks and related SOX certificates. SAC 啊 33-35 ,1811 51 , 84 , 110 , 120. But that bare fact is likewise insufficient to create a strong inference of19 11 scienter. Zucco , 552 F.3d at 1003-04 ("Boilerplate language in a co甲orations 10-K form , or20 11 required certifications under Sarbanes-Oxley . . . add nothing substantial to the scienter21 11 calculus"); Glazer , 549 F.3d at 747-48 ("Sarbanes-Oxley certifications are not sufficient,22 11 without more , to raise a strong inference of scienter"); In re Century Aluminum Co. Sec. Litig.,23" 2011 WL 830174 ,勺(N .D. Cal. Mar. 03 , 2011) (same). If signatures were enough, "scienter24 11 would be established in every case where there as an accounting error or auditing mistake made25 11 by a publicly traded company , thereby eviscerating the pleading requirements of the PSLRA."2611 Hansen , 527 F. Supp. 2d at 1159 (citation omitted). Stripped bare , Plaintiff relies on a2711 syllogism rather than particularized facts: because L&Ls SEC filings were false , the LANEP。可VELLpc CERTAIN DEFENDANTS MO Tl ON TO DISMISS - 25 1420 FlFTH A VENUE, SUπE4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 33 of 48 1 11 Individual Defendants knew they were false. The PSLRA demands more. It requires Plaintiff 2 11 to plead specific facts showing how each Individual Defendant knew or should have known of 3 11 the falsity. The SAC contains no such allegations. A 件 , 气 2. The SACs Allegations Regarding Stock Sales of Dickson and Robert Lee Do Not Raise an Inference of Scienter. d f O Unable to allege specific facts showing that the Individual Defendants were aware of 叮 any inaccuracies in L&Ls SEC filings , Plaintiff relies on allegations of "motive and / O O n y oppo此unity" to establish scienter. This too is not enough. Zucco , 552 F.3d at 991 ("although facts showing . . . a motive to commit fraud and opportunity to do so may provide some - o reasonable inference of intent, they are not sufficient to establish a strong inference of a t u - - deliberate recklessness"). Plaintiff alleges that "CEO Dickson Lee and his brother Director 且 1 呵 Robert Lee all profited handsomely from sales and disposition of L&L stock during the period i , t ι , 1 , i " of the fraud." SAC 咱 122. This allegation does not withstand scrutiny. "While suspicious 1 3句 1 A i t - - stock sales by co叩orate insiders may constitute circumstantial evidence of scienter, such sales i t 叶 P only give rise to an inference of scienter when they are dramatically out of line with the prior 3 正 trading practices at times calculated to maximize the personal benefit from undisclosed inside U 叮 information"λtfetzler, 540 F.3d at 1066-67 (quotation marks omitted). Three factors are r o o n Y relevant to this inquiry: (i) the amount and percentage of the shares sold; (ii) the timing of the A U - - sales; and (iii) whether the sales were consistent with the insider s trading history. I d. at 1067.且呵,中 Tested against these criteria, the SACs meager allegations regarding the Lees stock呵,中呵 sales do not remotely suggest deliberate fraud. "For individual defendants stock sales to raise- 「 an inference of scienter, plaintiffs must provide a ‘ meaningful trading history for pu甲oses of叮 4,中吨 句 comparison to the stock sales within the class period." Zucco , 552 F.3d at 1005 (citing In re, 3 A,缸呵 Vantive Corp. Sec. Litig. , 283 F.3d 1079, 1095-96 (9th Cir. 2002)). Plaintiff provides no, 吨, ," 、呵 comp町ative trading history , much less a meaningful one. The SACs allegations regarding the J缸呵 瓦 Lees trading history (with the exception of two post-period purchases by Dickson Lee) are U』 叮 confined to the two-year class period. SAC 咱咱 122-124. Plaintiff provides no data regarding / LANEPO明ELLpc CERTAIN DEFENDANTS MOTION TO DISMISS - 26 1420 FIFTH A VENUE, SUITE 4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 34 of 48 1 11 the Lees (or any insiders) trading history from the time L&L first appeared on the "NASDAQ 2 11 Bulletin Board" in August 2008. Id. 咱 122. With nothing to comp町e them to , there is simply 3 11 no way to infer that the Lees sales were "dramatically out of line with the prior trading 411 practices" or "calculated to maximize . . . personal benefit." There can be no inference of 5 11 scienter for this reason alone. Zucco , 552 F.3d at 1006; see also In re Zumiez Inc. Sec. Litig., 611 2009 WL 901934, *13-14 (W.D. Wash. Mar. 30, 2009) (rejecting inference of scienter where 7 11 "Complaint utterly fails to allege any facts about the Defendants ‘ prior trading history). 811 Moreover, other than the Lees , the SAC does not allege that any other Individual 911 Defendant sought to profit by selling L&Ls allegedly inf1 ated stock price during class period.10 11 Where a plaintiff alleges that other individuals were involved in securities fraud , but only a few11 11 engaged in suspicious stock sales , the sales do not raise a strong inference of scienter. Metzler ,1211 540 F.3d at 1067; see also Ronconi v. Larkin , 253 F.3d 423 , 436 (9th Cir. 2001) ("[o]ne13 11 insider s well timed sales do not support the ‘ strong inference required by the statute where the14 11 rest of the equally knowledgeable insiders act in a way inconsistent with the inference that1511 favorable characterization of the companys affairs were known to be false when made.").1611 According to Plaintiffs own theory , defendants Wang and Robinson also knew that L&L17 11 overstated its revenue. SAC 啊 155-163. Indeed, although not included in Plaintiffs Section18 11 