Yang v. Han et al

Filing 45

OPINION AND ORDER #106309: re: #24 MOTION to Dismiss the Consolidated Class Action Complaint filed by China XD Plastics Company Limited. #40 granting LETTER MOTION. The Defendants' motion to dismiss the Third Amended Complaint is GRANTED. The Clerk of the Court is directed to close the motion docketed as ECF No. 24. Plaintiffs may move within thirty (30) days, by letter application with an attached proposed amended complaint, for leave to amend if amendment would not be futile. SO ORDERED. (Signed by Judge George B. Daniels on 3/23/2016) (ama) Modified on 3/23/2016 (ama). Modified on 3/24/2016 (ca).

UNITED ST ATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

In re CHINA XD PLASTICS
LIMITED Securities Litigation.

COMPANY:

OPINION AND ORDER

This Document Relates to: All Actions

14-cv-05308 (GBD)
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·MAR 23 2016

GEORGE B. DANIELS, United States District Judge:
Lead Plaintiffs Terry Frishkorn and James Wang, pursuant to Rule 23 of the Federal Rules
of Civil Procedure, bring this consolidated class action on behalf of a class consisting of persons
who purchased the common stock of China XD Plastics Co. Ltd. stock between March 25, 2014
and July 10, 2014. (Consolidated Class Action Complaint for Violations of Federal Securities
Laws ("CAC"), (ECF No. 19), at

~

1.) The CAC alleges securities fraud claims under Section

lO(b) of the Securities Exchange Act of 1934 ("Act"), 15 U.S.C. § 78j(b), and Rule lOb-5
promulgated thereunder, 17 C.F.R. § 240.lOb-5, against Defendants China XD Plastics Co. Ltd.
("China XD" or "Company"), and five of its officers and directors 1 (collectively, the "Individual
Defendants," and with China XD, "Defendants"). (Id at~~ 92-103.) The CAC also asserts a claim
for control person liability under Section 20 of the Act, 15 U.S.C. 78t(a), against all Individual

1

The five officers and directors are Jie Han, Taylor Zhang, Lawrence W. Leighton, Linuyan Zhai, and Feng
Li (collectively, "Individual Defendants").

1

~.l

Defendants. 2 (Id. at~~ 104-09.) Defendants moved to dismiss the complaint with prejudice
pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. (Motion to Dismiss
the Consolidated Class Action Complaint, (ECF No. 24).)
The gravamen of the CAC is that Defendants made material misrepresentations by
overstating their 2012 and 2013 financial position in filings with the SEC, as evidenced by what
the CAC contends were lesser but more accurate financial numbers filed with the Chinese State
Administration for Industry and Commerce ("SAIC").

Because the Plaintiffs have failed to

plausibly plead facts supporting their conclusion that China XD's SEC filings were overstated
based solely upon a comparison to its SAIC filings, Defendants' motion is granted.
I.

Background

China XD is a Nevada corporation whose shares trade on the NASDAQ Global Market
under ticker symbol "CXDC." (CAC

at~~

15, 85; id.

at~

77 (incorporating by reference financial

news article stating ticker symbol).) Its principal executive offices are in Harbin, Heilongjiang
Province, in the People's Republic of China. (Id. at ~ 15.) It researches, develops, manufactures,
and sells modified and engineered plastics products for use in manufacturing in China, principally
in the automobile industry. (Id.)
China XD's 2012 10-K indicates that it adopted a restructuring plan in 2011. China XD
Plastics Co. Ltd., Annual Report (Form 10-K) (Dec. 31, 2012), at 2. 3 As of December 31, 2012,

2

Jie Han is China XD's Chairman and Chief Executive Officer, and has held that post since May 2009.
(Id. at~ 16). Defendant Taylor Zhang is the Company's Chief Financial Officer, and he too has held his
post since May 2009. (Id. at~ 17.) Both Defendants Lawrence W. Leighton and Linyuan Zhai have served
as directors and audit committee members of China XO since May 2009. (Id. at~~ 18-19.) Defendant
Feng Li has served as a direct and audit committee member since November 2012. (Id. at~ 20.)
3

On a motion to dismiss, the Court "may consider any written instrument attached to the complaint,
statements or documents incorporated into the complaint by reference, legally required public documents
filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in

