Faris et al v. Longtop Financial Technologies Limited et al

Filing 203

OPINION AND ORDER re: 172 MOTION for Summary Judgment filed by Derek Palaschuk. For the foregoing reasons, Palaschuk's motion for summary judgment is denied. The Clerk of Court is directed to close this motion (Docket No. 172). A conference is scheduled for July 7, 2014 at 4:30 pm., ( Status Conference set for 7/7/2014 at 04:30 PM before Judge Shira A. Scheindlin.) (Signed by Judge Shira A. Scheindlin on 6/16/2014) (lmb)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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IN RE LONGTOP FINANCIAL
TECHNOLOGIES LIMITED
SECURITIES LITIGATION

OPINION AND ORDER
11-cv-3658

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SHIRA A. SCHEINDLIN, U.S.D.J.:
I.

INTRODUCTION
Lead plaintiffs bring this action on behalf of themselves and others

similarly situated against Longtop Financial Technologies, Ltd. ("Longtop" or
"LFT"); Longtop's former CEO, Lian Weizhou; Longtop's former CFO, Derek
Palaschuk; and Longtop's former auditor, Deloitte Touche Tohmatsu CPA Ltd.
("DTT"). 1 The class consists of all persons and entities who purchased Longtop
American Depositary Shares ("ADS's") on the New York Stock Exchange

See Complaint.

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("NYSE") between February 21, 2008 and May 17, 2011, inclusive (the "Class
Pcriod"). 2
Plaintiffs brought claims against all of the defendants under Section
lO(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule
1Ob-5 promulgated thereunder. They additionally brought claims under Section
20(a) of the Exchange Act against the individual defendants, Lian and Palaschuk. 3
Palaschuk and DTT separately moved to dismiss. I denied
Palaschuk's motion on June 29, 2012, 4 but granted DTT's motion on April 8, 2013
without leave to amend. 5 On November 14, 2013, I granted plaintiffs' motion for a
default judgment against Longtop and Lian, who failed to appear in this action. 6
Plaintiffs allege that Palaschuk made materially false and misleading
statements during the Class Period regarding: 1) Longtop's cash and loan balances,
profit margins, revenue, and other key financial metrics, 2) the effectiveness of

2

See In re Longtop Fin. Tech. Ltd. Sec. Litig., No. 11 Civ. 3658, 2013
WL 3486990 (S.D.N.Y. July 11, 2013).
3

See Complaint.

4

See In re Longtop Fin. Tech. Ltd. Sec. Litig., No. 11 Civ. 3658, 2012
WL 2512280 (S.D.N.Y. June 29, 2012).
5

See In re Longtop Fin. Tech. Ltd. Sec. Litig., 939 F. Supp. 2d 360
(S.D.N.Y. 2013).
6

See Order Entering Default Judgment, Dkt. No. 164.
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Longtop' s internal controls, and 3) the accounting irregularity of Longtop' s
financial statements. 7 Palaschuk made the allegedly misleading statements on
conference calls with investors as well as through Longtop' s public filings and
press releases. 8 Plaintiffs alternately seek to hold Palaschuk liable as a control
person for false and misleading statements made by Longtop.
Palaschuk now moves for summary judgment. For the following
reasons, his motion is DENIED.

II.

BACKGROUND
Longtop was founded in 1996 to provide information technology

services to the banking and financial industry in China. 9 Longtop grew from five
hundred employees in June of 2006 to over seven thousand employees in March of

See Complaint ifil 49, 162-234. The Complaint also alleged that
Palaschuk made materially false statements regarding Longtop' s use of a third
party entity to avoid paying social welfare benefits on behalf of its employees.
However, plaintiffs have now withdrawn those allegations. See Memorandum of
Law in Support of Plaintiffs' Motion to Exclude Report and Testimony of Alan D.
Bell at 25 ("Plaintiffs will not pursue at trial claims against Palaschuk related to
Longtop' s accounting for XLHRS or the adequacy of its social welfare
payments.").
7

