Pehlivanian v. China Gerui Advanced Materials Group, Ltd. et al
Filing
59
OPINION AND ORDER re: 48 MOTION to Dismiss Second Amended Complaint filed by China Gerui Advanced Materials Group, Ltd., Harry Edelson. For the reasons set forth above, China Gerui and Edelson's motion to dismiss the SAC is G RANTED without prejudice. Plaintiff's Third Amended Complaint shall be filed, if at all, on or before June 16, 2016. The Clerk of the Court is respectfully directed to terminate the motion, Doc. 48. It is SO ORDERED. (As further set forth in this Order.) (Amended Pleadings due by 6/16/2016.) (Signed by Judge Edgardo Ramos on 5/16/2016) (kko)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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ARAM J. PEHLIVANIAN, Individually and
:
On Behalf of All Others Similarly Situated,
:
:
Plaintiff,
:
:
- against :
:
CHINA GERUI ADVANCED MATERIALS
:
GROUP, LTD., MINGWANG LU, EDWARD
:
MENG, YI LU, HARRY EDELSON, J.P. HUANG, :
KWOK KEUNG WONG, YUNLONG WANG,
:
and MAOTONG XU,
:
:
Defendants.
:
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OPINION AND ORDER
14 Civ. 9443 (ER)
Ramos, D.J.:
This case arises out of alleged violations of the Securities Exchange Act of 1934 (the
“Exchange Act”) by China Gerui Advanced Materials Group, Ltd. (“China Gerui” or the
“Company”) and eight of its current and former Directors and Officers (“Individual Defendants”
and collectively, “Defendants”). The Second Amended Complaint (“SAC”) alleges that
Defendants made a number of material omissions relating to the Company’s purchase of certain
land use rights and acquisition of an antique porcelain collection in violation of Sections 10(b)
and 20(a) of the Exchange Act and Securities and Exchange Commission (“SEC”) Rule 10b-5. 1
Lead plaintiff, Aram J. Pehlivanian (“Pehlivanian” or “Plaintiff”), brings suit on behalf of a class
of all those who purchased or otherwise acquired China Gerui securities between July 11, 2011
and November 24, 2015 (the “Class Period”), and sustained losses upon the revelation of alleged
corrective disclosures (the “Class”). Pending before this Court is China Gerui and Individual
1
Plaintiff also brought a claim for fraudulent concealment, but withdrew the claim in his Opposition to Defendants’
Motion to Dismiss the SAC. See Pl.’s Opp’n Mem. at 2 n.2.
Defendant Harry Edelson’s (“Edelson”) motion to dismiss the SAC pursuant to Rule 12(b)(6) of
the Federal Rules of Civil Procedure. For the reasons set forth below, the motion to dismiss is
GRANTED.
I.
Background
a. Factual Background
i. The Defendants
China Gerui is a steel processing company based in China and incorporated under the
laws of the British Virgin Islands that produces high-precision, ultra-thin, cold-rolled steel
products for sale internationally and domestically. SAC ¶¶ 2, 16.
As of the date of this Order, the only Individual Defendant that has been served is
Edelson. See Docs. 9, 54 (extending the deadline to serve the Individual Defendants, excluding
Edelson, to October 1, 2016). Edelson has been a director of China Gerui since 2009 and
previously served as Chief Executive Officer and Chairman of the Board of Directors of China
Gerui’s predecessor corporation. SAC ¶ 20. Edelson has received $10,000 a month from China
Gerui since 2010 for his services promoting awareness of the Company within the investment
community, participating in road shows and investor conferences, and providing the Company
with office space and communications facilities. Id.
The other seven Individual Defendants are: (1) Mingwang Lu (“Lu”), Chairman of China
Gerui’s Board of Directors and Chief Executive Officer; (2) Edward Meng (“Meng”), China
Gerui’s Chief Financial Officer and previously its Director of Investor Relations; (3) Yi Lu (“Y.
Lu”), China Gerui’s Chief Operating Officer and a Director; (4) J.P. Huang (“Huang”), a China
Gerui Director who serves on the Audit Committee, Compensation Committee, and Nominating
and Corporate Governance Committee; (5) Kwok Keung Wong (“Wong”), a former China Gerui
2
Director who served on the Audit Committee, Compensation Committee, and Nominating and
Corporate Governance Committee; (6) Yunlong Wang (“Wang”), a China Gerui Director who
took Wong’s place on the Audit Committee, Compensation Committee, and Nominating and
Corporate Governance Committee; and (7) Maotong Xu (“Xu”), a China Gerui Director and the
Chair of the Audit Committee, Compensation Committee, and Nominating and Corporate
Governance Committee. Id. ¶¶ 17–24.
ii. The Chinese Steel Market
In 2010, the Chinese steel industry was the largest in the world, accounting for
approximately 45% of global steel output. Id. ¶ 26. Years of growth, however, lead to a “glut of
over-capacity.” Id. As a result, heavy losses in the steel industry were anticipated and did occur
in late 2010. Id. In addition to the capacity issue, the Chinese steel industry was unable to
negotiate favorable pricing on the raw materials required to make steel because of its heavy
fragmentation. Id. In an attempt to bolster the steel industry, the Chinese government
announced a five-year plan to reduce capacity, decrease pollution, and improve China’s
bargaining position. Id. ¶ 27.
iii. Defendants’ Allegedly Material Omissions
Plaintiff claims that China Gerui implemented strategies that cut against the
government’s five-year plan, id. ¶ 28, and that Defendants failed to disclose material information
pertaining to two of those strategies: (1) the purchase of land use rights to 25.94 acres of land
located in China from an entity called Zhengzhou No. 2 Iron and Steel Company Limited
(“Zhengzhou”) for $42.6 million (the “Land Transaction”), id. ¶¶ 4–6, 29–34; 2 and (2) the
2
Plaintiff alleges that the Land Transaction involved the purchase of land use rights to 25.94 acres of land, although
the Company’s own annual reports consistently refer to 24.94 acres. Compare SAC ¶¶ 4–5, 29–31, with Declaration
3
purchase of a collection of antique Chinese porcelain for $234 million (the “Porcelain
Acquisition”), id. ¶¶ 7–11, 35–42. Each of these transactions is more fully described below.
The Land Transaction. On July 11, 2011, China Gerui announced, in its 2010 annual
report, that it had started the process of acquiring title to 25.94 acres of land use rights from
Zhengzhou. Id. ¶ 29. The Company’s existing production facilities and warehouses were
already located on a portion of that land, as the Company had been subleasing 6.69 acres. Id.
