Topping v. Deloitte Touche Tohmatsu CPA, Ltd.
95 F. Supp. 3d 607
S.D.N.Y.2015Background
- ChinaCast, a Delaware company operating in China, disclosed in 2012 extensive fraud by senior employees (including CEO Ron Chan) involving misappropriation of assets, undisclosed loans, and unauthorized transfers; the stock collapsed after public disclosures.
- Plaintiff Topping sued ChinaCast’s auditor DTTC (Shanghai) and Deloitte U.S.; claims allege false audit opinions and violations of Section 10(b)/Rule 10b-5 and Section 20(a).
- Three movants sought appointment as lead plaintiff under the PSLRA: institutional investor Jayhawk, and individuals Ronald Ordway and Christopher Hong; competing motions were filed within the 60-day window after the class notice.
- Jayhawk claimed the largest loss but sold all shares before the principal 2012 corrective disclosures; Jayhawk (via counsel) later filed a “Corrected Complaint” adding an October 3, 2011 partial-disclosure allegation after the PSLRA deadline.
- The court declined to consider the Corrected Complaint (filed after the 60-day lead-plaintiff window) and found the October 3, 2011 letter did not reveal the fraud; consequently Jayhawk’s in-and-out trades do not demonstrate recoverable losses.
- The court appointed Ordway as lead plaintiff (he had remaining shares and demonstrable losses) and approved Cohen Milstein as lead counsel.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether court may consider a corrected/amended complaint filed after the PSLRA 60-day lead-plaintiff window | Jayhawk (through Rosen Firm) argued the Corrected Complaint fixed an inadvertent scrivener’s error and established an October 3, 2011 partial disclosure that supports Jayhawk’s loss causation | Ordway and Hong argued the Corrected Complaint was an impermissible attempt to manipulate lead-plaintiff losses and was filed after the PSLRA deadline, so it should not be considered | Court refused to consider the Corrected Complaint because it was filed after the PSLRA deadline and materially altered loss allegations |
| Whether October 3, 2011 announcement constitutes a corrective or partial disclosure sufficient for loss causation | Jayhawk argued the announcement (suspension of buyback and audit of cash balances) partially disclosed the fraud and caused Jayhawk’s losses | Ordway and Hong argued the October 3 letter did not reveal falsity of prior statements or the fraud and thus cannot establish loss causation for in-and-out traders | Court held the October 3 letter did not reveal the fraud or falsity of prior statements and was not a corrective disclosure |
| Whether in-and-out trader (Jayhawk) has a recoverable financial interest for lead-plaintiff calculation | Jayhawk relied on the Corrected Complaint to tie its earlier sales to recoverable losses | Ordway and Hong argued that sales before any corrective disclosure cannot be causally linked to the fraud (Dura principle) and thus Jayhawk lacks recoverable losses | Court ruled Jayhawk’s sales predate any corrective disclosure and therefore its claimed losses are not attributable to the fraud; Jayhawk lacks a recoverable financial interest |
| Appointment of lead plaintiff and counsel under the PSLRA (largest loss, Rule 23 typicality/adequacy) | Jayhawk argued institutional status and larger alleged loss favored its appointment | Ordway argued he had the largest recoverable loss and met Rule 23 prereqs; Hong concurred that Ordway surpassed him | Court appointed Ordway as lead plaintiff (largest recoverable financial interest; prima facie typicality and adequacy) and approved Cohen Milstein as lead counsel |
Key Cases Cited
- Weltz v. Lee, 199 F.R.D. 129 (S.D.N.Y. 2001) (PSLRA goal to increase institutional investor role and prevent lawyer-driven litigation)
- Oxford Health Plans v. Sutter, 182 F.R.D. 42 (S.D.N.Y. 1998) (Rule 23 typicality and adequacy are central to lead-plaintiff inquiry)
- In re Olsten, 3 F. Supp. 2d 286 (E.D.N.Y. 1998) (adoption of Lax/Olsten factors for assessing largest financial interest)
- In re KIT Digital, Inc. Sec. Litig., 293 F.R.D. 441 (S.D.N.Y. 2013) (application of Lax/Olsten factors; financial loss most important)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (inflated purchase price alone does not prove loss causation)
- Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005) (loss causation standards: direct causation, materialization of risk, corrective disclosure)
- Flag Telecom Holdings, Ltd. v. Archer, 574 F.3d 29 (2d Cir. 2009) (in-and-out traders face heightened loss-causation issues; Dura’s standards apply in lead-plaintiff context)
- In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803 (N.D. Ohio 1999) (PSLRA 60-day deadline for lead-plaintiff motions is strict; courts should not consider losses asserted first in complaints filed after the deadline)
- Bensley v. FalconStor Software, Inc., 277 F.R.D. 231 (E.D.N.Y. 2011) (partial disclosures insufficient where they do not reveal fraud; in-and-out traders may be inadequate representatives)
- In re AOL Time Warner, Inc. Sec. & ERISA Litig., 503 F. Supp. 2d 666 (S.D.N.Y. 2007) (partial disclosures must reveal falsity of prior statements to establish loss causation)
- In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266 (S.D.N.Y. 2006) (concealed fact cannot cause stock decrease before public disclosure)
- In re IMAX Sec. Litig., 272 F.R.D. 138 (S.D.N.Y. 2011) (in-and-out trader denied class representative status where sales predated corrective disclosures)