The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge
This Document Relates To: All Actions
Lead Plaintiffs Leo Yen, James O'Callaghan, Shaokai Li and Wu Lin ("Plaintiffs"), who assert that their purchases of the stock of Defendant Xinhua Finance Media, Ltd. ("Xinhua"), were made pursuant to and/or were traceable to the prospectus issued in connection with Xinhua's March 2007 initial public offering (the "IPO"), bring this putative class action against Xinhua, individuals who were directors of Xinhua at all relevant times, and the underwriters of Xinhua's IPO (collectively, "Defendants"), alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The Court has jurisdiction of Plaintiffs' federal claims pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78v. Xinhua, the individual defendants and the underwriter defendants move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss the Consolidated Amended Class Action Complaint ("CAC") for failure to state a claim. The Court has considered thoroughly the arguments and submissions of the parties in connection with these motions. For the reasons that follow, Defendants' motions to dismiss the CAC are granted.
The following facts alleged in the CAC are taken as true for purposes of resolving Defendants' motions to dismiss.
Defendant Xinhua is a diversified media company organized under the laws of the Cayman Islands and headquartered in China. (CAC ¶ 10.) On March 9, 2007, Xinhua filed a registration statement and accompanying prospectus (see Decl. of Mark Holland dated May 16, 2008 ("Holland Decl. II"), Ex. A) with the SEC for an IPO of about 23 million American Depository Shares ("ADS's") priced at $13 per share. (CAC ¶ 19.) Defendant Loretta Fredy Bush ("Bush") was the CEO and Chairman of the Board of Xinhua at all relevant times, and Defendant Shelly Singhal ("Singhal") was the CFO and a director of Xinhua at the time of the IPO. (Id. ¶ 11.) Defendants J.P. Morgan Securities, Inc., UBS AG, CIBC World Markets Corp. and WR Hambrecht & Co., LLC, (the "Underwriter Defendants") served as underwriters of Xinhua's IPO. (Id. ¶ 12.)
Plaintiffs are purchasers of Xinhua ADS's whose acquisitions were made pursuant to and/or are traceable to the IPO prospectus (CAC ¶ 9) and claim to represent a putative class of all persons who purchased or acquired Xinhua ADS's from March 9 to May 21, 2007, inclusive, as well as a putative subclass of all persons who purchased Xinhua ADS's in connection with and traceable to the IPO. (Id. ¶¶ 1, 68, 84.)
On Friday, May 18, 2007, Xinhua's stock closed at $9.94 per share. (Decl. of Mark Holland dated Dec. 21, 2007 ("Holland Decl. I"), Ex. A.)*fn1 After the close of trading that day, Singhal resigned from all management positions and as a director of Xinhua. (CAC ¶¶ 11, 45.) On Monday, May 21, 2007, Barron's magazine published an article implicating Singhal in various stock manipulation and corruption charges that had been levied against numerous companies with which Singhal was involved. (CAC ¶¶ 23, 46.) On this news, the share price reached a record low of $8.31 per share (id. ¶ 24), rebounding slightly to close at $8.76 per share that day. (Holland Decl. I Ex. A.) The various actions that have been consolidated under the caption In re Xinhua Finance Media, Ltd. Securities Litigation were commenced soon thereafter, alleging that the prospectus issued on March 9, 2007, was misleading.
Omissions Alleged to Have Rendered Prospectus Misleading
The CAC alleges that the prospectus was misleading because it failed to include certain information. The omissions were enumerated in the CAC as follows:
Singhal was an owner and investment banker who was "in charge of" and "controlled" Bedrock Securities ("Bedrock"). Between April and December 2006, Bedrock was under a cease-and-desist order by the National Association of Securities Dealers ("NASD") for violating various SEC rules, and a regulatory inquiry was still ongoing at the time of the IPO. (CAC ¶ 2, 25(a).)
Singhal was the defendant in a civil RICO lawsuit in California, which alleged, inter alia, that Singhal masterminded a "pump and dump" scheme, manipulated the market for his own gain, improperly converted stock that was entrusted to him as an escrow agent, and illegally made usurious loans. (CAC ¶¶ 2; 25(e)-(l).)
Singhal was an inside investor, a lead investment banker, a manager or an underwriter for several other companies that had been sued by investors or were subject to regulatory or governmental actions or investigations, for charges including stock fraud, market manipulation, and other securities-related abuses. (CAC ¶ 2.) Singhal was the lead investment banker for AremisSoft and ACLN, Ltd., companies that were sued for securities fraud litigation. In March 2002, the SEC shut down trading in shares of ACLN, which the SEC described as being a "complete fraud," and AremisSoft was prosecuted by the United States government for fraud. In connection with AremisSoft's IPO in April 1999, AremisSoft defrauded investors out of hundreds of millions of dollars through false financial reports and stock manipulation and was later prosecuted. (CAC ¶¶ 25(m)-(o), (w).)
Singhal was a manager of Roth Capital Partners Bridge Fund, which had a history of nine regulatory events and 29 arbitration proceedings. From 1995 to 2000, Singhal was also a managing director of Roth Capital Partners LLC ("Roth Capital"), and during that time, hundreds of thousands of dollars of fines were assessed against it in arbitration proceedings and regulatory sanctions were imposed for various improprieties. While at Roth Capital, Singhal was a co-lead underwriter for the IPO of Partsbase.com ("Partsbase"); the following year, Partsbase was sued on the basis that the prospectus was allegedly false. Singhal was also a lead underwriter to Metropolitan Mortgage & Securities, Co.'s ("Metropolitan") January 2000 offering; Metropolitan filed for bankruptcy in February 2004 after the SEC alleged that Metropolitan had improperly booked certain profits, and a securities class action had been filed against it. (Id. ¶¶ 25(p)-(v).) Roth Capital, along with other investment banks, underwrote a $41.5 million secondary offering for Suprema Specialties, Inc. ("Suprema"), which "almost immediately unraveled" amid allegations that it had inflated sales to the tune of $560 million; Roth Capital thereafter agreed to pay $19 million to settle a class-action lawsuit filed against it. (Id. ¶ 25(x).)
Singhal was a financial advisor to and director of iMergent, but in May 2002 Singhal resigned from that directorship for reasons that were not publicly disclosed. In the following years, iMergent was forced to restate its financial data, paid hundreds of thousands of dollars in refunds and legal expenses, and is being investigated or prosecuted by the state attorneys general of Illinois, Florida, Oregon and Maryland. (Id. ¶¶ 25(y)-(aa).) In July 2001, Singhal was elected to the board of Chell Group Corporation ("Chell"), and in October of that year, Singhal's investment bank was hired to provide finance and mergers and acquisitions services. In ...