Gielata v. Heckmann et al
REPORT AND RECOMMENDATIONS re 63 MOTION to Dismiss for Lack of Jurisdiction Over the Person, Motion To Dismiss of Defendants Richard J. Heckmann, James Danforth Quayle, Alfred E. Osborne, Jr., Lou L. Holtz and Donald G. Ezzell filed by Heckmann Corp oration. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of the Objections (no longer than ten (10) pages) and the Response to the Objections (no longer than ten (10) pages). No further briefing shall be permitted with respect to objections without leave of the Court. Objections to R&R due by 7/5/2011. Signed by Judge Mary Pat Thynge on 6/16/2011. (cak)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE HECKMANN CORPORATION
C. A. No. 10-378-LPS-MPT
REPORT AND RECOMMENDATIONS
Lead plaintiff Matthew Haberkorn (“Haberkorn”) and defendants1 dispute over a
shareholder-approved merger between the Heckmann Corporation (“Company”) and
China Water and Drinks, Inc. (“China Water”).2 The amended complaint, filed on
October 8, 2010, asserts claims under §§ 10(b), 14(a), 20(a), and Rule 10b-5 of the
Securities Exchange Act of 1934 (“Act”) on behalf of all shareholders who held stock in
the Company as of September 15, 2008, and were entitled to vote on the merger, and
on behalf of investors who acquired securities in the Company during the class period,
May 20, 2008 to May 8, 2009.3 The allegations are of fraud, recklessness, and
materially false and misleading statements.4
Prior to the filing of the amended complaint, defendants moved to transfer to the
Central District of California,5 which this court denied.6 On November 12, 2010,
Defendants are Richard J. Heckmann, James Danforth Quayle, Alfred E.
Osborne, Jr., Lou L. Holtz, Donald G. Ezzell, Heckmann Corporation, and China Water
and Drinks, Inc. D.I. 52 ¶¶ 30-37.
Id. ¶ 1.
See generally Id. ¶¶ 135-229, 254-328.
D.I. 51 (finding that private and public interest factors of 28 U.S.C. § 1404(a) did
not warrant transfer); see also D.I. 83 (affirming D.I. 51).
Haberkorn moved for partial modification of the Private Securities Litigation Reform Act
(“PSLRA”) discovery stay,7 which this court also denied.8 Defendants presently move to
dismiss pursuant to the Rules of Federal Civil Procedure 8(a), 9(b), 12(b)(2) and
12(b)(6). For the reasons that follow, defendants’ motions are denied.
A. Factual Background
The Merger and Events Leading Thereto
The Company is a publicly traded, “blank check company” that acquires or
obtains control of operating entities through various business combinations, such as
stock acquisitions and mergers.9 It is incorporated under Delaware law with its principle
office in Palm Desert, California.10 In this particular instance, the Company raised funds
from public investors through an initial public offering (”IPO”) promising to acquire a
“qualifying” operating company using the IPO proceeds, which were held in escrow.11
The certificate of incorporation required the Company to be dissolved and the IPO
proceeds to be returned to the shareholders if it failed to accomplish a business
combination with an entity whose fair value was equal to at least 80% of the Company’s
net assets (a qualifying business combination) within twenty-four months of the IPO.12
The founders of the Company, i.e., defendants, were not to receive any of the proceeds
D.I. 82 (finding that Haberkorn did not satisfy PSLRA requirements of necessity
or undue prejudice and particularity to warrant modifying automatic stay).
D.I. 52 ¶¶ 3, 41.
Id. ¶ 31.
Id. ¶ 3.
Id. ¶¶ 3, 45.
upon the Company’s dissolution.13
The IPO was completed on November 16, 2007, raising approximately $432.9
million through the issuance of 54.1 million units at $8.00 per unit.14 Each unit consisted
of one share and one warrant, allowing the holder to purchase one share for $6.00.15
The founders awarded themselves 14,375,000 units, or 20% of the Company, at $0.005
per unit, for a total investment of $71,875.16 The founders also agreed to invest seven
million dollars in exchange for seven million warrants.17 These funds were placed in
escrow to be paid to shareholders if the Company failed to complete a qualifying
business combination.18 By October 30, 2008, the date of the shareholder vote,
defendants would personally lose more than $287 million if the Company failed to
acquire a qualifying business.19
On May 20, 2008, the Company publicized a merger agreement to acquire China
Water and filed the agreement with the Securities and Exchange Commission (“SEC”).20
China Water, now incorporated under Delaware law, manufactures and distributes
bottled water products in China.21 The agreement contained statements,
representations and warranties regarding China Water’s operations and financial
condition, expressing, inter alia, that its financial statements did not contain any
Id. ¶ 46.
Id. ¶¶ 5, 44.
Id. ¶ 44.
Id. ¶¶ 4, 46, 213.
Id. ¶¶ 47, 213.
Id. ¶ 47.
Id. ¶¶ 46-47 (basing amount on value of securities, $280 million, and purchase
of warrants, totaling $7 million).
Id. ¶ 52.
Id. ¶¶ 32, 48.
materially false or misleading statements or omissions.22 It also stated that China Water
possessed no undisclosed liabilities, paid all required taxes, and was in compliance with
all applicable laws.23 The purchase price was $625 million; $455 million in the
Company’s common stock and $170 million in cash.24 The Company praised China
Water and the merger, stating that it was a “compelling” and “special opportunity.”25
Defendant Richard Heckmann, Chairman and CEO of the Company, projected $220
million in revenues and $70 million in net income for fiscal year 2008.26 The merger
agreement required the Company to hold in escrow 90% of the Company’s shares
given to Xu Hong Bin (“Xu”), CEO and president of China Water and a director of the
Company, in exchange for his China Water shares.27 The Company agreed to release
80% of Xu’s escrowed shares on March 31, 2010, approximately eighteen months after
the merger closing, and the remaining shares two years after the merger closing.28
On June 16, 2008, the Company filed a Form S-4 registration statement for the
proposed merger with the SEC.29 The Form disclosed several risk factors that included
China Water’s failure to: maintain effective internal controls over its internal audit
function because it lacked sufficient qualified persons; maintain effective internal
controls over the financial closing process to ensure the accurate and timely preparation
of local financial statements and financial data due to an insufficient number of qualified
Id. ¶¶ 55-59.
Id. ¶¶ 6, 53.
Id. ¶¶ 7, 111, 190.
Id. ¶¶ 7, 12, 50, 136, 186.
Id. ¶¶ 54, 62.
Id. ¶ 62.
