Skeway et al. v. China Natural Gas Inc et al

Filing 94

MEMORANDUM OPINION re 88 MOTION to Certify Class and for Appointment of Class Representatives and Class Counsel. Signed by Judge Richard G. Andrews on 6/18/2014. (nms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

ROBERT SKEWAY and RAIMUNDO
JO-FUNG, Individually and On Behalf of All
Others Similarly Situated,
Plaintiffs,
Civil Action No. 10-728-RGA

V.

CHINA NATURAL GAS, INC., QINAN JI,
and DAVID SHE,
Defendants.

MEMORANDUM OPINION

Seth D. Rigrodsky, Esq., Rigrodsky & Long. P.A., Wilmington, DE; Brian D. Long, Esq.,
Rigrodsky & Long. P.A., Wilmington, DE; Gina M. Serra, Esq., Rigrodsky & Long. P.A.,
Wilmington, DE, Liaison Counsel for Plaintiffs.
Laurence M. Rosen, Esq., The Rosen Law Firm, P.A., New York, NY; Phillip Kim, Esq., The
Rosen Law Firm, P.A., New York, NY, Lead Counsel for Plaintiffs.

June

1$._, 2014

~~i~
Pending before the Court is Plaintiffs' Motion for Class Certification and Appointment of
Class Representatives and Class Counsel (D.I. 88).
Plaintiffs Robert Skeway ("Skeway") and Raimundo Jo-Fung ("Jo-Fung") (collectively
"Plaintiffs") brought this action against China Natural Gas, Inc. ("CHNG"), Qinan Ji ("Ji"), and
David She ("She") (collectively "Defendants"). (D.I. 55 at 2-5). Plaintiffs' Second Amended
Complaint asserts a claim for damages for violations of the Securities Exchange Act of 1934.
(D.I. 55 at 2).
Defendant She has not been served, and he therefore has not participated in the litigation. On
April 1, 2013, CHNG filed a Notice oflnvoluntary Petition for Relief under Chapter 11 of the
Bankruptcy Code. (D.I. 70). The bankruptcy petition stayed the case against CHNG. This case
continues against Ji.
On September 10, 2013, the Clerk of the Court entered a default against Ji pursuant to Federal
Rule of Civil Procedure 55(a) for failure to appear or answer Plaintiffs' Second Amended
Complaint. (D.I. 87). Prior to moving for a default judgment against Ji, Plaintiffs seek class
certification for all similarly situated investors in CHNG. (D.I. 88 at 1).

BACKGROUND
CHNG is a Delaware corporation with its principal executive offices located in the People's
Republic of China. (D.I. 55 at 6). CHNG, through its wholly-owned subsidiaries, engages in the
business of distributing compressed natural gas in the People's Republic of China. Id. At the
time of the alleged securities law violations, Defendant Ji was the Chief Executive Officer
("CEO"), President, and Principal Executive of CHNG, and Defendant She was the Chief

Financial Officer ("CFO") of CHNG. (D.I. 55 at 7). At that time, CHNG's common stock was
actively traded on the New York Stock Exchange. (D.I. 55 at 6).
In January 2010, CHNG subsidiaries extended two loans of$9,858,240 and $4,401,000 to a

real estate company to finance a real estate development project (the "Related Party
Transactions"). (D.I. 55 at 12-14). Ji's son owned 90% of the real estate company and Ji's
nephew owned the other 10% of the company. Id. Ji approved both loans without informing or
obtaining the approval of CHNG's board of directors or the CFO. (D.I. 55 at 15). Ji ordered
CHNG's internal audit chief to conceal the Related Party Transactions and failed to disclose the
true nature of the Related Party Transactions to CHNG's board of directors and its outside auditors.
(D.I. 55 at 13-17). Generally Accepted Accounting Principles ("GAAP") and SEC regulations
required disclosure of the Related Party Transactions. (D.I. 55 at 18-23; D.I. 89 at 7).
On February 26, 2010, CHNG entered into a bank loan for $17,676,000 (the "Bank Loan").
(D.I. 55 at 10; D.I. 89 at 7). The Bank Loan was guaranteed by a CHNG subsidiary and secured
by a pledge of the assets of that CHNG subsidiary. (D.I. 55 at 10). Ji signed all of the documents
for the Bank Loan, including the guarantee and the pledge of the assets. Id. The $17 million
Bank Loan represented more than 33% of CHNG's total liabilities. (D.I. 55 at 11). GAAP and
SEC regulations also mandated disclosure of the Bank Loan. (D.I. 55 at 18-23; D.I. 89 at 7). Ji
concealed the Bank Loan from CHNG's board of directors, outside auditors, and investors by
ensuring it was not reflected in CHNG's financial statements. (D.I. 55 at 12; D.I. 89 at 7).
In June 2010, CHNG admitted that it did not disclose the Bank Loan in its 2009 annual report