1O(b) claim, the SAC suggests that the other Individual Defendants, who were directors and19 11 members of L&L s audit committee , also knew or should have known of the alleged fraud. I d.2011 啊 38-47. Yet there is no allegation that any of these other knowledgeable insiders soug趾 to21 11 profit from the companys allegedly inf1 ated stock price. The lack of any such allegation2211 defeats the inference that the Lees isolated stock trades demonstrate scienter.23 11 Finally, even ifviewed in isolation, the Lees trades 町e not remotely suspicious. First,2411 as Plaintiff concedes , the Lees purchased significant amounts of L&Ls stock at a time when,25 11 Plaintiff alleges , they knew the stock price was artificially inf1 ated by fraud. Indeed, Dickson26 11 Lee purchased nearly $2.7 million worth of L&L stock during the class period-far more than27 11 the $1.6 million he sold. Id. 句 122. That fact alone raises a far more compelling inference that CERTA卧~ DEFENDANTS MOTION TO DISMISS - 27 LANE POWELL PC 1420 FIFTH AVENUE, SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASH刑GTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 35 of 48 1 11 there was no scienter. See In re A 再peon, Inc. Sec. Litig., 168 Fed. Appx 836 ,丰 3 (9th Cir. 211 2006) ("The purchase of stock by Aspeons CEO tends to negate the inference of scienter"); 3 11 Allison v. Brooktree Cm严, 999 F.Supp. 1342, 1352 (S.D. Cal. 1998) (same). After all , "[i]t 4 11 would have made no sense to purchase that stock if defendants knew the prices to be in f1 ated." 5 11 Matthews v. Centex Telemanageme时, Inc. , 1994 WL 269734 ,吨(N.D. Cal. June 8, 1994). 611 Second, with respect to the Lees sales of L&L stock, the timing and amount of those 7 11 sales do not suggest a scheme "calculated to maximize the personal benefit from undisclosed 811 inside information." Metzler, 540 F.3d at 1067. To begin with, Dickson Lees sales during the 9 11 class period were involuntary and , therefore , negate , rather than support, an inference of10 11 scienter. I d. at 1067 n. 11 ("Sales according to pre-determined plans may rebut an inference of11 11 scienter") (quotation marks omitted); Coates v. Heartland Wireless Comm. , Inc. , 26 F. Supp. 2d1211 910 , 920 (N .D. Tex. 1998) (no scienter when involuntary insider sale was made to meet a13 11 margin call). Dickson Lee sold 216 , 106 shares of L&L stock in three transactions in January1411 201 1. SAC 句 122. 14 As stated in an L&L Form 4/A, however , those sales "were not initiated15 11 by M r. Lee , but by a margin call carried out by a financial institution while Mr. Lee was16 11 traveling overseas and could not prevent the sales." R时 Ex. 28. The SAC contains no17 11 allegations to refute the forced nature of these sales.18 11 Further, the Lees sold far too little stock during the class period to raise an inference of1911 scienter. The law is clear here too. To demonstrate scienter, insider sales must constitute a2011 significant percentage of a defendants holdings. Metzler , 540 F.3d at 1067; Ronconi , 253 F.3d21 11 at 435. Dickson Lees margin call sales amounted to less than 3% of the 7,295 ,515 shares he22 11 held at the time. RJN Ex. 28. Even if the 800 ,000 shares Dickson Lee donated to charity 缸e句 34567』叮马 14 Plaintiff alleges that Lees donation of L&L stock to two charitable foundations during the呵,, class period should be treated like a stock sale on the the。可 that Lee received a tax deduction against," ordinary income for the value of the stock. SAC 啊 122-123. Not only is there no legal authority to呵, support this theory of scienter, Plaintiff alleges no facts to suggest that Lees donation was motivated by,"呵 a desire for pecuniary gain (or that he actually received such a benefit) , rather than simple benevolence,,中 which is "at least as compe l1 ing as any opposing inference one could draw from the facts al1 eged." Tellabs , 551 U.S. at 324. Regardless , as discussed herein, even if Lees donation is treated as a "sale," the total percentage of stock involved is far too low to be suspicious. CERTAIN DEFENDANTS MOTION TO DISMISS - 28 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 36 of 48 treated as sales , as Plaintiff contends , Lee still "sold" less than 13% of his overall holdings 2 11 during the class period. I d.; SAC 句 122. Robert Lees sales were equally benign. He sold 311 180,000 shares ofL&L in December 2010 and January 201 1. RJN Exs. 29 , 30; SAC 句 122. 4 11 Those sales constituted only around 21 % of the 836 , 146 shares of stock he held at the time. I d. 5" Courts uniformly find that the sale of such a small percentage of total holdings insufficient to 611 give rise to a strong inference of scienter. See Metzler , 540 F.3d at 1067 (no inference of 7 11 scienter from insider s sale of 37% of holdings); In re Apollo Group , 2011 WL 5101787 , * 10- 811 11 (same for 21% , 34% and 26%); In re Inter n. Rectifier Corp. Sec. Litig., 2008 WL 4555794 , 911 *19 (C.D. Cal. May 23 , 2008) (same for 23%). lndeed, the fact that the Lees retained the10 11 overwhelming bulk of their holdings during the class period is inconsistent with an inference11 11 that they knowingly sought to profit from a scheme to artificially inflate the price of L&Ls12 11 stock. This Court should refuse to infer scienter for this reason as well.