Goldstein v. Puda Coal, Inc. et al

Filing 399

OPINION AND ORDER: re: (373 in 1:11-cv-02598-KBF) MOTION to Dismiss the Second Consolidated Class Amended and Supplemental Complaint. filed by Macquarie Capital (USA) Inc., (370 in 1:11-cv-02598-KBF) MOTION to Dismiss Count IV (S ecurities Fraud) Of The Second Consolidated Amended And Supplemental Complaint. filed by Brean Murray, Carrt & Co., LLC. For the reasons set forth above, the underwriters' motions to dismiss the complaint are DENIED. The Clerk of Court sha ll terminate the motions at ECF Nos. 370 and 373. The parties shall confer and submit a proposed schedule for there solution of this matter within 10 days, or no later than Thursday, July 24, 2014. (Signed by Judge Katherine B. Forrest on 7/14/2014) Filed In Associated Cases: 1:11-cv-02598-KBF et al.(js) Modified on 7/14/2014 (js).

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

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC#:
DATE FILED:
l!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!'!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!J

11-cv-2598 (KBF)
and all member and related
cases
OPINION & ORDER

This document relates to: ALL ACTIONS

------------------------------------------------------------------- )(
KATHERINE B. FORREST, District Judge:
The second consolidated amended complaint in this matter ("Compl.,'' ECF
No. 352) asserts claims, inter alia, against Brean Murray, Carret & Co. ("Brean
Murray") and Macquarie Capital (USA) Inc. ("Macquarie") (collectively, the
"underwriters"), the underwriters of a public stock offering by Puda Coal Inc.
("Puda"), under Sections 11and12 of the Securities Act of 1933 and Section lO(b) of
the Securities Exchange Act of 1934 and Rule lOb-5 promulgated thereunder.
Now before the Court are the underwriters' motions to dismiss the complaint
on the grounds that (1) plaintiffs fail to allege that the underwriters "made" the
false statements within the meaning of Section lO(b) and Rule lOb-5, (2) plaintiffs
fail to allege facts sufficient for scienter, (3) plaintiff Trellus's claims are timebarred, and (4) Trellus lacks standing. (ECF Nos. 370, 373.)
For the reasons set forth below, both motions are DENIED.
I.

BACKGROUND
The Court assumes familiarity with the factual background underlying this

action. This action arises from an alleged fraudulent scheme orchestrated by

defendant Ming Zhao ("Zhao") to mislead investors as to the true ownership of
Puda's primary operating subsidiary, the Shanxi Puda Coal Group Co., Ltd.
("Shanxi"). Although Puda represented in public filings throughout the putative
class period that it owned 90% of Shanxi Coal, Zhao (Puda's former chairman and
its controlling shareholder) had secretly transferred Puda's interest in the
subsidiary first to himself and then to an unrelated private equity fund, effectively
leaving Puda a shell company without any assets, operations, or revenues. (Compl.

i1i1 8,

9, 11, 13, 81, 87.)
During the putative class period, Puda conducted two separate public

offerings without disclosing the transfers. (Id.

if 18.) In February 2010, Puda

conducted the first public offering, for which Brean Murray was the underwriter.
(Id.

irir 54-56.)

In December 2010, Puda conducted the second public offering, for

which Macquarie and Brean Murray were co-underwriters. (Id.

ifif 18, 42, 54-56.)

In this capacity, the underwriters "served as financial advisors, assisted in the
preparation and dissemination of the offering materials for the December Offering,
and had ultimate authority over the content of the Prospectus; the Underwriters'
names were prominently displayed on the first page of the offering prospectus as
'Joint Bookrunning Managers."' (Id.

if 56.) "Macquarie and Brean Murray jointly

with Puda's officers drafted" the prospectus in question and delivered it to
investors. (Id.

if 235.)

Before the December 2010 offering, Macquarie hired Kroll Inc. to assist with
Macquarie's due diligence efforts, specifically to "perform background checks with

2

respect to Puda and persons associated therewith." (Id.

