Faris et al v. Longtop Financial Technologies Limited et al

Filing 80

OPINION AND ORDER re: 68 MOTION to Dismiss Plaintiffs' Consolidated Class Action Complaint. filed by Derek Palaschuk. For the foregoing reasons, Palaschuk's motion to dismiss is denied. The Clerk of the Court is directed to close this motion (Docket No. 68). A conference is scheduled for July 16, 2012, at 4:00 p.m in Courtroom 15C. (Signed by Judge Shira A. Scheindlin on 6/28/2012) (djc)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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OPINION AND ORDER

IN RE LONGTOP FINANCIAL
TECHNOLOGIES LIMITED
SECURITIES LITIGATION

11 Civ.3658

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

INTRODUCTION
This putative class action arises out of federal securities law claims.

Danske Invest Management AlS ("Danske") and Pension Funds of Local No. One,
I.A.T.S.E. ("Local One") bring this action against Longtop Financial Technologies,
Ltd. ("Longtop") and several of its officers (Derek Palaschuk, Wai Chau Lin, and
Hui Kung Ka). Plaintiffs' Consolidated Class Action Complaint alleges violations
of Section lOeb) of the Exchange Act and Rule IOb-5 promulgated thereunder
(Count I) and violations of Section 20(a) of the Securities Exchange Act of 1934
(Count II). Palaschuk now moves to dismiss the complaint. For the reasons stated
below, Palaschuk's motion is denied.
1

II.

BACKGROUND
A.

Plaintiffs
Danske is an investment manager for Investeringsforeningen Danske

Invest and Den Professionelle Forening Danske Invest Institutional, both of whom
acquired Longtop securities and assigned their claims to Danske.1
Local One provides welfare, pension and annuity benefits to Local
One union membership consisting of members who operate, maintain, and
construct stage and sound equipment for various New York City shows and
concerts. Local One acquired Longtop securities.2
Both Danske and Local One (“Lead plaintiffs”) claim damages as a
result of acquiring Longtop American Depositary Shares (“ADSs”) during the
period from June 29, 2009 through and including May 17, 2011 (the “Class
Period”),3 and were appointed co-Lead plaintiffs in this action by order of the
Court on September 21, 2011.4
B.

Defendants

1

See Complaint ¶ 17.

2

See id. ¶ 18.

3

See id. at 1.

4

See id. ¶¶ 17–18.
2

1.

Palaschuk

Derek Palaschuk served as Longtop’s Chief Financial Officer from
September 2006 until his resignation on May 19, 2011.5 Palaschuk is a resident of
China.6
2.

Longtop

Longtop is another defendant in this class action, but has not yet filed
an appearance or a responsive pleading.7 Longtop is incorporated under the laws
of the Cayman Islands with principal executive offices located in North Point,
Hong Kong.8 During the Class Period, Longtop “held itself out as a leading
provider of software and information technology, or IT, services targeting the
financial services industry in China.”9 Longtop successfully marketed its ADSs in
the U.S., as Longtop was considered the “perfect company” to serve China’s IT
banking sector, “a niche market poised for rapid growth.”10 As a result, Longtop

5

See id. ¶ 23.

6

See id.

7

See Plaintiffs’ Memorandum of Law in Opposition to Defendant’s
Motion to Dismiss (“Pl. Mem.”) at 1 n.2.
8

See Complaint ¶ 20.

9

See id. ¶ 34 (quotation marks omitted).

10

See id.
3

experienced “immense growth” during the Class Period, reporting total revenues of
$106.2 million and a net income of $43.5 million in the fiscal year ending March
31, 2009 (compared with revenues of $66.7 million and a net income of $2.9
million in the previous year).11 In the fiscal year ending March 31, 2010, revenues
skyrocketed to $169.1 million and net income reached $59.1 million.12
Analysts credited Longtop’s unique success to operating margins that
“dwarfed those of its peers” — gross and operating margins of 62.5% and 35.8%,
respectively, compared with peer rates of 15-50% and 10-25%, respectively.13
Longtop’s reported financial performance allowed the company to access greater
U.S. capital through a Second Public Offering (“SPO”), through which Longtopraised more than $132 million, contributing to what Palaschuk termed a “robust”
cash flow.14
Lead plaintiffs allege that Longtop and its officers perpetrated a
“massive fraud,”15 which is the cause of the subsequent drop in price of Longtop’s

11

See id. ¶ 37.

12

See id.

13

See id. ¶ 38.

14

See id. ¶¶ 40, 42.

15

See id. ¶ 12.
4

ADSs from $42.73 to $0.16 Longtop is now delisted from the New York Stock
Exchange (“NYSE”) and is the subject of an SEC investigation.17 Lead plaintiffs
allege that the materially false and misleading statements of officers — delivered
even as negative reports concerning Longtop emerged — artificially inflated the
price of Longtop ADSs throughout the Class Period.18 They further allege that the
ultimate decline in the ADS price caused substantial damage to all plaintiffs.19
3.

Additional Defendants

Wai Chau Lin a/k/a Weizhou Lian has served as director and Chief
Executive Officer of Longtop since Longtop’s inception in June 1996.20 He is a
resident of China.21 Hui Kung Ka a/k/a Xiaogong Ka (“Ka”) is one of Longtop’s
founders and has served as Longtop’s Chairman since the Company’ inception.22
Ka is resident of China.23 Lead plaintiffs are in the process of serving these two

16

See id. ¶ 11.

17

See id.

18

See id. ¶¶ 147–148.

19

See id. ¶ 149.

20

See id. ¶ 22.

21

See id.

22

See id. ¶ 24.

23

See id.
5

defendants.24
D.

Lead Plaintiffs’ Allegations Against Palaschuk
1.

Palaschuk’s statements to the public

Lead plaintiffs allege that Palaschuk made false and misleading
statements to the public throughout the Class Period.
a.

Form 20-F

On the first day of the Class Period, June 29, 2009, Longtop filed its
2009 Form 20-F (Lontop’s fiscal year ends March 31)25 with the SEC.26 This form
was signed by Palaschuk.27 The Form 20-F reported total revenues of $106.2
million, operating expenses of $25.5 million, net income of $43.5 million, and a
gross profit margin of 65.7% for the period.28 It reported that the financial
statements were prepared in conformity with U.S. Generally Accepted Accounting
Principles (“U.S. GAAP”).29 The Form 20-F also discussed staffing and indicated
that Longtop employed 2,039 contracted employees for a monthly service fee
24

See Pl. Mem. at 1 n.2.

25

See Complaint ¶ 4.

26

See id. ¶ 65.

27

See id.

28

See id.

