HE v. CHINA ZENIX AUTO INTERNATIONAL LIMITED

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

ZHENGYU HE, individually and on

behalf of all others similarly situated, Civ. No. 2:18-15530 (KM-JAD)

Plaintiff,

OPINION

v.

CHINA ZENIX AUTO INTERNATIONAL

LIMITED, JIANHUI LAI, and MARTIN

CHEUNG,

Defendants.

MCNULTY, U.S.D.J.:

The plaintiffs have filed a putative class action alleging securities fraud

against China Zenix Auto International Limited (“China Zenix” or the

“Company”) and certain of its senior officials (See 1AC (DE 23)).1 The

allegations stem from purportedly false or materially misleading statements

and omissions made by the defendants in various public disclosures, as well as

an alleged stock manipulation scheme. Plaintiffs assert that these false and

materially misleading statements violated Section 10(b) and Section 20(a) of the

Exchange Act, and that the manipulation scheme violated Section 9(a) of the

Exchange Act.

Currently before the Court is Defendants’ motion to dismiss the first

amended complaint for failure to state a claim and for lack of personal

1 Citations to certain record items will be abbreviated as follows:

DE = Docket entry number

1AC = Plaintiffs’ First Amended Complaint (DE 23)

Def. Brf. = Defendants’ Brief in Support of the Motion to Dismiss Plaintiffs’ First

Amended Complaint (DE 30-1)

Pl. Opp. = Plaintiffs’ Brief in Opposition (DE 30-2)

Def. Reply Brf. = Defendants’ Reply Brief to Plaintiffs’ Opposition (DE 30-3)

jurisdiction. See Fed. R. Civ. P. 12(b)(6); 12(b)(2). For the reasons stated below,

the motion to dismiss is granted in part and denied in part.

I. FACTUAL BACKGROUND

In considering a motion to dismiss, the Court is required to treat the

facts alleged in the complaint as true and to draw all reasonable inferences in

the plaintiffs’ favor. I summarize those allegations as follows:

A. Relevant Parties and Participants

The plaintiffs, ITENT EDV Dienstleistungs GmbH and Ing. Richard

Deutner Softwaeentwicklung & Beratung, seek to represent a class consisting

of all those (other than the Defendants and their affiliates) who purchased

publicly traded securities issued by Defendant China Zenix from October 2,

2015 through June 14, 2018 (the “Class Period”). (1AC ¶ 1). Plaintiffs

purchased such securities during the Class Period. (Id. ¶ 16).

Defendant China Zenix is based in the People’s Republic of China and

incorporated under the laws of the British Virgin Islands. (Id. ¶ 18). It designs,

manufactures, and sells wheels for commercial vehicles. (Id.). In 2011, China

Zenix completed an initial public offering of American Depository Shares

(“ADS”), each of which represented four of the Company’s ordinary shares. (Id.

¶ 19). The ADS traded on the New York Stock Exchange (“NYSE”) from May 11,

2011 until June 14, 2018, and currently trade on the over-the-counter market.

(Id.).

Defendant Jianhui Lai is the Company’s founder. (Id. ¶ 20). During the

Class Period, he served as CEO and Chairman of the Company’s Board of

Directors. (Id.). Defendant Martin Cheung has served as the Company’s Chief

Financial Officer since March 2014. (Id. ¶ 21).

Lai beneficially owns approximately 70% of the Company’s ordinary

shares through his sole ownership of Newrace Limited, China Zenix’s Virgin

Islands-based holding company. (Id. ¶ 28). Additionally, multiple members of

his family are involved with the Company, serving as directors or officers of the

Company’s operating subsidiary. (Id. ¶ 29). Indeed, the Company “operates

much like a family business.” (Id. ¶ 30). Lai’s substantial ownership is unique;

no other director or executive officer of the Company holds more than 1% of its

total outstanding ordinary shares. (Id. ¶ 32).

