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Campbell v. Yu

United States District Court, S.D. New York

June 10, 2014

JOHN C. CAMPBELL, et al., Derivatively on Behalf of New Energy Systems Group, Plaintiffs,
v.
WEIHE YU, et al., Defendants, and NEW ENERGY SYSTEMS GROUP, Nominal Defendant

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[Copyrighted Material Omitted]

Page 474

For New Energy Systems Group, Weihe Yu, Junfeng Chen, Shuxian Cui, Li Liu, Elan Yaish, Goldman Kurland & Mohidin LLP, Yvonne Zhang and V Trust Accounting and Tax Services, Defendants: Caryn G. Schechtman, Joshua S. Sohn, David V. Sack, Robert D. Weber, DLA PIPER U.S. LLP.

For Plaintiffs: Joseph P. Guglielmo, Erin G. Comite, Anne L. Box, SCOTT SCOTT LLP.

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MEMORANDUM OPINION

Lewis A. Kaplan, United States District Judge.

Plaintiffs John Campbell, Basil Malouf, and Baseem Malouf bring this shareholder derivative suit on behalf of nominal defendant New Energy Systems Group (" New Energy" ). They assert that the officers and directors breached their fiduciary duties by failing to maintain adequate internal controls over financial reporting and by issuing false and misleading statements in the company's public disclosures. Plaintiffs allege further that the officers and directors breached their fiduciary duties in the sale and acquisition of New Energy subsidiaries. Finally, they claim that New Energy's accountants breached their contract, were enriched unjustly, and aided and abetted the officers' and directors' alleged breaches of their fiduciary duties.

Defendants move to dismiss for failure to make a demand on the board of directors or to establish demand futility. They argue that plaintiffs have not alleged particularized facts creating a reasonable doubt that a majority of the board would have been disinterested and independent or that the challenged transactions were otherwise a product of a valid exercise of business judgment. Defendants move alternatively to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

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I. The Parties

The plaintiffs are, and at all relevant times have been, shareholders of New Energy.[1] New Energy is a Nevada corporation with its principal place of business in New York.[2] Its operating subsidiaries, however, are based in the People's Republic of China (" PRC" ).[3] New Energy manufactures and distributes batteries and backup power systems for portable electronic devices.[4]

At the time the amended complaint (the " Complaint" ) was filed in August 2012, New Energy maintained a four-person board of directors.[5] Specifically, defendant Weihe Yu has served as chairman of the board since December 2009 and as chief executive officer since August 2011.[6] Defendant Elan Yaish has served as a director since June 11, 2010 and serves also as chair of the audit committee.[7] Defendant Shuxian Cui has served as a director since June 9, 2010 and is a member of the audit committee.[8] Defendant Li Liu has served as a director since May 18, 2010 and is a member of the audit committee.[9]

The suit is brought also against certain former officers and directors of New Energy. Defendant Junfeng Chen served as chief financial officer from August 2009 through August 2011.[10] Defendant Fushun Li served as chief executive officer and a director from May 2009 until he resigned in May 2010.[11] Immediately thereafter, defendant Nian Chen served as chief executive officer from May 2010 until his resignation in August 2011.[12]

Defendant GoldmanKurland& Mohidin, LLP (" GKM" ) is an accounting firm that has served as New Energy's independent auditor since 2009.[13] Defendant V Trust Accounting and Tax Services (" V Trust" ), another accounting firm, and its sole proprietor, defendant Yvonne Zhang, assisted in the preparation of New Energy's financial statements in 2009 and 2010.[14]

II. Factual Background

Plaintiffs complain first of New Energy's alleged failure to implement effective internal controls over financial reporting, which they claim resulted in overstatements of New Energy's financial results and earnings potential.[15] They contend that reports filed by New Energy with the Securities and Exchange Commission (" SEC" ) from April 15, 2010 to the present (the " Relevant Period" )[16] were materially false and misleading because they:

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o stated falsely that the company's internal controls over financial reporting were effective; [17]
o stated falsely that they were prepared in accordance with generally accepted accounting principles (" GAAP" ); [18]
o failed properly to account for goodwill in connection with certain acquisitions and to record warrants issued to an investor relation firm in accordance with GAAP; [19]
o stated falsely that New Energy would " continually receive orders from our loyal customers" and was " confident the battery distribution business will be profitable due to the outstanding battery quality and the ...

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