Skeway et al. v. China Natural Gas Inc et al
Filing
23
MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 8/12/2011. (nmf)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
MAXWELL VANDEVELDE,
Plaintiff,
v.
CHINA NATURAL GAS, INC., QINAN JI,
ZHIQIANG WANG, DONALD YANG,
DAVID SHE, CARL YEUNG, and
LAWRENCE LEIGHTON
Defendants.
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Civ. No. 10-728-SLR
Peter Bradford deLeeuw, Esquire of Rosenthal, Monhait & Goddess, P.A., Wilmington
Delaware. Counsel for Plaintiff. Shapiro Haber & Urmy LLP. Of Counsel.
Joel Friedlander, Esquire and Sean M Brennecke, Esquire of the Bouchard, Margules &
Friedlander, P.A., Wilmington, Delaware. Proposed Liaison Counsel for Plaintiffs and
Class. Brian ..1. Robbins, Esquire and Craig W. Smith, Esquire of Robbins Umeda LLP.
Counsel for Proposed Lead Plaintiff Richard Crippa.
Seth D. Rigrodsky, Esquire and Brian D. Long, Esquire of the Rigrodsky & Long, P.A.,
Wilmington, Delaware. Proposed Liaison Counsel for Plaintiffs and Class. Lauren M.
Rosen, Esquire and Phillip Kim, Esquire of The Rosen Law Firm, P.A. Counsel for
Proposed Lead Plaintiff Robert Skeway.
Jon E. Abramczyk, Esquire and John DiTomo, Esquire of Morris, Nichols, Arsht &
Tunnell LLP, Wilmington, Delaware. Counsel for Defendants.
MEMORANDUM OPINION
Dated: August 1)-, 2011
Wilmington, Delaware
I. INTRODUCTION
On August 26,2010, plaintiff Maxwell Vandevelde, individually and on behalf of
all others similarly situated (collectively, "plaintiffs"), instituted the present securities
class action against China Natural Gas, Inc. ("China Natural Gas").1 (0.1. 1 at 1111 1, 8)
Before the court are two competing motions for appointment of lead plaintiff and
approval of selection of lead counsel. Robert Skeway ("Skeway")2 filed the "Skeway
motion" on October 25,2010. (0.1. 8) Richard Crippa ("Crippa") filed the "Crippa
motion" on October 26,2010. (0.1. 5) For the foregoing reasons, Skeway's motion (0.1.
8) is granted and Crippa's motion (0.1. 5) is denied.
II. BACKGROUND
Plaintiffs allege that China Natural Gas failed to disclose material facts regarding
its financial well-being which, in turn, led plaintiffs to purchase China Natural Gas
common stock to their financial detriment during the time period of March 10, 2010 to
August 19, 2010 (hereinafter the "class period"). (0.1. 1 at W 41,55-56) According to
plaintiffs, China Natural Gas entered into a bank loan that required China Natural Gas
to restructure a portion of its debt from long-term liabilities to short-term liabilities. (Id.
at 1111 27, 41) Plaintiffs further allege that China Natural Gas misclassifed this debt
restructuring in an SEC filing in March of2010. (Id. at 11 41) On August 20,2010,
1 China Natural Gas provides pipeline natural gas in China, and it is the first
China-based natural gas company that is publicly traded in the United States. (0.1. 1 at
11 8)
2 Skeway moves on behalf of both himself and his wife, Lisa Skeway. (0.1. 9 at 5
n.1) During the relevant time period, Skeway purchased China Natural Gas stock on
behalf of himself and his wife and handled all investment decisions. (ld.) Skeway has
had power of attorney for 'finances and property for his wife since 2005. (Jd.)
China Natural Gas filed an amended SEC form, addressing its previous
misrepresentation regarding the loan. (Id. at 1150) Plaintiffs allege that the closing
price for China Natural Gas shares "declined markedly" after the amended SEC filing.3
(Id. at 11 54) Plaintiffs raise claims for violations of Section 1O(b)-5 of the Securities Act
and Sections 10(b) and 20(a) of the Exchange Act. 4 (Id. at 111165,69)
During the class period, Skeway engaged in non-confidential communications
with China Natural Gas's public relations and investor relations firm, RedChip
Companies, Inc. ("RedChip"). (D.1. 16, ex 1 at 115) Additionally, during the class
period, Skeway posted on Yahoo! message boards about China Natural Gas stock
prices, company productivity, and SEC investigations. (D.1. 14, exs. A-F)
3 The price declined from $6.64 on August 13,2010 to $5.29 on August 24,
2010. (D.1. 1 at 1154)
4
Section 1O(b) makes it
unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of any
national securities exchange ... [t]o use or employ, in connection with the purchase
or sale of any security ... any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may prescribe as
necessary and appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j. Rule 10b-5 makes it unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.
