McIntire v. China MediaExpress Holdings, Inc.
927 F. Supp. 2d 105
S.D.N.Y.2013Background
- Lead Plaintiffs seek class relief for alleged §10(b) and §20(a) violations by CCME and related Deloitte entities and A.J. Robbins in connection with CCME’s post-reverse-merger financial disclosures.
- Defendants include CCME, Cheng, Lam, Green, Bird, DTT HK, DTTL, Deloitte U.S., and A.J. Robbins; the class period spans Oct 5, 2009 to Mar 11, 2011.
- CCME underwent a reverse merger with TM into China MediaExpress Holdings, Inc.; Hong Kong Mandefu controlled CCME’s business network, with Cheng as founder and top shareholder.
- DTT HK audited CCME for 2009 but later issued a disclaimed and withdrawn audit; Citron and Muddy Waters issued reports alleging accounting fraud.
- Muddy Waters and Citron reports, together with internal auditor resignations and subsequent investigative disclosures, form the backdrop for alleged misstatements in the 2009 Proxy, 2009 Form 10-K, and 2010 Qs/press releases.
- Court posture: motions to dismiss governed by Rule 12(b)(6), Rule 9(b), and PSLRA pleading standards; the court denies some motions and grants others without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CCME statements and omissions pleaded with sufficient particularity show scienter | Plaintiffs allege false statements in multiple filings and rely on Citron/Muddy Waters reports as evidence of fraud | CCME argues lack of adequate scienter and improper reliance on short-seller reports | Plaintiffs adequately plead falsity and scienter against CCME for several statements |
| Whether Green and Bird adequately plead scienter to support §10(b) claims | Green and Bird had motive/opportunity and knew or should have known of fraud | No adequate allegations of knowledge or conscious recklessness; motive from stockholdings is insufficient | Scienter not shown; claims against Green and Bird dismissed without prejudice |
| Whether A.J. Robbins adequately pled scienter as auditor | Auditing failures and red flags suggest recklessness aiding fraud | GAAP/GAAS violations alone insufficient; no identified red flags before 2009 audit | Scienter not shown; claims against A.J. Robbins dismissed without prejudice |
| Whether DTT HK and related Deloitte entities properly alleged as §10(b) makers under Janus | DTT HK issued the misstatements; Deloitte network controlled or influenced them | Under Janus, liability cannot lie for statements issued by another entity; lack of ultimate authority | Claims against DTT HK survived; claims against DTTL and Deloitte U.S. dismissed under Janus with prejudice for those entities |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard; plausibility review after Bell Atl. Twombly)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (pslra heightened pleading; scienter requirements)
- Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (U.S. 2007) (strong inference of scienter must be cogent and as compelling as opposing inference)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (circumstantial evidence of conscious misbehavior or recklessness may satisfy scienter)
- In re Global Crossing, Ltd. Sec. Litig., 2005 WL 1881514 (S.D.N.Y. 2005) (control/culpable participation standards under §20(a) require actual control and culpable participation)
- In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d 370 (S.D.N.Y. 2007) (auditor recklessness standards and red flags considerations)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (maker liability under §10(b); ultimate authority over misstatement governs liability)
- China Educ. Alliance, Inc. Sec. Litig., 2011 WL 4978483 (C.D. Cal. 2011) (discrepancies between SAIC and SEC filings support falsity/scienter allegations)