- 句A 31ι1 A 3. The SACs Allegations Regarding Director Resignations and CFO 叶 Turnover Do Not Raise an Inference of Scienter. , 、 Stretching even further to allege scienter, Plaintiff suggests that L&L and the lndividual 且 J ζ u1 7 Defendants knew the companys financial statements were false because "[w]ithin three weeksA 1 OA O- O of the date Glaucus issued its repo此, two directors of L&L resigned ," and another directorA Yt AI Uq - - resigned five months later. SAC 啊 24 , 25 , 132-134. Plaintiff insinuates the same thing from the fact that L&L has had five CFOs over the years. Id. 句 135. Again, Plaintiff asks the Court to infer too much. Director and executive resignations , without more , do not support a strong 中 匀 , " inference ofscienter. Zucco , 552 F.3d at 1002; In re Cadence Design Sys. , Inc. Sec. Litig., 654 呵 , , , F. Supp. 2d 1037 , 1049-50 (N .D. Cal. 2009); In re Cornerstone Propane Partners, L. P. Sec. " 「4 「 1 d A Litig., 355 F. Supp. 2d 1069, 1093 (N .D. Cal. 2005). lndeed, in Zucco , the Ninth Circuit found4 「 no inference of scienter from the resignation of the CFO and two controllers during the relevant , 『 & , 句 、 period because the plaintiff failed to "allege sufficient information to differentiate between a 』 J 匀 , " 瓦 suspicious change in personnel and a benign one." 552 F.3d at 1001-02. 句 U , , 』 呵 Plaintiff s allegations suffer from the s缸ne defect here. Other than Plaintiffs / CERTAIN DEFENDANTS MOTION TO DISMISS - 29 LANE POWELL PC 1420 FIFTH A VENUE , S UITE 4100 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 0001/5298539.8 206.223 .7 000 FAX: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 37 of 48 123456789012345678901234567 speculation regarding the timing of the resignations , the SAC contains no allegations to connect the resignations to L&Ls financial statements or publication of the Glaucus Report. On the contrary, the facts refute Plaintiffs suspicions and raise non-culpable explanations "at least as compelling as any opposing inference one could draw 仕om the facts alleged." Tellabs , 551 U.S. at 324. With respect to the directors , L&L filed Form 8-Ks that disclosed benign reasons for the resignations , unrelated to any disagreement between the directors and the company: • "Andrew Leitch decided not to stand for re-election at the coming Annual Meeting of Shareholders and tendered his resignation 仕om the Company s Board of Directors effective August 10, 2011 for personal reasons. Mr. Leitch did not resign because of any disagreement with the Company."--1 • "Robert Okun has tendered his resignation from the Companys Board ofitit Directors effective August 17, 2011. The Board chose to reduce the number ofitit directors to 7 and Mr. Okun decided not to stand for re-election. Mr. Okuni--1 did not resign because of any disagreement with the company."11111 • Robert Lee has tendered his resignation 仕om the Companys Board of Directors effective December 30 , 2011 for personal reasons. Mr. Lee did not resign because of any disagreement with the company." RJN Exs. 31 , 32 & 33. Plaintiff does not allege any facts to dispute L&Ls Form 8-K disclosures, all of which dispel any inference of scienter. See City 01 Brockton Retirement 吵s. v. Shaw Group Inc. , 540 F. Supp. 2d 464 , 474-75 (S.D.N. Y. 2008) (no inference of scienter from auditor resignation where Form 8-K disclosed no disagreements between company and auditor). lndeed, the Form 8-Ks suggest th剖 the timing ofLeitch and Okuns resignations was「 prompted by L&Ls upcoming shareholders meeting , not publication ofthe Glaucus Report.,中匀,, The SAC is similarly devoid of allegations connecting the pu甲orted "revolving door for"叫J CFOs" to L&Ls alleged 仕aud-which likewise precludes an inference of scienter. Two CFOsu-呵 (Bennett and Leung , neither of whom is a defendant) resigned bφre the class period and , thus ,,,"匀, b写[ore L&L made the SEC filings at issue. SAC ~ 135 n. 32. Leung was replaced by defendant,,"呵 轧Tang who served as CFO until January 2011 when, according to a Form 8-K, she resigned for,中句, "family reasons." RJN Ex. 34. A sep町ate Form 8-K reveals that L&L appointed an acting,"呵,, CFO (Lin, who is not a defendant) to replace Wang for approximately five months until," CERTAIN DEFENDANTS MOTION TO DISMISS - 30 LANE POWELL PC 1420 FIFTH A VENUE, SUπE4100 NO.2:11-cv-01423-RSL SEATILE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 38 of 48 1 11 defendant Robinson was named permanent CFO. RJN Ex. 35. Thus , Plaintiff did not name 2 11 three of the four resigning CFOs (Bennett, Leung and Lin) as defendants , nor allege that they 3 11 were aware of any falsity or fraud , and , as to the fourth (Defendant Wang) , Plaintiff alleges no 411 facts to contradict the benign reason for her resignation stated in the companys Form 8-K. In 5 11 short, nothing in the SAC shows that the handful of routine director and officer resignations 6 11 experienced by L&L over the years were related to the allegations contained in the SAC. 7 , 。 4. The SACs Allegations of Dickson Lees Prior and Unrelated Securities O Laws Violations Do Not Raise an Inference of Scienter. Q J Q U Finally, unable to allege facts suggesting that the Individual Defendants (or any other 1 t director or officer of L&L) knew L&Ls Form 10-Ks or 10-Qs were false , Plaintiff goes so far i - - - i t - as to ask the Court to infer scienter from Dickson Lees alleged prior, but wholly unrelated , - i 且 t 匀 - , regulatory violations. SAC 咱 125. This theory is as untenable as it is desperate. Courts - i , t i t i " - 1 - d A routinely refuse to infer scienter from allegations that an insider has a "propensity" for fraud , especially where , as here , the prior conduct is unrelated to the conduct alleged in the complaint. 