2
A notice of the class action was published on September 2,2010. (0.1. 7, ex. A;
0.1. 10, ex. 1) Crippa and Skeway both timely filed motions to become lead plaintiff,
pursuant to 15 U.S.C. § 78u-4(a)(3)(A)(i)(II),5 and both assert that they possessed stock
in China Natural Gas during the class period. (0.1. 6 at 6; 0.1. 9 at 5) Crippa alleges he
suffered losses of over $16,000. (0.1. 6 at 6; 0.1. 7, ex. B) Skeway alleges he
expended net funds of $319,300.15 and suffered losses of $155,508.05. (0.1. 9 at 5;
0.1. 10, ex. 3)
Crippa is moving for Robbins Umeda LLP to be appointed lead counsel and
Bouchard Margules & Friedlander, P.A. to be appointed liaison counsel. (0.1. 5)
Skeway is moving for the Rosen Law Firm, P.A. to be appointed lead counsel and
Rigrodsky & Long, P.A. to be appointed liaison counsel. (0.1. 8) Per the court's June
29, 2010 order (0.1. 18), both parties have submitted supplemental briefs describing in
clearer detail the fee arrangements, retainer agreements, and the process of
negotiations to reach said fees and retainers.
III. STANDARD OF REVIEW
Both the selection of a lead plaintiff, or the "most adequate plaintiff," and the
approval of a lead plaintiff's choice of lead counsel is "committed to the court's
discretion." Dutton v. Harris Stratex Networks, Inc., Civ. No. 08-755, 2009 WL
1598408, at *2 (D. Del. June 5,2009) (quoting In re Molson Coors Brewing Co. Sec.
Litig., 233 F.R.O. 147, 150 (D. Del. 2005». Despite having this discretion, the court
5 15 U.S.C. § 78u-4(a)(3)(A)(i)(II) provides, in pertinent part: "[N]o[] later than 60
days after the date on which the notice is published, any member of the purported class
may move the court to serve as lead plaintiff."
3
nevertheless must follow the procedures established in the Private Securities Litigation
Reform Act (the "PSLRA"). See id.
Under the PSLRA, determining which movant qualifies as the lead plaintiff is a
two-step process. See City of Roseville Emps. Ret. Sys. v. Horizon, Civ. No. 08-969,
2009 WL 1811067, at *1 (D. Del. June 18, 2009). First, the court identifies a
presumptive lead plaintiff and, second, it determines whether the presumption has been
rebutted. See In re Cendant Corp. Litig., 264 F.3d 201,262 (3d Cir. 2001); see also 15
U.S.C. §§ 78u-4 (a)(3)(8)(iii)(I) & (II). The court adopts the presumption that a
particular plaintiff is the most adequate plaintiff when that movant: (1) "has either filed
the complaint or made a motion in response to a notice," (2) "in the determination of the
court has the largest financial interest in the relief sought by the class," and (3)
"otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil
Procedure." 15 U.S.C. §§ 78u-4(a)(3)(8)(i) & (iii)(I); see also City of Roseville, 2009 WL
1811067, at *1.
To identify the movant with the largest financial interest, "a court should consider,
among other things: (1) the number of shares that the [m]ovant purchased during the
putative class period; (2) the total net funds expended by the plaintiffs during the class
period; and (3) the approximate losses suffered by the plaintiffs." Cendant, 264 F.3d at
222. To meet the "otherwise satisfies" criterion, the movant must establish only a prima
facie case of typicality and adequacy under traditional Rule 23 principles. Id. at 263. At
this stage of the analysis, a court must make its prima facie finding independently and
cannot consider whether the presumption has been rebutted by members of the
4
purported class. See id. at 263-64.