~

57.) On December 2,

2010, Kroll delivered to Macquarie an investigative report showing that, based upon
public State Administration of Industry and Commerce ("SAIC") records, Puda did
not in fact own 90% of Shanxi Coal. (Id.) Six days before the December offering,
Kroll identified the true owners of Shanxi to Macquarie. (Id.) The Kroll report was
reviewed and disseminated among several Macquarie employees as well as legal
counsel for both underwriters. (Id.

~

152.)

The instant motions relate primarily to registration statements and a
prospectus that Puda filed with the SEC in connection with the December 2010
offering. (Id.

~

114.) Plaintiffs allege that these statements and prospectus were

false and misleading because they represented that Puda owned 90% of Shanxi
without disclosing the transfers. (Id.
II.

~~

116, 117.)

APPLICABLE LEGAL PRINCIPLES
A. Rule 12(b)(6) Motion to Dismiss
To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege

"enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal
556 U.S. 662, 678 (2009). In applying that standard, the court accepts as true all
well-pleaded factual allegations and draws all reasonable inferences in plaintiff's
favor, but does not credit "mere conclusory statements" or "[t]hreadbare recitals of
the elements of a cause of action." Id.
3

B. Section lO(b) and Rule lOb-5 of the Securities Exchange Act
To state a cause of action under Section lO(b) or Rule lOb-5, plaintiffs must
set forth sufficient plausible allegations that defendants "(1) made misstatements or
omissions of material fact; (2) with scienter; (3) in connection with the purchase or
sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance
was the proximate cause of their injury." In re IBM Corp. Sec. Litig., 163 F.3d 102,
106 (1998). "For purposes of Rule lOb-5, the maker of a statement is the entity with
authority over the content of the statement and whether and how to communicate
it." Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2303
(2011).
"Securities fraud claims are subject to heightened pleading requirements that
the plaintiff must meet to survive a motion to dismiss." ATSI Commc'ns, Inc. v.
Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). Of particular relevance here, the
complaint must "state with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind"-that is, scienter. 15 U.S.C. §
78u-4(b)(2)(A).
Scienter is the "mental state embracing intent to deceive, manipulate, or
defraud" by the maker of a statement. Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 319 (2007). When deciding a motion pursuant to Rule 12(b)(6), the
inquiry "is whether all of the facts alleged, taken collectively, give rise to a strong
inference of scienter." Id. at 322-23 (emphasis in original). "A complaint will
survive ... only if a reasonable person would deem the inference of scienter cogent

4

and at least as compelling as any opposing inference one could draw from the facts
alleged." Id. at 324.
The Second Circuit has "long held that the scienter element can be satisfied
by a strong showing of reckless disregard for the truth. By reckless disregard for
the truth, we mean conscious recklessness-i.e., a state of mind approximating
actual intent, and not merely a heightened form of negligence." S. Cherry Street,
LLC v. Hennessee Grp. LLC, 573 F.3d 98, 110 (2d Cir. 2009) (emphasis in original)
(citations and internal quotation marks omitted); see also Novak v. Kasaks, 216
F.3d 300, 308 (2d Cir. 2000) (explaining that recklessness is "highly unreasonable"
conduct that represents "an extreme departure from the standards of ordinary
care").
C. Sections 11and12 of the Securities Act
"Sections 11 and 12(a)(2) of the Securities Act impose liability on certain
participants in a registered securities offering when the registration statement or
prospectus contains material misstatements or omissions." Panther Partners Inc. v.
Ikanos Commc'ns, Inc., 681 F.3d 114, 119 (2d Cir. 2012). Section 11 imposes
liability for misstatements or omissions in registration statements, whereas Section
12 imposes liability for misstatements or omissions in prospectuses. Id.
III.

