Michael H. Resh et al v. China Agritech, Inc. et al

Filing 43

MINUTES (IN CHAMBERS): Order re: Defendants Charles Law and China Agritech, Inc.'s Motions to Dismiss (DE 27, 28) by Judge R. Gary Klausner: The Court GRANTS without leave to amend Moving Defendants' Motions to Dismiss. Plaintiffs are hereby ordered to show cause in writing no later than December 8, 2014 as to why the Motions to Dismiss should not be granted as to the remaining defendants. (See document for further details) (bp)

Case 2:14-cv-05083-RGK-PJW Document 43 Filed 12/01/14 Page 1 of 6 Page ID #:890

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV 14-05083-RGK (PJWx)

Title

RESH, et al. v. CHINA AGRITECH, INC., et al.

Present: The
Honorable

Date

December 1, 2014

R. GARY KLAUSNER, U.S. DISTRICT JUDGE

Sharon L. Williams (Not Present)

Not Reported

N/A

Deputy Clerk

Court Reporter / Recorder

Tape No.

Attorneys Present for Plaintiffs:

Attorneys Present for Defendants:

Not Present

Not Present

Proceedings:

I.

(IN CHAMBERS) Order re: Defendants Charles Law and China
Agritech, Inc.’s Motions to Dismiss (DE 27, 28)

INTRODUCTION

On September 4, 2014, Michael H. Resh (“Resh”), William Schoenke, Heroca Holding B.V., and
Ninella Beheer B.V. (collectively, “Plaintiffs”) filed an Amended Class Action Complaint (“FAC”)
against China Agritech, Inc. (“China AG”) and members of the company’s executive management team
and board of directors (“Individual Defendants”). Plaintiffs allege violations of: (1) Section 10(b) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and Securities and Exchange Commission
(“SEC”) Rule 10b-5 against China AG and Individual Defendants; and (2) Section 20(a) of the
Exchange Act against Individual Defendants. Among the Individual Defendants named in the FAC is
Charles Law (“Defendant Law” or “Law”).
Plaintiffs bring this class action on behalf of all persons and entities who purchased the publicly
traded common stock of China AG between November 12, 2009 and March 11, 2011 (the “Class
Period”). Class actions on behalf of classes identical to that in the present case have been filed with this
Court on two prior occasions, in actions entitled Dean v. China Agritech, Inc., No. CV 11-01331-RGK
(PJWx), 2011 WL 5148598 (C.D. Cal. Oct. 27, 2011), and Smyth v. Yu Chang, No. CV 13-03008-RGK
(PJWx) (C.D. Cal. filed Apr. 19, 2012).
Presently before the Court are motions to dismiss filed by China AG and Defendant Law (the
“Moving Defendants”). In Defendant Law’s motion, he joins in China AG’s motion, and adopts and
incorporates it by reference. (See Defendant Law’s Mot. 1 n.1, 18:2-5.) For the following reasons, the
Court GRANTS Moving Defendants’ motions.
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II.

FACTUAL BACKGROUND

China AG is a holding company incorporated in the state of Delaware with its principal place of
business in Beijing, China. China AG manufactures and distributes organic compound fertilizers for
agricultural application in China. The company was publicly traded within the United States as a result
of a financial technique known as a “reverse merger.” In a reverse merger, a private company seeking to
trade or sell shares in public equity markets acquires a publicly traded shell company in order to quickly
go public and avoid certain regulatory requirements. Once the reverse merger is complete, management
of the former private company generally takes control of the merged company. China AG completed its
merger in 2005 and began publicly offering its stock on the NASDAQ stock exchange. On October 17,
2012, the SEC issued an enforcement order revoking the registration of China AG’s stock.
Defendant Law was a director of China AG from January 2010 until his resignation in February
2011. During this time, Law also served on the Compensation and Nominating and Governance
Committees. In 2005, prior to Defendant Law’s appointment as a director, his law firm, King & Wood,
represented China AG in connection with its initial reverse merger registration.
Plaintiffs are four individual investors who allegedly purchased China AG’s common stock
between November 12, 2009 and March 11, 2011.
A.

