The opinion of the court was delivered by: P. Kevin Castel, District Judge
This is a putative class action for violation of federal securities laws. Defendants are, variously, a Florida corporation, several of its officers and directors, its controlling shareholder, and the underwriter of certain securities offered by the company. Plaintiffs are individuals who purchased shares in the defendant corporation either as part of a secondary offering or in the open market. Plaintiffs allege that defendants failed to disclose a related-party transaction and misstated various financial figures in their required reporting, and that plaintiffs relied on those omissions and misstatements and lost money as a result. The corporation, together with one of its officers and certain directors, now moves to dismiss plaintiffs' complaint for failure to state a claim upon which relief can be granted. The underwriter moves to dismiss certain claims insofar as they are alleged by plaintiffs who, the underwriter asserts, lack standing. For reasons explained, the underwriter's motion is granted, and the corporation's motion is granted in part and denied in part.
Defendant SkyPeople Fruit Juice, Inc. ("SPU") is a Florida corporation with its principal executive offices in Xi'an, China. (Consolidated Amended Class Action Complaint ("CAC") ¶ 61). SPU "purports to produce and sell fruit juice concentrates, fruit beverages, and other fruit-related products in and from [China]." (Id. ¶ 6.)
SPU claims to have the following business structure (see diagram): SPU is the 100% owner of Pacific Industry Holding Group ("Pacific"), a Vanuatu corporation. (Id. ¶ 101.) Pacific owns 99.78% of SkyPeople Juice Group Co., Ltd ("SkyPeople China"), a Chinese corporation. (Id.) SkyPeople China owns 91% of Qiyiwangguo Modern Organic Agriculture Co., Ltd. ("Qiyiwangguo"), 100% of Huludao Wonder Fruit, Co., Ltd. ("Huludao"), and 100% of Yingkou Trusty Fruit Co., Ltd. ("Yingkou"). (Id.) Qiyiwangguo, Huludao, and Yingkou are Chinese corporations (id.) and represent three different production facilities for SPU's products (see Marder Decl., Dec, 21, 2011, Ex. F, Absaroka Capital Mgmt., Initiating Coverage Report: SkyPeople Fruit Juice, Inc., - Pulp Fiction (June 1, 2011) (the "Absaroka Report"), at 7-12.)
Defendant Rodman & Renshaw, LLC ("Rodman") is a broker-dealer who served as the underwriter and sole manager of the secondary public offering of $25.9 million of SPU stock that was completed on or about August 30, 2010. (Id. ¶ 74.)
Defendant Yongke Xue ("CEO Xue") was at all relevant times Chief Executive Officer and a director of SPU. (Id. ¶ 62.) Defendant Spring Liu ("CFO Liu") was, until her resignation on September 21, 2011, Chief Financial Officer and a director of SPU. (Id. ¶ 63.) Defendant Xiaoqin Yan (VP Yan) was at all relevant times a vice-president and director of SPU. (Id. ¶ 64.) Collectively, CFO Xue, CFO Liu, and VP Yan are the "Officer Defendants."
Defendants Ko, Wang, Fields, and Smagula were at relevant times directors of SPU and members of its audit committee. (Id. ¶¶ 67-70.) Members of the audit committee are allegedly responsible for, among other things, "assisting the Board of Directors in fulfilling its responsibilities, by reviewing (i) the financial reports provided by [SPU] to the SEC, the Company's stockholders, or to the general public, and (ii) [SPU's] internal financing and controls," and "overseeing [SPU's] compliance with legal and regulatory requirements." (Id. ¶77.) Ko, Wang, and Fields were on the audit committee at the time that SPU made its 2009 SEC filings; Ko, Wang, and Smagula were on the audit committee at the time that SPU filed the registration statement for the secondary offering. (Id. ¶¶ 78-79.) Collectively, Ko, Wang, Fields, and Smagula are the "Director Defendants."
Defendant Hongke Xue ("H. Xue") was at all relevant times a controlling shareholder of SPU, holding roughly 59% of SPU's stock as of the date of the secondary offering and roughly 45% as of March 25, 2011. (Id. ¶ 66.) H. Xue was also at all relevant times CEO and Chair of the Board of SkyPeople China. (Id.) H. Xue is the brother of CEO Xue. (Id.)
