Dartell v. Tibet Pharmaceuticals, Inc. et al
OPINION fld. Signed by Judge Madeline C. Arleo on 2/22/16. (sr, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
ROBIN JOACHIM DARTELL, et al.,
Individually and on Behalf of All Others
Civil Action No. 14-3620
TIBET PHARMACEUTICALS, INC., et al.,
ARLEO, UNITED STATES DISTRICT JUDGE,
This matter comes before the Court by way of Plaintiffs Obasi Investment Limited, Jingli
Shao, Robin Dartell, Lixin Wu, and Jason Helton’s (collectively “Plaintiffs”) motion for class
certification. Dkt. No. 156. Defendants Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, L.
McCarthy Downs III, and Hayden Zou oppose the motion on typicality and adequacy grounds.
Dkt. No. 168. For the reasons stated below, the motion is granted and the class will be certified.
This matter concerns allegedly false statements and material omissions contained in Tibet
Pharmaceuticals, Inc.’s (“Tibet”) registration statement and prospectus issued in connection with
its initial public offering on January 24, 2011. Tibet owns two subsidiaries: China Tibetan
Pharmaceuticals Limited, incorporated in Hong Kong, and Yibo Information Consulting
(Shenzen) Company Ltd., incorporated in China. 1
Other defendants are included in this matter, including defendants who signed the
Registration Statement and Prospectus or otherwise approved of its contents. Defendant Taylor
The proposed class period extends from January 24, 2011, the date of Tibet’s
misstatements, to April 3, 2012, when Tibet stock halted trading on NASDAQ and the stock
plummeted in value. Allegedly, Tibet made several misrepresentations by (1) overstating Tibet’s
assets, (2) misrepresenting Tibet’s indebtedness, and (3) failing to disclose a series of adverse court
judgments for millions of dollars entered against Tibet and the freezing of the assets of Tibet’s
sole operating entity.
Tibet is a British Virgin Islands Corporation with its headquarters and operations located
in China. In its initial public offering (“IPO”), Tibet sold three million shares of Tibet common
stock for $16.5 million to investors.
Though Tibet’s registration statement and prospectus
represented Tibet as financially sound, it had actually defaulted on $4.54 million in loans from the
Agricultural Bank of China. On September 10, 2010, a Chinese court entered judgment against
Tibet for $4.54 million. When Tibet failed to pay, the court entered an order permitting the
Agricultural Bank of China to seize all Tibet’s assets. Tibet’s Registration Statement and
Prospectus for its IPO did not disclose any of this information.
On February 17, 2012, the Agricultural Bank of China began to auction off the assets of
Yunnan Tibetan, Tibet’s operating subsidiary. The same day, a Chinese website disclosed, in
Chinese language, that Tibet’s assets were being sold. On February 27, 2012, Tibet issued a press
release stating that the announcement of the public auction was “untrue and incorrect.” On April
Z. Guo has been Tibet’s Chief Executive Officer and Director since 2010. Defendant Hong Yu
has been Tibet’s Chairman of the Board of Directors since April 2010. Defendant Sabrina Y. Ren
has served as Tibet’s Chief Financial Officer since 2010. Defendants Wenbo Chen, Youhang
Peng, and Solomon Chen all served as Tibet Directors since April 2010. All of these individuals
signed the Registration Statement. Defendants L. McCarthy Downs III and Hayden Zou were
designated observers for Anderson & Strudwick to Tibet’s Board of Directors in connection with
the IPO. Finally, Acquavella Chiarelli, Shuster, Berkower & Co. LLP is a certified public
accountant and advisory firm headquartered in New Jersey that provided an unqualified audit
opinion in Tibet’s Registration Statement and Prospectus.
3, 2012, NASDAQ halted the trading of Tibet’s stock for “additional information
requested.” Tibet failed to provide that information. Its stock was subsequently delisted on
NASDAQ and began trading over the counter on pink sheets on April 27, 2012. The stock became
essentially worthless, dropping to $.01 per share.
The following class representatives sought class certification initially: Obasi Investment
Limited, Jingli Shao, Lixin Wu, Jason Helton, and Robin Dartell. Rosen Decl. Exs. 2-6. Sean
Carithers was subsequently proposed as an additional class representative to provide a class
representative who purchased securities directly from the IPO. Fuks Decl. Ex. 1. All of these
class representatives purchased shares of Tibet during the proposed class period.