Id. ¶ 171.
financial and accounting staff; and adequately design and operate internal controls in an
effective manner to support the requirements of the financial reporting and period-end
close process.30 The Form also described the due diligence conducted by Credit
Suisse, one of the Company’s financial advisors, which included weeks of meetings in
China and inspections of China Water’s plants.31 The Form stated that even though
extensive due diligence was performed, it could not be sure that the diligence identified
all material issues possibly present in China Water or its business, or that factors
outside of China Water’s control would not later arise.32 If such an issue arose, the
Form noted that it may result in losses and the Company “may be forced to write-down
or write-off assets, restructure operations, or incur impairment or other charges.”33 It
also stated that the acquisition of a company like China Water may negatively effect the
Company’s market perceptions or its common stock and cause it to violate net worth or
other covenants as a result of obtaining post-combination debt financing.34 These
disclosures were repeated in amendments to the Form filed on July 25, August 22,
September 30, and October 1, 2008, and the Form S-1 registration statement filed on
October 23, 2008, and an amendment filed on November 5, 2008.
The merger was renegotiated allegedly due to market instability, resulting in the
September 29, 2008 purchase price reduction to just over $400 million; $120 million
less in cash consideration.35 In addition, Xu agreed to reduce the cash proceeds he
D.I. 71 Ex. A at 20-32.
Id. at 34-36.
Id. at 32.
D.I. 52 ¶¶ 77, 80, 220.
was to receive from the merger from $5.00 per share to $2.77 per share for his 5.4
million shares of China Water.36 To induce China Water shareholders to do the same,
Xu agreed to transfer 7.6 million of his China Water shares to its shareholders.37
On October 2, 2008, the Company issued the joint proxy and filed it with the
SEC, recommending its shareholders to approve the merger.38 The joint proxy
included, inter alia, the merger agreement, a registration statement filed with the SEC,
and the financial statements of China Water and the Company.39 The proxy listed risk
factors and deficiencies in China Water’s internal controls, and stated that its historical
operating results may not provide a meaningful basis for evaluating its business,
financial performance, and future prospects.40 It also stated that it is more than a
remote likelihood that a material misstatement of the financial statement will not be
prevented or detected on a timely basis by employees in their normal course of work.41
The proxy restated the risk factors and the due diligence results described in Form
S-4.42 The proxy showed that China Water had a net loss of $36.55 million in 2007 and
a projected loss of $22.01 million for the first six months ending June 30, 2008.43
The Company nevertheless reassured investors in the proxy that it was
comfortable with the stated deficiencies, that it expected China Water to achieve record
Id. ¶¶ 78, 220.
Id. ¶¶ 79, 220.
Id. ¶¶ 10, 12, 94-95, 171-72.
Id. ¶ 171.
D.I. 71 Ex. B at 33-34.
Id. at 28-46.
Id. at 140-41.
results,44 and that China Water’s operations and value would exceed the qualifying
business combination requirement.45 Based on these and other reasons, the board of
directors encouraged shareholders to vote in favor of the merger and to amend the
certificate of incorporation to provide for the Company’s perpetual existence.46 The
change in the certificate would absolve the requirement that the Company dissolve and
return the IPO funds if it failed to complete a qualifying business combination within
twenty-four months of the IPO.47 After soliciting votes through a joint Proxy/Prospectus,
the stockholders secured the merger on October 30, 2008 at a special stockholder
meeting where the required majority voted to approve the merger and amend the
certificate of incorporation. The merger closed the same day.48
Approximately five months after the merger, Xu resigned as president and CEO
of China Water and from the Company’s board of directors.49 The agreement between
Xu and the Company provided for the release of Xu’s 3,500,000 shares in the Company
and the Company’s fourteen million dollar payment to Xu.50 On May 8, 2009, the
Company issued its financial results for the first quarter following the merger.51 It
disclosed financial results inconsistent with China Water’s historical and projected
D.I. 52 ¶¶ 11-12, 175.
Id. ¶¶ 97, 180.
Id. ¶¶ 12, 97, 180.
Id. ¶ 100.
Id. ¶ 112.
Id. ¶¶ 112, 224.
Id. ¶¶ 116-17.
financial data, and China Water’s value was written down by $184 million.52 It disclosed
that China Water’s prior management misrepresented the strength of its business, and
may have diverted corporate assets.53 It also disclosed that the Company cancelled
15,527,900 common shares and approximately 1.5 million shares underlying warrants
that were issued to former China Water management and insiders.54 The market
reacted negatively to these disclosures, decreasing the price of the Company’s common
shares by 13.2%; $4.99 on May 7, 2009, to $4.33 the next day.55 The price of the
Company’s warrants fell 25.5%, from $0.90 to $0.7075 during the same time frame.56
By the third quarter after the merger, China Water’s goodwill had been written down
from $384.72 million, the date of the joint proxy, to $6.3 million.57 On February 23,
2010, China Water’s total value had been written down to $21 million, a 96% reduction
from its $625 million initial price.58
B. Parties’ Contentions
While the Company’s financial statements in May 2009 noted that China Water
and Xu misrepresented the strength of China Water’s business, in subsequent litigation
in the Delaware Court of Chancery, defendants revealed the details of Xu’s fraud and
admitted that they knew of red flags and certain indicators of fraud prior to and after the
Id. ¶¶ 117, 232.
Id. ¶¶ 118, 233.
Id. ¶ 236.
Id. ¶ 237.
Id. ¶¶ 126, 128.
Id. ¶¶ 18, 127.
shareholder vote as a result of the due diligence. They confirmed that Xu intentionally
overstated China Water’s operating results and financial position prior to the merger,
thereby artificially inflating the Company’s operating results and reported financial
position.59 They acknowledged that China Water’s CFO was reporting a separate set of
numbers to Chinese officials at the same time Xu was providing overstated financial
reports to the SEC.60 Haberkorn argues that this constitutes as a concession to outright
falsification of China Water’s financial information. Haberkorn asserts that defendants
and the Company failed to verify the accuracy of China Water’s reported revenue and
value added tax (“VAT”) liabilities, and simply requested that China Water reserve funds
for additional VAT payments without disclosing these details and other falsifications in
China Water’s amended financial statements, which were filed prior to the vote on the
merger. Instead, defendants told shareholders that their due diligence was “extensive”
and indisputably recommended the merger even though the fraud rendered China
Water worthless as a going concern, as evidenced by the Company’s goodwill writedowns.
