37

538 views

Published on

Published in: Business, Career
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
538
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

37

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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

×