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In re New Energy Systems Securities Litigation

United States District Court, S.D. New York

September 30, 2014

In re: NEW ENERGY SYSTEMS SECURITIES LITIGATION

Page 402

For Lead Plaintiff: Thomas J. McKenna, Gregory M. Egleston, GAINEY MCKENNA & EGLESTON.

For Plaintiffs: Philip C. Kim, THE ROSEN LAW FIRM P.A.

For Defendants: Caryn G. Schechtman, Joshua S. Sohn, David V. Sack, Robert D. Weber, DLA PIPER LLP (U.S.).

Page 403

MEMORANDUM OPINION

Lewis A. Kaplan, United States District Judge.

This putative class action concerns purchases of New Energy Systems Group (" New Energy" or the " Company" ) stock between April 15, 2010, and November 14, 2011.[1] Plaintiffs[2] assert claims under Section 10(b) of the Securities Exchange Act of 1934 (the " Exchange Act" )[3] based on alleged misstatements regarding revenue and earnings in the Company's 2009 form 10-K.[4] Plaintiffs bring an additional claim for violation of Section 20(a) of the Exchange Act against four individual defendants who held various officer roles with the Company.[5]

The matter is before the Court on a motion to dismiss[6] brought by the Company and defendants Weihe Yu and Junfeng Chen.[7]

Facts

Defendant New Energy is a Nevada corporation with its headquarters and main operating divisions in Shenzhen, China.[8] As of 2008, most of New Energy's operations were conducted by a subsidiary, Shenzhen E'Jenie Technology Development Co., Ltd. (" E'Jenie" ).[9] The Company manufactures and distributes lithium battery shells and related products, primarily in China.[10]

The Complaint focuses on discrepancies in the Company's financial reports filed with the SEC and the Chinese State Administration for Industry and Commerce (" SAIC" ). In particular, Plaintiffs allege large differences in 2008 and 2009 revenue and net income as reported to the two entities. The Complaint states that revenue and net income in the 2008 SEC filings were 456 percent and 9,863 percent of what was reported in the Chinese filings for E'Jenie ($19.7 million and $4.45 versus

Page 404

$3.5 million and $44,700),[11] and that revenue and net income in the 2009 SEC filings were 1,185 percent and 9,662 percent of what was reported in Chinese filings ($26.38 million and $5.84 million versus $2 million and $59,800).[12] The gravamen of the Complaint is that the Company kept " two sets of books," and that the Chinese filings reflected the true state of the Company's finances while the SEC filings were false and misleading.[13]

Plaintiffs attempt to bolster these allegations by detailing the Chinese filings of E'Jenie's largest customer and New Energy's two largest suppliers. According to the Chinese filings, E'Jenie's largest customer had no revenue during much of the period when that customer was reported in New Energy's 2009 10-K to be responsible for between 55.9 perfect and 74.8 percent of the Company's revenue.[14] New Energy's largest supplier, accounting for 27.7 percent of purchases reported in the 2009 10-K for 2009, had no SAIC filings during the relevant period and interviews allegedly confirm that the company ceased operations in 2008.[15] New Energy's reported second-largest supplier, accounting for 26.6 percent of purchases for 2009 in the Company's 2009 10-K and 26.9 percent of purchases for 2008 in the ...


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