2

the Company was comprised of a total of nineteen subsidiary and sub-subsidiary companies. Id
at 3. 4 During 2013, the Company continued to execute the restructuring plan, and as of December
31, 2013, was comprised of a total of sixteen subsidiary and sub-subsidiary companies. China XD
Plastics Co. Ltd., Annual Report (Form 10-K) (Dec. 31, 2013), at 4. 5
In the United States, China XD files a consolidated financial statement with the SEC that
combines the financial statements of all of its Chinese subsidiaries. In China, however, each of
China XD's Chinese subsidiaries 6 files a separate report with the SAIC that includes only that
subsidiary's financial statement. (CAC at 13 n.17 (indicating that the China XD SAIC financial
figures set forth in the CAC were compiled from its subsidiaries SAIC filings); Id. at ~l 50

bringing suit." ATS! Commc 'ns v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (citing Rothman v.
Gregor, 220 F.3d 81, 88 (2d Cir. 2000)).
4

China XD's 2012 subsidiaries: Favor Sea Ltd.; Favor Sea (US) Inc.; Xinda Holding (HK) Co. Ltd.; Xinda
Holding (HK) US Sub. Inc.; Harbin Xindu Macromolecule Material Co., Ltd.; Heilongjiang Xinda
Enterprise Group Co., Ltd.; HK Engineering Plastics Co. Ltd. Harbin Branch; U.S. China XO Plastics Co.
Ltd. Harbin Representative Office; Haikou Xinda Plastics New Materials Co., Ltd.; Heilongjiang Xinda
Enterprise Group Macromolecule Material Research Center Co., Ltd.; Harbin Xinda Plastics Composite
Materials Co., Ltd.; Harbing Xinda Plastics New Materials Co., Ltd; Harbing Meiyuan Enterprise
Management Service Co., Ltd.; Heilongjiang Xinda Software Development Co., Ltd.; Heilongjiang Xinda
Enterprise Group Technology Center Co., Ltd.; Harbin Xinda Macromolecule Materials Testing Technical
Co., Ltd.; Hulkou Xinda Plastics New Materials Enterprise Technical Center Co., Ltd.; Hulkou Xinda
Software Development Co., Ltd.; Barbing Xinda Plastics Material Research Center Co., Ltd.
5

China XD's 2013 subsidiaries: Favor Sea Ltd.; Xinda (HK) International Trading Co., Ltd.; Xinda Holding
(HK) Co., Ltd.; Xinda Holding (HK) US Sub Inc.; Harbin Xinda Marcromolecule Material Co., Ltd.;
Heilongjiang Xinda Enterprise Group Co., Ltd.; Heilongjiang Xinda Enterprise Group Technology Center
Co., Ltd.; Heilongjiang Xinda Enterprise Group Macromolecule Material Research Center Co., Ltd.;
Sichuan Xinda Group Co., Ltd.; Sichuan Xinda Group Meiyuan Enterprise Management Service Co.;
Sichuan Xinda Group Software Development Co., Ltd.; Sichuan Xinda Group Sales Co., Ltd.; Harbin
Xinda Plastics New Materials Co., Ltd.; Barbing Meiyuan Enterprise Management Service Co., Ltd.;
Heilongjiang Xinda Software Development Co., Ltd.; Harbin Xinda Plastics Material Research Center Co.,
Ltd.
6

China XD's foreign subsidiaries are not required to file financial information with the SAIC. See Article
2, Measures for the Annual Inspection of Enterprises, Feb. 24, 2006 (incorporated by reference in CAC at
15 n.23) (stating that SAIC filings are not required for enterprises from foreign countries that do not engage
in business operations in China).

3

(discussing the incentive for China XD's subsidiaries to file accurate annual reports with the
SAIC).)
Before trading began on the morning of July 10, 2014, analyst firm Bleecker Street
Research published a report entitled, "China XD Plastics: When the Numbers Don't Add Up,
There's Over 80% Downside." (Id. at iJ 77.) It provided a four-bullet point summary:
•

CXDC reports substantially margins [sic] higher than its main
competitor, yet spends much less on R&D.

•

From 2008-2010 CXDC reported higher revenues and net
income in SEC filings compared to SAIC filings.

•

CXDC CFO refused to answer basic questions about his
company, and did not respond to questions.

•

If the trend of overstating net income from 2008-2010 continues,
shares should be worth $1.38/share.

