Susan Hufnagle v. Rino International Corporation et al

Filing 243

ORDER by Judge Dean D. Pregerson: granting 212 Frazer Frosts Motion to Dismiss is GRANTED, with leave to amend. Any amended complaint shall be filed within fourteen days of the date of this order. (lc). Modified on 1/15/2013 (lc).

1
2

O

3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

CENTRAL DISTRICT OF CALIFORNIA

10
11
12

SUSAN HUFNAGLE, individually
and on behalf of all others
similarly situated,

13

Plaintiff,

14
15
16
17
18

v.
RINO INTERNATIONAL
CORPORATION, DEJON ZOU,
JENNY LIUE, BEN WANG, LI YU,
KENNITH C. JOHNSON, JIANPING
QIU, ZIE QUAN, and ZEJIN LI,
Defendants.
___________________________

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

Case No. CV 10-08695 DDP (VBKx)

ORDER GRANTING DEFENDANT’S MOTION
TO DISMISS

[Dkt. No. 212]

19
20

Presently before the court is Defendant Frazer Frost, LLP

21

(“Frazer Frost” or “the Auditor”)’s Motion to Dismiss.

22

considered the submissions of the parties and heard oral argument,

23

the court grants the motion and adopts the following order.

24

I.

25

Having

Background
This case is a purported class action alleging violations of

26

the Securities Exchange Act of 1934, 15 U.S.C. § 78 et seq. (the

27

"Exchange Act") brought on behalf of a class consisting of all

28

persons and entities, other than Defendants, who purchased publicly

1

traded Rino International Corporation (“Rino”) common stock and

2

call options, and who sold put options of Rino, between March 31,

3

2009 and November 17, 2010 (the "Class Period").

4

Complaint (“SAC”) ¶ 3.)

5

movant Frazer Frost, engaged in a wide-ranging fraud.

6

Pursuant to a settlement agreement, Plaintiff has dismissed all

7

claims against all Defendants, with the exception of Frazer Frost.

8

(Dkt. No. 235.)

9

(Second Amended

The SAC alleges that Defendants, excluding
(SAC ¶ 5.)

Plaintiff alleges that auditor Frazer Frost recklessly ignored

10

obvious signs of financial irregularities and failed to follow

11

generally accepted auditing standards in its review of RINO.

12

¶¶ 15-19, 120-126, 156-196.)

13

then issued false and misleading opinions regarding RINO’s

14

financial statements.

15

Plaintiff alleges that Frazer Frost’s 2009 audit opinion falsely

16

represented that Frazer’s audit conformed to the standards of the

17

Public Company Accounting Oversight Board (“PSAOB”) and that RINO’s

18

financial statements conformed with generally accepted accounting

19

principles (“GAAP”).

20

dismiss the SAC.

21

II.

22

(SAC

The SAC alleges that Frazer Frost

(SAC ¶ 14, 190-196.)

(SAC ¶ 190.)

Specifically,

Frazer Frost now moves to

Legal Standard
A complaint will survive a motion to dismiss when it contains

23

“sufficient factual matter, accepted as true, to state a claim to

24

relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S.

25

662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,

26

570 (2007)).

27

“accept as true all allegations of material fact and must construe

28

those facts in the light most favorable to the plaintiff.” Resnick

When considering a Rule 12(b)(6) motion, a court must

2

1

v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000).

2

need not include “detailed factual allegations,” it must offer

3

“more than an unadorned, the-defendant-unlawfully-harmed-me

4

accusation.”

5

allegations that are no more than a statement of a legal conclusion

6

“are not entitled to the assumption of truth.” Id. at 679.

7

other words, a pleading that merely offers “labels and

8

conclusions,” a “formulaic recitation of the elements,” or “naked

9

assertions” will not be sufficient to state a claim upon which

Iqbal, 556 U.S. at 678.

10

relief can be granted.

11

Although a complaint

Conclusory allegations or

In

quotation marks omitted).

12

Id. at 678 (citations and internal

“When there are well-pleaded factual allegations, a court should

13

assume their veracity and then determine whether they plausibly

14

give rise to an entitlement of relief.” Id. at 679.

15

must allege “plausible grounds to infer” that their claims rise

16

“above the speculative level.” Twombly, 550 U.S. at 555.

17

“Determining whether a complaint states a plausible claim for

18

relief” is a “context-specific task that requires the reviewing

19

court to draw on its judicial experience and common sense.”

20

556 U.S. at 679.

21

Plaintiffs

Iqbal,

To state a claim for securities fraud under Section 10(b) of

22

the Securities Exchange Act and Rule 10b-5 promulgated thereunder,

23

plaintiffs must plead particularized facts demonstrating “(1) a

24

material misrepresentation or omission of fact, (2) scienter, (3) a

25

connection with the purchase or sale of a security, (4) transaction

26

and loss causation, and (5) economic loss.”