8

See In re Longtop, 2012 WL 2512280, at *9 (finding Palaschuk to be
the "maker" of the signed press release commentary).
9

See Defendant Derek Palaschuk's Local Civil Rule 56.1 Statement of
Material Facts in Support of His Motion for Summary Judgment ("Def. 56.1") if 3.
Unless otherwise stated, all citations to Def. 56.1 are admitted by plaintiffs.
-3-

2011. 10 Palaschuk joined Longtop as CFO in September of 2006 and helped the
company complete an initial public offering ("IPO") on October 24, 2007 .11
Before Palaschukjoined the company, Longtop retained DTT as
outside auditors.12 DTT audited Longtop's financial statements and issued
multiple reports throughout the Class Period. In April of 2009, Palaschuk and his
employee Philip Li exchanged a series of emails with Tony Wen-ping Wang, an
employee from DTT's Shanghai office, regarding an ongoing audit. 13 Palaschuk
asked Wang to use alternative testing on Longtop's revenue contracts instead of
confirmations as Wang had originally planned. 14 Wang protested and explained
that "confirmation is a required procedure that we are [sic] difficult to get
around." 15 Palaschuk responded, "I am absolutely certain it is not a US auditing
standard to confirm terms of revenue contracts. If it is please send me the auditing

10

See id.

II

See id.

if 8.

12

See id.

if 7.

13

See 4120/09 to 4122109 email chain between Palaschuk, Li, and Wang
("4/20-22 Email Chain"), Ex. X to Declaration of Plaintiffs' Attorney Kimberly A.
Justice in Support of Plaintiffs' Memorandum of Law in Opposition to Defendant
Derek Palaschuk's Motion for Summary Judgment ("Justice Deel.").
14

See id. at 4-5.

15

Id. at 4.

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standard or other SEC requirement." 16 Wang sent Palaschuk several auditing
standards that recommended but did not require the use of revenue confirmations. 17
Palaschuk continued to insist that confirmation of revenue contracts was
unnecessary for Longtop, and Wang ultimately agreed to perform alternate
testing. 18
On February 4, 2010, Wedge Partners, an equity analysis firm, issued
a report identifying several "red flags" in Longtop's financials: 1) an exodus of
employees from Longtop's accounting department, 2) Longtop's use of a third
party intermediary employer, and 3) Longtop's rushed and overpriced acquisition
of a company called Giantstone. 19 The report concluded, "[i]n these situations,
especially in China, we have found it to be best to trust our instincts and choose not
to ignore the red flags .... " 20 Wedge Partners issued another report on March 23,
2010 clarifying that only two employees had left Longtop' s finance department,

16

Id.

17

See id. at 3.

18

See id. at 1.

19

See 214110 Wedge Report, Ex. Q to Justice Deel., at 1.

20

Id.

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and for personal reasons.2 1 The report reiterated concerns about Longtop's use of a
third party company to employ gtaff, ag well ag the Giuntgtone ucquigition. 22
In February 2010, Palaschuk emailed Lian and Ruan Cijie, Longtop's
head of business operations, 23 expressing concern about certain members of his
finance department. 24 He wrote:

Yingling [Li] is a wonderful and capable person but she cannot
manage financial operations and financial accounting for a
company with $300 million in revenue and 7,000 employees with
international business. Same goes for Junwei ... I know there are
many things that certain people are doing behind my back and I
am not going to tolerate it anymore. If you want to put people in
finance that only both of you "like" rather than based on them
being trustworthy and competent, then you should start your new
CFO search as soon as possible. 25

21

See 3/23/10 Wedge Report, Ex. 4 to Affidavit of Derek Palaschuk in
Support of Reply Memorandum of Law in Further Support of Motion for Summary
Judgment.
22

See id.

23

See Def. 56.1 ,-r 6.