Bleecker Street Research, "China XD Plastics: When the Numbers Don't Add Up, There's Over
80% Downside" (Jul. 10, 2014) ("Report") (attached in Declaration of Jerome S. Fortinksy in
Support of Defendant China XD Plastics Company Limited's Motion to Dismiss the Consolidated
Class Action Complaint ("Fortinsky Deel."), Exhibit B, (ECF No. 26-2), at 1). 7 In another
overview section immediately following the summary, it stated:
CXDC entered the US public markets through a reverse merger, a
method that many fraudulent companies have previously used.
Below is a summary of what we have found researching CXDC.
•

Reported profit margins 200% higher than its larger and
better funded competitor Kinfa.

•

Income reported to the Chinese SAIC is much smaller than
Income reported to the SEC from 2008-2010.

7

This Report was later revised. See infra. This Court may take judicial notice of both versions of the
Bleecker Street Research Report without converting this motion to dismiss into a motion for summary
judgment because the Report is incorporated by reference, (see CAC at ~~ 9, 54, 77), and because both
versions were known to Plaintiffs and relied upon in bringing suit. Supra note 3.

4

•

If the trend of inflating net income in SEC Statements from
2008-2010 had continued, then 90% ofCXDC's 2013 profits
could have been exaggerated in SEC filings.

•

CXDC shares a CFO with the now defunct Advanced
Battery Technologies.

•

When asked (just one!) a basic question about the company
the CFO said that he needed to go and would call us back in
20 minutes. We never received a call back.

Id.
On the day the article was published, the price of China XD securities declined more than
15% from $7.65 per share to $6.48 per share on heavy trading volume. (CAC at il~ 9, 78.)
On July 14, 2014, in light of the irregular trading that took place four days earlier, China
XD responded to the Bleecker Street Research article in a Press Release, titled "China XD Plastics
Refutes Allegations in Seeking Alpha Article. " 8 In relevant part, the Press Release stated:
China XD Plastics believes that the Bleecker Street Article contains
numerous errors of facts, misleading speculations and malicious
interpretations of events. China XD Plastics believes that the
dissemination of these spurious allegations is irresponsible. The
Company is currently evaluating what actions it will take with
regard to Bleecker Street.
The following presents the Company's rebuttal to the maJor
allegations in the article.
Fact: China XD Plastics Raised Capital at Market Rates

Fact: CXDC's Gross Margins Are in Line with Competitors
Who Engage in Similar Business Lines

8

Available at http://www.sec.gov/ Archives/edgar/data/1353970/000107997314000385/ex99x1.htm (last
visited Feb. 27, 2016) (cited in CAC at~ 54 ).

5

-

-

-·-··-~------·---·-·---~···~-------~--

Fact: A Company's Days Sales Outstanding (DSO) can
Fluctuate due to Macroeconomic Conditions and CXDC's DSO
has Stabilized
Fact: Mr. Zhang Conducts Business Based on the Highest
Ethical Standards and was not Employed by Companies When
They Were Accused of Wrongdoings

Fact: China XD Plastics' Change of Auditors was Based on its
Growth and is Justifiable

Id. Most relevant, it stated:
Fact: The Company's SEC and SAIC Filings are Consistent

Had Bleecker Street Research consolidated our financial
statements to include all of the Company's subsidiaries and done a
reconciliation between US GAAP and China accounting principles,
it would have concluded that our SAIC and SEC filings are
consistent. Bleecker Street Research failed to include the SAIC
filings of all subsidiaries of the Company in its calculations. In
addition to this failure, such methodology is also flawed because it
does not, for example, take into account any eliminations of intergroup transactions.
Id. (emphasis added).
One day later, on July 15, 2014, a class-action lawsuit was filed, which led to the abovecaptioned action. 9
On July 31, 2014, counsel for China XD contacted the author of the Bleecker Street
Research Report.

In light of that conversation, the author made several revisions, including

9

Sungwan Yang filed the initial complaint. (Class Action Complaint for Violations of Federal Securities
Laws, (ECF No. 2).) Another plaintiff filed a lawsuit on July 16, 2014. (Complaint for Violations of
Federal Securities Laws, (Case No. 14-cv-5359, ECF No. 1).) These lawsuits were consolidated into the
above-captioned action after Lead Plaintiffs filed a motion to consolidate the actions and to serve as lead
plaintiffs. (See Order Consolidating Related Actions and Appointing Lead Plaintiff and Lead Counsel,
(ECF No. 13).)

