Jeff Feyko v. Yuhe International Inc et al, No. 2:2011cv05511 - Document 140 (C.D. Cal. 2013)
Court Description: ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS MOTION TO DISMISS 1334 by Judge Dean D. Pregerson: For the reasons stated herein, the Underwriter Defendants Motion is DENIED, except that the Court dismisses with prejudice Lead Plaintiffs Se ction 11 claim on behalf of Subclass members who bought Yuhe stock on or after March 23, 2011. However, the only Section 11 allegations against the Underwriter Defendants that survive are those related to the Prospectus Supplements statement that five of the Dajiang farms were operational. The remaining Section 11 allegations against the Underwriter Defendants are dismissed with prejudice. (lc). Modified on 7/10/2013. (lc).
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Jeff Feyko v. Yuhe International Inc et al Doc. 140 1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 12 JEFF FEYKO, individually and on behalf of all others similarly situated, 13 14 15 Plaintiff, v. YUHE INTERNATIONAL, INC., GAO ZHENTAO and HU GANG., 16 17 Defendants. ___________________________ 18 ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 11-05511 DDP (PJWx) ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTION TO DISMISS [Docket No. 134] I. Background 19 Lead Plaintiff aAd Partners LP (“Lead Plaintiff”) alleges that 20 it purchased shares of common stock of Yuhe International, Inc. 21 (“Yuhe”) during the class period, including in the October 20, 2010 22 secondary offering of Yuhe shares. 23 Consolidated Amended Complaint (“SCAC”).) 24 that it suffered losses because of false statements that Yuhe and 25 its executives made, including false statements made in the second 26 offering. 27 organizations. 28 Plaintiff’s allegations against Roth Capital Partners, LLC (Id.) (See generally Second Lead Plaintiff alleges Lead Plaintiff has sued various individuals and (Id.) This Court previously dismissed Lead Dockets.Justia.com 1 (“Roth”); 2 Securities, LLC (the “Underwriter Defendants”). (See generally 3 Order Granting in Part and Denying in Part Motions to Dismiss and 4 Strike (“Order”), Docket No. 128.) 5 the SCAC. 6 Defendants’ Motion to Dismiss Lead Plaintiff’s Section 11 claim. 7 (“Motion”). 8 9 Brean Murray, Carret & Co., LLC; and Global Hunter Lead Plaintiff has since filed Presently before the Court is the Underwriter (Docket No. 134.) Yuhe buys chickens, raises them to produce eggs, hatches the eggs and then sells the live day-old chicken (sometimes referred to 10 as broilers). 11 allegedly false statements concerning Yuhe’s acquisition of 12 thirteen chicken breeder farms in China from the Weifang Dajiang 13 Corporation (“Dajiang”), an acquisition that would have 14 approximately doubled the number of Yuhe’s breeder farms. 15 2, 45-46.) 16 never occurred. 17 Yuhe’s October 20, 2010 offering, with Roth serving as the lead 18 underwriter. 19 Prospectus Supplement for the October 20, 2010 offering, which was 20 issued as part of the Registration Statement for that offering, 21 falsely stated that Yuhe had acquired chicken breeder farms from 22 Dajiang. 23 II. Legal Standard 24 (SCAC ¶ 18.) At issue in this case are various (Id. ¶¶ Lead Plaintiff alleges that the purchase of these farms (Id. ¶ 2.) (Id. ¶¶ 23-27.) The Underwriter Defendants managed Lead Plaintiff alleges that the (Id. ¶¶ 140-61.) A complaint will survive a motion to dismiss when it contains 25 “sufficient factual matter, accepted as true, to state a claim to 26 relief that is plausible on its face.” 27 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 28 570 (2007)). Ashcroft v. Iqbal, 556 U.S. When considering a Rule 12(b)(6) motion, a court must 2 1 “accept as true all allegations of material fact and must construe 2 those facts in the light most favorable to the plaintiff.” 3 v. Hayes, 213 F.3d 443, 447 (9th Cir. 2000). 4 need not include “detailed factual allegations,” it must offer 5 “more than an unadorned, the-defendant-unlawfully-harmed-me 6 accusation.” 7 allegations that are no more than a statement of a legal conclusion 8 “are not entitled to the assumption of truth.” 