Defendants moved to dismiss in July 2014. Dkt. Nos. 96, 101-102, 104. Those motions
were denied. Dkt. No. 156. Subsequently, the parties engaged in class discovery and filed the
instant motion for (and opposition to) class certification.
Defendants oppose class certification on two grounds. First, they argue the proposed lead
plaintiffs are not typical of the class because (1) no lead plaintiff has produced evidence showing
they purchased shares traceable to the IPO and (2) no lead plaintiff suffered damages, because they
purchased their shares over a year after the IPO and weeks after information concerning the fraud
was disclosed, so the market had already incorporated the information concerning the fraud.
Second, Defendants oppose certification of particular proposed class representatives because the
timing of their purchase, their performance in depositions, and a variety of credibility issues
preclude them from adequately representing the class. The Court addresses these issues in turn.
Federal Rule of Civil Procedure 23 sets forth the requirements that must be fulfilled before
a case may proceed as a class action. There are four basic prerequisites for class action treatment:
(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law 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). These are known as the numerosity, commonality, typicality, and adequacy
requirements. See In re Constar Int’l Inc. Sec. Litig., 585 F.3d 774, 780 (3d Cir. 2009). Plaintiffs
must also meet the requirements of one of Rule 23(b)’s provisions. Id. Here, Lead Plaintiffs seek
certification under Rule 23(b)(3), which permits certification only if “the court finds that the
questions of law 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). “The twin requirements of
Rule 23(b)(3) are known as predominance and superiority.” In re Hydrogen Peroxide Antitrust
Litig., 552 F.3d 305, 310 (3d Cir. 2008).
A plaintiff “must affirmatively demonstrate” that Rule 23’s requirements are satisfied,
Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011), by providing actual evidentiary
proof that the requirements are met. Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432
(2013). Therefore, a reviewing court must conduct a “rigorous analysis” of each of Rule 23’s
requirements, Dukes, 131 S. Ct. at 2551, and must be satisfied that each requirement is established
by a preponderance of the evidence. In re Blood Reagents Antitrust Litig., 783 F.3d 183, 187 (3d
Cir. 2015). This analysis frequently overlaps with “the merits of the plaintiff’s underlying
claim.” Dukes, 131 S. Ct. at 2551. The merits may be considered, however, “only to the extent .
. . that they are relevant to determining whether the Rule 23 prerequisites for class certification are
satisfied.” Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1194-95 (2013). To
the extent facts relevant to the class certification question are in dispute, it is appropriate for the
Court to probe beyond the complaint. Wal–Mart Stores, Inc., 131 S. Ct. at 2551-52. The Court
should not merely accept allegations in the complaint without inquiry. See In re Schering Plough
Corp. ERISA Litig., 589 F.3d 585, 603 (3d Cir. 2009).
A. Uncontested Class Certification Requirements
This matter alleges securities violations under Section 11 and Section 12. See 15 U.S.C. §
77k(a); 15 U.S.C. § 77l(a)(2). To establish a Section 11 claim, Plaintiffs must show that Tibet’s
registration statement “(1) contained an untrue statement of material fact; (2) omitted to state a
material fact required to be stated therein; or (3) omitted to state a material fact ‘necessary to make
the statements therein not misleading.” Cal. Pub. Employees Ret. Sys. v. Chubb Corp., 394 F.3d
126, 167 (3d Cir. 2004) (quoting 15 U.S.C. § 77k(a)). “To state a prima facie claim under Section
12(a)(2), the plaintiff must allege the purchase of securities pursuant to a materially false or
misleading prospectus or oral communication.” In re Suprema Specialties, Inc. Sec. Litig., 438
F.3d 256, 269-70 (3d Cir. 2006). Section 15 also extends liability to anyone “who controls a
violator of Section 11 or Section 12.” Id. at 284 (citing 15 U.S.C. § 77o). It is uncontested that
Plaintiffs are numerous and that evidence of the relevant disputes is predominantly common.
Numerosity is met here. Numerosity requires that “the class is so numerous that joinder of
all members is impracticable.” In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions,
148 F.3d 283, 309 (3d Cir. 1998); Fed. R. Civ. P. 23(a)(1). Generally, if the “potential number of
plaintiffs exceeds 40, the [numerosity] prong of Rule 23(a) has been met.” Stewart v. Abraham,
275 F.3d 220, 226-27 (3d Cir. 2001) (holding class of 67 people was sufficiently numerous). Here,
there were three million shares of stock sold in the IPO, and the press release published by
Plaintiffs’ Counsel seeking individuals to serve as class representatives received approximately
166 certifications from class members who claimed to have sustained losses investing in Tibet
stock during the Class Period. Rosen Decl. ¶ 8.
