SUN v. HAN et al

Filing 17

OPINION. Signed by Judge Jose L. Linares on 5/14/2015. (ld, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

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ç.

CHAO SUN, on behalf of himself and all
others similarly situated,

Civil Action No.

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Plaintiff,
v.

OPINION

HAN, et al,
Defendants.

JOSE L. LINARES, U.S.D.J.
This matter comes before the Court upon five motions submitted
by various plaintiffs to:
1) appoint lead plaintiff; and 2) appoint lead counsel. (ECF Nos.
5, 6, 7, 8, 9). Pursuant to Rule
78 of the Federal Rules of Civil Procedure, no oral argument was
heard. Upon consideration of
the submissions, and for the reasons stated below, the motion
by Plaintift Bin Qu, (ECF No. 6),
is GRANTED. Accordingly, motions by Ting Xiong, (ECF
No. 5), Bruce Zurbrick, (ECF No. 7),
Walter Aerts and Zhu Xi, (ECF No. 8), and Joseph Hirsch, (ECF
No. 9), are DENIED.

I. BACKGROUND

This is a securities fraud class action brought on behalf of
all persons or entities who
acquired securities of Telestone Technologies Corporation
(hereinafter “Telestone”) between
March 31, 2010 and April 16, 2013.

(Complaint, ECF No. I, ¶1). The class seeks remedies

pursuant to Sections 10 (b) and 20(a) of the Securities Exchan
ge Act of 1934. (Id.).

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Telestone provides wireless local-access network technologies and solutio
ns primarily in
the People’s Republic of China. (Id.

¶

11). The Complaint alleges that Telestone misrepresented

that its financial statements were presented in accordance with Generally
Accepted Accounting
Principles (“GAAP”) and that its policy was to recognize revenues only
if collectability was
reasonably assured. (Id.

¶ 3).

The Complaint further specifies that Defendants knew or recklessly

disregarded and failed to disclose that: (1) in one of the Telestone’s main
segments, it had only
collected 0.8%, 22.9%, and 21.5%, of its 2009, 2010, and 2011 revenues,
respectively; (2) the
Telestone’s average collections period exceeds one year, even though payme
nts were purportedly
due upon customers’ acceptance of the Telestone’s products or service; (3) Telesto
ne only invoiced
customers after it received payment, purportedly for tax reasons, and its Chinafiled tax returns
claimed far less revenues than its financial statements filed with the U.S. Securi
ties and Exchange
Commission; (4) as of December 31, 2009, over $26.6 million of
the Telestone’ s accounts
receivable were at least one year old, with the amounts increasing to
$49.2 million and $66.6
million by December 31, 2010 and 2011, respectively; and (5) Telestone
did not keep centralized
records of its accounts receivable, and to obtain a purported accounting
of its accounts receivable
took two months’ work from a 10-member team. (Id.

¶ 6).

According to the Complaint, the market gradually learned that there may
have been an
issue with Telestone’s revenues when its accounts receivable ballooned,
which resulted in the
company’s stock price declining during the Class Period from $2.48 to
$2.01, or 19.0%, on May
15, 2012, $1.62 to $1.38, or 14.8%, on November 19, 2012, and from
$0.84 to $0.30, or 64.2%,

following resumption of trading after a trading halt on June 3, 2013.
(Id.

¶J

3 8-40). Plaintiffs

allege that as a result of the aforementioned wrongful acts and
omissions, and the precipitous
decline in the market value of the Telestone’s securities, Class membe
rs have suffered significant

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losses and damages. Plaintiff Chao Sun therefore commenced case against Telestone on Februa
ry
2, 2015. That same day, counsel for Plaintiff Sun published on Globe Newswire the first PSLRA
notice announcing that a securities class action had been initiated against the defendants
herein.
(See Cecchi Decl., ECF No. 6 at Exhibit A).
On April 3, 2015, five motions to appoint lead plaintiff and approve lead counsel were filed
by various Plaintiffs.

(See ECF Nos. 5, 6, 7, 8, 9).

Plaintiffs, Ting Xiong and Bruce

Zurbrick/Zurbrick Family, each who filed the aforementioned motions, each filed notices
which
withdrew their respective Motions, (ECF Nos. 5, 7), and supported the appointment of
Bin Qu as
lead plaintiff. (Notice, ECF No. 10; Notice, ECF No. 13). Plaintiffs, Walter Aerts
and Zhu Xi
opposed Plaintiff, Bin Qu’s Motion and argued that they in fact should be appointed lead plainti
ffs
(as they claim to be the presumptive lead plaintiffs) and thus their motion, (ECF No. 8), should
be
granted. The final moving Plaintiff, Joseph Hirsh, neither supported nor opposed any co-pen
ding
motion. In sum, the issue left for this Court is whether Bin Qu, or, Walter Aerts and Zhu Xi
should
serve as lead plaintiff(s).