29

See id. ¶ 69.
6

through Xiamen Longtop Human Resource Services Co, Ltd. (“XLHRS”), an
“unrelated party.”30 In connection with the filing of the 2009 Form 20-F,
Palaschuk signed certifications pursuant to the Sarbanes-Oxley Act of 2002 “that
affirmed the accuracy of Longtop’s reported financial results and the effectiveness
of its internal controls over reporting.”31
On July 16, 2010, Palaschuk signed the 2010 Form 20-F, which
reported total revenues of $169.1 million, operating expenses of $45.2 million, a
net income of $59.1 million, a gross margin of 62.5%, and cash and cash
equivalents of $331.9 million.32 The 2010 Form 20-F reiterated that XLHRS was
an unrelated party,33 and attributed gross margin and revenue growth to an
improving line of products.34 The 2010 Form 20-F also included Palaschuk’s
Sarbanes-Oxley certifications,35 and stated that it was produced in accordance with
the standards of the U.S. Public Company Accounting Oversight Board.36

30

See id.

31

See id. ¶ 68.

32

See id. ¶ 87.

33

See id. ¶ 88.

34

See id. ¶ 90.

35

See id. ¶ 91.

36

See id. ¶ 89.
7

Lead plaintiffs allege that these certifications and statements were
fraudulent in particular because they certified that Longtop’s financial results were
prepared in accordance with U.S. GAAP and that XLHRS was an unrelated
entity.37 U.S. GAAP mandates the disclosure of material related-party transactions
as set forth in the Financial Accounting Standards (“FAS”) No. 57.38 Lead
plaintiffs allege that XLHRS is a related entity39 and Palaschuk made a material
misstatement in signing Form 20-F that certified that XLHRS was an unrelated
company.40
b.

Press Releases

Longtop issued quarterly press releases, which were submitted to the
SEC and signed by Palaschuk. The first of these within the Class Period was
issued on August 19, 2009, furnished to the SEC on Form 6-K, and signed by
Palaschuk.41 The press release reported revenues of $28.5 million, operating
expenses of $6.3 million, net income of $10.5 million, a gross margin of 62.6% for

37

See id. ¶ 107.

38

See id. ¶ 109; FAS no. 57 ¶ 1.

39

See Complaint ¶¶ 69, 92.

40

See id.

41

See id. ¶ 71.
8

the period, and cash and cash equivalents of $215.1 million.42
In the second quarter of 2010, Palaschuk signed another of these press
releases which was again furnished to the SEC on Form 6-K. This press release
reported revenues of $42.8 million, operating expenses of $10 million, net income
of $21.4 million, a gross margin of 65.9% for the period, and cash and cash
equivalents of $226.4 million.43
In the third quarter of 2010, Palaschuk again signed a press release
furnished to the SEC on Form 6-K.44 In the press release, Palaschuk stated that
third quarter revenue and adjusted net income once more
substantially exceeded guidance. A robust third quarter cash flow
from operations of US$39.2 million and US$50.1 million for the
first nine months together with the proceeds from the November
2009 secondary offering will . . . help extend our leading position
in China’s financial technology industry.45
The press release also reported revenues of $54.7 million, operating expenses of
$9.7 million, net income of $29.3 million, a gross margin of 71.4% for the period,
cash and cash equivalents of $389.7 million, and $27.1 million in short term

42

See id.

43

See id. ¶ 74.

44

See id. ¶ 80.

45

See id. ¶ 82.
9

borrowings.46
Palaschuk signed the fourth quarter press release on May 24, 2010.47
It reported revenues of $43 million, operating expenses of $9 million, net income
of $16.3 million, and a gross margin of 61.5% for the quarter.48 Palaschuk also
participated in an investor conference call on May 24, 2010, and stated that he
expected “adjusted gross margins of 66% as compared to 67% in 2009 . . .[the]
margin decline is due to the acquisition of Giantstone and other investments we’re
making, including annual salary increase of around 10%.”49
Palaschuk continued to sign the quarterly press releases in 2011,
which were furnished to the SEC on Form 6-K.50 The first quarter’s press release
reported revenues of $48.9 million, operating expenses of $9.4 million, net income
of $17.9 million, a gross margin of 58.4% for the period, and cash and cash
equivalents of $342.4 million.51 Palaschuk added a statement:
We have delivered sound top and bottom line financial results
46

Id. ¶ 80.

47

See id. ¶ 84.

48

See id.

49

Id. ¶ 86.

50

See id. ¶ 94.

51

See id.
10

during the first fiscal quarter, which is traditionally our lowest
revenue and net income quarter in the fiscal year. The strong
outlook, evidenced by a healthy backlog and pipeline in our core
software development business, has allowed us to increase
guidance, and for the first time in our history we expect to achieve
US$100 million in Adjusted Net Income. As in previous years, in
Q2 and Q3 2011 we expect significant improvements from this
quarter in our margins as well as from cash flow from
operations.52
In the second quarter of 2011, Palaschuk signed another press release.53 It reported
revenues of $55.5 million, operating expenses of $10.1 million, a net income of
$25.7 million, a gross margin of 64.3% for the period, cash and cash equivalents of
$379 million, and $27.1 million in short term borrowings.54 Palaschuk added that
“our order intake, margins and cash flow from operations which was US$31.6
million significantly improved in the second quarter . . . on the back of strong
demand and execution, we are now raising our fiscal 2011 revenue guidance.”55
On January 31, 2011, Palaschuk signed the final press release within
the Class Period, noting, “Longtop’s growth prospects remain bright for fiscal
2012 . . . Longtop’s growth competitive position is stronger than ever . . . .”56 This
52

Id. ¶ 97.

53

See id. ¶ 99.

54

See id.

55

Id. ¶ 101.

56

Id. ¶¶ 103–104.
11

press release also reported revenues of $72.5 million, operating expenses of $12.8
million, net income of $35.6 million, a gross margin of 68.8% for the period, cash
and cash equivalents of $423.2 million, and $10.6 million in short term
borrowings.57
2.

What Palaschuk Knew

Lead plaintiffs allege that Palaschuk’s public statements were false
and misleading because they failed to disclose that Longtop had (1) falsified
records in relation to its cash position, (2) improperly stated expenses and
artificially inflated gross margins, particularly with respect to its workforce and
XLHRS, and (3) fabricated its revenue and net income.58 Generally, they allege
that Palaschuk had no reasonable basis for speaking positively about Longtop’s
financial outlook during the Class Period.59 Lead plaintiffs allege that directors or
senior officers were in “a position to control all of the company’s false and
misleading statements and omissions including the contents of the Forms Form 20F, the Forms 6-K and press releases.”60 They further allege that senior officers

57

See id. ¶ 103.

58

See id. ¶¶ 69, 73, 76, 83, 92, 98, 102, 106.