Contrary to defendants’ statements in their proxy solicitation applauding Xu’s
educational background and experience in the water business, Haberkorn avers
defendants admitted in the Delaware litigation that the Company had not completed a
basic background check on Xu prior to the merger closing. When they did, according to
Haberkorn, they discovered that: Xu falsified his educational and employment history;
Xu was not his real name; he was a convicted felon with ties to criminal organizations;
Id. ¶¶ 21, 23, 60, 74-75, 104-15, 124, 138, 141, 167, 178-79.
Id. ¶¶ 21, 73, 258.
and stole millions of dollars from China Water.61 Haberkorn maintains that these are the
true reasons for Xu’s resignation. Haberkorn argues the Delaware litigation revealed
that the Company secretly agreed to reimburse Xu for the 7.6 million China Water
shares he transferred to China Water shareholders during the merger renegotiation,
thus undermining defendants’ rationale of market instability for reducing the price.62 In
disseminating the materially false and misleading joint proxy and other solicitation
materials without confirming the veracity of China Water’s reported operating results
and financial positions, particularly after discovering Xu’s background, Haberkorn
argues that defendants breached their disclosure obligations to the Company’s
shareholders and deprived them of their right to cast an informed vote on the merger.
Lastly, Haberkorn argues defendants knew prior to the merger vote that the
acquisition did not constitute a qualifying business combination, and that the Company
failed to complete such a transaction within the twenty-four month time period.
Haberkorn argues that disclosure of the undisclosed information would lead to the
Company’s dissolution, rendering defendants’ investments worthless. Thus, Haberkorn
states, by misleading the shareholders to approve the merger and amending the
certificate of incorporation, defendants improperly and simultaneously dissolved their
personal liability to the shareholders for the Company’s failure to complete a qualifying
business combination and preserved their investment, thereby reaping windfall gains.
In sum, Haberkorn claims that defendants and the Company: (1) acted
negligently by making misleading statements and omitting information regarding China
Id. ¶¶ 21, 63.
Id. ¶¶ 21, 79, 221.
Water’s past financial and operating results, its past and future growth prospects, the
managers’ experience, valuation of China Water, and the level of diligence performed
by the Company; (2) employed devices, schemes, and artifices to defraud, made untrue
statements of material facts or omitted material facts so the statements were
misleading; (3) engaged in acts, practices and a course of business that operated as a
fraud or deceit on the class in connection with its purchase of securities in the class
period; (4) acted with scienter in that they had actual knowledge of the
misrepresentation and omissions of material facts, or acted with reckless disregard for
the truth in that they failed to ascertain and disclose the true facts when such facts were
available to them; and (5) denied the class the option to make an informed decision in
voting on the merger, resulting in damages as a direct and proximate cause of the
misleading statements and omissions. These claims constitute violations of §§ 10(b),
14(a), 20(a) of the Act.63
Defendants argue that Haberkorn’s claims are a classic case of fraud by
hindsight; the very type Congress sought to deter through the PSLRA. Defendants
argue that Haberkorn alleges, with no supporting facts, that the disclosed financial
results in May 2009 corrected the false and misleading information, and the Company’s
stock price and warrants fell in response to the so-called corrective disclosures. They
aver that Haberkorn’s arguments are conclusory in nature and assume that defendants
had knowledge of the fraud prior to the merger. Defendants assert that they did not
Id. ¶¶ 1, 26.
learn of China Water and Xu’s activities until after the merger, which Haberkorn admits
and acknowledges in the amended complaint, and thus, there was no duty to disclose
the purported fraud in the absence of any lack of awareness.
Defendants move to dismiss all claims alleged in the amended complaint
pursuant to Rules 8, 9(b), 12(b)(2), and 12(b)(6) of the FED. R. CIV. P., and the PSLRA.
First, defendants argue that the court lacks personal jurisdiction over individual
defendants because none of them reside in Delaware and their only connection to
Delaware is as officers and directors of a Delaware-incorporated company. Second,
defendants contend that Haberkorn failed to raise a strong inference that each
defendant acted negligently under § 14(a). Third, they note that Haberkorn has not
alleged the requisite state of mind with particularity as required by the PSLRA and
Rules 8 and 9. Fourth, defendants maintain that the securities prices declined for a
reason unrelated to the alleged fraud; they declined due to the overall collapse of the
stock market, and not as a result of any corrective disclosure. Because causation has
not been proven, defendants purport that all claims under §§ 14(a) and 10(b) are
foreclosed. Lastly, defendants argue that Haberkorn’s failure to plead a primary
violation of the securities laws precludes derivative control person liability under § 20 of
III. STANDARD OF REVIEW
A. Motion to Dismiss Based on Lack of Personal Jurisdiction
Rule 12(b)(2) compels a court to dismiss a claim against a defendant for lack of
personal jurisdiction.64 When reviewing a motion to dismiss based upon this defense,
although plaintiff has the burden of presenting the facts “with reasonable particularity”65
to establish jurisdiction, “a court must accept as true all allegations of jurisdictional fact
made by the plaintiff and resolve all factual disputes in the plaintiff’s favor.”66 To meet
this burden, plaintiff “must produce ‘sworn affidavits or other competent evidence,’ since
a Rule 12(b)(2) motion ‘requires resolution of factual issues outside the pleadings.’”67
B. Motion to Dismiss for Failure to State a Claim for Which Relief Can Be
Rule 8(a)(2) requires a pleading to contain “a short and plain statement of the
claim showing that the pleader is entitled to relief”68 in order to survive a motion to
dismiss. Rule 12(b)(6) compels a court to dismiss a claim for “failure to state a claim
upon which relief can be granted.”69 The pleading need not describe in detail the factual
allegations supporting the claim;70 all that is required is a short and plain statement that
“must simply ‘give the defendant fair notice of what the plaintiff’s claim is and the
FED. R. CIV. P. 12(b)(2).
Snowstorm Acquisition Corp. v. Tecumseh Prods. Co., 739 F. Supp. 2d 686,
698 (D. Del. 2010) (citing Provident Nat'l Bank v. Cal. Fed. Sav. & Loan Ass'n., 819
F.2d 434, 437 (3d Cir. 1987)).
Snowstorm, 739 F. Supp. 2d at 698 (citing Traynor v. Liu, 495 F. Supp. 2d 444,
448 (D. Del. 2007)); see also Pinker v. Roche Holdings Ltd., 292 F.3d 361, 368 (3d Cir.
2002) (quoting Carteret Sav. Bank, FA v. Shushan, 954 F.2d 141, 142 n.1 (3d Cir.
Snowstorm, 739 F. Supp. 2d at 700 (quoting Time Share Vacation Club v. Atl.