24

See Febniary 2010 email from Palaschuk to Lian and Ruan, Ex. N to
Justice Deel., at 1.
25

Id.
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At the end of August 2010, Palaschuk moved to Vancouver, Canada. 26
Ile continued to serve as Longtop's CFO.
On October 14, 2010, Palaschuk received an email from Jonathan
Maietta, an analyst at Needham & Company, LLC ("Needham"), an investment
banking and asset management firm. Maietta expressed concern about Longtop' s
reported revenues from its largest customer, China Construction Bank ("CCB").
He wrote:

I just had a meeting with one of CCB' s senior IT officials. This
person ... disputed the CCB revenue contribution of $33 million
that LFT has reported. While this official did not disclose an
exact figure, said person implied that the "real" figure was
substantially less and jokingly said "maybe 33 million RMB, not
USD.'' Please advise. 27

When Maietta declined to give the name of his CCB contact, Palaschuk responded,
"[i]t is impossible for us to rebut these absolutely untrue comments without
knowing who said them and what is the persons [sic] position." 28

26

See Def. 56.1

~

27.

27

10/14/10 email chain between Maietta and Palaschuk ("10/14/10
Email Chain"), Ex. R to Justice Deel., at 2.
28

Id. at 1.
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On October 15, 2010, Needham issued a report downgrading
Longtop' s status from "buy" to "hold" based on its belief that CCB revenue was
likely to decrease significantly. 29 Needham issued another report on February 1,
2011 concluding, "[i]t appears that [concerns that we had previously about the
potential risk of a large customer slowing] will not materialize. We could
potentially take a more favorable stance on LFT shares in the low $30's." 30
On November 2, 2010, Palaschuk attended a meeting between DTT
and Longtop management, including Lian, Ruan, Yingling Li, and Philip Li.
According to the meeting minutes, the discussion centered on market rumors that:
1) Longtop had reported inflated revenue from CCB, 2) Longtop's margins were
suspiciously higher than its competitors, 3) Longtop had paid unusually "high
multiples to acquire companies," and 4) Longtop was using a third party human
resources company to employ the vast majority of its staff. 31
Although DTT indicated that it had seen no indicators of fraud or
potential inaccuracy in the CCB revenues, it suggested that Longtop hire an
29

See 10/15/10 Needham Report, Ex. 22 to Affidavit of Derek
Palaschuk in Support of Motion for Summary Judgment ("Palaschuk Aff."), at
1-2.
30

2/1/11 Needham Report, Ex. 23 to Palaschuk Aff., at 1.

31

11/2/10 Minutes of meeting between Longtop and DTT, Ex. Y to
Justice Deel., at 1.
-8-

independent third party to investigate. 32 Longtop's management responded: "As
there are no indications of fraud or internal control problems, an independent
investigation is unnecessary." 33 With respect to the other market rumors, DTT was
persuaded by management's explanations and concluded that no followup was
necessary. 34
On December 6, 2010, BMO Capital Markets, a financial services
provider, issued a favorable financial report on Longtop. 35 BMO gave Longtop a
stock rating of "outperform" and concluded that "[ s]treet fears that CCB revenues
could [decline] are likely overblown." 36
On or before February 22, 2011, an investor forwarded Palaschuk an
anonymous report about Longtop from the Internet (the "Anonymous Report").
The author of the Report stated: "I have strong doubts about the accuracy of LFT's
reported financials. Revenues from top customers cannot be verified and the
company's industry leading margins do not seem possible. Therefore the earnings

32

See id. at 2.

33

Id. at 3. However, management agreed to ask Longtop's counsel, Tim
Bancroft, whether an independent investigation was necessary. See id.
34

See id. at 3-4.

35

See 12/6/10 BMO Report, Ex. 24 to Palaschuk Aff.

