Goldstein v. Puda Coal, Inc. et al

Filing 263

OPINION & ORDER re: (258 in 1:11-cv-02598-KBF) MOTION to Amend/Correct (47) Amended Complaint filed by Thomas Rosenberger, Howard Pritchard, Salomon Querub, Hotel Ventures, Steven Weissmann, (199 in 1:11-cv-02598-KBF) MOTION for Partial Summary Judg ment re: (198) First Motion for Partial Summary Judgment filed by Moore Stephens, P.C., (216 in 1:11-cv-02598-KBF) MOTION to Certify Class [Notice of Plaintiffs' Motion for Class Certification and Appointment of Class Representatives a nd Class Counsel]. MOTION to Certify Class [Notice of Plaintiffs' Motion for Class Certification and Appointment of Class Representatives and Class Counsel] filed by Thomas Rosenberger, Howard Pritchard, Salomon Querub, Hotel Venture s, Steven Weissmann, (194 in 1:11-cv-02598-KBF) MOTION for Summary Judgment filed by C. Mark Tang, Lawrence Wizel, (198 in 1:11-cv-02598-KBF) FIRST MOTION for Partial Summary Judgment filed by Moore Stephens, P.C., (188 in 1:11-cv-02598-KBF) MOTION f or Summary Judgment filed by Macquarie Capital (USA) Inc., (176 in 1:11-cv-02598-KBF) MOTION to Intervene By Plaintiffs and Trellus Management Company LLC filed by Thomas Rosenberger, Howard Pritchard, Salomon Querub, Hotel Ventures, Steven We issmann, (196 in 1:11-cv-02598-KBF) FIRST MOTION for Summary Judgment filed by Moore Stephens Hong Kong. For the reasons set forth above, the Underwriter defendants' motion for summary judgment is GRANTED; the Outside Director defendants' motion for summary judgment is GRANTED; the Auditor defendants' motions for summary judgment are GRANTED; Trellus's motion to intervene is DENIED; plaintiffs' motion for class certification and appointment of class representatives and class counsel is GRANTED as modified; and plaintiffs' motion for leave to amend is DENIED. The Clerk of the Court is directed to terminate the motions at ECF Nos. 176, 188, 194, 196, 198, 199, 216, and 258. (Signed by Judge Katherine B. Forrest on 10/1/2013) Filed In Associated Cases: 1:11-cv-02598-KBF et al. ***Docketed in all member and related cases pursuant to instructions from Chambers. (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------------){
IN RE PUDA COAL SECURITIES INC.,
et al. LITIGATION

USDC SDNY
DOCUMENT
ELECTRONICALL Y FILED
DOC#:
DATE FILED:"nCT

0 12013

11 Civ. 2598 (KEF)

and all member and
related cases
OPINION & ORDER

This document relates to: ALL ACTIONS
------------------------------------------------------------------- )(
KATHERINE B. FORREST, District Judge:
This putative securities class action was commenced on April 15, 2011. (ECF
No. 1.) A Consolidated Complaint [Corrected] was filed on February 9, 2012 ("the
Complaint"). (ECF No. 47.) The matter was transferred to the undersigned on
October 3,2012. (ECF No. 124.) The Court resolved various pending motions to
dismiss on March 18, 2013. (ECF No. 152.)
Plaintiffs allege that defendants engaged in violations of various sections of
the securities laws, including Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 and Sections 11 and 12 of the Securities Act of 1933, in
connection with the offering, purchase or sale of common stock, put and/or call
options of Puda Coal, Inc. ("Puda Coal"). 15 U.s.C. § 78(b) (2010); 17 C.F.R. §
240.10b-5 (2013); 15 U.S.C. § 77k-771 (1998). Plaintiffs purport to represent a
putative class of those who purchased or sold common stock, call or put options
during the period from November 13, 2009 to October 3, 2011. Plaintiffs also seek
to represent those who purchased or otherwise acquired Puda Coal's common stock
pursuant to or traceable to its public offering on or around December 8, 2010 ("the
December 2010 Offering"),

According to plaintiffs, at the time of their purchase, sale or acquisition of
securities, they had every reason to believe that Puda Coal owned 90% of an
operating company, Shanxi Puda Coal Group Co. Ltd. ("Shanxi"). Shanxi was a
supplier of coking coal used for steel manufacturing in China. However, Puda Coal
did not in fact own a 90% interest in Shanxi during the time period at issue. It is
alleged that its chairman and major shareholder, defendant Ming Zhao ("Zhao"),
had improperly transferred Puda Coal's 90% interest in Shanxi to himself, made a
second transfer of a portion of that interest to an unrelated investment fund
controlled by CITIC, and then pledged the remaining portion to CITIC to secure a
loan. (Compl.

~

2-3.) Puda Coal is alleged not to have received any consideration

for these transactions. (See generally Compl.

~~

1-4.) In April 2011, Alfred Little

published a research report ("the Little Report") in which he revealed Zhao's actions
vis-a-vis Shanxi and Puda Coal. (Id.
decreased as a result. (Id.

~'r

~

19.) Puda Coal's security prices predictably

20, 25, 28.)

Plaintiffs have sued Puda Coal and its inside officers and directors: Ming
Zhao, his brother Y. Zhao, Qiong Wu (Puda Coal's former chief financial officer), and
Jianfei Ni. Each has resigned from Puda Coal. (Compl.

~

30.) Plaintiffs have also

sued two outside directors, C. Mark Tang and Lawrence Wizel

Wi. ~~ 47-48) ("the

Outside Director defendants"); the Underwriters of the December 2010 Offering,
Macquarie Capital (USA) Inc. and Brean Murray, Carret & Co., LLC ("the

2

Underwriter defendants"); and Puda Coal's external auditors, Moore Stephens Hong
Kong ("MHSK") and Moore Stephens, P.C. ("MSPC") ("the Auditor defendants")'!
Now before the Court are various motions. The Underwriter defendants have
moved for summary judgment as to Counts I and II of the Complaint (ECF No. 188);
the Outside Director defendants have moved for summary judgment as to Counts I
and III (ECF No. 194); the Auditor defendants have moved for summary judgment
as to Count I (ECF Nos. 196, 198, 199); Trellus Management Company, LLC has
moved to intervene (ECF No. 176); plaintiffs have moved for class certification and
appointment of class representatives and class counsel (ECF No. 216); and, finally,
plaintiffs have moved to amend their complaint (ECF No. 258).
For the reasons set forth below, the Court grants each of the summary
judgment motions, denies the motion to intervene, appoints lead counsel, and, while
certifying two classes, substantially narrows the class definition.
1.

THE SUMMARY JUDGMENT MOTIONS

In ruling on the motions to dismiss, the Court specifically invited targeted
discovery and an early summary judgment motion if any party believed that there
was an efficient way to narrow the case or resolve certain issues. At the oral
argument on the motions to dismiss, the Underwriter defendants' counsel, Greg A.
Danilow, made clear his intention to challenge whether Plaintiff Thomas
Rosenberger-the only named plaintiff asserting a claim pursuant to Section 11 of
the Securities Act, 15 U.S.C. § 77k-in fact bought in an offering or could trace his

1 This Court previously dismissed an additional Moore Stephens entity-Moore Stephens
International Ltd.-for lack of jurisdiction. (ECF No. 120.)

3

shares to an offering. (Hr'g Tr. 30-32, 65, 94-95 Mar. 25, 2013.) Targeted
discovery has occurred, and that motion is now fully briefed and before this Court.
Each of the summary judgment motions asserts that Rosenberger lacks standing to
pursue claims under Sections 11 and 12 of the Securities Act. The Court therefore
deals with the summary judgment motions together and, because the other motions
largely joined in the Underwriters' motion, refers to the Underwriters' motion for
convenIence.
A.

Facts Relevant to the Underwriters' Summary Judgment Motion

No party disputes on these motions that a fraud occurred in connection with
Puda Coal's transfer through Zhao of its interest in Shanxi. The issues before the
Court have to do one way or another with whether those defendants presently
before the Court can be held responsible pursuant to the theories on which they
have been sued.
Puda Coal was a publicly traded stock prior to two follow-on offerings that
occurred in 2010. In February 2010, Puda Coal offered 3.284 million shares; later
that year, in December 2010, it offered 9 million additional shares (the "December
2010 Offering"). (PIs.' Resp. to Defs.' Statement of Material Facts on Mot. Summ. J.

("PIs.' RSOF")

~

1, ECF No. 239.) Macquarie and Brean Murray served as the sole

underwriters for the December 2010 Offering. (Id.

~

establish a selling group as part of that offering. (Id.

4

2.) The Underwriters did not
~I

3.) Plaintiff Rosenberger is

the sole named plaintiff asserting claims pursuant to Sections 11 and 12 of the
Securities Act of 1933 in the operative Consolidated Complaint. 2 (Id.

~

4(a).)