Resorts, Ltd., 735 F.2d 61, 67 n.9 (3d Cir. 1984)).
FED. R. CIV. P. 8(a)(2).
FED. R. CIV. P. 12(b)(6).
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1940 (2009) (quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007)).
grounds upon which it rests.’”71 A plaintiff, however, must “provide ‘more than labels
and conclusions, and a formulaic recitation of the elements of a cause of action will not
do.’”72 The “allegations must ‘raise a right to relief above the speculative level on the
assumption that all of the complaint's allegations . . . are true (even if doubtful in
fact).’”73 In other words, “[t]o survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on
its face.’”74 This connotes that the complaint must allow “the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged” and it must
provide “more than a sheer possibility that a defendant has acted unlawfully.”75
A. Personal Jurisdiction Over Defendants
A court must view the correlation between the defendant, the forum, and the
litigation when deciding if personal jurisdiction exists.76 Defendants argue that to
establish personal jurisdiction, Haberkorn must first prove that the court has statutory
authority to exercise jurisdiction over a nonresident of the forum state under that state’s
Swierkiewicz v. Sorema N. A., 534 U.S. 506, 512 (2002) (quoting Conley v.
Gibson, 355 U.S. 41, 47 (1957)).
Stubbs v. Bank of America Corp., C.A. No. 08-108-SLR-LPS, 2010 WL
659911, at *1 (D. Del. Feb. 23, 2010) (quoting Lorah v. Dep't of Nat. Res. and Envtl.
Control, C.A. No. 06-539-SLR, 2007 WL 2049908, at *2 (D. Del. July 16, 2007)); see
also Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 555).
Stubbs, 2010 WL 659911, at *1 (quoting Lorah, 2007 WL 2049908, at *2); see
also Twombly, 550 U.S. at 545, 555-56.
Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 570).
Id. (citing Twombly, 550 U.S. at 556).
Snowstorm, 739 F. Supp. 2d at 699.
long-arm statute.77 Second, he must demonstrate that the nonresident defendant has
sufficient “minimum contacts”78 with the forum state by establishing “either that the
particular cause of action sued upon arose from the defendant's activities within the
forum state (‘specific jurisdiction’) or that the defendant had ‘continuous and systematic’
contacts with the forum state (‘general jurisdiction’).”79 In determining the sufficiency of
defendant’s contact with the forum state in the context of specific jurisdiction in federal
court, a court should examine whether “the defendant purposefully avails itself of the
privilege of conducting activities within the forum [s]tate, thus invoking the benefits and
protections of its laws.”80 Exercise of jurisdiction in federal court must comport with Fifth
Amendment requirements of Due Process81 and must not “offend ‘traditional notions of
fair play and substantial justice.’”82
Where a plaintiff’s claim is based upon federal law, however, particularly the
Securities Exchange Act of 1934, jurisdiction is governed by § 27 of the Act,83 which
states in relevant part that:
The district courts of the United States . . . shall have exclusive jurisdiction
of violations of this chapter or the rules and regulations thereunder, and of all
suits in equity and actions at law brought to enforce any liability or duty
created by this chapter or the rules and regulations thereunder. Any criminal
proceeding may be brought in the district wherein any act or transaction
Reach & Assocs., P.C. v. Dencer, 269 F. Supp. 2d 497, 502 (D. Del. 2003)
(citing FED. R. CIV. P. 4(e) and DEL. CODE ANN. tit.10 § 3104(c) (2011)).
Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945).
Provident Nat'l Bank, 819 F.2d at 437 (quoting Helicopteros Nacionales de
Colom., S.A. v. Hall, 466 U.S. 408, 414, 416 (1984)).
Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985).
See Pinker, 292 F.3d at 369.
Int’l Shoe, 326 U.S. at 316 (quoting Milliken v. Meyer, 311 U.S. 457, 463
15 U.S.C. § 78aa (2010).
constituting the violation occurred. Any suit or action to enforce any liability
or duty created by this chapter or rules and regulations thereunder, or to
enjoin any violation of such chapter or rules and regulations, may be brought
in [the district wherein any act or transaction constituting the violation
occurred] or in the district wherein the defendant is found or is an inhabitant
or transacts business, and process in such cases may be served in any other
district of which the defendant is an inhabitant or wherever the defendant
may be found.84
Section 27 authorizes nationwide service of process for claims based on violations of
the Act,85 which in turn permits a “nationwide contacts analysis.”86 Under this analysis,
“the jurisdiction of a federal court need not be confined by the defendant's contacts with
the state in which the federal court sits” and “the relevant forum for analyzing the extent
of the defendant's contacts is the United States as a whole.”87 Thus, neither the forum
state’s long-arm statutes nor Fourteenth Amendment Due Process concerns are
applicable to the analysis of sufficient minimum contacts under this federal question.88
The Third Circuit has applied the nationwide contacts test in cases involving foreign
defendants.89 Neither the Third Circuit nor this court have prohibited the application of
the nationwide contacts test to domestic defendants.90 Indeed, this court has recently
Snowstorm, 739 F. Supp. 2d at 699.
Pinker, 292 F.3d at 369.
See Snowstorm, 739 F. Supp. 2d at 700.
See In re Auto. Refinishing Paint Antitrust Litig., 358 F.3d 288, 298 (3d Cir.
2004); see also Pinker, 292 F.3d at 369.
See Pinker, 292 F.3d at 368-70 (sanctioning standard of authorizing personal
jurisdiction over nonresident of forum state based on nationwide contacts test without
limiting its application only to foreign defendants); see also Howard Hess Dental Labs.
Inc. v. Dentsply Intern., Inc., 516 F. Supp. 2d 324, 337 (D. Del. 2007) (acknowledging
that holding in In re Auto. Refinishing Paint, 358 F.3d at 305-06 is not “limited to
jurisdiction over foreign corporations”).
applied the nationwide contacts test to a domestic defendant.91
Defendants reply that Fifth Amendment Due Process concerns must still apply in
cases involving federal statues that authorize nationwide service of process.92
Defendants rely on outside jurisdictions as well as past decisions from this jurisdiction
for the proposition that sufficient minimum contacts must still be established within the
forum state to comport with due process.93 Defendants’ argument, however, is
unpersuasive. A federal court in a § 27 federal question case is not constrained to the
normal personal jurisdiction requirements of “minimum contacts” within certain districts
or states.94 “Due process concerns under the Fifth Amendment are satisfied if a federal
statute provides for nationwide service of process in federal court for federal question
cases.”95 Thus, the only issue left to determine is whether defendants had minimum
contacts with the United States, which is undisputed by both sides. Even if nation-wide
contacts were not the proper standard employed in this securities dispute, defendants
would be hard-pressed to prove that they had not purposefully availed themselves to
the privileges of conducting activities within this forum. The subsequent litigation in the
Chancery Court of Delaware (“the Delaware Litigation”) not only involved the Company,
its private shareholders, and former employees of China Water, but also involved a
See Snowstorm, 739 F. Supp. 2d at 699-700.