36

Id. at 1, 5.
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and the cash on the balance sheet could be vastly overstated."37 The Report noted
that Longtop had reported gross margins of sixty-nine percent compared to fifteen
to fifty percent among its competitors. 38 The Report also explained in detail why
Longtop' s reported revenues from CCB could not be correct and hypothesized that
Longtop was "simply forging contracts." 39
The Anonymous Report also identified several other red flags,
including Longtop's third party staffing model, questionable acquisitions like
Giantstone, and suspicious management stock sales and gifts. 4° Furthermore, the
Report noted that several members ofLongtop's top management had been sued
for unfair business practices in connection with their previous business ventures,
and had paid significant damages. 41 The Report concluded, "[a] number of[]
Chinese frauds have been exposed recently and I think this could be the next one to
fall. ,,42

37

2/22/11 email from Palaschuk to Kyle Weaver, Ex. S to Justice Deel.,

38

See id. at 2.

39

Id.

40

See id. at 3-4.

41

See id. at 4-5.

42

Id. at 1.

at 1.

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Between March 11, 2011 and March 21, 2011, Palaschuk exchanged
emails with DTT manager Zuzu Zhu regarding DTT's confirmations ofLongtop's
cash balances. Palaschuk instructed Zhu to obtain bank statements directly from
the banks, stating: "If we are committing fraud[,] which we are not, it would be
useless for you to look at our accounting records because we make all the
accounting records. The only document[ s] that you can trust in the case of possible
fraud must be documents directly from the bank. " 43 Palaschuk pressured Zhu to
finish the cash confirmation report on a short timeline (two days). 44
On April 2, 2011, DTT completed a draft due diligence report on
Longtop's cash balances from September 30, 2010 through February 28, 2011.
After reviewing bank statements and certificates of deposit, DTT stated that it had
succeeded in confirming eighty-five percent to ninety-three percent of Longtop's
stated bank balances. 45
On April 26, 2011, Citron Research ("Citron"), an online stock
commentary firm, issued a report on Longtop that echoed many of the concerns
43

March 2011 email chain between Zhu and Palaschuk ("March 2011
Email Chain"), Ex. Z to Justice Deel., at 6.
44

See id. at 1-2.

45

See Def. 56. lit 57; DTT draft due diligence report on Longtop's cash
balances from September 30, 2010 to February 28, 2011 ("DTT Due Diligence
Report"), Ex. 26 to Palaschuk Aff., at 4.
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contained in the Anonymous Report. Citron was concerned with Longtop 's
"spectacularly high margins," unconventional staffing model, implausibly large
stock gifts from Longtop management to employees and friends, and problems
with revenue recognition from Longtop's largest customers. 46 Citron was further
troubled by the previous high-profile lawsuit against Longtop's top management
for unfair business practices. 47 Citron concluded that Longtop had "[a]ll the
markings of a complete stock fraud," and that "every financial statement from
[Longtop' s] IPO to this date is fraudulent. " 48
On April 27, 2011, Bronte Capital ("Bronte"), a global fund manager,
published a report that questioned Longtop's decision to "[go] to market to raise
cash" when the company's balance sheets indicated that it was "swimming in

46

4/26/11 Citron Report, Ex. T to Justice Deel., at 2 ("Citron Report").

47

See id. at 3-4. Palaschuk claims that the lawsuit against Longtop's
Chariman and CEO "contained no findings of fraud by the court, and the actual
damages of approximately $80,000 were much less than the approximately $1.4
million in damages alleged by Citron." Def. 56.1 ,-r 58. However, Palaschuk has
produced no court documents or other documentary evidence to validate those
statements.
48

Citron Report at 1.
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[cash ]."49 Bronte also noted several ways in which Longtop did not match the
typical profile of a fraudulent corporation. 50
On April 28, 2011, Longtop held a conference call for investors to
address the allegations in the Citron report and other market rumors. 51 Palaschuk
directed the call and unequivocally denied the "absolutely false allegations of fraud
and other alleged wrongdoings" in the analyst reports. 52
From May 18 through May 20, 2011, Palaschuk had multiple phone
conversations with Lian. 53 According to Palaschuk's typed notes from the
discussion, Lian told Palaschuk that "the company had been a fraud since 2004.
While the company had reported significant profits, in fact the company had never
really made a profit." 54 Lian revealed that Longtop had far more debt that what
had been disclosed in financial statements, and that the cash balance was

49

4/27/11 Bronte Report, Ex. U to Justice Deel., at 1-2.