The Company stated that it had prepaid, as of December 31, 2010, approximately $2.1 million to
Zhengzhou, but that the final price was to be further determined “based on market-based
valuation of the land value and calculation of associated value-added tax.” Id. The stated
purpose of the transaction was “operation risk mitigation.” Id.
On May 7, 2012, in its 2011 annual report, the Company again stated that it was in the
process of transferring title to the 25.94 acres of land use rights. Id. ¶ 30. The Company also
announced that it had increased its prepayment to approximately $12.7 million, noting that the
final transfer price would need to be further determined and that the Company might need to
make additional payments “depending on the conditions of transfer that [were] ultimately
negotiated.” Id. The Company reiterated that the purpose of the transaction was “operation risk
mitigation.” Id. The Company also noted that the Land Transaction would “protect the legal
status of [the Company’s] current operations and potential expansions.” Id.
On April 30, 2013, in its 2012 annual report, the Company announced that on February
26, 2013, it had entered into an agreement with Zhengzhou, whereby the Company would
acquire the land use rights to the 25.94 acres in exchange for $42.6 million. Id. ¶ 31. The
of David M. Furbush in Support of Motion to Dismiss (“Furbush Decl.”) (Doc. 51), Ex. 1 (2010 annual report) at 53,
Ex. 2 (2013 annual report) at 9, 41. The Court assumes for present purposes that 25.94 acres of land are at issue.
4
Company disclosed that the purchase price was determined based on a report prepared by an
independent appraisal firm called Henan Minsheng Asset Appraisal Office. Id. The Company
stated that the purpose of the transaction was “to ultimately reduce [the Company’s] overall risk
position by reducing [its] dependence on third parties for [its] land use rights,” although the
Company acknowledged that over-capacity was a risk to its business. Id. ¶¶ 31, 34. Plaintiff
alleges that both the Board and the Board’s Audit Committee approved the Land Transaction.
Id. ¶ 31.
Plaintiff claims that the Company grossly overpaid for the land use rights 3 and that the
Land Transaction did not make fiscal sense, given the over-capacity problem then existing in the
steel industry. Id. ¶¶ 29–30. Plaintiff also contends that Defendants failed to disclose a number
of facts regarding the Land Transaction, namely: the “market-based valuation of the land value;”
the “calculation of associated value-added tax;” the “conditions of transfer that [were] ultimately
negotiated;” the meaning of “operation risk mitigation;” how the transfer of land use rights
would “protect the legal status of [the Company’s] current operations and potential expansions;”
what economic benefit, if any, the transfer would produce for the Company’s public
shareholders; and the rationale for the Company to further expand its production capacity. Id.
¶¶ 31–33.
Plaintiff also claims that he has learned from confidential sources certain facts regarding
the Land Transaction that were not disclosed by Defendants, including that there is a dispute
between Chinese government agencies over ownership of the land use rights, that title to the land
3
Plaintiff alleges that at the time the Company entered into the Land Transaction, it had almost fifteen years
remaining on its sublease of 6.69 acres from Zhengzhou. SAC ¶ 6. According to Plaintiff, the sum of the lease
payments for the remaining fifteen years would have equaled only approximately 1% of the aggregate value of the
Land Transaction. Id.
5
use rights was never actually transferred to the Company, and that the independent appraisal firm
alleged to have prepared the report relied upon by the Company does not exist. Id. ¶¶ 49–51.
The Porcelain Acquisition. On September 4, 2014, the Company announced, during an
earnings conference call, that it had purchased for $234 million a collection of antique Chinese
porcelain appraised at $905 million. Id. ¶ 35. Lu, the Company’s CEO, explained that Company
management and the Board of Directors decided to take advantage of the Company’s rich cash
position to make the alternative investment. Id. Lu explained that the Company’s intention was
to sell all 206 pieces in the collection over time at a substantial return, and to use the profits from
the sale to support the Company’s steel operations while the steel industry “gains stronger
fundamental balance.” Id. ¶¶ 35–36.
Meng, the Company’s CFO, provided more detail regarding the porcelain collection. He
noted that the porcelain came from a private entrepreneur who was under financial pressure from
his personal business, that the collection was appraised and authenticated by “Class A certified
China arts appraisers,” and that the prices of the individual pieces in the collection compared
favorably with those of similar pieces. Id. ¶ 40. Both Lu and Meng acknowledged that the
Porcelain Acquisition, paid for from the Company’s existing cash accounts, would put short-term
pressure on the Company’s cash position. Id. ¶¶ 37–38, 40. Both executives expressed
optimism, however, regarding the potential rewards from the investment. Id. ¶¶ 37–38.
On the date the Porcelain Acquisition was announced, September 4, 2014, China Gerui’s
stock price declined approximately 20%, from $0.61 per share (pre-split) 4 on September 3, 2014,
to $0.49 per share (pre-split). Id. ¶ 43. Approximately three weeks later, on September 26,
4
China Gerui’s Board of Directors approved a one-for-ten reverse stock split, effective November 7, 2014, meant to
raise the Company’s share price above the NASDAQ’s $1.00 per share listing requirement to avoid being delisted.
SAC ¶ 45. The Company’s shares were later delisted on November 24, 2015. Id. ¶ 47.
6
2014, Lu sent a letter to shareholders discussing the Company’s ongoing growth strategy, but the
letter made no mention of the recent porcelain purchase. Id. ¶ 44. On January 6, 2015, the
Company issued a press release, in which it stated that the Company was “vigorously pursuing
opportunities with established domestic and international auction houses to liquidate the antique
collection in part or in its entirety.” Id. ¶ 46.
According to Plaintiff, since the January 6, 2015 press release, the Company has not
disclosed any information regarding the porcelain collection. Id. ¶ 48. Indeed, Plaintiff claims
that Defendants have failed to disclose a number of facts regarding the Porcelain Acquisition,
namely: when or from whom the porcelain was purchased; where the collection was being
stored; whether the collection was insured; who appraised and authenticated the collection; what
material actions were being taken to “vigorously pursu[e] opportunities” to liquidate the
collection; and which “established domestic and international auction houses” were being used to
liquidate the collection. Id. ¶¶ 42, 46, 58.
