This Court now turns to the substance of Plaintiffs' claims and
Defendants' motions to dismiss. Before resolving these issues,
this Court will first set forth the legal standard that governs
the instant opinion.
A. Standard of Law
The appropriate legal standard for purposes of this opinion is
that which controls a motion to dismiss for failure to state a
claim upon which relief can be granted pursuant to Rule 12(b)(6).
In reviewing the pleadings pursuant to Rule 12(b)(6), a court
looks only to the four corners of the complaint and evaluates the
legal viability of the allegations contained therein. See
Fed.R.Civ.P. 12(b)(6); Cortec Indus., Inc. v. Sum Holding L.P.,
949 F.2d 42, 47 (2d Cir. 1991); Kramer v. Time Warner, Inc.,
937 F.2d 767, 773 (2d Cir. 1991). "[A] district court must limit
itself to facts stated in the complaint or in documents attached
to the complaint as exhibits or incorporated in the complaint by
reference." Kramer, 937 F.2d at 773; accord Kopec v. Coughlin
III, 922 F.2d 152, 155-56 (2d Cir. 1991); Fonte v. Board of
Managers of Continental Towers Condominium, 848 F.2d 24, 25 (2d
Cir. 1988). If a court wishes to consider material outside the
pleadings, it must convert the motion to dismiss into one for
summary judgment under Rule 56. See Kramer, 937 F.2d at 773;
Kopec, 922 F.2d at 155-56; Fonte, 848 F.2d at 25.
The Second Circuit has stated that a court's function is
"merely to assess the legal feasibility of the complaint, not to
assay the weight of the evidence which might be offered in
support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d
Cir. 1980); accord Ricciuti v. New York City Transit Auth.,
941 F.2d 119, 124 (2d Cir. 1991). "The issue is not whether a
plaintiff will ultimately prevail but whether the claimant is
entitled to offer evidence to support the claims." Scheuer v.
Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).
Moreover, in evaluating whether a complaint will withstand a Rule
12(b)(6) motion, a court must assume the truth of plaintiff's
"well-pleaded allegations." Albright v. Oliver, 510 U.S. 266,
268, 114 S.Ct. 807, 127 L.Ed.2d 114 (1994); LaBounty v. Adler,
933 F.2d 121, 123 (2d Cir. 1991).
The court should read the complaint generously and draw
reasonable inferences in favor of the pleader. See LaBounty,
933 F.2d at 123. A court will not dismiss a complaint unless it
appears beyond a reasonable doubt that the plaintiff can prove no
set of facts in support of his claim that would entitle him to
the relief requested. See Hishon v. King & Spalding,
467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984); Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Branum v.
Clark, 927 F.2d 698, 705 (2d Cir. 1991). Nevertheless, while the
pleading standard is a liberal one, bald assertions and
conclusions of law will not suffice to defeat a defendant's
motion to dismiss. See Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir.
B. Plaintiffs' Securities Act Claims
The gravamen of Plaintiffs' claim is that Defendants' IPO
violated Chinese law and that the Prospectus failed to disclose
the alleged violation. The amended complaint, however, does not
allege adequate facts to support either contention.
To state a claim under § 11, a plaintiff must allege that "[a]
part of the registration statement, when such part became
effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading."
15 U.S.C. § 77k. Similarly, to argue a claim under § 12(a)(2), a
complaint must allege that a defendant offered or sold a security
through a prospectus or oral communication "which include[d] an
untrue statement of a material fact or omit[ted] to state a
material fact necessary in order to make the statements, in the
light of the circumstances under which they were made, not
15 U.S.C. § 77l(a)(2). The amended complaint does not satisfy
either of these standards.
The amended complaint relies exclusively on statements
contained in two documents, a July 24, 1998 Washington Post
article and the Prospectus. Plaintiffs' decision not to attach
either of these documents to the amended complaint puzzles and
concerns this Court. This Court must carefully consider both of
these documents, as they form the basis of the claim. See
Sazerac Company, Inc. v. Falk, 861 F. Supp. 253, 257 (S.D.N Y
1994) (citations omitted) ("In the event that a plaintiff alleges
a claim based on a written instrument, as is the case here, the
court may consider such an instrument in ruling on a Rule
12(b)(6) motion even if it was not attached to the complaint and
made a part thereof. . . ."). If these documents contradict the
allegations of the amended complaint, the documents control and
this Court need not accept as true the allegations in the amended
complaint. See id.