originally issued on March 10, 2010 or its quarterly report issued on May 7, 2010. (D.I. 55 at
26-27; D.I. 89 at 8). Further, on September 21, 2011, CHNG reported that it had engaged in the
undisclosed Related Party Transactions in violation of GAAP and SEC regulations. (D.I. 55 at
2

36). That same day NASDAQ halted trading ofCHNG shares in response to the disclosure of the
Related Party Transactions. (D.1. 55 at 37; D.I. 89 at 8). NASDAQ delisted CHNG shares on
November 9, 2011. (D.1. 55 at 37; D.I. 89 at 8). CHNG issued four different restatements of its
financial reports in order to correct the falsities contained in its financial statements resulting from
the concealment of the Bank Loan and the Related Party Transactions. (D.I. 55 at 26-38). With
each disclosure, CHNG's share price declined, resulting in losses for investors. (D.I. 89 at 8).
Plaintiffs are investors who purchased CHNG shares. (D.1. 55 at 5). Plaintiffs' Second
Amended Complaint, filed on July 27, 2012, asserts claims for damages pursuant to§ IO(b) of the
Securities Exchange Act of1934 (15 U.S.C. § 78j(b)) and Rule lOb-5 promulgated thereunder (17
C.F.R. § 240.lOb-5) and§ 20(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78t(a)).
(D.I. 55 at 5).
On June 20, 2013, Ji was served with a copy of the summons and the Second Amended
Complaint at his home and work addresses in the People's Republic of China pursuant to Federal
Rule of Civil Procedure 4(f) and the Hague Convention. (D.1 86 at 1; D.I. 83 at 3, 6). On
September 9, 2013, pursuant to Federal Rule of Civil Procedure 55(a), Plaintiffs requested an entry
of default against Ji for failing to respond in accordance with Federal Rule of Civil Procedure 12.
(D.I. 86 at 1). The following day, September 10, 2013, the Clerk of the Court entered a default
pursuant to Rule 55(a) against Ji. (D.1. 87). Plaintiffs have not yet moved for default judgment
against Ji. (D.I. 89 at 9).
On December 23, 2013, Plaintiffs moved for their appointment as class representatives, the
appointment of class counsel, and class certification under Federal Rule of Civil Procedure 23 "on
behalf of those persons or entities that purchased or otherwise acquired the public traded common

3

stock of China Natural Gas, Inc. between March 10, 2010 and September 21, 2011, inclusive" (the
"Class"). 1 (D.I. 88 at 1; D.I. 89 at 6).

DISCUSSION
I. The Effect of the Entry of Default on Plaintiffs' Motion for Class Certification
As a threshold matter, the entry of default by the Clerk of the Court against Ji does not alter the
Court's analysis for class certification. Certification under Rule 23 remains a necessary
procedural requirement in order for the Class to recover damages. The prerequisites imposed by
Rule 23 serve "the important function of protecting absent class members whose rights may be
affected by the class certification." Davis v. Hutchins, 321F.3d641, 649 (7th Cir. 2003) (citing

Davis v. Romney, 490 F.2d 1360, 1366 (3d Cir. 1974)). As such, "relief cannot be granted to a
class before an order has been entered determining that class treatment is proper." Romney, 490
F .2d at 1366. In cases in which the district courts have entered a default judgment against a
defendant and no class has been certified, only named plaintiffs can recover damages. See