Plaintiff also claims that he has learned from confidential sources certain facts regarding
the Porcelain Acquisition that were not disclosed by Defendants, including that the porcelain
collection was being stored at a hotel in China, that the collection was not insured, and that the
Company had attempted to obtain insurance for the collection but was denied coverage. Id.
¶¶ 55–56.
Other Omissions. Aside from Defendants’ alleged omissions related to the Land
Transaction and the Porcelain Acquisition, Plaintiff claims that he has learned from confidential
sources a number of other facts regarding the Company that were not disclosed by Defendants,
namely that: the Company will not be issuing any financial statements in the near future; the
Company’s most recent public auditor is no longer performing any auditing or accounting work
7
for the Company; the Company no longer maintains any active business operations; and
Company management is no longer being paid. Id. ¶¶ 52, 54, 59.
b. Procedural Background
On November 26, 2014, Pehlivanian, individually and on behalf of purchasers and those
that otherwise acquired China Gerui securities between January 11, 2012 and September 4, 2014,
filed a Complaint against China Gerui and the Individual Defendants. Doc. 1. On December 5,
2014, Plaintiff filed an Amended Complaint. Doc. 3. Plaintiff’s Amended Complaint focused
on the events leading up to the Porcelain Acquisition, claiming that Defendants made false and
misleading statements regarding China Gerui’s growth strategy, fiscal strategy, and unrestricted
cash holdings by failing to disclose the Company’s intention to use a significant portion of its
cash holdings to acquire the porcelain. Id.
On December 23, 2015, this Court granted Defendants’ motion to dismiss the Amended
Complaint. Pehlivanian v. China Gerui Advanced Materials Grp., Ltd., No. 14 Civ. 9443 (ER),
2015 WL 9462115 (Dec. 23, 2015) (“China Gerui I”). The Court held that Plaintiff failed to
plausibly allege that any of Defendants’ statements regarding the Company’s growth strategies,
fiscal responsibilities, or cash reserves were false when made, id. at *8–9, or that they rendered
any of Defendants’ prior statements misleading, id. at *11–12. 5 The Court also found that
Plaintiff’s allegations did not raise a strong inference that Defendants intended to deceive or
mislead investors. Id. at *14–16. Acknowledging that it was possible for Plaintiff to plead
5
The Court appreciated that the events surrounding the Porcelain Acquisition, if true, would lead any reasonable
investor to suspect fraud, but explained that this suspicion must at base be supported by facts tending to establish
that the Company’s public statements regarding the purchase were false when made—which the Amended
Complaint failed to do. China Gerui I, 2015 WL 9462115, at *9 n.6.
8
additional facts to remedy the deficiencies identified by the Court, the Court granted Plaintiff
leave to amend his Complaint a second time. Id. at *17.
On January 22, 2016, Pehlivanian filed his SAC against China Gerui and the Individual
Defendants. Doc. 45. Plaintiff filed the SAC individually and on behalf of purchasers and those
that otherwise acquired China Gerui securities, this time between July 11, 2011 and November
24, 2015. Id. ¶ 1. As with the Amended Complaint, the SAC alleges that Defendants failed to
disclose a number of facts regarding the Porcelain Acquisition. Plaintiff also now alleges that
Defendants failed to disclose information regarding the Land Transaction, as well as other facts
pertaining to the business of the Company. On February 22, 2016, Defendants China Gerui and
Edelson moved to dismiss the SAC. Doc. 48.
II.
Legal Standard
a. Rule 12(b)(6) Motions to Dismiss: General Legal Standard
When ruling on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
the Court must accept all factual allegations in the complaint as true and draw all reasonable
inferences in the plaintiff’s favor. Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014). The Court is
not required to credit “mere conclusory statements” or “threadbare recitals of the elements of a
cause of action.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly,
550 U.S. 544, 555 (2007)); see also id. at 681 (citing Twombly, 550 U.S. at 551). “To survive a
motion to dismiss, a complaint must contain sufficient factual matter . . . to ‘state a claim to relief
that is plausible on its face.’” Id. at 678 (quoting Twombly, 550 U.S. at 570). 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.” Id. (citing Twombly, 550 U.S.
at 556). More specifically, the plaintiff must allege sufficient facts to show “more than a sheer
9
possibility that a defendant has acted unlawfully.” Id. If the plaintiff has not “nudged [her]
claims across the line from conceivable to plausible, [the] complaint must be dismissed.”
Twombly, 550 U.S. at 570; see Iqbal, 556 U.S. at 680.
The question in a Rule 12 motion to dismiss “is not whether a plaintiff will ultimately
prevail but whether the claimant is entitled to offer evidence to support the claims.” Sikhs for
Justice v. Nath, 893 F. Supp. 2d 598, 615 (S.D.N.Y. 2012) (quoting Villager Pond, Inc. v. Town
of Darien, 56 F.3d 375, 378 (2d Cir. 1995)). “[T]he purpose of Federal Rule of Civil Procedure
12(b)(6) ‘is to test, in a streamlined fashion, the formal sufficiency of the plaintiff’s statement of
a claim for relief without resolving a contest regarding its substantive merits,’” and without
regard for the weight of the evidence that might be offered in support of Plaintiff’s claims.
Halebian v. Berv, 644 F.3d 122, 130 (2d Cir. 2011) (quoting Glob. Network Commc’ns, Inc. v.
City of New York, 458 F.3d 150, 155 (2d Cir. 2006)).
b. Heightened Pleading Standard under Rule 9(b) and the PSLRA
Beyond the requirements of Rule 12(b)(6), a complaint alleging securities fraud must
satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the
Private Securities Litigation Reform Act of 1995 (“PSLRA”) by stating the circumstances
constituting fraud with particularity. See, e.g., ECA & Local 134 IBEW Joint Pension Tr. of
Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (citing Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 319–20 (2007)). Specifically, Rule 9(b) requires that
a securities fraud claim based on misstatements must identify: (1) the allegedly fraudulent
statements, (2) the speaker, (3) where and when the statements were made, and (4) why the
statements were fraudulent. See, e.g., Anschutz Corp. v. Merrill Lynch & Co., Inc., 690 F.3d 98,
108 (2d Cir. 2012) (citing Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)). Put another
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way, Rule 9(b) “requires that a plaintiff set forth the who, what, when, where and how of the
alleged fraud.” U.S. ex rel. Kester v. Novartis Pharm. Corp., 23 F. Supp. 3d 242, 252 (S.D.N.Y.
2014).