Accordingly, this Court has closely examined the substance of
the two documents upon which Plaintiffs rely. This Court finds
that the documents contradict Plaintiffs' allegations and,
therefore, this Court must grant Defendants' motion to dismiss.
See Feick v. Fleener, 653 F.2d 69, 75 (2d Cir. 1981) ("Since
the documents upon which appellants based their claim show on
their face absence of any grounds for relief, dismissal was
1. The July 24, 1998 Washington Post article
Based entirely on a portion of a July 24, 1998 Washington
Post article, Plaintiffs allege that, by issuing common stock in
Asia Electronics, Defendants violated Chinese law. See Amended
Compl. at ¶ 32. In particular, the amended complaint includes the
following excerpt from the article relating to Defendant Du:
"According to an official for the party's Propaganda Bureau in
Xianyang, Du was detained July 2 because Asia Electronic's public
offering on the Nasdaq Stock Market broke Chinese law." Id.
Thus, the factual basis of the Washington Post article
consists mainly of the vague statement of an unnamed Propaganda
Bureau official from the local Communist Party. Neither the
article nor the amended complaint identifies in any way the
specific Chinese law that Defendants violated or the nature of
the alleged violation. The Second Circuit recently affirmed
dismissal of a civil rights claim for lack of specificity because
the plaintiff did not indicate which portion of the Civil Rights
Act the defendants allegedly violated. See Tubner v. West, No.
97-7151, 162 F.3d 1148, 1998 WL 639291, at *2 (2d Cir. March 27,
Moreover, when read as a whole, the article itself calls into
question and, apparently, contradicts Plaintiffs' contention that
Defendants violated Chinese law. See Salinger v. Projectavision,
Inc., 972 F. Supp. 222, 226 (S.D.N.Y. 1997) ("On a motion to
dismiss . . . a court may consider . . . the full text of press
releases, magazine articles, analyst's reports, and wire services
stories that are referred to or quoted from in the complaint.")
(citations omitted). The anonymous Propaganda Bureau official
cited in the article claimed to have acted at the request of
China's Stock Exchange Executive Council. See Amended Compl. at
¶ 32. According to other portions of the article, however, an
official from the Stock Exchange Executive Council itself could
not confirm any violation of law. See id. Instead, as
Plaintiffs themselves observe, the official said "it was not
clear whether Asia Electronics followed Chinese law when its
shares were listed on the Nasdaq in September." Id. In
addition, the official appeared to deny the suggestion that
Defendant Du's detainment was connected to any council finding of
an alleged violation of Chinese law, insisting that "the council
did not recommend `causing senior executives to disappear.'"
Affidavit of David M. Lederkramer ("Lederkramer Aff.") at Exhib.
1. Finally, the official added that "`[t]here are lots of other
methods you can take, like increasing their taxes, denying
them the special treatment that is reserved for such firms, or
Therefore, the amended complaint does not identify any portion
of Chinese law that Defendants have transgressed or even
articulate a basic description of how Plaintiffs allegedly
committed the violation. Accordingly, based on the vague nature
of Plaintiffs' allegations and Plaintiffs' unconvincing reliance
on the newspaper article, this Court concludes that Plaintiffs
have failed to state a claim upon which relief can be granted.
See Fed.R.Civ.P. 12(b)(6).
2. The Prospectus
Even if this Court accepts the adequacy of Plaintiffs'
allegations that Defendants violated Chinese law, this Court must
dismiss the amended complaint because the Prospectus did not
guarantee that there was no such violation. Thus, the Prospectus
did not contain a materially false statement or omission under §§
11 or 12(a)(2) of the Securities Act.
Plaintiffs claim that the Prospectus inaccurately portrayed the
Company as being in compliance with all domestic and
international laws. See Amended Compl. at ¶ 21. The Second
Circuit has established clear instructions for analyzing a
prospectus for a claim brought under §§ 11 or 12 of the
Securities Act. Olkey v. Hyperion 1999 Term Trust, Inc.,
98 F.3d 2, 5 (2d Cir. 1996). The Second Circuit stated:
It is undisputed that the prospectus must be
treated as a whole. It is further undisputed that the
"central issue . . . is not whether the particular
statements, taken separately, were literally true,
but whether defendants' representations, taken
together and in context, would have misl[ed] a
reasonable investor about the nature of the
[securities]." A prospectus will violate federal
securities law if it does not disclose "material
objective factual matters," or buries those matters
beneath other information, or treats them cavalierly.
