NANCY GEORGE, ROBERT GEORGE AND RANDALL WHITMAN, on behalf of themselves and all others similarly situated Plaintiffs,
CHINA AUTOMOTIVE SYSTEMS, INC., HANLIN CHEN, QIZHOU WU, XIE LIPING, WONG TSE YIU, WANG SHAOBO, YU SHENGBING, and SCHWARTZ LEVITSKY FELDMAN LLP, Defendants.
ORDER & OPINION
KATHERINE B. FORREST, District Judge.
Purported class actions alleging securities laws violations are commenced in this district with frequency. And with frequency, class certification is granted. The certified action proceeds along a relatively predictable path of expensive litigation, significant potential loss allegations, and most often, an eventual settlement. Certification of the class is, therefore, a crucial inflection point in such a case. Given the enormous ramifications of certifying a class - turning potential losses from relatively small amounts into potentially massive exposure - careful analysis of the factors under Rule 23 is required. This rigorous analysis is further required by Supreme Court precedent as well as by a judiciary calibrated to be fair and just.
While it is certainly true that many motions for class certification meet the requirements of Rule 23, it is also true that there are those that do not. This is one that does not.
As set forth in this Court's prior decisions on the motions to dismiss,  in this purported class action plaintiffs Nancy and Robert George (spouses) and Randall Whitman, allege that defendants China Automotive Systems, Inc. ("CAAS"), various of its officers and directors,  and CAAS' former auditor, Schwartz Levitsky Feldman LLP ("SLF") (together the "CAAS defendants" or "defendants"), made false and misleading statements in securities filings in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 15 U.S.C. § 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
Plaintiff now moves for class certification pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure of a class consisting of:
[P]urchasers of CAAS common stock, call options and sellers of put options, during the period from May 12, 2009 through and including March 17, 2011 (the "Class Period").
(Aug. 2, 2012 Am. Class Action Compl., ECF No. 59.)
This Court's most significant concern is that the particular named plaintiffs chosen to represent the putative class are subject to unique defenses. The Court finds that the presence of unique defenses defeats adequacy, typicality, and predominance. In addition, after an evidentiary hearing at which the Court heard testimony from the experts proffered by the parties, the Court also finds that plaintiffs have failed to show by a preponderance of the evidence that the China Automotive securities at issue - common stock, options, and puts - traded in an efficient market. In the absence of sufficient proof that the market for the securities at issue was efficient, plaintiffs are not entitled to a presumption of reliance. In the absence of such a presumption, reliance must be proven on an individualized basis - also defeating predominance. For all of these reasons, class certification must be denied.
I. THE SECURITIES LAW VIOLATIONS ALLEGED
Plaintiffs allege that defendants made a series of false and misleading statements regarding CAAS' accounting for certain convertible notes issued on February 15, 2008 (the "Convertible Notes"), CAAS' operating expenses and other charges against income. Plaintiffs also allege a series of actionable omissions: that defendants failed to reveal alleged material deficiencies in the CAAS' internal controls, failed to disclose that the financial results were not prepared in accordance with Generally Accepted Accounting Principles, and failed to disclose that SLF was not licensed to conduct audits in the People's Republic of China.
Plaintiffs allege that until December 31, 2008, CAAS was entitled to classify the Convertible Notes as equity and not as liabilities. However, a new accounting rule went into effect as of January 1, 2009 (EITF 07-05), which required that the Notes thereafter be classified as liabilities. In its 2008 Form 10-K, CAAS specifically recognized that EITF 07-05 would require it to evaluate its impact on its financial statements. Plaintiffs allege that despite the requirements of EITF, defendants continued to classify the Convertible Notes as equity during all of 2009 and the first three quarters of 2010, resulting in a significant misstatement of earnings.