Like Rule 9(b), the PSLRA requires that securities fraud complaints “‘specify’ each
misleading statement,” set forth the reasons or factual basis for the plaintiff’s belief that the
statement is misleading, and “state with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.” Dura Pharm., Inc. v. Broudo, 544 U.S.
336, 345 (2005) (quoting 15 U.S.C. §§ 78u-4(b)(1), (2)); see also, e.g., Slayton v. Am. Express,
Co., 604 F.3d 758, 766 (2d Cir. 2010).
c. Confidential Sources
Notwithstanding a securities fraud plaintiff’s obligation to plead with particularity, his
complaint allegations may be based on information obtained from confidential sources. In re
PXRE Grp., Ltd., Sec. Litig., 600 F. Supp. 2d 510, 526 (S.D.N.Y. 2009). In order for a court to
credit such information, however, the confidential sources must be “described in the complaint
with sufficient particularity to support the probability that a person in the position occupied by
the source would possess the information alleged.” Emps.’ Ret. Sys. of Gov’t of the Virgin
Islands v. Blanford, 794 F.3d 297, 305 (2d Cir. 2015) (quoting Novak v. Kasaks, 216 F.3d 300,
314 (2d Cir. 2000)).
Defendants contend that the Court cannot credit SAC allegations that rely on the
following sources: (1) anonymous non-class-member Company investors; (2) an investigation
report commissioned by an anonymous non-class-member investor and produced by Steve
Vickers and Associates Limited (the “SVA Report”); (3) an employee of the Company’s most
recent public auditor, the independent registered public accounting firm, UHY Vocation HK
11
Limited (“UHY”); and (4) a Chinese law firm/title company retained by Plaintiff. Defs.’ Mem.
at 12–14. The Court considers each of these allegations in turn.
Plaintiff alleges that according to one or more non-class-member investors, 6 “there is a
dispute between certain Chinese government agencies over the actual ownership of the land use
rights, and therefore, title to the land use rights could not be transferred to the Company,” SAC
¶ 49; the Company was denied insurance coverage for its porcelain collection, id. ¶ 56; the
Company will not be issuing any financial statements in the near future, id. ¶ 52; and
management is no longer being paid, id. ¶ 59. Without more, however, the Court cannot
determine whether someone in each investor’s position “would be privy to the information
alleged.” In re EVCI Colls. Holding Corp. Sec. Litig., 469 F. Supp. 2d 88, 97 (S.D.N.Y. 2006).
Accordingly, the Court cannot credit these allegations and will not consider them in deciding the
present motion.
Plaintiff also alleges that according to a non-class-member investor, the porcelain
collection was being stored at a hotel in China. SAC ¶ 55. Unlike Plaintiff’s other allegations
attributed to non-class-member investors, Plaintiff explains how this particular investor came to
learn the fact of the porcelain’s whereabouts—namely, Plaintiff alleges that the investor visited
the hotel and physically examined the collection. Id. The Court accordingly assumes as true the
fact that the porcelain was stored at a hotel in China at some point in time.
Plaintiff cites a number of his claims to the SVA Report, which was allegedly prepared
following “an investigation into the on-going business operations and finances of [the
Company], as well as other [Company]-related individuals and entities.” Id. at 2. “This vague
6
It is unclear from the wording of the SAC how many non-class-member investors supplied information for
Plaintiff’s allegations. Cf. In re PXRE Grp., Ltd., Sec. Litig., 600 F. Supp. 2d at 526 (referring to confidential
informants as CI # 1, CI # 2, CI # 3, and CI # 4).
12
description of the source provides no basis for the Court to evaluate its reliability.” City of
Brockton Ret. Sys. v. Avon Prods., Inc., No. 11 Civ. 4665 (PGG), 2014 WL 4832321, at *23
(S.D.N.Y. Sept. 29, 2014). Therefore, the Court cannot credit Plaintiff’s allegations that the
Company “paid $42.6 million for the transfer of title to a land use right,” but “the title to that
property was never actually transferred,” SAC ¶ 50; “an entity entitled ‘Henan Minsheng Asset
Appraisal Office’ does not exist,” id. ¶ 51; “the Company’s steel production plant has
experienced only irregular steel production operations during the June 2014 to Spring 2015 time
period,” id. ¶ 59; and “since the Spring of 2015, the Company’s production activity has virtually
been suspended” with “no indication from [the Company’s] management or its Board as to when
normal production activities would resume,” id. 7
Plaintiff alleges that according to a UHY employee, UHY is no longer performing any
auditing or accounting work for the Company. Id. ¶ 54. Moreover, according to a Chinese law
firm/title company, Zhengzhou—and not the Company—has owned the land use right since
March 2006. Id. ¶ 50. The Court is satisfied that a UHY employee is likely to know whether the
auditor was performing work for the Company, irrespective of the employee’s name, title, or job
responsibilities. In addition, the Court is satisfied that a title company likely knows the
ownership status of the land use right, notwithstanding that Plaintiff does not provide additional
information regarding the investigative efforts the company undertook to learn that fact.
Accordingly, the Court considers these allegations to be true. 8
7
In his opposition brief, Plaintiff states that he has been given permission to identify his anonymous sources with
more particularity and authorization to supply the Court with a copy of the SVA Report. Pl.’s Opp’n Mem. at 12
n.8.
8
Plaintiff contends that he has uncovered more information from confidential sources since filing the SAC. See
Pl.’s Opp’n Mem. at 16 n.9 (the Company will not be issuing any more financial statements because the CEO does
not want to pay for an auditor to review the Company’s financial reports), 16 n.10 (the Company is no longer in
business), 19 n.11 (Edelson was more like a management executive than an outside Board member). The Court does
13
d. Extrinsic Documents
“When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may
consider documents that are referenced in the complaint, documents that the plaintiffs relied on
in bringing suit and that are either in the plaintiffs’ possession or that the plaintiffs knew of when
bringing suit, or matters of which judicial notice may be taken.” Silsby v. Icahn, 17 F. Supp. 3d
348, 354 (S.D.N.Y. 2014) (citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.
2002)), aff’d sub nom. Lucas v. Icahn, No. 14 Civ. 1906, 2015 WL 3893617 (2d Cir. June 25,
2015) (summary order); see also DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir.
