United States District Court, S.D. New York
ARAM J. PEHLIVANIAN, Individually and On Behalf of All Others Similarly Situated, Plaintiff,
CHINA GERUI ADVANCED MATERIALS GROUP, LTD., MINGWANG LU, EDWARD MENG, YI LU, HARRY EDELSON, J.P. HUANG, KWOK KEUNG WONG, YUNLONG WANG, and MAOTONG XU, Defendants.
OPINION AND ORDER
Edgardo Ranios, U.S.D.J.
case arises out of alleged violations of the Securities Act
of 1933 (the “Securities Act”) and the Securities
Exchange Act of 1934 (the “Exchange Act”) by
China Gerui Advanced Materials Group, Ltd. (“China
Gerui” or the “Company”) and eight of its
current and former Directors and Officers (“Individual
Defendants” and collectively,
“Defendants”). By way of his Third Amended
Complaint (“TAC”), lead plaintiff, Aram J.
Pehlivanian (“Pehlivanian” or
“Plaintiff”), brings suit on behalf of a class of
all those who purchased or otherwise acquired China Gerui
securities between March 17, 2009 and June 16, 2016 (the
“Class Period”), and sustained losses upon the
revelation of alleged corrective disclosures (the
“Class”). Pending before this Court is China
Gerui and Individual Defendant Harry Edelson's
(“Edelson”) motion to dismiss the TAC with
prejudice pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure. For the reasons set forth below, the motion
Gerui is a steel processing company based in China and
incorporated under the laws of the British Virgin Islands
that produces high-precision, ultra-thin, cold-rolled steel
products for sale internationally and domestically. TAC
¶¶ 2, 8.
the date of this Order, the only Individual Defendant that
has been served is Edelson. See Docs. 9, 54, 66
(extending the deadline to serve the Individual Defendants,
excluding Edelson, to December 1, 2016). Edelson was a
director of China Gerui from 2009 until March 2016, when he
resigned. TAC ¶¶ 12, 46 & n.5. He previously
served as Chief Executive Officer and Chairman of the Board
of Directors of China Gerui's predecessor corporation.
Id. ¶ 12. Edelson has received $10, 000 a month
from China Gerui since 2010 for his services promoting
awareness of the Company within the investment community,
participating in road shows and investor conferences, and
providing the Company with office space and communications
other seven Individual Defendants are: (1) Mingwang Lu
(“Lu”), Chairman of China Gerui's Board of
Directors and Chief Executive Officer; (2) Edward Meng
(“Meng”), China Gerui's Chief Financial
Officer and previously its Director of Investor Relations;
(3) Yi Lu (“Y. Lu”), China Gerui's Chief
Operating Officer and a Director; (4) J.P. Huang
(“Huang”), a China Gerui Director who serves on
the Audit Committee, Compensation Committee, and Nominating
and Corporate Governance Committee; (5) Kwok Keung Wong
(“Wong”), a former China Gerui Director who
served on the Audit Committee, Compensation Committee, and
Nominating and Corporate Governance Committee; (6) Yunlong
Wang (“Wang”), a China Gerui Director who took
Wong's place on the Audit Committee, Compensation
Committee, and Nominating and Corporate Governance Committee;
and (7) Maotong Xu (“Xu”), a China Gerui Director
and the Chair of the Audit Committee, Compensation Committee,
and Nominating and Corporate Governance Committee.
Id. ¶¶ 9-16.
Defendants' Allegedly False and Misleading
claims that over the past five years, Defendants have made a
number of material misstatements to the investing public in
order to “hide” China Gerui's “horrible
financial performance” and the “serious problems
being experienced with its business operations, use of
capital, financial condition and fiscal strategy.” TAC
¶ 3. Plaintiff's allegations of fraud
center on five events: (1) the Company's purchase of land
use rights to 25.94 acres of land located in China from an
entity called Zhengzhou No. 2 Iron and Steel Company Limited
(“Zhengzhou”) for $42.6 million (the “Land
Transaction”), id. ¶¶ 18,
51-53; (2) the Company's relationship
with Cambelle-Inland, LLC (“Cambelle”), a
U.S.-China investment firm, id. ¶¶ 25,
54-55; (3) the Company's purchase of a collection of
antique Chinese porcelain for $234 million (the
“Porcelain Acquisition”), id.
¶¶ 61-70; (4) the Company's retention of UHY
Vocation HK CPA Limited (“UHY”) as its auditor,
id. ¶¶ 21, 100; and (5) the Company's
regulatory filings with the SEC in the United States and the
State Administration for Industry and Commerce
(“SAIC”) in China, id. ¶¶
86-89. Each of these events is more fully described below.
11, 2011, China Gerui announced, in its 2010 annual report,
that it had started the process of acquiring title to 25.94
acres of land use rights from Zhengzhou. Id. ¶
51. The Company's existing production facilities and
warehouses were already located on a portion of that land, as
the Company had been subleasing 6.69 acres. Id. The
Company stated that it had prepaid, as of December 31, 2010,
approximately $2.1 million to Zhengzhou, but that the final
price was to be further determined “based on
market-based valuation of the land value and calculation of
associated value-added tax.” Id. The stated
purpose of the transaction was “operation risk
7, 2012, in its 2011 annual report, the Company again stated
that it was in the process of transferring title to the 25.94
acres of land use rights. Id. ¶ 52. The Company
also announced that it had increased its prepayment to
approximately $12.7 million. Id. On April 30, 2013,
in its 2012 annual report, the Company announced that on
February 26, 2013, it had entered into an agreement with
Zhengzhou, whereby the Company would acquire the land use
rights to the 25.94 acres in exchange for $42.6 million.