6

removing all but the first bullet points in each of its excerpts reprinted above. See Bleecker Street
Research, China XD Plastics: When the Numbers Don't Add Up, There's Over 80% Downside
(Jul. 10, 2014) (attached in Fortinsky Deel., Exhibit C, (ECF No. 26-3), at 1). Additionally, the
author retracted the entire section of the Report stating that China XD's "SAIC Filings From 20082010 Did Not Match SEC Filings." (Fortinsky Deel., Exhibit D, (ECF No. 26-4), at 8-9 (providing
redline comparing original and revised Bleecker Street Research Reports).)
II.

Standard of Review and Applicable Law

A. Securities and Exchange Act of 1934 Rule lO(b) and SEC Rule lOb-5

"Section 1O(b) of the Securities Exchange Act of 1934 and the Securities and Exchange
Commission's Rule lOb-5 prohibit making any material misstatement or omission in connection
with the purchase or sale of any security." Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct.
2398, 2407(2014 ). Although section 1O(b) does not expressly provide for private causes of action,
private actions have been "long recognized" by the Supreme Court "to enforce the provision and
its implementing regulation." Id. To recover damages for violations of section lO(b) and Rule
lOb-5, a plaintiff must allege and then 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 security; (4) reliance upon the misrepresentation or omission; (5) economic
loss; and (6) loss causation." Id. (citation and internal quotation marks omitted).
B. Rule 12(b)(6)

To survive a motion to dismiss, a complaint "must contain sufficient factual matter ... to
'state a claim for relief that is plausible on its face."' Ashcroft v. Iqbal, 556 U.S. 662, 677 (2009)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the reasonable inference that

7

the defendant is liable for the misconduct alleged." Id. On the other hand, when the facts pleaded
leave the Court speculating as to whether the defendant is liable for the misconduct alleged, the
plaintiff has failed to carry this burden. ATS! Commc 'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87,
98 (2d Cir. 2007) (citing Twombly, 550 U.S. at 555)). Although a court must accept all wellpleaded factual allegations as true and draw all reasonable inferences in the plaintiff's favor, it
need not accept "conclusory allegations or legal conclusions masquerading as factual
conclusions." Rolon v. Henneman, 517 F.3d 140, 149 (2d Cir. 2008).

C. Rule 9(b) and the Private Securities Litigation Reform Act
Although under Rule 8 a party need only submit "a short and plain statement of the claim
showing that the pleader is entitled to relief, Fed. R. Civ. P. 8(a)(2), a plaintiff alleging securities
fraud is subject to the heightened pleading standards imposed by Federal Rule of Civil Procedure
9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b ).
With regard to the material-misrepresentation element, these standards require the plaintiff to "( 1)
specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state
where and when the statements were made, and (4) explain why the statements were fraudulent."

Novak v. Kosaks, 216 F.3d 300, 306 (2d Cir. 2000) (quoting Shields v. Citytrust Bancorp, Inc., 25
F.3d 1124, 1128 (2d Cir. 1994)).

Additionally, "if an allegation regarding the statement or

omission is made on information and belief, the complaint shall state with particularity all facts on
which that belief is formed." 15 U.S.C. § 78u-4(b )(1 ). Thus, to plead falsity, "plaintiffs must do
more than say that the statements ... were false and misleading; they must demonstrate with
specificity why and how that is so." Rombach v. Chang, 355 F.3d 164, 174, (2d Cir. 2004).

8

III.

Failure to State a Claim

Defendants argue that the CAC should be dismissed because it has not adequately alleged
a material misstatement, loss causation, or scienter.
A. The CAC Has Not Adequately Pleaded a Material Misstatement
The CAC generally alleges significant discrepancies between the revenues, tax expenses,
net income, and gross margin that China XD reported in its SEC and SAIC filings, primarily in
reliance on the initially released Bleecker Street Report which suggested that its 2008-10 filings
with the SEC did not match its SAIC filings for those years. (CAC at iii! 34-35, 46, 48.) The CAC
sets forth a comparison of different values reported for revenue, tax expense, and net income in
SEC versus SAIC filings in 2012 and 2013. (Id. at iJ 48, Table 1.) The CAC alleges that the higher
SEC-reported figures are false and that the lower SAIC figures represent the true financial
condition of the Company. (Id. at iii! 3, 7, 36, 47, 49.)
The CAC provides four reasons in support of this allegation. First, it contends that Chinese
companies and their officers often operate beyond the reach of criminal and civil judgments and
sanctions imposed by American courts. They are subject to penalties imposed in China for filing
false SAIC documents. Therefore, there is greater incentive for Chinese companies and officers
to ensure that their Chinese filings, as opposed to American filings, are accurate. (Id. at iii! 49-51 ).
Second, the CAC argues that business professionals doing business in China regularly obtain SAIC
filings, rather than simply relying on SEC filings, based on the belief that SAIC filings are more
accurate. (Id. at