Partington v. Am Int'/ Specialty Lines Ins. Co., 443 F.3d 334, 340 (4th Cir. 2006) (holding that
class members could not use a default judgment to establish the class was judgment creditors when
the district court never formally certified the class); Hutchins, 321 F.3d at 648-49 (holding that the
district court improperly awarded class damages when no class had been certified).
However, in cases where a defendant failed to appear, an entry of default by the clerk of the
court has not prevented district courts from considering whether to certify a class prior to the entry
of a default judgment against a defendant. See Leider v. Ralfe, 2003 WL 24571746, at *8-13
(S.D.N.Y. Mar. 4, 2003) (conducting class certification analysis following defendant's default and

1

The Class excludes Defendants, Ji's and She's immediate families, present and former officers and directors of
CHNG and any subsidiary thereof, and Defendants' legal representatives, heirs, successors or assigns, and any entity
in which Defendants have or had a controlling interest. (D.I. 89 at 6 n.l).

4

denying certification for failure to meet requirements of Rule 23); Trull v. PlazaAssocs., 1998 WL
578173, at *1, *4 (N.D. Ill. Sept. 3, 1998) (denying without prejudice the certification of a class
after defendant's default); In re Industrial Diamonds Antitrust Litig., 167 F.R.D. 374, 376 n.l,
386-87 (S.D.N.Y. 1996) (certifying a class against co-defendants after one defendant's default).
An entry of default "does not change the fundamental analysis [the district court] must undertake

in deciding whether to certify the class." Trull, 1998 WL 578173, at * 1. As a policy matter,
"any other conclusion might give defendants an incentive to default in situations where class
certification seems likely." Leider, 2003 WL 24571746, at *8.
In the present case, Ji has defaulted, but Plaintiffs have not yet moved for default judgment

against him. (D.1. 89 at 9). Therefore, this Court may consider Plaintiffs' Motion for Class
Certification.

II. Class Certification and Appointment of Class Representatives under Rule 23
The Court finds that Plaintiffs have satisfied the requirements of Federal Rule of Civil
Procedure 23. "Rule 23 does not set forth a mere pleading standard. A party seeking class
certification must affirmatively demonstrate his compliance with the Rule ... "

Wal-Mart Stores,

Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011). The district court's analysis of a motion for class

certification "must be 'rigorous' and may 'entail some overlap with the merits of the plaintiffs
underlying claim."' Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1194 (2013)
(quoting Dukes, 131 S. Ct. at 2551 ). The merits of a party's claim may only be considered to the
extent ''that they are relevant to determining whether the Rule 23 prerequisites for class
certification are satisfied." Id. at 1195. "Factual determinations necessary to make Rule 23
findings must be made by a preponderance of the evidence." In re Hydrogen Peroxide Antitrust

5

Litig., 552 F.3d 305, 320 (3d Cir. 2008). 2 Parties seeking class certification under Rule 23 must
satisfy all four requirements of Rule 23(a) and at least one of the requirements of Rule 23(b). Id.
at 309-10 n.6. Plaintiffs in this case have met their burden under Rule 23. The Court will discuss
each requirement in tum.
A. Rule 23(a) Requirements

In order for class representatives to bring suit on behalf of a class of plaintiffs, the court must
find that: "(1) the class is so numerous that joinder of all members is impracticable; (2) there are
questions oflaw or fact common to the class; (3) the claims or defenses of the representative
parties are typical of the claims or defenses of the class; and (4) the representative parties will
fairly and adequately protect the interests of the class." FED. R. CIV. P. 23(a).

I.

Numerosity

First, the court must find that the potential class is "so numerous that joinder of all members is
impracticable." FED. R. CIV. P. 23(a)(l). Determinations of whether numerosity is met must be
"based upon common sense." Walling v. Brady, 1995 WL 447658, at *2 (D. Del. July 19, 1995).
"No minimum number of plaintiffs is required to maintain a suit as a class action, but generally if
the named plaintiff demonstrates that the potential number of plaintiffs exceeds [forty], the first
prong of Rule 23(a) has been met." Stewart v. Abraham, 275 F.3d 220, 226-27 (3d Cir. 2001).
Plaintiffs represent to the Court that, during the proposed class period, 1.2 million shares of
CHNG stock were traded on a weekly basis, demonstrating the existence of a large class of
potential plaintiffs. (D.I. 55 at 45; D.I. 89 at 12). Additionally, at the commencement of this