DISCUSSION
A. The Underwriters as "Makers" of the Statements
Defendants argue that plaintiffs have failed to allege that they were

"makers" of the material misstatements at issue within the meaning of Section
lO(b) of the Securities Exchange Act and Rule lOb-5. Under Janus, the "maker of a

5

statement is the person or entity with ultimate authority over the statement,
including its content and whether and how to communicate it .... [I]n the ordinary
case, attribution within a statement or implicit from surrounding circumstances is
strong evidence that a statement was made by-and only by-the party to whom it
is attributed." Janus, 131 S. Ct. at 2302. Relying on Janus, several district courts
have sustained Section lO(b) claims brought against underwriters. See Scott v. ZST
Digital Networks, Inc., 896 F. Supp. 2d 877, 890 (C.D. Cal. 2012) (sustaining a
Section lO(b) claim against an underwriter whose name appeared on the statement
in question); In re Nat'l Century Fin. Enters., Inc., 846 F. Supp. 2d 828, 861 (S.D.
Ohio 2012) (same); In re Allstate Life Ins. Co. Litig., No. cv-09-8162 (GMS), 2012
WL 176497, at *5 (D. Ariz. Jan. 23, 2012) (same).
Macquarie, with whom Brean Murray joins for purposes of this argument,
asserts that it was not the "maker" of the misstatements in Puda's prospectus and
registration statements. Rather, Macquarie argues that the prospectus was Puda's
document, and that Puda-not Macquarie-made any statements contained in that
prospectus. (See, e.g., Compl.

i!il 10 (alleging that "the Company" represented to

investors that Puda owned 90% of Shanxi), 234 (alleging that "the Company's"
prospectuses and registration statements were false and misleading) (emphasis
added).)
This Court disagrees. Under Janus, "attribution within a statement or
implicit from surrounding circumstances is strong evidence that a statement was
made by-and only by-the party to whom it is attributed." 131 S. Ct. at 2302.

6

With facts construed and inferences drawn in plaintiffs' favor, the complaint alleges
that Macquarie had authority over the information contained in the prospectus
sufficient to make its statements attributable to Macquarie. The complaint alleges
that the underwriters "actively participated in creating the Prospectus, drafting it
jointly with Puda management." (Compl.

ii 137.) Pursuant to its formal agreement

with the underwriters, Puda agreed to "prepare the Prospectus in a form approved
by" Macquarie. (Rosen Deel. Ex. 2,

at~

5(a)(i), ECF No. 386.) Indeed, on the

morning of the December offering, Puda's counsel sent an email stating that, while
the "Company has signed off," Puda's counsel still did not have "the underwriters'
sign off." (Compl.

ir 138.)

Thus, the complaint alleges that, "[a]bsent Macquarie's

sign-off and approval, the Prospectus would not have been filed with the SEC and
disseminated to investors." (Id.

~

139.)

Furthermore, the complaint alleges that the underwriters communicated
their involvement with the prospectus to the investing public in several ways. The
front cover of the prospectus prominently displayed both underwriters' names, thus
endorsing the statements within the prospectus to investors. (Id.

ii 56.) Macquarie

also solicited investors for the offering and distributed the prospectus to investors.
(Id.

~if

56, 137.) Finally, the prospectus provided that the underwriters were

authorized to make representations about Puda shares. (See Rosen Deel. Ex. 1, at
S-2.) Construed in plaintiffs' favor, these facts are sufficient to show "attribution
within a statement or implicit from surrounding circumstances" such that the

7

statements within the prospectus are attributable to the underwriters. Janus, 131
S. Ct. at 2302.
The underwriters cite several cases for the proposition that the underwriters'
actions here-participating in drafting and disseminating the December 2010
prospectus-are insufficient for them to have "made" the statements. However, the
cases on which the underwriters rely are distinguishable. 1
First, Macquarie cites Pacific Investment Mgmt. Co. LLC v. Mayer Brown
LLP for the proposition that "secondary actors can be liable in a private action
under Rule lOb-5 for only those statements that are explicitly attributed to them.
The mere identification of a secondary actor as being involved in a transaction, or
the public's understanding that a secondary actor 'is at work behind the scenes' are
alone insufficient." 603 F.3d 144 (2d Cir. 2010). However, that case dealt with a
law firm that was merely "mention[ed]" on offering documents as having
represented the issuing party as legal counsel. Id. at 158. The complaint in this
case, with reasonable inferences drawn in favor of the plaintiffs, alleges facts
supporting asserting far more intricate involvement by the underwriters. (See
Compl.