2010). To be incorporated into the complaint by reference, “the [c]omplaint must make a clear,
definite and substantial reference to the documents.” Mosdos Chofetz Chaim, Inc. v. Vill. of
Wesley Hills, 815 F. Supp. 2d 679, 691 (S.D.N.Y. 2011). The Court may also “take judicial
notice of public disclosure documents that must be filed with the [SEC] and documents that both
‘bear on the adequacy’ of SEC disclosures and are ‘public disclosure documents required by
law.’” Silsby, 17 F. Supp. 3d at 354 (quoting Kramer v. Time Warner Inc., 937 F.2d 767, 773–
74 (2d Cir. 1991)); see also In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564,
570 (S.D.N.Y. 2013), aff’d, 566 F. App’x 93 (2d Cir. 2014) (summary order).
China Gerui and Edelson attach the Company’s 2010 and 2013 annual reports and an
article from China’s official media outlet, Xinhua News Agency, to their motion to dismiss the
SAC and reply brief in support thereof. See Declaration of David M. Furbush in Support of
not consider these new allegations in deciding Defendants’ present motion to dismiss. See Goplen v. 51job, Inc.,
453 F. Supp. 2d 759, 764 n.4 (S.D.N.Y. 2006) (“[T]hese allegations are not properly before the Court. The
complaint makes no mention of these claims and plaintiffs cannot amend their complaint through a legal
memorandum.”).
14
Motion to Dismiss (“Furbush Decl.”) (Doc. 51), Exs. 1–2; Declaration of David M. Furbush in
Support of Defendants’ Reply Memorandum of Law (“Furbush Reply Decl.”) (Doc. 58), Ex. 1.
The SAC cites and relies on the 2010 annual report. SAC ¶ 29. Accordingly, the SAC
incorporates this document by reference and the Court will consider it in deciding the present
motion to dismiss. See San Leandro Emergency Med. Grp. Profit Sharing Plan v. Phillip Morris
Cos., Inc., 75 F.3d 801, 809 (2d Cir. 1996).
Regarding the documents not cited to or relied on in the SAC—the 2013 annual report
and the Xinhua News Agency article—the Court may “take judicial notice of public disclosure
documents that must be filed with the [SEC,] . . . documents that both ‘bear on the adequacy’ of
SEC disclosures and are ‘public disclosure documents required by law,’” Silsby, 17 F. Supp. 3d
at 354 (quoting Kramer, 937 F.2d at 773–74), and of “press coverage establishing what
information existed in the public domain during periods relevant to the plaintiffs’ claims,” In re
Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d at 570 (citing Staehr v. Hartford Fin.
Servs. Grp., Inc., 547 F.3d 406, 425–26 (2d Cir. 2008)). Plaintiff also does not object to the
Court’s consideration of any of the attached documents. Accordingly, this Court may take
judicial notice of the annual report and article.
III.
Discussion
Defendants contend that this action must be dismissed in its entirety because Plaintiff
fails to even allege that any Defendant made a material misrepresentation or omitted to state a
fact necessary to render a prior statement not misleading. Defs.’ Mem. at 2. According to
Defendants, Plaintiff has instead, for the second time, attempted to improperly disguise corporate
mismanagement allegations as securities fraud allegations. Id. at 9. Defendants also argue that
15
Plaintiff fails to adequately plead a strong inference of scienter, reliance, or loss causation, id. at
7, and that Plaintiff’s claim related to the Land Transaction is time barred, id. at 18.
a. Section 10(b) Claims
Section 10(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,” 15
U.S.C. § 78j(b), while SEC Rule 10b-5, promulgated thereunder, creates liability for a person
who makes “any untrue statement of a material fact or . . . omit[s] to state a material fact . . . in
connection with the purchase or sale of any security,” In re OSG Sec. Litig., 971 F. Supp. 2d 387,
397 (S.D.N.Y. 2013) (quoting 17 C.F.R. § 240.10b-5 (1951)).
To state a private civil claim under Section 10(b) and Rule 10b-5, a plaintiff must plead
that: (1) the defendant made a material misrepresentation or omission, (2) with scienter, i.e., a
wrongful state of mind, (3) in connection with the purchase or sale of a security, and (4) that the
plaintiff relied on the misrepresentation or omission, thereby (5) causing economic loss. Dura,
544 U.S. at 341–42; see also, e.g., Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d
Cir. 2007); Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001). The Court finds that Plaintiff
fails to adequately plead the existence of even the first element of a Section 10(b) claim.
i. Material Misstatements and Omissions
In order to survive a motion to dismiss, Plaintiff must establish that Defendants “made a
statement that was ‘misleading as to a material fact.” 9 Matrixx Initiatives, Inc. v. Siracusano,
9
In determining materiality, the question is whether “there is ‘a substantial likelihood that the disclosure of the
[omitted fact] would have been viewed by the reasonable investor as having significantly altered the total mix of
information [ ] available.’” Monroe Cty. Emps.’ Ret. Sys. v. YPF Sociedad Anonima, 15 F. Supp. 3d 336, 349
(S.D.N.Y. 2014) (quoting In re ProShares Tr. Sec. Litig., 728 F.3d 96, 102 (2d Cir. 2013)). China Gerui and
Edelson argue that many of the statements and omissions underlying Plaintiff’s claims are immaterial. Defs.’ Mem.
at 11–12. Since the Court finds that Plaintiff has not adequately plead a misrepresentation or omission, however, the
Court need not address the issue of materiality.
16
563 U.S. 27, 38 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)); see In re
Lululemon Sec. Litig., 14 F. Supp. 3d 553, 571 (S.D.N.Y. 2014) (“With respect to misstatements,
there are two components to this requirement: the statement must be false, and the statement
must be material.”), aff’d, 604 F. App’x 62 (2d Cir. 2015). “A violation of Section 10(b) and
Rule 10b-5 premised on misstatements cannot occur unless an alleged material misstatement was
false at the time it was made.” In re Lululemon Sec. Litig., 14 F. Supp. 3d at 571. Furthermore,
the Second Circuit has repeatedly indicated that plaintiffs cannot simply assert that a statement is
false—“they must demonstrate with specificity why and how that is so.” Rombach, 355 F.3d at
174.
With respect to material omissions, a defendant’s silence is not misleading absent a duty
to disclose. Basic, 485 U.S. at 239 n.17. “Disclosure of an item of information is not
required . . . simply because it may be relevant or of interest to a reasonable investor.” Resnik v.
Swartz, 303 F.3d 147, 154 (2d Cir. 2002). Rather, “[a] duty to disclose arises whenever secret
information renders prior public statements materially misleading.” In re Time Warner Inc. Sec.
