Stream Sicav v. Wang
989 F. Supp. 2d 264
S.D.N.Y.2013Background
- SmartHeat, a Nevada holding company operating primarily in China, announced a management lock-up on January 29, 2009, preventing insiders from selling ~61% of outstanding shares until January 2012; the company repeatedly touted the lock-up to investors.
- Plaintiffs (lead plaintiff Stream SICAV and named plaintiffs) allege SmartHeat and CEO James Jun Wang secretly amended the lock-up on February 5, 2010 (effective Jan 1, 2010) and did not disclose that revision.
- Plaintiffs further allege Wang caused 380,000 previously locked-up shares to be sold through broker First Merger between Feb–Aug 2010 for $23 million, with First Merger receiving an allegedly excessive $1.1 million commission; FINRA later charged First Merger for failing to report suspicious activity.
- Plaintiffs claim these omissions and secret sales rendered SmartHeat’s prior public statements materially false, inflating the stock price and causing losses when the truth emerged.
- Procedurally: plaintiffs filed a Second Amended Complaint asserting § 10(b)/Rule 10b-5 and § 20A claims; SmartHeat moved to dismiss the SAC; plaintiffs moved to strike a stockholder list exhibit and for alternative service on Wang under Fed. R. Civ. P. 4(f)(3).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether nondisclosure of the Feb 5, 2010 amendment (revision theory) states a §10(b) claim | SmartHeat secretly revoked the lock-up effective Jan 1, 2010 and kept prior lock-up statements on its website, misleading investors | (Not directly challenged by SmartHeat in motion to dismiss) | Court: Revision theory pleads a materially misleading omission and survives dismissal |
| Whether secret sales of 380,000 shares (insider sale theory) state a §10(b) claim | Sales were of previously locked-up shares; nondisclosure of those sales made lock-up statements misleading | SmartHeat: public statements referenced only “senior management,” but SAC alleges unidentified “insiders”; implausible that sellers were senior managers; stockholder list shows senior managers still hold shares | Court: SAC plausibly alleges sold shares were locked-up shares; identity tracing not required at pleading stage; insider sale theory survives dismissal |
| Whether scienter (knowledge/recklessness) of CEO Wang can be imputed to SmartHeat | Wang acted to preserve investor confidence and corporate financing; corporate benefited from concealment (e.g., later equity raise) so his intent imputable | SmartHeat: Wang acted for personal reasons adverse to corporation, invoking adverse-interest exception to imputation | Court: Adverse-interest exception is narrow and inapplicable; allegations plausibly show corporate benefit, so Wang’s scienter imputable to SmartHeat |
| Whether alternative service on Wang via SmartHeat’s registered agent and counsel under Rule 4(f)(3) is permissible | Plaintiffs show Hague Convention service impractically slow and that service on SmartHeat/counsel is likely to notify Wang | SmartHeat contends Wang works for subsidiaries and may not be apprised by parent or counsel | Court: Proposed service not prohibited by international agreement, comports with due process, and is warranted; court grants Rule 4(f)(3) alternative service |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading standards require plausibility)
- Ashcroft v. Iqbal, 556 U.S. 662 (conclusory allegations not entitled to assumption of truth)
- ATSI Communs., Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir.) (Rule 9(b) particulars for securities fraud)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (scienter must give rise to strong inference)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir.) (failure to follow publicly announced policy can be misleading)
- Rothman v. Gregor, 220 F.3d 81 (2d Cir.) (similar principle: nondisclosure of departure from public policy can state claim)
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (N.Y.) (narrow adverse-interest exception to imputing agent knowledge to corporation)