59

See id.

60

Id. ¶ 111.
12

knew and/or recklessly disregarded adverse facts61 — namely, facts indicated in
analyst reports and the resignation letter discussed below.62
Lead plaintiffs allege that “key officers” can rightfully bear liability
for falsely portrayed cash levels, as such figures were significant to the company.63
Lead plaintiffs also allege that directors and senior officers had full knowledge of
Longtop’s “close relationship” with XLHRS, heavy reliance on XLHRS, and
shared headquarters.64 Lead plaintiffs state that Palaschuk “was intimately
involved with Longtop’s financial reporting, touting his training as a professional
accountant,”65 and that he demonstrated an “in-depth involvement in the
presentation of the fraudulent financial results” — signing press releases and
issuing commentary therein.66 Lead plaintiffs also plead that Palaschuk benefitted
personally from the alleged fraud by selling 150,000 shares for four million dollars
during the Class Period.67

61

See id. ¶ 114.

62

See infra Parts II.D.2.a–b.

63

See Complaint ¶ 115.

64

See id. ¶ 116.

65

Id. ¶ 118.

66

Id. ¶ 120.

67

See id. ¶ 122.
13

a.

Analyst Reports

Lead plaintiffs cite to three analyst reports in the Complaint that were
published during the Class Period and state adverse facts about Longtop.68 The
first of these was published by Citron Research (“Citron”) on April 26, 2011.69
This report stated that Longtop’s high margins (which greatly exceeded its peers’)
were partly due to its staffing model, which outsourced 80% of its workforce —
95% of that 80% came from XLHRS.70 Citron reported that this model allowed
Longtop to “transfer the majority of its cost structure off-balance sheet which
creates opportunities for massive accounting fraud.”71 Citron then produced eight
facts indicating the XLHRS was a related entity (requiring disclosure under U.S.
GAAP): (1) XLHRS shares a name (Longtop) with Longtop; (2) XLHRS was
formed in May 2007, just months before Longtop’s IPO; (3) XLHRS is Longtop’s
largest line item by far, but it was not mentioned in filings until 2008; (4) XLHRS
has no website and was not soliciting clients, even though it just lost its only
customer; (5) Longtop did not have a long term contract with XLHRS and did not

68

See id. ¶¶ 44, 48, 54.

69

See id. ¶ 44.

70

See id. ¶ 45.

71

Id.
14

have to pay any penalties or minimums; (6) XLHRS used the same email server as
Longtop; (7) Citron had reason to believe Longtop and XLHRS were located in the
same building; and (8) when the agency relationship was challenged the company
terminated it and brought all the XLHRS employees in-house.72 Upon the
publishing of the Citron report, Longtop’s ADSs declined in price from $25.54 to
$22.24 — a decline of approximately eight percent.73
On April 27, 2011, Bronte Capital (“Bronte”) issued an article that
challenged the accuracy of Longtop’s financial statements and questioned the need
for Longtop’s SPO, in light of the cash Longtop purportedly already possessed.74
Upon this news, the ADSs declined an additional twenty percent to close at $17.73
on April 27, 2011.75 Following this decline, Palaschuk participated in a conference
call with investors to address Citron’s and Bronte’s allegations: “it is appropriate to
have this call to rebut the absolutely false allegations of fraud and other alleged
wrongdoings in an April 26 report [posted in] Citron reports . . . There is
absolutely no basis to support his allegation. . . .”76 Palaschuk specifically
72

See id.

73

See id. ¶ 47.

74

See id. ¶ 48.

75

See id. ¶ 49.

76

Id. ¶ 50.
15

addressed the XLHRS issue, stating: “there has been no off-balance sheet
accounting . . . [XLHRS] is definitely an unrelated party.”77 In response to these
assurances, the company’s stock rose eleven percent to close at $19.66 on April 28,
2011.78
Over the following weeks, Citron, Bronte, and other analysts issued
followup reports raising new questions about the validity of Longtop’s
representations.79 OLP Global issued a report on May 9, 2011, in which it was
disclosed that two employees of Longtop had been administering XLHRS’s state
filings and that Longtop, using XLHRS, was under-contributing to state social
welfare benefit funds, thus inflating its margins by several million dollars.80 In
response, Longtop’s ADSs declined further, settling at $18.93 per share when the
NYSE halted trading in Longtop’s ADSs on May 17, 2011.81 On May 19, 2011,
Palaschuk resigned.82
b.
77

Id. ¶ 52.

78

See id. ¶ 53.

79

See id. ¶ 54.

80

See id.

81

See id. ¶ 55.

82

Resignation Letter

See id. ¶ 56.
16

On May 23, 2011, Deloitte Touche Tohmatsu CPA Ltd. (“DTT”),
Longtop’s accounting firm, released their resignation letter.83 This letter indicated
that (1) Longtop employees had interfered with DTT’s auditing process by
threatening DTT staff and indicating to bank staff that DTT was not Longtop’s
auditor, and (2) there were serious defects in documents on file.84 DTT reported
that its reasons for resignation included (1) the falsity of the Group’s financial
records in relation to cash at bank and loan balances, (2) deliberate interference by
the management in the audit process, and (3) the unlawful detention of audit files.85
DTT declined to be associated with any prior period financial reports including the
financial communications produced during 2010 and 2011.86 DTT also stated that
Ka, the Chairman of Longtop, informed DTT’s Eastern Region Managing Partner
that “there were fake revenue in the past so there were fake cash recorded on the
books.”87 Ka reported that “senior management” was involved in the
discrepancies.88
83

See id. ¶ 58.

84

See id.

85

See id.

86

See id.

87

Id. (quotation marks omitted).

88

See id. (quotation marks omitted).
17

III.

LEGAL STANDARD — MOTION TO DISMISS
In deciding a motion to dismiss pursuant to Federal Rule of Civil

Procedure 12(b)(6), the court “accept[s] all factual allegations in the complaint as
true, and draw[s] all reasonable inferences in the plaintiff’s favor.”89 The court
evaluates the sufficiency of the complaint under the “two-pronged approach”
advocated by the Supreme Court in Ashcroft v. Iqbal.90 First, “[a] court ‘can
choose to begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth.’”91 “Threadbare recitals of
the elements of a cause of action, supported by mere conclusory statements, do not
suffice” to withstand a motion to dismiss.92 Second, “[w]hen there are wellpleaded factual allegations, a court should assume their veracity and then
determine whether they plausibly give rise to an entitlement for relief.”93 To

89

Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir. 2011)
(quotation marks omitted).
90

556 U.S. 662, 679 (2009).

91

Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal,
556 U.S. at 664). Accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d
55, 59 (2d Cir. 2010).
92

Iqbal, 556 U.S. at 663 (citing Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007)).
93

Id. at 670. Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d
111, 124 (2d Cir. 2010).
18

survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must
meet a standard of “plausibility.”94 A claim is facially plausible “when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.”95 Plausibility “is not akin to a
probability requirement;” rather, plausibility requires “more than a sheer
possibility that a defendant has acted unlawfully.”96
“In considering a motion to dismiss for failure to state a claim
pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the
complaint, documents attached to the complaint as exhibits, and documents
incorporated by reference in the complaint.”97 The court may consider matters that
are subject to judicial notice.98 The court may also consider a document that is not
incorporated by reference, “where the complaint ‘relies heavily upon its terms and

94

Twombly, 550 U.S. at 564.