Id. (citations omitted) (alterations in original).
Therefore, despite Plaintiffs' inexplicable failure to submit a
copy of the Prospectus, this Court will not limit its review to
those segments of the Prospectus that Plaintiffs cite in the
amended complaint. The Second Circuit has clearly established
when a plaintiff chooses not to attach to the
complaint or incorporate by reference a prospectus
upon which it solely relies and which is integral to
the complaint, the defendant may produce the
prospectus when attacking the complaint for its
failure to state a claim, because plaintiff should
not so easily be allowed to escape the consequences
of its own failure.
Cortec, 949 F.2d at 47. Thus, this Court bases its conclusions
on the Prospectus as a whole. See Lederkramer Aff. at Exhib. 6.
Plaintiffs assert that through various statements in the
Prospectus, Defendants guaranteed that the Company conducted the
IPO in compliance with Chinese law. See Amended Compl. at ¶¶
21, 23-24, 28; Prospectus at 8-9, 59, F-7, F-21. Having carefully
reviewed these excerpts, this Court finds no merit to Plaintiffs'
claim that through these statements Defendants assured investors
that the IPO conformed with Chinese law. In fact, contrary to
Plaintiffs' allegations, these very statements, as well as others
in the Prospectus, contain detailed and specific warnings
concerning the legal and political risks of investing in Asia
Electronics, arising from having its manufacturing operations
located in China. See Prospectus at 8-9, F-7, F-21. Thus, the
statements in the Prospectus "bespeak caution" so that "[n]o
reasonable investor would be misled by the [P]rospectus into
believing" that the Company guaranteed against legal or political
difficulties. I. Meyer Pincus Assoc. v. Oppenheimer & Co.,
936 F.2d 759, 763 (2d Cir. 1991) (citations omitted); accord Olkey,
98 F.3d at 9 (finding that language in prospectus "fully
disclosed the risk of investment and was specific enough to
warrant a reasonable investor's attention").
The Prospectus contains numerous and significant examples of
such cautionary statements that, in both substance and typeface,
highlight the potential risks involved in investing with the
Company. For example, pages 8-14 of the Prospectus comprise a
section labeled "RISK FACTORS." Prospectus at 8 (boldface and
capitalization in original). The first page of that section
includes a smaller section labeled "Risks Related to the Legal
System of China," id. (italics in original), which Plaintiffs
quote at length in the amended complaint. See Amended Compl. at
¶ 21. This section warns that "decided legal cases in China have
little precedential value" and that "because [Chinese] laws,
regulations and legal requirements are relatively recent, their
interpretation and enforcement involve significant uncertainty."
Prospectus at 8-9.
Additionally, the Financial Statements included in the
Prospectus contain further warnings of the potential legal and
political risks stemming from the Company's operations in China.
The first section of the notes to the Consolidated Financial
Statements is labeled "1. ORGANIZATION AND PRINCIPAL
ACTIVITIES[,]" Prospectus at F-7 (boldface and capitalization in
original). That section, which is also quoted in the amended
complaint, see Amended Compl. at ¶ 28, cautions that because
the Company's operations are conducted in the PRC, they "are
subject to special considerations and significant risks not
typically associated with investments in equity securities of
United States and Western European companies. These include risks
associated with, among others, the political, economic, legal
environments and foreign currency exchange. These risks are
described further in the following paragraphs[.]" Prospectus at
F-7; see also id. at F-21.
The very first paragraph of that section, which is absent from
the amended complaint, is labeled "a. Political Environment,"
and warns that the Company's production "may be adversely
affected by changes in the political and social conditions in the
PRC and by, among other things, changes in governmental policies
with respect to laws and regulations." Prospectus at F-7 (italics
in original). The third paragraph, "c. Legal Environment," id.
(italics in original), which Plaintiffs cite but insist is
inadequate, see Amended Compl. at ¶¶ 23-24, issues explicit
The PRC's legal system is relatively new, and the
government is still in the process of developing a
comprehensive system of laws. . . . Considerable
progress has been made in the promulgation of laws
and regulations dealing with economic matters such as
corporate organization and governance, foreign
investment, commerce, taxation and trade. Such
legalization has significantly enhanced the
protection afforded to foreign investors. However,
experience with respect to the implementation,
interpretation and enforcement of such laws is
Prospectus at F-7.