i1 52). Third, the CAC contends that differences in U.S. and Chinese Generally

Accepted Accounting Principles ("GAAP") are not marked enough to account for the
extraordinary differences between China XD's SAIC and SEC filings. (Id. at iii! 54-61.) Fourth,
the CAC contends that because China XD's explanation for its superior financial results vis-a-vis

9

its pnmary competitors-i. e., that it has supenor Research & Development ("R&D")
capabilities-is false, IO the financial results themselves must be false. I 1 (Id. at~ 6 ("China XD's
claim that its superior profitability is driven by its substantial investment in R&D is false. It is no
surprise, then, that China XD's claim to superior profitability is itself false."); see id.

at~~

53, 62-

76.)
Given the allegation that the SAIC figures are accurate, the reasonableness of the allegation
that China XD's SEC filings are fraudulent depends entirely on whether the pleaded facts support
a reasonable inference that there is indeed a significant discrepancy between comparable SEC and
SAIC filings. See 15 U.S.C. § 78u-4(b)(l); Rombach, 355 F.3d at 174. The raw numbers in the
CAC leave one to speculate as to whether a discrepancy exists between China XD's SEC and SAIC
filings. Thus, the Plaintiffs' basis for their allegation that China XD's SEC filings are fraudulent
is likewise speculation. The CAC fails to plausibly allege a material misstatement. See ATS!

Commc 'ns, 493 F.3d at 98.
The CAC acknowledges that China XD files a single statement consolidating the financials
of all of its subsidiaries with the SEC, while, in contrast, it files separate financial statements for
each of its subsidiaries with the SAIC. (CAC

at~

50 (stating that China XD's subsidiaries file

annual reports with the SAIC, not a single filing made by China XD as parent company); id. at ~13
n.17 (indicating that the financial figures filed by each China XD subsidiary had to be summed to

10

The CAC claims that China XD's R&D investment is not as much as it says it is because of purported
misstatements in its SEC filings regarding the number of R&D professionals it employs. According to nine
Confidential Witnesses, China XO employed anywhere from 30-70 R&D professionals during the relevant
timeframe, but reports in its SEC filings that it employed 247 professionals. The CAC's allegation of
purported misstatements regarding China XD's R&D headcount do not provide an independent basis to
support the securities violations alleged.
11

The CAC also appears to suggest that China XD's SEC filings are fraudulent because it entered the U.S.
capital markets through a reverse merger. (Id. at ilil 25-28.)

10

arrive at the total SAIC figures presented).) The CAC also acknowledges that proper due diligence
requires obtaining the SAIC filings for all of a company's subsidiaries. (Id. at ~ 52 (stating that
proper due diligence requires "obtaining the entire SAIC file" (emphasis added).)
Notwithstanding these acknowledgements, the CAC does not separately identify any of
China XD's individual subsidiaries nor separately present the relevant financial data for any
subsidiary so an accurate aggregate comparison can be made to China XD's SEC filings. 12 In fact,
the CAC admits that the SAIC financial data it presents does not include the financial results of
several China XD subsidiaries because Lead Plaintiffs were unable to obtain the SAIC filings for
all of China XD's subsidiaries: "Lead Plaintiffs obtained SAIC filings for all of China XD's
subsidiaries that have filed them, other than those responsible for China XD's Sichuan
subsidiary-i. e., Sichuan Xinda Enterprise Group Co. Ltd., Sichuan Xinda Group Mei yuan
Enterprise Management Service Co., Sichuan Xinda Group Software Development Co. Ltd., and
Sichuan Xinda Group Sales Co. Ltd." (Id. at 13 n.17.) This admission demonstrates that the
financial data presented in the CAC fails to include the SAIC filings of at least two categories of
China XD subsidiaries: ( 1) those who had not yet filed reports; and (2) those located in Sichuan. 13

