Goldstein v. Puda Coal, Inc. et al

Filing 650

REPORT AND RECOMMENDATION: Defaulting defendants have not made any written submissions to me, nor have they contacted my chambers in any way. Accordingly, I make the following findings of fact and conclusions of law as to the defaulting defendants o n the basis of plaintiffs' written submissions alone. (As further set forth in this Report.) Accordingly, for all the foregoing reasons, I respectfully recommend that judgment be entered for plaintiffs against Puda and Zhao, jointly and severally, in the amount of $228 million, plus post-judgment interest, with costs to be taxed by the Clerk of the Court. Objections to R&R due by 1/20/2017 (Signed by Magistrate Judge Henry B. Pitman on 1/6/2017) Copies Sent By Chambers (cf)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X
11 Civ. 2598 (DLC)(HBP)
IN RE PUDA COAL SECURITIES INC.
et al. LITIGATION

:
:

REPORT
AND RECOMMENDATION

-----------------------------------X

PITMAN, United States Magistrate Judge:

TO THE HONORABLE DENISE L. COTE, United States District
Judge,

I.

Introduction

Class representatives Salomón Querub, Howard Pritchard,
Hotel Ventures LLC and Steven Weissmann and intervenor Trellus
Management Company LLC ("Trellus") commenced this class action
alleging various violations of the securities laws, stemming from
actions taken by defendant Puda Coal, Inc.'s ("Puda") former
Chairman of the Board of Directors, defendant Ming Zhao.

Plain-

tiffs1 allege that defendants Puda, Zhao, Liping Zhu, Qiong Laby
Wu, Jianfei Ni, C. Mark Tang, Lawrence S. Wizel, Moore Stephens
Hong Kong, Moore Stephens, P.C., Macquarie Capital (USA) Inc.
("Macquarie") and Brean Murray, Carret & Co. ("Brean Murray")
violated various provisions of the securities law by falsely

1

"Plaintiffs" refers to the class representatives, Trellus
and the class.

representing that Puda owned 90% of an operating subsidiary,
Shanxi Coal, and that Puda was a profitable company.
The claims against all of the defendants have been
resolved except for the claims against defendants Puda and Zhao.
The Honorable Denise L. Cote, United States District Judge,
entered final judgment in favor of defendants Moore Stephens Hong
Kong and Moore Stephens, P.C. in June 2015 (Order Entering Final
Judgment, dated June 8, 2015 (Docket Item ("D.I.") 505)).2

Judge

Cote dismissed all claims against defendants Zhu, Wu and Ni
(Order, dated Oct. 20, 2015 (D.I. 558)).

Plaintiffs settled

their claims against defendants Macquarie (Stipulation and
Agreement of Settlement, dated Oct. 16, 2015 (D.I. 555); Final
Order and Judgment of Dismissal, dated June 21, 2016 (D.I. 610)),
Brean Murray (Amended Stipulation of Settlement, dated Oct. 16,
2015 (D.I. 556); Final Judgment and Order of Dismissal, dated
June 21, 2016 (D.I. 611)), Tang and Wizel (Stipulation and

2

While an appeal of Judge Cote's order was pending, Moore
Stephens, P.C. settled with plaintiffs (Stipulation and Agreement
of Settlement, dated Sept. 16, 2016 (D.I. 629); Memorandum of Law
in Support of Plaintiffs' Motion for Preliminary Approval of
Proposed Class-Action Settlement with Moore Stephens, P.C., dated
Sept. 16, 2016 (D.I. 631), at 2). While Judge Cote had preliminarily approved that settlement on December 21, 2016 (Order
Preliminarily Approving Proposed Settlement, dated Dec. 21, 2016
(D.I. 643) ¶ 2), she vacated that approval on December 30, 2016
(Order Vacating MSPC Preliminary Approval Order, dated Dec. 30,
2016 (D.I. 646)).
2

Agreement of Settlement, dated Dec. 1, 2015 (D.I. 574); Final
Order and Judgment of Dismissal, dated June 21, 2016 (D.I. 613)),
and all those settlements have been approved by Judge Cote.
Plaintiffs allege that Puda violated Sections 11 and
12(a)(2) of the Securities Act of 1933 (the "Securities Act") and
Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder.
77k, 77l, 78j(b); 17 C.F.R. § 240.10b-5.

15 U.S.C. §§

Puda has failed to

answer or move with respect to the Second Consolidated Amended
and Supplemental Complaint.

Accordingly, Judge Cote entered a

default against Puda (Order Entering Default Judgment, dated Nov.
17, 2014 (D.I. 459)).
Plaintiffs allege that Zhao violated Sections 11 and 15
of the Securities Act and Section 10(b), Rule 10b-5 and Section
20(a) of the Exchange Act.
C.F.R. § 240.10b-5.

15 U.S.C. §§ 77k, 77o, 78j(b); 17

Although Zhao answered the Second Consoli-

dated Amended and Supplemental Complaint, he later declared that
he no longer wished to defend the action (Declaration of Ming
Zhao, filed Feb. 17, 2015 (D.I. 486) ¶ 6).

Therefore, Judge Cote

also entered a default against Zhao (Order, dated Apr. 1, 2015
(D.I. 497)).
This matter was referred to me to conduct an inquest
concerning plaintiffs' entitlement to damages from the defaulting
3

defendants (Order of Reference, dated Nov. 17, 2014 (D.I. 462);
Order of Reference, dated Oct. 9, 2015 (D.I. 551)).

By a Sched-

uling Order dated June 23, 2016, I directed plaintiffs to serve
and file their proposed findings of fact and conclusions of law
by August 24, 2016 and directed defendants Puda and Zhao to
submit responsive materials by September 26, 2016.

The Schedul-

ing Order further provided as to each defendant:
IF DEFENDANTS (1) FAIL TO RESPOND TO PLAINTIFFS' SUBMISSIONS, OR (2) FAIL TO CONTACT MY CHAMBERS BY SEPTEMBER 26, 2016 AND REQUEST AN IN-COURT HEARING, IT IS MY
INTENTION TO ISSUE A REPORT AND RECOMMENDATION CONCERNING DAMAGES ON THE BASIS OF PLAINTIFFS' WRITTEN SUBMISSIONS ALONE WITHOUT AN IN-COURT HEARING. See Transatlantic Marine Claims Agency, Inc. v. Ace Shipping
Corp., 109 F.3d 105, 111 (2d Cir. 1997); Fustok v.
ContiCommodity Services Inc., 873 F.2d 38, 40 (2d Cir.
1989) ("[I]t [is] not necessary for the District Court
to hold a hearing, as long as it ensured that there was
a basis for the damages specified in a default judgment.").
(Scheduling Order, dated June 23, 2016 (D.I. 617) (emphasis in
original)).
Defaulting defendants have not made any written submissions to me, nor have they contacted my chambers in any way.
Accordingly, I make the following findings of fact and conclusions of law as to the defaulting defendants on the basis of
plaintiffs' written submissions alone.

4

II.

Findings of Fact

A.

The Parties

1.

Class representatives Querub, Pritchard and Hotel

Ventures LLC are individuals and a limited liability company that
purchased Puda securities on or between November 13, 2009 and
April 8, 2011 (the "Class Period") and claim to have lost,
collectively, more than $2 million (Second Consolidated Amended
and Supplemental Complaint, dated Apr. 21, 2014 (D.I. 352)
("SAC") ¶ 40; Memorandum of Law in Further Support of Motion for
Appointment as Lead Plaintiff, dated June 30, 2011 (D.I. 25), at
5).3
2.

Class representative Weissmann is an individual who

purchased Puda securities, including options, during the Class
Period (SAC ¶ 41).
3.

Intervenor Trellus is a limited liability company

that purchased or acquired Puda securities for funds under its
management during the Class Period, including 179,734 shares of

3

As a result of the default, all of the allegations of the
SAC, except as to the amount of damages, must be taken as true as
against the defaulting defendants. Greathouse v. JHS Sec. Inc.,
784 F.3d 105, 107 (2d Cir. 2015); Greyhound Exhibitgroup, Inc. v.
E.L.U.L. Realty Corp., 973 F.2d 155, 158-59 (2d Cir. 1992); Trans
World Airlines, Inc. v. Hughes, 449 F.2d 51, 69-70 (2d Cir.
1971), rev'd on other grounds sub nom., Hughes Tool Co. v. Trans
World Airlines, Inc., 409 U.S. 363 (1973).
5

common stock purchased at $12 per share from Brean Murray on
December 8, 2010, pursuant to a public offering (the "December
Offering") (SAC ¶ 42).
4.