Plaintiff Padnos purchased 4500 shares of SPU stock directly from Rodman at the secondary offering price of $5.00. (Id. ¶ 60.) Padnos sold 4400 shares on June 1, 2011, at a price of $2.10, and made no other transactions in SPU securities. (Id.) Plaintiffs Lewy, Lee, and Klement allegedly "purchased shares of [SPU] at artificially inflated prices and [were] damaged thereby." (Id. ¶¶ 57-59.)
II. Documents Allegedly Containing False Statements (the "U.S. filings") Plaintiffs allege that defendants made the allegedly false statements described below in SPU's SEC Form 10-K for fiscal year 2009, see SkyPeople Fruit Juice, Inc., SEC Form 10-K for Year Ended Dec. 31, 2009*fn1 (the "2009 Form 10-K"). (CAC ¶¶ 258.i, 260.) SPU's 2009 Form 10-K was signed and certified pursuant to the Sarbanes-Oxley Act by CEO Xue and CFO Liu; it was also signed by VP Yan and Directors Wang, Fields, and Ko. (CAC ¶ 258.i.) Plaintiffs allege that defendants repeated at least some of the false statements in all of the following documents (collectively, with the 2009 Form 10-K, the "U.S. filings"):
Quarterly reports for the first, second, and third quarters of FY 2010 on SEC Forms 10-Q filed May 17, 2010, August 16, 2010, and November 15, 2010, which forms were signed by CFO Liu and certified by Liu and CEO Xue. A proxy statement issued on June 28, 2010. A registration statement and amendments thereto culminating in the registration statement declared effective August 24, 2010, signed by SPU, CEO Xue, CFO Liu, VP Yan, and Directors Wang, Smagula, and Ko. A prospectus dated August 26, 2010. An annual report for FY 2010 on SEC Form 10-K filed April 1, 2011, and a subsequent amendment thereto, signed and certified by CEO Xue and CFO Liu, and also signed by VP Yan and Directors Wang, Smagula, and Ko. SkyPeople Fruit Juice, Inc., SEC Form 10-K for Year Ended Dec. 31, 2010*fn2 (the "2010 Form 10-K")). (The 2010 Form 10-K discloses the alleged related-party transaction but restates the allegedly false 2009 financial figures). (Id. ¶ 258.ii-vii, 260)
III. Allegedly False Statements
a. Non-reporting of Yingkou Transaction
On May 26, 2008, SPU agreed to purchase Yingkou from Shaanxi Boai Pharmaceutical & Scientific Development Co., Ltd. ("Boai"). (Id. ¶ 119.) Thereafter, the transaction was "delayed" for some time. (Id. ¶ 131.) During this delay, on January 6, 2009, CEO Xue and Director Yan purchased a 46% interest in Boai, through another company they owned, giving them an indirect ownership interest in Yingkou. (Id. at 119.) Still during the delay, on November 10, 2009, Xue and Yan sold their indirect ownership interest. (Id. ¶ 21.) SPU eventually purchased Yinkgou on November 25, 2009, for 22.7 million renminbi ("RMB"). (Id. ¶ 118.)
Plaintiffs allege that the other 54% of Boai was always related to SPU and that Boai "was, at all times, a mere straw-man used by Yan and Xue to launder assets onto SPU's balance sheets." (Id. ¶ 28.) Plaintiffs admit that "Boai was registered to other parties" (id. ¶ 129), but plaintiffs allege that when Boai received its business license from the Chinese State Administration for Industry and Commerce (the "SAIC"), CEO Xue "signed his name to pick up the paperwork" and that "[t]here is no good reason for Xue to pick up founding documents for an unrelated third party." (Id. ¶ 30.) Plaintiffs further allege that Boai purchased Yingkou on April 2, 2008, from another entity wholly owned by Xue and Yan, Shaanxi Hede Investment Management Co, Ltd. ("Hede"). (Id. ¶ 124.) On April 11, 2008, Boai increased Yingkou's registered capital from 8 million RMB to 20 million RMB. (Id. at 126.) As noted, SPU initially agreed to purchase Yingkou on May 26, 2008, and eventually paid-on November 26, 2009-22.7 RMB.