Prior to December 8, 2010, Rosenberger had made nine separate purchases of
Puda Coal common stock. (Id.

~

13.) Rosenberger purchased 1000 shares of Puda

Coal common stock on December 8,2010, through his online Fidelity brokerage
account. (Id.

~

5.) He did not buy his shares in a market containing only shares

issued pursuant to the registration statement for the December 2010 Offering (the
"Registration Statement"). (Id.

~

6.) The Underwriters did not allocate any of the

shares ofPuda Coal stock in the December 2010 Offering to Rosenberger, nor did he
purchase his shares on December 8,2010, from Macquarie or Brean Murray. (rd.

~

7.)

The Underwriters did not allocate any of the shares of Puda Coal common
stock issued in the December 2010 Offering to Fidelity.3 Following notice that the
Underwriters intended to file a motion for summary judgment as to Rosenberger's
standing under Section 11 (on the basis that he did not buy directly from the
Underwriters, which he concedes, and that he cannot trace his shares to the
Registration Statement, which he does not concede), Rosenberger asked Fidelity to
tell him what the origin of his shares were. (Id.

~

9(a).) Fidelity was unable to do

so. (Id.)

2 Plaintiffs dispute this fact in part, but it is indisputable. Their unwillingness to concede the fact
relates to the pending motion to intervene by Trellus. As set forth below, that motion is denied. It
therefore cannot alter the identity of the actual named plaintiffs presently before the Court.
3 Plaintiffs do not dispute this general proposition, but note that an allocation was made to Fidelity
specifically for one of Fidelity's customers, not for Rosenberger, and that-so far as the record in this
matter reflects-the allocation was not associated with the events here at issue. (PIs.' RSOF ~ 8.)

5

After discovery following defendants' motion for summary judgment, the
following facts are undisputed regarding the provenance of Rosenberger's shares.
On the day of the December 2010 offering, Brean J\{urray sold 450,000 shares in the
December 2010 Offering to the Richard Strong Rollover IRA ("the Strong Account");
these were the first and only Puda Coal shares that the Strong Account purchased.
(Id.

~

9(b).)4 Rosenberger's Fidelity trade for Puda Coal shares was matched by the

NYSE Arca Exchange at 15:19:44 on December 8,2010 with a sale by the Strong
Account. (rd.) The clearing firm acting on behalf of Fidelity was National Financial
Services ("NFS"); the contrabroker acting on behalf of the Strong Account was
Knight Capital. (ld.) Knight Capital identified the Strong Account as the subaccount that sold the 1000 shares of Puda Coal common stock to Rosenberg. (rd.

~

15(a).)
While it is true that the Strong Account purchased its first-ever Puda Coal
shares directly from Brean Murray in the December 2010 Offering W:L.

~

15(d»,

Brean Murray actually held old and new Puda Coal shares on that day. (Hr'g Tr.
17-18, 24, 32-33, Sept. 27, 2013.) Logistically, when Knight Capital brokered the
Puda Coal shares for the Strong Account, the shares came from an account at the
Depository Trust Clearing Corp. ("DTCC") credited with a number of old and new
Puda Coal shares owned by different people/entities. Thus, Brean Murray's DTCC

4 At oral argument on this motion, plaintiffs' counsel conceded that both Underwriters had existing
shares of Puda Coal stock in their inventory. When they sold Puda Coal shares on December 8,
2010, those shares came from a DTCC account that held Puda Coal shares in a fungible manner.
(Hr'g Tr. 17-18, 32-33, Sept. 27, 2013.) Thus, at the outset of the process, it is unclear whether the
actual shares the Richard Strong Rollover IRA acquired were in fact part of the preexisting
inventory or newly issued shares.

6

account was debited and Knight was credited with the acquired numbers of Puda
Coal shares; all of this was through book entries. (Hr'g Tr. 7-9, 15-19, 24-33.) In
effect, while the Strong Account assumed it was "purchasing shares" from the
December 2010 Offering, the shares credited to its account (through Knight) were
derived from a fungible group of Puda Coal shares (old and new) at the DTCC.
(Hr'g Tr. 7-9, 17-19.) It is uncontested that prior to its purchase of 450,000 Puda
Coal shares on December 8, 2010, the Strong Account did not hold any Puda Coal
common stock in inventory. (PIs.' RSOF

~

15 (e).)

A further trade implicating the fungible DTCC account occurred later that
same day. On December 8, 2010, Andrew Klister of Baraboo Growth LLC
("Baraboo"), an agent of the Strong Account, facilitated the sale of 300,000 Puda
Coal shares in multiple lots. (Id.

~

15 (f).) Baraboo's sales were effected through

book entries with shares from the DTCC. (Hr'g Tr. 15-19, 25-33, Sept. 27, 2013.)
(See Decl. of Stephanie D. Venezia, Sept. 19,2013 ("Venezia Decl."), Ex. B
(McKissick Dep. Tr.), at 12:10-14 ("Q: In fact, the Baraboo shares were in book
entry form at DTC and not identified in any specific way or segregated in any way?
A: Correct."), 26:3-15.)
Neither Knight nor Baraboo ever obtained physical possession of the Puda
Coal shares. Both NFS and Knight confirmed that the Puda Coal shares for which
Baraboo facilitated sales were shares in the DTCC and aggregated with all other
existing Puda Coal shares. The "Richard Strong Rollover IRA shares," bought on
the day of the December 2010 offering, were part of an undifferentiated, fungible

7

mass at the DTCC that had both old and new Puda Coal shares. (See id. at 19:5-12
("A: Once the physical security goes for deposit into the DTCC, it becomes part of
the total aggregated number. It could have been existing shares coming in with
other shares. Once they're book entry, they're completely anonymous shares.
They're just there."); see also Venezia Dec!. Ex. D (Collins Dep. Tr.), at 16:21-17:3.)
When Baraboo is credited with electronic shares-as it was with the Puda
Coal shares-the shares are not specifically identifiable. (Venezia Dec!. Ex. B
(McKissick Dep. Tr.), at 11:11-18 ("[The Puda shares came in electronically.] Q:
And when you're credited with shares electronically, are you credited with specific
identifiable share certificates? A: Absolutely not. They would come in as an
electronic reference only. It does not designate pure identification of what we're
getting."), 12:10-14 ("Q: In fact, the Baraboo shares were in book entry form at the
DTC and not identified in any specific way or segregated in any way? A: Correct.");
26:6-11.)
When the Strong Account shares were then transferred to Rosenberger's
Fidelity account, the trade was effected through book entries out of the DTCC
account; they were not distinguishable from any other Puda Coal shares held at the
DTCC. (Venezia Decl. Ex. B (McKissick Dep. Tr.), at 12:25-13:4 ("Q: And when
these sales were made, did DTC identify the particular shares in connection with
those sales? A: Negative."), 15:10-22,22:22-23:2,25:23-26:15; see also Venezia
Dec!. Ex. D (Collins Tr.) at 16:21-17:3 ("Q: Did you purchase identifiable shares
[for] Mr. Rosenberger, the actual stock certificates that one could identify? A: No,

8

it's a trade on the exchange of shares which are very much considered fungible. It's
not a transaction about specific shares."): see also id. Ex. B (McKissick Tr.) at
14:17-22 ("Q: Specifically, what shares is ARCA selling when they sold these
thousand shares, whose shares were they selling? A: Undeterminable. They could
have been shares from anyone."). When asked whether there was any way at all
that Baraboo could identify where the thousand shares purchased by Rosenberger
came from, the witness testified that there was not. (Venezia DecL Ex. B (McKissick
Tr.), at 21:23-22:15 ("Q: Can you tell me where those thousand shares came from?
A: I cannot.... Q: And there's no way you know, based on your experience, that
you could identify where those thousand shares came from, correct? A: There's
nothing that I'm aware of.").)
Rosenberger testified that he never read a prospectus for Puda Coal. (PIs.'
RSOF

~

10.) He did not speak to anyone at Puda Coal prior to making his

December 8, 2010 purchase and he never attended an investor presentation or road
show conducted in connection with the December 2010 Offering. (Id.

~

11.) When

Rosenberger purchased 1000 shares of Puda Coal common stock on December 8,
2010, he did not know who the underwriters of the December 2010 Offering were.
(Id.

~

12.) The shares that Rosenberger purchased on December 8, 2010, and those

that he had previously purchased on nine separate occasions prior to that date, all
had the same CUSIP number. (Id.

~

14.)

9

B.

