United States District Court, S.D. New York
IN RE LONGTOP FINANCIAL TECHNOLOGIES LIMITED SECURITIES LITIGATION
For Lead Plaintiffs: Gregory M. Castaldo, Esq., Kimberly A. Justice, Esq., Richard A. Russo, Esq., Margaret E. Onasch, Esq., John A. Kehoe, Esq., John J. Gross, Esq., Kessler Topaz Meltzer & Check, LLP (PA), Radnor, Pennsylvania; Daniel L. Berger, Esq., Deborah A. Elman, Esq., Jeff A. Almeida, Esq., Reena S. Liebling, Esq., Grant & Eisenhofer, P.A. (NY), New York, New York.
Derek Palaschuk, Defendant, Pro se, Vancouver, Canada.
OPINION AND ORDER
Shira A. Scheindlin, U.S.D.J.
Lead plaintiffs bring this action on behalf of themselves and others similarly
situated against Longtop Financial Technologies, Ltd. (" Longtop" or " LFT" ); Longtop's former CEO, Lian Weizhou; Longtop's former CFO, Derek Palaschuk; and Longtop's former auditor, Deloitte Touche Tohmatsu CPA Ltd. (" DTT" ). The class consists of all persons and entities who purchased Longtop American Depositary Shares (" ADS's" ) on the New York Stock Exchange (" NYSE" ) between February 21, 2008 and May 17, 2011, inclusive (the " Class Period" ).
Plaintiffs brought claims against all of the defendants under Section 10(b) of the Securities Exchange Act of 1934 (the " Exchange Act" ) and Rule 10b-5 promulgated thereunder. They additionally brought claims under Section 20(a) of the Exchange Act against the individual defendants, Lian and Palaschuk.
Palaschuk and DTT separately moved to dismiss. I denied Palaschuk's motion on June 29, 2012, but granted DTT's motion on April 8, 2013 without leave to amend. On November 14, 2013, I granted plaintiffs' motion for a default judgment against Longtop and Lian, who failed to appear in this action.
Plaintiffs allege that Palaschuk made materially false and misleading statements during the Class Period regarding: 1) Longtop's cash and loan balances, profit margins, revenue, and other key financial metrics, 2) the effectiveness of Longtop's internal controls, and 3) the accounting irregularity of Longtop's financial statements. Palaschuk made the allegedly misleading statements on conference calls with investors as well as through Longtop's public filings and press releases. Plaintiffs alternately seek to hold Palaschuk liable as a control person for false and misleading statements made by Longtop.
Palaschuk now moves for summary judgment. For the following reasons, his motion is DENIED.
Longtop was founded in 1996 to provide information technology services to the banking and financial industry in China. Longtop grew from five hundred employees in June of 2006 to over seven thousand
employees in March of 2011. Palaschuk joined Longtop as CFO in September of 2006 and helped the company complete an initial public offering (" IPO" ) on October 24, 2007.
Before Palaschuk joined the company, Longtop retained DTT as outside auditors. DTT audited Longtop's financial statements and issued multiple reports throughout the Class Period. In April of 2009, Palaschuk and his employee Philip Li exchanged a series of emails with Tony Wen-ping Wang, an employee from DTT's Shanghai office, regarding an ongoing audit. Palaschuk asked Wang to use alternative testing on Longtop's revenue contracts instead of confirmations as Wang had originally planned. Wang protested and explained that " confirmation is a required procedure that we are [sic] difficult to get around."  Palaschuk responded, " I am absolutely certain it is not a U.S. auditing standard to confirm terms of revenue contracts. If it is please send me the auditing standard or other SEC requirement."  Wang sent Palaschuk several auditing standards that recommended but did not require the use of revenue confirmations. Palaschuk continued to insist that confirmation of revenue contracts was unnecessary for Longtop, and Wang ultimately agreed to perform alternate testing.
On February 4, 2010, Wedge Partners, an equity analysis firm, issued a report identifying several " red flags" in Longtop's financial: 1) an exodus of employees from Longtop's accounting department, 2) Longtop's use of a third party intermediary employer, and 3) Longtop's rushed and overpriced acquisition of a company called Giantstone. The report concluded, " [i]n these situations, especially in China, we have found it to be best to trust our instincts and choose not to ignore the red flags. . . ."  Wedge Partners issued another report on March 23, 2010 clarifying that only two employees had left Longtop's finance department, and for personal reasons. The report reiterated concerns about Longtop's use of a third party company to employ staff, as well as the Giantstone acquisition.
In February 2010, Palaschuk emailed Lian and Ruan Cijie, Longtop's head of business operations, expressing concern about certain members of his finance department. He wrote:
Yingling [Li] is a wonderful and capable person but she cannot manage financial operations and financial accounting for a company with $300 million in revenue and 7,000 employees with international business. Same goes for Junwei . . . I know there are many things that certain people are doing behind my back and I am not going to tolerate it anymore. If you want to put people in finance that only both of you " like" rather than based on ...