irir 56,

137-139; Rosen Deel. Ex. 1, at S-2, Ex-2, at

ii 5(a)(i).) The

1 Macquarie also cites the Supreme Court's recent decision in Halliburton Co. v. Eric P. John Fund,
Inc .. for the principle that Section lO(b) and Rule lOb-5 liability should not be extended "to entirely
new categories of defendants who themselves had not made any material, public misrepresentation."
No. 13-317, 2014 WL 2807181, at *2 (U.S. June 23, 2014). Halliburton did not, however, disturb the
Supreme Court's prior statements in Janus that "the maker of a statement is the person or entity
with ultimate authority over the statement, including its content and whether and how to
communicate it," and that "attribution within a statement or implicit from surrounding
circumstances is strong evidence that a statement was made by-and only by-the party to whom it
is attributed." 131 S. Ct. at 2302. Based on the well-pleaded allegations of the complaint, the
underwriters fall within the definition of "maker" set forth in Janus.

8

underwriters' involvement in creating, approving, and disseminating the prospectus
constitute "attribution within a statement or implicit from surrounding
circumstances" sufficient for them to be "makers" of the statements. Janus, 131 S.
Ct. at 230.
Second, Macquarie cites SEC v. Tambone for the proposition that securities
professionals do not "impliedly 'make' a representation to investors that the
statements in a prospectus are truthful and complete." 597 F.3d 436, 447 (1st Cir.
2010). However, in that case, the SEC did not allege that the defendant played a
role in preparing the prospectus, but only in disseminating a prospectus. See id. at
439. Here, by contrast, plaintiff alleges not only that the underwriters distributed
the prospectus, but that they were involved in preparing and signing off on the
prospectus. (Compl.

il~

56, 137; Rosen Deel. Ex. 2,

at~

5(a)(i).) That combination of

facts, construed in plaintiffs' favor, is sufficient at the pleading stage to show the
necessary "authority over the content of the statement and whether and how to
communicate it." Janus, 131 S. Ct. at 2303.
Finally, both underwriters cite In re Fannie Mae 2008 Sec. Litig. for the
proposition that generalized, conclusory statements that an underwriter "made" the
alleged misstatements are insufficient. 891 F. Supp. 2d 458, 484 (S.D.N.Y. 2012),
aff d, 525 F. App'x 16 (2d Cir. 2013). However, the plaintiffs in that case did not
allege facts supporting an attribution theory, as here; rather, plaintiffs' claims were
based only on the underwriter's participation in preparing the prospectus. See
Fannie Mae, 891 F. Supp. 2d at 484. Additionally, the prospectus there only

9

incorporated the misrepresentations of previous SEC filings, over which Fannie
Mae, not the underwriter, had authority; the prospectus itself did not contain the
misstatements in question. See id. By contrast, the prospectus in this case itself
contained the false statements that Puda conducted its operations through its
subsidiary Shanxi. (See, e.g., Rosen Deel. Ex. 1, at S-5.) The specific facts set forth
in the complaint in this action are sufficient to survive a motion to dismiss.
Brean Murray separately argues that the complaint alleges only that
Macquarie, not Brean Murray, was the entity with ultimate authority over the
documents. (See Compl.

iiir 139, 154, 235.) This Court again disagrees. The

complaint does allege that Macquarie ultimately signed off on and approved the
prospectus, but the complaint also alleges that it did so as the representative of
both underwriters. (Id.