9 other words, a pleading that merely offers “labels and Iqbal, 556 U.S. at 678. Resnick Although a complaint Conclusory allegations or Id. at 679. In 10 conclusions,” a “formulaic recitation of the elements,” or “naked 11 assertions” will not be sufficient to state a claim upon which 12 relief can be granted. 13 quotation marks omitted). 14 Id. at 678 (citations and internal “When there are well-pleaded factual allegations, a court should 15 assume their veracity and then determine whether they plausibly 16 give rise to an entitlement of relief.” 17 must allege “plausible grounds to infer” that their claims rise 18 “above the speculative level.” 19 “Determining whether a complaint states a plausible claim for 20 relief” is a “context-specific task that requires the reviewing 21 court to draw on its judicial experience and common sense.” 22 556 U.S. at 679. 23 III. Analysis 24 Id. at 679. Plaintiffs Twombly, 550 U.S. at 555-56. Iqbal, The Underwriter Defendants seek to dismiss the Section 11 25 claims of subclass members who bought shares traceable to the 26 October 20, 2011 offering. 27 1933, 15 U.S.C. § 77(k), provides a cause of action to any person 28 who buys a security issued under a materially false or misleading “Section 11 of the Securities Act of 3 1 registration statement.” 2 No. 11-15599, 2013 WL 1633094, at *1 (9th Cir. Apr. 17, 2013). 3 have standing to sue under Section 11, plaintiffs must show that 4 they “have purchased shares in the offering made under the 5 misleading registration statement,” or if they purchased their 6 shares in the aftermarket, standing will be found “provided they 7 can trace their shares back to the relevant offering.” 8 latter approach is “often impossible,” and conclusory allegations 9 in the complaint that the shares are traceable will not suffice. In re Century Aluminum Co. Sec. Litig., Id. To The 10 Id. at *2-3. 11 merely consistent with both their explanation and defendants’ 12 competing explanation.” 13 which, accepted as true, tend[] to exclude the possibility that the 14 defendant[‘s]” competing explanation is correct. 15 Plaintiffs “must do more than allege facts that are Id. at *4. They must “allege[] facts Id. The Court previously dismissed Subclass members whose shares 16 were only traceable to the October 20, 2010 offering: “[S]ince 17 Plaintiff seeks to represent members of the Subclass who purchased 18 Yuhe stock that is traceable to the secondary offering, and since 19 Lead Plaintiff does not provide any detailed analysis as to how 20 these Subclass members’ shares can be traced to the relevant 21 offering, the Court dismisses the Section 11 claims of these 22 subclass members.” 23 Order at 14:4-9. Lead Plaintiff amended the definition of the Subclass to “all 24 persons and entities who purchased or otherwise acquired newly 25 issued Yuhe shares at the Offering price of $7.00 per share 26 pursuant to and traceable (for purposes of the Section 11 claim) to 27 a secondary offering Yuhe made on or about October 20, 2010 and who 28 4 (SCAC ¶ 36.)1 1 were damaged thereby.” 2 that Yuhe sold all of the shares issued pursuant to the October 20, 3 2010 offering on November 2, 2010. 4 takes judicial notice that from October 19, 2010, the day before 5 the relevant offering, through March 22, 2011, Yuhe’s shares were 6 not traded in the open market at an amount equal to or less than 7 $7.00.2 8 Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) 9 (holding that “[a] court may take judicial notice of matters of Lead Plaintiff also alleges (Id. ¶¶ 61-62.) The Court (Plaintiff’s Request for Judicial Notice (“PRJN” EX. E)); 10 public record without converting a motion to dismiss into a motion 11 for summary judgment. 12 a fact that is subject to reasonable dispute”) (internal quotation 13 marks and citations omitted).3 14 were sold at $7.00, and that in the open market Yuhe shares were 15 traded at over that amount through March 22, 2011, “tend[s] to 16 exclude the possibility” that the Subclass members who bought Yuhe 17 stock at a price of $7.00 per share prior to March 23, 2011 bought 18 stock that was not traceable to the October 20, 2010 offering. 