50

See id. at 1.

51

See Transcript of 4/28/11 conference call with investors, Ex. FF to

Justice Deel.
52

Id. at 3.

53

See Palaschuk's notes from 5/19/11 and 5/20/11 phone conversations
with Lian ("5/19-20 Notes"), Ex. V to Justice Deel.; Transcript of 5118/11 call
between Palaschuk and Lian, Ex. CC to Justice Deel.
54

5/19-20 Notes at 1.
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only $131 million as opposed to the $421 million shown on Longtop's balance
sheet as of March 31, 2011. 55 In fact, about forty percent of the revenue reported
in fiscal year 2011 was "not real." 56 Lian informed Palaschuk that Ruan and
Yingling Li were aware of the fraud. 57
On May 19, 2011, the NYSE halted trading in Longtop's ADS's. 58
The same day, Palaschuk tendered his resignation from Longtop. 59 On May 22,
2011, DTT resigned as Longtop's auditor due to: "l) the recently identified falsity
of [Longtop' s] financial records in relation to cash at bank [sic] and loan balances
(and also now seemingly in the sales revenue); 2) the deliberate interference by the
management in our audit process; and 3) the unlawful detention of our audit
files." 60 In the course of its most recent audit, DTT had discovered "a number of
serious defects, including":

55

See id.

56

Id.

57

See id.

58

See 5119111 China Economic Review daily briefing, Ex. BB to Justice

59

See Def. 56.1

60

5/23/11 Form 6-K, Ex. W to Justice Deel., at 5, 8.

Deel.

ii 62.

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[S]tatements by bank staff that their bank had no record of certain
transactions; confirmation replies previously received were said
to be false; significant differences in deposit balances reported by
the bank staff compared with the amounts identified in previously
received confirmations (and in the books and records of the
Group); and significant bank borrowings reported by bank staff
not identified in previously received confirmations (and not
recorded in the books and records of the Group). 61

In attempting to follow up on these discrepancies, DTT encountered resistance
from Longtop officials, including calls to banks asserting that Deloitte was not
Longtop' s auditor; seizure of bank confirmation documents on bank premises;
threats to stop DTT staff from leaving Longtop' s premises unless they turned over
their audit files; and seizure of DTT's working papers. 62
DTT's resignation letter also states that Longtop's Chairman, Jia Xiao
Gong, informed a DTT Managing Partner that "there were fake revenue in the past
so there were fake cash recorded on the books."63 When asked who was involved
in the fraud, Jia answered, "senior management."64

III.

SUMMARY JUDGMENT STANDARD

61

Id. at 7.

62

See id. at 7-8.

63

Id. at 8.

64

Id.
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Summary judgment is appropriate "only where, construing all the
evidence in the light most favorable to the non-movant and drawing all reasonable
inferences in that party's favor, there is 'no genuine issue as to any material fact
and ... the movant is entitled to judgment as a matter of law. "'65 "A fact is
material if it might affect the outcome of the suit under the governing law, and an
issue of fact is genuine if the evidence is such that a reasonable jury could return a
verdict for the nonmoving party."66
"[T]he moving party has the burden of showing that no genuine issue
of material fact exists and that the undisputed facts entitle him to judgment as a
matter of law." 67 To defeat a motion for summary judgment, the non-moving party
must "show more than 'some metaphysical doubt as to the material facts,' " 68 and
"'may not rely on conclusory allegations or unsubstantiated speculation. "'69

65

Rivera v. Rochester Genesee Reg'/ Transp. Auth., 743 F.3d 11, 19 (2d
Cir. 2014) (quoting Fed. R. Civ. P. 56(c)) (some quotation marks omitted).
66