吁 , 3 See In re Elan Corp. Sec. Litig., 543 F. Supp. 2d 187, 221 (S.D.N. Y. 2008); In re Cardinal ζ u 7 Health Inc. Sec. Litig., 426 F. Supp. 2d 688 , 779 (S.D. Ohio 2006); In re Focus Enhancements, Inc. Sec. Litig., 309 F. Supp. 2d 134, 159 (D. Mass. 2001). All five "securities law violations" , 。 cited in the SAC stem 仕om regulatory proceedings that occurred in 2003-2004 , none of which O Q J Q involved an allegation of 丘aud similar to those contained in the SAC. To be sure , these ma饥ers U 1 A 叮 had nothing to do with L&Ls representations regarding ownership or income from the - 呵 Chinese-based mining operations that L&L would acquire some four or five ye町s later. , 中 句 呵 As readily disclosed in L&Ls SEC filings and apparent from the administrative orders4 47B 句 themselves , these proceedings arose from allegations that , in connection with its 2003-2004 3 A「 financings , L&L (i) failed to register its stock, (ii) sold its stock through an unregistered broker,, 『, ,, 、" and (iii) failed to disclose the amount of commission paid to the broker. RJN Ex. 36 at 30-31呵 J,,』「 瓦 (Dec. 16, 2009 L&L Form 10-Q, Part 11, "Legal Proceedings"); Ex. 37 (Oct. 26, 2009 Wash., U』呵, 叮 Dept of Fin. Insti t., Sec. Div. , Consent Order and Statement of Charges (summarizing actions, f』 CERTA卧~ DEFENDANTS MOTION TO DISMISS - 31 LANE POWELL PC 1420 FIFTH A VENUE , SU1TE 4100 NO.2:11-cv-OI423-RSL SEATTLE , WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 39 of 48 1 11 in Washington, Connecticut, Califomia, New Mexico and F时RA)). These alleged violations 2 11 were promptly and voluntarily resolved with no admission of wrongdoing by L&L or Dickson 3 11 Lee , and resulted in modest fines , all of which were paid , and/or cease and desist periods , all of 4 11 which have expired. I d. L&L ceased its relationship with the p旧ported broker responsible for 5 11 these allegations , and there have been no further regulatory citations. I d. Plaintiff飞 effort to 6 11 create an inference of scienter from these stale and unrelated allegations must be rejected. 711 C. The SAC Fails to Plausibly Allege Loss Causation. 8 11 Even if Plaintiff could satis市 the falsity and scienter elements , he must also allege "loss 9 11 causation"-a causal connection between the alleged fraud and his alleged damages. Dura1011 Pharm. , 544 U.S. at 342; 15 U.S.C. S 78u-4 (b)(4). "The complaint must allege that the11 11 defendant s share price ‘ fell significantly after the truth became known." Metzler, 540 F.3d at1211 1062 (quoting Dura Pharm , 544 U.S. at 347). To do this , Plaintiff must plausibly allege a13 11 "corrective disclosure ," meaning that the companys stock declined after the "truth" underlying1411 the alleged fraud was actually revealed to the market. I d. at 1063-65. The SAC points to three1511 possible corrective disclosures: (i) the July 29 , 2011 amendment to L&Ls 2010 Form 10-K1611 (SAC ~~ 136-137); (ii) the August 2, 2011 Glaucus Report (id. 啊 138-141); and (iii) the1711 January and February, 2012 Geoinvesting articles (id. 啊 142-143). As explained below, none18 11 of these disclosures is sufficient to show loss causation, nor is there loss causation from the19 11 (meritless) allegations of fraud revealed for the first time in Plaintiff s amended complaints.20 1. The July 29 , 2011 Amendment to the 2010 Form 10-K Does Not Support Loss Causation Because It Was Unrelated to Plaintiff s Allegations and , in21 Any Event, Did Not Reveal Any Fraud.2211 On July 29 , 2011 , L&L issued an amendment to its 2010 Form 10-K to include an23" opinion from its auditors 也剖 L&L did not "maintain effective intemal control over financial24 11 reporting as of April 30 , 2010 ," and th时 this material weakness should have been identified in25 11 the companys 2010 Form 10-K.阳N Ex. 38 时 7; SAC ~ 136. The 2011 amendment cannot26 11 support loss causation for the simple reason th剖 it did not reveal a 仕aud. If a disclosure does27 11 not relate to or actually reveal the fraud alleged in the complaint, there is no loss causation. CERTAIN DEFENDANTS MOTION TO DISMISS - 32 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 41 00 No.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 40 of 48 1 11 Metzler, 540 F.3d at 1062-64; see αlso In re Mω im Integrated Prods. , Inc. Sec. Litig., 639 F. 211 Supp. 2d 1038 , 1045 (N .D. Cal. 2009) ("[a] corrective disclosure must reveal some aspect of 3 11 the alleged fraud to the market"); Hansen , 527 F. Supp. 2d at 1162 (no loss causation because 4 11 气lOne of the three public disclosures referenced in Plaintiff s Complaint contain a disclosure of 5 11 wrongdoing"). Nor can a plaintiff plead loss causation through "euphemism." Metzler , 540 611 F.3d at 1064. That is , if a disclosure does not reveal a prior falsity , a plaintiff cannot plead loss 7 11 causation by alleging "that the market ‘understood a defendants statement . . . as a coded 8 11 message revealing the fraud." I d. 9 11 In alleging that the J uly 2011 amendment was a corrective disclosure , Plaintiff relies on10 11 a loss-causation-by-euphemism theory forbidden by the Ninth Circuit. The amendment has11 11 nothing to do with Plaintiff s allegations; the sole basis of Plaintiff s claim is th剖 L&L1211 overstated its financials and misrepresented its ownership of Chinese mining operations-not13 11 that it made false statements regarding its intemal controls. The amendment relates only to the1411 latter, and