12

The CAC's failure to attach or even reference comparable data in any of the SAIC filings may also be
considered an independent pleading failure. Cf Jn re L&L Energy, Inc. Sec. Litig., 908 F. Supp. 2d 1147,
1153 (W.D. Wash. 2012) ("Plaintiff did not attach any of the SAIC or SEC filings to his complaint, making
it virtually impossible to determine whether the comparisons he draws are apples-to-apples. What
information defendants were asked to provide in each regulatory setting and the sources of that information
cannot be ascertained directly.").
13

The CAC alleged that the omission of the Sichuan subsidiaries' financial results was immaterial. (CAC
at 13 n.17 .) However, the Sichuan subsidiaries' SAIC filings reveal that they earned more than $100 million
in revenue for 2013. (Reply Memorandum of Law in Further Support of Defendant China XO Plastics
Company Limited 's Motion to Dismiss the Consolidated Class Action Complaint ("Reply"), (ECF No. 31 ),
at 3 n.3). The Court may take judicial notice of the Sichuan Subsidiaries' SAIC filings. Supra note 3.
Furthermore, the Plaintiffs admit the veracity of this figure. (Sur-Reply in Opposition to Motion to Dismiss
("Sur-Reply"), (ECF No. 37), at 2-3). Any implication that these filings are fraudulent, (id.), is contradicted
by the express allegations of the CAC, which state that SAIC filings are reliable. (CAC at iii! 50-51.)

11

This failure proves fatal to the CAC. Without identifying which China XD subsidiaries'
SAIC filings are missing, and why these omissions are immaterial, the missing subsidiaries'
financials could close the gap between the incomplete SAIC financial data presented in the CAC
and China XD's consolidated SEC filings. If including the missing subsidiaries' SAIC filings
demonstrate that there is no discrepancy between China XD's SAIC and SEC filings, then material
misstatements do not exist. It is not reasonable to infer that China XD's SEC filings must be false
based upon a comparison to less than a complete set of its subsidiaries' SAIC filings. Any such
allegation is pure speculation not supported by the factual allegations and filings incorporated by
reference. It thus fails to state a claim that is plausible on its face. Iqbal, 556 U.S. at 677; ATS!

Commc 'ns, 493 F.3d at 98.
This conclusion squares firmly with this Court's prior decision in Ho v. Duoyuan Global

Water, Inc., 887 F. Supp. 2d 547, 567-68 (S.D.N.Y. 2012). The Plaintiffs in Ho "allege[d] that
discrepancies between filings made with the . . . SAIC in China for two [of defendant's]
subsidiaries ... for the years 2006 to 2008 and the financial statements for those same years
included in the SEC ... Forms ... , demonstrate that the SEC filings [were] false." Id. at 567
(alleging a violation of Section 11 of the Securities Act of 1933). The complaint in Ho isolated
the financials of the relevant subsidiaries contained within the SEC filings that it contended were
overstated, and compared them with each of the relevant subsidiaries' filings with the SAIC. Thus,
this Court found that the comparison was "substantively appropriate." Id. at 568.
The CAC, in contrast, does not make a "substantively appropriate" comparison because
the CAC does not say which 2012 or 2013 subsidiaries' financial results it is comparing to China
XD's consolidated SEC filings. 14 In re L&L Energy, Inc. Sec. Litig., 908 F. Supp. 2d at 1153

14

It appears that the financial results for 2012 that Plaintiffs relied upon were based solely on the SAIC
filing of one subsidiary, Heilongjiang Xinda Enterprise Group Company Limited. (Compare Declaration

12

(omission of information regarding the SAIC filings, including reporting periods, accounting
treatment and auditing requirements made it "virtually impossible to determine whether the
comparisons" to SEC filings were "apples-to-apples" and warranted dismissal); Jn re A-Power

Energy Generation Sys. Ltd Sec. Litig., No. MDL-11-2302-GW(CWx), 2012 WL 1983341, at *8
(C.D. Cal. May 31, 2012) (same). 15