Litig., 9 F.3d 259, 268 (2d Cir. 1993). The parties are not under a duty to disclose information
that is equally available, widely reported, or “so basic that any investor could be expected to
know it.” Monroe Cty. Emps.’ Ret. Sys. v. YPF Sociedad Anonima, 15 F. Supp. 3d 336, 349
(S.D.N.Y. 2014).
In the SAC, Plaintiff only generally alleges that Defendants affirmatively made any
materially false or misleading statements. See, e.g., SAC ¶¶ 25 (“The Individual Defendants are
liable for both the false and misleading statements being issued by the Company, as well as the
significant omissions of material facts that the Defendants had a duty to disclose . . . .”), 68 (“At
all relevant times, the material misrepresentations and omissions particularized in this Complaint
17
directly or proximately caused or were a substantial contributing cause of the damages sustained
by Plaintiff and the other members of the Class.”). General allegations such as these do not
satisfy a securities fraud plaintiff’s obligation under Rule 9(b) and the PSLRA to specify each
misleading statement at issue in the action. See Dura, 544 U.S. at 345.
Plaintiff instead focuses his claims on what Defendants allegedly failed to say. The SAC
contains a litany of facts Defendants purportedly failed to disclose regarding the Land
Transaction, the Porcelain Acquisition, and the Company itself. See supra Section I.a.iii. But
Plaintiff nowhere explains in his pleading how these alleged omissions rendered any of
Defendants’ prior statements false or misleading. For that reason, Plaintiff fails to adequately
plead a Section 10(b) claim.
For example, Plaintiff recites a number of facts alluded to but never actually disclosed by
Defendants about the Land Transaction, including the “market-based valuation of the land
value,” the “calculation of associated value-added tax,” the “conditions of transfer that [were]
ultimately negotiated,” the meaning of “operation risk mitigation,” and how the transfer of land
use rights would “protect the legal status of [the Company’s] current operations and potential
expansions.” SAC ¶¶ 30–32; see Pl.’s Opp’n Mem. at 8. Similarly, Plaintiff alleges that
Defendants failed to explain the rationale for the Land Transaction or the economic benefit the
purchase would produce for the Company’s shareholders. SAC ¶ 33. While the Court
appreciates Plaintiff’s frustration with the opacity of Defendants’ disclosures to date, Defendants
are not required to disclose every detail and contour of a Company transaction “simply because it
may be relevant or of interest to a reasonable investor.” Resnik, 303 F.3d at 154. 10
10
Plaintiff also alleges that Defendants failed to disclose that the Company’s most recent public auditor is no longer
performing auditing or accounting work for the Company, SAC ¶ 54, and argues—without providing any support—
that the identity of a company’s auditor is “always” a material fact, Pl.’s Opp’n Mem. at 7, 11. Unless Plaintiff
18
Even the allegations Plaintiff makes for the first time in his brief fail to connect the dots
between Defendants’ omissions and some misleading statement. For instance, the SAC alleged
that the Company announced, in its 2012 annual report, that it “had entered into a contract to
obtain title” to the 25.94 acres of land use rights owned by Zhengzhou. SAC ¶ 31. Plaintiff also
claimed that a title company informed him that Zhengzhou continued to own the land use rights.
Id. ¶ 50. Plaintiff now argues that the latter fact renders the prior announcement misleading.
Pl.’s Opp’n Mem. at 3, 7, 8–9. There is no inconsistency between these two statements,
however. Moreover, the 2012 annual report itself disclosed that “additional funds may need to
be paid in order to transfer the land use rights,” thus curing any potential confusion about
whether title transferred automatically upon signing the contract. Affirmation of Shawn P.
Thomas in Support of Defendants’ Motion to Dismiss the Amended Complaint (Doc. 25), Ex. 3
at 10; 11 see also Furbush Decl., Ex. 2 (2013 annual report) at 41 (noting that the transfer “is still
in process”).
The SAC also alleged that the Company disclosed in its 2012 annual report that it
“recently completed its production capacity expansion program.” SAC ¶ 13. Plaintiff now
argues that Defendants have never clarified the “inconsistency” between this statement and the
fact that the Company was endeavoring to purchase more land use rights. Pl.’s Opp’n Mem. at
7–8. Plaintiff fails to identify how any investor could have been misled by the Company’s
statement regarding its capacity expansion program, however, especially considering the
points to some statement rendered false or misleading by Defendants’ alleged omission, the fact that the Company
no longer has an auditor does not adequately serve as the basis of a Section 10(b) claim.
11
Although the 2012 annual report was not submitted in support of Defendants’ motion to dismiss the SAC, the
Court may take judicial notice of the report, as it is a public disclosure document that must be filed with the SEC.
Silsby, 17 F. Supp. 3d at 354.
19
Company announced, in the same report, that it was planning to purchase the 25.94 acres of land
use rights. SAC ¶ 31. The Court does not doubt that a reasonable investor might be puzzled by
the Land Transaction, but the sine qua non of a Section 10(b) action is fraud. 12
Plaintiff similarly fails to tie any of Defendants’ omissions regarding the Porcelain
Acquisition to a materially misleading statement. Plaintiff first argues that Defendants’
omissions regarding the porcelain rendered false the impression that the Company was
“employing a business strategy consistent with its status as a steel company, not a company that
solely invests in porcelain.” Pl.’s Opp’n Mem. at 7. This Court has already rejected Plaintiff’s
attempt to base Section 10(b) claims upon the Company’s statements regarding its business
strategies leading up to the Porcelain Acquisition. China Gerui I, 2015 WL 9462115, at *10–11
(“[S]tatements about China Gerui’s fiscal strategy are best considered non-actionable puffery.”).
Plaintiff also argues that Defendants had a duty to disclose details regarding the
disposition of the porcelain, such as the actions being taken to liquidate the collection, because of
Lu’s announcement on the September 4, 2014 earnings call that the Company intended to “sell
all 206 pieces over time.” Pl.’s Opp’n Mem. at 10–11. Defendants had no such duty, however.
As with Plaintiff’s allegations regarding the Land Transaction, Plaintiff does not identify how
Defendants’ failure to disclose these details renders any of the Company’s prior statements
misleading.