not at all to the former. The "necessary connection" between the 2011 amendment15 11 and L&L s alleged fraud is lacking, and there certainly was no revelation of the "truth"16 11 regarding the financial and ownership issues. If anything , the 2011 amendment is the opposite17 11 of a corrective disclosure. The amendment states clearly that lack of intemal controls , while a18 11 weakness th剖 the company should have reported , did not affect the accuracy (i. e. , "truth") of1911 L&Ls financial statements-which were not, and have never been, restated. See RJN Ex. 382011 at 7; SAC 句l3 6. Indeed, the auditors July 2011 opinion reaffirmed its audit report a year21 11 earlier approving L&L s tinancial statements. I d. Regardless , Plaintiff does not even allege22 11 that the market viewed this benign announcement as a "coded message" for fraud , nor could23 11 this Court indulge such an "unwarranted inference" anyway. A命 tzler, 540 F.3d at 1064-65.24 11 Indeed , the fact that the market did not view the 2011 amendment as a "euphemism" for25 11 fraud is evident based on its reaction, which provides a related but separate basis to reject loss2611 causation. In Metzler , the Court noted that the defendants "stock quickly recovered ," making27 11 it "further unwarranted to infer that the [disclosure] was understood by the market to mean CERTA卧~ DEFENDANTS MOTION TO DISMISS - 33 LANE POWELL PC 1420 FIFTH A VENUE, SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE , WASHINGTON 98101-2338 126372.000 1/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 41 of 48 1 11 that" the defendant had engaged in fraud. Id. at 1065; see also In re Immucor, Inc. Sec. Litig., 211 2011 WL 2619092 ,叫(N .D. Ga. June 30 , 2011) (no loss causation where "share price quickly 3 11 rebounded to pre-disclosure levels 础er each of the . . . disclosures"); In re Manulife Fin. Corp. 411 Sec. Litig. , 276 F.R.D. 87 , 104 (S.D.N. Y. 2011) (plaintiff、 s failure to explain stock "rebound 5 11 renders their loss causation allegation implausible"). The same is true here. The 2011 611 amendment was issued on Friday, July 29 , 2011. As Plaintiff alleges (SAC 咱 137) , on August 711 1, 2011 , the following Monday , L&Ls stock fell 79~ per share-from $4.96 to $4 .1 7. R则 Ex. 811 6. What the SAC fails to mention , however, is that the very next day , August 2, 2011 , L&Ls 911 stock rebounded to $4.84/share-just 12~ (or 2.42%) off its pre-disclosure level. I d. As in1011 Metzler , this "quick recovery" renders Plaintiffs allegation ofloss causation implausible.- -A1i A 2. The Glaucus Report Does Not Support Loss Causation Because It Was1itι 句 Itself False or, at Most, Revealed Only a Possibility of Fraud.1 it 』 句ι1i Unlike the July 2011 amendment, Glaucuss attack on L&L did cause the price oft 3-- A1 L&L s stock to drop , yet Plaintiff still cannot plausibly allege that the Glaucus Report triggered 叶 , 、 loss causation for three reasons. First , as noted above , of the various false statements Plaintiff J 瓦 attributes to L&L, only two were mentioned in the Glaucus Report: (i) L&L s revenue and U 叮 income for calendar year 2009 (RJN Ex. 2 at 11-12); and (ii) L&Ls ownership ofthe Zone Lin I O O Q coking plant (i d. at 2-4). Because the Glaucus Report did not discuss , much less reveal the J A U 1 "truth" about, the other misrepresentations alleged in the SAC一including L&L s revenue and呵 income beyond calendar year 2009 , or its ownership of Ping Yi and Hon Shen-the Glaucus,中吨, Report does not provide a requisite nexus between those alleged misrepresentations and& 且呵 呵 』 Plaintiffs alleged losses. Metzler , 540 F.3d at 1063 ("The complaint must allege that the 句缸呵,中 practices that the plaintiff contends are fraudulent were revealed to the market and caused the呵 3 A,中句 resulting losses."). In short, while the Glaucus Report caused L&Ls stock price to decline ,, 『,, that decline cannot support loss causation for most of the fraud Plaintiff alleges in the SAC. 飞F " 回 7 瓦 - Second, with respect to the two alleged misrepresentations that the SAC borrows from U 7 · 呵 the Glaucus Report , there is no loss causation either because , as discussed above , Glaucus was 但 CERTAn叶 DEFENDANTS MOTION TO Dl SMISS - 34 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.22 3. 7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 42 of 48 1 11 simply wrong. L&Ls representations regarding its 2009 revenue and ownership of the Zone 211 Lin coking plant were not false and , thus , the Glaucus Report was not a "corrective disclosure." 311 In re Uωim , 639 F. Supp. 2d at 1045 ("[a] corrective disclosure must reveal some aspect ofthe 411 alleged fraud to the market"). Put differently , because the allegations in the Glaucus Report 5 11 were themselves "false ," the Report could not and did not disclose the "truth." See In re Apollo 6 11 Group , 2011 WL 5101787 , at *18 ("If the GAO report incorrectly revealed fraudulent activities 711 to the market that Defendants were not actually engaged in, those false reports cannot possibly 8 11 have revealed a real fraud to the investors."). To the extent Plaintiff suffered losses from the 9 11 drop in L&L s stock price following publication of the Glaucus Report , those losses were10 11 caused by the spurious, unreliable and biased "reporting" by Glaucus , not anything false or11 11 fraudulent that L&L or the Individual Defendants said or did.12 11 Third, and in any event, this Court need not decide whether the Glaucus Report was13 11 bogus to reject Plaintiff、 s loss causation theory. Ninth Circuit law is clear that there is no loss1411 causation when the alleged corrective disclosure reveals only a "risk" or "potential" that the1511 companys tinancial statements are false or might be restated in the future. Metzler , 540 F.3d16 11 at 1063-64. Thus , courts have rejected the the。