IV. DISCUSSION
80th movants satisfy the first prong for presumptive lead plaintiff status as both
made timely motions in response to a published notice. See 15 U.S.C. §§
78u-4{a)(3)(8)(i) & (iii)(I). The court moves to the next prong - the determination as to
which movant has the largest financial interest - and finds that Skeway presumptively
satisfies this prong as his losses amount to over $155,000, and Crippa only claims
losses amounting to $16,000. Upon finding that Skeway is the movant with the largest
financial loss, the court will next address whether Skeway satisfies the prima facie
requirements of Rule 23.
A. Typicality
"The typicality requirement is designed to align the interests of the class and the
class representatives so that the latter will work to benefit the entire class through the
pursuit of their own goals. However, typicality ... does not require that all putative
class members share identical claims." In re Molson Coors, 233 F.R.D. at 152 (quoting
In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 531-32 (3d Cir. 2004». "Factual
differences will not render a claim atypical if the claim arises from the same event or
practice or course of conduct that gives rise to the claims of the class members, and if it
is based on the same legal theory." Grasty V. Amalgamated Clothing & Textile Workers
Union, 828 F.2d 123, 130 (3d Cir. 1987) (citation omitted). "Indeed, even relatively
pronounced factual differences will generally not preclude a finding of typicality where
there is a strong similarity of legal theories." Baby Neal v. Casey, 43 F.3d 48,58 (3d
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Cir. 1994). Because at this juncture the court's initial inquiry into whether movant
satisfies the typicality and adequacy requirements "need not be extensive," the court
finds that Skeway makes out the prima facie case for typicality. See Cendant, 264 F.3d
at 264. Skeway has the same interests and shares the same legal theories as the rest
of the class. Both Skeway and plaintiffs allege that China Natural Gas violated the
Exchange Act by failing to disclose material facts about their business dealings, which
led both the class and Skeway to purchase shares to their financial detriment.
B. Adequacy
"The adequacy determination is made in context with the movant's choice of lead
counsel." Vicuron Pharms., Inc. Secs. Litig., 225 F.R.D. 508, 511 (E.D. Pa. 2004)
(citation omitted). The adequacy requirement "mandates that a representative party be
able to 'fairly and adequately protect the interests of the class.'" Id. (quoting Fed. R.
Civ. P. 23(a)(4)). For adequacy, "courts should consider whether [the movant] 'has the
ability and incentive to represent the claims of the class vigorously, [whether the
movant] has obtained adequate counsel, and [whether] there is [a] conflict between [the
movant's] claims and those asserted on behalf of the class.'" Id. (quoting Hassine, 846
F.2d at 179). This inquiry, however, should only negatively impactthe adequacy
threshold if "the proposed lead counsel is 'so deficient as to demonstrate that it will not
fairly and adequately represent the interests of the class.'" Id. at 511-12.
As instructed by the court's June 29th order, Skeway submitted supplemental
briefs attesting to the fee arrangements and negotiations subsequent thereto. The
court finds that Skeway satisfies the adequacy requirement because Skeway has
chosen a firm with adequate credentials that has requested a reasonable one-third
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contingent fee. 6 See Neuberger v. Shapiro, 110 F. SLipp. 2d 373, 386 (E.D. Pa. 2000)
(allowing attorneys to recover 30% of recovery). The fees negotiated between Skeway
and his proposed counsel are "reasonable on their own terms." Cendant, 264 F.3d at
276. Additionally, Skeway has submitted two declarations attesting to his desire to be
lead plaintiff and expressing his understanding of the responsibilities that such a
position entails. (D.1. 10; D.1. 22)
Because Skeway has the largest financial loss and satisfies the prima facie
showing of typicality and adequacy, the court finds that Skeway is the presumptive lead
plaintiff.7 Per the PSLRA, the court will move to the second step and consider whether
Crippa has successfully rebutted the presumption.
C. Rebutting the Presumption
According to the statute, the court's presumption as to lead plaintiff may be
rebutted by evidence supplied by a member of the purported plaintiff class which states
that the presumptive lead plaintiff either (1) "will not fairly and adequately protect the
interests of the class" or (2) "is subject to unique defenses that render such plaintiff
incapable of adequately representing the class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II)(bb).
Crippa argues that Skeway does not qualify as the most adequate plaintiff
To make its determination, the court has reviewed the supplemental brief, a
letter that Skeway's counsel wrote to Skeway informing him more in-depth about the
one-third contingent fee arrangement, and Skeway's own declaration attesting to the
process he underwent to select The Rosen Law Firm.