Alleged Wrongful Conduct

Plaintiffs allege that China AG materially misstated its net revenue and income for the third
quarter of 2009 on its SEC Form 10-Q filing. Plaintiffs allege that China AG also materially misstated
its net revenue and income for fiscal years 2008 and 2009 in its 2009 SEC Form 10-K filing. Plaintiffs
further allege that Defendants concealed related-party transactions between a China AG subsidiary and a
third-party supplier owned by one of the Individual Defendants.
On February 3, 2011, Lucas McGee Research published a report (“LM Report”) contending that
China AG was a fraud and alleging that the company’s factories were either non-operational or were
producing far less than reported. The report further stated that China AG had filed financial statements
with the SEC for fiscal year 2009 that showed substantially larger net revenue than China AG reported
in filings to the Chinese State Administration for Industry and Commerce (“SAIC”) for the same period.
After publication of the report, the value of China AG stock declined from $10.78 per share on February
2, 2011, to $9.85 per share on February 3, 2011, representing a day-over-day decline of 8.63%. On
February 15, 2011, Bronte Capital issued a report (“BC Report”) with similar allegations about China
AG’s production levels. China AG’s stock value again declined from $9.21 per share on February 4,
2011 to $7.44 per share on February 16, 2011, a decline of approximately 16%. As a result of
Defendants’ actions, Plaintiffs allegedly suffered damages in connection with the purchase of their
China AG stock.
Plaintiffs allege that during this time, Individual Defendants, including Defendant Law, acted as
controlling persons of China AG. Each of these Individual Defendants had direct and supervisory
involvement in the day-to-day operations of China AG and were directly or indirectly involved in the
dissemination of the various fraudulent statements.
B.

Related Cases

As discussed, class actions involving substantially similar allegations against China AG and
classes identical to the present one proposed by Plaintiffs have previously been filed twice before this
Court.
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The complaint in Dean was filed on February 11, 2011. On May 3, 2012, this Court denied the
Dean plaintiffs’ motion for class certification because the plaintiffs failed “to establish that questions of
law or fact common to class members predominate[d] over any questions affecting only individual
members,” as was necessary for class certification pursuant to Federal Rule of Civil Procedure (“Rule”)
23(b)(3). (Order Den. Mot. Class Cert. at 7, Dean v. China Agritech, Inc., No. CV 11-01331-RGK
(PJWx) (C.D. Cal. Oct. 27, 2011), ECF No. 134.)
Subsequently, the complaint in Smyth was filed on October 4, 2012. On September 26, 2013, this
Court denied the Smyth plaintiffs’ motion to certify the class. (Order Den. Mot. Class Cert., Smyth v. Yu
Chang, No. CV 13-03008-RGK (PJWx) (C.D. Cal. filed Apr. 19, 2012), ECF No. 112.) The motion was
denied largely because plaintiffs failed to satisfy the “typicality” and “adequacy of representation”
requirements of Rule 23(a)(3)-(4). (Id. at 4-7.) On January 2, 2013, all claims asserted by plaintiffs were
voluntarily dismissed with prejudice. (See generally Order Granting Mot. Dismiss, Smyth v. Yu Chang,
No. CV 13-03008-RGK (PJWx) (C.D. Cal. filed Apr. 19, 2012), ECF No. 136.)
III.

JUDICIAL STANDARD

Under Rule 12(b)(6), a party may move to dismiss for failure to state a claim upon which relief
may be granted. Fed. R. Civ. P. 12(b)(6). In deciding a Rule 12(b)(6) motion, the court must assume
allegations in the challenged complaint are true, and construe the complaint in the light most favorable
to the non-moving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 338 (9th Cir. 1996). However, a
court need not accept as true unreasonable inferences, unwarranted deductions of fact, or conclusory
legal allegations cast in the form of factual allegations. See W. Mining Council v. Watt, 643 F.2d 618,
624 (9th Cir. 1981). Although the complaint need not contain detailed factual allegations, it must
provide more than a “formulaic recitation of the elements of a claim.” Bell Atl. Corp. v. Twombly, 550
U.S. 544, 555 (2007).
Furthermore, a pleading must contain sufficient factual matter that, if accepted as true, states a
claim that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim is facially
plausible when there are sufficient factual allegations to draw a reasonable inference that the defendant
is liable for the alleged misconduct. Id. Dismissal is appropriate “only where the complaint lacks a
cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mediondo v. Centinela
Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008).
IV.