Standard on Summary Judgment

Summary judgment may not be granted unless all of the submissions taken
together show that "there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter oflaw." Fed. R. Civ. P. 56(a). The
moving party bears the burden of demonstrating "the absence of a genuine issue of
material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In making that
determination, the Court must "construe all evidence in the light most favorable to
the nonmoving party, drawing all inferences and resolving all ambiguities in its
favor." Dickerson v. Napolitano, 604 F.3d 732,740 (2d Cir. 2010).
Once the moving party has asserted facts showing that the non-movant's
claims cannot be sustained, the opposing party must cite to "particular parts of
materials in the record" that establish a "genuine dispute," and cannot rely merely
on allegations or denials contained in the pleadings. Fed. R. Civ. P. 56(c)(I)(A); see
also Wright v. Goord, 554 F.3d 255,266 (2d Cir. 2009). "[A] party may not rely on
mere speculation or conjecture as to the true nature of the facts to overcome a
motion for summary judgment," as "[m]ere conclusory allegations or denials cannot
by themselves create a genuine issue of material fact where none would otherwise
exist." Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (citation omitted). Self­
serving, conclusory affidavits, standing alone, are insufficient to create a triable
issue of fact and defeat a motion for summary judgment. See BellSouth
Telecomms., Inc. v. W.R. Grace & Co.-Conn., 77 F.3d 603, 615 (2d Cir. 1996).

10

C.

Section 11 Standing Requirements

Section 11 provides the purchasers of registered securities with strict liability
protection for material misstatements or omissions in registration statements filed
with the Securities and Exchange Commission ('SEC"). See In re Lehman Bros
Mortgage-Backed Sec. Litig., 650 F.3d 167, 175 (2d Cir. 2013). The "imposition of
strict liability is limited, however, to statutorily enumerated parties: (1) signatories
of the registration statement; (2) directors or partners of the issuer at the time of
filing; (3) persons consenting to be named as about to become a director or partner;
(4) accountants or other experts consenting to be named as preparing or certifYing
part of the registration statement; and (5) underwriters of the security at issue."
Id. at 175. Stated simply, standing for Section 11 claims is limited to those who
have purchased securities that are the direct subject of a specified prospectus or
registration statement. See Barnes v. Osofsky, 373 F.2d 269, 272 (2d Cir. 1967).
The shares purchased must, in other words, be demonstrably "new"; they
cannot be previously issued shares. Lorber v. Beebe, 407 F. Supp. 279, 286
(S.D.N.Y. 1975).5 Plaintiffs bear the burden of showing that Rosenberger's shares
are traceable to a registration statement. See In re Global Crossing, Ltd. Secs.
Litig., 313 F. Supp. 2d 189, 207 (S.D.N.Y. 2003). To carry their burden here,
plaintiffs must prove that Rosenberger's shares are directly traceable to the
December 2010 Offering. Klein v. Computer Devices, Inc., 591 F. Supp. 270, 273
(S.D.N.Y. 2004); see also Abbey v. Computer Memories, Inc., 634 F. Supp. 870, 875­
See id. ("Anyone who may have purchased identical securities already traded on the open market
must look elsewhere for relief."); see also In re IPO Sees. Litig., 227 F.R.D. 65, 117 (S.D.N.Y. 2004),
overruled on other grounds, 471 F.2d 24 (2d Cir. 2006).
5

11

76 (N.D. Cal. 1986) (granting summary judgment on a Section 11 claim when
plaintiffs shares were commingled with other shares in the Depository Trust
Company's vault). Showing that identical shares to those issued in an offering may
have been acquired is not enough to demonstrate actual traceability to a specific
offering.

Klein, 591 F. Supp. at 273 n.7.

Plaintiffs cite Kirkwood v. Taylor, 590 F. Supp. 1375, 1378-83 (D. Minn.
1984), in support of the tracing method they have used. In Kirkwood, the court set
forth various methods plaintiffs had attempted or could attempt to trace shares to
an offering. Id.
First, the court noted the "direct trace method," by which plaintiffs would
show a straight trail back to the underwriter(s). Id. at 1378. This method clearly
would work, but plaintiffs in that case conceded their inability to establish such a
clear line. In contrast, at oral argument on this motion, plaintiffs' counsel here
asserted that they had achieved a direct tracing of the shares. (Hr'g Tr. 13-14,
Sept. 27, 2013.)
Next, the court discussed the "fungible mass method," by which plaintiffs
would trace their shares to the fungible mass of all pooled shares (old and new) that
the DTC held for the benefit of all its member brokerage firms. Kirkwood, 590 F.
Supp. at 1379. The court rejected this method as akin to asserting a "proportionate
interest" in the fungible shares held by the DTC. Id. at 1380. The Lorber court had
previously rejected such an approach because it would show, at best, that shares
"might" have been issued pursuant to a defective statement. Id. at 1379. The

12

Kirkwood court agreed. rd. at 1380 ("The argument plaintiffs are making is merely
a variation of one rejected years ago. Essentially, plaintiffs are showing only that
their securities 'might' have been issued in the offering and they are asking the
court to presume that a pro rata portion of their shares are new shares.").
Next, and most notably for the case before this Court, Kirkwood described the
"contrabroker method," which the plaintiffs here also assert they have successfully
used. According to that method, a plaintiff demonstrates that he purchased his
shares from a broker who purchased from the offering. The Kirkwood court rejected
this method in the case before it, because the plaintiffs there had failed to show that
the only inventory of shares held by their broker were those from the offering at
issue, as opposed to from inventory. rd. at 138l.
Finally, the court reviewed the "heritage method," which it also rejected.
That method involved tracing of specific stock certificates in a plaintiffs name back,
certificate by certificate, to the original offer. rd. at 1382. The court agreed with
defendants that plaintiffs ultimately were unable to show that their certificates
related to new rather than old shares. rd. Again, plaintiffs were only showing that
they "might" have purchased pursuant to the offering. Id.
The case law is uninterrupted and has long been clear: traceability is strictly
construed for a Section 11 claim.
D.

Rosenberger Lacks Standing for a Section 11 Claim

Plaintiff Rosenberger has done all that he can do to trace his shares back to
the December 2010 Offering, but it is simply not enough. It is of course worth

13

noting that Rosenberger, the plaintiff whom counsel proffered as having standing
for a Section 11 claim, had no information regarding the provenance of his shares
until well after the Complaint was filed in this action. This begs a threshold
question: how could counsel have based a Section 11 claim on his shares in the first
instance? It is simply not enough to note that he bought shares on the day of an
offering in a marketplace actively trading issued shares, and rely on the similarity
of date and share price to demonstrate that the shares were issued pursuant to, or
were traceable to, the December 2010 Offering.
Ultimately, after much work, plaintiffs have traced Rosenberger's shares to a
series of transactions associated with the Strong Account. That, according to
plaintiffs, constitutes a direct tracing of shares (Hr'g Tr. 13-14, Sept. 27, 2013), or is
at least akin to the contrabroker method outlined in Kirkwood, 590 F. Supp. at
1381. Plaintiffs have also put forward evidence that the Strong Account had no
Puda Coal shares prior to its acquisition of shares in the December 2010 Offering.
Plaintiffs ignore crucial steps the shares took on their journey.
First, at oral argument, counsel for plaintiffs conceded that the Underwriters
held a preexisting inventory of Puda Coal shares in the form of book entry credits at
the DTCC. (Hr'g Tr. 24, Sept. 27, 2013.) \Vhen the Underwriters sold shares
equivalent to the number of those being purchased by the Strong Account, that
trade was effected by a book entry from one DTCC account for the Underwriters to
Knight's DTCC account. (Hr'g Tr. 15-19.) All shares in the account were
undifferentiated and fungible; only the book entries changed as to who was credited

14

with what. Next, Baraboo bundled the Strong Account shares, but such bundling
did not and could not be clearly and provably of "new shares"; rather, the bundles
were of "shares generally" (since shares at the DTCC are held in a non-segregated
account). Some shares could have been old shares, some new, who knows.
Following the Baraboo transaction, the DTCC then credited Fidelity's account with
a random group of unsegregated shares, and Fidelity then credited Rosenberger
with those unsegregated shares.
The steps necessarily involving the DTCC are fatal to traceability. See, e.g.,
In re: Initial Pub. Offering Secs. Litig., 227 F.R.D. 65, 118 (2004), vacated and
remanded on other grounds, 471 F.3d 24 (2d Cir. 2006); Abbey, 634 F. Supp. at 875­
76; Klein, 591 F. Supp. at 273; Lorber, 407 F. Supp. at 287. Once a part of the
DTCC group of Puda Coal shares, they lose any specific identity. (Venezia Decl. Ex.
B (McKissick Tr.), at 11:15-18 (,,[The Puda Shares came in electronically. Q: And
when you're credited with shares electronically, are you credited with specific
identifiable share certificates? A: Absolutely not. They would come in as an
electronic reference only. It does not designate pure identification of what we're
getting."); 12:10-14 (Q: "In fact, the Baraboo shares were in book entry form at the
DTC and not identified in any specific way or segregated in any way? A: Correct."),
26:6-11.)
Plaintiffs' theory thus resembles not the contrabroker method of tracing
described in Kirkwood, 590 F. Supp. at 1381, but the fungible mass method, id. at