ii 139; Rosen Deel. Ex. 1, at S-22.) Additionally, both

underwriters' names are displayed on the front cover of the December offering
prospectus, and the prospectus provided that the "underwriters," not just
Macquarie, were authorized to make representations about Puda. (See Compl.

ii 56;

Rosen Deel. Ex. 1, at S-2.)
With all well-pleaded factual allegations assumed to be true and all
reasonable inferences drawn in plaintiffs' favor, plaintiffs' allegations are sufficient
at this stage to meet the "heightened pleading requirements" of a securities fraud
claim, ATSI Commc'ns, 493 F.3d at 99, and to plead that both underwriters were
"makers" of the alleged misstatements within the meaning of Section lO(b) under
Janus.

10

B. The Underwriters' Scienter
Brean Murray argues that plaintiffs' factual allegations fail to allege the
necessary scienter to survive a motion to dismiss under the "heightened pleading
requirements" of a securities fraud claim. ATSI Commc'ns, 493 F.3d at 99. Brean
Murray claims that the Kroll report was found only in Macquarie's files, and that it
neither had the Kroll report nor was aware of the facts contained in the Kroll
report. (Hr'g Tr. 41, Mar. 10, 2014, ECF No. 332.) Rather than recklessly or
deliberately closing its eyes to the issue of whether Puda actually owned Shanxi
Coal, Brean Murray claims that it simply missed the ownership transfer through
faulty due diligence. Thus, Brean Murray argues, an inference of negligence is far
more "compelling" than an inference of scienter, Tellabs, 551 U.S. at 324, which
requires "conscious recklessness-i.e., a state of mind approximating actual intent."
S. Cherry Street, 573 F.3d at 110 (emphasis in original).
This Court disagrees. The Court is mindful, of course, that simply alleging
that a party should have known of a fact is insufficient to survive a motion to
dismiss. See, e.g., Novak, 215 F.3d at 312. However, when construed in plaintiffs'
favor, the allegations in the complaint indeed allege that the transfer was "so
obvious" that Brean Murray "must have been aware of it," S. Cherry Street, 573
F.3d at 112, and "consciously disregarded it," Dolphin & Bradbury, Inc. v. SEC, 512
F.3d 634, 639 (D.C. Cir. 2008)-that is, that Brean Murray was reckless.
On April 8, 2011, after Alfred Little revealed Zhao's transfer of Shanxi, the
chief executive officer ("CEO") of Brean Murray, William McCluskey, stated in an
email, "Wasn't this news talked about and dismissed a while ago?" (Compl.
11

~

164 &

n.27.) Construed in plaintiffs' favor, that statement is enough to show that Brean
Murray was aware of the transfer and consciously disregarded it. Moreover, Zhao's
transfer of Shanxi to himself was not hidden and was in fact recorded in public files.
An American money manager named Dan David, Kroll, and Puda's board of
directors all were able to obtain documentation of the transfer through inquiring
with the SAIC, where Zhao filed the relevant paperwork. (See Compl.

iii!

32, 150,

175.) The fact that Brean Murray lacked the Kroll report itself is not dispositive.
In light of underwriters' "unique position" and the requirement that underwriters
"exercise a high degree of care in investigation and independent verification of the
company's representation," plaintiffs adequately allege that Brean Murray's failure
to uncover the transfer was fraudulent. See In re WorldCom, Inc. Sec. Litig., 346 F.
Supp. 2d 628, 662 (S.D.N.Y. 2004).
For these reasons, the factual assertions in the complaint-assumed to be
true and with all reasonable inferences drawn in plaintiffs' favor-allege enough
"circumstantial evidence of ... recklessness" to raise a strong inference of scienter.
ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187,
198 (2d Cir. 2009). The complaint therefore satisfies the "heightened pleading
requirements" of a securities fraud claim, ATSI Commc'ns, 493 F.3d at 99, and "the
inference of scienter [is] cogent and at least as compelling as any opposing inference
one could draw from the facts alleged." Tellabs, 551 U.S. at 324; see also Ganino v.
Citizens Utils Co., 228 F.3d 154, 169 (2d Cir. 2000) (stating that "great specificity"
is not required for allegations of scienter).