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7 The "threshold determination of whether the movant with the largest financial
losses satisfies the typicality and adequacy requirements should be a product of the
court's independent judgment ...." Cendant, 264 F.3d at 263-64.
7
because he has unique defenses, which make his claims atypical from the class, and
his credibility is questionable. Specifically, Crippa argues that (1) Skeway's frequent
contacts with RedChip subject him to the unique defense of non-reliance; (2) because
Skeway posted on Yahoo! message boards that there was no fraudulent activities
occurring at China Natural Gas his credibility is questionable; and (3) Skeway's
credibility is further questioned because he posted "over 150 comments" on Yahoo!
message boards concerning China Natural Gas. (0.1. 13)
Skeway rebuts Crippa's arguments by stating that (1) his communications with
China Natural Gas do not create a unique defense because he did not receive any nonpublic information from RedChip; (2) his Yahoo! message board postings do not render
him inadequate because he indicated in other posts that improper internal governance
in the company was afoot; and (3) Crippa does not cite caselaw to confirm that his
postings disqualify him as a presumptive lead plaintiff. (0.1. 15)8
1. Unique defense
In a securities litigation case under Rule 10b-5, there are six elements a plaintiff
must establish to successfully bring a claim.9 See Crammer v. Bloom, 711 F. Supp.
8 The court cites to Skeway's answering brief in opposition to movant Crippa's
lead plaintiff motion (0.1. 15) because Skeway did not independently file a reply brief to
his own motion. Skeway's answering brief addresses the issues raised in Crippa's
answer.
9 The six elements are: "(1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation." In re DVI, Inc. Secs. Litig., 639
F.3d 623, 631 (3d Cir. 2011) (quoting Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, Inc., 552 U.S. 148 (2008».
8
1264, 1276 (D.N.J. 1989). One of the elements is reliance upon false statements. See
id. To prove reliance, plaintiffs use on the fraud-on-the-market theory, 10 rather than
directly on defendant's misrepresentations. See id. Here, Crippa argues that Skeway
cannot avail himself of this theory because he relied on non-market information (his
communications with RedChip), which render him atypical of the class.
According to the Third Circuit, the court's duty once the presumption has been
triggered is "not whether another movant might do a better job of protecting the
interests of the class than the presumptive lead plaintiff; instead, the question is
whether anyone can prove that the presumptive lead plaintiff will not do a 'fair[ ] and
adequate
[r job." Cendant,
264 F.3d at 268. Most importantly, the allegations upon
which a rebuttal is based must comprise "actual proof' because "allegations of
impropriety are not proof of wrongdoing." Id. at 269 (finding that absent actual
evidence, the presumption of lead plaintiff status had not been rebutted); see also
Constance Sczesny Trust v. KPMG LLP, 223 F.R.D. 319, 324-25 (S.D.N.Y. 2004)
("[C]onclusory assertions of inadequacy are, however, insufficient to rebut the statutory
presumption under the PSLRA without specific support in evidence of the existence of
an actual or potential conflict of interest or a defense to which [movant] would be
uniquely subject.").
Crippa has not offered substantial proof of his allegations that Skeway received
10 "The fraud-on-the-market theory provides a presumption that a plaintiff 'who
buys or sells stock at the price set by the market does so in reliance on the integrity of
that price,' which, in turn, depends on the accuracy of the publicly available
information." Shiring v. Tier Technologies, Inc., 244 F.R.D. 307, 312 (E.D. Va. 2007)
(quoting Basic, Inc. v. Levinson, 485 U.S. 224, 247 (1988».
9
non-public information from RedChip. The only evidence Crippa pOints to are Yahoo!
message board postings which reiterate conversations with RedChip regarding China
Natural Gas's business. (D.I. 14, ex.1, 2,15,18-19) Compare Shiring v. Tier
Technologies, Inc., 244 F.R.D. 307, 312 (E.D. Va. 2007) (denying class certification
because the lead plaintiff testified that he had face-to-face interactions with the
company's chief financial officer about the value of the stock). Not only did Skeway
submit a declaration attesting that his communications with RedChip did not concern
confidential information (D.1. 16, ex. 1 at ~ 5), but Skeway posted the information he
learned 'from RedChip on public internet message boards. (D.1. 14, ex.1, 2,15,18-19)
Because Crippa has not produced evidence proving that Skeway received information
that was non-public, Skeway's reliance claim remains intact and, therefore, he is not
atypical of the class.