II. LEGAL STANDARD

The Private Securities Litigation Reform Act (hereinafter “PSLRA”) sets forth proced
ures
for the selection of Lead Plaintiff in class actions brought under the Exchange Act.
The PSLRA
directs courts to consider any motion to serve as Lead Plaintiff filed by class membe
rs in response
to a published notice of class action by the latter of (i) 90 days after the date of publica
tion, or (ii)
as soon as practicable after the Court decides any pending motion to consolidate. 15
U.S.C.

§ 78u-

4(a)(3 )(B)(i) and (ii). The PSLRA provides a “rebuttable presumption” that the
most “adequate
plaintiff’ to serve as Lead Plaintiff is the “person or group of persons” that:

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(aa) has either filed the complaint or made a motion in response to a
notice...;
(bb) in the determination of the Court, has the largest financial interest
in the relief sought by the class; and
(cc) otherwise satisfies the requirements of Rule 23 of the Federal
Rules of Civil Procedure.
15 U.S.C.

§ 78u-4(a)(3)(B)(iii). In deciding a motion to serve as lead plaintiff, the Court should

limit its inquiry to the typicality and adequacy prongs of Rule 23(a), and defer examination of the
remaining requirements until the Lead Plaintiff moves for class certification. See Hoxworth v.
Blinder,Robinson & Co., 980 F.2d 912, 924 (3d Cir. 1992); see also In re Nice Sys. Secs. Litig.,
188 F,R.D. 206, 217 (D.N.J. 1999). The PSLRA vests authority in the lead plaintiff to select and
retain counsel to represent the Class, subject to the Court’s approval. 15 U.S.C. §78u-4(a)(3)(B)(v).

III. DISCUSSION
A. Largest Financial Interest

The Court first notes that it is unclear how Aerts and Xi arrived at their purported losses.
Thus, it is unclear to the Court if they may qualify as the presumptive lead plaintiff(s). On the
other hand, Qu clearly explains the methodology used to arrive at his losses figure, which utilized
a method clearly accepted by the Third Circuit. (Brief, ECF No. 12 at 2-5). Notably, two plaintiffs
who withdrew their motions for appoint as lead plaintiff, now support Qu, not Aerts and Xi. The
determination of which candidate has the largest loss is by far the most important factor in
determining who should be the lead plaintiff. See Local 144 Nursing Home Pension Fund v.
Honeywell Int’l, Inc., No. 00-3605, 2000 U.S. Dist. LEXIS 16712, at *14 (D.N.J. Nov. 16, 2000).
The presumptive lead plaintiff must be appointed unless it is proven that the movant will not satisfy
the typicality and adequacy requirements of Rule 23. It is undisputed that, apart from Walter Aerts

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and Zhu Xi combined, or Bin Qu, none of the other Plaintiffs have suffered the greates
t loss in
connection with the alleged fraud. It is also undisputed that Bin Qu suffered a greater
loss than
Walter Aerts individually, and Zhu Xi individually. Thus, the pointed issues before
this Court are
whether Walter Aerts and Zhu Xi may aggregate their losses to possibly qualify as the presum

ptive

lead plaintiffs and whether this presumption is successfully rebutted. For the reason
s that follow,
the Court will appoint Bin Qu as lead Plaintiff.
B. Adequacy and Typicality

As indicated, of the four requirements for class certification under Rule 23(a), only
two
typicality and adequacy of representation

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directly address whether a lead plaintiff movant is the

“most adequate plaintiff.” See Blake Partners, Inc. v. Orbcomm, Inc., No. CIV.A
. 07-4517
(WHW), 2008 WL 2277117, at *6 (D.N.J. June 2, 2008).

Rule 23(a)(4)’s requirement of

“[a]dequacy, for purposes of the lead plaintiff determination, is contingent upon both
the existence
of common interests between the proposed lead plaintiffs and the class, and a willing
ness on the
part of the proposed lead plaintiff to vigorously prosecute the action.” In re Nice
Sys. Sec. Litig.,
188 F.R.D. 206, 219 (D.N.J. 1999).