可 that loss causation can be grounded on1711 publication of speculative analyst reports that merely question the accuracy of a companys1811 tinancial statements or conduct. See In re Maxim , 639 F. Supp. 2d at 1045 (Merrill Lynch,19 11 Credit Suisse , CitiGroup reports were not corrective disclosures because , "[ w]hile each of these20 11 disclosures provides notice that Maxim may have illicitly backdated stock options , none of21 11 them goes beyond speculation"); Teamsters Locα1 617 Pension and Welfare Funds v. Apollo2211 Group, Inc. , 633 F. Supp. 2d 763 , 820-22 (D. Ariz. 2009) (Lehman Brothers report calling23 11 companys stock options "highly questionable" wa s not a corrective disclosure because 臼 "[n ]扣 le 川 one 叶 e n 叶 12411 ofthes e 由 臼 speculative observations . . . ∞ c omport with the loss causation pleading requ 它 山Iire ement s" 归 丁)匀2 511 This 臼臼创吨 叩 rea so n m gapplies 回 equally to the Glaucus Report-and even more so since , unlike2611 the objective and reputable analyst reports 叫 ected in those cases , the Glaucus Report is not2711 only speculative , but, in its own words , it is "undoubtedly biased." RJN Ex. 2 at 2 1. Indeed, CERTAIN DEFENDANTS MOTION TO DISMISS - 35 LANE POWELL PC 1420 FIFTH A VENUE , SUπE4100 No. 2: ll-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 43 of 48 1 11 Glaucus specifically advised investors that Glaucus "has a direct or indirect short position" in 2 11 L&L s stock, and "stands to realize significant gains in the event that the price of stock 3 11 declines." I d. at 1. If Glaucuss motive to malign L&L were not enough to wam investors that 411 its speculation disclosed, at most , only the "risk" of fraud , Metzler , 540 F.3d at 1063-64, the 5 11 Report itself expressly disavowed its own reliability: "Glaucus... makes no representation , 611 express or implied, as to the accuracy , timeliness , or completeness of any such information[.]" 711 RJN Ex. 2 at 1. Thus , while the market may have reacted to Glaucuss biased and malicious 8 11 speculation as to a risk of fraud , it did not react to an actual disclosure of fraud. That 911 (unfounded) speculation, even if it caused L&Ls stock price to drop , cannot establish loss10 11 causation as a matter of law.11 3. The Geoinvesting Articles Do Not Support Loss Causation Because They Occurred after the Class Period and , in Any Event, Did Not Cause a12 Decline in the Price of L&L s Stock.13 11 Plaintiff alleges that the January and February , 2012 Geoinvesting intemet articles ,14 11 which questioned L&Ls ownership of the Ping Yi mine , "corroborated" the Glaucus Report ,15 11 but it is unclear whether Plaintiff co附nds 由副 these articles provide a separate basis for loss16 11 causation. See SAC 啊 142-143. A白er all , the Geoinvesting articles were "published" some17 11 five months after Plaintiffs counsel filed this action. In any event, if the Glaucus Report truly18 11 revealed L&L s fraud to the market , as Plaintiff co附nds, and the Geoinvesti吨 articles merely19 11 "corroborated" the purported revelations of the Glaucus Report,出 Plaintiff also contends , then20 11 these subsequent articles cannot establish loss causation becau晚 "[i]t stands to reason then that21 11 [a] disclosure that does not reveal anything new to the market is , by definition, not2211 corrective." Teamsters , 633 F. Supp. 2d at 818 (citations omitted); see also In re Omnicom23 11 Group, Inc. Sec. Litig., 541 F. Supp. 2d 546 , 552 (S.D.N. Y. 2008) ("A recharacterization of24 11 previously disclosed facts cannot qualify as a corrective disclosure."). Plaintiff 响的时ly25 11 agrees that the Glaucus Report is the only corrective disclosure at issue in this case. Despite26 11 having been granted leave to amend twice following publication of the Geoinvesti吨 articles,27 11 Plaintiff has continued to define the class to include only those individuals who purchased L&L CERTAIN DEFENDANTS MOTION TO DISMISS - 36 LANE POWELL PC 1420 FIFTH AVENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 1263 72. 0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 44 of 48 1 11 stock b旷ore the G1aucus Report was pub1ished on August 2 , 2011. SAC 句1. 2 11 There is an even more fundamenta1 reason why P1aintiff cannot allege 10ss causation 3 11 with respect to the Geoinvesting articles. Loss causation requires a p1aintiff to show that the 411 price of defendants stock declined after a corrective disclosure. Dura , 544 U.S. at 346. The 5 11 SAC contains no such allegation, and for good reason. On Friday, January 13 , 2012 , the day 611 the Geoinvesting article was pub1ished, L&Ls stock price was $2.61 per share. At the close of 711 the next trading day , Tuesday , January 17, 2012 (January 16 was Martin Luther King , J r. Day) , 811 L&Ls stock price increased by 25~ per share to $2.86. RJN Ex. 6. There were simi1ar 911 increases in L&Ls stock price on January 20 and February 17, 2012一the days after the1011 January 19 and February 16, 2012 "follow-up reports." I d. That L&Ls stock price went up,11 11 not down , following pub1ication of the Geoinvesting articles precludes a p1ausib1e allegation of12 11 10ss causation. In re