Windsor v. United States, 699 F.3d 169, 192 (2d Cir. 2012), aff'd, 133
S. Ct. 2675 (2013) (quotations and alterations omitted).
67

Coo/lick v. Hughes, 699 F.3d 211, 219 (2d Cir. 2012) (citations

omitted).
68

Gioia v. Forbes Media LLC, 501 Fed. App'x 52, 54 (2d Cir. 2012)
(quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87
(1986)) (some citations omitted).
69

Robinson v. Allstate Ins. Co., 508 Fed. App'x 7, 9 (2d Cir. 2013)
(quoting Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998)).

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In deciding a motion for summary judgment, "[t]he role of the court is
not to resolve disputed issues of fact but to assess whether there are any factual
issues to be tried."70 "'Credibility determinations, the weighing of the evidence,
and the drawing of legitimate inferences'" are jury functions, not those of a
judge. 71
IV.

APPLICABLE LAW
A.

Section 1O(b) of the Exchange Act and Rule 1Ob-5
Section 1O(b) of the Exchange Act prohibits using or employing, "in

connection with the purchase or sale of any security ... any manipulative or
deceptive device or contrivance .... " 72 Rule lOb-5, promulgated thereunder,
makes it illegal to "make any untrue statement of a material fact or to omit to state
a material fact ... in connection with the purchase or sale of any security." 73 To
sustain a claim for securities fraud under Section 1O(b ), "a plaintiff must prove (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

°

7

Cuff ex rel. B.C. v. Valley Cent. School Dist., 677 F.3d 109, 119 (2d
Cir. 2012) (quotation marks and citations omitted).
71

Barrows v. Seneca Foods Corp., 512 Fed. App'x 115, 117 (2d Cir.
2013) (quoting Redd v. New York Div. ofParole, 678 F.3d 166, 174 (2d Cir.
2012)).
72

15 U.S.C. § 78j(b) (2014).

73

17 C.F.R. § 240.lOb-5 (2014).
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security; (4) reliance upon the misrepresentation or omission; (5) economic loss;
and (6) logg cnugntion." 74 "For the purpmieg of Rule lOb-5, the muker of u
statement is the person or entity with ultimate authority over the statement,
including its content and whether and how to communicate it." 75
The required level of sci enter under Section 1O(b) is either "intent to
deceive, manipulate, or defraud"76 or "reckless disregard for the truth. " 77 Plaintiffs
may meet this standard by "alleging facts ( 1) showing that the defendants had both
motive and opportunity to commit the fraud or (2) constituting strong
circumstantial evidence of conscious misbehavior or recklessness." 78
Under the latter theory, plaintiffs must allege that the defendants have
engaged in "conduct which is highly unreasonable and which represents an

74

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S.
148, 157 (2008).
75

Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. 2296,
2302 (2011 ).
76

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).

77

South Cherry St., LLC v. Hennessee Grp. LLC, 573 F .3d 98, 109 (2d
Cir. 2009) ("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."' (quoting Novak v. Kasaks, 216 F.3d 300, 312 (2d Cir. 2000))
(emphasis in original)).
78

ATS! Commc 'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir.

2007).
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extreme departure from the standards of ordinary care to the extent that the danger
was either known to the defendant or go obvioug that the defendant mugt have been
aware of it." 79 "To state a claim based on recklessness, plaintiffs may either
specifically allege defendants' knowledge of facts or access to information
contradicting defendants' public statements, or allege that defendants failed to
check information they had a duty to monitor. " 80 Mere "allegations that defendants
should have anticipated future events and made certain disclosures earlier than they
actually did do not suffice to make out a claim of securities fraud." 81 An inference
of scienter "must be more than merely plausible or reasonable - it must be cogent
and at least as compelling as any opposing inference of nonfraudulent intent. " 82

B.