As certified by the Honorable Katherine B. Forrest,

United States District Judge, the class consists of "[a]ll
purchasers of Puda stock and call options on Puda common stock
and sellers of put options on Puda common stock" during the Class
Period, excluding "[i]n-and-out purchasers," i.e., persons who
bought Puda securities after November 13, 2009 and who liquidated
their positions prior to April 8, 2011 (Opinion and Order, dated
October 1, 2013 (D.I. 263), at 42).4
5.

As certified by Judge Cote, the subclass for claims

pursuant to Section 11 of the Securities Act consists of "[t]hose
persons or entities who purchased Puda shares pursuant or traceable to the [December Offering], and who were damaged thereby."
The subclass for claims pursuant to Section 12(a)(2) of the
Securities Act consists of "[t]hose persons or entities who
purchased Puda shares:

(a) directly in the [December Offering]

from either Brean or Macquarie, or whose purchase of Puda shares
was directly solicited by Puda, Zhao, Macquarie or Brean and (b)

4

A shorter class period was certified with respect to claims
against defendants Moore Stephens Hong Kong and Moore Stephens,
P.C. (Opinion and Order, dated Oct. 1, 2013 (D.I. 263), at 41).
6

who were damaged thereby" (Order Regarding Class Certification,
dated Jan. 12, 2015 (D.I. 481), at 2 (emphasis in original)).
6.

Defendant Puda is a Delaware corporation with its

principal executive offices located at 426 Xuefu Street, Taiyuan,
Shanxi Province, China (SAC ¶ 44).
7.

Defendant Zhao was, at all relevant times, the

Chairman of the Board of Directors of Puda and owned approximately 36% of Puda's outstanding common stock.

Zhao was also, at

all relevant times, Chairman of Shanxi Coal's Board of Directors.
Zhao was previously Puda's President and CEO from July 2005 to
June 2008 and Shanxi Coal's CEO from 1995 to June 2008 (SAC ¶
45).

B.

The Defendants' Fraud

8.

During the Class Period, Puda claimed to be a

supplier of cleaned coking coal used to produce coke for steel
manufacturing in China and a government appointee to consolidate
mining operations in Shanxi Province (SAC ¶ 44).
9.

Puda's operations are conducted exclusively through

Shanxi Coal, which owns all of Puda's mining assets, coal washing
plants, cash and receivables (SAC ¶ 44).
10.

Shanxi Coal's operations were the sole source of

Puda's revenue and profits (SAC ¶ 5).
7

11.

Before and during the Class Period, Puda repre-

sented that it indirectly "own[ed] 90% of the equity interest" in
Shanxi Coal.

Zhao owned 8% of Shanxi Coal and his brother, Y.

Zhao, owned the remaining 2% (SAC ¶ 8).
12.

On or about September 3, 2009, Zhao arranged for

his brother, Y. Zhao, to authorize improperly and cause the
transfer of Puda's 90% interest in Shanxi Coal to Zhao, adding to
the 8% interest Zhao already held.5

Additionally, Y. Zhao di-

vided and transferred half of his interest in Shanxi Coal to Zhao
(1%) and half to a Shanxi Coal employee named Wei Zhang (1%) (SAC
¶ 9).
13.

As a result, as of around September 3, 2009, Zhao

had increased his ownership of Shanxi Coal to 99%, thereby
leaving Puda with no ownership in Shanxi Coal (SAC ¶ 9).
14.

Puda's shareholders were not advised of this

transfer (SAC ¶ 9).
15.

Having obtained a 99% ownership interest in Shanxi

Coal in September 2009, on or around July 15, 2010, Zhao transferred 49% of his interest in Shanxi Coal to CITIC Trust Co.,
Ltd. ("CITIC"), in exchange for 100% of the ordinary shares in

5

As demonstrated by the corrective disclosures in paragraphs
30 and 35, Zhao did not provide any consideration to Puda in
exchange for Puda's interest in Shanxi Coal.
8

the CITIC Juxinhuijin Trust Fund I (the "CITIC Fund I") (SAC ¶
11).6

CITIC had created the CITIC Fund I as an investment vehi-

cle to hold and operate the business of Shanxi Coal (SAC ¶ 12).
16.

Just days after Zhao transferred 49% of his

interest in Shanxi Coal to CITIC, he pledged the remaining 51% of
his interest in Shanxi Coal to CITIC as security to obtain a 2.5
billion yuan, three-year loan to Shanxi Coal at a cost of 14.5%
(12.5% annual interest plus 2% annual fees).

In November 2010,

the loan was increased to 3.5 billion yuan (SAC ¶ 13).
17.

Even though Zhao and Y. Zhao's actions effectively

rendered Puda a shell company with no assets, no operations and
no revenue, Puda nevertheless continued to represent to investors
during the Class Period that it owned 90% of Shanxi Coal (SAC ¶¶
10, 85-87).
18.

Puda made these representations in its 10-K

reports for 2009 and 2010 and in its 10-Q reports for the third
quarter of 2009 through the third quarter of 2010 (SAC ¶¶ 85-87).

6

Although the SAC alleges that Zhao acquired only 99% of
Shanxi Coal (SAC ¶ 11), it also goes on to allege that he transferred 100% of Shanxi Coal stock to CITIC (SAC ¶ 13). Because
Zhao could not transfer more stock than he owned, I interpret the
SAC to allege that the percentages Zhao transferred to CITIC were
percentages of the stock Zhao owned, not percentages of Shanxi
Coal's issued and outstanding stock.
9

19.

Moreover, Puda's annual reports for 2009 and 2010

represented that "[t]he operations of Shanxi Coal are [Puda's]
sole source of revenues."

At the time these statements were

made, Puda did not maintain any ownership interest in Shanxi Coal
after it was transferred to Zhao in September 2009 (SAC ¶ 89).
20.

Additionally, Puda continued to consolidate the

operating results of Shanxi Coal into Puda's 10-K reports for
2009 and 2010 and 10-Q reports for the third quarter of 2009
through the third quarter of 2010 (SAC ¶¶ 77-79, 81, 83-84).
This was a violation of generally accepted accounting principles
(SAC ¶¶ 81-84).
21.

Puda conducted two separate public securities

offerings in 2010 without disclosing the transfer of its interest
in Shanxi Coal or that it no longer had any operating business at
all (SAC ¶ 18).
22.

The registration statement and prospectus for the

December Offering expressly incorporated Puda's false and misleading 10-K report for 2009 and the 10-Q reports for the first
and second quarters of 2010.

Thus, Puda improperly incorporated

Shanxi Coal's operating results into its own at a time when Puda
had no ownership or control over Shanxi Coal (SAC ¶ 116).
23.

Moreover, the registration statement and prospec-

tus failed to disclose that Zhao had transferred ownership of
10

Puda's Shanxi Coal stock to himself, that he sold 49% of his
holdings in Shanxi Coal to CITIC, that he pledged the remaining
51% to CITIC as collateral for a loan and that Puda did not have
any ownership interest in Shanxi Coal after September 3, 2009
(SAC ¶ 117).
24.

Puda raised $115 million from public investors by

selling shares in what was effectively an empty shell company
(SAC ¶ 18).
25.

Until April 2011, the defendants did not disclose

to investors that Puda no longer had any ownership interest in
Shanxi Coal, and hence had no operating business or revenue (SAC
¶ 19).
26.

On or around April 8, 2011, Alfred Little pub-

lished a research report on Puda (the "Little Report"), accusing
Zhao of improperly transferring ownership of Shanxi Coal to
himself in September 2009, selling 49% of his interest in Shanxi
Coal to CITIC in July 2010 and pledging the remaining 51% of his
interest in Shanxi Coal to CITIC as collateral for a loan (SAC ¶
19).
27.
news.