SPU did not include the Yingkou transaction as a related-party transaction in any U.S. filing prior to the 2010 Form 10K. (Id. ¶¶ 258, 260.) In its 2010 Form 10-K, SPU disclosed that it had concluded that the Yingkou transaction was a related-party transaction, as that term is defined by company policy and "the related SEC rules." (Id. ¶ 132.) SPU explained:
[M]anagement determined that the acquisition of Yingkou that was consummated in November 25, 2009 was a related party transaction that should have been subject to our policies and procedures governing related party transactions (Statement of Policies and Procedures with Respect to Related Party Transactions). Even though the ultimate purchase price of Yingkou paid by us was lower than the valuation appraised by a qualified third party, thus favorable to us, and there was no affiliation between the relevant directors and officers of the Company and the seller of Yingkou at the time Yingkou Acquisition was initially approved by the shareholders of SkyPeople (China) and the affiliation between the relevant directors and officers and the seller of Yingkou came into existence while the transaction was being delayed and such affiliation ended prior to the consummation of the acquisition, management determined that the failure to disclose the relevant affiliation while the transaction was pending was a material weakness in our disclosure controls and procedures . . . .
Based on that evaluation, our CEO and CFO concluded that because of the lack of disclosure related to the acquisition of Yingkou, our disclosure controls and procedures were not effective as of December 31, 2010. (Id. ¶ 131); 2010 Form 10-K at 47.
Plaintiffs allege that defendants instituted the above-referenced Policies and Procedures after having failed to disclose related-party transactions in the past. (CAC ¶¶ 102-109.) During the two business days following SPU's disclosure, SPU's stock price fell from $4.41 per share to $3.57 per share, or over 23%, on "heavy trading volume." (Id. ¶ 306.)
b. Alleged Misstatement of FY 2009 Financial Figures
In addition to SPU's required SEC filings, SPU's Chinese subsidiaries were required to file, and did file, annual reports with the SAIC. (Id. ¶ 136.) The penalties for false filings include fines and revocation of the entity's business license. (Id. ¶ 137.) SAIC filings must be signed by the legal representative of the company, who must state, "I confirm that the content of the submitted company's annual inspection report is true." (Id.) The legal representative of SkyPeople China and Yingkou is H. Xue (CFO Xue's brother and SPU's controlling shareholder); the legal representative of Huludao is VP Yan; the legal representative of Qiyiwangguo is Ke Lu, a former SPU Director. (Id. ¶ 139.)
On June 1, 2011, an American investment fund, Absaroka Capital Management, published a coverage report on SPU claiming that there were discrepancies between SPU's SEC and SAIC filings. (CAC ¶ 148; Absaroka Report 6 (Marder Decl., Dec. 21, 2011, Ex F).) In the report, Absaroka analyst Kevin Barnes stated that the 2009 SAIC filings of SPU's China-based subsidiaries, when consolidated, presented sharply different financial figures than those in SPU's 2009 Form 10-K, including sharply lower revenues, net income, cash, and assets. (Absaroka Report at 6.) Most dramatically, SPU's 2009 Form 10-K stated SPU's revenue as $59.2 million, whereas the consolidated SAIC filings allegedly showed combined revenue of $5.2 million. (Id.) Barnes attached the SAIC filings on which he based his analysis. (Id., Attachs.) Barnes also stated that, based on in-country investigation, SPU's actual operations were far smaller than claimed in SEC filings. (Id. 7-18.) Barnes stated, among other things, that the Huludao and Yingkou facilities were largely idle and that SPU's products were generally unavailable at the retail outlets at which SPU claimed they were available. (Id.) Barnes further stated that SPU's reported margins and inventory turnover were remarkably higher than, and their reported marketing expenditures remarkably lower than, their industry peers. (Id. 18-22.) Although SkyPeople allegedly attributed 36% of its 2009 revenue to kiwifruit products, Barnes concluded, based on "discussions with the company's customers, industry experts, and plant managers, and two former executives," that "the market for kiwifruit concentrate and [SPU]'s production [were] miniscule." (Id. at 21.) On the day that the Absaroka Report was released, SPU's stock price fell 18% on "unusually heavy" trading volume. (CAC ¶ 306.)