Id. ¶ 53.
alleges that the Land Transaction was a “complete
fraud, and could not have possibly taken place under the
normal governmental oversight exercised in the United
States.” Id. ¶ 90. Although the TAC does
not clarify in what way the transaction was a fraud,
Plaintiff does set forth a few relevant facts. First,
according to a Chinese law firm/title company that Plaintiff
retained, title to the land use rights was never actually
transferred from Zhengzhou to the Company. Id.
¶ 91, Ex. D. Second, Zhengzhou's filings with the
SAIC show that neither Zhengzhou's assets nor its profits
were ever valued near $43.6 million from 2012 through
2015-the time period during which Zhengzhou purportedly owned
and then sold the land use rights to the Company.
Id. ¶¶ 92-93, Ex. E. Third, at the time
of the “transfer, ” Defendant Lu, China
Gerui's Chairman and CEO, owned 40% of Zhengzhou.
Id. ¶ 51.
1, 2013, China Gerui entered into an agreement with Cambelle
for business-related advice and consulting services.
Id. ¶ 54. On May 13, 2013, Defendant Lu
commented on the engagement, stating that the Company planned
to “globalize [its] business through accretive
acquisitions while continuing to focus on organic growth
opportunities, ” and that this strategy would enable
the Company, “[d]uring the next few years, . . . [to]
create a blend of revenue across a broader customer base,
both domestically . . . and internationally.”
Id. ¶ 55. Plaintiff claims that this statement
was “false when made or became false sometime after it
was made, ” because as of at least November 14, 2014,
Cambelle was no longer performing work for the Company.
Id. ¶ 95.
September 4, 2014, the Company announced, during an earnings
conference call, that it had purchased for $234 million a
collection of antique Chinese porcelain appraised at $905
million. Id. ¶¶ 61-62. Defendant Lu
explained that Company management and the Board of Directors
decided to take advantage of the Company's rich cash
position to make the alternative investment. Id.
¶ 62. Lu explained that the Company's intention was
to sell all 206 pieces in the collection over time at a
substantial return, and to use the profits from the sale to
support the Company's steel operations while the steel
industry “gains stronger fundamental balance.”
Id. ¶¶ 62-63.
Meng, the Company's CFO, provided more detail regarding
the porcelain collection. He noted that the porcelain came
from a private entrepreneur who was under financial pressure
from his personal business, that the collection was appraised
and authenticated by “Class A certified China arts
appraisers, ” and that the prices of the individual
pieces in the collection compared favorably with those of
similar pieces. Id. ¶ 67. Both Lu and Meng
acknowledged that the Porcelain Acquisition, paid for from
the Company's existing cash accounts, would put
short-term pressure on the Company's cash position.
Id. ¶¶ 64-65. Both executives expressed
optimism, however, regarding the potential rewards from the
date the Porcelain Acquisition was announced, September 4,
2014, China Gerui's stock price declined approximately
20%, from $0.61 per share (pre-split) on September 3,
2014, to $0.49 per share (pre-split). Id. ¶ 71.
Approximately three weeks later, on September 26, 2014, Lu
sent a letter to shareholders discussing the Company's
ongoing growth strategy, but the letter made no mention of
the recent porcelain purchase. Id. ¶ 72. On
January 6, 2015, the Company issued a press release, in which
it stated that the Company was “vigorously pursuing
opportunities with established domestic and international
auction houses to liquidate the antique collection in part or
in its entirety.” Id. ¶ 74.
claims that Defendants have failed to disclose a number of
facts regarding the Porcelain Acquisition, namely: when or
from whom the porcelain was purchased; where the collection
was being stored; whether the collection was insured; who
appraised and authenticated the collection; what material
actions were being taken to “vigorously pursu[e]
opportunities” to liquidate the collection; and which
“established domestic and international auction
houses” were being used to liquidate the collection.
Id. ¶¶ 69, 74.
also claims that the Porcelain Acquisition was “a
complete fraud.” Id. ¶ 96. As with the
Land Transaction, the TAC does not clarify in what way the
acquisition was a fraud. However, Plaintiff sets forth a few
salient facts. First, Plaintiff alleges that no certificates
of authenticity for the porcelain collection were ever
offered or disclosed by Lu. Id. ¶ 38. Second,
Plaintiff alleges that Lu has a “background in art
fraud.” Id. Namely, in 2002, Lu was allegedly
involved in a widely publicized scheme to sell fake paintings
of a famous Chinese painter. Id. ¶ 37. Third,
Plaintiff alleges that art experts he consulted have
“clearly indicated” that a large percentage of
the artwork offered for sale in China are forgeries.
Id. ¶ 38. Fourth, Plaintiff alleges that the
Company attempted to obtain insurance for the porcelain
collection but was denied coverage. Id. ¶ 99.
Finally, Plaintiff alleges that the Company's filings for
the SAIC “do not leave room” for spending $234
million on the porcelain collection, “let alone
acquiring an asset worth” $905 million. Id.
¶ 98, Ex. G.
April 30, 2015, the Company filed Form NT 20-F with the SEC,
stating that its 2014 annual report would be filed late.
Id. ¶ 75. The Company further stated that it
anticipated that it would file the report “within the
fifteen-day grace period provided by Exchange Act Rule
12b-25.” Id. ¶ 76. Ultimately, the
Company never filed its 2014 annual report. Id.
alleges that the Company's April 30, 2015 statement was
“false when made, ” because “it no longer
had an auditor, ” which it would need to properly file
its report with the SEC. Id. ¶ 100. Plaintiff
does not indicate on what date the Company allegedly lost its
auditor. However, the TAC alleges elsewhere that UHY was the
Company's public auditor “from ...