A proposed class meets the commonality requirement if “there are questions of law or fact
common to the class.” Prudential, 148 at 309; Fed. R. Civ. P. 23(a)(2). “Commonality does not
require an identity of claims or facts among class members; [i]nstead, 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.” Loewen, 233 F.R.D. at 162; Johnston v. HBO Mgmt.,
Inc., 265 F.3d 178, 184 (3d Cir. 2001). “Where [a]ll plaintiffs, both individual representatives and
member of the class, seek to establish the defendants’ fraudulent conduct under the federal
securities laws, commonality is found to exist.” In re Schering-Plough Corp./ENHANCE Sec.
Lit., No. 08-397, 2012 WL 4482032, at *4 (D.N.J. 2012).
Many common questions of law and fact exist here. For example, both the existence of
misrepresentations in the Registration Statement and Prospectus and the adequacy of Acquavella’s
audit investigation are common disputes to be resolved for all members of the class. The Plaintiffs
all seek to establish that Defendants provided fraudulent statements and material omissions in their
Registration Statement and Prospectus. Commonality is met.
Rule 23(b)(3)’s predominance inquiry requires the Court to determine whether common
questions of law or fact predominate over questions affecting only individual class
members. “Plaintiffs need not have identical claims to be certified as a class, but if the facts present
individual questions these must be outweighed by common ones.” Loewen, 233 F.R.D., at 167.
The Supreme Court has found that “Predominance is a test readily met in certain cases alleging
consumer or securities fraud.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997). In
cases brought under Section 11, there is no requirement to prove individualized reliance or
knowledge of the alleged misrepresentations. In re Constar Int’l. Inc. Sec. Litig., 585 F.3d 774,
784 (3rd Cir. 2009).
Defendants do not challenge predominance here. The essential dispute here is plainly
misrepresentations. Because Defendants do not point to anything to defeat predominance, and all
facially critical issues are common, the Court finds common issues of fact and law predominate in
B. Contested Class Certification Requirements
“While commonality ‘looks at the relationship among the class members generally,’
typicality focuses on ‘the relationship between the proposed class representative and the rest of the
class.’” In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., No. 05-1151, 2013 WL 396117,
at *5 (D.N.J. Jan. 30, 2013) (citing 1 W. Rubenstein, Newberg on Class Actions § 3:26 (5th ed.
2011)). Three requirements must be met in order to satisfy typicality. First, the proposed class
representatives’ claims must “[arise] from the same event or practice or course of conduct” and be
“based on the same legal theory” as the claims of the class. Baby Neal, 43 F.3d at 58; see also In
re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 599 (3d Cir. 2009); In re Warfarin Sodium
Antitrust Litig., 391 F.3d 516, 532 (3d Cir. 2004). Second, class representatives’ claims “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.” Schering Plough, 589 F.3d at 599. Finally, “the interests of the
class and the class representatives” must be aligned “so that the latter will work to benefit the entire
class through the pursuit of their own goals.” Prudential, 148 F.3d at 311.
Defendants challenge the typicality of the proposed class representatives on two
grounds. First, Defendants argue that the class representatives cannot trace their shares to the
IPO. Second, the proposed class representatives purchased their shares after purported corrective
disclosures on February 17, 2012 and February 27, 2012. The proposed class representatives,
therefore, cannot be typical of the class because they are subject to the unique defense that they do
not have standing.
Neither of these arguments preclude class certification here because Plaintiffs have
provided an alternate class representative to which these arguments do not apply. Proposed lead
Plaintiff Sean Carithers purchased 6,000 shares of Tibet stock in the IPO directly from Anderson
& Strudwick. Fuks Decl. Ex. 1. The timing and directness of his purchase ensures that at least
one class representative will be able to represent the class, even if Defendants’ arguments that
post-IPO purchases cannot be traced to the IPO were to prevail on summary judgment.