15

1379. This fungibility of shares is fatal to Rosenberg's attempt to trace particular
shares to the December 2010 Offering.
At oral argument, plaintiffs argued for the first time that various provisions
of the Uniform Commercial Code ("UCC") supported their view that they had
achieved the level of traceability Section 11 requires. In particular, counsel pointed
to Sections 8-102,8-104 and 8-302. N.Y. U.C.C. § 1-101 et seg. (McKinney 2013).
According to the plaintiffs, the Puda Coal shares were "uncertificated securities" as
defined in Section 8-102. Section 8-102 comment 18 defines the term
"uncertificated security" to mean "a security that is not represented by a security
certificate. For uncertificated securities, there is no need to draw any distinction
between the underlying asset and the means by which the holder's interest in that
asset is evidenced ...." Id. § 8-102 Official Comment 18.
Counsel also pointed to Section 8-104(d): "Unless the context shows that a
different meaning is intended, a person who is required by other law, regulation,
rule, or agreement to transfer, deliver, present, surrender, exchange, or otherwise
put in the possession of another person a security or financial asset satisfies that
requirement by causing the other person to acquire an interest in the security or
financial asset pursuant to subsection (a) or (b)." Id. § 8-104(d).
Finally, counsel pointed to Section 8-302(a): "Except as otherwise provided in
subsections (b) and (c), a purchaser of a certificated or uncertificated security
acquires all rights in the security that the transferor had the power to transfer." Id.
§ 8-302(a).

16

According to plaintiffs, these VCC provisions demonstrate that when an
uncertificated security-such as the Puda Coal shares here at issue in the
December 2010 Offering-is transferred, it is transferred with all of its rights
intact, and those shares are transferred when another acquires an "interest" in the
shares. It is undisputed that the Strong Account acquired an interest in Puda Coal
shares residing in an account at the DTCC on December 8, 2008. Thus, they argue,
because, pursuant to the VCC, there is no need to draw any distinction between the
uncertificated security and the underlying asset, and "a" security may be
transferred by transferring the interest in "that" security. Thus, according to
plaintiffs, a security "interest" that is once shown to have derived from the
December 2010 Offering can never lose its original identity. (Hr'g Tr. 12-14, Sept.
27,2013.)
These arguments are unavailing. As an initial matter, the VCC does not
preempt the specific statutory standing requirements separately set forth in Section
11 of the Securities Act. See Levitin v. PaineWebber, Inc., 159 F.3d 698, 705 (2d
Cir. 1998).
In addition, these VCC provisions do not eliminate the statutory and case
law requirements for strict adherence to traceability by showing the true identity of
shares. If plaintiffs' argument were credited, it would mean that traceability could
always be shown without regard to the fungibility of shares at the DTCC, and case
law discussions of the problems with fungibility would all be wrongly decided. This
Court rejects that argument, not because courts cannot err, but because the case

17

law reflects the plain intent and purpose of Section II's strict requirements: a lot of
certainty is required regarding the provenance of shares to obtain the strict liability
of Section 11. Finally, plaintiffs' argument misconstrues these provisions of the
UCC: they serve an important purpose of ensuring the efficient movement of shares
through book entries and electronic transfers, but they do not purport to provide a
substitute for Section 11 traceability requirements. Thus, provisions outlining how
a security may be transferred by transferring the interest in that security (akin to
the changing of book entries at the DTCC) is different from a securities law
statutory requirement for standing.
Given the strict requirements, plaintiffs' theory is not enough to show
traceability. Accordingly, Rosenberger lacks standing to assert claims pursuant to
Section 11. 6
The Court notes that it does not appear that sufficient due diligence was
conducted on Rosenberger's shares prior to filing the Complaint. The discovery
taken in connection with the motion by the Underwriters for summary judgment on
this issue appears to be the only due diligence conducted. As Rosenberger testified,
he did not request information regarding the provenance of his shares until the
Underwriter defendants stated a present intention to file this motion. There are
therefore serious questions as to whether there was ever a sufficient basis to allege

6 The only claims asserted against the Outside Directors are pursuant to Sections 11, 15, and 20. A
claim pursuant to Sections 15 and 20 ("control person liability") requires an underlying securities
law violation.
In re Global Crossing, Ltd. Secs. Litig., 322 F. Supp. 2d 319, 349 (S.D.N.Y. 2004).
However, in the absence of a viable Section 11 claim, plaintiffs are unable to maintain either claim
against the Outside Directors. The Outside Directors' motion for summary judgment is therefore
granted as to Counts I and III.

18

standing to assert a Section 11 claim, and it is now established that standing is, in
fact, lacking. Counsel should have, of course, understood strict traceability
requirements at the time of filing.
E.

Section 12 Standing Requirements

Section 12(2) provides for standing as to statutory "sellers" of securities-that
is, people who directly sold securities or solicited their purchase. Pinter v. Dahl,
486 U.s. 622, 641 (1988). "At the very least ... the language of § 12(1)
contemplates a buyer-seller relationship not unlike traditional contractual privity."
Id. To survive summary judgment on this claim, if Rosenberger cannot raise a
triable issue as to whether he purchased his securities from a defendant, he must
demonstrate that he at least purchased them as a result of a defendant's
solicitation. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42,49-50 (2d
Cir. 1991). He cannot.
Rosenberger concedes that he did not purchase any securities directly from
any defendant. (PIs.' Mem. ofL. in Opp. to Defs.' Mot. for Summ. J. 2, ECF No.
237.) The uncontroverted evidence set forth above shows that he also did not read a
prospectus, speak to anyone at Puda Coal, or attend a road show. (PIs.' RSOF

~

10­

11.) He has not proffered a single fact sufficient to support Section 12 standing
(again, raising issues regarding adequate due diligence at the outset).
Accordingly, there is no triable issue as to whether Rosenberger has standing
to bring a claim pursuant to Section 12(2). He does not. 7

Plaintiffs' sole claims against the Underwriters arise under Sections 11 and 12. No named plaintiff
has standing to assert such claims, and summary judgment is therefore appropriate for the

7

19

II.

MOTION TO INTERVENE

Plaintiffs assert that even if summary judgment is granted as to the
traceability of Rosenberg's shares or his standing under Section 12, those claims
should nonetheless survive because Trellus has made a motion to intervene; if that
motion to intervene is granted, then Trellus would be able to assert such claims. A
number of defendants oppose such intervention. 8 The Court, however, does not
agree that Trellus should be allowed to intervene. Its motion is denied and cannot
salvage the Section 11 or 12 claims.
A.

Facts Relevant to Intervention Motion

Trellus is a sophisticated institutional investment firm with $93 million in
assets. (Decl. of Seth Goodchild in Opp. re: Mot. to Intervene ("Goodchild Decl.") Ex.
A (Usdan Dep. Tr.), at 32:6-9.) Trellus is the parent company of a number of
investment funds, each of which is a distinct legal entity. (Id. at 156:23-157:7.)
While Trellus did not itself purchase any shares in the December 2010 Offering (id.
at 156: 17-22), five of its investment funds did purchase 179,734 shares fuL. at
156:23 -157:7).9
In April 2011, the Little Report revealed the transfer of the Shanxi operating
company from Puda Coal. Trellus concedes that it learned of the Little Report in
April 2011. (Id. at 111:12-18.) In late April or early May 2011, Trellus also became

Underwriters with respect to Counts I and II. Count I also asserts a Section 11 claim against
Stephen Moore Hong Kong and Stephen Moore P.C. Those claims are similarly dismissed. (Section
lO(b) and Rule lOb-5 claims remain as to the Auditor defendants.)
8 Oppositions to the motion to intervene have been filed by the Underwriters (ECF No. 211), Moore
Stephens Hong Kong (ECF No. 210); Moore Stephens PC (ECF No. 213), and the Outside Directors
(ECF No. 209).
9 Trellus received assignments of these entities' claims.

20

aware that class action lawsuits had been filed against Puda Coal. (Decl. of James
Scaplen, May 10, 2013 ("Scaplen Decl.")

~

8, ECF No. 179; Goodchild Decl. Ex. A

(Usdan Dep. Tr.), at 45:8-17,127:10-17.) Notably, the Trellus motion to intervene
refers to the Goldstein action (ECF No.1) as the suit of which it became aware.
(Mem. of L. in Supp. of Mot. to Intervene by PIs. 1-3, ECF No. 177.) While that
complaint did contain claims pursuant to Sections 11 and 12 of the Securities Act, it
did not allege that plaintiff Goldstein had purchased shares pursuant and/or
traceable to the December 8, 2010 offering. (Goldstein Compl.,

~

12, ECF No. 1.)