Thus, Defendants "could not guarantee and did not guarantee, as
Plaintiffs contend," that legal or political events in the PRC
would not affect the Company's operations. Lasker v. New York
State Elec. & Gas Corp., 85 F.3d 55, 58 (2d Cir. 1996). "The
only reasonable interpretation of the [Prospectus] language was
that the Company would attempt to" conform with the relevant
Chinese law. Id. The relevant statements from the Prospectus
"merely indicate[d] the Company's intention to avoid" legal
obstacles. Id. They were "not a guarantee." Id.
Therefore, "[r]eading the Prospectus as a whole and taking the
challenged statements in context, the challenged statements . . .
were surrounded by express cautionary language." Schoenhaut v.
American Sensors, Inc., 986 F. Supp. 785, 793 (S.D.N.Y. 1997)
(citation omitted). The challenged statements themselves "alert
investors that the Company could not and did not guarantee"
against legal attacks by the Chinese government, and indeed,
these statements "specifically warn that" such
a development is possible. Id.; see Crystal v. Foy, 562 F. Supp. 422,
427 (S.D.N.Y. 1983) ("[T]he very document [plaintiff] relies
upon negates the charge of fraudulent concealment."); see also
In re TCW/DW North Am. Gov't Income Trust Sec. Litig.,
941 F. Supp. 326, 337 (S.D.N.Y. 1996) (noting that "prospectus did
disclose . . . various risk factors regarding investing in
Mexican government debt securities"; finding that "based upon
these disclosures, the level of risk associated with investing in
Mexican debt securities was adequately disclosed in the
prospectus" and that "Plaintiffs' complaint identifies no
misstatements or omission in the prospectus which a reasonable
investor would find important in making an investment decision";
and concluding that "[t]herefore, any misstatements or omissions
are immaterial as a matter of law"); In re AES Corp. Sec.
Litig., 825 F. Supp. 578, 588 (S.D.N.Y. 1993) (finding that
company "could not have known, and need not have disclosed, that
local officials . . . would . . . derail the project;" that
company "disclosed the general political risks;" that "when
defendants warn investors of a potential risk, they need not
predict the precise manner in which the risks will manifest
themselves;" and concluding that "[t]herefore, plaintiffs have
not alleged any material misrepresentations").
Having read the Washington Post article and the Prospectus
carefully and closely, this Court dismisses the first two actions
as to all Defendants, for failure to state a claim. Because this
Court dismisses the causes of action under §§ 11 and 12(a)(2) of
the Securities Act, consideration of a "controlling persons"
liability claim under § 15, 15 U.S.C. § 77o, is unnecessary.
Therefore, this Court also dismisses the third cause of action.
See Hinerfeld v. United Auto Group, No. 97 Civ. 3533, 1998 WL
397852, at *8 (S.D.N.Y. July 15, 1998).
C. Leave to Amend
Finally, Plaintiffs have requested leave to amend further the
amended complaint in the event that this Court grants Defendants'
motion to dismiss. See Plaintiffs' Mem. of Law in Opp'n to
Defs.' Mot. to Dismiss dated June 28, 1999, at 25. This Court
acknowledges that Rule 15(a) provides that permission to amend a
pleading "should be freely given when justice so requires."
Fed.R.Civ.P. 15(a). Nevertheless, it is within the sound
discretion of the district court whether to grant leave to amend.
See United Auto Group, 1998 WL 397852, at *8 (citing Foman v.
Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)).
In particular, leave to amend may be denied if the amendment
would be futile. See In re Am. Express Co. Shareholder Litig.,
39 F.3d 395, 402 (2d Cir. 1994) (citing Foman, 371 U.S. at 182,
83 S.Ct. 227). This Court finds that "insofar as all of the
claims contained in the [a]mended [c]omplaint are belied by the
plain language of the [P]rospectus, it would be an exercise in
futility as well as a waste of judicial resources to allow
further amendment." United Auto Group, 1998 WL 397852, at
This Court has carefully reviewed the factual allegations in
the amended complaint and the relevant case law. This Court finds
that Plaintiffs have failed to allege sufficiently claims for
violations of the Securities Act against Defendants. Thus,
IT IS HEREBY ORDERED THAT Defendants' motions to dismiss the
amended complaint are GRANTED, and Plaintiffs' complaint is
DISMISSED with prejudice.
IT IS FURTHER ORDERED THAT Plaintiffs' request to amend the
amended complaint is DENIED.