27

Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

28

alleging securities fraud under the
3

Zucco Partners, LLC v.
A complaint

Private Securities Litigation

1

Reform Act of 1995 (“PSLRA”) must meet a heightened pleading

2

standard.

3

“[s]pecify each statement alleged to have been misleading, the

4

reason or reasons why the statement is misleading, and . . . state

5

with particularity facts giving rise to a strong inference that the

6

defendant acted with the required state of mind.”

7

Section 78u-4(b)(1), (b)(2).

8

view complaints holistically, and should deny a motion to dismiss

9

if the inference of scienter advanced by plaintiffs is "at least as

10

compelling as any opposing inference one could draw from the facts

11

alleged."

12

1309, 1324 (2011) (citing Tellabs, Inc. v. Makor Issues & Rights,

13

Ltd., 551 U.S. 308, 324 (2007).

14

III. Discussion

The PSLRA requires that any securities fraud claim

15 U.S.C.

When analyzing intent, courts must

Matrixx Initiatives, Inc. v. Siracusano, 141 S. Ct.

15

A.

16

Frazer Frost argues that the SAC must be dismissed because it

Subjective Falsity

17

fails to allege that the Auditor’s opinions are subjectively false.

18

“When a plaintiff challenges opinion statements under the

19

securities law, the plaintiff must allege with particularity that

20

the defendant believed his or her opinion was false.”

21

Tree Value Partners, LP v. Sweeney, – F.Supp.2d –, 2012 WL 6644397

22

at *6 (C.D. Cal. Dec. 10, 2012) (quotation omitted) (citing Va.

23

Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1085 (1991) and Rubke

24

v. Capital Bancorp, Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009)).

Buttonwood

25

Plaintiff argues that at least one court in this circuit has

26

rejected the proposition that auditors can only be held liable if

27

they subjectively believe that their own stated opinions are false.

28

(Opp. at 19 (citing In re Wa. Mut. Inc. Sec. Deriv. & ERISA Litig.,
4

1

694 F. Supp. 2d 1192.)

2

recognize the Ninth Circuit’s holding that auditor opinions must be

3

plead to be both objectively and subjectively false.

4

(citing Rubke, 551 F.3d at 1162.)

5

subjective falsity requirement inapplicable only because the

6

defendant auditor had stated a verifiable fact, not an opinion.

7

Washington Mutual, 694 F. Supp. 2d at 1224.

8
9

The Washington Mutual court, however, did

Id. at 1223

The court proceeded to find the

The court acknowledges that the Washington Mutual court
addressed allegations similar to those here.

So too, however, did

10

a court of this district in Buttonwood, 2012 WL 6644397 at * 6.1

11

As the court recently recognized, reiterating its earlier holding,

12

“an auditor’s [generally accepted accounting standards] and GAAP

13

assertions are statements of professional judgment and opinion, not

14

verifiable fact.”

15

initially explained, GAAP “are a collection of broad standards that

16

are couched in rather general[,] and in some cases inherently

17

subjective[,] terms . . . .”

18

Sweeney, No. SACV 10-537 CJC, 2012 WL 2086607

19

June 7, 2012) (quotation and citation omitted).

20

though Plaintiff now strives to characterize Frazer Frost’s opinion

21

regarding PSAOB and GAAP compliance as a statement of fact rather

22

than of belief, the SAC itself alleges that Frazer Frost issued

23

“false and misleading audit opinions,” that Frazer Frost “falsely

24

opined” that Rino’s statements satisfied GAAP, and that Frazer

25

Frost “provided an audit opinion” and “opined.”

Id.

This court agrees.

As the Buttonwood court

Buttonwood Tree Value Partners, LP v.
at *2 (C.D. Cal.
Furthermore,

(SAC ¶¶ 14, 121,

26
27
28

1

While the parties both cite to and discuss the earlier June
order by the Buttonwood court, neither party references that
court’s more recent December 2012 order.
5

1

190, 191.)

2

allegation that the Auditor misrepresented its own opinion,

3

Plaintiff must allege that Frazer Frost’s stated opinion was

4

subjectively false.

5

satisfy the misrepresentation element of a securities fraud claim,

6

and the complaint must be dismissed.2

7

IV.

8
9
10

Having based her claim against Frazer Frost upon an

Absent any such allegation, Plaintiff cannot

Conclusion
For the reasons stated above, Frazer Frost’s Motion to Dismiss

is GRANTED, with leave to amend.

Any amended complaint shall be

filed within fourteen days of the date of this order.

11
12

IT IS SO ORDERED.

13
14
15

Dated: January 14, 2013
DEAN D. PREGERSON
United States District Judge

16
17
18
19
20
21
22
23
24
25
2

26
27
28

Having determined that the SAC does not adequately plead
subjective falsity, the court does not reach the question whether
the SAC adequately pleads scienter, and expresses no opinion on
that issue. To the extent Plaintiff wishes to amend the scienter
allegations in light of discussions at oral argument, it is free to
do so.
6