Verisign, Inc. Derivative Li邸, 531 F. Supp. 2d 1173 , 1208 (N .D. Cal.13 11 2007); In re Impax Laboratories, Inc. Sec. Litig., 2007 WL 5076983 , *5 (N .D. Cal. Jan. 03 ,1411 2007). P1ain1y , the market ignored the articles allegations as unfounded or immaterial.1511 Regard1ess , because P1aintiff did not suffer any damages from Geoinvestings claim that L&L 1516" did not own Ping Yi , that allegation a1so must be dismissed for 1ack of 10ss causation.17 4. Plaintiff Does Not and Cannot Allege That L&Ls Alleged False Statements Regarding Acquisition and Sale of The Hon Shen Coal Company Were the18 Subject of a Corrective Disclosure.19 11 Finally, and for simi1ar reasons , this Court may dismiss on 10ss causation grounds20 11 P1aintiff、 s allegations 时arding the Hon Shen coa1 company. P1aintiff alleges that L&L fa1se1y21 11 represented th旧 it acqui时 and s01d the Hon Shen coa1 company in 2009 and 2010. SAC2211 啊 126-130. As discussed above , P1aintiffhas not p1ausib1y alleged that L&Ls representations23叮 4 F 15 Even if Plaintiff could allege loss causation with respect to the Geoinvesting articles , such an』呵 3 r allegation would fail for all the same reasons Plaintiffs allegations regarding the Glaucus Report fail:, O the Geoinvesting articles (i) are themselves incorrect and , thus , do not reveal any falsity , and (ii) at best,," contain speculation regarding a "risk" or "potential" for fraud that cannot se凹e as a predicate for loss呵, causation. Metzler , 540 F .3 d at 1062-64. Indeed , like Glaucus , Geoinvesting is a short-seller with every马呵, incentive to disseminate unsubstantiated allegations about L&L in an effort to drive down the price of中 叮 J its stock. And , like Glaucus , Geoinvestings articles , "make no warranties , express or implied, as to the accuracy, adequacy or completeness of any of the information contained in the website." RJN Ex. 4. CERTAIN DEFENDANTS MOTION TO Dl SMISS - 37 . __ __!:-~~E_P~~~L!:-_~~ 1420 FIFTH A VENUE. SUπE4100 NO.2:11-cv-01423-RSL SEATTLE. WASHINciTÓN-98101-2338 126372.000 1/5298539.8 206 .223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 45 of 48 1 11 were false but, in any event, there simply is no theory of loss causation to support the claim. 211 No questions regarding L&Ls ownership of Hon Shen were disclosed in L&Ls July 29 , 2011 311 amendment to its 2010 Form 10-K, the Glaucus Report , or the Geoinvesting articles. See R开J 411 Exs. 2, 4 & 38. Thus , there has been no "corrective disclosure" regarding L&Ls statements 511 regarding its acquisition and sale of Hon Shen and , consequently , no decline in L&Ls stock 6 11 price can be attributed to this alleged fraud. Indeed , this allegation was raised for the first time 711 (anywhere) in Plaintiff巧 s own amended complaint. See Dkt. No. 3 1. Plaintiffs allegation that 8 11 L&L misrepresented its ownership in Hon Shen must be dismissed for this reason alone. 9 V. PLAINTIFFS SECTION 20(a) CLAIMS MUST BE DISMISSED10 11 Plaintiffs derivative Section 20(a) claims against Dickson Lee ,矶Tang, Robinson,11 11 Ki ang , Robert Lee , Bracy and Okun are equally without merit, and must be dismissed as a1211 matter of law. Section 20(a) creates joint and severalliability for certain individuals deemed to13 11 be "control persons" who aid and abet violations of Section 10(屿, absent a finding of good1411 faith or lack of inducement. No. 84 Employer-Teamster Joint Counc i/ Pension Trust Fund v.1511 Am. W. Holding Corp. , 320 F.3d 920 , 945 (9th Cir. 2003). The elements of such a claim 町e:16" (ωi) a primary violation of federal securities law; and (ii) primary 叮 control or actual power 町口l 711 exercised by the individual over 町 the primary 叫 创 v iolatoωr. I d.山1 811 management 吨 旧 and policies of the ∞ c ompany or the employee alleged to have committed the19 11 violation, either through ownership of stock, contract, or other means. I d. (quoting 17 C. F .R.20 11 S230 .4 05). "Section 20(a) claims may be dismissed summarily, however, if a plaintiff fails to21 11 adequately plead a primary violation of section 10(b)." Zucco , 552 F.3d at 990. Because2211 Plaintiffs Section 10(b) claim must be dismissed , so too must his Section 20(a) claim.23 11 Even if Plaintiff adequately pled a violation of Section 1O(b), the SAC still fails to24 11 allege plausible facts showing that Individual Defendants Kiang , Robert Lee , Bracy and Okun25 11 exercised "prim町y control or actual power." Determining controlling person status is usually2611 "an intensely factual question, involving scrutiny of the defendants participation in the day-to-2711 day affairs ofthe co叩oration and the defendant s power to control co叩orate actions." Howard CERTA卧~ DEFENDANTS MOTION TO DISMISS - 38 LANE POWELL PC 1420 FIFTH AVENUE, SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASH剧 GTON 98101-2338 126372.0001/5298539.8 206.223.7000 FAX: 206.223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 46 of 48 1 11 v. Everex 吵stems, Inc. , 228 F.3d 1057 , 1065 (9th Cir. 2000) (quotation marks and citations 2 11 omitted). Nevertheless , a plaintiff cannot rely on boilerplate allegations; the complaint must 3 11 provide factual detail to show that each individual defendant was in a position to control a 411 primary violator. See Hansen , 527 F. Supp. 2d at 1163 ("[T]his boilerplate allegation is 5 11 insufficient to state a claim for control person liability"); In re Downey Sec. Lit邸, 2009 WL 611 2767670 , *15 (C. D. Cal. Aug. 21 , 2009) ("boilerplate allegations 町e insuftìcient