Investors immediately reacted negatively to this

Puda's stock price promptly declined $3.10 per share, or

by 34.1%, to close on Friday, April 8, 2011 at $6.00 per share,
on unusually heavy trading volume (SAC ¶ 20).
11

28.

The following Monday morning, April 11, 2011,

before the market opened, the NYSE Amex Exchange (the "NYSE
Amex") halted trading of Puda's shares.

Trading remained halted

for more than four months, rendering the stock held by Puda's
shareholders immediately illiquid (SAC ¶ 20).

During these four

months, the NYSE Amex delisted Puda's stock (SAC ¶ 25).
29.

Shortly after the Little Report, Puda's Audit

Committee commenced an investigation into the allegations of
fraud (SAC ¶¶ 21-23, 175-76).
30.

In a last minute effort to avoid liability for his

transfers of Shanxi Coal stock, Zhao offered to buy Puda for $12
per share, an offer that was disclosed in a press release issued
by Puda on April 29, 2011.

The press release further announced

that Puda's Audit Committee intended to review and negotiate the
terms of the sale and that Puda was "continu[ing] to investigate
the allegations raised in a recent article alleging various
unauthorized transactions in the shares of . . . Shanxi Coal, by
Mr. Zhao" and that Puda intended "to provide further information
when the investigation [was] complete" (SAC ¶¶ 23, 176).
31.

Zhao's promised buyout offer never materialized

(SAC ¶¶ 177, 194).
32.

On August 18, 2011, after a halt of more than four

months, trading of Puda's stock resumed on the OTC Pink Sheets.
12

Over the course of the next two days of trading, investors dumped
their holdings en masse (SAC ¶¶ 25, 183).
33.

On August 18, 2011, Puda's shares declined $1.90

per share, nearly 32% from the April 8, 2011 closing price of
$6.00 per share, to close at $4.10 per share.

On Friday, August

19, 2011, Puda's shares declined another $0.87 per share, more
than 21%, to close at $3.23 per share.

During these few days,

Puda's shares lost 46.17% of their value, on unusually heavy
trading volume (SAC ¶¶ 26, 183-84).
34.

The decline in Puda's stock price was stopped when

trading was halted for a second time prior to the start of
trading on Monday, August 22, 2011 (SAC ¶ 26).
35.

On September 1, 2011, Puda's Audit Committee

issued a lengthy report which disclosed, among other things, the
"interim" findings of its internal investigation.7

The Audit

Committee's findings effectively confirmed that the rumors of
Zhao's improper and undisclosed transfer of Puda's ownership of
Shanxi Coal to himself and then to CITIC were true, as was the
rumor that 51% of Zhao's Shanxi Coal stock was pledged to CITIC
as security for a loan to Shanxi Coal.

7

The Committee did not

Although labeled interim, there was no further investigation of the remaining open issues because, in part, the funds
available to pay counsel had run out (SAC ¶ 27).
13

resolve allegations concerning the existence of the loan itself
because of conflicting evidence, including a letter from Zhao and
purportedly issued by CITIC, denying that CITIC had funded the
loan (the "CITIC Letter") (SAC ¶¶ 27, 185).
36.

Following this announcement, Puda's shares resumed

trading and declined $1.21 per share, or by 37.46%, to close on
September 2, 2011 at $2.02 per share, on unusually heavy trading
volume (SAC ¶ 186).
37.

On October 3, 2011, Puda disclosed that it re-

ceived a letter from CITIC confirming that the CITIC Letter was
not, in fact, issued by CITIC (SAC ¶¶ 29, 190).
38.

Upon this news, Puda's stock dropped another 16.6%

(SAC ¶¶ 29, 191).
39.

In the wake of the Little Report and subsequent

disclosures, Puda's market capitalization has lost more than $325
million in value (SAC ¶ 192).
40.

Puda's and Zhao's wrongful conduct directly and

proximately caused the economic losses suffered by plaintiffs
(SAC ¶ 170).
41.

Because the trading market for Puda securities was

open, well-developed and efficient at all relevant times, the
market promptly digested current information regarding Puda from

14

all publicly available sources and reflected such information in
Puda's stock price (SAC ¶¶ 195-96).

III.

Conclusions of Law

A.

Jurisdiction and Venue

42.

This Court has subject matter jurisdiction over

this action pursuant to Section 22 of the Securities Act, 15
U.S.C. § 77v, Section 27 of the Exchange Act, 15 U.S.C. § 78aa,
and 28 U.S.C. § 1331.
43.

Venue in this district is proper pursuant to

Section 22 of the Securities Act, 15 U.S.C. § 77v, Section 27 of
the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1391(b).
Substantial acts in furtherance of the alleged fraud or the
effects of the fraud have occurred in this District.

B.

Determination of Liability and Damages

1.

44.

Standards Governing Default Motions

"'[W]hile a party's default is deemed to consti-

tute a concession of all well pleaded allegations of liability,
it is not considered an admission of damages.'"

Renaissance

Search Partners v. Renaissance Ltd. LLC, 12 Civ. 5638 (DLC), 2014
WL 4928945 at *4 (S.D.N.Y. Oct. 1, 2014) (Cote, D.J.), quoting
15

Cement & Concrete Workers Dist. Council Welfare Fund v. Metro
Found. Contractors Inc., 699 F.3d 230, 234 (2d Cir. 2012).
45.

Thus, even where, as here, defendants have de-

faulted, the court must "conduct an inquiry in order to ascertain
the amount of damages with reasonable certainty."

Credit Lyonna-

is Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir.
1999).
46.

To determine damages, a court may rely on detailed

affidavits and documentary evidence in lieu of an evidentiary
hearing.

Action S.A. v. Marc Rich & Co., 951 F.2d 504, 508 (2d

Cir. 1991); see Fed.R.Civ.P. 55(b)(2)(B) ("The court may conduct
hearings or make referrals . . . when, to enter or effectuate
judgment, it needs to . . . determine the amount of damages."
(emphasis added)); accord Trustees of Mason Tenders Dist. Council
Welfare Fund, Pension Fund, Annuity Fund & Training Program Fund
v. Stevenson Contracting Corp., 05 Civ. 5546 (GBD)(DF), 2008 WL
3155122 at *4 (S.D.N.Y. June 19, 2008) (Freeman, M.J.) (Report &
Recommendation), adopted by, 2008 WL 2940517 (S.D.N.Y. July 29,
2008) (Daniels, D.J.).
47.

Accordingly, and in light of defendants' default,

I shall rely on the uncontradicted statements and evidence
contained in plaintiffs' affidavits and other submissions regarding purchase, sale and other prices.
16

2.

48.

Section 11
of the Securities Act

Trellus asserts a claim pursuant to Section 11 of

the Securities Act, 15 U.S.C. § 77k, against Puda and Zhao on
behalf of the subclass of people who acquired shares of Puda's
common stock in or traceable to the December Offering pursuant to
false offering materials issued in connection with the offering
(SAC ¶ 199).
49. The elements of a claim under Section 11 of the
Securities Act are:

(1) the purchase of a registered security,

"either directly from the issuer or in the aftermarket following
the offering"; (2) defendant's participation in the offering
"sufficient to give rise to liability under [S]ection 11,"8 and
(3) a registration statement that "'contained an untrue statement
of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein
not misleading.'"

In re Morgan Stanley Info. Fund Sec. Litig.,

592 F.3d 347, 358-59 (2d Cir. 2010), citing 15 U.S.C. § 77k(a);

8

The parties who may be liable under Section 11 include
"every person who signed the registration statement." 15 U.S.C.
§ 77k(a)(1). In addition, the issuer may be liable under Section
11. Omnicare, Inc. v. Laborers Dist. Council Constr. Indus.
Pension Fund, 135 S. Ct. 1318, 1323 (2015).
17

see also In re Fuwei Films Sec. Litig., 634 F. Supp. 2d 419, 435
(S.D.N.Y. 2009) (Sullivan, D.J.).
50.

Puda was the issuer of the securities in the

December Offering and Zhao signed the registration statement (SAC
¶¶ 114, 224-25).
51.

