The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
These federal securities class actions are brought pursuant to sections 10(b) and 20(a)*fn1 of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA"),*fn2 and Securities and Exchange Commission ("SEC") Rule 10b-5. *fn3 Defendants include Longtop Financial Technologies Limited ("Longtop" or the "Company") and certain officers and/or directors of Longtop (collectively, the "defendants"). Plaintiffs bring these actions on behalf of themselves and all persons who purchased Longtop securities, including Longtop American depository shares ("ADS's"), between October 25, 2007 and May 17, 2011 (the "Class Period"). Plaintiffs seek remedies under the Exchange Act.
On July 22, 2011,*fn4 the following six groups of movants submitted competing applications seeking appointment as lead plaintiff and approval of their respective selection of lead counsel: Danske Invest Management A/S ("Danske") and Pension Funds of Local No. One, I.A.T.S.E. ("Local One") (collectively "Danske-Local One"); Joseph Kowalczyk, Platinum Partners Value Arbitrage Fund, L.P. ("Platinum Arbitrage"), Platinum Partners Liquid Opportunity Master Fund, L.P. ("Platinum Opportunity") (together, the "Platinum Funds"), and James Casolo (collectively the "Kowalczyk Group"); Ramesh Patel;*fn5 Norfolk County Retirement System ("Norfolk");*fn6 Bradley D. Kair and Peter Yahr ("Kair and Yahr");*fn7 and the City of Pontiac General Employees' and Police and Fire Retirements Systems (the "Retirement Systems").*fn8
In light of the concessions made by Patel, Norfolk, Kair and Yahr, and the Retirement Systems, the Court must decide between Danske-Local One, its selection of the law firm of Kessler Topaz Meltzer & Check LLP as lead counsel, and its selection of the law firm of Grant & Eisenhofer P.A. as liaison counsel, and the Kowalczyk Group and its selection of The Rosen Law Firm, P.A. and Wohl & Fruchter LLP as co-lead counsel.*fn9 Both movants argue that the other is subject to unique defenses, thereby rendering each group incapable of adequately representing the class. For the reasons stated below, Danske-Local One is appointed lead plaintiff and its selection of the law firm of Kessler Topaz Meltzer & Check LLP as lead counsel is approved as is its selection of the law firm of Grant & Eisenhofer P.A. as liaison counsel.
Longtop is a Cayman Islands corporation with principal executive offices in Hong Kong and a principal operations office located in the People's Republic of China ("China"). Longtop, together with its subsidiaries, provides software and information technology products and services to financial institutions operating in China. Until the Company's trading was suspended on May 16, 2011, Longtop's ADS's traded on the New York Stock Exchange under the ticker symbol "LFT."
The Complaints allege that during the Class Period, defendants misrepresented and overstated the financial condition of the Company and issued materially false and misleading statements regarding the Company's financial statements and related filings. The Company made materially false and misleading statements to investors by misrepresenting and failing to disclose that: (1) defendants falsified certain financial records in relation to cash reserves, loan balances, and sales revenue; (2) management interfered with the audit process and improperly detained audit files of the Company's auditor; (3) defendants improperly understated expenses, thereby artificially inflating profit margins; and (4) the Company's financial statements were not presented in accordance with Generally Accepted Accounting Principles ("GAAP") and were false and misleading at all relevant times. As a result of defendants' false and misleading statements, Longtop securities traded at artificially inflated prices during the Class Period, reaching a high of $42.73 per share on November 10, 2010.
On April 26, 2011, a financial analysis firm called Citron Research released a report, Citron Reports on Longtop Financial (NYSE:LFT) (the "Citron Report"). The Citron Report raised serious issues regarding the legitimacy of Longtop's financial statements dating back to its initial public offering. Specifically, the Citron Report stated that the Company's high profit margins were the result of fraudulent and improper balance sheet transfers with a related party, Xiamen Longtop Human Resources Services Co. ("XLHRS"), a staffing company. The Citron Report attributed the Company's success to its use of an "unconventional staffing model" whereby the Company used XLHRS to take its largest expenditure, staffing costs, off the Company's books in an improper off-balance sheet transaction. The Citron Report also called into question the integrity of Longtop's key management, pointing to various undisclosed misdeeds. For example, the Citron Report revealed that Longtop's Chairman and its Chief Executive Officer had been found liable for violations of Chinese unfair competition law and other deceptive conduct. In response to the negative news revealed in the Citron Report, the price of Longtop shares declined substantially, closing at $22.24 per share.
The next day, April 27, 2011, another financial analysis firm, Bronte Capital, issued a report that questioned Longtop's representations and financial statements. Longtop's ADS price continued to plummet, dropping more than twenty percent to close at $17.73 per share. Analysts continued issuing negative reports on Longtop; on May 3, 2011, Bronte Capital reported that Longtop's purported fifty percent revenue growth was highly questionable. Then, on May 9, 2011, Citron Research published a follow-up report, Longtop Financial (NYSE: LFT) Final Proof of Undisclosed Related Party Transactions (the "Second Citron Report"). The Second Citron Report indicated that a research company named OLP Global determined that Longtop used an off-balance-sheet transaction with a related party to hide certain expenses. The Second Citron Report further revealed the Company's connection to XLHRS and how that connection materially impacted Longtop's financial condition. Longtop's stock price continued its dramatic fall.
On May 10, 2011, Longtop issued a press release that refuted the allegations of both Citron Research and OLP Global. On May 17, 2011, all trading in Longtop's ADS's was halted. At the time trading was suspended, Longtop's stock was trading at $18.93 per share. On May 19, 2011, Longtop issued another press release announcing that the Company would not announce its fourth quarter and fiscal year 2011 financial results as previously scheduled. Then, on May 23, 2011, Longtop issued a third press release announcing that its independent auditor had resigned and that the SEC was conducting an investigation of the Company. The Company also announced that its Chief Financial Officer had tendered his resignation several days earlier.
In sum, plaintiffs allege that statements made by defendants regarding the Company's financial performance and expected earnings were false and misleading and lacked a reasonable basis when made. As a result of defendants' materially false statements, Longtop's securities traded at inflated levels during the Class Period. Because of the precipitous decline in the market value of Longtop's securities, plaintiffs and the putative class members suffered significant losses and damages.
On May 27, 2011, two similar class actions were filed in this district on behalf of all persons who purchased Longtop securities during the Class Period: Faris v. Longtop Financial Technologies Limited, 11 Civ. 3658 (SAS), and Kair v. Longtop Financial Technologies Limited, 11 Civ. 3661 (DAB) (hereinafter referred to as the "Actions"). Three similar actions, including the first-filed action, are pending in the United States District Court for the Central District of California.*fn11
In both Actions, plaintiffs allege that Longtop and certain of its officers and/or directors violated sections 10(b) and 20(a) of the Exchange Act, as amended by the PSLRA, and Rule 10b-5 promulgated thereunder.
Following the filing of the first-filed action in the Central District of California, the first notice that a class action had been initiated against the defendants was published on May 23, 2011, on Business Wire, a widely circulated national business-oriented wire service.*fn12 The notice advised members of the proposed class of their right to move to be appointed lead plaintiff. All movants filed their lead plaintiff motions within the sixty-day period following publication of the May 23, 2011 notice.