On the face of the complaint, Goldstein lacked standing as to Section 11 or 12
claims.
In the fall of 2011, Trellus reached out to Robbins Geller Rudman & Dowd
LLP (potential class counsel) regarding the pending lawsuit, and was told that
Robbins Geller "was seeking to pursue remedies under the Securities Exchange Act
of 1934." (Goodchild Decl. Ex. G, at 375-76.) Nothing in the record suggests that
Robbins Geller mentioned possible claims pursuant to Section 11 of the Securities
Act of 1933 as part of that communication. On January 6,2012, James Scaplen,
Trellus's then-controller and current chief financial officer, sent an email to
Lawrence Rosen of the Rosen Law Firm asking whether there was "anything we
should be doing in order to participate in the Class Action." (Scaplen Decl.

~

12;

Goodchild Decl. Ex. F, at 82.) Scaplen did not follow up; Rosen did not respond until
June 2012. (Scaplen Decl.

~~

14-16.) On January 19, 2012, Trellus's outside

claims firm informed Trellus that "[t][he lawyers are looking for a large holder to be

21

an additional lead plaintiff. They are looking for someone who purchased on the
IPO so they can bring a section 11 claim v. the underwriters." (Goodchild Dec!. Ex.
G, at 374.)
Plaintiffs filed a [Corrected] Consolidated Amended Complaint on February
9, 2012, which asserted two causes of action against the Underwriters (under
Sections 11 and 12); Rosenberger was the sole named plaintiff asserting standing to
bring those claims. (ECF No. 47.) Trellus did not read the Complaint at that time.
(Goodchild Dec!. Ex. A (Usdan Dep. Tr.), at 43:18-44:8.)
By late April or early May 2012, one year had elapsed since the time Trellus
first reviewed a complaint asserting securities laws claims against Puda Coal and
others. On June 1,2012, the Underwriter defendants filed a motion to dismiss the
Complaint on the grounds that Rosenberger lacked standing to pursue a Section
12(a)(2) claim because he had not purchased directly from either Underwriter.
(ECF No. 82.) The next day, Rosen called Trellus to ask whether it had purchased
shares in the December 2010 Offering. Trellus stated that it had, and Rosen and a
representative of Trellus then discussed the "status of the lawsuit." (Scaplen Dec!.
~~[

14-16.) Trellus decided not to intervene at that time.l O
Based on unequivocal statements in the pleadings that Rosenberger had

acquired shares from the Underwriters "pursuant andlor traceable to the December

10 According to Trellus, it was informed that only one named plaintiff was required to represent the
interests of the Trellus Funds and that Rosenberger had been named; Rosen also informed Trellus
that if Rosenberger were found to be inadequate, then it "could" intervene at that stage. (Scaplen
Decl. ~~ 17-19.) This communication occurred after a motion had been filed challenging
Rosenberger's adequacy.

22

Offering" (Compl. '" 38), the Court denied the motion to dismiss the Underwriters at
that time.
At a conference with the Court in April 2013, the Underwriters restated their
intention to move for summary judgment as to Rosenberger's standing to pursue his
Section 11 and 12 claims. (Hr'g Tr. 8-9, Apr. 15, 2013, ECF No. 200.) That same
afternoon, Rosen contacted Trellus and recommended that it move to intervene.
(Scaplen Decl. '"'" 21-22.)
On May 13, 2013, Trellus made its motion to intervene. The parties
conducted limited discovery in connection with that motion, and it was fully briefed
as of July 12, 2013. (ECF No. 225.)

B.

Legal Principles Applicable to Intervention

In order to intervene as a matter of right, a potential intervenor must
demonstrate that: (1) the application is timely; (2) the intervenor claims "an
interest relating to the property or transaction that is the subject of the action"; (3)
the applicant is situated such that "disposition of the action may, as a practical
matter, impair or impede the applicant's ability to protect its interest"; and (4) the
applicant's "interest is not adequately represented by the other parties."
MasterCard Int'l Inc. v. Visa Int'! Servo Ass'n, Inc., 471 F.3d 377, 389 (2d Cir. 2006);
accord St. John's Univ., New York v. Bolton, 450 F. App'x 81 (2d Cir. 2011)
(summary order); Fed. R. Civ. P. 24(a). Failure to demonstrate one of the above
requires denial of the intervention motion. MasterCard Int'l Inc., 471 F.3d at 389;

23

Washington Elec. Coop., Inc. v. Massachusetts Mun. \Vholesale Elec. Co., 922 F.2d
92, 96 (2d Cir. 1990).
Courts typically consider the same four factors whether a motion for
intervention is "of right" under Fed. R. Civ. P. 24(a) or "permissive" under Fed. R.
Civ. P. 24(b). See, e.g., "R" Best Produce, Inc. v. Shulman-Rabin Mktg., Corp., 467
F.3d 238, 240 (2d Cir. 2006); see also Hnot v. Willis Grp. Holdings, Ltd., 234 F.
App'x 13, 14 (2d Cir. 2007) (same); Fed. R. Civ. P. Rule 24(b). "A district court has
broad discretion under Rule 24(b) to determine whether to permit intervention on
the basis that the intervenor's claim or defense and the main action have a question
of law or fact in common.'" St. John's Univ., 450 F. App'x at 84 (quoting Fed. R. Civ.
P. 24(b)(2». Here, plaintiffs seek permissive intervention.
\Vhether or not to grant permissive intervention is within the district court's
discretion. See AT&T Corp. v. Sprint Corp., 407 F.3d 560, 561 (2d Cir. 2005). The
timeliness of an intervention motion falls within that discretion. In re Bank of N.Y.
Deriv. Litig., 320 F.3d 291,299-300 (2d Cir. 2003). In determining timeliness, the
Court considers "(a) the length of time the applicant knew or should have known of
[its] interest before making the motion; (b) prejudice to the existing parties
resulting from the applicant's delay; (c) prejudice to [the] applicant if the motion is
denied; and (d) [the] presence of unusual circumstances militating for or against a
finding of timeliness." MasterCard Int'l Inc., 471 F.3d at 390.
First, the possible "prejudice to the existing parties" arising here from
Trellus's potential intervention is significant. Id. If Trellus's motion to intervene

24

fails, then the Underwriter and Outside Director defendants would be dismissed
from the lawsuit entirely; no current plaintiff has standing to proceed against them.
By contrast, if the Court grants Trellus's motion, then at least Trellus--even if not
Rosenberger-will have standing to assert such claims. Thus, the very presence of
the Underwriter and Outside Director defendants in this lawsuit, and the potential
for major prejudice, hinges on the outcome of the intervention motion.
In any event, the intervention motion is not timely, based on "the length of
time the applicant knew or should have known of [its] interest." Id. at 390.
Timeliness of intervention implicates, inter alia, the statute of limitations and any
applicable tolling of such limitations period. As plaintiffs themselves concede, a
claim pursuant to Section 11 must be brought within one year of the accrual of the
claim. (See Mem. of Law in Supp. of Mot. to Intervene by PIs. and Trellus Mgmt.
Co. 11 ("Claims brought pursuant to Sections 11 and 12 of the Securities Act are
subject to a one-year statute of limitations running from the date of discovery of the
untrue statement or omissions."), ECF No. 177; 15 U.S.C. § 77m.)
Plaintiffs argue that the principles set forth in American Pipe & Constr. v.
Utah, 414 U.S. 538 (1974), are applicable to situations such as those before this
Court. In American Pipe, the Supreme Court held that the statute of limitations is
tolled for putative class members until certification is denied. In such situations,
the Court found that it would be fundamentally unfair as well as bad policy to
penalize those plaintiffs who assumed that their rights were being protected by the
putative named plaintiff. In that case, a lack of numerosity defeated certification.

25

Id. at 553. The Supreme Court determined that in such circumstances, putative
class members should have the opportunity, notwithstanding the running of the
statute of limitations prior to denial of certification, to file an individual lawsuit. Id.
There, the named plaintiff had Article III standing at the outset of the case. The
Supreme Court was not asked to address the very separate question of whether
American Pipe tolling applies or should apply in instances in which the named
plaintiff actually lacks standing to bring a claim in the first instance.
The Second Circuit and other courts in this district have addressed the
question of the interplay between American Pipe and Article III standing. See, e.g.,
Police & Fire Retirement of City of Detroit et al. v. IndyMac MBS, Inc., et al., 721
F.3d 95 (2d Cir. 2013). In IndyMac, the Second Circuit addressed whether proposed
intervenors may press their otherwise expired claims on a theory of relation back to
a timely complaint, when claims have previously been dismissed for want of
jurisdiction. Id. at 110. There, the district court had dismissed all claims arising
from offerings in which the named plaintiffs had not themselves purchased for lack
of standing, based on the fact that no named plaintiff had standing to assert such
claims. Id. The Second Circuit found that "the proposed intervenors' ability to join
the suit is foreclosed by the 'long recognized' rule that 'if jurisdiction is lacking at
the commencement of a suit, it cannot be aided by the intervention of a plaintiff
with a sufficient claim'" (quoting Disability Advocates, Inc. v. New York Coal. for
Quality Assisted Living, Inc., 675 F.3d 149, 160 (2d Cir. 2012); see also Town of