Because the registration statement for the Decem-

ber Offering expressly incorporated Puda's false and misleading
10-K report for 2009 and the 10-Q reports for the first and
second quarters of 2010, it was materially false; in those
filings, Puda improperly incorporated Shanxi Coal's operating
results into its own at a time when Puda had no ownership or
control over Shanxi Coal (SAC ¶ 116).
52.
disclose that:

Moreover, the registration statement failed to
(1) Zhao transferred ownership of Shanxi Coal to

himself; (2) he sold 49% of his interest in Shanxi Coal to CITIC;
(3) he pledged the remaining 51% of his interest to CITIC as
collateral for a loan and (4) Puda did not have an ownership
interest in Shanxi Coal after September 3, 2009 (SAC ¶ 117).
53.

Puda and Zhao are liable to plaintiffs for violat-

ing Section 11 of the Securities Act.
54.

Trellus and the subclass sustained damage in that

the value of their Puda shares declined as a result of Puda's and
Zhao's violation of Section 11 (SAC ¶¶ 20, 26, 27, 29, 204).
18

3.

55.

Section 12(a)(2)
of the Securities Act

Trellus also asserts a claim against Puda pursuant

to Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77l, on
behalf of the subclass of people or entities who purchased Puda
stock directly from one of the underwriters in the December
Offering or were directly solicited to make their purchases by
one of the underwriters (SAC ¶ 213).
56.

The elements of a claim under Section 12(a)(2) of

the Securities Act are:

(1) a sale "'by means of a prospectus or

oral communication'"; (2) "an untrue statement of a material fact
[in the prospectus or oral communication or the omission of] a
material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not
misleading,'" and (3) the defendant's status as a "'statutory
seller.'"9

In re Morgan Stanley Info. Fund Sec. Litig., supra,

9

A "statutory seller" includes one who has "'passed title,
or other interest in the security, to the buyer for value,'" or
"'successfully solicit[ed] the purchase [of a security], motivated at least in part by a desire to serve his own financial
interests or those of the securities['] owner.'" In re Morgan
Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 359 (alterations in original), citing in part Pinter v. Dahl, 486 U.S. 622,
642, 647 (1988).
19

592 F.3d at 359, citing 15 U.S.C. § 77l(a)(2); see also In re
Fuwei Films Sec. Litig., supra, 634 F. Supp. 2d at 435.
57.

The securities sold in the December Offering

occurred by means of a prospectus (SAC ¶ 114).

Because the

prospectus expressly incorporated Puda's false and misleading 10K report for 2009 and the 10-Q reports for the first and second
quarters of 2010, it was materially false because in those
filings, Puda improperly incorporated Shanxi Coal's operating
results into its own at a time when Puda had no ownership or
control over Shanxi Coal (SAC ¶ 116).
58.

Moreover, the prospectus failed to disclose that:

(1) Zhao transferred ownership of Shanxi Coal to himself; (2) he
sold 49% of his interest in Shanxi Coal to CITIC; (3) he pledged
the remaining 51% to CITIC as collateral for a loan and (4) Puda
did not have any ownership interest in Shanxi Coal after September 3, 2009 (SAC ¶ 117).
59.

Puda is a statutory seller because it sold its

common stock in the December Offering (SAC ¶¶ 114, 214).
60.

Puda is liable to plaintiffs for violating Section

12(a)(2) of the Securities Act.
61.

Trellus and the subclass sustained damage in that

the value of their Puda shares declined as a result of Puda's
violation of Section 12(a)(2) (SAC ¶¶ 20, 26, 27, 29).
20

4.

Section 15
of the Securities Act

62.

All plaintiffs assert a claim against Zhao pursu-

ant to Section 15 of the Securities Act, 15 U.S.C. § 77o (SAC ¶
222).
63.

"Section 15 establishes 'control person' liability

for violations of [S]ections 11 and 12."
Litig., supra, 634 F. Supp. 2d at 435.
under Section 15 are:

In re Fuwei Films Sec.
The elements of a claim

(1) "'a primary violation by a controlled

person'" and (2) "'control by the defendant of the primary
violator.'"

In re Fuwei Films Sec. Litig., supra, 634 F. Supp.

2d at 435, quoting In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d
611, 637 (S.D.N.Y. 2007) (Lynch, then D.J., now Cir. J).
64.

Although there is no definition of "control" in

the Securities Act, many courts have defined it as "the power to
direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by
contract, or otherwise."

E.g., Sec. & Exch. Comm'n v. First

Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996); In re:
EZCorp, Inc. Sec. Litig., 181 F. Supp. 3d 197, 212 (S.D.N.Y.
2016) (Carter, D.J.); In re Virtus Inv. Partners, Inc. Sec.
Litig., 15 Civ. 1249 (WHP), 2016 WL 3647959 at *8 (S.D.N.Y. July

21

1, 2016) (Pauley, D.J.); In re Wachovia Equity Sec. Litig., 753
F. Supp. 2d 326, 379 (S.D.N.Y. 2011) (Sullivan, D.J.); In re
Refco, Inc. Sec. Litig., supra, 503 F. Supp. 2d at 637.
65.

As explained in paragraphs 48-61, Puda violated

Sections 11 and 12 of the Securities Act.
66.

Zhao signed or authorized the signing of the

registration statement issued in connection with the December
Offering, participated in the process which allowed the offering
to be successfully completed or participated in the offer or sale
of Puda's shares (SAC ¶ 225).

As Chairman of the Board of

Directors, Zhao was responsible both for the content of the
registration statement and for ensuring it was not misleading
(SAC ¶ 226).

Thus, Zhao was a control person and is liable

pursuant to Section 15 of the Securities Act.
67.

Plaintiffs sustained damage in that the value of

their Puda shares declined as a result of Puda's violation of
Sections 11 and 12 of the Securities Act (SAC ¶¶ 20, 26, 27, 29,
227).

5.

68.

Section 10(b) of the
Exchange Act and Rule 10b-5

All plaintiffs assert a claim against Puda and

Zhao for violating Section 10(b) of the Exchange Act, 15 U.S.C. §

22

78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. §
240.10b-5 (SAC ¶ 229).
69.

The elements of a claim under Section 10(b) and

Rule 10b-5 are:

"(1) a material misrepresentation or omission by

the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission; (5) economic
loss; and (6) loss causation."

Erica P. John Fund, Inc. v.

Halliburton Co., 563 U.S. 804, 809-10 (2011) (internal quotation
marks omitted).
70.

The only proper defendant in a Rule 10b-5 private

suit is the "maker" of a statement.

Janus Capital Grp. v. First

Derivative Traders, 564 U.S. 135, 142-44 (2011).

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."

Janus Capital Grp. v. First Derivative Traders,

supra, 564 U.S. at 142.
71.

To be material, there must be "'a substantial

likelihood that a reasonable shareholder would consider [the
statement] important in deciding how to [act].'"

Basic Inc. v.

Levinson, 485 U.S. 224, 231-32 (1988) (requiring "'a substantial
likelihood that the disclosure of the omitted fact would have
been viewed by the reasonable investor as having significantly
23

altered the "total mix" of information made available'"), citing
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
72.

An inference of scienter can be supported:

"(a)

by alleging facts to show that defendants had both motive and
opportunity to commit fraud, or (b) by alleging facts that
constitute strong circumstantial evidence of conscious misbehavior or recklessness."

Novak v. Kasaks, 216 F.3d 300, 307 (2d

Cir. 2000) (internal quotation marks omitted).
At least four circumstances may give rise to a strong
inference of the required scienter: where the complaint sufficiently alleges that the defendants (1)
benefitted in a concrete and personal way from the
purported fraud; (2) engaged in deliberately illegal
behavior; (3) knew facts or had access to information
suggesting that their public statements were not accurate; or (4) failed to check information they had a
duty to monitor.
ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase
Co., 553 F.3d 187, 199 (2d Cir. 2009) (internal quotation marks
omitted).
73.

In order to show reliance, a plaintiff must

demonstrate that "but for the claimed misrepresentations or
omissions, the plaintiff would not have entered into the detrimental securities transaction" that led to the loss.

ATSI

Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 106 (2d Cir.
2007) (internal quotation marks omitted).