B. Alleged Material Omissions

Plaintiffs’ allegations center on an NYSE regulation requiring the average

closing price of a security traded on the exchange to be greater than or equal to

$1.00 over a period of 30 trading days. (Id. ¶ 35). If the price dips below $1.00

for a given period, the NYSE notifies the company and allows it a six-month

cure period to raise the price. (Id.). If, at the end of the cure period, the price

has remained below $1.00 for the previous 30 trading-days, then the NYSE is

permitted to delist the company. (Id.).

On August 18, 2015, China Zenix issued a press release revealing that

the Company had been notified it was in violation of this policy. (Id. ¶ 36). On

October 2, 2015, the Company issued a press release announcing that it had

cured the violation and raised the price above the applicable threshold,

bringing it into compliance with “all NYSE continued listing requirements . . . .”

(the “October 2015 Press Release”). (Id. ¶ 39).

Plaintiffs allege that the October 2015 Press Release was misleading

because it failed to disclose three facts: (1) that the Company knew its

employees and others were trading the ADS in an improper manner following

the notification from the NYSE; (2) that this improper trading was the true

reason the Company was able to comply with the $1.00 price requirement; and

(3) that the Company faced a material risk of being delisted by the NYSE

because of this improper trading and its knowledge thereof. (Id. ¶ 40).

On April 28, 2016, the Company filed its annual report for the fiscal year

ending December 31, 2015 with the Securities and Exchange Commission

(“SEC”) on Form 20-F (the “2015 Annual Report”). (Id. ¶ 41). The 2015 Annual

Report was accompanied by a certification filed pursuant to the Sarbanes-

Oxley Act of 2002, signed by Lai and Cheung (the “2015 SOX”). (Id. ¶ 42). Each

signatory certified that the 2015 Annual Report was accurate, that it did not

contain any untrue statement of a material fact, and that he had disclosed to

the Company’s auditor and audit committee any fraud involving Company

management or employees with a significant role in controlling the Company’s

financial reporting. (Id.). These statements were allegedly misleading for the

same reasons as the October 2015 Press Release. (Id. ¶ 45).

On May 27, 2016, the Company issued a press release stating that it had

again been notified by the NYSE that it was not in compliance with the

minimum price threshold. (Id. ¶ 44). On September 2, 2016, it issued a press

release announcing that it was back in compliance the NYSE’s minimum price

requirements (the “September 2016 Press Release”). (Id. ¶ 46). This

announcement, like the October 2015 Press Release, was allegedly misleading

because the Company omitted its knowledge of the improper trading that had

produced the increase in the share price. (Id. ¶ 47).

On April 28, 2017, the Company filed its annual report for the fiscal year

ending December 31, 2016 (the “2016 Annual Report”), as well as a

certification signed by Lai and Cheung (the “2016 SOX”). (Id. ¶¶ 48, 49). These

statements were allegedly misleading for the same reasons as the 2015 Annual

Report and 2015 SOX. They were additionally misleading because there had

been additional improper trading following the May 2016 notification from the

NYSE that the Company was not meeting the minimum price threshold. (Id. ¶

50).

Finally, on April 27, 2018, the Company filed its annual report for the

fiscal year ending December 31, 2017 (the “2017 Annual Report”). The 2017

Annual Report was accompanied by another certification signed by Lai and

Cheung (the “2017 SOX”). (Id. ¶¶ 51, 52). These were allegedly misleading for

the same reasons as the 2016 Annual Report and the 2016 SOX. (Id. ¶ 53). This

time, the Company disclosed that in July of 2017, the NYSE had requested

information regarding the Company’s “knowledge of the trading conducted by

certain persons, including a number of Company employees, in the Company’s

stock during certain periods in 2015 and 2016.” (Id. ¶ 54). That disclosure

warned that “[i]f the NYSE believes it is warranted, it can remove the

Company’s stock from listing on its exchange.” (Id.). Plaintiffs allege that this

statement is misleading for the same reasons as the 2016 and 2017 Annual

Reports and SOX certifications: i.e., the Company’s knowledge that improper

trading had occurred and that this trading had created a material risk of

delisting. (Id. ¶ 55).