19 In re Century Aluminum Co. Sec. Litig., No. 11-15599, 2013 WL 20 1633094, at *4. But a court may not take judicial notice of That shares in the second offering See Therefore Subclass members who bought Yuhe stock 21 22 23 24 25 1 While this definition suffices at the motion to dismiss stage, more than the price of purchased shares will have to be shown to ultimately prove tracing at trial. In order to show that shares purchased at $7 are directly traceable to a sale from Yuhe or its agent, Lead Plaintiff will have to follow the shares’ chain of possession and eventually show that they match a sale or sales from Yuhe or its agent in the secondary offering. 26 2 27 3 28 Yuhe used to be listed on Nasdaq. (SCAC ¶ 18.) The Underwriter Defendants have not disputed the accuracy of Yuhe’s stock price, nor have they objected to the Court taking judicial notice of them. 5 1 at $7.00 per share from October 20, 2010 to March 22, 2011 have 2 standing. 3 However, Subclass members who purchased Yuhe stock on or after 4 March 23, 2011 do not have standing, because Lead Plaintiff has not 5 alleged sufficient facts that these members’ shares are traceable. 6 Indeed, Lead Plaintiff seemed to acknowledge as much in its 7 opposition brief: “Therefore, it is plausible that a subclass 8 member, such as Lead Plaintiff, who purchased shares at a price of 9 $7.00 on or after October 20, 2010 until the date thereafter when 10 the stock price traded at or below $7.00, purchased shares 11 traceable to the Offering.” 12 Docket No. 135 at 22:13-17. The Underwriter Defendants also state that a due diligence 13 affirmative defense is established on the face of the SCAC, because 14 it alleges that they reasonably relied on CVB, Yuhe’s auditor, in 15 preparing the Registration Statement for the secondary offering and 16 documents that were part of that statement. 17 California Library Ass'n, 955 F.2d 1214, 1219 (9th Cir. 1990) 18 (holding that an affirmative defense “must appear on the face of 19 the pleading” for a complaint to be dismissed). 20 requires a plaintiff to prove “(1) that the registration statement 21 contained an omission or misrepresentation, and (2) that the 22 omission or misrepresentation was material, that is, it would have 23 misled a reasonable investor about the nature of his or her 24 investment.” 25 citation omitted). 26 securities . . . absolutely liable.” 27 425 U.S. 185, 208 (1976). 28 portions of the registration statement are accorded a ‘due See McCalden v. Section 11 Rubke, 551 F.3d at 1161 (internal quotation marks and Section 11 generally holds “the issuer of the Ernst & Ernst v. Hochfelder, However, experts “who have prepared 6 1 diligence’ defense. 2 Id. 3 In effect, this is a negligence standard.” The expert must prove it acted with due diligence. Id. “An underwriter need not conduct due diligence into the 4 ‘expertised’ parts of a prospectus, such as certified financial 5 statements.” 6 Cir. 1994). 7 reasonable ground to believe, and did not believe ... that the 8 statements therein were untrue or that there was an omission to 9 state a material fact required to be stated therein or necessary to In re Software Toolworks Inc., 50 F.3d 615, 623 (9th An underwriter “need only show that it ‘had no 10 make the statements therein not misleading.’” 11 plaintiffs to point to red flags that should have indicated to the 12 underwriter that the financial statements were untrustworthy. 13 id. at 623-24. In In re Countrywide, a district court allowed an 14 underwriter to establish the due diligence defense at the motion to 15 dismiss stage, because “underwriters may reasonably rely on 16 auditors’ statements, absent red flags that the underwriters were 17 in a position to see.” 18 previously dismissed Lead Plaintiff’s Section 11 claim because it 19 pointed to no red flags that should have cautioned the Underwriter 20 Defendants against relying on CVB, Yuhe’s auditor. 21 20:2.) 