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Tarsavage v. Citic Trust Co., Ltd.

United States District Court, S.D. New York

March 11, 2014

THOMAS TARSAVAGE, individually and on behalf of all others similarly situated, and on behalf of Puda Coal, Inc. derivatively, Plaintiff,
CITIC TRUST CO., LTD., Defendant, -and- PUDA COAL, INC., Nominal Defendant

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[Copyrighted Material Omitted]

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For Thomas Tarsavage, Individually and on behlaf of all others similarly situated, and on behalf of Puda Coal, Inc. derivatively, Plaintiff: Laurence Matthew Rosen, The Rosen Law Firm, P.A. (NYC), New York,, NY; Sara Esther Fuks, Milberg LLP (NYC), New York, NY.

For CITIC Trust Co., Ltd., Defendant: Carl W. Oberdier, LEAD ATTORNEY, Oberdier Ressmeyer LLP, New York, NY.


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KATHERINE B. FORREST, United States District Judge.

Before the Court is defendant CITIC Trust Co., Ltd.'s motion to dismiss the complaint in this action pursuant to Federal Rules of Civil Procedure 12(b)(2) and 12(b)(6). For the following reasons, defendant's motion is GRANTED.


The following facts are alleged in the complaint, and the Court assumes them to be true for purposes of this motion. (" Compl.", ECF No. 1.)

Puda Coal, Inc. (" Puda" ) is a U.S. company based in the People's Republic of China.[1] Prior to September 2009, Puda indirectly owned 90% of Shanxi Puda Coal Group Co., Ltd. (" Shanxi Coal" ). (Id. ¶ 9.) The remaining 10% was split between Puda's Chairman and major shareholder Ming Zhao (" Zhao" ), who owned 8%, and his brother Yao Zhao (" Y. Zhao" ), who owned 2%. Y. Zhao was also the legal representative of Putai, Puda's indirect Chinese subsidiary. (Id.)

In September 2008, the Chinese government announced that, as part of its regulation of the coal industry, it would award certain large coal production enterprises the opportunity to acquire smaller coal mines. (Id. ¶ 77.) To participate in this lucrative opportunity, Shanxi and Puda would require additional financing. (Id. ¶ 78.)

In order to raise money from domestic investors to fund his expansion plans, Zhao needed to sever the direct foreign shareholder ownership (that is, the Delaware-incorporated Puda) of Shanxi. (Id. ¶ 146.) In September 2009, Zhao arranged for Y. Zhao to improperly transfer Puda's 90% share of Shanxi Coal to Zhao personally for no consideration. (Id. ¶ ¶ 6, 123, 146, 218.) Thereafter, Puda was a shell without any operations or revenues. (Id. ¶ 6, 218.)

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On September 28, 2009, after Zhao had already transferred the 90% interest in Shanxi to himself, Puda announced that the Chinese government had selected Shanxi to become a consolidator of eight mines. (Id. ¶ 78.) Pursuant to that program, Shanxi was required to consolidate operations, upgrade certain mines, and close other small mines; Shanxi required substantial financing to complete these directives. (Id. ¶ ¶ 79-80.)

Defendant CITIC Trust Co., Ltd. (" CITIC" ) is part of the CITIC Group Corporation, the largest private equity fund management company in China, and is wholly owned and controlled by the Chinese government. (Id. ¶ ¶ 12, 49.)

On or about July 15, 2010, Zhao transferred 49% of his shares in Shanxi to CITIC in exchange for 100% of the common stock in an investment fund created by CITIC, the " CITIC Fund I," which were worth $179 million. (Id. ¶ 12.)[2] CITIC had created the CITIC Fund I as an investment vehicle to hold and operate the business of Shanxi Coal. (Id. ¶ 13.) At about the same time, Zhao pledged his remaining 51% interest in Shanxi to CITIC as collateral for a $369 million loan to Zhao at an annual interest rate of 14.5%; CITIC increased the loan amount to nearly $740 million by January 2011. (Id. ¶ 14.) Zhao never disclosed to CITIC that he was not the beneficial owner of the shares that he was selling. (Id. ¶ 126 n. 13.)[3]

At that point, CITIC controlled all of Shanxi Coal; CITIC's investment totaled $1.2 billion. (Id. ¶ 14.) CITIC recorded the share purchase, loan, and Zhao's pledge of 51% of his interest, and publicized these transactions to CITIC's prospective Chinese investors. (Id. ¶ 15.) CITIC then offered shares to Chinese investors and sold $443 million of stock in China. (Id. ¶ 18.)