DISCUSSION
A.

Plaintiffs’ Class Action Is Barred by the Statute of Limitations

Moving Defendants argue that Plaintiffs’ class action claims are barred by the statute of
limitations and, therefore, should be dismissed. The Court agrees.
A securities fraud claim must be filed no later than the earlier of (1) two years after the facts
constituting the violation were, or reasonably should have been, discovered, or (2) five years after the
violation occurred. 28 U.S.C. § 1658(b); see also Merck & Co. v. Reynolds, 559 U.S. 633, 648 (2010)
(holding “that ‘discovery’ as used in this statute encompasses not only those facts the plaintiff actually
knew, but also those facts a reasonably diligent plaintiff would have known.”). Here, Plaintiffs do not
contest that the LM and BC Reports, published in February 2011, sufficiently provided notice that the
alleged fraud occurred. As such, the two-year statute of limitations began to run at that time. Three years
later, in June 2014, Plaintiffs filed their original Complaint.
Plaintiffs do not dispute that, absent the Dean and Smyth actions, the statute of limitations would
have run by the time they filed their Complaint. Instead, Plaintiffs assert that the statute of limitations
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was tolled during the pendency of the foregoing actions, and the Complaint was therefore timely. In
order for Plaintiffs to succeed in this argument, the Court must find that the statute of limitations tolled
during the pendency of not only one, but both of the prior actions.
The commencement of a class action can suspend the applicable statute of limitations, but only
under certain circumstances. In American Pipe & Construction Company v. Utah, 414 U.S. 538 (1974),
the Supreme Court held that if the statute of limitations expires during the pendency of a class action,
“the commencement of the original class suit tolls the running of the statute for all purported members
of the class who make timely motions to intervene after the court has found the suit inappropriate for
class action status.” Id. at 553-54. In Crown, Cork & Seal Company v. Parker, 462 U.S. 345 (1983), the
Supreme Court expanded on its opinion in American Pipe, ruling that tolling is appropriate not only
where plaintiffs sought to intervene in a continuing action, but also where they sought to file an entirely
new action as individual plaintiffs. Id. at 349-50, 353-54. The Supreme Court has not, however,
determined whether tolling allows the above-mentioned individuals to bring an entirely new class action
based upon a substantively identical class. This is the issue presently before the Court.
The Ninth Circuit first addressed this issue in Robbin v. Fluor Corporation, 835 F.2d 213 (9th
Cir. 1987). There, similar to the present case, a securities fraud class action was filed after a class action
based on the same alleged fraud had been denied certification and voluntarily dismissed. Id. at 214. The
applicable statute of limitations had expired, and the Ninth Circuit held that the statute of limitations
was not tolled as to the class action during the prior action. Id. In reaching its decision, the court
recognized that several out-of-circuit courts had rejected the position that “the tolling doctrines of
American Pipe and Crown, Cork should be extended to include class members who file subsequent class
actions.” See id. (citing Korwek v. Hunt, 827 F.2d 874, 879 (2d Cir.1987); Salazar-Calderon v. Presidio
Valley Farmers Ass’n, 765 F.2d 1334, 1351 (5th Cir.1985), cert. denied, 475 U.S. 1035 (1986)). The
court agreed with those decisions, and held “that to extend tolling to class actions ‘tests the outer limits
of the American Pipe doctrine and . . . falls beyond its carefully crafted parameters into the range of
abusive options.’” Robbin, 835 F.2d at 214 (quoting Korwek, 827 F.2d at 879).1
Plaintiffs do not address Robbin. Instead, Plaintiffs cite to Catholic Social Services, Inc. v. I.N.S.,
232 F.3d 1139 (9th Cir. 2000) (en banc) as support for the proposition that tolling applies to the class
action as long as class certification has not been previously denied on the ground that the claims were
not suitable for class treatment. However, Catholic Social Services does not provide such support.
In Catholic Social Services, the Ninth Circuit found that tolling was warranted where the class
had originally been certified on two occasions, but was dismissed after a statutory enactment stripped
the courts of jurisdiction over certain of plaintiffs’ claims. 232 F.3d at 1144-49. Following the dismissal,
plaintiffs promptly filed a new class action with the district court. Id. at 1144. Although the new class
action was filed after the statute of limitations had expired, the Ninth Circuit held that “the statute of
limitations was tolled during the pendency of the first class action[.]” Id. at 1150. In doing so, the court
emphasized that “there is no dispute in the case that the classes in the first action were properly
certified.” Id. at 1149.
The court was careful to distinguish two sets of cases. The first was Robbin (in turn relying on
Korwek, 827 F.2d 874), in which the Ninth Circuit “interpreted American Pipe not to allow tolling . . .
when the second action is no more than an attempt to relitigate the issue of class certification and
thereby to circumvent the earlier denial.” Id. at 1147. The second set of cases were decided by the
Eleventh, Fifth, and Sixth Circuits, as well as various district courts, which applied the rule in Robbin