22 Id. 588 F.Supp. 2d at 1175. Courts look to See This Court (Order at 19:7- Lead Plaintiff has stated a sufficient Section 11 claim 23 against the Underwriter Defendants. 24 Offering also states that 20 breeder farms are in operation, 25 including five of the Dajiang farms.” 26 alleges that Yuhe never acquired the Dajiang farms. 27 98.) 28 represented that the five Dajiang farms were operational. The SCAC alleges: (SCAC ¶ 98.) “The The SCAC (Id. ¶¶ 2, At the time of the October 20, 2010 offering, CVB had not 7 The 1 first representation that these five farms were operational 2 occurred in Yuhe’s July 19, 2010 Form 8-K,4 which was incorporated 3 by reference into the October 20, 2010 Prospectus Supplement and 4 which was filed more than three months after CVB’s audit report was 5 made public. 6 and as part of the Registration Statement.” 7 (Id. ¶ 97.) The Prospectus Supplement was “issued to (Id. ¶ 141.) The Underwriter Defendants dispute the significance of the 8 representation about the five Dajiang farms being operational by 9 referencing several filings that CVB audited, which indicate that 10 the Dajiang farms would become operational in 2010. 11 137 at 9:16-10:7.) 12 entitled to “reasonably rely on auditors’ statements, absent red 13 flags,” not assume that Yuhe’s predictive statements had, in fact, 14 come to fruition. 15 this Court has previously ruled, the Underwriter Defendants were 16 allowed to rely on the expertised portions of CVB’s audit report. 17 But the Underwriter Defendants were not permitted to, as the SCAC 18 alleges, elevate the audited expectancies into an accomplished 19 fact. 20 become operational is one thing, stating they are operational 21 indicates something more–it indicates that the Dajiang transaction 22 is being successfully. 23 (Docket No. But the Underwriter Defendants were only See In re Countrywide 588 F.Supp.2d at 1175. As In other words, an expectation that the farms to would Thus, on the face of the SCAC, the Underwriter Defendants 24 relied on Yuhe’s statements that five of the Dajiang farms, a 25 quarter of Yuhe’s operational farms, were operational. 26 27 28 4 The July 19, 2010 Form 8-K was incorporated by reference into the October 20, 2010 Prospectus Supplement. (Id. ¶ 97; PRJN Ex. B at 66.) 8 1 Accordingly, and because due diligence should generally be reserved 2 for a jury to determine, Lead Plaintiff has alleged sufficient 3 facts for a Section 11 claim. 4 50 F.3d 615, 621, 626 (9th Cir. 1994) (“For its due diligence 5 investigation of these sales, however, the Underwriters did little 6 more than rely on Toolworks' assurances that the transactions were 7 legitimate. 8 Toolworks fabricated the June sales to ensure that the offering 9 would proceed and that the Underwriters knew, or should have known, See In re Software Toolworks Inc., A reasonable inference from this evidence is that 10 of this fraud.”); Leasco Data Processing Equip. Corp., 332 F.Supp. 11 544, 582 (E.D.N.Y.1971) (“Tacit reliance on management is 12 unacceptable; the underwriters must play devil's advocate.”); see 13 also Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 14 341, 370 (2d Cir. 1973) (“Prospective investors look to the 15 underwriter-a fact well known to all concerned and especially to 16 the underwriter–to pass on the soundness of the security and the 17 correctness of the registration statement and prospectus.”). 18 IV. Conclusion 19 For the reasons stated herein, the Underwriter Defendants’ 20 Motion is DENIED, except that the Court dismisses with prejudice 21 Lead Plaintiff’s Section 11 claim on behalf of Subclass members who 22 bought Yuhe stock on or after March 23, 2011. 23 Section 11 allegations against the Underwriter Defendants that 24 survive are those related to the Prospectus Supplement’s statement 25 that five of the Dajiang farms were operational. 26 /// 27 /// 28 9 However, the only The remaining 1 Section 11 allegations against the Underwriter Defendants are 2 dismissed with prejudice. 3 IT IS SO ORDERED. 4 5 6 Dated: July 10, 2013 7 DEAN D. PREGERSON United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10
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