26

West Hartford v. Operation Rescue, 915 F.2d 92, 95 (2d Cir. 1990).)11 Intervention
is not a cure-all for jurisdictional defects that would have barred the court from
hearing an action in the first instance. IndyMac, 721 F.3d at 111; see also Walters
v. Edgar, 163 F.3d 430,432 (7th Cir. 1998); Pressroom Unions-Printers League
Income Sec. Fund, 700 F.2d at 893; In re Direxion Shares ETF Trust, 279 F.R.D.
221, 237 (S.D.N.Y. 2012).
In IndyMac, the Second Circuit ruled that "[t]he District Court lacked
jurisdiction over certain claims of the original lead plaintiff-the very claims now
asserted by the proposed intervenors-and that defect may not be cured by later
intervention." IndyMac, 721 F.3d at 111. Thus, "absent circumstances that would
render the newly asserted claims independently timely, neither Rule 24 nor the
Rule 15(c) 'relation back' doctrine permits members of the putative class, who are
not named parties, to intervene in the class action as named parties in order to
revive claims." Id. The Court also noted that "[o]ur holding today merely
reemphasizes that 'the [Private Securities Litigation Reform Act] was ... certainly
not intended to excuse sophisticated parties [such as proposed intervenors] from
being diligent and keeping abreast of developments in the case, especially when the
class is not certified." Id. at 112 (quoting Employers-Teamsters Local Nos. 175 &
505 Pension Trust Fund v. Anchor Capital Advisors, 498 F.3d 920,925 (9th Cir.
11 The Second Circuit ruled similarly in the analogous case of Pressroom Unions-Printers League
Income Sec. Fund v. Conel Assur. Co., 700 F.2d 889, 893 (2d Cir. 1983). There, the issue related to
whether plan participants had adequate standing to maintain an ERISA action and, if not, whether
other plan participants could be substituted. The Second Circuit affirmed the lower court's denial of
a motion to amend a complaint to add substitute plan participants as plaintiffs. The Court stated
that "[t]he longstanding and clear rule is that 'if jurisdiction is lacking at the commencement of [a]
suit, it cannot be aided by the intervention of a [plaintiff! with a sufficient claim.'" Id. (quoting
Pianta v. H.M. Reich Co., 77 F.2d 888,890 (2d Cir. 1935); additional citations omitted),

27

2007»; see also New Jersey Carpenters Health Fund v. DLJ Mortg., Inc., No. 08
Civ. 5653 (PAC), 2010 WL 6508190, at *2 n.l (S.D.N.Y. Dec. 15,2010).12
C.

Trellus's Motion to Intervene is Untimely

At the latest, Trellus's claim accrued when it learned that lawsuits against
Puda Coal had been filed; according to Trellus's testimony, that was late April or
early May 2011. Thus, one year later-May 2012-the statute ran. Trellus waited
until June of 2013 to make the instant motion to intervene; that was twelve months
too late. Trellus is a sophisticated investor who knew how to follow cases in which
it might have an interest-and, as the facts set forth above, it did, but to an
insufficient extent. The law does not provide a safe harbor for such a lapse. Had
Trellus's counsel carefully reviewed the Goldstein complaint in May 2011, it would
have to have understood that the named plaintiff in that action simply could not
represent its interests in connection with claims pursuant to Sections 11 and 12;
Goldstein obviously lacked standing for such claims.
Trellus had further opportunities prior to the running of the statute of
limitations to protect its claims-but it did not. In January 2012 Trellus "checked
in" on the lawsuit-yet its CFO testified that Trellus did not even read the
Complaint filed in February of that year. (Goodchild Decl. Ex. A (Usdan Dep. Tr.),
12 In Walters v. Edgar, 163 F.3d 430 (7th Cir. 1999), Judge Posner addressed a situation in which
named class representatives were found to lack standing. Judge Posner stated, "Certification of a
class action comes after the suit is filed, so if the named plaintiffs lacked standing when they filed
the suit, there was no other party plaintiffs to step into the breach created by the named plaintiffs
lack of standing; and so there was no case when class certification was sought. The danger that a
class action will have to be dismissed for lack of standing of the named plaintiffs, even though
unnamed members of the class might have standing, is another reason ... for scrupulous adherence
to the requirement that the determination whether to certify a suit as a class action be made as soon
as practicable after the commencement of the action." Id. at 433 (citation and internal quotation
marks omitted).

28

at 43:18-44:8.) Failure to read the Complaint demonstrates that Trellus could not
have been relying on the allegations as to Rosenberger in that Complaint.
Finally, not until a year later-long after defense counsel made it clear in
open court that they had serious doubts as to the adequacy of Rosenberger's
standing and the court invited early motions-did plaintiffs and Trellus bring this
motion to intervene. (ECF No. 176.)
The motion is simply too late. American Pipe does not provide refuge. That
case dealt with a far different situation-one in which standing existed at the
outset. As the Second Circuit recently ruled in affirming IndyMac, if standing does
not exist at the outset, it cannot be manufactured through belated intervention.
That proposition applies here. 13
At oral argument, plaintiffs argued that the distinction between
constitutional and statutory standing supports applying American Pipe tolling in
this case. (See, e.g., Hr'g Tr. 46-51, Sept. 27, 2013.) In fact, the lack of statutory
standing reinforces this Court's determination.
Statutory standing is distinct from and often narrower than Article III
standing. See Central States Se. & Sw. Areas Health & Welfare Fund v. MerckMedco Managed Care, L.L.C., 43 F.3d 181, 201 (2d Cir. 2005). Here, statutory

13 In a Notice of Supplemental Authority (ECF No. 262), Plaintiffs referred the Court to two further
decisions related to IndyMac, but neither supports their proposition that American Pipe tolling
applies here. First, plaintiffs' invocation of Saperstein-Stone-Weiss Found. v. Merkin, 2013 WL
2495141 (S.D.N.Y. June 11, 2013), is simply a case of apples and oranges. The court there was
dealing with a request to reconsider rather than dismissing fraud claims, and found that IndyMac
had no bearing on its decision because a statute of repose was not at issue. The Court respectfully
disagrees with the invocation of IndyMac in Lighthouse Fin. Grp. v. Royal :Sank of Scotland Grp.,
PLC, 2013 WL 4405538, at *12 n.11 (S.D.NY. Aug. 5,2013). The court there approvingly cited a
decision that should have come out the other way under IndyMac. See id.

29

standing under Sections 11 and 12-established through direct sales of shares or
traceability of shares-is narrower than constitutional standing, in order to limit
the availability of the Securities Act's strict-liability protection. Plaintiffs argue
that if they can show that Rosenberger had Article III standing at the outset of the
lawsuit, then Trellus should obtain the benefit of American Pipe tolling; under this
theory, Rosenberger's lack of standing becomes irrelevant. This Court disagrees.
First, the argument misconstrues when Article III standing can exist. Article
III standing requires that a plaintiff allege an "injury in fact" that (1) is "concrete
and particularized" and "actual or imminent"; (2) bears a causal connection to the
conduct complained of; and (3) is "likely to be redressed by the requested relief."
Lujan v. Defenders of\Vildlife, 504 U.S. 555, 560-61 (1992). Here, Rosenberger has
been injured; but he cannot show a causal connection from his harm to conduct by
the defendants in the December 2010 Offering because he cannot trace his shares to
the Offering. Even if he could show a concrete injury caused by defendants, he
simply does not have a Section 11 (or 12) claim, and the Court could not render a
decision in his favor for such a claim. Thus, since Rosenberger lacks statutory
standing to assert Sections 11 and 12 claims in this Court, he lacks Article III
standing for those claims.
Second, even assuming that Rosenberger did have Article III standing, the
absence of subject matter jurisdiction due to lack of statutory standing would
ultimately prove fatal to the lawsuit. Statutory standing is "generally treated as
jurisdictional in nature." Lifrak v. New York City Council, 389 F. Supp. 2d 500, 503

30

(S.D.N.Y. 2005) (quoting Lerner v. Fleet Bank, N.A., 318 F.3d 113, 127 (2d Cir.
2003). Thus, Rosenberger's lack of statutory standing means there has been a lack
of jurisdiction as to the Section 11 (and 12) claims since the outset of this lawsuit.
In the absence of subject matter jurisdiction, this Court has no justiciable
controversy to consider, and would need to dismiss the case.
Plaintiffs' argument must also fail based on policy considerations. If
plaintiffs' view of American Pipe were correct, then litigants could effectively hold
their place in line by initiating lawsuits in disregard of statutory standing
requirements, before then searching for a plaintiff who did have standing to
intervene in the action. American Pipe was not intended to incentivize filing
lawsuits on behalf of nominal plaintiffs who in fact lack statutory standing to
proceed.
Finally, there are no equitable principles that suggest that the Court should
proceed other than with a denial of the motion. Trellus had plenty of notice of its
claims and simply did not do enough to protect them. I .! To grant intervention would
be to condone minimal due diligence regarding the adequacy of a plaintiff in
advance of the expiration of the statute of limitations, and to allow defendants to
incur significant costs to demonstrate what must have been a clear lack of standing

14 Trellus argues that the reference to an initial public offering or "IPO" did not put it on notice that
a plaintiff representative was needed for its Section 11 and 12 claims because it bought in a
secondary public offering or "SPO." (Reply Mem. ofL. in Supp. of Mot. to Intervene by PIs. 4 n.12,
ECl" No. 225.) This, of course, makes little sense, since the class period in question-November 2009
to October 2011-did not in any event encompass the IPO, which had occurred in early 2008. See
EDGAR Search Results, http://www.sec.gov/cgi-binlbrowse­
edgar?action=getcompany&CIK=0001l62747 (last visited Sept. 26, 2013). At the very least, a
sophisticated investor seeking diligently to protect its interest should have probed further. Even a
modest probe-as it turns out-would have revealed the evident problems.