12
Given that Plaintiff fails to properly allege the existence of any actionable omission of material fact, the Court
need not decide whether Plaintiff’s claims related to the Land Transaction are barred by the applicable statute of
limitations, or whether Plaintiff has adequately plead reliance or loss causation. The Court notes, however, that the
Company’s 2013 annual report explicitly stated that the transfer of title was still in progress, Furbush Decl., Ex. 2 at
9, 41, calling into question Plaintiff’s contention that “[t]o this day, a reasonably diligent plaintiff still would not
have discovered that the land use right has not transferred from Zhengzhou to [the Company],” Pl.’s Opp’n Mem. at
18.
20
It is apparent that Plaintiff suspects that, contrary to Defendants’ disclosures, the
porcelain is actually worth substantially less than reported. Rather than expressly make that
allegation, however, Plaintiff seems to argue that there are a number of facts that Defendants
could disclose that could support an inference that the porcelain is worth less, e.g., from whom it
was purchased, where it has been stored, whether it is insured, and who appraised it. See Pl.’s
Opp’n Mem. at 9–10 (“If it were disclosed to the investing public that the Porcelain Collection
was being stored in a secure location, it could arguably be worth $905 million; yet, if the
Porcelain Collection were being stored in an unprotected hotel suite and could be physically
examined by significant numbers of people, . . . it becomes less believable that the Porcelain
Collection is even worth its acquisition cost of $234 million.”). The Court does not disagree.
But Plaintiff’s sheer speculation falls far short of the heightened pleading requirements set by
Rule 9(b) and the PSLRA. 13 Without any particularized allegations going to the falsity of
Defendants’ statements, the Court is once again compelled to dismiss Plaintiff’s claims.
13
Relying on Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004), Plaintiff argues that the requirement to plead with
particularity should be relaxed here, because the information Defendants have omitted regarding the porcelain is
“solely and exclusively within Defendants’ control.” Pl.’s Opp’n Mem. at 11. Rombach does not compel such a
result. First, in Rombach, as here, the plaintiffs failed to explain why the alleged statements were, in fact,
fraudulent. 355 F.3d at 175. Notwithstanding any “relaxed” pleading requirement, the Second Circuit Court of
Appeals therefore affirmed the district court’s dismissal of plaintiffs’ claim. Id. Second, the plaintiffs in Rombach
provided far more specificity than Plaintiff does here. In Rombach, the plaintiffs alleged that the defendants
intentionally fostered mistaken beliefs concerning material facts that were incorporated into several analysts’
reports. Id. at 174–75. The Court held that the plaintiffs had sufficiently alleged that the defendants intentionally
fostered the beliefs, because the complaint alleged that the analysts’ reports were derived from internal budget
information furnished to the respective analysts by the defendants. Id. at 175. The Court held that the plaintiffs
were not required to specifically allege when and where the defendants conveyed the information to the analysts,
since that information was likely to be exclusively within the control of the defendants and the analysts. Id. at 175
n.10. Here, on the basis of what essentially amounts to a hunch, Plaintiff is asking this Court to bypass the
requirements of Rule 9(b) and the PSLRA that Plaintiff specify not only which of Defendants’ statements are false
or misleading, but also the factual bases for believing them to be so. Plaintiff is not entitled such a wide-ranging
pass.
21
ii. Scienter
Given that Plaintiff fails to adequately plead the existence of a materially misleading
statement or omission, Plaintiff’s allegation that Defendants intentionally or recklessly defrauded
Plaintiff by making such a statement or omission necessarily fails. Even if one of Defendants’
alleged omissions did render a prior statement misleading, however, Plaintiff still fails to
adequately plead scienter.
To satisfy the PSLRA’s pleading requirements for scienter, a plaintiff must allege facts
with particularity that would give rise “to a strong inference that the defendant acted with the
required state of mind.” ECA, 553 F.3d at 198 (quoting 15 U.S.C. § 78u-4(b)(2)(A)). As
Supreme Court precedent dictates, a “strong inference” that a defendant acted with a certain
intent is one that is “more than merely plausible or reasonable—it must be cogent and at least as
compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314
(emphasis added). This inquiry goes beyond the ordinary Rule 9(b) framework and requires
courts to consider “not only inferences urged by the plaintiff . . . but also competing inferences
rationally drawn from the facts alleged.” Id. “According to the Supreme Court, the critical
inquiry is: ‘[w]hen the allegations are accepted as true and taken collectively, would a
reasonable person deem the inference of scienter at least as strong as any opposing inference?’ If
so, then scienter has been adequately pleaded. If not, the case may be dismissed.” Medis Inv’r
Grp. v. Medis Techs., Ltd., 586 F. Supp. 2d 136, 141 (S.D.N.Y. 2008) (quoting Tellabs, 551 U.S.
at 326).
A plaintiff may establish scienter by alleging facts that either (1) show that the defendant
had both the “motive and opportunity” to commit the alleged fraud, or (2) constitute “strong
circumstantial evidence of conscious misbehavior or recklessness.” ECA, 553 F.3d at 198; see
22
also Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290–91 (2d Cir. 2006). Here, Plaintiff relies
solely on “circumstantial evidence of conscious misbehavior or recklessness” to establish
scienter. Pl.’s Opp’n Mem. at 13–14. “Where the plaintiff pleads scienter by conscious
misbehavior or recklessness rather than motive, ‘the strength of the circumstantial allegations
must be correspondingly greater.’” Medis Inv’r Grp., 586 F. Supp. 2d at 141–42 (quoting Kalnit,
264 F.3d at 142); see also In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405, 415 (S.D.N.Y.
2007) (“[T]he strength of the recklessness allegations must be greater than that of allegations of
garden-variety fraud, and the inference of recklessness must be at least as compelling as any
opposing inferences.”).
The SAC allegations as to Defendants’ knowledge are entirely conclusory. Plaintiff
alleges that because of their “positions and access to material non-public information,” the
Individual Defendants “knew that . . . the limited representations that were being made were
materially false and/or misleading.” SAC ¶ 25; see also id. at ¶ 71 (“[T]he Individual
Defendants knew that the public documents and statements issued or disseminated in the name of
the Company were materially false and/or misleading . . . .”). Plaintiff thus fails to plead scienter
with particularity, as required by Rule 9(b) and the PSLRA. 14
Plaintiff is also incorrect that “there is not a ‘cogent’ and/or ‘compelling’ inference in
favor of Defendants’ innocence” under the facts as alleged. Pl.’s Opp’n Mem. at 14. The SAC
allegations suggest that the Company thought it wise to invest in assets not subject to the same
14
In his brief, Plaintiff asks this Court to draw a number of inferences from the facts alleged, including that “the
Land Transaction was simply created in order to allow the Individual Defendants to steal $42.6 million from [the
Company],” that “Zhengzhou failed to transfer title to [the Company], and simply kept both the $42.6 million and
the land use right,” and that the Company spent $234 million on “worthless porcelain.” Pl.’s Opp’n Mem. at 14.