Furthermore, Defendants’ argument that Plaintiffs cannot trace their shares to the IPO fails
at this stage. “By its terms, Section 11 provides that ‘any person acquiring’ a security issued
pursuant to a materially false registration statement may sue (unless the purchaser knew about the
false statement).” In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 274 n.7 (3d Cir. 2006)
(citing 15 U.S.C. § 77k(a)); see also In re FleetBoston Fin. Corp. Sec. Litig., 253 F.R.D. 315, 345
(D.N.J. 2008) (discussing tracing requirement). The Third Circuit has stated that shares purchased
in the secondary market—i.e. not the public market—“would not be linked to a registration
statement filed during the class period, and the § 11 claim would fail.” Shapiro v. UJB Fin. Corp.,
964 F.2d 272, 286 (3d Cir. 1992), as amended (May 27, 1992). With respect to shares in the public
market, “[t]racing may be established either through proof of a direct chain of title from the original
offering to the [plaintiff] ... or through proof that the [plaintiff] bought her shares in a market
containing only shares issued pursuant to the allegedly defective registration statement.” In re
IPO, 471 F.3d at 31 n. 1 (alteration and ellipses in original) (quotation marks omitted); see also In
re Smart Techs., Inc. S’holder Litig., 295 F.R.D. 50, 61 (S.D.N.Y. 2013).
As of the date of the Registration Statement and Prospectus, 11,812,500 shares of Tibet
stock were outstanding. Three million shares were subsequently issued in the IPO. 33,400 shares
were then issued to Trilogy Partners. Lockup agreements precluding sale of the restricted shares
expired on April 24, 2011 and August 2, 2011, and Defendants claim that no class representative
can trace their stock to the public offering because there are over fourteen million shares of Tibet
Plaintiffs reply that the public market for Tibet securities contained only shares issued
during the IPO. There was no public market for Tibet shares prior to the IPO. Fuks Decl. Ex. 2.
All shares issued outside of the IPO were restricted stock, which required (1) a legal opinion
proving exemption from registration requirements and (2) removal of the restricted legend or filing
of registration statement concerning the stock in order to sell the shares on the public stock
market. No registration statement for these shares was filed with the SEC, nor was any form 4
filed evidencing insider sales of stock. Defendants produce no contrary evidence to show that any
of the restricted shares were sold or could be sold on the public market. As such, Plaintiffs have
produced evidence indicating that the only shares available on the public market were those issued
in the IPO. 2 See Perry v. Douyuan Printing, Inc., 2013 WL 4505199, at *10-11 (S.D.N.Y. Aug.
To the extent additional information on this issue becomes available, the parties may revisit
this issue on summary judgment. See In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256,
274 n.7 (3d Cir. 2006) (“If, as appellees suggest, plaintiffs have misrepresented the circumstances
22, 2013) (where only one registration statement was issued on behalf of a company, all shares
could be traced to that statement); In re Smart Technologies, Inc. S'holder Litig., 295 F.R.D. 50,
61-62 (S.D.N.Y. 2013) (“Put simply, any individual who can show that his or her shares were
issued under/registered to the allegedly defective registration statement—regardless of whether
the shares were acquired directly from the issuer or in the aftermarket—has standing to pursue a
section 11 claim.”).
Defendants’ second argument that the proposed class representatives (other than Mr.
Carithers) purchased their shares after certain corrective disclosures in this case similarly does not
prevail because Defendants have not shown that either of the purported disclosures were
That “the plaintiff knew of the untruth or omissions at the time of his or her acquisition of
the security,” is a dispositive affirmative defense to a section 11 claim. In re Initial Pub. Offering
Sec. Litig., 483 F.3d 70, 73 n.1 (2d Cir. 2007). If such a defense exists for the proposed class
plaintiff, but not the class, it may render that representative not typical. See Klein v. A.G. Becker
Paribas Inc., 109 F.R.D. 646, 652 (S.D.N.Y. 1986); cf. New Jersey Carpenters Health Fund v.
Residential Capital, LLC, 272 F.R.D. 160, 170 (S.D.N.Y. 2011), aff'd 477 F. App'x 809 (2d Cir.
Two potential disclosures are disputed here. 4 One occurred on February 17, 2012, when a
Chinese website posted, in Chinese, that Tibet’s assets were being auctioned. The second occurred
of their stock purchases and do not in fact have standing, appellees can raise that matter at the
summary judgment stage after discovery.”).
As before, Plaintiffs’ alternate class representative indisputably purchased shares before
any corrective disclosure, so this dispute concerns only which proposed class representatives will
be approved, not whether the class may be certified.
Plaintiffs argue that the corrective disclosure actually occurred on April 3, 2012, when
NASDAQ halted trading in Tibet stock.
on February 27, 2012, when Tibet issued a press release announcing that the company would
conduct an investigation into allegations that its assets were being auctioned, and denounced those
allegations as false.
