The opinion of the court was delivered by: Edelstein, District Judge.
Lead Plaintiffs Alan Rapoport and various other individuals
("Rapoport Group"), on behalf of themselves and all others
similarly situated (collectively "Plaintiffs"), bring this
uncertified securities class action, pursuant to Federal Rules of
Civil Procedure ("Rules") 23(a) and (b)(3) and §§ 11, 12(a)(2),
and 15 of the Securities Act of 1933 ("Securities Act"), against:
(1) Defendant Asia Electronics Holding Co., Inc. ("Asia
Electronics" or "Company") for allegedly violating the Securities
Act through the issuance of common stock in a September 25, 1997
Initial Public Offering ("IPO") pursuant to the Company's
materially false and misleading Registration Statement and
Prospectus dated September 24, 1997 ("Prospectus") that
purportedly failed to disclose that the Company's
actions failed to comply with Chinese Law; (2) Defendants Du
Quingsong, Mary Xia, Fan Baiyan, and Li Lianjie ("Individual
Defendants"), officers and/or directors of the Company, as
controlling persons of the Company with respect to the alleged
violations; and (3) Defendants Barington Capital Group, L.P. and
Value Investing Partners, Inc. ("Underwriter Defendants"),
underwriters of the IPO, as participants in the alleged
violations. Presently before this Court are Defendants' motions
to dismiss Plaintiffs' claims pursuant to Rule 12(b)(6).
This matter reaches the Court framed as a Rule 12(b)(6) motion.
Accordingly, the facts recited herein are drawn predominantly
from Plaintiffs' amended complaint.
Plaintiffs are members of the Class who purchased or otherwise
acquired Asia Electronics common stock pursuant to or traceable
to the Company's September 25, 1997 IPO and were allegedly
damaged thereby. See Amended Class Action Compl. ("Amended
Compl.") at ¶¶ 11, 24. By order signed November 19, 1998, this
Court appointed Plaintiffs to serve as lead plaintiffs on behalf
of the class. See Order of Honorable David N. Edelstein dated
Nov. 19, 1998 ("Edelstein Order").
Defendant Asia Electronics is a British Virgin Islands company
that incorporated in January 1996 and went public via an IPO on
September 25, 1997. See Amended Compl. at ¶¶ 2, 12, 15, 17. The
Company, through its several China-based subsidiaries, develops
and sells deflection yokes — electronic devices attached to color
picture tubes in television sets and computer monitors. See id.
According to the Prospectus, Asia Electronics is one of the
largest independents manufacturers of deflection yokes in the
world. See id. at ¶ 15.
The Individual Defendants, at all times relevant to this
action, served as senior officers and/or directors of the
Company. See id. at ¶ 13. The Underwriter Defendants, at all
times relevant to this action, were engaged in the business of
investment banking and underwriting and selling securities to the
investing public, and were the lead underwriters of the IPO. See
id. at ¶ 14.
Through the Company's IPO, Asia Electronics sold 4.6 million
shares of common stock at $8.00 per share, raising $36.8 million,
$34.2 million of which went directly to the Company, the
remainder of which went to pay the Underwriter Defendants. See
id. at 19. Subsequent to the IPO, the Company posted steadily
improving financial results and acquired a number of other
companies. See id. at ¶ 18. By October 22, 1997, the price of
Asia Electronics common stock had risen to $14.13 per share. See
id.
Plaintiffs allege that on July 16, 1998, Asia Electronics then
"shocked the market" when it announced in a press release that
"its Chairman, defendant Du, was being questioned by the
Disciplinary Committee of the Municipal Communist Party in
Xianyang, China, where Asia Electronics' operations are
conducted." Id. at ¶ 29. Plaintiffs observe that on July 16,
1998, on almost eight-times average trading volume, the market
price of Asia Electronics common stock declined to $2.88 per
share. See id. at ¶ 30. Plaintiffs also point to a July 24,
1998 press release through which the Company announced that "the
Company's Chief Financial Officer, Li Lei, had also been detained
for questioning by the Disciplinary Committee." Id. at ¶ 31.
Finally, Plaintiffs note that on July 29, 1998, Asia Electronics
common stock fell to $1.63 per share, and that at the time of the
filing of the amended complaint, the stock traded in the range of
$0.50 per share. See id. at ¶¶ 33-34.
First, the Prospectus stated that:
The Chinese legal system is based on written statutes
and, unlike common law systems, decided legal cases
in China have little precedential value. In 1979,
China began the process of developing its legal
system by undertaking to promulgate a comprehensive
system of laws. On December 29, 1993, the National
People's Congress promulgated the Company Law of The
People's Republic of China ["PRC"]. . . . Pursuant to
the Company Law, the State Council issued the "PRC
Special Regulations on Overseas Offering and Listing
of Shares by Joint Stock Limited Companies" to
regulate joint stock limited companies that offer and
list their shares overseas. The Company Law, the
rules and regulations promulgated under it and legal
prescriptions relating to Chinese companies provide
the core of the legal framework governing the
corporate behavior of companies, such as the
Company's subsidiaries, and their directors and
shareholders. Because these laws, regulations and
legal requirements are relatively recent, their
interpretation and enforcement involve significant
uncertainty.
Second, according to the Prospectus:
Certain legal matters will be passed upon for the
Company as to U.S. law by Proskauer Rose LLP, New
York, New York and as to China law by Jun He Law
Office, Beijing, People's Republic of China. The
validity of the shares of Common Stock offered by
this Prospectus and certain other legal matters are
being passed on for the Company by Harney, Westwood &
Riegels as to British Virgin Islands law. Certain
legal matters will be passed upon for the
Underwriters by Kramer, Levin, Naftalis & Frankel,
New York, New York and, with respect to matters of
Chinese law, by the Great Wall Law Offices, Shanghai,
Peoples's Republic of China.
Finally, the Prospectus reads:
The PRC's legal system is based on written statutes
under which prior court decisions may be cited as
authority but do not have binding precedence. The
PRC's legal system is relatively new, and the
government is still in the process of developing a
comprehensive system of laws, a process that has been
ongoing sine 1979. 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 legislation has
significantly enhanced the ...