“The Third Circuit explained that when assessing the

adequacy of representation, courts should consider whether the proposed lead
plaintiff has the
ability and incentive to represent the claims of the class vigorously, [whether
it] has obtained
adequate counsel, and [whether] there is [a] conflict between [the movant’s]
claims and those
asserted on behalfof the class.” Id. (quoting In re Cendant Corp., 264 F.3d at 265)
(internal citation
omitted). Qu easily meets the adequacy requirements. Here, Bin Qu has retaine
d counsel with the
resources, experience and expertise to efficiently and effectively prosec
ute this action, and his
significant financial losses demonstrate that he has sufficient incentive
to ensure vigorous
advocacy. (See Cecchi Deci., Exhs. D-E).
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As it relates to Aerts and Xi, the Third Circuit has explicitly rejected the conclusion

reached

by other courts that the PSLRA “invariably precludes a group of ‘unrelated
individuals’ from
serving as a lead plaintiff.” In re Cendant Corp. Litig., 264 F.3d 201,
266 (3d Cir. 2001).
However, in assessing whether a group satisfies the adequacy prong of the
Rule 23 analysis, the
Third Circuit incorporates an extra step in the process. That is, a court must
determine whether
“the way in which a group seeking to become lead plaintiff was formed or the
manner in which it
is constituted would preclude it from fulfilling the tasks assigned to
a lead plaintiff.” Id.
Essentially, the Third Circuit disapproves of groups that are created by counse
l in an effort to
satisfy the largest financial loss requirement. If the court concludes that the
group was created by
counsel rather than class members, then “the court should disqualify that movan
t on the grounds
that it will not fairly and adequately represent the interests of the class.” Id.
Even assuming arguendo that Walter Aerts and Zhu Xi were the presum
ptive lead
plaintiffs, this Court cannot find that they would adequately represent the Class.
Walter Aerts and
Zhu Xi seek to “serve as a small, cohesive group for the purpose of overse
eing the prosecution of
the class action.” (Brief, ECF No. 11 at 5). Each have submitted Declarations
to this effect, which
also purport that Aerts and Xi are aware of their responsibilities as lead plainti
ff and are willing to
fulfill them. (See ECF No. 8-6). However, Aerts and Xi do not provide
any evidence that they
can work cohesively as a group or why they should be permitted to. It is
not apparent from the
Declarations submitted that Aerts and Xi even know each other.
Among the factors to consider in determining whether the movan
t will “fairly and
adequately” represent the interests of the class are: (i) whether the individ
uals in question had a
pre-existing relationship, (ii) the extent of that relationship, (iii) whethe
r the group was created by
the efforts of lawyers for the purpose of obtaining lead plaintiff status, and
(iv) whether the group
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is too large to adequately represent the Class. In re Cendant Corp. Litig., 264 F.3d
at 266—67. As
an example, the Third Circuit explained that if a movant “group” was created
by the efforts of
lawyers for the purpose of ensuring that it is named lead counsel, the “group” should

not be named

lead plaintiff Id. (citing In re Razorfish, Inc. Sec. Litig., 143 F.Supp.2d 304, 308
(S.D.N.Y.2001)
(holding that to allow lawyers to designate unrelated plaintiffs as a “group” and
aggregate their
financial stakes would allow and encourage lawyers to direct the litigation and
would defeat the
purpose of the Reform Act)). Of primary concern to this Court is the fact that
without aggregation
of Aerts’ and Xi’s losses (the figures calculated according to their own methodology
), Xi would
have suffered less losses than Qu and would be removed from qualification
as the presumptive
lead plaintiff. As to the first two prongs, the Declarations’ submitted by Aerts
and Xi fail to
indicate a pre-existing relationship (and therefore the extent of that relationship)
. The fmal prong
works in Aerts’ and Xi’s favor as there is just two of them, a small number
of potential lead
plaintiffs.
But the third prong of the factors above, namely, whether the group was created
by the
efforts of lawyers for the purpose of obtaining lead plaintiff status, is one this
Court takes issue
with. Indeed, Qu submitted substantial briefing in an effort to rebut the possib
le presumption that
Aerts and Xi were the presumptive lead plaintiffs and specifically raised the issue
of an attorney
Further,
1 to sustain a group of proposed lead plaintiffs, courts have established
protocols to insure
that the group will be effective. Such protocols include requiring declara
tions or affidavits to
demonstrate that the proposed lead plaintiffs can work effectively as a
group. See Local 144
Nursing Home Pension Fund v. Honeywell Int’l Inc., No. 00—3605, 2000
U.S. Dist. LEXIS 16712,
at *13, 2000 WL 33173017, at *45 (D.N.J. Nov. 16, 2000) (appointing as
lead plaintiff a group
of five investors who submitted declarations describing past and continu
ing meetings between
them and their counsel, and their involvement in the litigation so far); In
re Lernout & Hauspie
Sec. Litig., 138 F.Supp.2d 39, 45 (D.Mass.2001)(appointing three lead
plaintiffs where group
submitted affidavits to show their ability to work together effectively).
Aerts’ Declaration does
not mention any contact between him and Xi at all.