31

from the outset, only to give the proposed intervenor and plaintiffs a "pass" on the
clear and longstanding principles of standing. This would not be a just or legally
supportable result.
The motion to intervene is denied.
III.

CLASS CERTIFICATION15

The Court's rulings on the various summary judgment and intervention
motions have eliminated all claims pursuant to Sections 11 and 12 (and Sections 15
and 20). Thus, the motion to certify the class is a far narrower motion than that
originally briefed. Two classes can be maintained, one as to the two Auditor
defendants, and one as to the defaulted defendants. 16
The only remaining claims as to the defendants are those brought pursuant
to Section 10(b) of the Securities Exchange Act and Rule 10b·5 promulgated
thereunder. 15 U.S.C. § 78(b) (2010); 17 C.F.R. § 240.10b·5 (2013).
Plaintiffs have proposed the following class 17 :
All purchasers of Puda common stock and call options on Puda common stock
and sellers of put options on Puda common stock during the period November
13,2009, through October 3, 2011, both dates inclusive (the "Class Period").18

15 Plaintiffs' request to appoint class representatives and class counsel, made as part of their motion

to certify a class (ECF No. 216), is granted, except as set forth above with respect to Rosenberger's

standing for certain claims. That request was not contested. (See Underwriter Defs.' Opp. to PIs.'

Mot. for Class Cert., ECF No. 240.)

16 The Court notes that certain inside director and officer defendants have not been served. There is

no basis to certify a class relating to claims asserted against unserved defendants.

17 Plaintiffs also propose a subclass relevant to the Section 11 and 12 claims that have now been

dismissed.

18 Excluded from the Class are the defendants, other officers and directors of Puda Coal, members of

their immediate families and their heirs, successors or assigns of any of the foregoing. (See PIs.'

Mem. in Supp. of Mot. for Class Cert. 3 n.B, ECF No. 217.)

32

A plaintiff seeking to certify a class must prove by a preponderance of the
evidence that its proposed class meets the requirements of Rule 23(a) and, if those
requirements are met, that the class is maintainable under at least one of the
subdivisions of Rule 23(b). See Teamsters Local 445 Freight Div. Pension Fund v.
Bombardier Inc., 546 F.3d 196, 201-02 (2d Cir. 2008).
Rule 23(a) states that a party may be a class representative only if:
(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).
The subdivision of Rule 23 under which plaintiff here seeks to certify a class
is (b)(3), which allows certification if "the questions oflaw or fact common to class
members predominate over any questions affecting only individual members, and ..
. a class litigation is superior to other available methods for fairly and efficiently
adjudicating the controversy." Fed. R. Civ. P. 23(b)(3); see also In re Initial Pub.
Offering Sees. Litig., 471 F.3d 24, 33 (2d Cir. 2006) (hereinafter "In re IPO Sees.
Litig.").
Rule 23 is not 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). In evaluating a motion for class

certification, a district court is required to make a definitive assessment of Rule 23
requirements. See id.; see also Severin V. Project Oh.r, Inc., No. 10 Civ. 9696 (DLC),

33

2012 WL 2357410, at *4 (S.D.N.Y. June 20, 2012) (citing In re IPO Secs. Litig., 471
F.3d at 27). The district court must "receive enough evidence, by affidavits,
documents, or testimony, to be satisfied that each Rule 23 requirement has been
met." Teamsters Local 445, 546 F.3d at 204 (quoting In re IPO Secs. Litig., 471
F.3d at 42).
The Auditor defendants raise a threshold issue with respect to the Class
Period. They assert that the Class Period as to them-and that is the only Class
Period now at issue-must be limited to the timeframe in which they could
potentially be implicated in a misstatement or omission. (See Combined Opp. of
Moore Stephens Hong Kong and MPSC to PIs.' Mot. for Class Cert. ("Auditor Br.") 3,
ECF No. 236.) Plaintiffs concede as much in their memorandum in support of their
motion for class certification, noting that "MSHK and MSPC are only being sued
with respect to documents containing or incorporating their audited financial
statements, not any other of Puda's class period public statements." (PIs.' Mem. in
Supp. of Mot. for Class Cert. 3 n.5, ECF No. 217.) The Complaint identifies MSHK's
2009 and 2010 audit reports as the basis for the alleged Auditor liability.
Accordingly, the earliest that the Class Period could commence would be March 31,
2010.
A.

Numerosity and Common Questions

Class certification is appropriate if, inter alia, "the class is so numerous that
joinder of all members is impracticable." Fed. R. Civ. P. 23(a)(1). A class of more
than forty members "presumptively satisfies the numerosity requirement." Public

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Emps.' Ret. Sys. of Miss. v. Goldman Sachs Grp., Inc., 280 F.R.D. 130, 134 (S.D.N.Y.
2012). There is no dispute that any class here would be sufficiently numerous.
Defendants do not contest that point, and it is clear that the class, if certified, would
be greater than forty individual purchasers. See In re IndyMac Mortgage-Backed
Sees. Litig., 296 F.R.D. 226, 233 (S.D.N.Y. 2012).
Commonality is also uncontested on this motion. Even a single question of
law or fact will suffice to satisfy the commonality requirement. See Marisol A. by
Forbes v. Giuliani, 126 F.3d 372, 376-77 (2d Cir. 1997). Here, the question whether
the alleged misstatements and omissions with which the Auditor defendants are
associated were legally adequate is itself a sufficient common question to satisfy
Rule 23. That question is common to all members of the proposed class.
B.

Typicality and Adequacy

In the Second Circuit, typicality is satisfied when "each class member's claim
arises from the same course of events and each class member makes similar legal
arguments to prove the defendant's liability." See In re Flag Telecom Holdings, Ltd.
Sees. Litig., 574 F.3d 29,35 (2d Cir. 2009). While there may be variations in fact
pattern as between the named plaintiffs and other members of the class, if the same
allegedly unlawful conduct was directed at or affected them, the typicality
requirement is usually met. See Robidoux v. Celani, 987 F.2d 931,936-37 (2d Cir.
1993).
To satisfy the "adequacy" requirement, plaintiffs must prove both that the
interests of the named plaintiffs are not antagonistic to other members of the class,

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and that plaintiffs' attorneys are qualified, experienced, and able to conduct the
litigation. Flag Telecom, 574 F.3d at 35. Courts have generally found that if a
named plaintiffs claims satisfy the typicality requirement, he or she is also
adequate to represent the class. Damassia v. Duane Read(Oj, Inc., 250 F.R.D. 152,
158 (S.D.N.Y. 2008); see also Hicks v. Morgan Stanley & Co., No. 01 Civ. 10071
(HB), 2003 WL 21672085, at *3 (S.D.N.Y. July 16, 2003) (finding that class
representatives were adequate when the complaint alleged a common course of
conduct and unitary legal theory for the entire class period).
The Auditor defendants assert that in-and-out purchasers are subject to
unique defenses (including negative loss causation) that make them atypical of the
class (alternatively, this same argument would apply to a potential lack of
predominance under 23(b)(3». The Auditor defendants do not point to a particular
named plaintiff as an in-and-out purchaser. Nevertheless, plaintiffs do not contest
that among the purchasers of Puda Coal shares would be in-and-out purchasers.
Indeed, they concede as much in their reply memorandum in which they urge the
Court to include in-and-out purchasers according to a new "leakage" theory-that
news leaked into the market prior to April 8, 2011, and that significant price
declines had occurred by that date. (PIs.' Reply Mem. in Supp. of Mot. for Class
Cert. 9, ECF No. 251.) Plaintiffs state that they intended to file (and they have
filed) a motion to amend the Complaint to add a leakage theory. Plaintiffs' leakage
theory-if accepted-would pull into the class some in-and-out purchasers