D.I. 80 at 5-7.
See In re Auto. Refinishing Paint, 358 F.3d at 298-99; Pinker, 292 F.3d at 37071; Peay v. BellSouth Med. Assistance Plan, 205 F.3d 1206, 1210 (10th Cir. 2000);
ESAB Group, Inc. v. Centritcut, Inc., 126 F.3d 617, 627 (4th Cir. 1997); Republic of
Panama v. BCCI Holdings (Lux.) S.A., 119 F.3d 935, 942 (11th Cir. 1997); D’Addario v.
Geller, 264 F. Supp. 2d 367, 387 (E.D. Va. 2003).
Snowstorm, 739 F. Supp. 2d at 700.
Id. (citing FS Photo, Inc. v. PictureVision, Inc., 48 F. Supp. 2d 442, 445 (D. Del.
counterclaim by the Company.96 Thus, defendants are subject to personal jurisdiction
with respect to Haberkorn’s claims.
B. Haberkorn’s Securities Claim Under §§ 10(b) and 14(a) of the Act
Defendants also move to dismiss Haberkorn’s §§ 10(b) and 14(a) claims for
failure to state a claim upon which relief may be granted. When alleging claims of fraud
or mistake, Rule 9(b) requires a party to plead “with particularity the circumstances
constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a
person's mind may be alleged generally.”97 “Although a plaintiff is not required to allege
every material detail - such as date, location, or time - a plaintiff must plead the
circumstances of the fraud with sufficient particularity ‘to place defendants on notice of
the precise misconduct with which they are charged.’”98 Plaintiff must at least “support
[his] allegations of securities fraud with all of the essential factual background that would
accompany ‘the first paragraph of any newspaper story’ - that is, the ‘who, what, when,
where, and how of the events at issue.”99 Rule 8(a) controls the second sentence in
Rule 9(b).100 Complaints that allege a violation of § 10(b) of the Act must meet the
See generally Xu v. Heckann Corp., C.A. No. 4637-CC, 2009 WL 3440004
(Del. Ch. Oct. 26, 2009).
FED. R. CIV. P. 9(b) (2011).
Stubbs v. Bank of America Corp., C.A. No. 08-108-SLR-LPS, 2010 WL
659911, at *1 (D. Del. Feb. 23, 2010) (quoting Eames v. Nationwide Mut. Ins. Co., C.A.
No. 04-1324-JJF-LPS, 2008 WL 4455743, at *13 (D. Del. Sept. 30, 2008), aff'd C.A. No.
08-4125, 2009 WL 3041997 (3d Cir. Sept. 24, 2009)); see also Seville Indus. Mack
Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984).
Snowstorm Acquisition Corp. v. Tecumseh Prods. Co., 739 F. Supp. 2d 686,
701 (D. Del. 2010) (quoting In re Suprema Specialities, Inc. Sec. Litig., 438 F.3d 256,
276 (3d Cir. 2006)).
See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1954 (2009).
[A] rigid rule requiring the detailed pleading of a condition of mind would
be undesirable because, absent overriding considerations pressing for a
higher pleading standard of 9(b).101 “In contrast to § 10(b) and Rule 10(b)(5), scienter is
not a necessary element in alleging a section 14(a) claim.”102 The Third Circuit has
recognized, however, that when security claims “sound in fraud,” the enhanced
requirements of Rule 9(b) will still apply.103
The PSLRA was enacted by Congress to prevent misuse of securities class
actions and to protect all parties associated with the capital markets from abusive
securities litigation practices.104 In effectuating this objective, the Act requires a
heightened pleading standard in order to survive a motion to dismiss. First, when a
plaintiff in a private action “alleges that the defendant made [a false] statement of a
material fact or omitted to state a material fact necessary in order to make the
statements made . . . not misleading[,]” the pleading must “specify each statement
specificity requirement, as in the case of averments of fraud or mistake,
the general ‘short and plain statement of the claim’ mandate in Rule 8(a)
. . . should control the second sentence of Rule 9(b).
Id. (citations omitted).
Snowstorm, 739 F. Supp. 2d at 701.
Cal. Pub. Employees' Ret. Sys. v. Chubb, 394 F.3d 126, 143-44 (3rd Cir.
In re Suprema Specialties, 438 F.3d at 270.
H.R. REP. NO. 104-369, at 31 (1995) (Conf. Rep.), reprinted in 1995
U.S.C.C.A.N. 730, 730. The abusive practices in which Congress was concerned
(1) the routine filing of lawsuits against issuers of securities and others
whenever there is a significant change in an issuer's stock price, without
regard to any underlying culpability of the issuer, and with only faint hope that
the discovery process might lead eventually to some plausible cause of
action; (2) the targeting of deep pocket defendants, including accountants,
underwriters, and individuals who may be covered by insurance, without
regard to their actual culpability; (3) the abuse of the discovery process to
impose costs so burdensome that it is often economical for the victimized
party to settle; and (4) the manipulation by class action lawyers of the clients
whom they purportedly represent.
alleged to have been misleading, the reason[s] why the statement is misleading, and, if
an allegation regarding the statement or omission is made on information and belief, the
complaint shall state with particularity all facts on which that belief is formed.”105
Secondly, the complaint must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind” whenever a plaintiff
may recover money damages based solely on evidence that defendant acted with the
Section 14(a) of the Exchange Act and Rule 14a-9
Section 14(a) makes it “unlawful for any person . . . to solicit or to permit the use
of his name to solicit any proxy or consent or authorization” in contravention of SEC
rules and regulations.107 Rule 14a-9 states that no proxy solicitation shall contain “any
statement which, at the time and in the light of the circumstances under which it is
made, is [materially] false or misleading . . . , or which omits to state any material fact
necessary” to render “the statements . . . not false or misleading or necessary to correct
any statement in any earlier communication with respect to the solicitation of a proxy for
the same meeting or subject matter which has become false or misleading.”108 To
defeat a motion to dismiss, plaintiff must show that “(1) a proxy statement contained a
material misrepresentation or omission which (2) caused the plaintiff injury and (3) that
the proxy solicitation itself, rather than the particular defect in the solicitation materials,
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007) (quoting
15 U.S.C. § 78u-4(b)(1) (2010)).
15 U.S.C. § 78u-4(b)(2) & (3)(A) (2010).
15 U.S.C. § 78n(a) (2010).
17 C.F.R. § 240.14a-9 (2010).
was an essential link in the accomplishment of the transaction.”109 Information is
material “if there is a substantial likelihood that a reasonable shareholder would
consider it important in deciding how to vote.”110 Determination of materiality, however,
is a mixed question of fact and law.111
Defendants first argue that the § 14(a) claims should be dismissed because
Haberkorn has impermissibly relied on group pleading in naming individual defendants.