12

C. Trellus's Claims and the Statute of Limitations
Macquarie also repeats its argument previously set forth in this litigation
that Section 11and12 claims by Trellus Management Company LLC ("Trellus") are
time-barred. (See, e.g., ECF Nos. 211, 317, 326; Hr'g Tr. Mar. 10, 2014.) For the
reasons set forth below, this Court disagrees.
1. Procedural history

The Court assumes familiarity with the unusual procedural history of this
litigation. On May 13, 2013, Trellus moved to intervene in this action. (ECF No.
176.) On October 1, 2013, the Court granted the underwriters' motion for summary
judgment; it ruled, inter alia, that named plaintiff Thomas Rosenberger lacked
standing due to his inability to trace the shares he purchased to the December 2010
offering. (ECF No. 263 at 13-19.) Accordingly, the Court dismissed the claims
against the underwriter defendants "for lack of subject matter jurisdiction." (ECF
No. 305.) In the October 2013 opinion, the Court also denied Trellus's motion to
intervene as time-barred under the statute of limitations, and ruled that Trell us
could not benefit from tolling under American Pipe & Construction Co. v. Utah, 414
U.S. 538 (1974), due to a lack of subject matter jurisdiction over Rosenberger's
claims at the outset of the action. (ECF No. 263 at 23-32.) The Court also ruled
that Trellus's motion was untimely based on a four-factor test weighing the equities
in favor and against intervention. Trellus appealed that ruling. (ECF No. 272.)
On February 4, 2014, after Macquarie produced the Kroll report in discovery,
Trellus moved pursuant to Rule 62. l(a)(3) for an indicative ruling that this Court
would grant a Rule 60(b) motion to vacate its earlier denial of Trellus's intervention
13

motion and would permit Trellus to intervene. (ECF Nos. 288, 289.) On February
21, 2014, the Court granted the Rule 62.l(a)(3) motion. (ECF No. 305.) On March
18, 2014, after further briefing on the issue, the Court reaffirmed that it was
prepared to allow Trell us to assert claims as a party plaintiff under several Federal
Rules of Civil Procedure. (ECF No. 331.) On April 2, 2014, the Second Circuit
remanded the appeal to this Court. (ECF No. 343.) On April 7, 2014, the Court
granted Trellus's Rule 60(b) motion and allowed it to enter as a party plaintiff.
(ECF No. 347.)
Macquarie argues that the Court should not have allowed Trellus to
intervene in this action. It maintains that Trellus's claims remain time-barred
notwithstanding the production of the Kroll report because, when Trell us moved to
intervene in May 2013, the applicable statute of limitations had already expired,
and American Pipe tolling was unavailable. The Court agrees with Macquarie that
the equitable factors involved in determining timeliness do not relate to the
question of whether a complaint is time-barred due to the statute of limitations.
See MasterCard Int'l Inc. v. Visa Int'l Serv. Ass'n, Inc., 471 F.3d 377, 390 (2d Cir.
2006). The Court also does not revisit its earlier determination that American Pipe
tolling is unavailable under these circumstances. Furthermore, the Court is
mindful of the Second Circuit's recent holding that "the Rule 15(c) 'relation back'
doctrine does not permit members of a putative class, who are not named parties, to
intervene in the class action as named parties in order to revive claims that were

14

dismissed from the class complaint for want of jurisdiction." Police & Fire Ret. Sys.
of City of Detroit v. IndyMac MES, Inc., 721 F.3d 95, 110 (2d Cir. 2013). 2
Nonetheless, the doctrine of equitable tolling provides a basis for tolling the
statute of limitations and either granting Trellus's motion to intervene under Rule
24 or substituting Trell us for Rosenberger as plaintiff under Rules 15 and 21.
2. Equitable tolling
"Equitable tolling is a doctrine that permits courts to extend a statute of
limitations on a case-by-case basis to prevent inequity." Warren v. Gavin, 219 F.3d
111, 113 (2d Cir. 2000); see also Irwin v. Dep't of Veterans Affairs, 498 U.S. 89, 95