2

Plaintiffs cite Chiang v. Veneman, 385 F.3d 256, 262 (3d Cir. 2004) for the proposition that in ruling on class
certification, "the substantive allegations of the complaint must be taken as true." (D.1. 89 at 10). In Hydrogen
Peroxide, the Third Circuit identified Chiang as bad law on this point, stating that "[n]o supporting analysis of Rule 23
jurisprudence accompanied this statement, which contradicts and conflicts with" existing Third Circuit precedent.
552 F.3d at 318 n.18.

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action, Plaintiffs' counsel issued a press release seeking individuals to serve as class
representatives. (D.I. 89 at 12). Plaintiffs' counsel represents that counsel received 105
certifications from potential class members claiming to have suffered losses from their investment
in CHNG during the same period as the Class. (D.I. 90 at 1). Therefore, the Class is sufficiently
numerous.

2. Commonality
Second, the court must find "there are questions oflaw or fact common to the class." FED. R.

CN. P. 23(a)(2). "The commonality requirement will be satisfied if the named plaintiffs share at
least one question of fact or law with the grievances of the prospective class." Baby Neal for and

by Kanter v. Casey, 43 F.3d 48, 56 (3d Cir. 1994). Commonality is not satisfied by a mere
showing that members of the proposed class "have all suffered a violation of the same provision of
law." Dukes, 131 S. Ct. at 2551. Rather, claims common to the entire class "must depend on a
common contention ... [that is] of such a nature that it is capable of [class-wide] resolution ... [and]
that determination of its truth or falsity will resolve an issue that is central to the validity of each
one of the claims in one stroke." Id.

Courts in this District have previously held that

"commonality was satisfied where the matter involved alleged violations of Sections 1O(b ) ... and
20(a) of the Securities Exchange Act." In re Heckmann Corp. Sec. Litig., 2013 WL 2456104, at
*10 (D. Del. June 6, 2013) (citing In re DaimlerChrysler AG Sec. Litig., 216 F.R.D. 291, 296 (D.
Del. 2003)).
In a cause of action for violations of§ 1O(b) and Rule 1Ob-5, Plaintiffs must show "(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." Amgen, 133 S. Ct. at
7

1192 (quotingMatrixxlnitiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011)). Plaintiffs
allege Defendants failed to disclose material information regarding the Related Party Transactions
and the Bank Loan; Defendants did so knowingly or with reckless disregard; and, Plaintiffs and the
Class sustained losses in the same way as a result of Defendants' omissions. (D.I. 89 at 13-14;
D.I. 55 at 48-51 ). Thus, Plaintiffs' § 1O(b) and Rule 1Ob-5 claim raises common questions of fact
and law capable of class-wide resolution.
Plaintiffs also claim that Ji, as President and CEO, is joint and severally liable for any
violations of the Securities Exchange Act by CHNG as a control person under§ 20(a). (D.I. 89 at
13; D.I. 55 at 51-53). Whether Ji was a "control person" within the meaning of§ 20(a) is also a
common question of fact. Thus, the commonality requirement is satisfied.

3. Typicality
Third, the court must find ''the claims or defenses of the representative parties are typical of the
claims or defenses of the class." FED. R. CIV. P. 23(a)(3). The typicality requirement "is
intended to assess whether the action can be efficiently maintained as a class" and "assure that the
absentees' interests will be fairly represented." Baby Neal, 43 F.3d at 57. "[C]ases challenging
the same unlawful conduct which affects both the named plaintiffs and the putative class usually
satisfy the typicality requirements irrespective of the varying fact patterns underlying the
individual claims." Id. at 58. "'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." Id. (quoting Hoxworth v. Binder, Robinson
& Co., Inc., 908 F.2d 912, 923 (3d Cir. 1992)). The Third Circuit has identified "three distinct,

though related, concerns" in assessing typicality. In re Schering Plough Corp. ERISA Litig., 589
F.3d 585, 599 (3d Cir. 2009). First, the legal theory and factual circumstances underlying that
8

theory advanced by the proposed class representatives "must be generally the same" as the claims
of the proposed class. Id.