C. Subsequent Developments

On June 14, 2018, the NYSE commenced delisting proceedings against

the Company. (Id. ¶ 56). The NYSE announced the delisting in a press release:

The determination to delist the Company was based on an

investigation conducted by NYSE Regulation that brought to light

the existence of events that made further dealings or listing of the

securities on the Exchange contrary to the public interest and not

in keeping with sound public policy, pursuant to Section 802.01D

of the Listed Company Manual.

(Id. ¶ 56).

The next day, the Company issued its own press release announcing its

intent to appeal the NYSE delisting decision (the “June 2018 Press Release”):

The delisting decision was made by the NYSE staff in relation to a

review of the trading of the Company’s stock during certain periods

in 2015 and 2016 when its stock price fell below the NYSE

minimum price requirement. The Company was disappointed by

the decision of the NYSE staff and disagrees with their factual

findings. The Company has decided to appeal against the NYSE

delisting decision. In the meantime, the Company will apply for its

common stock to be quoted and traded on the OTCQX.

(Id. ¶ 60).

On June 18, 2018, the Company resumed trading, now on the over-the-

counter exchange, under a new stock ticker symbol. (Id. ¶ 58). On the first day

of trading, the price fell 42% from the previous closing price. (Id.). On

December 11, 2018 the Company issued a press release announcing that a

committee of the Board of Directors of the NYSE had affirmed the exchange’s

decision to delist the Company’s ADS. (Id. ¶ 62).

D. Procedural History

Plaintiffs assert the following causes of action:

1. Violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and

Rule 10b-5 promulgated thereunder by the SEC (against the

Company, as well as Lai and Cheung individually)

2. Violation of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a)

(against Lai and Cheung individually)

3. Violation of Sections 9(a) and 9(f) of the Exchange Act, 15 U.S.C. §

78i(a) & (f) (against the Company, as well as Lai and Cheung

individually)

The original complaint was filed by Zhengyu He on October 31, 2018.

(DE 1). On February 17, 2019, Magistrate Judge Dickson granted an order

appointing Plaintiffs as lead plaintiffs for the proposed class. (DE 12). Plaintiffs

filed the First Amended Complaint on April 23, 2019 (1AC, ECF No. 23).

Defendants’ motion to dismiss was entered on the docket on September 11,

2019. (DE 30-1). Plaintiff filed a response (DE 30-2) and Defendants filed a

reply (DE 30-3). For the following reasons, Defendants’ motion to dismiss is

granted in part and denied in part.

II. APPLICABLE LEGAL STANDARD

Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a

complaint if it fails to state a claim upon which relief can be granted. The

defendant, as the moving party, bears the burden of showing that no claim has

been stated. Animal Science Products, Inc. v. China Minmetals Corp., 654 F.3d

462, 469 n.9 (3d Cir. 2011). For the purposes of a motion to dismiss, the facts

alleged in the complaint are accepted as true and all reasonable inferences are

drawn in favor of the plaintiff. New Jersey Carpenters & the Trustees Thereof v.

Tishman Const. Corp. of New Jersey, 760 F.3d 297, 302 (3d Cir. 2014).

When deciding a motion to dismiss, a court typically does not consider

matters outside the pleadings. However, a court may consider documents that

are “integral to or explicitly relied upon in the complaint” or any “undisputedly

authentic document that a defendant attaches as an exhibit to a motion to

dismiss if the plaintiff’s claims are based on the document.” In re Rockefeller

Ctr. Props., Inc. Sec. Litig., 184 F.3d 280, 287 (3d Cir. 1999) (emphasis and

citations omitted); see In re Asbestos Prods. Liab. Litig. (No. VI), 822 F.3d 125,

133 n.7 (3d Cir. 2016); Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014).