95

Iqbal, 556 U.S. at 678 (quotation marks omitted).

96

Id. (quotation marks omitted).

97

DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010)
(citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)).
98

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322

(2007).
19

effect,’ thereby rendering the document ‘integral’ to the complaint.”99 The court
may also consider “legally required public disclosure documents filed with the
SEC.”100
IV. APPLICABLE LAW
A.

Section 10(b) and Rule 10b-5 of the Securities Exchange Act
Section 10(b) of the Securities Exchange Act of 1934 makes it illegal

to “use or employ, in connection with the purchase or sale of any security . . . any
manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe . . . .”101 Under Rule 10b-5 one may
not “make any untrue statement of a material fact or [] omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading . . . in connection with the purchase
or sale of any security.”102 “To sustain a private claim for securities fraud under
Section 10(b), ‘a plaintiff must prove (1) a material misrepresentation or omission

99

Id. (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir.
2006)). Accord Global Network Commc’ns, Inc. v. City of N.Y., 458 F.3d 150, 156
(2d Cir. 2006).
100

ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.

2007).
101

15 U.S.C. § 78j(b).

102

17 C.F.R. § 240.10b-5.
20

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.’”103
1.

Misstatements or Omissions of Material Fact

In order to satisfactorily allege misstatements or omissions of material
fact, a complaint must “state with particularity the specific facts in support of
[plaintiffs’] belief that [defendants’] statements were false when made.”104 “For
the purposes of Rule 10b-5, 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.”105
“‘[A] fact is to be considered material if there is a substantial
likelihood that a reasonable person would consider it important in deciding
whether to buy or sell shares [of stock].’”106 In situations “‘[w]here plaintiffs
103

Ashland Inc. v. Morgan Stanley & Co., Inc., 652 F.3d 333, 337 (2d
Cir. 2011) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552
U.S. 148, 157 (2008)). Accord Erica P. John Fund, Inc. v. Halliburton Co., —
U.S. — , 131 S.Ct. 2179, 2184 (2011).
104

Rombach v. Chang, 355 F.3d 164, 172 (2d Cir. 2004) (quotation
marks omitted).
105

Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. 2296,
2302 (2011).
106

Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt.
LLC, 595 F.3d 86, 92–93 (2d Cir. 2010) (quoting Azrielli v. Cohen Law Offices, 21
21

contend defendants had access to contrary facts, they must specifically identify the
reports or statements containing this information.’”107 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.”108 “[A]n omission is actionable when the failure to disclose renders a
statement misleading.”109
2.

Scienter

A plaintiff may plead scienter 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.”110
“‘Sufficient motive allegations entail concrete benefits that could be realized by

F.3d 512, 518 (2d Cir. 1994)).
107

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital
Inc., 531 F.3d 190, 197 (2d Cir. 2008) (quoting Novak v. Kasaks, 216 F.3d 300,
309 (2d Cir. 2000)).
108

Id. Accord Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000).

109

In re Alstom SA, 406 F. Supp. 2d 433, 453 (S.D.N.Y. 2005) (citing In
re Time Warner Inc. Secs. Litig., 9 F.3d 259, 268 (2d Cir. 1993)).
110

ATSI, 493 F.3d at 99 (citing Ganino v. Citizens Utils. Co., 228 F.3d
154, 168–69 (2d Cir. 2000)). Accord Dandong v. Pinnacle Performance Ltd., No.
10 Civ. 8086, 2011 WL 5170293, at *11 (S.D.N.Y. Oct. 31, 2011) (quoting Lerner
v. Fleet Bank, N.A., 459 F.3d 273, 290-91 (2d Cir. 2006)).
22

one or more of the false statements and wrongful nondisclosures alleged.’”111
“Motives that are generally possessed by most corporate directors and officers do
not suffice; instead, plaintiffs must assert a concrete and personal benefit to the
individual defendants resulting from the fraud.”112
“‘Where motive is not apparent, it is still possible to plead scienter by
identifying circumstances indicating conscious behavior by the defendant, though
the strength of the circumstantial allegations must be correspondingly greater.’”113
Under this theory of scienter, a plaintiff must show that the defendant’s conduct is
“at the least . . . highly unreasonable and [] represents an extreme departure from
the standards of ordinary care to the extent that the danger was either known to the
defendant or so obvious that the defendant must have been aware of it.”114 “To
state a claim based on recklessness, plaintiffs may either specifically allege
111

Campo v. Sears Holdings Corp., 371 Fed. App’x 212, 215 (2d Cir.
2010) (quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001)).
112

Kalnit, 264 F.3d at 139. Accord ECA & Local 134 IBEW Joint
Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir.
2009).
113

Kalnit, 264 F.3d at 142 (quoting Beck v. Manufacturers Hanover
Trust Co., 820 F.2d 46, 50 (2d Cir. 1987)). Accord South Cherry St., LLC v.
Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009); In re Novagold Res. Inc.
Secs. Litig., 629 F. Supp. 2d 272, 297 (S.D.N.Y. 2009) (quoting ECA, 553 F.3d at
198–99).
114

South Cherry St., 573 F.3d at 109 (quotation marks and emphasis
omitted). Accord ECA, 553 F.3d at 203.
23

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.”115
3.

Causation

A securities fraud plaintiff is required to “prove both transaction
causation (also known as reliance) and loss causation.”116 Loss causation is “the
proximate causal link between the alleged misconduct and the plaintiff’s economic
harm.”117 “A misrepresentation is ‘the proximate cause of an investment loss if the
risk that caused the loss was within the zone of risk concealed by the
misrepresentations . . . .’”118 Therefore, “to plead loss causation, the complaint[]
must allege facts that support an inference that [defendant’s] misstatements and
omissions concealed the circumstances that bear upon the loss suffered such that
plaintiffs would have been spared all or an ascertainable portion of that loss absent
115

In re Gildan Activewear, Inc. Secs. Litig., 636 F. Supp. 2d 261, 272
(S.D.N.Y. 2009) (quotation marks and citation omitted).
116

ATSI, 493 F.3d at 106.