(1990); IndyMac, 721 F.3d at 108 ("Judicial power to toll statutes of limitations
arises from an exercise of a court's equity powers, traditionally used to relieve
hardships which, from time to time, arise from a hard and fast adherence to more
absolute legal rules.") (internal quotation marks omitted). "Equitable tolling
requires a party to pass with reasonable diligence through the period it seeks to
have tolled." Johnson v. Nyack Hosp., 86 F.3d 8, 12 (2d Cir. 1996).
For the reasons set forth in the Court's prior orders, this case presents
unusual circumstances that warrant equitable tolling. On April 15, 2011-one
week after the Shanxi transfer was revealed-Harriet Goldstein filed the first
complaint in this action on behalf of herself and other purchasers of Puda securities

2 The Second Circuit in IndyMac faced the question whether the Rule 15(c) "relation back" doctrine
applied to make claims timely notwithstanding the three-year statute of repose, rather than the oneyear statute of limitations. 721 F.3d at 110. The Second Circuit noted that, in contrast to the
statute of limitations, application of equitable tolling to the "three-year repose period is barred by
Lampf, which states that equitable 'tolling principles do not apply to that period."' Id. at 109
(quoting Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991)).
IndyMac thus does not bar the application of equitable tolling to the one-year statute oflimitations.

15

pursuant to or traceable to Puda's December 2010 offering; on the face of the
complaint, it appeared that she could trace her shares to the December 2010
offering. (ECF No. 1 ~[if 39, 52.) Trell us became aware of the lawsuit within a
month of its filing, and contacted plaintiffs' lead counsel on January 6, 2012. (ECF
No. 263 at 21.) On February 9, 2012, Thomas Rosenberger filed the operative
complaint, which alleged that he purchased shares pursuant to or traceable to the
offering and thus had standing. (Id. at 22.) In June 2012, Trellus and plaintiffs'
counsel again discussed the status of the lawsuit. (Id.) On May 13, 2013, Trell us
then moved to intervene, before the underwriters filed motions for summary
judgment and before the Court dismissed Rosenberger's claims for lack of standing.
(ECF Nos. 176, 188, 263.)
Based on the complaints of which Trell us was aware, it was reasonable to
believe that the plaintiffs had standing to represent a class including Trellus and
other investors. Trellus also acted diligently in following up with plaintiffs' counsel
to discuss the lawsuit. Furthermore, although Trellus moved to intervene after the
statute of limitations on its claims in fact expired, Trell us could reasonably believe
that plaintiffs had standing and that Trellus could benefit from American Pipe
tolling. Trellus thus acted with "reasonable diligence through the period it seeks to
have tolled,'' and can benefit from equitable tolling. Johnson, 86 F.3d at 12.
Because equitable tolling applies to the statute of limitations in this matter,
Trellus may intervene in this action pursuant to Rule 24. As the Court previously
explained in its orders of February 21 and April 7, 2014 (ECF Nos. 305, 347), the

