887 F. Supp. 2d 547
S.D.N.Y.2012Background
- Lead Plaintiffs allege violations of §11 & §15 of the Securities Act and §10(b) & §20(a) of the Exchange Act against DGW, its management, directors, underwriters, auditors, and the GEF group.
- DGW is a China-based water-treatment company; Guo (CEO/Chairman) and Park (CFO) are central figures; Holbert, Wei, Larrea, Rooney, Firlotte, and Yu served as DGW directors or officers during the class period.
- Plaintiffs allege misrepresentations or omissions in DGW’s IPO/SPO filings and in related press releases, misleading investors and causing a decline in DGW’s ADSs.
- GTIL/GT-HK acted as DGW external auditors; GTIL is a global umbrella firm and GT-HK allegedly served as its agent; GEF invested in DGW through GEEMF III and held a significant stake.
- Underwriters Piper Jaffray, Oppenheimer, Janney, Credit Suisse, Macquarie, and Rodman & Renshaw helped price the IPO/SPO and marketed shares; DYP’s accounting troubles in September 2010 spurred ensuing investigations and restatements.
- DGW’s March 2011 disclosures and subsequent events (Muddy Waters’ report, director resignations, Skadden review) precipitated stock decline and intensified scrutiny of the filings:**
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Plaintiffs have standing under §11 | Ho/Jin trace to IPO/SPO, claim injury from misstatements | Traceability to SPO/IPO insufficient; plaintiffs must prove direct link | IPO claims survive; SPO traceability rejected for standing |
| Whether §11 claims are adequately pleaded under Rule 9(b) | Statements in registration materials were false or misleading | Discrepancies with SAIC filings do not prove false statements | §11 claims against DGW survive on FP/GAAP discrepancies |
| Whether §10(b) claims against DGW, Guo, Park are pled with scienter | Factual allegations show motive/recklessness and GAAP discrepancies | Safe Harbor and deficiency of direct falsity/knowledge | §10(b) claims survive against DGW, Guo, Park; scienter adequately pled |
| GTIL’s liability under §10(b) and §11 | GTIL as outside auditor with authority; agency theory | Janus controls; GTIL lacked ultimate authority; no liability | GTIL liable only to extent shown; §10(b) claim against GTIL dismissed; §11 claim dismissed |
| §15 control person liability against directors and GEF defendants | Control through board roles and GEEMF/GEF relationships | No adequate showing of actual control | Director Defendants’ §15 claims dismissed; GEF §15 claim dismissed for lack of control showing |
Key Cases Cited
- In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011) (strict §11 liability; narrow list of liable parties)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (maker of a misstatement bears ultimate liability under §10(b))
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleading allegations)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading requires plausible claims, not merely arguable)
- Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993) (inquiry notice analysis for statute of limitations)
- In re Global Crossing, Ltd. Sec. Litig., 324 F. Supp. 2d 319 (S.D.N.Y. 2004) (control person liability standards)
- In re Vivendi Universal, S.A. Sec. Litig., 765 F. Supp. 2d 512 (S.D.N.Y. 2011) (imputing state of mind of insiders to corporation)
- Camofi Master LDC v. Riptide Worldwide, Inc., 2011 WL 1197659 (S.D.N.Y. 2011) (group pleading limitations in oral statements)
- Nelson v. Paramount Commc’ns, Inc., 872 F. Supp. 1242 (S.D.N.Y. 1994) (GAAP/financial statement discrepancies scrutiny)