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fabricated group. This point went unanswered by Aerts and Xi. The Court is mindful that once a
presumptive lead plaintiff has been identified, the presumption can be rebutted if “the
presumptively most adequate plaintiff-(aa) will not fairly and adequately protect the interests of
the class; or (bb) 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). The Third Circuit has emphasized that

“only class members may seek to rebut the presumption, and the court should not permit or
consider any arguments by defendants or non-class members.” Cendant, 264 F.3d at 268.
Additionally, “once the presumption is triggered, the question 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

[J

[1’ job.” Id. (emphasis in original). Plaintiff, Bin Qu has, in this Court’s view,

successfully rebutted just the mere the possibility of this presumption.
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Based upon their

Declarations, this Court is constrained to find that Aerts and Xi cannot work effectively to
adequately represent the interests of the class as they appear to concede that the only pre-existing
relationship among them is the fact that they invested in the same Telestone securities. Further, it
appears that these unrelated individuals amalgamated together for the sole purpose of obtaining
lead plaintiff status. The extent of the pre-existing relationship is therefore minimal and it does
not appear that there is a sufficient connection to bind them together as a unit. Also, although
Aerts and Xi submitted a Declaration acknowledging the duty to represent the class, there is no
evidence to suggest that they have the background or investment experience to effectively monitor
the litigation.

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Bin Qu also opposes Walter Aerts and Zhu Xi’s calculations of losses, an argument which need
not be addressed.
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In the same vein perhaps, each of the plaintiffs who withdrew
their motions for lead
plaintiff appointment, support Qu as lead plaintiff, not Aerts and Xi.
This Court finds Bin Qu to
be the presumptive lead Plaintiff and further finds he will adequately
represent the interests of the
class. Qu also purports claims typical of the Class. A proposed lead
plaintiff’s claims are typical
of the class when the proposed lead plaintiff’s claims and injurie
s arise from the same event or
course of conduct that gave rise to the claims of the other class memb
ers and are premised on the
same legal theory. In re Party City Sec. Litig., 189 F.R.D. 91, 107
n.13 (D.N.J. 1999). The Rule
23(a)(3) typicality requirement “is to ensure that ‘maintenance of a
class action is economical and
that the named plaintiff’s claims and the class claims are so interre
lated that the interests of the
class members will be fairly and adequately protected in their absenc
e.’” Cromer Fin. Ltd. v.
Berger, 205 F.R.D. 113, 122 (S.D.N.Y. 2001) (quoting General
Telephone Co. of the Southwest
v. Falcon, 457 U.S. 147, 157 n. 13 (1982). Here, Qu’s claims are
typical of the claims asserted by
the putative Class because as a stockholder, like all members of
the Class, he suffered financial
losses as a result of his transactions in Telestone securities. Like
all of the members of the Class,
Qu’ s losses arise from defendants’ alleged misrepresentations,
misstatements and omissions.
Accordingly, Bin Qu’s claims are in all respects “typical” of the
claims of the Class.

C. Lead Counsel

The PSLRA vests authority in the lead plaintiff to select and retain
counsel, subject only
to approval of the Court. See 15 U.S.C. §78u-4(a)(3)(B)(v). This
Court should not disturb the lead
plaintiffs’ choice of counsel unless it is “necessary to protect
the interests of the class.” 15 U.S.C.
§78u-4(a)(3)(B)(iii)(II)(aa); In re Cendant Corp., 264 F.3d
at 273. In the present case, Bin Qu has
retained Carella, Byrne, Cecchi, Olstein, Brody & Agnello,
P.C. and Glancy Prongay & Murray
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LLP

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law firms with extensive experience and substantial expertise in securities litigation

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to

pursue this litigation on his behalf. Qu has represented he will retain these firms as plainti
ff’s co
lead counsel, as lead plaintiff. As reflected by the firms’ résumés, (attached to the Cecchi Deci.
as
Exhs. D-E), this Court is assured that, by granting Bin Qu’s motion, the Class will receive
the
highest caliber of legal representation. Accordingly, the Court approves Bin Qu’s selecti
on of
counsel.

IV. CONCLUSION

For the reasons set forth above, Bin Qu’s motion to appoint lead plaintiff and lead counse
l,
(ECF No. 6), is GRANTED, and the remaining Plaintiffs’ motions are therefore DENIE
D. (ECF
Nos. 5, 7, 8, 9). An appropriate Order accompanies this Opinion.

Date: May/Y,20l5

States District Judge

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