In that regard, courts may consider matters of public record and exhibits

attached to the complaint. Schmidt, 770 F.3d at 249 (“To decide a motion to

dismiss, courts generally consider only the allegations contained in the

complaint, exhibits attached to the complaint and matters of public record”);

Arcand v. Brother Int’l Corp., 673 F. Supp. 2d 282, 292 (D.N.J. 2009) (court

may consider documents referenced in complaint that are essential to plaintiff’s

claim). That exception rests on the rationale that “[w]hen a complaint relies on

a document . . . the plaintiff obviously is on notice of the contents the

document, and the need for a chance to refute evidence is greatly diminished.”

Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196-

97 (3d Cir. 1993).

Plaintiffs pleading securities fraud claims pursuant to Section 10(b) of

the Securities Exchange Act and Rule 10b-5 must exceed the requirements of

Rule 8; they must meet a heightened pleading standard as set forth in the

PSLRA. 15 U.S.C. § 78u-4(b)(1). Under the PSLRA, plaintiffs bringing a claim

involving an allegedly false or misleading statement must: “(1) ‘specify each

statement alleged to have been misleading [and] the reason or reasons why the

statement is misleading,’ 15 U.S.C. § 78u–4(b)(1), and (2) ‘state with

particularity facts giving rise to a strong inference that the defendant acted

with the required state of mind,’ § 78u–4(b)(2).” Rahman v. Kid Brands, Inc.,

736 F.3d 237, 242 (3d Cir. 2013) (quoting Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308, 321 (2007)) (internal quotations omitted). The

required state of mind is “scienter,” which is defined as “a mental state

embracing intent to deceive, manipulate, or defraud.” Id. (quoting Tellabs, 551

U.S. at 319).

Both provisions of the PSLRA pleading standard require that facts be

pled “with particularity,” echoing the requirement set forth in Fed. R. Civ. P.

9(b). Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir.

2009); see Fed. R. Civ. P. 9(b) (a party must state with particularity the

circumstances constituting fraud or mistake.”). Therefore, although the PSLRA

supplanted Rule 9(b) as the pleading standard governing private securities

class actions, Rule 9(b)’s particularity requirement is effectively subsumed by

the requirements in Section 78u-4(b)(1) of the PSLRA. Id. (citing Miss. Pub.

Employees' Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75, 85 n. 5 (1st Cir.2008)).

This standard requires that plaintiffs plead the “who, what, when, where and

how.” Id. (citing In re Advanta Corp. Secs. Litig., 180 F.3d 525, (3d Cir. 1999)).

Section 78u-4(b)(1) also adds an additional requirement where “an allegation

regarding [a defendant’s] statement or omission is made on information or

belief.” Id.;15 U.S.C. § 78u–4(b)(1). In such cases, plaintiffs must also “state

with particularity all facts on which that belief is formed,” that is, they must

describe the sources of information with particularity, including the who, what,

when, where and how of the sources, as well as the who, what, when, where,

and how of the information conveyed by those sources. Id.

The PSLRA’s approach for pleading scienter sharply deviates from that

under Rule 9(b), which permits plaintiffs to plead the scienter element

generally. Id. Under the PSLRA, the Court must evaluate whether all the facts

in the complaint as alleged, taken collectively, give rise to a “strong inference of

scienter.” Tellabs, 551 U.S. at 323. In determining whether the pleaded facts

together give rise to a strong inference of scienter, the Court must take into

account plausible opposing inferences. Id. This involves a comparative inquiry

that evaluates how likely is one conclusion as compared to others, in light of

the pleaded facts. Id. Therefore, the Court must consider plausible,

nonculpable explanations for the defendant’s conduct as well as inferences

favoring the plaintiff. Id. Although the inference that the defendant acted with

scienter need not be irrefutable, it must be more than merely “reasonable” or

“permissible.” Id. A complaint will survive only if a reasonable person would

“deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Id.

These pleading requirements apply whether the alleged fraudulent

statement at issue is an assertion of current fact or a prediction of the future.

Avaya, 564 F.3d at 253-54. However, when an allegation involves a prediction,

the Safe Harbor Provision of the PSLRA immunizes from liability any forward-

looking statement provided that “the statement is identified as such and

accompanied by meaningful cautionary language; or is immaterial; or the

plaintiff fails to show the statement was made with actual knowledge of its

falsehood.” Id. at 254; 15 U.S.C. § 78-u-5(c).