117

Id. at 106-07 (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346
(2005); Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 172 (2d Cir. 2005)).
Accord Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 157 (2d Cir. 2007);
Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 197 (2d
Cir. 2003).
118

In re Omnicom Grp., Inc. Secs. Litig., 597 F.3d 501, 513 (2d Cir.
2010) (quoting Lentell, 396 F.3d at 173) (emphasis in original).
24

the fraud.”119
a.

Fraud-on-the-Market Presumption

In Basic v. Levinson, the Supreme Court determined that an investor
may invoke a rebuttable presumption of reliance in certain cases of
misrepresentations.120 The Court held that an investor who bought stock at market
price121 may avail herself of the presumption that she “relied on the integrity of the
price set by the market” if the market is efficient.122 “Because most publicly
available information is reflected in [the] market price, an investor’s reliance on
any public material misrepresentations, therefore, may be presumed for purposes of
a Rule 10b-5 action.”123 As long as the “plaintiffs can show that the alleged
misrepresentation was material and publicly transmitted into a well-developed
market, then reliance will be presumed . . . .”124
Defendants can rebut the fraud-on-the-market presumption by

119

Lentell, 396 F.3d at 175.

120

485 U.S. 224, 247 (1988).

121

Id.

122

Id. at 227.

123

Id. at 247. Accord Hevesi v. Citigroup Inc., 366 F.3d 70, 77 (2d Cir.

2004).
124

In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 483 (2d Cir.
2008) (emphasis added).
25

demonstrating that “no price impact” resulted from the misrepresentations.125
“Any showing that severs the link between the alleged misrepresentation and either
the price received (or paid) by the plaintiff, or his decision to trade at a fair market
price, will be sufficient to rebut the presumption of reliance.”126 One way to “sever
the link” is to demonstrate that the alleged misrepresentations were immaterial
because they did not lead to a distortion in price.127
b.

Affiliated Ute Presumption

The Supreme Court has also held that a presumption of reliance may
apply in certain cases in which plaintiffs have alleged that defendants failed to
disclose information. In Affiliated Ute Citizens of the State of Utah v. United
States, the Court held that where a plaintiff’s fraud claims are based on omissions,
transaction causation may be satisfied as long as the plaintiff shows that defendants
had an obligation to disclose the information and the information withheld is
material.128 This presumption is not conclusive.129 “Once the plaintiff establishes
the materiality of the omission . . . the burden shifts to the defendant to establish . .
125

Basic, 485 U.S. at 248–49.

126

Id.

127

See id. at 248.

128

See 406 U.S. 128, 154 (1972).

129

See DuPont v. Brady, 828 F.2d 75, 78 (2d Cir. 1987).
26

. that the plaintiff did not rely on the omission in making the investment
decision.”130 To satisfy this burden, a defendant must prove “that ‘even if the
material facts had been disclosed, plaintiff’s decision as to the transaction would
not have been different from what it was.’”131
B.

Control Person Liability Under Section 20(a) of the Exchange Act
“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.”132
“Allegations of control are not averments of fraud and therefore need not be
pleaded with particularity.”133 “Thus, ‘[a]t the pleading stage, the extent to which
the control must be alleged will be governed by Rule 8’s pleading standard . . .

130

Id. at 76.

131

Id. at 78 (quoting Rochez Bros. v. Rhoades, 491 F.2d 402, 410 (3d Cir.
1974)). But see Ganino, 228 F.3d at 162 (“[I]t is not necessary to assert that the
investor would have acted differently if an accurate disclosure was made.”).
132

ATSI, 493 F.3d at 108 (citing S.E.C. v. First Jersey Secs., Inc., 101
F.3d 1450, 1472 (2d Cir. 1996)).
133

In re Parmalat Secs. Litig., 414 F. Supp. 2d 428, 440 (S.D.N.Y.

2006).
27

.’”134 “While a party cannot be held liable for both a primary violation and as a
control person, alternative theories of liability are permissible at the pleading
stage.”135
IV.

DISCUSSION
A.

Lead Plaintiffs Have Sufficiently Pled Specific Facts Regarding
Palaschuk
Lead plaintiffs pled considerable facts regarding the senior officers of

Longtop under the group pleading doctrine, including the facts concerning the
Form 20-F.136 However, Lead plaintiffs also pled sufficient facts that concern
Palaschuk alone. As such, it is not necessary to reach the question of whether the
group pleading doctrine survives Janus Capital Group v. First Derivative Traders
in federal securities actions.137 Regardless of the answer to this question, there are
134

In re Scottish Re Grp. Secs. Litig., 524 F. Supp. 2d 370, 386
(S.D.N.Y. 2007) (quoting In re Converium Holding AG Secs. Litig., No. 04 Civ.
7897, 2006 WL 3804619, at *14 (S.D.N.Y. Dec. 28, 2006)).
135

In re American Int’l Grp., Inc. 2008 Secs. Litig., 741 F. Supp. 2d 511,
534–35 (S.D.N.Y. 2010) (citing Police & Fire Ret. Sys. of City of Detroit v.
SafeNet, Inc., 645 F. Supp. 2d 210, 241 (S.D.N.Y. 2009)).
136

See Complaint ¶¶ 151–152.

137

See 131 S.Ct. 2296. See also In re Optimal U.S. Litig., — F. Supp. 2d
— , No. 10 Civ. 4095, 2011 WL 6424988, at *11 (S.D.N.Y. Dec. 21, 2011) (noting
several rationales indicating Janus bars the group pleading doctrine in federal
securities actions and applies exclusively to those actions, as well as preserving the
group pleading doctrine in common law fraud actions); Rolin v. Spartan Mullen Et
Cie, S.A., No. 10 Civ. 1586, 2011 WL 5920931, at *5 (S.D.N.Y. Nov. 23, 2011)
28

sufficient well-pleaded facts specifically targeting Palaschuk to state a claim under
Sections 10(b) and 20(a), without employing the group pleading doctrine or
examining collectively pleaded facts.138
B.

The 10(b) Claim — Count I
1.

Plaintiffs Have Sufficiently Pled Facts Demonstrating that
Palaschuk Made Material False and Misleading Statements

Lead plaintiffs have satisfactorily alleged that Palaschuk made
material misstatements and omissions. The Complaint states with particularity two
categories of statements that were false when made by Palaschuk — the signed
press release commentary139 and the conference call statements.140 The Complaint
also states with particularity facts in support of the falsity of those statements.141

(finding that the question of whether Janus abrogated the group pleading doctrine
remains an open question).
138

See Complaint ¶¶ 23, 50–52, 65, 68, 71, 74, 80, 82, 84, 86, 87, 94, 97,
99, 101, 103, 107, 118–121, 127.
139

See id. ¶¶ 65, 68, 71, 74, 80, 82, 84, 87, 94, 97, 99, 101, 103.