24

74.

To show causation, a plaintiff must allege that

"the subject of the fraudulent statement or omission was the
cause of the actual loss suffered, i.e., that the misstatement or
omission concealed something from the market that, when disclosed, negatively affected the value of the security."

Lentell

v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005) (internal quotation marks omitted; emphasis in original).
75.

As Chairman of Puda's Board of Directors, Zhao was

privy to and participated in the creation, development and
reporting of Puda's internal reports.

He enjoyed significant

personal contact and familiarity with the other defendants and
was advised of, and had access to, other members of Puda's
management team, internal reports and other data and information
about Puda's finances, operations and sales.

Moreover, he was

aware of Puda's dissemination of information to the public which
he knew was materially false and misleading (SAC ¶ 232).
76.

Because of his position with Puda, Zhao possessed

the power and authority to control the contents of Puda's filings
with the Securities and Exchange Commissioner (the "SEC") (SAC ¶
53).
77.

There were material misrepresentations in Puda's

10-K reports for 2009 and 2010 and 10-Q reports for the third
quarter of 2009 through the third quarter of 2010 because they
25

consolidated the operating results of Shanxi Coal, even though
Puda no longer had any ownership interest in it (SAC ¶¶ 77-79,
81-84).
78.

Moreover, Puda's 10-K report for 2009 and 10-Q

reports for the third quarter of 2009 through the third quarter
of 2010 contained material misrepresentations in that they each
represented that Puda owned 90% of Shanxi, even though Puda no
longer had any ownership interest in it (SAC ¶¶ 85-87).
79.

Additionally, Puda's 10-K reports for 2009 and

2010 represented that "[t]he operations of Shanxi Coal are
[Puda's] sole source of revenue."

At the time these statements

were made, Puda did not have any ownership interest in Shanxi
Coal because its interest had been transferred to Zhao in September 2009 (SAC ¶ 89).
80.

Moreover, as explained in paragraphs 51-52 and 57-

58, Puda's prospectus and registration statement in connection
with the December Offering were materially false and misleading.
81.

Puda and Zhao acted with scienter because they had

actual knowledge of the falsity of the misrepresentations (SAC ¶¶
233-34).

Moreover, Zhao received copies of Puda's reports prior

to, or shortly after, their issuance and had the ability and
opportunity to prevent their issuance or cause them to be corrected (SAC ¶ 53).
26

82.

At the time the foregoing misrepresentations were

made, plaintiffs did not know of their falsity and believed them
to be true.

Had plaintiffs and the marketplace known the truth

regarding Puda's misrepresentation that it owned 90% of Shanxi
Coal, plaintiffs would not have purchased or otherwise acquired
their Puda securities, or, if they had acquired such securities
during the Class Period, they would not have done so at the
artificially-inflated prices that they paid (SAC ¶ 237).
83.

Puda and Zhao are liable to plaintiffs for violat-

ing Section 10(b) of the Exchange Act and Rule 10b-5.
84.

When Puda's fraud was disclosed, the value of

Puda's shares declined (SAC ¶¶ 20, 26, 27, 29, 239).

As a

result, plaintiffs suffered damages in connection with their
respective purchases and sales of Puda's securities during the
Class Period.

6.

85.

Section 20(a)
of the Exchange Act

All plaintiffs assert a claim against Zhao pursu-

ant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78u(a) (SAC
¶ 240).
86.

The elements of a claim under Section 20(a) are:

(1) a primary violation of Section 10(b) by the controlled person

27

and (2) control of the primary violator by the defendant.
Special Situations Fund III QP, L.P. v. Deloitte Touche Tohmatsu
CPA, Ltd., 33 F. Supp. 3d 401, 437 (S.D.N.Y. 2014) (Ramos, D.J.);
McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d
105, 121 (S.D.N.Y. 2013) (Marrero, D.J.).
87.

Although the Exchange Act does not define "con-

trol," as noted in paragraph 64 above, most courts define it as
"the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting
securities, by contract, or otherwise."

E.g., Sec. & Exch.

Comm'n v. First Jersey Sec., Inc., supra, 101 F.3d at 1472-73.
88.

Moreover, "the majority of district courts in this

Circuit have required Section 20(a) plaintiffs to allege that the
defendant was, in some meaningful sense, a culpable participant
in the controlled person's fraud."

Special Situations Fund III

QP, L.P. v. Deloitte Touche Tohmatsu CPA, Ltd., supra, 33 F.
Supp. 3d at 437 (internal quotation marks omitted) (collecting
cases).

To show "culpable participation," a plaintiff must

allege, with particularity, "facts giving rise to a strong
inference that the defendant acted with the required state of
mind, i.e., scienter."

McIntire v. China MediaExpress Holdings,

Inc., supra, 927 F. Supp. 2d at 122 (internal quotation marks
omitted); see In re Satyam Comput. Servs. Ltd. Sec. Litig., 915
28

F. Supp. 2d 450, 482 (S.D.N.Y. 2013) (Jones, D.J.) ("A plaintiff
asserting a Section 20(a) claim must allege at least particularized facts of the controlling person's conscious misbehavior or
recklessness." (internal quotation marks omitted)); Kalin v.
Xanboo, Inc., 526 F. Supp. 2d 392, 406 (S.D.N.Y. 2007) (Karas,
D.J.).
89.

As explained in paragraphs 68-84, Puda violated

Section 10(b) and Rule 10b-5.
90.

By virtue of his high-level position as Chairman

of the Board of Directors, as well as his ownership and contractual rights, participation in and/or awareness of Puda's operations and/or intimate knowledge of the false financial statements
filed by Puda and disseminated to the public, Zhao had the power
to influence and control, and did influence and control, Puda's
decision-making, including controlling the content and dissemination of the various statements that were false and misleading.
Zhao received, or had unlimited access to, copies of Puda's
reports, public filings and other statements that were materially
misleading and prior to and/or shortly after these statements
were issued.

Zhao had the ability to prevent the issuance of the

statements or cause them to be corrected (SAC ¶ 242).
91.

In particular, Zhao had direct and supervisory

involvement in Puda's day-to-day operations and, by virtue of his
29

title and involvement in the transactions, can be presumed to
have had the power to control or influence the particular transactions giving rise to the securities violations (SAC ¶ 243).
Thus, Zhao was a control person and is liable pursuant to Section
15 of the Exchange Act.
92.

As a direct and proximate result of Puda's viola-

tion of Section 10(b) and Rule 10b-5, plaintiffs suffered damages
in connection with their purchase of Puda's securities during the
Class Period (SAC ¶¶ 20, 26, 27, 29, 244).

7.

Damages

93.

Plaintiffs' inquest submissions do not expressly

or implicitly address the damages recoverable as a result of
Puda's and Zhao's violations of the Securities Act.

To the

contrary, plaintiffs' inquest submissions focus exclusively on
the damages recoverable for a violation of Section 10(b) of the
Exchange Act and the impact of Section 201 of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4, on
plaintiffs' damages.

By its terms, the provisions of the PSLRA

limiting damages are applicable only to claims brought under the
Exchange Act.10

10

Given plaintiffs' total failure to address the

15 U.S.C. § 78u-4(e) limits damages in "any private action
(continued...)
30

damages recoverable under the Securities Act and their exclusive
focus on the damages recoverable under the Exchange Act, I
conclude that plaintiffs have abandoned any claim for damages on
their claims under the Securities Act.
94.

In an action alleging a violation of Section 10(b)

and Rule 10b-5, the most commonly accepted measure of damages is
the out-of-pocket loss, measured by the difference between the
purchase price and the true value of the security on the date of
purchase.

See, e.g., Acticon AG v. China N.E. Petroleum Holdings

Ltd., 692 F.3d 34, 38-41 (2d Cir. 2012); In re Barrick Gold Sec.
Litig., 314 F.R.D. 91, 103 (S.D.N.Y. 2016) (Scheindlin, D.J.);
Mazuma Holding Corp. v. Bethke, 21 F. Supp. 3d 221, 235 (E.D.N.Y.
2014).
95.

The PSLRA, however, caps damages on an investment

loss based on the price paid for the stock and the market price
for the stock subsequent to the disclosure.

