United States District Court, S.D. New York
ORDER AND OPINION
PAUL A. CROTTY, District Judge.
Plaintiffs Neil Vanleeuwen and Rodney Omanoff (collectively, "Plaintiffs") brought this class action in the U.S. District Court for the Central District of California against Defendants Keyuan Petrochemicals, Inc. ("Keyuan"), Chunfeng Tao ("Tao"), Aichun Li ("Li"), Weifeng Xue ("Xue") (collectively, the "Individual Defendants"), and Delight Reward Limited ("Delight Reward") (collectively, "Defendants") alleging claims for: (1) violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78a et seq., and Rule 10b-5, 17 C.F.R. § 240.10b-5, against Defendants; and (2) violation of Section 20(a) of the Act against the Individual Defendants. Plaintiffs are Keyuan shareholders who allege that Defendants failed to disclose related-party transactions in Offering Documents distributed in connection with the March and April 2010 private sales of Keyuan stock ("the Private Class") and in regulatory filings made in connection with purchases of Keyuan common stock over the NASDAQ exchange between August 16, 2010 and October 7, 2011 (the "Public Class").
On August 26, 2013, U.S. District Judge Philip S. Gutierrez held that venue in the Central District of California was improper and transferred the action to this Court. See Vanleeuwen v. Keyuan Petrochemicals, Inc., No. CV 11-9495, 2013 WL 4517242 (C.D. Cal. Aug. 26, 2013). Judge Gutierrez deferred to this Court the remaining issues in Li's motion to dismiss Plaintiffs' Third Amended Complaint.
The Court DENIES Li's motion to dismiss.
Keyuan, a Nevada Corporation, manufactures and sells petrochemical products in the People's Republic of China ("China"). Third Amended Complaint ("TAC"), ECF No. 97, ¶ 22. Tao is the current Chairman of the Board and Chief Executive Officer of Keyuan. Id. ¶ 24. During 2009 and 2010, Keyuan allegedly engaged in a number of undisclosed transactions with entities owned and controlled by Tao. Id. ¶¶ 86-96. These transactions totaled over $21 million in 2009 and $100 million in 2010, and the amount of raw materials purchased from Tao represented 36 percent in 2009 and 47 percent in 2010 of Keyuan's inventory. Id.
On May 12, 2010, Keyuan became a publicly-listed company in the United States through a reverse merger transaction. Id. ¶ 23. At about this time, Keyuan hired Li to act as its Chief Financial Officer ("CFO"). Id. ¶ 25. She is a U.S.-licensed Certified Public Accountant who previously worked as a member of the CFO Group at Bank of America and as a consultant at Deloitte and Touche LLP. Id. ¶ 25. Keyuan apparently hired Li given her knowledge of U.S. Generally Accepted Accounting Principles ("GAAP") and U.S. financial reporting requirements. As CFO, Li certified in management representation letters and SEC filings that Keyuan had made no undisclosed related-party transactions. TAC, ¶¶ 77-83, 103-07.
On January 17, 2011, Keyuan retained KPMG, LLP ("KPMG") to audit Keyuan's 2010 year-end financial statements. See Declaration of Howard M. Privette in Support of Motion to Dismiss ("Privette Decl."), ECF No. 162, Ex. 2, at 2. KPMG subsequently raised concerns regarding certain Keyuan cash transactions and recorded sales, and Keyuan was unable to file a timely 10-K for the 2010 fiscal year as a result. TAC, ¶ 109. On October 20, 2011, Keyuan filed its 10-K, disclosing the 2009 and 2010 related-party transactions for the first time. Id. ¶ 87. On November 1, 2011, Keyuan filed restated 10-Qs for the second and third quarters in 2010 to include the related-party transactions. Id. ¶¶ 94-96.
II. The SEC Action
Sixteen months later, on February 28, 2013, the SEC brought a civil frauds action against Keyuan and Li, in part, for nondisclosure of related-party transactions in the SEC filings. See Complaint, SEC v. Keyuan Pharmaceuticals, Inc., No. 13-CV-263 (RC) (DDC), ECF No. 1. On July 1, 2013, the District Court entered a final judgment, on Li's consent, permanently enjoining Li from future violations of the Act and imposing a civil penalty of $25, 000 without admitting or denying the SEC's allegations. See Declaration of Phillip Kim, ECF No. 164, Ex. 1. Plaintiffs rely, in part, on the SEC's allegations pertaining to Li to form the basis of their own claims against her in the Third Amended Complaint. See TAC, ¶¶ 84-85.
I. Legal Standard
To state a claim, a plaintiff must "provide the grounds upon which his claim rests through factual allegations sufficient to raise a right to relief above the speculative level.'" ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). A securities fraud claim under Section 10(b) of the Act and Rule 10b-5 must also satisfy the heightened pleading standards of Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b). Id. at 99. Rule 9(b) requires that for complaints alleging fraud, "a party must state with particularity the circumstances constituting fraud or mistake." A plaintiff must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Stevelman v. Alias ...