Second, the class representatives "must not be subject to a defense that

is both inapplicable to many members of the class and likely to become a major focus of the
litigation." Id.

Third, the interests and incentives of the class representatives "must be

sufficiently aligned with those of the class." Id.
Prior to the filing of the Second Amended Complaint, an order was entered naming Sekway as
Lead Plaintiff in this action. (D.I. 24). In the accompanying opinion, the Court found Skewayto
be "the most adequate plaintiff' for having met the requirements of the Private Securities
Litigation Reform Act ("PLSRA") (15 U.S.C. § 78u-4(a)(3)(B)), including satisfying the
typicality and adequacy requirements of Rule 23(a). Vandevelde v. China Natural Gas, Inc., 277
F.R.D. 126, 132, 135 (D. Del. 2011); (D.I. 23 at 5, 13). The party opposing Skeway's
appointment as Lead Plaintiff failed to produce material evidence that Skeway was subject to
unique defenses or that Skeway would not fairly represent the interests of the proposed Class. Id.
at 133-35; (D.I. 23 at 9-13).
As with Skeway's appointment as Lead Plaintiff, both Skeway and Jo-Fung meet the typicality
requirement as Class Representatives. First, Plaintiffs allege the same violations of§ 1O(b) and §
20(a) of the Securities Exchange Act as the proposed Class based on the same factual allegations
regarding Defendants' failure to disclose the Related Party Transactions and the Bank Loan. (D.I.
89 at 15). Second, Plaintiffs are not subject to unique defenses, because, like members of the
Class, Plaintiffs purchased CHNG shares on the open market. Id.

Third, Plaintiffs' interests and

incentives are aligned with the Class, as Plaintiffs seek to recover losses suffered as a result of
Defendants' omissions. Id. Therefore, the typicality requirement is satisfied.

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4. Adequacy

Fourth, the court must find that the proposed class representatives "will fairly and adequately
protect the interests of the class." FED. R. CIV. P. 23(a)(4). To meet the adequacy requirement,
the district court must find that (1) the class representatives' interests do not "conflict with those of
the class" and (2) the proposed class counsel are "capable of representing the class." Newton v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 185 (3d Cir. 2001) (citing Gen. Tel.
Co. ofSw. v. Falcon, 457 U.S. 147, 157 n.13 (1982)).

The Court previously found that Skeway established his prima facie compliance with the
adequacy requirement and that the opposing party did not present material evidence that Skeway
could not meet the adequacy requirement of Rule 23.

Vandevelde, 277 F.R.D. at 132-33, 135;

(D.I. 23 at 7-8, 13). The Court found that Skeway had retained adequate counsel, the proposed
Lead Counsel and Liaison Counsel for the Class, and that Skeway had no conflict of interest with
the Class. Id. at 131, 132-33; (D.I. 23 at 4, 7-8)
As with Skeway's appointment as Lead Plaintiff, both Skeway and Jo-Fung are appropriate
class representatives as their interests align with the interests of the Class. First, Plaintiffs allege
they purchased CHNG shares at an artificially inflated price during the same period as the Class.
(D.I. 55 at 5). Plaintiffs, like the proposed Class, seek to recover their losses resulting from
Defendants' omissions. (D.I. 89 at 16). Further, Plaintiffs have affirmatively represented that
they are willing to prosecute this action on behalf of the Class. (D.I. 90-1 at 45, 49; D.I. 89 at 16).
Second, the Class attorneys are capable of representing the Class. Proposed Lead Counsel
and Liaison Counsel are experienced in both complex class litigation and securities actions. (D.1.
90-1). 3 Therefore, the adequacy requirement is satisfied.

3

The Court has seen both Lead and Liaison Counsel in multiple previous securities litigation.

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B. Rule 23(b)(3)
If all requirements of Rule 23( a) are met, a class action seeking an award of damages is
appropriate under Rule 23(b)(3) if"the court finds that the questions oflaw or fact common to
class members predominate over any questions affecting only individual members, and that a class
action is superior to other available methods for fairly and efficiently adjudicating the
controversy." FED. R. CIV. P. 23(b)(3).