140

See id. ¶¶ 50–52, 86.

141

See id. ¶¶ 44–56. Palaschuk argues that these statements are protected
by the Private Securities Litigation Reform Act Safe Harbor because the statements
are forward-looking. However, these statements are only partially forward-looking
and not protected. See Sgalambo v. McKenzie, 739 F. Supp. 2d 453, 478
(S.D.N.Y. 2010) (citation omitted) (“Many of the alleged misstatements are not
forward-looking because they either state a present or historical fact alone or
incorporate forward-looking aspects into statements of present or historical fact.”).
29

a.

“Maker” of the Statements

The signed press release commentary and the conference call
statements can rightly be attributed to Palaschuk because he had the ultimate
authority over those statements.142 Palaschuk’s brief does not address who “made”
the statements issued, spoken, or signed by Palaschuk; it only argues that, under
Janus, Palaschuk cannot be held liable for the statements of other directors.143
However, Palaschuk, the CFO, had authority over the content and delivery of his
own oral and written statements.144

142

See Janus, 131 S.Ct. at 2302 (“For the purposes of Rule 10b-5, 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.”). See
also In re Merck & Co., Inc. Secs., Derivative, & “ERISA” Litig., Nos. 05–1151,
05–2367, 2011 WL 3444199, at *25 (D.N.J. Aug. 8, 2011) (distinguishing the facts
of Janus from a case where a defendant was an officer of a single entity during the
period when the alleged misrepresentations were made, and finding that the officer
was acting “pursuant to his responsibility and authority to act as an agent of [the
entity]”); In re Pfizer Inc. Secs. Litig., Nos. 04 Civ. 9866, 05 MD 1688, 2012 WL
983548, at *4 (S.D.N.Y. Mar. 22, 2012) (finding individual officers liable for
misrepresentations they made in corporate press releases they drafted, reviewed,
approved, or ratified).
143

See Defendant’s Corrected Memorandum of Law in Support of
Motion to Dismiss (“Def. Mem.”) at 24–25.
144

See S.E.C. v. Greenstone Holdings, Inc., No. 10 Civ. 1302, 2012 WL
1038570, at *7–8 (S.D.N.Y. Mar. 28, 2012) (holding that the “maker” of the
statements within press releases was the drafter of the press releases, where the
drafter was the CEO or COO of the company, even though the releases were
unsigned).
30

b.

Signed Press Release Commentary

Lead plaintiffs sufficiently allege that the signed press release
commentary was false when made. Palaschuk affirmed in the February 10, 2010
press release that “cash flow from operations” supported Longtop’s rapid
growth.145 Palaschuk next indicated in the May 24, 2010 release that “organic
business expansion” and acquisitions were behind the growth.146 In August 18,
2010, Palaschuk credited the “healthy backlog and pipeline” in Longtop’s core
software development business.147 In November 15, 2010, Palaschuk commented
again, stating: “our order intake, margins and cash flow form operations . . .
significantly improved . . . [o]n the back of strong demand and execution . . . .”148
Last, Palaschuk touted Longtop’s “industry leading margins” in January 31,
2011.149
Palaschuk’s argument that the analysts cited by Lead plaintiffs have a
financial stake in negatively affecting Longtop’s stock (and short-selling it) is

145

See Complaint ¶ 82.

146

Id. ¶ 85.

147

Id. ¶ 97.

148

Id. ¶ 101.

149

Id. ¶ 105.
31

compelling.150 However, Palaschuk made financial statements in the press
releases. Contrary to Palaschuk’s argument that DTT’s resignation letter does not
concern cash levels during the Class period,151 the DTT letter plainly indicates that
DTT rejected Longtop’s documentation in 2010 and 2011and felt that Longtop’s
financial statements were overstated throughout the Class Period.152 DTT also
indicated that Longtop should investigate its legal liability under the Exchange
Act.153 As such, Lead plaintiffs have pled that Palaschuk made material
misstatements when he delivered financial information to the public and the SEC.
Lead plaintiffs have also adequately pled facts with particularity
indicating that Palaschuk’s explanations for Longtop’s growth were false and
misleading, and, in fact, Longtop’s growth was due to an illicit accounting scheme
— the shifting of workforce costs off the books to XLHRS. The analyst report
facts — though not as persuasive as the DTT letter — are nonetheless
considered.154 Lead plaintiffs allege that Longtop’s high margins (which greatly
150

See Def. Mem. at 16.

151

See id. at 22.

152

See Complaint ¶ 58.

153

See id.

154

See Tellabs, 551 U.S. at 323–324 (citation omitted) (“[C]ourts must
consider the complaint in its entirety, as well as other sources courts ordinarily
examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents
32

exceeded its peers’) were partly due to its staffing model, which outsourced 80% of
its workforce — 95% of that 80% came from XLHRS.155 They also allege that this
model allowed Longtop to “transfer the majority of its cost structure off-balance
sheet which creates opportunities for massive accounting fraud.”156 Lead plaintiffs
further allege the eight Citron facts indicating that XLHRS is a related entity
(requiring disclosure under U.S. GAAP), all of which are set forth above.157 These
facts include the allegation that Longtop and XLHRS share headquarters.158 The
Lead plaintiffs also allege that two employees of Longtop had been administering
XLHRS’s state filings and that Longtop, using XLHRS, was under-contributing to
state social welfare benefit funds, thus inflating its margins by several million
dollars.159
These facts are stated with particularity and support the allegation that
Palaschuk’s press release commentary regarding the cause of Longtop’s margins

incorporated into the complaint by reference, and matters of which a court may
take judicial notice.”).
155

See Complaint ¶ 45.

156

Id.

157

See supra Part II.D.2.a.

158

See id.

159

See Complaint ¶ 45.
33

and resulting success were false when made during the Class period. Given the
specific allegations supporting the strong inference that a GAAP violation may
have been the source of Longtop’s success, Palaschuk’s statements to the contrary
are actionable.160
Palaschuk argues that the analyst report facts do not suggest that the
financial statements themselves were false.161 However, the Lead plaintiffs’
allegations raise a strong inference that the rationales given to the public and the
SEC to explain Longtop’s growth were false.162 Palaschuk further argues that Lead
plaintiffs must plead the specific accounting principles violated in order to plead
accounting fraud.163 However, Lead plaintiffs have alleged that Palaschuk violated
U.S. GAAP — specifically, FAS No. 57 — in failing to disclose related-party

160

See id. ¶¶ 45, 54. See also In re Alstom, 406 F. Supp. 2d at 453 (citing
In re Time Warner, 9 F.3d at 268) (an omission is actionable when it renders a
statement misleading).
161

See Def. Mem. at 20–21.