Defendants’ arguments, however, are unpersuasive. The plain text of the statute
applies to “any person” that “permits[s] the use of his name to solicit any proxy.”112 The
Third Circuit has held that the PSLRA abolished the group pleading doctrine, which
“allows a plaintiff to plead that defendants made a misstatement or omission of a
material fact without pleading particular facts associating the defendants to the alleged
fraud.”113 Claims must be pleaded with specificity with respect to “the role of each
defendant, demonstrating each defendant's involvement in misstatements and
omissions.”114 Including individual defendants solely because of their status as officers
and directors of the company is group pleading and thus not allowed.115
Here, the amended complaint does not rest solely on an individual defendant’s
relationship to the Company. Instead, it alleges that each defendant specifically
Tracinda Corp. v. DaimlerChrysler AG, 502 F.3d 212, 228 (3d Cir. 2007)
(citing Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932 (3d Cir. 1992) (citing Mills v. Elec.
Auto-Lite Co., 396 U.S. 375, 385 (1970))).
Id. (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
Gen. Elec., 980 F.2d at 932 (citing TSC Indus., 426 U.S. at 450).
15 U.S.C. § 78n(a) (2010).
Snowstorm, 739 F. Supp. 2d at 702-03 (citing Winer Family Trust v. Queen,
503 F.3d 319, 334-37 (3d Cir. 2007)).
Winer Family Trust, 503 F.3d at 335-37.
indicated in the Joint Proxy that they approved the merger.116 Further, the
recommendations for the merger were formulated after reviewing China Water’s
operation and business and financial results.117 Unless a director formally dissents and
disassociates himself from the proxy solicitation, that director is considered to be
soliciting proxies on behalf of management and thus, is liable for misstatements
contained in the proxy materials.118 The amended complaint therefore, passed the
threshold of group pleading because individual defendants allowed their names to be
used in connection with the proxy solicitations.
Second, defendants argue Haberkorn has not alleged defendants’ negligence
with the requisite particularity. The standard of culpability under § 14(a) is one of
negligence.119 This court has declined to apply the PSLRA’s heightened pleading
requirements that a plaintiff “state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind” to claims brought under
14(a).120 “Thus, an individual who participates in a solicitation which utilizes materially
false or misleading statements is liable if he knew or should have known that the
statements were false or misleading.”121 Defendants argue that “fraud by hindsight,” the
implication that bad results mean that statements or actions at the time of the incident
D.I. 52 ¶ 19
Id. ¶¶ 12, 97
Gould v. American Hawaiian Co. S.S., 351 F. Supp. 853, 860 (D. Del. 1972),
aff’d, 535 F.2d 761, 777-78 (3d Cir. 1976).
Id.; see also Chubb, 394 F.3d at 168.
In re U.S. W. Sec. Litig., 201 F. Supp. 2d 302, 305-06 (D. Del. 2002) (citing In
re Reliance Sec. Litig., 91 F. Supp. 2d 706, 729 (D. Del. 2002) (citing 15 U.S.C. § 78u4(b)(2) (2010))).
Gould, 351 F. Supp. at 860.
must have been untrue or misleading, is present here and is grounds for failing to state
In this case, however, hindsight has not been used as the sole factor in indicating
negligence or fraud on behalf of defendants. Instead, the amended complaint relies on
the Delaware Litigation, which involved both companies and their officers.123 It alleged
that during the Delaware Litigation, defendants admitted that Ernst & Young LLP
informed the Company that Xu justified China Water’s inconsistent VAT payments by
claiming it was common practice in China.124 The Delaware Litigation also indicated that
the Company promised to reimburse Xu for 7,600,00 shares of China Water stock used
to induce shareholders to approve a merger amendment that reduced the amount of
cash the Company had to pay.125 Both of these events occurred prior to the merger, yet
they were not disclosed to the shareholders via the proxy solicitation. Instead, the
amended complaint alleges that these facts were not revealed until the Delaware
Litigation, which occurred over seven months after the deal was approved.126 These
admissions alone show that defendants were aware, and chose not to disclose,
information that a reasonable shareholder would like to know when determining whether
to approve the pending merger. Even if the heightened pleading requirements applied
to this dispute, these admissions still create a “strong inference” that defendants knew
or should have known this information was material to the shareholders. Viewing all
In re Suprema Specialties, 334 F. Supp. 2d at 647, rev’d on other grounds,
438 F.3d 256 (3d Cir. 2006).
D.I. 52 ¶ 2.
Id. ¶ 21.
facts and inferences in the most favorable light, Haberkorn has plead sufficient facts to
indicate that defendants knew or should have known that material information was
omitted from the proxy solicitation in violation of §14(a) of the Act.
Section 10(b) of the Exchange Act and Rule 10b-5
Section 10(b) prohibits any person from using or employing “any manipulative or
deceptive device or contrivance in contravention of” SEC rules and regulations “in
connection with the purchase or sale of any security.”127 Rule 10b-5 creates a private
cause of action for investors making it unlawful for any person, in connection with the
purchase or sale of any security, “(a) [t]o employ any device, scheme, or artifice to
defraud, (b) [t]o make any untrue statement of a material fact or to omit to state a
material fact necessary” to render “the statements made . . . not misleading, or © [t]o
engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person.”128 To state a claim under Rule 9(b), a plaintiff must
plead “(1) a specific false representation or omission of material fact; (2) knowledge by
the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it
was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted
upon it to his damage.”129 To defeat a motion to dismiss under §10(b) and Rule 10b-5 in
respect to the PSLRA’s heightened pleading requirements, a plaintiff must allege that
each defendant (1) made a misstatement or an omission of material fact; (2) with
scienter; (3) in connection with the purchase or the sale of a security; (4) upon which the
15 U.S.C. § 78j(b) (2010).
17 C.F.R. § 240.10b-5 (1951).
Snowstorm, 739 F. Supp. at 701 (citing In re Suprema Specialties, Inc. Sec.