Plaintiffs allege that in December 2010, CAAS announced that it was replacing SLF with PricewaterhouseCoopers LLP ("PWC"). This announcement was followed by a decline in CAAS' stock price. On March 12, 2011, CAAS disclosed in a press release and Form 8-K that its Form 10-K for 2010 would be delayed due to the prior misclassification of the Convertible Notes; this caused a significant drop in CAAS' stock price. Ultimately, CAAS issued a restatement of net income for the Class Period.
In order to prove their claims pursuant to Rule 10b-5, plaintiffs must demonstrate the following:
1. A misstatement of fact or omission;
2. That is material;
3. Made with scienter;
4. A connection between the misrepresentation or omission and the purchase or sale of a security;
5. Reliance on the misstatement or omission; and
6. Loss causation.
See, e.g., Stoneridge Inv. Partners, LLC v. Scientific-Atlanta , 552 U.S. 148, 165 (2008).
A prima facie claim under Section 20(a) - for control person liability in connection with a securities law violation - requires an underlying violation by a controlled person, control of the primary violator by the targeted defendant, and some "meaningful culpable participation" by the targeted defendant. SEC v. First Jersey Secs., Inc. , 101 F.3d 1450, 1472 (2d Cir. 1996).
This Court's denial of class certification follows its rigorous review of the requirements of Rule 23 based on evidence from an evidentiary hearing, declarations, and other materials submitted in connection with this motion.
Earlier this year, the Supreme Court reiterated the longstanding proposition that "[r]eliance... is an essential element of the § 10 (b) private cause of action." Amgen Inc. v. Conn. Ret. Plans & Trust Funds , 133 S.Ct. 1184, 1192 (2013) (citation omitted). The Court noted that proof of reliance ensures that there is a "proper connection between a defendant's misrepresentation and a plaintiff's injury." Id . (citing Erica P. John Fund, Inc. v. Halliburton Co. , 131 S.Ct. 2179, 2184 (2011)).
Recognizing the difficulties of proving direct reliance, in Basic Inc. v. Levinson , 485 U.S. 224, 241(1988), the Supreme Court "endorsed the fraud-on-themarket' theory, which permits certain Rule 10b-5 plaintiffs to invoke a rebuttable presumption of reliance on material misrepresentations aired to the general public." Amgen , 133 S.Ct. at 1192 (citing Basic , 485 U.S. at 241-249). The fraud-on-themarket theory rests on the premise that "certain well developed markets are efficient processors of public information, " and therefore that the price of a security at any given time reflects the impoundment (or inclusion) of that information. Id.
The presumption of reliance is, however, just that - a presumption. It is rebuttable. See Amgen , 133 S.Ct. at 1193; Halliburton , 131 S.Ct. at 2185. "Absent the fraud-on-the-market theory, the requirement that Rule 10b-5 plaintiffs establish reliance would ordinarily preclude certification of a class action seeking money damages because individual reliance issues would overwhelm questions common to the class." Amgen , 133 S.Ct. at 1193; see also Basic , 485 U.S. at 242.
II. PLAINTIFFS' TRADING HISTORY
Plaintiffs allege that the corrective disclosure that revealed the fraud occurred on March 17, 2011. Each of the lead plaintiffs, Nancy and Robert George and Randall Whitman, made post-disclosure purchases.
Plaintiff Nancy George made four post-disclosure purchases. She made a purchase in August 2011, then again two weeks after the original complaint was filed in this matter (November 2011), and again on March 1, 2012, shortly after the amended complaint was filed. Nancy George made yet another purchase on February 25, 2013, six weeks after the instant motion for class certification was filed. At her deposition Nancy George testified that she had purchased stock following the Class Period, and that she had made a profit.
Nancy George provided investing advice to her husband, Robert George. Robert George purchased CAAS securities on five occasions following the issuance of the alleged corrective disclosure on March 17, 2011. His last purchase was in March 2012.
Finally, Randall Whitman made several purchases of CAAS securities - his first was the day after the March 17, 2011, corrective disclosure.
Thus, each of the named plaintiffs increased their holdings of CAAS securities after each had allegedly learned of the fraud. In total, the named ...