Under the PSLRA,

damages may not exceed the "difference between the purchase

10

(...continued)
arising under this chapter." The foregoing provision of the
PSLRA is codified in Chapter 2B of Title 15. The Securities Act
is codified in Chapter 2A of Title 15. Accordingly, the provisions of the PSLRA limiting damages are inapplicable to claims
brought under the Securities Act. See In re Initial Pub. Offering Sec. Litig., 241 F. Supp. 2d 281, 337-38 (S.D.N.Y. 2003)
(Scheindlin, D.J.) (applying the same rationale and concluding
that the heightened pleading requirements of the PSLRA do not
apply to claims brought under the Securities Act).
31

. . . price . . . and the mean trading price of that security
during the 90-day period beginning on the date on which the
information correcting the misstatement or omission that is the
basis for the action is disseminated to the market."

15 U.S.C. §

78u-4(e)(1).
96.

Plaintiffs have submitted the expert reports of

Professor Gregg A. Jarrell and Peter Lert, Ph.D., C.F.A. in
support of their calculation of damages (Declaration of Joshua L.
Crowell in Support of Plaintiffs' Proposed Findings of Fact and
Conclusions of Law Concerning Damages, dated Aug. 24, 2016 (D.I.
626) ("Crowell Decl."), Exs. 1, 2, 11).
97.

Jarrell is a tenured Professor of Economics and

Finance at the University of Rochester's Simon Graduate School of
Business Administration (Crowell Decl., Ex. 1 ¶¶ 1, 4).

He holds

a Ph.D. in Business Economics from the University of Chicago,
with major concentrations in Industrial Organization and Finance,
an MBA from the University of Chicago and a B.S. in Business
Administration from the University of Delaware (Crowell Decl.,
Ex. 1 ¶ 4).
98.

Before his current position, Jarrell was a profes-

sor at the University of Rochester's Graduate School of Management and the George Washington University Law School (Crowell
Decl., Ex. 1 ¶¶ 5-6).

He was also a Senior Economist with
32

Lexecon, Inc., an economics consulting firm; Chief Economist for
the SEC, and the Senior Vice President and Director of Research
at the Alcar Group, Inc., a consulting and software firm specializing in financial valuations of businesses and securities
(Crowell Decl., Ex. 1 ¶¶ 5-6).

Jarrell has authored a number of

published papers in the fields of finance and economics (Ex. 1 to
Crowell Decl., Ex. 1, at 4-9).

He has also testified as an

expert in a number of securities cases (Ex. 1 to Crowell Decl.,
Ex. 1, at 9-11).
99.

Lert is an Affiliated Expert with Crowninshield

Financial Research, Inc., a financial economics consulting firm
(Crowell Decl., Ex. 11 ¶ 7).

He is a Chartered Financial Ana-

lyst, which Lert claims is the premier credential for financial
analysts worldwide (Crowell Decl., Ex. 11 ¶¶ 12-13).

To receive

this credential, an applicant must pass a series of three exams
covering such topics as equity analysis, fixed income analysis
and financial analysis (Crowell Decl., Ex. 11 ¶ 13).

In addi-

tion, an applicant must have extensive work experience in the
investment management field in order to qualify for the credential (Crowell Decl., Ex. 11 ¶ 13).
100.

Lert holds a Ph.D. in theoretical chemistry from

the University of California, San Diego, an M.S. in chemistry
from the University of California, San Diego and a B.S. in
33

chemistry from the University of Virginia (Ex. 2 to Crowell
Decl., Ex. 11, at 23).
101.

Lert has more than 24 years of experience in the

financial services industry (Crowell Decl., Ex. 11 ¶ 8).

He was

also a quantitative analyst at the SEC (Ex. 2 to Crowell Decl.,
Ex. 11, at 24).

Lert has authored several published papers in

the field of finance and is a member of the Boston Security
Analysts Society and the Chartered Financial Analyst Institute
(Ex. 2 to Crowell Decl., Ex. 11, at 25-27).

a.

102.

Jarrell's Per
Share Damages Analysis

Plaintiffs' calculation of the amount by which

the value of each share of Puda stock was inflated during the
Class Period, or plaintiffs' per-share damages, is based on
Jarrell's conclusion that had Puda or Zhao disclosed that Puda
had transferred its ownership interest in Shanxi Coal for no
consideration and that it had no other assets, Puda's stock price
would have gone to zero (Crowell Decl., Ex. 4, at 12:8-13:7).
103.

In performing his per-share damages analysis,

Jarrell assumed Puda's and Zhao's liability.

Moreover, Jarrell

assumed that at the beginning of the Class Period, Puda and Zhao
disclosed that, due to the transfer of stock in Shanxi Coal, Puda

34

no longer had any ownership interest in Shanxi Coal.

Jarrell

also assumed that Puda had no other assets (Crowell Decl., Ex. 1
¶ 60).
104.

To estimate the stock-price impact of this

hypothetical full-truth disclosure, Jarrell used "basic
financial-economic theory to analyze the implications of the
disclosure" and "examine[d] the economic evidence available about
Puda Coal's value when the full truth about the fraud was public
and fully impounded [sic] in its stock price" (Crowell Decl., Ex.
1 ¶ 60).
105.

Jarrell determined that, subsequent to this

hypothetical full-truth disclosure, the value of Puda stock would
have been zero (Crowell Decl., Ex. 1 ¶¶ 60-67).
106.

According to Jarrell, "[t]he most common approach

for measuring the level of artificial inflation present in a
company's stock price is through the use of an event study
analysis which measures the stock price reactions to the relevant
'corrective' disclosures that occurred during the time period for
which investors were informed of the Defendants' misconduct and
misrepresentations" (Crowell Decl., Ex. 2 ¶ 78).
107.

However, in reaction to the corrective disclo-

sures after the market close on April 7, 2011, Puda's stock did
not immediately fall to zero.

Instead, on the next day, April 8,
35

2011, the stock price closed at $6 per share (Crowell Decl., Ex.
1 ¶¶ 27-39).
108.

Before the market opened on the next trading day,

April 11, 2011, trading of the stock was halted and did not
resume until August 18, 2011 (Crowell Decl., Ex. 1 ¶¶ 43-44).
109.

After the market closed on August 19, 2011,

trading was again halted through September 1, 2011 (Crowell
Decl., Ex. 2 ¶ 53).
110.

Once trading resumed on September 2, 2011, Puda's

stock price did not reach zero -- or virtually zero -- until the
end of 2012 (Crowell Decl., Ex. 1 ¶ 64).
111.

Notwithstanding its being a shell company with no

assets or operations, Puda's stock price did not immediately
reach zero in response to the corrective disclosures because of
the following:

(1) the market was skeptical of the disclosures

in the Little Report; (2) Zhao's offer to buy out Puda was never
publicly withdrawn and (3) the true facts were not completely
disclosed until October 2011, when Puda disclosed that the CITIC
Letter was false and that Zhao falsely represented that CITIC
failed to fund the loan (Crowell Decl., Ex. 1 ¶¶ 46, 49; Crowell
Decl., Ex. 2 ¶¶ 81-82).
112.

In light of these facts, Jarrell employed a zero-

value approach, rather than a traditional event study.
36

Under the

zero-value approach, damages are calculated based on the determination that, in response to a hypothetical full-truth disclosure,
the value of Puda stock would be zero (Crowell Decl., Ex. 1 ¶¶
60-62).

This approach is supported by a working paper written by

National Economic Research Associates, Inc. (Crowell Decl., Ex. 2
¶¶ 84-88).

It is also supported by common sense; if Puda owned

nothing, had no income-producing operations and no plans to
develop income-producing operations, then its stock would have no
value.
113.

Because Puda stock did not trade at all in the 90

days following the end of the Class Period on April 8, 2011,
there are no trading prices during that 90-day period.

When

trading recommenced on August 18, 2011, the closing price of Puda
stock that day was $4.10 per share (Crowell Decl., Ex. 1 ¶ 68).
For the 90 calendar days after Puda stock commenced trading after
the second trading halt, on September 2, 2011, its average price
was $0.59 per share (Crowell Decl., Ex. 1 ¶ 68).
114.