Section 20(a) of the Exchange Act

79

City ofPontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, No. 12
Civ. 4355, 2014 WL 1778041, at *6 (2d Cir. May 6, 2014) (quoting Novak, 216
F.3d at 308, 312).
80

In re Gildan Activewear, Inc. Secs. Litig., 636 F. Supp. 2d 261, 272
(S.D.N.Y. 2009) (quotation marks and citation omitted). Accord Novak, 216 F.3d
at 308, 311.
81

Novak, 216 F.3d at 309.

82

Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308, 314
(2007). Accord Sawabeh Info. Servs. Co. v. Brody, 832 F. Supp. 2d 280, 295
(S.D.N.Y. 2011) (noting that "the tie ... goes to the plaintiff' (quotation marks and
citations omitted)).
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Section 20(a) of the Exchange Act creates a cause of action against
"control persons" of the primary violator. 83 "To establish a prima facie case of
control person liability, a plaintiff must show (1) a primary violation by the
controlled person, (2) control of the primary violator by the defendant, and (3) that
the defendant was, in some meaningful sense, a culpable participant in the
controlled person's fraud." 84 Where there is no primary violation, there can be no
"control person" liability under Section 20(a). 85

V.

DISCUSSION
Palaschuk moves for summary judgment on the Section 1O(b) and

20(a) claims on the grounds that plaintiffs have raised no genuine issue of material
fact regarding his sci enter at the time the statements were made. 86 Plaintiffs seek to
hold Palaschuk liable under a theory of recklessness rather than intent. 87

83

See 15 U.S.C. § 78t(a).

84

ATS!, 493 F.3d at 108.

85

See id. See also In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266,
297-98 (S.D.N.Y. 2006).
86

Palaschuk does not contest the materiality or falsity of the statements
or his status as a "control person" of Longtop within the meaning of Section 20(a).
87

At a court conference on October 21, 2013, plaintiffs represented that
they would pursue a theory of recklessness rather than intent to defraud. See
10/21/13 Transcript 14:20-23, Ex. C to Justice Deel.
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Palaschuk has presented a good deal of evidence in his favor. For
example, independent auditors from DTT repeatedly approved the accuracy of
Longtop' s financial statements, and even completed a due diligence report
claiming to have confirmed eighty-five percent to ninety-three percent of
Longtop's stated bank balances. 88 Moreover, Palaschuk personally instructed DTT
to obtain original bank statements in March of 2011, since "[t]he only document[s]
that you can trust in the case of possible fraud must be documents directly from the
bank. " 89 Palaschuk contends that he reasonably relied on DTT' s conclusions and
cannot be held liable for doing so.
Palaschuk also argues that plaintiffs have not identified specific steps
that he could have taken to uncover the fraud. However, a reasonable jury could
find that Palaschuk failed to adequately investigate cash balances and reported
CCB revenues in light of multiple analyst reports challenging those metrics. 9° For
88

See Def. 56.1if57; DTT Due Diligence Report at 4.

89

March 2011 Email Chain at 6.

90

Palaschuk argues that his last allegedly false statement was made on
January 31, 2011, and most of the analyst reports were published after that date.
See Memorandum of Law in Support of Defendant Palaschuk's Motion for
Summary Judgment at 20. However, plaintiffs have also presented evidence that
Palaschuk made materially false statements to investors during a conference call on
April 28, 2011. See Complaint if 49; Plaintiffs' Memorandum of Law in
Opposition to Defendant Derek Palaschuk's Motion for Summary Judgment at 6.
Moreover, a jury could infer recklessness solely from the information available to
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example, a jury could find that Palaschuk was reckless in failing to obtain original
bank statements, or asking DTT to do so, long before March of 2011. 91
Similarly, Palaschuk was aware of multiple reports that CCB revenues
were inflated, including a personal email from a Needham analyst who claimed to
have spoken directly with multiple members of CCB management. 92 There is no
evidence that Palaschuk attempted to verify Longtop' s reported revenue by crosschecking with CCB - a seemingly simple procedure. Instead, Palaschuk
immediately denied the Needham analyst's allegations before attempting to
investigate them. 93 With respect to both cash balances and CCB revenues, a jury
could well find that Palaschuk recklessly "failed to check information [he] had a
duty to monitor." 94

Palaschuk prior to January 31, 2011.
91

Relatedly, plaintiffs have presented evidence that Palaschuk resisted
DTT's proposed auditing procedures with respect to revenue contract
confirmations. See 4120-22 Email Chain.
92

10/14/10 Email Chain at 2.