Litig., 438 F.3d 256, 276 (3d Cir. 2006)).
plaintiff reasonably relied and; (5) that the plaintiff suffered an economic loss; (6) which
was proximately caused by its reliance on the misstatement or omission.130 To the
extent that Rule 9(b) conflicts with the PSLRA, the PSLRA supersedes in §10(b) and
Rule 10b-5 actions.131
Here, the only element in dispute is whether defendants acted with scienter. The
requisite scienter is defined as the intent to deceive, manipulate, or defraud132 and
necessitates a “knowing or reckless state of mind.”133 The Third Circuit has defined
recklessness as “highly unreasonable conduct, involving not . . . simple, or even
inexcusable negligence, but an extreme departure from the standards of ordinary care
which presents a danger of misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware of it.”134 In analyzing
whether an inference is “strong,” a court must consider both those inferences presented
by plaintiff and “competing [nonculpable] inferences rationally drawn from the facts
“To qualify as ‘strong’ . . . , an inference of scienter must be more than merely
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); Snowstorm, 739 F.
Supp. 2d at 702 (citing Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 251
(3d Cir. 2009)).
Snowstorm, 739 F. Supp. 2d at 701 (citing In re Suprema Specialties, 438
F.3d at 277).
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (quoting
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976)); Avaya, 564 F.3d at 252 (quoting
Hochfelder, 425 U.S. at 193).
Avaya, 564 F.3d at 252 (citing In re Advanta Corp. Sec. Litig., 180 F.3d 525,
534-35 (3d Cir.1999)).
In re Suprema Specialties, 438 F.3d at 276 (quoting SEC v. Infinity Group Co.,
212 F.3d 180, 192 (3d Cir. 2000)).
Tellabs, 551 U.S. at 314, 323-24.
plausible or reasonable,”136 however, it need not be “irrefutable” or “even the most
plausible.”137 “A complaint will survive . . . only if a reasonable person would deem the
inference of scienter cogent and at least as compelling as any opposing inference one
could draw from the facts alleged.”138 “Omissions and ambiguities count against
inferring scienter”139 and a motive of personal financial gain is a relevant consideration
because it “weigh[s] heavily in favor of a scienter inference, [although] the absence of a
motive allegation is not fatal.”140 The relevant inquiry, however, is “whether all of the
facts alleged, taken collectively, give rise to a strong inference of scienter, not whether
any individual allegation, scrutinized in isolation, meets that standard.”141
Defendants argue that Haberkorn’s evidence of scienter is not as compelling as
any opposing direct evidence of non-fraudulent intent. One particular argument
defendants make is that the Company’s reliance on China Water accountants infers
non-fraudulent intent. Additionally, defendants argue that Haberkorn’s allegations of
motive and opportunity, the scope of the goodwill impairment, the renegotiation of the
purchase price, and Xu’s departure from China Water collectively do not raise an
inference of scienter, but instead are a “puzzle-style approach.”
Taking all facts alleged in the amended complaint as true, however, indicates
that the Company was aware that China Water had been intentionally understating their
Id. at 314.
Id. at 324.
Avaya, 564 F.3d at 268 (quoting Tellabs, 551 U.S. at 326).
Tellabs, 551 U.S. at 325; see also Snowstorm, 739 F. Supp. 2d at 705
(“motive may be a factor in analyzing the defendant’s state of mind”).
Tellabs, 551 U.S. at 322-23.
tax liabilities. In addition, the Company demanded that China Water restate its 2007
VAT liability, thus further confirming that defendants were aware of reporting
discrepancies. Finally, although China Water never restated its 2007 VAT liability,
defendants failed to disclose these discrepancies in the Joint Proxy. Thus, the
Company allowed the Joint Proxy to contain information it was aware of as being
incorrect, yet failed to inform the shareholders of the inaccuracies. Based on these
allegations alone, one can make a strong inference that these disclosures were withheld
from shareholders in order to mislead or deceive them and were done so knowingly or
Defendants claim of a “puzzle-style approach” is also misguided. As indicated by
prior case law, an inquiry into scienter is not an individualized critique of each “puzzle”
piece, but instead a view of the entire picture and whether the pieces together make a
“strong inference” of scienter. Not only does the aforementioned information that
defendants possessed about China Water’s VAT liabilities rise to the level of “strong
inference,” but the other alleged facts pertaining to defendant’s motive and the
resignation of Xu only strengthen this already strong inference of scienter. Although
pieces on their own may not be sufficient, looking at these facts collectively and all
reasonable inferences in the most favorable light yields the conclusion that Haberkorn
has plead the required level of scienter for a §10(b) claim.
Additionally, plaintiff must establish economic loss and proximate causation
under the requirements of Rule 8(a) to state a claim under §§ 14(a) and 10(b).142 Loss
causation is defined as the causal connection between the misrepresentation and the
loss.143 A plaintiff must at minimum show the subsequently revealed information
demonstrates that “the defendant misrepresented or omitted the very facts that were a
substantial factor in causing the plaintiff's economic loss,”144 that is, the decline in the
security price. “An inflated purchase price will not itself constitute or proximately cause
the relevant economic loss” because a subsequent lower price may be the result of
“changed economic circumstances, changed investor expectations, new industryspecific or firm-specific facts, conditions, or other events, which taken separately or
together account for some or all of that lower price.”145 A plaintiff “may include loss of a
possible profit or benefit, an addition to the value of one's investment, unless the loss is
See Dutton v. Harris Stratex Networks, Inc., 270 F.R.D. 171, 181 (D. Del.
2010) (citing Dura Pharm., 544 U.S. at 346 (“[T]he Federal Rules of Civil Procedure
require only ‘a short and plain statement of the claim showing that the pleader is entitled
to relief.’ . . . [N]either the Rules nor the securities statutes impose any special further
requirement in respect to the pleading of proximate causation or economic loss.”)
(citations omitted)); see also In re DaimlerChrysler AG Sec. Litig., 294 F. Supp. 2d 616,
626, 629 (D. Del. 2003).
Dutton, 270 F.R.D. at 181 (quoting Dura Pharm., 544 U.S. at 342).
McCabe v. Ernst & Young, LLP, 494 F.3d 418, 426 (3d Cir. 2007); see also In
re DaimlerChrysler, 294 F. Supp. at 626 (citing Newton v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 259 F.3d 154, 181 n.24 (3d Cir. 2001) (plaintiff must prove that “fraudulent
conduct proximately caused or substantially contributed to causing its economic loss”)).
Dura Pharm., 544 U.S. at 342-43; see also McCabe, 494 F.3d at 428-29.