162

See Lapin v. Goldman Sachs Group, Inc., 506 F. Supp. 2d 221, 240
(S.D.N.Y. 2006) (citation omitted) (quoting In re Providian Fin. Corp. Secs. Litig.,
152 F. Supp. 2d 814, 824–25 (E.D. Pa. 2001)) ([I]f [a defendant] puts the topic of
the cause of its financial success at issue, then it is ‘obligated to disclose
information concerning the source of its success, since reasonable investors would
find that such information would significantly alter the mix of available
information.”).
163

See id. at 18–19.
34

transactions.164 Lead plaintiffs must demonstrate a material misstatement or
omission.165 In this case, they have done so by alleging a failure to comply with
the GAAP rule requiring disclosure of related-party transactions with sufficient
particularity as required by Section 10(b) pleading standards.166
c.

Conference Call Statements

Lead plaintiffs have also properly pled that Palaschuk’s conference
call statements were false when made. On April 28, 2011, Palaschuk told investors
that there was “no basis” to support the Citron report, and reiterated that XLHRS
was unrelated.167 On May 24, 2010, Palaschuk attributed slight downward trends
in the gross margin to acquisitions and investments.168 Lead plaintiffs have
sufficiently alleged that these statements were false and misleading — in that they

164

See Complaint ¶ 108; FAS No. 57 ¶ 1.

165

Ashland Inc., 652 F.3d at 337 (quoting Stoneridge Inv. Partners, LLC,
552 U.S. at 157).
166

See In re Bear Stearns Cos., Inc. Secs., Derivative, and ERISA Litig.,
763 F. Supp. 2d 423, 472 (S.D.N.Y. 2011) (“Related party transactions include
transactions between affiliates, which are defined as ‘a party that, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with an enterprise.’”) (quoting FAS no. 57 ¶ 1) (emphasis
added).
167

See id. ¶¶ 51–52.

168

See id. ¶ 86.
35

allege a violation of GAAP.169
d.

Materiality

Lead plaintiffs have properly pled that the facts concerning the
potential GAAP violation (XLHRS) and the artificial inflation of the gross margin
were material. A reasonable person would consider an artificially inflated gross
margin or accounting violations when purchasing stock.170 Further, investors
clearly did weigh these issues because the stock declined eight percent in response
to the Citron report.171
2.

Plaintiffs Have Sufficiently Pled Facts Indicating Scienter

Lead plaintiffs have properly pleaded strong circumstantial evidence
of Palaschuk’s recklessness.
a.

Motive and Opportunity Are Apparent

Lead plaintiffs have pled that Palaschuk made material

169

See supra IV.A.1.b.

170

In re Bear Stearns Cos., 763 F. Supp. 2d at 497 (“‘[A] complaint may
not properly be dismissed . . . on the ground that the alleged misstatements or
omissions are not material unless they are so obviously unimportant to a
reasonable investor that reasonable minds could not differ on the question of their
importance.’”) (quoting ECA and Local 134 IBEW Joint Pension Trust of Chi. v.
JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009)).
171

See Complaint ¶ 47.
36

misstatements172 — which artificially inflated the value of the company — and
made a large stock sale during the Class Period.173 Palaschuk argues that the
documentation provided to demonstrate this sale only indicates the proposed sale
of stock.174 This argument raises a factual dispute which cannot be resolved on a
motion to dismiss. Lead plaintiffs sufficiently allege that Palaschuk sold 150,000
shares for four million dollars during the Class Period.
b.

Allegations Indicate a Duty to Monitor

There are allegations also indicating that Palaschuk was reckless in
failing to check information that he had a duty to monitor. As CFO, Palaschuk
made alleged misstatements concerning XLHRS and Longtop’s workforce that
concerned the core operations of Longtop.175 It is therefore appropriate to impute
knowledge of available contrary facts to Palaschuk.176 The allegations indicate that
172

See supra Part IV.B.1.

173

See Complaint ¶ 122. See also Novak, 216 F.3d at 309 (citation
omitted) (“[Concrete and personal benefits arise] when corporate insiders were
alleged to have misrepresented to the public material facts about the corporation's
performance or prospects in order to keep the stock price artificially high while
they sold their own shares at a profit.”).
174

See Def. Mem. at 14.

175

See supra Part IV.B.1.

176

See In re Atlas Air Worldwide Holdings, Inc. Secs, 324 F. Supp. 2d
474, 489 (S.D.N.Y. 2004) (citing Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir.
1989)) (“[I]f a plaintiff can plead that a defendant made false or misleading
37

information was available to Palaschuk that would have made him aware of the
falsity of the financial statements (which he signed) and his own oral and written
statements.
Lead plaintiffs plead the facts gleaned from the analyst reports,
including the fact that Longtop employees were compiling state filings for
XLHRS.177 These facts were readily available to Palaschuk and Lead plaintiffs
sufficiently allege that if investigated they would have revealed a GAAP violation
that artificially inflated Longtop’s gross margins.178 Palaschuk relies on the fact
that Lead plaintiffs have not provided any internal corporate documents.179
However, they have cited to specific reports to which Palaschuk had access.180
statements when contradictory facts of critical importance to the company either
were apparent, or should have been apparent, an inference arises that high-level
officers and directors had knowledge of those facts by virtue of their positions with
the company.”). See also In re Lehman Bros. Secs. and Erisa Litig. 799 F. Supp.
2d 258, 294 (S.D.N.Y. 2011) (“A complaint may allege facts sufficient to give rise
to an inference of scienter with respect to a misleading financial statement where it
alleges that a corporate officer knew of or recklessly failed to learn of “red flags”
indicating that the officer’s public statements were false or misleading.”).
177

See Complaint ¶¶ 44–57.

178

See id. ¶ 50. See also Novak, 216 F.3d at 309 (“Where plaintiffs
contend defendants had access to contrary facts, they must specifically identify the
reports or statements containing this information.”).
179

See Defendant’s Reply Memorandum of Law in Support of Motion to
Dismiss at 2.
180

See Complaint ¶¶ 44–57.
38

There is no requirement in the case law that the contradictory reports be internal to
a corporation.181 As a result, Lead plaintiffs have properly pled scienter by alleging
facts both to demonstrate motive and opportunity and recklessness.182
3.

Plaintiffs Have Properly Pled, Unchallenged, a Presumption
of Reliance

Plaintiffs have properly pled Affiliated Ute and fraud-on-the-market
presumptions based on material omissions and misstatements, respectively.183
Palaschuk has not challenged these presumptions, and, for the purposes of this
motion, I accept the allegation that the market “promptly digested current
information regarding Longtop,” and that all purchasers have suffered “similar
injury.”184
4.