36

~,

certain purchasers who sold or "got out" before the Letter Response of April 8,
2011).
Plaintiffs have submitted a report of an expert who performed certain
analyses in support of their certification motion, Gregg A. Jarrell (ECF No. 219).
The Jarrell Report confirms that there was significant trading activity of Puda Coal
shares prior to April 8, 2011. This is not surprising for a stock trading on the New
York Stock Exchange. However, it does support the Auditor defendants' argument
that in-and-out traders who sold prior to April 8, 2011 could well have had negative
loss causation. (Some sellers may also have experienced losses-but there is no
showing that such losses predominate over the winners, who theoretically sold at
the earliest warning signs.) Defendants, of course, do not bear the burden of proof
as to each element of Rule 23-plaintiffs do. In-and-out traders subject themselves
to unique inquiries regarding their trading patterns and why they made investment
decisions, whether the fraud was in fact irrelevant to their purchasing and sale
decisions, and whether they profited on individual trades. These inquiries will also
require considerable time and resources, and indeed threaten to become the focus of
the litigation.
Accordingly, based on the trading activity, it does appear that there is a
significant possibility of negative loss causation for in-and-out traders. On this
record, the Court finds that plaintiffs have not carried their burden as to the

37

typicality of in-and-out traders. Such traders are therefore excluded from the
class. 19
In Flag Telecom, the Second Circuit affirmed a finding that certain class
representatives failed the typicality requirement for Rule 23 because they were
subject to unique defenses as a result of having been "in-and-out" purchasers
(buying and selling into and out of the securities at issue during the class period).
Flag Telecom, 574 F.3d at 40-41; see also Bensley v. FalconStor Software, Inc., 277
F.R.D. 231, 237-41 (E.D.N.Y. 2011) (refusing to appoint a fund, an in-and-out
investor, as lead plaintiff because it was subject to unique defenses); In re Bally
Total Fitness Sec. Litig., No. 04C3530, 2005 \VL 627960, at *6 (N.D. Ill. Mar. 15,
2005) (refusing to appoint an in-and-out trader as lead plaintiff because it would
have to establish that losses were actually caused by the alleged fraudulent
statements, and would need to expend considerable resources to do so); cf. In re
Smart Techs., Inc., No. 11 Civ. 7673, 2013 WL 139559, at *9 (S.D.N.Y. Jan. 11,
2013) (excluding in-and-out purchasers from the class); Kline v. Wolf, 88 F.R.D. 696,
699 (S.D.N.Y. 1981) (denying class certification in part because a named plaintiff
was an in-and-out trader and therefore faced unique defenses), affd, 702 F.2d 400
(2d Cir. 1983).
19 The Court also denies the motion for leave to amend. (ECF No. 259.) This action was filed more
than two years ago; there has already been significant motion practice on the pleadings; and
significant activity in this case has occurred, including discovery, briefing, and decisions on certain
summary judgment motions. Amendment would now prejudice defendants. The Court notes that
long ago plaintiffs stated-after being asked by the Court-that they were content to rest on their
pleadings. In addition, the fact that significant trading occurred prior to April 8, 2011 is not
something that required more than a review of daily stock volumes available in any major
newspaper, and a leakage theory was therefore available and knowable at the earliest stages of this
case. The fact that an expert has now determined that a bigger damage number may come from an
earlier class period is insufficient at this late date to change theories of the case.

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C.

Predominance

In addition to having to meet each of the requirements of Rule 23(a) by a
preponderance of the evidence, plaintiffs must also meet the requirements of Rule
23(b)(3), referred to as the "predominance" requirement.
Predominance tests whether the proposed class is sufficiently cohesive to
warrant adjudication by representation. Myers v. Hertz Corp., 624 F.3d 537,547
(2d Cir. 2010); see also Amchem Prods., Inc. v. Windsor, 521 U.s. 591, 623 (1997).
"The requirement's purpose is to ensure that the class will be certified only when it
would achieve economies of time, effort, and expense, and promote uniformity of
decision as to persons similarly situated, without sacrificing procedural fairness or
bringing about other undesirable results." Myers, 624 F.3d at 547 (alteration,
citations, and internal quotation marks omitted). "Economies of time, effort and
expense in fully resolving each plaintiffs claims will only be served, and the
predominance requirement satisfied, if the plaintiffs can show that" the question at
issue can be "answered with respect to the members of the class as a whole through
generalized proof and that those common issues are more substantial than
individualized ones." Id. at 549 (alteration, citations, and internal quotation marks
omitted).
"Class-wide issues predominate if resolution of some of the legal or factual
questions that qualify each class member's case as a genuine controversy can be
achieved through generalized proof, and if these issues are more substantial than
the issues subject only to individualized proof." UFCW Local 1776 v. Eli Lilly &

39

Co., 620 F.3d 121, 131 (2d Cir. 2010). The existence of some individualized issues
does not necessarily defeat predominance-it is a question of the balance. See
Public Emps.' Ret. Sys. of Miss., 277 F.RD. at 111-19; In re NYSE Specialists Sees.
Litig., 260 F.RD. 55, 74-77 (S.D.N.Y. 2009).
Class certification is only warranted if plaintiffs can establish by a
preponderance of the evidence a class-wide presumption of reliance by virtue of the
presence of an efficient market critical to the fraud-on-the-market theory. See Basic
Inc. v. Levinson, 485 U.S. 224, 241-42 (holding that plaintiffs may be entitled to a
presumption of reliance on material misstatements or omissions to the extent that
securities they have purchased traded in an efficient market that incorporated all
such information into the price of the security).
In the absence of this presumption of reliance on a market that absorbs the
alleged material misstatements and omissions, questions as to whether any
particular investor in fact relied on any particular misstatement or omission come
to the fore and may overwhelm the common questions. In such a situation,
resolution through representative class action is neither feasible nor a superior
means of adjudication. See Fed. R Civ. P. 23(b)(3); see also Basic, 485 U.s. at 241­
42 ("The fraud on the market theory is based on the hypothesis that, in an open and
developed securities market, the price of a company's stock is determined by the
available material information regarding the company and its business.").
The "predominance" issue raised by the Auditor defendants relates to
whether plaintiffs can obtain the benefit of presumed reliance by virtue of trading

40

in an efficient market after April 8, 2011. 20 According to the Auditor defendants,
and confirmed by the Jarrell Report, plaintiffs have only proffered evidence that the
market for Puda Coal stock was efficient up to April 8, 2011. Plaintiffs of course
bear the burden of proof on market efficiency-and they have carried that burden
up to, but not beyond, April 8,2011. Jarrell himself states that he was only tasked
with examining market efficiency to that point. (Jarrell Report at 1.)
D.

The Auditor Defendants

As a result of the issues relating to the initial time period, in-and-out traders
and the lack of a demonstrably efficient market after April 8, 2011, the Court finds
that the a class may be certified only as follows:
All purchasers ofPuda common stock and call options on Puda common stock
and sellers of put options on Puda common stock during the period March 31,
2010 through April 8, 2011, both dates inclusive (the "Class Period"). In-and­
out purchasers are excluded from the class, along with defendants, other
officers and directors of Puda Coal, members of their immediate families and
their heirs, and successors or assigns of any of the foregoing.

E.

The Defaulted Defendants

There are two defendants who have been served but are in default. No
judgment of default has yet issued. The liability phase of this case is still ongoing
as a matter of law as to them. The Court therefore considers certification of a
separate class for these defendants.
The Court cannot ignore its findings by a preponderance of the evidence as
set forth above, even for defendants in default. The Court is required to conduct a

20 The Court's prior discussion as to in-and-out traders also applies to the predominance element.
For the same reasons that in-and-out traders are not typical, questions as to their trading patterns,
losses, etc. would predominate over common questions.

41

vigorous inquiry under Rule 23 before certifying a claim. See Wal-Mart, 131 S. Ct.
at 2551. The lack of demonstrably efficient market after April 8, 2011 thus
similarly limits the certifiable class as to the defaulted defendants. However, inand-out purchasers would similarly have unique defenses defeating
typicality/predominance. The Court certifies a class of plaintiffs as to the defaulted
defendants as follows:
All purchasers of Puda common stock and call options on Puda common stock
and sellers of put options on Puda common stock during the period November
13, 2009 through April 8, 2011, both dates inclusive (the "Class Period"). In­
and-out purchasers are excluded from the class, along with defendants, other
officers and directors of Puda Coal, members of their immediate families and
their heirs, and successors or assigns of any of the foregoing.

CONCLUSION
For the reasons set forth above, the Underwriter defendants' motion for
summary judgment is GRANTED; the Outside Director defendants' motion fm
summary judgment is GRANTED; the Auditor defendants' motions for summary
judgment are GRANTED; Trellus's motion to intervene is DENIED; plaintiffs'
motion for class certification and appointment of class representatives and class
counsel is GRANTED as modified; and plaintiffs' motion for leave to amend is
DENIED.

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The Clerk of the Court is directed to terminate the motions at ECF Nos. 176,
188, 194, 196, 198, 199, 216, and 258.
SO ORDERED.

Dated:

New York, New York
October
2013

L,

=

KATHERINE B. FORREST
United States District Judge

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