1

In Robbin, the court held that the tolling doctrine of American Pipe did apply to
preserve an individual action that was filed along with the class action. 835 F.2d at 215.
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and Korwek “to cases in which a later class of plaintiffs [did] not disagree with the denial of class
certification, but rather [tried] to cure the deficiency that led to the denial.” Id. at 1147-48 (citing Griffin
v. Singletary, 17 F.3d 356, 359 (11th Cir. 1994); Andrews v. Orr, 851 F.2d 146 (6th Cir. 1988);
Salazar–Calderon, 765 F.2d 1334, 1351 (5th Cir. 1985)). The court explained that “[p]laintiffs in the
class action now before us . . . do not seek to cure any procedural deficiencies in the classes under Rule
23 certified in the first action because there were none.” Id. at 1149. The court’s ultimate holding
therefore turned on the fact that “[p]laintiffs in this case are not attempting to relitigate an earlier denial
of class certification, or to correct a procedural deficiency in an earlier would-be class.” Id.
Catholic Social Services does not support Plaintiffs’ argument in the present case. Unlike in
Catholic Social Services, where the class was properly certified twice, here class certification has been
denied on two separate occasions in the Dean and Smyth actions. Whether the Court construes the
current class action as an attempt to relitigate the two earlier denials or to correct procedural deficiencies
in the earlier would-be classes, Catholic Social Services indicates that tolling does not apply.
Plaintiffs appear to read the Ninth Circuit’s use of the term “procedural deficiencies” as referring
solely to deficiencies related to the lead plaintiff’s suitability as class representative, to the exclusion of
deficiencies related to the suitability of the claims for class treatment. (See Pls.’ Opp’n 13:6-14:3.)
However, the Court finds no support in Catholic Social Services for such an interpretation. To the
contrary, that decision indicates that the term “procedural deficiencies” does in fact apply to the
suitability of claims for class treatment. As discussed, the Ninth Circuit was careful to distinguish,
among other cases, the Fifth Circuit’s decision in Salazar-Calderon, and at least implicitly approved of
that decision. In discussing Salazar-Calderon’s holding that tolling was improper, the Ninth Circuit
noted that class certification in that case “was denied for failure to satisfy the predominance and
superiority criteria of Rule 23(b)(3).” Catholic Social Services, 232 F.3d at 1148. This failure
fundamentally goes to the suitability of the claims for class treatment, and has nothing to do with the
suitability of the class representative.
Plaintiffs also cite two Central District of California decisions rendered post-Catholic Social
Services, but those decisions are similarly unavailing. First, In re Toys “R” Us, No. MDL 08-01980MMM (FMOx), 2010 WL 5071073 (C.D. Cal. Aug. 17, 2010), affirms the Ninth Circuit’s focus on
whether the Plaintiff is seeking to relitigate an earlier denial of certification or correct a procedural
defect. Id. at *14. It did not parse the term “procedural,” as Plaintiffs do, and the issue of tolling arose in
the unrelated context of plaintiffs seeking to certify subclasses in a piecemeal fashion. Id. at *14-15. The
second case, In re American Funds Securities Litigation, 556 F. Supp. 2d 1100 (C.D. Cal. 2008), was
vacated and remanded on appeal. See 395 F. App’x 485 (9th Cir. 2010). In any event, the district court’s
decision actually undermines Plaintiffs’ position. In American Funds Securities Litigation, the court
noted Catholic Social Services’ emphasis on the fact that the class had been properly certified in the first