Based on Jarrell's opinion that Puda's true value

was zero during the Class Period, and because there were no
intervening or market events that would have independently caused
a decrease in the price of Puda stock, Jarrell concluded that
the damages per-share appropriate for the Defaulted
Defendants equals the lesser of: i) the purchase price
minus the sales price; and ii) the purchase price minus
37

the PSLRA price. These damages apply to U.S. investors
who purchased Puda Coal common stock on or after November 13, 2009, and who held that stock at least until
the start of trading on April 8, 2011, so that they
suffered a stock-price drop on April 8, 2011.
(Crowell Decl., Ex. 1 ¶ 67).
115.

In calculating damages to be assessed against

Puda and Zhao, Jarrell assumed that investors are not damaged
unless they held their purchased Puda shares at least until the
start of trading on April 8, 2011.

Thus, investors who liqui-

dated their Puda stock before that date have no damages (Crowell
Decl., Ex. 1 ¶ 67).
116.

Because the application of the PSLRA lookback

provision is a legal issue, see infra paragraphs 129-35, Jarrell
calculated per-share damages based on two alternatives for the
PSLRA lookback price:

"i) the closing price of $4.10 per share

when trading resumed on August 18, 2011; or ii) the 90-day
average price of $0.59 after trading ultimately resumed on
September 2, 2011" (Crowell Decl., Ex. 1 ¶ 69).
117.

Thus, per-share damages for Puda common stock

equals the lesser of:

(1) the purchase price minus the sales

price or (2) the purchase price minus the PSLRA lookback price of
either $4.10 or $0.59.
118.
and put options.

Jarrell also calculated the damages for Puda call
For call options, Jarrell concluded that "[i]f
38

the value of the underlying stock is zero, a call option will
also have no value."

Thus, for purchasers of call options,

damages are "equal to the price paid to initiate the call position less the proceeds received on closing the position," provided that the position was held at least until April 8, 2011
(Crowell Decl., Ex. 1 ¶ 85).

For put options, Jarrell concluded

that "[i]f the value of the underlying stock is zero, the value
of the put option will be its exercise price."
of put options, damages are "equal to:

Thus, for sellers

i) the exercise price on

the date of sale less the proceeds received from the initiating
sale; less ii) the exercise price on the date the position was
closed less the cost of closing the position" (Crowell Decl., Ex.
1 ¶ 86).

b.

119.

Number of Damaged
Shares and Aggregate Damages

Lert calculated the number of damaged shares and

aggregate damages against Puda and Zhao (Crowell Decl., Ex. 11 ¶
36).
120.

Lert adopted Jarrell's per-share and per-contract

damages analysis and then aggregated damages using a two-trader
proportional trading model, which is discussed in more detail
below (Crowell Decl., Ex. 11 ¶¶ 2-3, 24-38).

39

Lert then estimated

aggregate damages based on the two alternative PSLRA lookback
prices calculated by Jarrell (Crowell Decl., Ex. 11 ¶ 3).

i.

121.

Two-Trader
Proportional Trading Model

To aggregate damages, Lert concluded it was

necessary to estimate how many Puda shares and options were
bought on each day of the Class Period and to estimate if and
when those same shares and options were subsequently sold (Crowell Decl., Ex. 11 ¶ 36).

The two-trader proportional trading

model estimates the requisite purchase and sale dates for all
shares of common stock traded during the Class Period (Crowell
Decl., Ex. 11 ¶ 37).
122.

Proportional trading models are generally ac-

cepted in finance and economics research and are widely used by
experts for calculating aggregate damages in the course of
litigation, settlement discussions and in drafting plans of
allocation for settlement (Crowell Decl., Ex. 11 ¶¶ 42-44).
Additionally, such models have been empirically tested in published peer-reviewed research studies and have been shown to
produce reliable estimates of aggregate damages in securities
litigation (Crowell Decl., Ex. 11 ¶¶ 45-48).

40

123.

Aggregated damages models, such as the propor-

tional trading model Lert employed, have been accepted in this
District for estimating aggregate damages under Section 10(b).
See, e.g., In re Worldcom, Inc. Sec. Litig., 02 Civ. 3288 (DLC),
2005 WL 517331 at *4-*5 (S.D.N.Y. Mar. 4, 2005) (Cote, D.J.); In
re Blech Sec. Litig., 94 Civ. 7696 (RWS), 2003 WL 1610775 at *26*27 (S.D.N.Y. Mar. 26, 2003) (Sweet, D.J.).

ii.

124.

Lert's Conclusions
on Aggregate Damages

To calculate aggregate damages using the two-

trader proportional trading model, Lert applied the same parameters utilized in a published empirical study, William H. Beaver,
James K. Malernee and Michael C. Keeley, Stock Trading Behavior
and Damage Estimation in Securities Cases, Cornerstone Research
(1997) (Crowell Decl., Ex. 11 ¶¶ 48, 52).
125.

Lert estimated damages only for Puda shares

purchased during the Class Period and held until at least the
final day of the Class Period, April 8, 2011.

He did not include

in-and-out traders in his calculation of aggregate damages
because such traders are not included in the class certified by
Judge Forrest in her Order dated October 1, 2013 (Crowell Decl.,
Ex. 11 ¶ 25).

41

126.

Based on a PSLRA lookback price of $0.59, Lert

estimated that aggregate class-wide damages for purchasers of
Puda stock were $197.1 million.

Based on a PSLRA lookback price

of $4.10, Lert estimated that aggregate class-wide damages were
$144.2 million (Crowell Decl., Ex. 11 ¶ 21).
127.

Lert also estimated the aggregate damages to

holders of Puda call options and writers of Puda put options
based on options market trading data and Jarrell's per-contract
damages calculations (Crowell Decl., Ex. 11 ¶¶ 65-72).

Based on

a PSLRA lookback price of $0.59, Lert estimated that aggregate
class-wide damages to holders of call options and writers of put
options were $39.6 million (Crowell Decl., Ex. 11 ¶ 22).

Based

on a PSLRA lookback price of $4.10, he estimated that aggregate
class-wide damages to holders of call options and writers of put
options were $27.8 million (Crowell Decl., Ex. 11 ¶ 22).
128.

Thus, based on a PSLRA lookback price of $0.59,

total estimated damages equal $236.7 million.

Based on a PSLRA

lookback price of $4.10, total estimated damages equal $172.0
million.

42

c.

129.

Application of the
PSLRA Lookback Provision

While Jarrell and Lert performed their calcula-

tions applying both potentially applicable PSLRA lookback prices,
I conclude that the lookback price of $0.59 per share should be
used.

This is consistent with the purpose of the PSLRA's lookba-

ck provision and Second Circuit precedent applying the lookback
provision.
130.

Under the PSLRA, damages are not calculated based

upon a single-day decline in price, but instead are given a 90day opportunity to recover after the misrepresentations or
omissions are corrected.

See Acticon AG v. China N.E. Petroleum

Holdings Ltd., supra, 692 F.3d at 38-39.
131.

The legislative history of the PSLRA indicates

that the purpose of the 90-day lookback is to prevent an overestimation of plaintiffs' damages by looking at the price only on
the day following the corrective disclosure.

Acticon AG v. China

N.E. Petroleum Holdings, Ltd., supra, 692 F.3d at 39.
132.

Due to the first trading halt on April 11, 2011,

Puda stock did not trade on any of the 90 days following the
initial, incomplete corrective disclosures on April 8, 2011.
Thus, it would not be appropriate to use the price ($4.10) on the
first trading day, August 18, 2011, after that 90-day period
43

elapsed.

Because trading had been halted throughout the previous

90 days, Puda's stock price did not have the requisite number of
trading days to reach an equilibrium price following the partial
disclosure of the fraud on April 8, 2011.
133.

Moreover, the full truth was not disclosed until

October 2011, when Puda's Audit Committee confirmed Zhao's theft
of the entirety of Puda's holdings in Shanxi Coal and confirmed
the falsity of Zhao's denials, through a series of disclosures
that continued well after August 18, 2011 (SAC ¶¶ 24, 27, 185).
See In re LDK Solar Sec. Litig., 255 F.R.D. 519, 528-29 (N.D.
Cal. 2009) ("If some tentative or partial disclosure of fraud is
published but the truth is not fully revealed, there would be no
reason to assume that the market fully recovered from the impact
of misrepresentation or omission." (emphasis in original)).
134.

