33 F. Supp. 3d 401
S.D.N.Y.2014Background
- ChinaCast disclosed in 2012 that rogue executives, led by Ron Chan, engaged in widespread fraud, prompting a decline in stock price.
- Plaintiffs allege Deloitte DTTC and its U.S. affiliate Deloitte U.S., along with former ChinaCast officers/directors, violated the Exchange Act and committed common law fraud based on audits/filings.
- DTTC audited ChinaCast from 2007–2010, issuing unqualified opinions that the financials were GAAP-compliant and that internal controls were effective (with an adverse internal-control opinion for 2010).
- DTTC’s relationship with ChinaCast spanned over a decade; Deloitte U.S. allegedly controlled DTTC’s audits and influenced filings, including a write-off directed to address SEC concerns.
- New management in 2012 replaced Ron Chan as chair/CEO and uncovered significant fraud, including missing documents, missing bank records, and improper transfers, leading to investigations and public disclosures in 2012–2013.
- By 2013–2014 ChinaCast announced restatements/adjustments, instructed investors not to rely on 2009–2010 financials, and the stock remained devalued; 2013 Form 8-Ks reflected ongoing investigations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs plead scienter for §10(b) against DTTC | Plaintiffs allege red flags and massive fraud imply DTTC knowingly concealed truth. | DTTC argues allegations show negligence, not conscious recklessness; no strong inference of scienter. | Scienter not proven; §10(b) claim against DTTC dismissed. |
| Whether Section 20(a) claims against Deloitte U.S. survive | Deloitte U.S. controlled DTTC and thus liable as a control person. | No primary violation established and culpable participation not pled with specificity. | §20(a) claims dismissed. |
| Whether Section 18 claims survive against all defendants | DTTC and Deloitte caused or made false statements in 10-K/10-Q filings. | Liability limited to audit opinions; testified reliance insufficient and 10-Q financial statements barred. | Section 18 claims dismissed (with limitations on reliance and 10-Q financial statement bases). |
| Whether group pleading suffices for Deloitte Defendants | Lumping Deloitte U.S. and DTTC is sufficient to plead theory of vicarious liability. | Group pleading lacks notice as to which entity performed which acts. | Group pleading allowed; plaintiffs sufficiently apprised of theory of liability against Deloitte entities. |
| Whether common law fraud claims survive | Auditors’ misrepresentations/omissions support NY common law fraud alongside federal claims. | No adequate scienter; separate từ considerations fail. | Common law fraud claims dismissed. |
Key Cases Cited
- In re Parmalat Sec. Litig., 375 F. Supp. 2d 278 (S.D.N.Y. 2005) (group pleading; notice concerns discussed)
- In re Bear Stearns Companies, Inc. Sec., Derivative, & ERISA Litig., 995 F. Supp. 2d 291 (S.D.N.Y. 2014) (Rule 9(b) pleading standards; Section 18 reliance standards)
- In re Livent, Inc. Sec. Litig., 78 F. Supp. 2d 194 (S.D.N.Y. 1999) (scienter standards; recklessness vs. negligence)