SPU issued a rebuttal to the Absaroka Report in a press release later filed with the SEC. (CAC ¶ 150 & Ex. 3.) According to a published report, SPU claimed that the Absaroka Report's "so-called SAIC reports are entirely fabricated reports which contain materially false information about [SPU]."*fn3 (Marder Decl., Dec 21, 2012, Ex. G, GeoInvesting, SkyPeople Fruit Juice: Investor Alert (June 9, 2011) (the ("GeoInvesting Alert").) SPU allegedly further claimed that "[t]he auditor of the so-called SAIC reports contained in the [Absaroka Report] as shown on its company stamp did not appear to be the same auditor that actually audited the financial statements of [SPU's Chinese] subsidiaries." (Id. at 1.) In the press release, SPU claimed to summarize the numbers that actually appeared in the SAIC filings of its subsidiaries. (CAC Ex. 3.) The numbers in the press release roughly match the numbers in SPU's 2009 SEC filings. (Compare id., with 2009 Form 10-K at 78.)
In June 2011, GeoInvesting, an American analyst firm, posted an "Investor Alert" questioning SPU's rebuttal and corroborating the Absaroka Report. (Marder Decl., Dec. 21, 2011, Ex. G., GeoInvesting Alert.) GeoInvesting was able to corroborate the Absaroka numbers in part, stating, "[T]he GeoTeam had recently obtained its own set of SPU's SAIC filings. We currently only possess the filings of two out of four [of] SPU's subsidiaries. Although we have not confirmed that we pulled these filings from a different source than Absaroka's, it turns out that the data contained within them match the SAIC information disclosed by Absaroka right down to the auditor [stamp]." (Id. at 1.)
Plaintiffs allege that in September 2011 they obtained partial SAIC filings that corroborate the Absaroka Report. First, on September 22, 2011, plaintiffs obtained a copy of the SAIC filings for SkyPeople China. (CAC ¶ 154 & Ex. 4.) The SAIC filings plaintiffs obtained were missing many of the required documents, which plaintiffs allege was the result of intentional manipulation. (Id. ¶ 154.) However, the financial figures that were included allegedly match those cited in the Absaroka report, including those for revenue, cost of revenue, operating expenses, and net income. (Id. ¶ 158 tbl. 1) Second, on September 24, 2011, plaintiffs obtained the SAIC filings for Qiyiwangguo. (Id. ¶ 157 & Ex. 5.) The figures in the Qiyiwangguo filings obtained by plaintiffs also allegedly match those cited in the Absaroka Report as to revenue, cost of revenue, operating expenses, operating income, tax, and net income. (Id. ¶ 158 tbl. 2.)
Plaintiffs further allege that, independent of their corroboration of the Absaroka report, the SkyPeople China and Qiyiwangguo filings that they obtained conflict with SPU's 2009 Form 10-K for other reasons. First, SkyPeople China's incomplete SAIC filings contain a narrative description of SkyPeople China's "reason for loss." (Id. ¶ 156 & Ex. 4.) The narrative states, "Since our primary products are produced for export, our sales was [sic] negatively affected by the economic crisis, and we had a substantial decline in sales . . . ." (Id.) Allegedly, this narrative conflicts with SPU's 2009 Form 10-K, which shows that SPU, which has no revenue-generating companies other than those owned by SkyPeople China, had an increase in revenue of over $18 million. (Id.); see 2009 Form 10-K at 3, 78. Second, the Qiyiwangguo SAIC filing states Qiyiwangguo's revenue as 2 million RMB. (CAC ¶ 158 tbl. 2 & Ex 5.) SPU's rebuttal press release states that Qiyiwangguo's contribution to total revenues was 265 million RMB. (Id. Ex. 3.) Therefore, plaintiffs allege, looking only to this discrepancy-and setting against Qiyiwangguo's account all of SPU's alleged 48 million RMB elimination of intercompany balances-Qiyiwangguo's 2009 revenues, and therefore SPU's 2009 revenues, are overstated by at least 214 million RMB, or $31 million, or 113%. (Id. ¶ 163.) Third, the alleged Qiyiwangguo filing also indicates that SkyPeople China owns only 70.1% of Qiyiwangguo, not 91.15%, as indicated on all of SPU's SEC filings. (Id. ¶¶ 284-286.)
c. Alleged Misstatement of FY 2008 Financial Figures
The entirety of plaintiffs' allegations regarding FY 2008 are as follows (with ...