Instead, the full effect of the disclosure of the

fraud on Puda's stock price is more accurately reflected in the
mean closing price, $0.59, for the 90-day period after Puda began
trading again, on September 2, 2011.
135.

While plaintiffs would ordinarily be entitled to

a total of $236.7 million in damages, that amount must be reduced
because plaintiffs settled with certain defendants.

44

8.

Settlement Reduction

136.

Section 21D(f) of the Exchange Act contains a

settlement reduction provision:
If a covered person enters into a settlement with the
plaintiff prior to final verdict or judgment, the
verdict or judgment shall be reduced by the greater of
-- (i) an amount that corresponds to the percentage of
responsibility of that covered person; or (ii) the
amount paid to the plaintiff by that covered person.
15 U.S.C. § 78u-4(f)(7)(B).
137.

A "covered person" is defined to mean a defendant

in any Exchange Act private action or an outside-director who is
a defendant in a private action arising under Section 11 of the
Securities Act.
138.

15 U.S.C. § 78u-4(f)(10)(C).
Prior to final verdict or judgment, plaintiffs

settled with Macquarie and Brean Murray.

Since both were Ex-

change Act defendants (SAC ¶¶ 229-39), they are "covered persons."
139.

Prior to final verdict or judgment, plaintiffs

also settled with Tang and Wizel.

Since both are independent

directors (SAC, Ex. 1, at 19, 24) and both were Section 11
defendants (SAC ¶¶ 197-210), they are "covered persons" as well.
140.

Plaintiffs settled with Macquarie for $7.4

million (Stipulation and Agreement of Settlement, dated Oct. 16,
2015 (D.I. 555) ¶ 1.41).
45

141.

Plaintiffs settled with Brean Murray for $1.2

million (Amended Stipulation of Settlement, dated Oct. 16, 2015
(D.I. 556) ¶ 1.18).
142.

Plaintiffs settled with Tang and Wizel for

$100,000 (Stipulation and Agreement of Settlement, dated Dec. 1,
2015 (D.I. 574) ¶ 2.1).11
143.

The total amount of plaintiffs' settlement with

covered persons equals $8.7 million.
144.

Subtracting the total of these four settlements

from plaintiffs' damages of $236.7 million, plaintiffs are
entitled to damages of $228 million.12

11

The "Settlement Amount," as defined in plaintiffs' settlement agreement with Tang and Wizel, is $100,000, to be paid by
Tang and Wizel, plus a stipulated judgment for $1.2 million,
which plaintiffs "shall not attempt to enforce or execute . . .
against [Tang and Wizel], and shall attempt to enforce or
execute . . . only against [the People's Insurance Company of
China ("PICC")] (Stipulation and Agreement of Settlement, dated
Dec. 1, 2015 (D.I. 574) ¶¶ 1.41, 2.1). In the absence of proof
that plaintiffs have been able to enforce the stipulated judgment
against PICC, or that they will be able to enforce the judgment,
I shall not include it in the total amount of the settlement
between plaintiffs and Tang and Wizel.
12

While plaintiffs also settled with Moore Stephens, P.C.,
an Exchange Act defendant, Judge Cote has not yet entered an
order of final approval of that settlement. Thus, I shall not
subtract the amount of that settlement from plaintiffs' damages.
46

9.

Joint and Several Liability

145.

Section 21D(f) of the Exchange Act provides for

proportionate liability for covered persons.

Under this provi-

sion, covered persons "shall be liable solely for the portion of
the judgment that corresponds to the percentage of responsibility
of that covered person," 15 U.S.C. § 78u-4(f)(2)(B)(i), unless
the covered person "knowingly committed a violation of the
securities laws."
146.

15 U.S.C. § 78u-4(f)(2)(A).

In the case of a knowing violation, covered

persons are jointly and severally liable.

15 U.S.C. § 78u-

4(f)(2)(A).
147.

A defendant knowingly violates the securities

laws in an action based on an untrue or misleading statement of
material fact if the defendant:

(1) "ma[d]e an untrue statement

of a material fact, with actual knowledge that the representation
is false," or (2) made a statement that was misleading because of
an omission "with actual knowledge that, as a result of the
omission, one of the material misrepresentations" made by the
defendant was false.

15 U.S.C. § 78u-4(f)(10)(A)(i)(I).

In

either instance, investors must be "likely to reasonably rely on
that misrepresentation or omission."
4(f)(10)(A)(i)(II).

47

15 U.S.C. § 78u-

148.

Puda and Zhao are covered persons because they

are Exchange Act defendants (SAC ¶¶ 229-39).

They made the

material misrepresentations13 with actual knowledge that they
were false (SAC ¶¶ 233-34).

Moreover, plaintiffs reasonably

relied on those misrepresentations (SAC ¶ 237).
149.

Therefore, Puda and Zhao are jointly and sever-

ally liable for plaintiffs' damages.

10.

150.

Post-Judgment Interest

Plaintiffs are entitled to post-judgment interest

as a matter of right.

Schipani v. McLeod, 541 F.3d 158, 165 (2d

Cir. 2008) ("[W]e have consistently held that an award of
postjudgment interest is mandatory."), citing Westinghouse Credit
Corp. v. D'Urso, 371 F.3d 96, 100 (2d Cir. 2004).

Accordingly, I

respectfully recommend that plaintiff be awarded post-judgment
interest on all sums awarded.

13

Although Zhao did not personally make the misrepresentations, the drafters of Section 21D(f) could not have intended to
limit the provision to individuals who personally make the
statements in issue; otherwise, outside-directors could not be
jointly and severally liable under Section 11. 2 Harold S.
Bloomenthal & Samuel Wolff, Securities Law Handbook § 37:5
(2016).
48

IV.

Conclusion

Accordingly, for all the foregoing reasons, I respectfully recommend that judgment be entered for plaintiffs against
Puda and Zhao, jointly and severally, in the amount of $228
million, plus post-judgment interest, with costs to be taxed by
the Clerk of the Court.14

V.

Objections

Pursuant to 28 U.S.C. § 636(b)(1)(C) and Rule 72(b) of
the Federal Rules of Civil Procedure, the parties shall have
fourteen (14) days from receipt of this Report to file written
objections.

See also Fed.R.Civ.P. 6(a).

Such objections (and

responses thereto) shall be filed with the Clerk of the Court,
with courtesy copies delivered to the Chambers of the Honorable
Denise L. Cote, United States District Judge, 500 Pearl Street,
Room 1610, New York, New York 10007, and to the Chambers of the
undersigned, 500 Pearl Street, Room 1670, New York, New York
10007.

Any requests for an extension of time for filing objec-

14

While plaintiffs demanded an award of costs and fees in
their Second Consolidated Amended and Supplemental Complaint
(SAC, at 87), their inquest submissions do not address either.
Costs are ordinarily taxed by the Clerk of the Court. With
respect to fees, neither the Securities Act nor the Exchange Act
contains a provision that permits recovery of attorneys' fees.
49

tions must be directed to Judge Cote.
FOURTEEN (14)

FAILURE TO OBJECT WITHIN

DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL

PRECLUDE APPELLATE REVIEW.

Thomas v. Arn,

474 U.S. 140, 155

(1985); United States v. Male Juvenile, 121 F. 3d 34, 38

(2d Cir.

1997); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054
(2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.
1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir.
1988); McCarthy v. Manson, 714 F.2d 234, 237-38

(2d Cir. 1983)

(~curiam).

Dated:

New York, New York
January 6, 2017
Respectfully submitted,

United States Magistrate Judge
Copies sent to:
Counsel for plaintiffs
For Ming Zhao:
Juan P. Morillo, Lauren Dickie,
Michael Carlinsky, Minyao Wang
Quinn Emanuel Urquhart & Sullivan LLP
For Puda Coal, Inc:
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801
AND
Shanxi Puda Coal Group, Ltd.
50

426 Xuefu Street
Taiyuan, 030006
China

51