The first inference is not properly before the Court, as it is raised for the first time in Plaintiff’s brief. See Goplen,
453 F. Supp. 2d at 764 n.4. And neither of the other two inferences goes to Defendants’ knowledge of any
materially misleading statement.
23
over-capacity problem as the Chinese steel industry—namely, land and antique porcelain. See
Defs.’ Mem. at 1. As this Court found in China Gerui I, “Plaintiff has made no particularized
allegations to suggest that China Gerui did not hold such a belief. And as unorthodox as such an
investment may be, this nonfraudulent justification is at least as compelling as the inference of
fraudulent intent Plaintiff would have the Court draw.” 2015 WL 9462115, at *15.
b. Section 20(a) Claims
Plaintiff also brings claims against the Individual Defendants under Section 20(a) of the
Exchange Act, which imposes liability on individuals who control any person or entity that
violates Section 10. See SAC ¶¶ 88–90; see also 15 U.S.C. § 78t(a). “To assert a prima facie
case under Section 20(a), a plaintiff ‘must show a primary violation by the controlled person and
control of the primary violator by the targeted defendant, and show that the controlling person
was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled
person.’” Bd. of Trs. of City of Ft. Lauderdale Gen. Emps.’ Ret. Sys. v. Mechel OAO, 811 F.
Supp. 2d 853, 882 (S.D.N.Y. 2011) (quoting S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450,
1472 (2d Cir. 1996)), aff’d sub nom. Frederick v. Mechel OAO, 475 F. App’x 353 (2d Cir. 2012)
(summary order). The control person liability claims under Section 20(a) must be dismissed
because Plaintiff fails to allege a primary violation under Section 10(b). See Rombach, 355 F.3d
at 178 (“Because we have already determined that the district court properly dismissed the
primary securities claims against the individual defendants, these secondary claims must also be
dismissed.”); see also Mechel, 811 F. Supp. 2d at 859 n.4, 882 (dismissing Section 20(a) claims
against individual defendants who resided in Russia and had therefore not been served with the
complaint nor joined the company’s motion to dismiss).
24
c. The Non-Moving Individual Defendants
This Court has the power to dismiss a complaint against the non-moving Individual
Defendants, so long as it is exercised cautiously and on notice. See Wachtler v. Cty. of
Herkimer, 35 F.3d 77, 82 (2d Cir. 1994) (affirming the district court’s dismissal of a claim
against a defendant who neither filed an appearance nor moved for dismissal since plaintiff was
on notice from motion of other defendants and had an opportunity to be heard); see also Alki
Partners, L.P. v. Vatas Holding GmbH, 769 F. Supp. 2d 478, 499 (S.D.N.Y. 2011) (dismissing
claims under Sections 10(b) and 20(a) against an individual defendant who did not appear in the
case or join in the other defendants’ motions because the plaintiffs’ claims against him failed for
the same reasons they failed against the other defendants), aff’d sub nom. Alki Partners, L.P. v.
Windhorst, 472 F. App’x 7 (2d Cir. 2012) (summary order). Although only China Gerui and
Edelson have been served, see Doc. 52, their motion put Plaintiff on notice of the grounds for
dismissal and Plaintiff was afforded an opportunity to respond. Plaintiff has not established the
existence of material misstatements or omissions or scienter. See supra Section III.a.i–ii. These
deficiencies are fatal to Plaintiff’s claims against the moving and non-moving Individual
Defendants alike. Therefore, Plaintiff’s claims against the non-moving Individual Defendants
are dismissed.
IV.
Leave to Amend
China Gerui and Edelson request that this Court dismiss Plaintiff’s action with prejudice.
Defs.’ Mem. at 4, 22; Defs.’ Reply Mem. at 1, 10. Plaintiff conversely requests that the Court
permit him leave to amend his Complaint a third time, so that he can supplement his pleading
with new information discovered since filing the SAC. Pl.’s Opp’n Mem. at 23–24.
25
Rule 15 of the Federal Rules of Civil Procedure instructs courts to “freely give leave” to
replead “when justice so requires.” Fed. R. Civ. P. 15(a)(2); see also Foman v. Davis, 371 U.S.
178, 182 (1962). The “usual practice” in this Circuit upon granting a motion to dismiss is to
permit amendment of the complaint. Special Situations Fund III QP, L.P. v. Deloitte Touche
Tohmatsu CPA, Ltd., 33 F. Supp. 3d 401, 446–47 (S.D.N.Y. 2014) (citing Ronzani v. Sanofi S.A.,
899 F.2d 195, 198 (2d Cir. 1990)). “Where the possibility exists that the defect can be cured,
leave to amend at least once should normally be granted unless doing so would prejudice the
defendant.” Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., 26 F. Supp. 2d
593, 605 (S.D.N.Y. 1998) (citing Oliver Schools, Inc. v. Foley, 930 F.2d 248, 253 (2d Cir.
1991)); see also ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007)
(noting that “courts typically grant plaintiffs at least one opportunity to plead fraud with greater
specificity when they dismiss under Rule 9(b)” but denying leave to amend where the plaintiff
was already given that opportunity); Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986)
(“Complaints dismissed under Rule 9(b) are almost always dismissed with leave to amend.”).
Because it is possible that Plaintiff can plead additional facts to remedy the deficiencies
identified in this opinion without prejudice to Defendants, Plaintiff is granted leave to amend his
Complaint a third time. See Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d
160, 189–90 (2d Cir. 2015) (finding the “district court exceeded the bounds of its discretion in
denying Plaintiffs leave to amend their complaint” because an amended complaint “may cure the
remaining defects” identified by the court). Plaintiff will not be given unlimited bites at the
apple, however. This is the Court’s second opinion dismissing Plaintiff’s claims for failing to
plead with the particularity required by Rule 9(b) and the PSLRA. Plaintiff is thus on notice of
the deficiencies in his pleading. See Dietrich v. Bauer, 76 F. Supp. 2d 312, 351 (S.D.N.Y. 1999)
26
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