2. Yahoo! message board postings
The court will consolidate Crippa's second and third arguments, which claim that
some of the al/eged 150 comments posted on Yahoo! message boards were
misleading, because both arguments go to Skeway's credibility as a presumptive lead
plaintiff. 11 Crippa relies on Kamuth v. Rodale, Inc., Civ. No. 03-742, 2005 WL 747251,
*3-4 (E. D. Pa. Mar. 30,2005), to question Skeway's credibility. In Kamuth, the court
found that plaintiffs credibility was in "serious question" because of inconsistencies
regarding his original complaint and depositions that took plaintiff nearly 15 months to
11 The parties seem to agree that Skeway used the screename "rskeway."
Although there is not evidence put forth to establish this, the court will assume it to be
true.
10
correct through the filing of an amended complaint. See id. The emphasis on Karnuth
is misplaced, however, because Skeway has not made any material misrepresentations
in his filings that would call into question his credibility.
Crippa argues that Skeway's internet postings illustrate that he did not believe
there was fraudulent activities ongoing at China Natural Gas. (0.1. 13 at 5) To
substantiate his assertions, Crippa cites snippets of longer quotes and argues they are
representative of Skeway's disbelief that there were fraudulent happenings at China
Natural Gas. For example, in his brief, Crippa argues that Skeway stated on message
boards that there were "no earnings issues/manipulation," "no fraud" and "no
fundamental financial issues." (/d.) However, upon consultation of the attached
exhibits (the internet postings), it is evident that Crippa bases his argument on a post
wherein Skeway summarizes an SEC filing, not his own personal assessment of the
company. Further, within the same posting, Skeway states that
the CEO was running the company as if it were a sole proprietorship (Le. treating
the assets as if they are all his and he calls all shots). The issue is with governance.
The CEO needs to learn to ask for parents' permission, aka Board of Directors,
before acting on major decisions.
(0.1. 14, ex. G1-2) This particular posting does not call into question Skeway's
credibility because he does not, as Crippa claims, assert there were no financial
troubles at China Natural Gas during the class period. Rather, Skeway comments
about China Natural Gas's CEO engaging in improper governance and shines light on
corporate malfeasance.
Crippa calls into question Skeway's credibility by highlighting five specific posts
11
which arguably relate to Skeway's personal financial decisions to sell stoCk. 12 Quite
frankly, the court does not know what these postings mean or how they might reflect on
Skeway's credibility. Crippa has not carried his burden in this regard. Moreover, unlike
Kamuth, Skeway has not made any material misrepresentations in filings to the court.
See 2005 WL 747251 at *3-4.
In sum, according to the statute, the presumptive lead plaintiff status can only be
rebutted if he or she "will not fairly and adequately protect the interests of the class." 15
U.S.C. § 78u-4(a)(3)(8)(iii)(II)(bb). The court is satisfied that Skeway qualifies as
presumptive lead plaintiff. Crippa has not to persuasively rebutted that presumption.
v.
CONCLUSION
For the foregoing reasons, the court finds that Skeway is the lead plaintiff and
approves his choice for lead and liaison counsel. An appropriate order shall issue.
12 On July 2,2010, Skeway posted that he is "adding shares in .40 increments
here." (0.1. 14, ex. 8 at 1) On August 8,2010, Skeway posted that he had "been
picking up Dec Calls, strike price of $10 right now, timing could be OK, we will see."
(0.1. 14, ex. Cat 1) On August 17, 2010 Skeway posted that he was "OK holding [his]
shares for the long term." (0.1. 14, ex. 0 at 1) On August 18, 2010, Skeway posted that
he was "holding [his] shares in my IRA no margin, no hurry to sell. Let the LNG plant
and River business roll out then look at the price." (0.1. 14, ex. Eat 2) On August 19,
2010, Skeway posted that he would "hold this stock at this time and wait to see how the
LNG and NG sales, Riverboat sales roll out. I will be calling Red [sic] Chip to suggest a
press release discussing LNG and NG distribution options in general without comprising
CHNG marketing information. This should help demonstrate the market potential given
the successful completion of the LNG facility." (0.1. 14, ex. Fat 1-2)
12
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