to state a 7 11 claim for control person liability"). Furthermore , it is insufficient to merely allege th剖 certain 8 11 of the lndividual Defendants are members of the audit committee. See e. g., Ba阳lin v. Occam 911 Networks , Inc. , 2008 WL 2676364 , *25 (C.D. Cal. July 01 , 2008) (allegation that defendants1011 were members of audit committee who signed companys SEC filings , standing alone , was11 11 insufficient to state claim for control person liability under Section 20(a)).1211 But, with respect to Kiang , Robert Lee , Bracy and Okun, boilerplate is all there is.1311 Beyond reciting that they are (or were) directors and members ofthe audit committee , the SAC14 11 contains only bare and conclusory allegations regarding power and control. Similar to its15 11 deficient scienter allegations , Plaintiff relies on undifferentiated group allegations regarding the1611 lndividual Defendants "high-level positions ," "participation in and/or awareness of the1711 Companys operations and/or intimate knowledge ofthe false tìnancial statements" and "direct1811 and supervisory involvement in the day-to-day operations of the Company." SAC 啊 168-1911 169. Plaintiff offers no specific information as to how Kiang , Robert Lee , Bracy, or Okun20 11 exercised primary control or power over L& L. lnstead, Plaintiff apparently li白ed his21 11 allegations against these individuals verbatim from the oper目ive complaint in Hansen. See 5272211 F. Supp. 2d at 1163 ("Plaintiff has alleged that ‘ [b]y virtue of their high-level positions , . . .23 11 participation in and/or aw町eness of the Companys operations and/or intimate knowledge of24 11 the false tìnancial statements . . . , the lndividual Defendants had the power to influence and25 11 control . . . the decision making of the Company. . .. ").药26 11 different complaint tωoc opy. ∞ The Hansen court dismissed the plaintiff飞咆oilerplate" Section2711 20(a) claims without leave to amend. I d. This Court should do the same thing here. CERTAIN DEFENDANTS MOTION TO DISMISS - 39 LANE POWELL PC 1420 FIFTH A VENUE , SUITE 41 00 No. 2: ll-cv-01423-RSL SEATTLE, WASH刑GTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206 .223.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 47 of 48 VI. LEAVE TO AMEND THE SAC SHOULD BE DENIED 2 11 Although leave to amend may be freely given, this Court has discretion to deny leave 3 11 when amendment would be futile. Partington v. Bugliosi , 56 F.3d 1147 , 1162 (9th Cir. 1995). 4" This discretion is particularly broad where "the plaintiff has previously been granted leave to 5 11 amend and has subsequently failed to add the requisite particularity to its claims." Zucco , 552 611 F.3d at 1007. Plaintiffs counsel has already filed three complaints in this action. Each time , 7 11 Plaintiff飞 counsel has relied on SAIC and SEC filings and the short-sellers reports to state 8 11 Plaintiffs claim-not on any "inside" information obtained from confidential witnesses or 9 11 documents. There are no additional facts that Plaintiff could plead with respect to the SAIC10 11 and SEC filings or the Glaucus Report and Geoinvesting articles; the contents of those11 " documents will not change. Cf Hansen , 527 F. Supp. 2d at 1163 (denying leave where12 11 "Plaintiff飞 allegations are all based on publicly-filed documents-and not , as is the case in13" many securities fraud cases , on the statements of confidential witnesses andlor employees and14" former employees"). Given Plaintiffs allegations and sources , there simply are no additional15" facts for Plaintiff to plead. Leave to amend should be denied as futile.16 VII. CONCLUSION1711 For the reasons stated above , this Court should dismiss the SAC with prejudice and18 11 without leave to amend.1911 DATED: Apri123 , 2012.2011 LANEPO轧ELL PC21句 234567 BY: s./Larrv 丘 Gammes ,& Larry S. Gangnes ,轧SBA No. 08118叮马 Ryan P. McBride , WSBA No. 33280呵,牛 Erin M. Wilson WSBA No. 42454呵, Attorneys for D价ndants L&L Energy, Inc. ,中句 Dickson Lee, Ian Robinson, Shirley Kianι Robert, Lee, Dennis Bracy and Robert Okun中呵,中 CERTAIN DEFENDANTS MOTION TO DISMISS - 40 LANE POWELL PC 1420 FIFTH AVENUE , SUITE 4100 NO.2:11-cv-01423-RSL SEATTLE, WASHINGTON 98101-2338 126372.000115298539.8 206.223.7000 FAX: 206 .2 23.7107
    • Case 2:11-cv-01423-RSL Document 37 Filed 04/23/12 Page 48 of 48 123456789012345678901234567 CERTIFICATE OF SERVICE Pursuant to RCW 9 .A. 72.085 , the undersigned certifies under penalty of perjury under the laws ofthe State ofWashington, that on the 23rd day of April , 2012 , the document attached hereto was presented to the Clerk of the Court for filing and uploading to the CMÆCF sys臼m. In accordance with their ECF registration agreement and the Courts rules , the Clerk of the Court will send e-mail notification of such filing to the following persons: Phillip Kim , Esq. Laurence M. Rosen, Esq. The Rosen Law Firm, :p.A. 275 Madison Ave. , 34th Floor New York, New York 1001611 Dkim(a), rosenle lZ al.com1111 lrosen(a),rosenle lZ al.com1A11111 Richard Adam Smith, Esq.1ti- Knoll Lowney, Esq.-1i Smith & Lowney, P. L.L. C. 2317 E J ohn Street Seattle,引TA 98112-5412 rasmithwa(a), ilZc.or lZ knoll (a), ilZc.orlZ Executed on the 23rd day of April , 2012 , at Seattle, Washington. ~Òj _"~;I 斗 中 呵 , , " 呵 , , , " 句 , 中 句 , 中 呵 , , , " 呵 , 中 呵 』 CERTAIN DEFENDANTS MOTION TO DISMISS - 41 LANE POWELL PC 1420 FIFTH AVENUE, SUITE 4100 No.2:11-cv-OI423-RSL SEATTLE, WASHINGTON 98101-2338 206.223.7000 FAX: 206.223.7107 126372.0001/5298539.8