16

production of the Kroll report increases the "prejudice to [the] applicant if the
motion [for intervention were] denied," and presents "unusual circumstances
militating for ... a finding of timeliness." MasterCard, 4 71 F.3d at 390.
The Court may alternatively substitute Trell us as plaintiff pursuant to Rules
15 and 21. Under Rule 21, "on its own, the court may at any time, on just terms,
add or drop a party." Fed. R. Civ. P. 21. Under Rule 15, the "court should freely
give leave [to amend the complaint] when justice so requires." Fed. R. Civ. P. 15.
The Court's discretion in this regard "encompasses both whether to permit
substantive amendments of plaintiffs' claims and allegations, as well as whether to
permit the joinder of additional plaintiffs." In re Initial Public Offering Sec. Litig.,
224 F.R.D. 550, 551 (S.D.N.Y. 2004). Even where the statute oflimitations has run
on a putative plaintiffs claims, equitable tolling may nonetheless permit the Court
to substitute a plaintiff. See In re Initial Public Offering Sec. Litig., Nos. 21-mc-92,
01-cv-9741, 01-cv-10899 (SAS), 2004 WL 3015304, at *4 (S.D.N.Y. Dec. 27, 2004).
For these reasons, Trellus's claims are not time-barred under the doctrine of
equitable tolling.
D. Trellus's Standing With Respect to Macquarie Under Section 12
Finally, Macquarie argues that Trellus lacks standing to assert a Section 12
claim against it. Section 12(a)(2) provides that any "person who ... offers or sells a
security ... by means of a prospectus ... which includes an untrue statement of a
material fact or omits to state a material fact ... shall be liable ... to the person
purchasing such security from him." 15 U.S.C. § 77l. Thus, Macquarie argues that
a purchaser in a public offering can sue only his statutory seller-the person who
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either sold the securities directly to him or solicited his purchase and was
"motivated at least in part by a desire to serve [its] own financial interests or those
of the securities owner." Pinter v. Dahl, 486 U.S. 622, 642 (1988). The complaint
alleges that Trellus purchased December offering shares not from Macquarie, but
rather from Brean Murray. (See Compl.

ii 42.)

Nonetheless, Trellus has standing under Section 12 to assert claims against
Macquarie. Trellus alleges that Macquarie prepared and disseminated the
December 2010 offering materials, prominently displayed its name on the
prospectus, received financial benefits in connection with the offering, and served as
a representative for Brean Murray. (Id.

iii! 56, 121, 154.) 3 Macquarie's direct

participation in preparing the offering materials and soliciting the purchase of Puda
shares by Trellus makes it a statutory seller under Section 12. See Pinter, 486 U.S.
at 642; Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988) (finding that plaintiffs
could state a Section 12 claim against partners who "contemplated and authorized"
a transaction). Trellus therefore has standing against Macquarie under Section 12.

:i Plaintiff also cites deposition testimony indicating that Macquarie sent a representative with Zhao
to meet with Trell us. (Crowell Deel. Ex. 3, at 84: 10-85: 10 ("I think there was a banker from
Macquarie ... present."), ECF No. 388.) Plaintiffs provided this deposition testimony as an exhibit
to their opposition to Macquarie's motion to dismiss. (See id.) The testimony is therefore outside the
four corners of the complaint and does not appear to be the type of public filing of which the Court
may take judicial notice. The cases that plaintiffs cite are not to the contrary. See Blue Tree Hotels
Inv. (Can.) Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212 (2d Cir. 2004) ("[W]e
may also look to public records, including complaints filed in state court, in deciding a motion to
dismiss."); Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991) (relying on "public
documents" filed with the SEC in deciding a motion to dismiss). But see Cartee Indus., Inc. v. Sum
Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991) (explaining that "the problem that arises when a court
reviews statements extraneous to a complaint generally is the lack of notice to the [party] that they
may be so considered," and affirming a district court's decision to consider non-public documents in
deciding a motion to dismiss). In any event, the deposition testimony is not necessary to this Court's
finding that Macquarie was a statutory seller within the meaning of Section 12.

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IV.

CONCLUSION
For the reasons set forth above, the underwriters' motions to dismiss the

complaint are DENIED. The Clerk of Court shall terminate the motions at ECF
Nos. 370 and 373. The parties shall confer and submit a proposed schedule for the
resolution of this matter within 10 days, or no later than Thursday, July 24, 2014.
SO ORDERED.
Dated:

New Y{k, New York
July I , 2014

jc_ /J .~-KATHERINE B. FORREST
United States District Judge

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