1. Predominance
Under the first criterion of Rule 23(b )(3), the court must find that "questions oflaw or fact
common to class members predominate over any questions affecting only individual members."
FED. R. CIV. P. 23 (b )(3). The predominance criterion is a "far more demanding standard" than
the commonality requirement of Rule 23(a)(2) and "tests whether proposed classes are sufficiently
cohesive to warrant adjudication by representation." Amchem Products, Inc. v. Windsor, 521

U.S. 591, 623-24 (1997). To determine whether common issues of fact or law predominate over
individual issues, the court must "examine the elements of plaintiffs' claim." Hydrogen

Peroxide, 552 F.3d at 311 (citing Newton, 259 F.3d at 181). "If proof of the essential elements of
the cause of action requires individual treatment, then class certification is unsuitable." Newton,
259 F.3d at 172.
First, Plaintiffs' § 1O(b) and Rule 1Ob-5 claim does not require individual treatment. As
previously stated, a cause of action pursuant to § 1O(b) and Rule 1Ob-5 requires Plaintiffs to prove
Defendants made a material misrepresentation or omission; with scienter; in connection with the
purchase or sale of a security; upon which Plaintiffs relied; causing Plaintiffs economic losses.

Amgen, 133 S. Ct. at 1192. Plaintiffs' claim raises common questions oflaw and fact regarding
11

whether Defendants failed to disclose material facts regarding the Related Party Transactions and
the Bank Loan; whether the Defendants knowingly omitted information or acted with reckless
disregard; and, whether Defendants' omission caused class members to suffer losses. (D.I. 89 at
17-18; D.I. 55 at 48-51).
The issue of whether Class members relied on Defendants' omissions does not require
individual treatment in this case. For a § 1O(b) and Rule IOb-5 claim, the element ofreliance
"would ordinarily preclude certification of a class action seeking money damages because
individual reliance issues would overwhelm questions common to the class." Id. at 1193.
However, for § 1O(b) and Rule 1Ob-5 claims "involving primarily a failure to disclose" by persons
with a duty to disclose, "positive proof of reliance is not a prerequisite to recovery." Affiliated
Ute Citizens of Utah v. U.S., 406 U.S. 128, 153 (1972). "All that is necessary is that the facts

withheld be material in the sense that a reasonable investor might have considered them important
in the making of this decision." Id. at 153-54. Conversely, there is no presumption ofreliance
for alleged misrepresentations. Johnston v. HBO Film Mgmt., Inc., 265 F.3d 178, 192 (3d Cir.
2001 ). Where plaintiff alleges both misrepresentation and omissions, the district court must
'"analyze the plaintiffs allegations, in light of the likely proof at trial, and determine ... ' on a case
by case basis, whether the offenses can be characterized primarily as omissions or
misrepresentations." Id. (quoting Sharp v. Coopers &Lybrand, 649 F.2d 175, 187 (3d Cir.
1981)).
Here, Defendants' actions constitute omissions. The Second Amended Complaint alleges
that Defendants knowingly concealed the Bank Loan, which represented more than 33% of
CHNG's total liabilities. (D.1. 55 at 12; D.I. 89 at 21). As a result, the Bank Loan was omitted
from CHNG's May 2010 quarterly report and its 2009 annual report. (D.1. 55 at 3). Further,
12

Plaintiffs allege that Defendant Ji failed to disclose to CHNG's board and internal auditors the
Related Party Transactions. (D.I. 55 at 4). As a result, the Related Party Transactions were not
disclosed as related-party transactions in CHNG 2010 annual report, its quarterly reports, or its
proxy statements. Id.