Furthermore, the CAC significantly relies upon the

unsubstantiated claim in the Bleecker Street Report that was later retracted. Accordingly, because
the CAC has failed to plausibly allege a material misstatement, it is due to be dismissed. 16 • 17

of Brian G. Burke in Further Support of Defendant China XO Plastics Company Limited's Motion to
Dismiss the Consolidated Class Action Complaint, (ECF No. 32), Exhibit C at 6 (showing RMB
3,005227692.27 as the 2012 main operating revenue for Heilongjiang Xinda Enterprise Group Company
Limited, which at 6.31 RMB per USO is $476,264,293.55) with CAC ii 48 Table I (alleging the "true value
derived from SAIC filings" for China XD's 2012 revenue as $476,172,618.94, almost exactly the same
amount); see also Official Exchange Rate (LCU per US$, period average), The World Bank, available at:
http://data.worldbank.org/indicator/PA.NUS.FCRF (last accessed Feb. 28, 2016)). Supra note 3. This
information, along with supra note 13, underscores the speculative nature of the CAC's allegation that a
genuine discrepancy between China XD's SEC and SAIC filings exists.
15

In both In re L&L Energy and In re A-Power, the courts found that the comparison was not apples-toapples, and therefore inappropriate, largely based upon the complaint's failure to adequately plead facts
demonstrating that the differences between SAIC and SEC filings could not be attributed to different
accounting methodologies. Id.
16

It bears noting that at oral argument this Court invited Defendants to submit "a letter ... with the
attachments ... and underlying documentation" in order to "demonstrate to [the Court] that [the Plaintiffs
allegations] are not true." (Oral Argument Transcript, (ECF No. 41), at 86:18-87:1-5.) On January 11,
2016, the Defendants notified the Court and Plaintiffs that they intended to submit such a letter. (Letter,
(ECF No. 43).) On January 29, 2016, Defendants made such a submission attaching what appear to be
China XO SAIC filings and audited tax statements purporting to demonstrate that there is no discrepancy
between China XD's SEC and SAIC filings. (Letter, (ECF No. 44).) Plaintiffs have not refuted or even
responded to this submission. Nevertheless, Defendants' submission was unaccompanied by a sworn
statement indicating how it obtained these documents, that the documents are true and correct copies of
what they purport to be, and that the English translations are reliable. The submission is therefore itself not
dispositive of the instant motion.
17

Defendants also argued that the CAC should be dismissed because it has failed to plead loss causation
and scienter. To meet their pleading burden with regard to scienter, Plaintiffs must "state with particularity
facts giving rise to a strong inference that the defendant acted with the required state of mind" as to each
alleged false statement. 15 U.S.C. §78u-4(b)(l)-(2). The CAC first alleges that the Defendants possessed
the requisite fraudulent intent based upon a 2011 article which appears to be cited in the Bleecker Street
Report. (CAC at ii 79; see Fortinsky Deel., Exhibit B at 9.) However, Plaintiffs cannot plead fraudulent
intent with particularity by pointing to another party's unproven and retracted allegations of fraud in the
past with respect to a completely different set of statements. The CAC also alleges Defendants purposely

13

IV.

Conclusion

The Defendants' motion to dismiss the Third Amended Complaint is GRANTED. The
Clerk of the Court is directed to close the motion docketed as ECF No. 24. 18 Plaintiffs may move
within thirty (30) days, by letter application with an attached proposed amended complaint, for
leave to amend if amendment would not be futile.

Dated: March 23, 2016
New York, New York
SO ORDERED:

overstated their financials to complete a bond offering. (Id. at~~ 80-83.) However, the bond offering
closed before the alleged misstatements included in China XD's 2013 10-K and 2014 10-Q were issued.
Thus, the alleged misstatements could not have been driven by a desire to complete the offering. In their
opposition, Plaintiffs argue that the "massive disparity" between China XD's SEC and SAIC filings
demonstrates "conscious misbehavior and recklessness," and this satisfies the heightened pleading
requirements as to the fraudulent-intent element. (Opposition to Motion to Dismiss, (ECF No. 29), at 28).)
Plaintiffs' alleged disparity between SAIC and SEC filings, without more, does not suffice to establish a
"strong inference" of scienter, since the very disparity claimed to exist is speculative. Plaintiffs do not
allege any other factors supporting a strong inference of scienter.
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Defendants' unopposed letter motion for consideration of a proposed response to Plaintiffs' sur-reply,
which was attached to the motion, has also been granted. (Letter Motion, (ECF No. 40).) The Clerk of
Court is directed to close this motion as well.

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