Defendants’ only citation in support of the alleged February 17, 2012 corrective disclosure
is Plaintiff’s Amended Complaint at paragraph 58. Dkt. No. 50. This paragraph merely states that
a Chinese-language website announced that Tibet’s assets were being auctioned. Court actions in
China were also published on the Supreme People’s Court website.
Am. Compl. ¶
61. Subsequently, Tibet’s chairman denied the rumors of a public auction. Id. ¶ 59. The Court is
not convinced that this disclosure on a Chinese-language website is sufficient to constitute a
corrective disclosure, especially where that disclosure is repudiated by management in an official
press release shortly thereafter. See In re Fuwei Films Sec. Litig., 634 F. Supp. 2d 419, 438
(S.D.N.Y. 2009) (holding that a Chinese-language article in Chinese news media did not constitute
public information). Defendants point to no evidence that this disclosure actually was known to
the relevant public or that the market quickly priced in the disclosure. At class certification, the
Court will not manufacture facts, and here, no facts show that the disclosure in Chinese on a
website constituted a corrective disclosure.
Furthermore, these rumors were subsequently denied by the relevant company
management in the February 27, 2012 press release. Far from being a corrective disclosure of all
allegedly actionable fraud, the February 27, 2012 press release entrenched the alleged fraud by
stating that the rumors were “untrue and incorrect” and were the result of a completely “mistaken
report.” Am. Compl. ¶ 59. The company announced that it would conduct a further investigation,
but there is no indication that the outcome of that investigation was already known. The Court
therefore cannot find on the information available at this stage that either the February 17, 2012
website posting or the February 27, 2012 press release constituted corrective disclosures which
would preclude certification of a class following those disclosures. Defendants’ argument that
Plaintiffs’ class representatives are not typical fails. 5
Defendants contest whether the proposed lead plaintiffs are adequate to represent the
class. Rule 23(a)(4) permits class certification when the class representatives “will fairly and
adequately protect the interests of the class.” Fed. R. Civ. P. 23(a)(4). There are two criteria to
determine adequacy. “First, the adequacy of representation inquiry tests the qualifications of the
counsel to represent the class… Second, it serves to uncover conflicts of interest between named
parties and the class they seek to represent.” Prudential, 148 at 312.
There is no contest that Plaintiffs’ counsel is adequate to represent the class in this
matter. See Rosen Decl. Ex. 1. Defendants do, however, raise a variety of concerns about
individual class representatives. Robin Dartell purchased shares after the misrepresentations were
disclosed. Jason Helton posted a comment on a message board indicating Tibet was a scam (Mr.
Helton claims this was a copy and paste of someone else’s message or a rhetorical response). Lixin
Wu has some difficulty understanding and responding in English. Jingli Shao failed to cooperate
with certain questions from counsel, including his other email addresses and stock trades unrelated
to Tibet, and did not know certain details of the case. Finally, Edmund Obasi sought to pump up
Tibet stock through a variety of internet postings on message boards using different accounts, and
claimed he was “al auditor” in a comment (he claims this was a typo).
Finally, the date of any corrective disclosure and whether such disclosure precludes recovery
under Section 11 is a common question, not an individual one. See In re Constar Int’l Inc. Sec.
Litig, 585 F.3d 774, 785 (3d Cir. 2009). This question is one that is cleanly amenable to resolution
on a classwide basis.
None of these issues are substantial enough to preclude any of the class representatives
from effectively representing the class here. The timing of Robin Dartell’s purchase coincides
with many others in the class and does not preclude him from being adequate. Defense counsel’s
concerns about Lixin Wu and Jingli Shao seem to stem only from minor difficulties during
depositions which do not rise to the level of precluding them from representing the class. Jason
Helton and Edmund Obasi both sought to profit from Tibet stock, despite there being some
indicator that the stock was of questionable quality. But they both have explanations for their
activity, and none of their activity rises to a level sufficient to destroy their credibility. The Court
therefore rejects Defendants’ adequacy challenge. This class will be certified with the following
lead plaintiffs: Obasi Investment Limited, Jingli Shao, Lixin Wu, Jason Helton, Robin Dartell, and
For the foregoing reasons, the Court grants Plaintiffs’ motion to certify the class. An
appropriate order accompanies this opinion.
Date: February 22, 2016
/s/ Madeline Cox Arleo
Hon. Madeline Cox Arleo
UNITED STATES DISTRICT JUDGE
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