26 F. Supp. 3d 266
S.D.N.Y.2014Background
- Silvercorp Metals, a Canadian company operating the Ying mine in China, traded on U.S. and Canadian exchanges; plaintiffs allege SEC filings materially overstated the Ying mine’s resources, production, and grades compared to Chinese "2010 Dynamic Report."
- Class period: May 20, 2009–September 13, 2011; suit alleges violations of §10(b)/Rule 10b-5 and §20(a).
- Plaintiffs rely on discrepancies between Chinese regulatory filings (allegedly strictly enforced, multi-layer reviewed) and Silvercorp’s SEC filings, arithmetic comparisons, third-party AMC report, and the Carnes short-seller report.
- Defendants responded that the filings reflect different reporting standards/denominators, that plaintiffs miscomputed Chinese figures, and that plaintiffs’ confidential-witness and motive allegations are insufficient.
- Court denied defendants’ motion to dismiss as to Silvercorp (finding falsity and scienter adequately pleaded for the company) but granted dismissal as to individual defendants Rui Feng and Meng "Maria" Tang (scienter not adequately pleaded), and dismissed the §20(a) claims against the individuals.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Falsity of SEC statements re: Ying mine reserves, production, grades | SEC filings materially overstated metrics; Chinese 2010 Dynamic Report is more reliable and corroborated by arithmetic and a third-party AMC report | Differences reflect different reporting standards/denominators or plaintiffs’ arithmetic errors; Chinese report may be limited to pre-2005 veins | Court: Plaintiffs adequately pleaded falsity as to Silvercorp — comparisons proper at pleading stage; arithmetic and regulatory-enforcement allegations suffice to plausibly allege SEC figures false |
| Whether discrepancies are explainable by differing reporting rules | Plaintiffs: Chinese rules require full-mine reporting; dynamic report covered entire Ying mine and thus is comparable | Defendants: SEC filings follow Canadian guidelines and include post-2005 discoveries; comparison is apples-to-oranges | Court: At pleading stage, plaintiffs’ allegations that the dynamic report covered the full mine are sufficient; defendant’s standards argument not resolved as a basis to dismiss |
| Omission of related-party disclosures re: Yongning | Plaintiffs: Silvercorp had 11.75–18% ownership and board representation, implying joint control and required disclosure under Canadian GAAP/IFRS | Defendants: <20% stake creates presumption against significant influence; plaintiffs plead only conclusory assertions of joint control | Court: Dismissed related-party disclosure claim — plaintiffs failed to plead facts showing joint control or significant influence |
| Scienter for company and individual defendants | Plaintiffs: Motive (December 2010 $117M offering) plus circumstantial facts (retaliation against critic, alleged fictitious customers, restatements, RCMP/SEC investigations) support a strong inference of scienter | Defendants: Motive is generalized; senior insiders bought stock during class period; allegations about retaliation and CW are insufficiently particularized for individuals | Court: Scienter adequately pleaded as to Silvercorp (company) on combined motive + strong circumstantial evidence; scienter not adequately pleaded as to Feng and Tang — claims against individuals and §20(a) dismissed |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim and factual content to raise a reasonable inference of liability)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (complaint must contain enough facts to state a plausible claim)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (elements of a §10(b) securities fraud claim)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (scienter inference must be cogent and at least as compelling as any opposing inference)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (standards for pleading confidential witnesses’ reliability and personal knowledge)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (scienter shown by motive/opportunity or strong circumstantial evidence)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (recklessness can be pleaded by strong circumstantial allegations when motive is not apparent)
- In re MBIA, Inc. Sec. Litig., 700 F. Supp. 2d 566 (S.D.N.Y. 2010) (corporate scienter can be shown even where individual scienter is not pleaded)