[L]osses due to a subsequent decline in the market, or insolvency of the
corporation brought about by business conditions or other factors in no way
related to the representations will not afford any basis for recovery. It [i]s only
where the fact misstated was of a nature calculated to bring about such a
result that damages for it can be recovered.
Id. (citations omitted).
Haberkorn first relies on the chain of events that occurred on May 8, 2009 to
allege proper causation. On that day, the Company reported a $184 million goodwill
impairment on China Water and revealed that China Water “misrepresented the
strength” of its operations and “may have diverted corporate assets.”147 In light of these
announcements, the price of the Company’s common shares and warrants fell on that
day by 13.2% and 25.5%, respectively.148 Defendants argue that causation cannot be
adequately established because the economy had been experiencing a general
economic downturn. They relied on the fact that the Company’s stock had been
substantially declining, from $7.24 on the day of the merger vote to $4.99 the day before
the corrective disclosure, to argue that the chain of causation was broken. Haberkorn
responds that the influence of market factors is not an issue that should be resolved at
the pleading stage.149 Instead, “[s]o long as the alleged misrepresentations were a
substantial cause of the inflation in the price of a security and in its subsequent decline
in value, other contributing forces will not bar recovery.”150 Viewing all facts and
inferences in the light most favorable to plaintiff, Haberkorn has pled with sufficient
particularity that once the disclosures and all the corresponding misrepresentations
were made public to the shareholders, the stock price, warrants and value of China
Tse v. Ventana Med. Sys., Inc., 297 F.3d 210, 220 (3d Cir. 2002) (citing Gould
v. American Hawaiian Co. S.S., 535 F.2d 761, 781 (3d Cir. 1976)).
D.I. 52 at ¶ 232.
Id. ¶¶ 236-37.
Semerenko v. Cendant Corp., 223 F.3d 165,186-87 (3d Cir. 2000).
Water adjusted to adequately reflect the new disposition of the Company.
Regarding the loss causation required to satisfy § 14(a) of the Act, Haberkorn
additionally alleges that the eligible Company shareholders were denied the IPO
proceeds they would have received once the Company failed to complete a qualifying
business transaction within the required twenty-four months.151 Defendants argue that
this lost opportunity argument should fail because the alleged loss is wholly speculative.
They argue that no facts have been alleged to show that, assuming a qualifying
business was not met with the China Water purchase, the Company would not be able
to complete a qualifying transaction within the remaining thirteen months. These
claims, again, are overlooking the minimal hurdle that Haberkorn must allege at this
initial stage. Accepting all the facts and inferences in the most favorable light,
Haberkorn has plead with particularity that the omitted material facts about China Water
were a substantial factor in the approval of the merger and the satisfaction of a
qualifying business transaction.
C. Section 20(a) of the Exchange Act
Section 20(a) states that “[e]very person who, directly or indirectly, controls any
person liable [under the Act is] jointly and severally liable to the same extent . . . unless
the controlling person acted in good faith and did not directly or indirectly induce the act
or acts constituting the violation or cause of action.”152 The term “control” is defined as
“the possession, direct or indirect, of the power to direct or cause the direction of the
D.I. 52 at ¶¶ 239-41.
15 U.S.C. § 78t(a) (2010).
management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise.”153 A plaintiff “must prove not only that one person
controlled another person [or entity], but also that the ‘controlled person’ [or entity] is
liable under the Act.”154 For secondary liability to exist, a defendant must be a culpable
participant in the fraud.155 To state a claim under the PSLRA, a plaintiff must plead with
particularity “the circumstances of both the defendant's control of the primary violator,
as well as of the defendant's culpability as a controlling person.”156 A director is not
automatically liable as a controlling person.157 Lastly, secondary liability under § 20(a)
establishes personal jurisdiction over a defendant when a federal statute provides for
nationwide service of process.158 Thus, a defendant cannot assert the fiduciary shield
doctrine to argue lack of personal jurisdiction because jurisdiction under the Exchange
Act renders this doctrine inapplicable.159
Defendants only argument for why Haberkorn’s § 20(a) claim should fail is that
“[p]laintiff must first adequately plead an independent violation of the Act by some
Snowstorm Acquisition Corp. v. Tecumseh Prods. Co., 739 F. Supp. 2d 686,
707 (D. Del. 2010) (quoting 17 C.F.R. § 240.12b-2 (2010)).
Id. (quoting In re Alpharma Inc. Sec. Litig., 372 F.3d 137, 153 (3d Cir. 2004)).
Id. (citing In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 294 n.16
(3d Cir. 2006)).
Id. (quoting In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 561 (D. Del.
2002) aff’d, 357 F.3d 322 (3d Cir. 2004)).
Id. at 707-08 n.15 (quoting In re Digital Island, 223 F. Supp. 2d at 561).
Id. 700-01 n.8 (citations omitted).
Id. (citations omitted). The doctrine states that a forum does not have
jurisdiction over a defendants merely “because they are agents or employees of
organizations which presumably are amenable to jurisdiction” in that particular forum.
person controlled by the Individual Defendants.”160 As noted previously herein,
Haberkorn has propounded sufficient facts to support claims under both §§ 10(b) and
14(a). Thus, at this stage, Haberkorn has plead with particularity that individual
defendants were in control of the Company at the time of the alleged fraud.
ORDER AND RECOMMENDED DISPOSITION
For the reasons contained herein, I recommend that:
(1) Defendants motion to dismiss for lack of personal jurisdiction (D.I. 63) be
(2) Defendants motion to dismiss for a failure to state a claim (D.I. 63) under §
14(a) of the Securities Act of 1934 be DENIED.
(3) Defendants motion to dismiss for a failure to state a claim (D.I. 63) under §
10(b) of the Securities Act of 1934 be DENIED.
(4) Defendants motion to dismiss for a failure to state a claim (D.I. 63) under §
20(a) of the Securities Act of 1934 be DENIED.
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(1)(B),
FED. R. CIV. P. 72(b)(1), and D.DEL.LR 72.1. The parties may serve and file specific
written objections within fourteen (14) days after being served with a copy of this Report
and Recommendation. FED. R. CIV. P. 72(b).
The parties are directed to the Court’s standing Order in Non-Pro Se matters for
Objections Filed under Fed. R. Civ. P. 72, dated November 16, 2009, a copy of which is
D.I. 70 at 20.
available on the Court’s website, www.ded.uscourts.gov.
Dated: June 16, 2011
/s/ Mary Pat Thynge
UNITED STATES MAGISTRATE JUDGE
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