The Remaining Elements of a 10(b) Claim Are Pled

181

See Novak, 216 F.3d at 308 (finding that recklessness claims can
typically rest on access to contradictory information). See also Cosmas, 886 F.2d
at 12 (finding that knowledge of a foreign import restriction was contradictory
information).
182

See Tellabs, 551 U.S. at 324 (citation omitted) (“A complaint will
survive, we hold, only if a reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference one could draw from
the facts alleged.”). Palaschuk has not offered an opposing nonculpable inference
to draw from the analyst report facts regarding XLHRS, and chooses instead to
challenge the argument of Lead plaintiffs that Longtop’s and Palaschuk’s public
statements were false when made. See Def. Mem. at 10.
183

See Complaint ¶ 44.

184

Id.
39

Palaschuk has not challenged the remaining elements of the 10(b)
claim. Lead plaintiffs have properly alleged a causal connection between the
misrepresentations and the purchase of the ADSs185 and the purchase of the ADSs,
and an economic loss due to the drop in the stock price.186 They have also
adequately alleged that the misrepresentations caused the loss — they allege that as
the truth of Longtop’s financial circumstances became public, the price of the stock
deflated, causing substantial damage to plaintiffs.187 Loss causation is buttressed
by the well-pled facts demonstrating price drops in response to the analyst
reports,188 and price increases in response to Palaschuk’s conference call
statements.189 As a result, Lead plaintiffs have stated a Section 10(b) claim.
C.

The Section 20(a) Claim — Count II
1.

Plaintiffs Have Properly Pled a Primary Violation

Lead plaintiffs have properly pled a primary violation by Longtop, the
controlled entity. Longtop’s financial filings contained financial representations.190

185

See id. ¶ 144.

186

See id. ¶ 149.

187

See id. ¶¶ 147–150.

188

See id. ¶¶ 47, 49.

189

See id. ¶ 53.

190

See supra Part II.D.1.a.
40

Longtop made the financial statements contained in Longtop’s Forms 20-F and 6K filings.191 DTTs resignation letter indicates that Longtop’s cash position and
revenues were falsely inflated during the Class Period.192 Lead plaintiffs allege
that Longtop realized concrete benefits from the fraud — the artificial inflation of
the gross margins. Lead plaintiffs further allege sufficient motive — Longtop’s
reported performance allowed it to access additional U.S. capital through the
SPO193 and additional operations.194
Palaschuk does not rebut the presumption of reliance, and Lead
plaintiffs have sufficiently alleged a connection between the misrepresentation and
the purchase of the ADSs,195 an economic loss,196 and loss causation. Lead
plaintiffs allege that as concealed risks became known by the public, the price of
Longtop ADSs declined substantially,197 culminating in the removal of the ADSs

191

See Janus, 131 S.Ct. at 2302 (holding that a corporation with the
obligation to file documents with the SEC was the maker of statements contained
within those SEC filings).
192

See Complaint ¶ 58.

193

See id. ¶ 40.

194

See id. ¶ 82.

195

See id. ¶ 150.

196

See id. ¶ 147.

197

See id. ¶ 149.
41

from the NYSE,198 and damaging plaintiffs.
2.

Plaintiffs Have Properly Pled Control

Control need only be alleged according to the Rule 8 standard.199
Here, Lead plaintiffs have sufficiently alleged Palaschuk had control over the
financial statements of the company and direct involvement in Longtop’s financial
reporting.200 They include Palaschuk’s own statement that he had “very close
discussions with [the] auditors since the day [he] joined the company.”201
Palaschuk signed the SEC filings and issued commentary on the press releases that
accompanied those filings.202
3.
198

Plaintiffs Have Properly Pled Culpability

See id. ¶ 11.

199

See In re Am. Int’l Grp., Inc. 2008 Secs., No. 08 Civ. 4772, 2012 WL
1134142, at * 2. (S.D.N.Y. Mar. 6, 2012); In re Fannie Mae 2008 Secs. Litig.,742
F. Supp. 2d 382, 415 (S.D.N.Y. 2010); Cornwell v. Credit Suisse Grp., 689 F.
Supp. 2d 629, 639 (S.D.N.Y. 2010).
200

See Complaint ¶ 118.

201

Id.

202

See id. ¶ 120. See also In re Bristol Myers Squibb Co. Secs. Litig.,
586 F. Supp. 2d 148, 171 (S.D.N.Y. 2008) (finding adequate allegations of control
where an officer was the “signor and speaker of many of the public statements”
and CEO, and therefore, “clearly in a position to exercise control over the
Company”); In re Alstom SA, 406 F. Supp. 2d at 494 (citation omitted) (finding
that although an officer’s status is generally not enough to constitute control, it is
reasonable to assume that an officer who signs a report has a measure of control
over that report).
42

Lead plaintiffs have properly pled the liability ofPalaschuk with
regard to the lOeb) claim. 203 As a result, Lead plaintiffs have stated a 20(a)
claim. 204

v.

CONCLUSION

For the foregoing reasons, Palaschuk's motion to dismiss is denied.
The Clerk of the Court is directed to close this motion (Docket No. 68). A
conference is scheduled for July 16, 2012, at 4:00 p.m in Courtroom 15C.

SO ORDERED:

Dated:

New York, New York

Jun~,2012

203

See supra Part IV.B.

204

In reAmerican, 741 F. Supp. 2d at 535 (A plaintiff must demonstrate

'''that the controlling person was in some meaningful sense a culpable participant
in the primary violation."') (quoting Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d
Cir. 1998)) (quotation marks and citation omitted).
43

-Appearances-

For Plaintiffs:
Daniel Lawrence Berger, Esq.
Bernstein Litowitz Berger & Grossmann LLP
1285 Avenue of the Americas, 38th Floor
New York, New York 10019
[phone]
Deborah A. Elman, Esq.
Jay W. Eisenhofer, Esq.
Grant & Eisenhofer P.A. (NY)
485 Lexington Avenue, 29th Floor
New York, New York 10017
[phone]
John Anthony Kehoe, Esq.
John J. Gross, Esq.
Kimberly A. Justice, Esq.
Margaret Onasch, Esq.
Kessler Topaz Meltzer & Check, LLP (PA)
280 King of Prussia Road
Radnor, Pennsylvania 19087
[phone]

For Defendant:
Michael J. Biles, Esq.
Royale P. Price, Esq.
King & Spalding, L.L.P. (Austin)
401 Congress Avenue, Suite 3200
Austin, Texas 78701
[phone]

44

Paul Richard Bessette, Esq.
King & Spalding LLP (NYC)
1185 Avenue of the Americas
New York, New York 10036
[phone]

45