Puda did not disclose the September 2009 transfer or the CITIC financing transactions to its U.S. shareholders. (Id. ¶ ¶ 22, 40.) Puda's 10-K filings in 2008, 2009, and 2010 each stated that its " operations are conducted exclusively by an entity in China, Shanxi Coal, which we control through 90% indirect equity ownership," and that the " operations of Shanxi Coal are our sole source of revenues." (Oberdier Decl. Ex. C, at 4, 12; Ex. D, at 4, 13; Ex. E, at 3, 17, ECF No. 18.) In fact, Puda had no revenue and no profit in 2010 and materially less revenue and profit in 2009, because Zhao had transferred ownership of Shanxi away from Puda. (Compl. ¶ ¶ 19, 130.)

Puda conducted two public offerings in the U.S. in February and December 2010; it misrepresented that it still owned a 90% interest in Shanxi, that it earned over $200 million in revenue and over $5 million in profit in 2009, and that it had earned more than $300 million in revenue and over $23 million in profit in 2010. (Id. ¶ ¶ 19, 20, 77, 130.) In the December 2010 offering, Puda raised $108 million from U.S. investors based on SEC filings that falsely stated that Puda owned Shanxi, when in reality

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Zhao had transferred it to himself and then to CITIC. (Id. ¶ ¶ 96-98.)

CITIC did not correct what are alleged to be Puda's misrepresentations. (Id. ¶ 19.) There are no factual allegations in the complaint that CITIC knew about those representations before or at the time at which they were made; indeed, all were prior to CITIC's involvement. Similarly, the complaint does not allege that CITIC reviewed, signed, or audited any of Puda's filings, or that CITIC had any role in or knowledge of the September 2009 transfer of Shanxi from Puda to Zhao; it was only after the transfer that Zhao began looking for Chinese investors. (Id. ¶ 146.) The complaint also does not allege that CITIC owed Puda's shareholders any duty to investigate Puda's financial situation. By the time of the CITIC financing transactions described below, Puda's former indirect ownership of Shanxi had been " sever[ed]" for ten months. (Id.)

The complaint itself asserts that CITIC publicly disclosed its financing transactions with Zhao in its State Administration of Industry and Commerce (" SAIC" ) filings and in a July 2010 marketing report. (Id. ¶ 15.) In the marketing report, CITIC stated that the CITIC Fund I's primary purpose would be the acquisition of Shanxi's coal mines and coal washing plants and then the subsequent resale of those same assets back to Shanxi Coal. (Id. ¶ 93.) CITIC also stated that it intended to cooperate with Shanxi to take advantage of Puda's " strength in resources." (Id. ¶ 97.) In this report, CITIC disclosed its " 100% equity control of Shanxi Coal" and stated that it would " supervise Shanxi Coal's daily operation very closely," as well as its expenditures. (Id. ¶ ¶ 102-03, 105-06.) CITIC also stated that it would " [p]otentially utilize Puda Group's two public listed companies' resources for capital operation." (Id. ¶ 108.)

From July 2010 to August 2011, the 51% of Shanxi's shares that Zhao had pledged to CITIC changed hands several times. (Id. ¶ ¶ 110-115.) Among those transfers was a December 2010 transfer in which Zhao secretly transferred back to Puda the 51% share in Shanxi. (Id. ¶ ¶ 111-14.) In August 2011, the 51% interest in Shanxi was transferred back to Zhao and pledged back to CITIC. (Id. ¶ 115.) Puda's Audit Committee Report found no " evidence that these asset transfer agreements have been filed in a government registry." (Id. ¶ 157.)

In April 2011, short-seller Alfred Little published a research report accusing Zhao of improperly transferring ownership of Shanxi to himself in September 2009 and selling and pledging his interest in Shanxi to CITIC, and stating that CITIC totally controlled Shanxi Coal. (Id. ¶ 23.) Puda's stock price on the U.S. stock markets promptly declined, and Puda's U.S. board of directors began an investigation. (Id. ¶ ¶ 24-25.)

On September 2, 2011, Puda's Audit Committee disclosed that its internal investigation confirmed that the rumors of Zhao's improper transfer of Puda's ownership of Shanxi to himself and the transfer to CITIC were correct. (Id. ¶ 29.) Zhao denied that any financing transaction between Shanxi and CITIC had occurred and provided a letter purporting to be from CITIC verifying this fact. (Id.) CITIC refused to cooperate with the investigation due to a confidentiality provision in its agreement with Shanxi Coal. (Id.) In a September 26, 2011 press release, Puda announced that the supposed CITIC letter was a forgery. (Id. ¶ ¶ 30-32.) The value of Puda's common stock dropped steadily over the period in question. (See id. ¶ ¶ 24-33.)

From April 14 to June 23, 2011, Puda shareholders brought ...

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