instance. 556 F. Supp. 2d at 1112. It then went on to distinguish Catholic Social Services and find that
tolling was not proper in part because – as is true in the present case – “no class has ever been certified
by this Court . . . .” Id.
Even if the Court were to adopt Plaintiffs’ interpretation of the law, tolling would still be
impermissible. The Court previously denied certification of this same putative class in the Dean action
on the ground that the claims were not suitable for class treatment. Specifically, the Court found that
plaintiffs failed to establish the “predominance” requirement of Rule 23(b)(3).
A plaintiff asserting securities fraud under Section 10(b) of the Exchange Act must prove that he
or she relied upon a material misrepresentation when purchasing stock. See Basic, Inc. v. Levinson, 485
U.S. 224, 242-43 (1988). To invoke a presumption of reliance in showing that it can be determined on a
class-wide rather than individual basis, plaintiffs must establish that the defendant made a material
misrepresentation that directly caused the rise in stock. See Connecticut Ret. Plans & Trust Funds v.
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Amgen Inc., 660 F.3d 1170, 1172 (9th Cir. 2011). In Dean, this Court found that the plaintiffs’ expert,
and as a result the plaintiffs, failed to establish “a causal relationship between [China AG’s] disclosures
and movement in the price of its stock.” (Order Den. Mot. Class Cert. at 7, Dean v. China Agritech, Inc.,
No. CV 11-01331-RGK (PJWx) (C.D. Cal. Oct. 27, 2011), ECF No.134.) As such, the plaintiffs were
unable to invoke the presumption of reliance and therefore failed to show that the issue of reliance could
be determined on a class-wide, rather than individual, basis. It was for this reason that class certification
was denied.
Plaintiffs argue that this denial “was based upon the particular lead plaintiffs’ experts’
deficiencies rather than any suitability of the claims for class treatment.” (Pls.’ Opp’n 8:5-8:7, ECF No.
35.) Put differently, Plaintiffs argue that class certification was denied not because the claims were not
suitable for class certification, but rather, because the plaintiffs failed to establish that the claims were
not suitable for class certification. The Court finds this argument unpersuasive, as it would allow tolling
to extend indefinitely as class action plaintiffs repeatedly attempt to demonstrate suitability for class
certification on the basis of different expert testimony and/or other evidence.
For the foregoing reasons, the Court finds that the statute of limitations did not toll as to a class
action during the pendency of the Dean or Smyth actions. Therefore, Plaintiffs’ claims are barred as
untimely. Further, because amendment “could not possibly cure th[is] deficiency,” Abagninin v.
AMVAC Chem. Corp., 545 F.3d 733, 742 (9th Cir. 2008), the Court grants Moving Defendants’
Motions to Dismiss without leave to amend.
B.

Defendant Law’s Remaining Arguments

Defendant Law also argues that Plaintiffs’ FAC fails to state a claim for relief pursuant to Rule
12(b)(6). Defendant Law argues that Plaintiffs’ FAC, as it relates to him, fails to allege facts sufficient
to satisfy the heightened pleading standards of Rule 9(b) and the Private Securities Litigation Reform
Act. However, as the Court is dismissing the FAC on other grounds, it need not decide this issue.
V.

CONCLUSION

For the foregoing reasons, the Court GRANTS without leave to amend Moving Defendants’
Motions to Dismiss. Plaintiffs are hereby ordered to show cause in writing no later than December 8,
2014 as to why the Motions to Dismiss should not be granted as to the remaining defendants.

IT IS SO ORDERED.

:

Initials of Preparer

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