93

See id. at 1.

94

Gildan Activewear, 636 F. Supp. 2d at 272 (quotation marks and
citation omitted). Accord Novak, 216 F .3d at 308, 311.

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Even if Palaschuk presents a strong case, the question of his sci enter
is for the jury to decide. 95 In the words of Judge William Young of the District of
Massachusetts:

Too often, judges substitute their own judgment for that of the
jury. These judges decide that no reasonable juror could view the
evidence in a manner different from the judge's own conclusion.
This cognitive illiberalism has been rightly condemned as a form
of judicial arrogance .... Juries have not only the duty, but also
the right to decide cases. Encroaching upon the province ofjuries
to decide questions of fact, such as the determination of a
defendant's state of mind, violates not only the constitutional
rights of the parties in a suit, but also the constitutional rights of
the jurors themselves. 96

A court may grant summary judgment only where the facts are so one-sided that
reasonable parties could not disagree on the outcome. This case does not present
such facts.
Palaschuk relies heavily on his own sworn affidavit and the affidavits
of two former employees, Christina Zhang and Philip Li, to explain the ways he
allegedly investigated the analyst reports, including initiating internal audits and

95

See S.E.C. v. EagleEye Asset Mgmt., 975 F. Supp. 2d 151, 159 (D.
Mass. 2013) ("Few things seem more appropriately the province of a jury than the
inference of a defendant's mental state.").
96

Id. at 159-60.

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asking independent parties to complete due diligence. 97 However, he has produced
little documentary evidence in support, and the jury is free to digregurd the
testimony of those affiants at trial if it finds them not credible. 98 Because
credibility determinations fall squarely within the province of the jury, Palaschuk's
overwhelming reliance upon witness testimony further supports the conclusion that
summary judgment is inappropriate in this case.
Because a reasonable jury could find that Palaschuk was reckless in
failing to properly investigate Longtop's revenues, cash balances, and other
financial metrics, the motion for summary judgment must be denied. While
Palaschuk may very well prevail at trial, that decision is one for the fact-finder and
not the court.

VI.

CONCLUSION
For the foregoing reasons, Palaschuk's motion for summary judgment

is denied. The Clerk of Court is directed to close this motion (Docket No. 172). A
conference is scheduled for July 7, 2014 at 4:30 pm.

97

See Def. 56.1 ,-r,-r 56-57.

98

Palaschuk's 56.1 statement cites almost exclusively to his own
affidavit. See Def. 56.1.
-24-

Dated:

New York, New York
June~, 2014

-25-

-Appearances-

Counsel for Lead Plaintiffs:

Gregory M. Castaldo, Esq.
Kimberly A. Justice, Esq.
Richard A. Russo, Esq.
Margaret E. Onasch, Esq.
John A. Kehoe, Esq.
John J. Gross, Esq.
Kessler Topaz Meltzer & Check, LLP (PA)
280 King of Prussia Road
Radnor, Pennsylvania 19087
[phone]
Daniel L. Berger, Esq.
Deborah A. Elman, Esq.
Jeff A. Almeida, Esq.
Reena S. Liebling, Esq.
Grant & Eisenhofer, P.A. (NY)
485 Lexington Avenue, 29th Floor
New York, New York 10017
[phone]

Defendant (Pro Se):
Derek Palaschuk
4326 Dunbar Street
Box 45117
Vancouver, Canada
Email: [e-mail]

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