Plaintiffs allege that CHNG stock prices declined with the discovery of

each non-disclosure. Id. Though Plaintiffs allege that CHNG's financial statements were false
and misleading, the underlying conduct that caused the misrepresentations are Defendant's
omissions. (D.I. 55 at 2-4). Therefore, the alleged conduct central to Plaintiffs' claims is
properly characterized as omissions.
Defendants' omissions are also material. Both GAAP and SEC regulations obligated
Defendants to disclose the Bank Loan and Related Party Transactions. (D.I. 55 at 18-23; D.I. 89
at 20). Plaintiffs allege that as a result of the omissions, Plaintiffs and the Class purchased CHNG
shares at an inflated price. (D.I. 89 at 21). Further, disclosure of the Bank Loan and Related
Party Transactions caused CHNG's share price to decline and led NASDAQ to halt trading and
delist CHNG's shares. Id. Because the disclosure of the omissions is alleged to have resulted in
the decline in price and delisting of CHNG's share from the NASDAQ stock exchange, the
omissions are material as a reasonable investor would have deemed the omissions important in
deciding whether to purchase CHNG shares. Thus, Plaintiffs are entitled to a presumption of
reliance under Affiliated Ute. Therefore, Plaintiffs' § 1O(b) and Rule 1Ob-5 claim does not require
individual treatment.
Second, Plaintiffs' claim under§ 20(a) does not require individual treatment. The issue of
whether Ji was a "control person" within the meaning of the statute is a common question of fact
capable of class-wide resolution. (D.I. 55 at 52-53)

13

Therefore, Plaintiffs' claims predominantly raise questions oflaw and fact capable of
class-wide resolution. The only issue requiring individual treatment will be the computation of
damages for the Class members. (D.l. 89 at 18). Therefore, the predominance requirement of
Rule 23(b)(3) is met.
2. Superiority

Under the second criterion of Rule 23(b )(3), the district court must find that "class action is
superior to other available methods for fairly and efficiently adjudicating the controversy."

FED.

R. CN. P. 23(b)(3). Rule 23(b)(3) enumerates a non-exhaustive list of factors to consider:
(A) the class members' interests in individually controlling the prosecution ... of
separate actions; (B) the extent and nature of any litigation concerning the
controversy already begun by... class members; (C) the desirability... of
concentrating the litigation of the claims in the particular forum; and (D) the likely
difficulties in managing a class action.
Id. The Courts of Appeals have noted that "'a class action in a federal securities action may well

be the appropriate means for expeditious litigation of the issues, because a large number of
individuals may have been injured, although no one person may have been damaged to a degree
which would have induced him to institute litigation solely on his own behalf."' Eisenberg v.
Gagnon, 766 F.2d 770, 785 (3d Cir. 1985) (quoting Green v. Wolf Corp., 406 F.2d 291, 296 (2d

Cir. 1968)).
Here, Plaintiffs convincingly represent to the Court that maintaining separate claims is
impractical as the number of potential Class members is too numerous and the typical claims of the
Class are too small. (D.l. 89 at 23). Additionally, because CHNG's shares were sold on a
national stock exchange and the Class is likely dispersed nation-wide, it is desirable that litigation
of these claims be concentrated in a single forum. Id. This District is a logical choice as CHNG
is a Delaware corporation. (D.I. 89 at 7). Further, there are no foreseeable management issues
14

I

I

which preclude maintaining this action as a class action. Therefore, the superiority requirement
of Rule 23(b)(3) is met.

III. Appointment of Class Counsel
Lastly, Plaintiffs' Lead Counsel and Liaison Counsel satisfy the requirements of Rule
23(g)(l )(A) for the appointment of as class counsel. In appointing class counsel, the district court
must consider: "(i) the work counsel has done in identifying or investigating potential claims in the
action; (ii) counsel's experience in handling class actions, other complex litigation, and the types of
claims asserted in the action; (iii) counsel's knowledge of the applicable law; and (iv) the resources
that counsel will commit to representing the class." FED. R. Crv. P. 23(g)(l)(A).
Here, the proposed counsel for the Class has already committed resources to identifying class
representatives and potential class members. (D.I. 89 at 12). Additionally, Lead Counsel has
already pursued the interests of the Class by defending the initial Complaint in response to a
Motion to Dismiss, filing the Second Amended Complaint, and engaging in efforts to serve the
Defendants residing in the People's Republic of China. (D.I. 89 at 24). Further, Lead Counsel
has a history of successfully prosecuting securities class actions. (D.I. 90-1 ). Therefore, the
Court finds that appointment of Lead and Liaison Counsel for the Class is appropriate.

CONCLUSION
For the reasons discussed above, Plaintiffs' Motion for Class Certification and Appointment of
Class Representatives and Class Counsel is granted. A separate order will be entered.

15