III. ANALYSIS

Section III.A analyzes Plaintiffs’ 10(b) misrepresentation claim under the

Exchange Act. Section III.B discusses the Section 9(a) claim, and Section III.C

covers the Section 20(a) claim. Section III.D discusses this Court’s personal

jurisdiction over Defendants Lai and Cheung.

A. Exchange Act Section 10(b) and Rule 10b-5 (Count 1)

To state a claim for securities fraud under Exchange Act Section 10(b)

and Rule 10b-5, a plaintiff must allege: (1) a material misrepresentation or

omission; (2) scienter; (3) a connection between the misrepresentation or

omission and the purchase or sale of a security; (4) reliance upon the

misrepresentation or omission; (5) economic loss; and (6) loss causation. City of

Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014). As

discussed in detail above, the first two elements must be pled with

particularity. Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 253 (3d

Cir. 2009).

Defendants argue that Plaintiffs have not described the alleged omissions

or pled scienter with sufficient particularity, and have not adequately pled loss

causation.

1. Material Omissions

Plaintiffs do not argue that Defendants’ statements were literally false.2

Instead, they argue that Defendants omitted information and that those

omissions rendered the statements misleading. Omissions are actionable when

the omitted fact would be “necessary . . . to make the statements made, in the

light of the circumstances under which they were made, not misleading.” 17

C.F.R. § 240.10b-5(b). An omission is materially misleading if “there is ‘a

substantial likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered the ‘total mix’

of information available’” to that investor. Matrixx Initiatives, Inc. v. Siracusano,

563 U.S. 27, 38, 131 S. Ct. 1309 (2011) (quoting Basic v. Levinson, 485 U.S.

224, 231-32, 108 S. Ct. 978 (1988) ); In re Amarin Corp. PLC Sec. Litig., 689 F.

App'x 124, 129 (3d Cir. 2017).

a) October 2015 Press Release and September 2016 Press Release

Plaintiffs point first to the October 2015 Press Release and the

September 2016 Press Release, both of which announced that the Company

had regained compliance with the NYSE’s minimum price threshold of $1.00

per share. The omission is that the press releases failed to inform investors

that the Company regained compliance through improper trading by Company

employees, an impropriety which created a material risk that the Company

would be delisted. Assuming the truth of these allegations, the omitted

information does render the statements misleading. It is substantially likely

that investors informed of this fact would have changed their opinion of the

situation. Instead of concluding that the Company’s share price rebounded

naturally or fortuitously, an investor would have been alarmed that the share

price rebounded through improper means. That alarm would only be

2 Plaintiffs do seem to allege that the SOX certifications were false, in that they

certified that the annual reports contained no misleading omissions. The underlying

issue is an omission, however, and I analyze it as such.

heightened by the concomitant risk that the NYSE would delist the Company, a

risk that ultimately did materialize.

Defendants argue that this allegation is too vague and that Plaintiffs

have not described the omissions with particularity. Defendants misconstrue

the particularity requirement. Plaintiffs are required to plead with particularity

the omission, not all of the underlying misconduct. The “who, what, when,

where and how” have been pled. For the press releases, Plaintiffs clearly state

who made the misleading statements (the Company), what the material

omissions were (improper trading), when they were made (October 2015 and

September 2016), where they were made (in the press releases), and how they

were misleading (they neglected to inform investors of the true means by which

the Company regained compliance with the $1.00 per share requirement).

That is not to say that allegations of wrongdoing need not be pled at all;

they provide essential background to the allegation of an omission. And when

allegations of wrongdoing are made upon information and belief, the plaintiff

must state the facts on which that belief is based. Plaintiffs do not use the

phrase “information and belief,” but they have pled facts that would

inferentially suggest improper trading that inflated the share price to bring it

above the $1.00 level. The phrase “improper trading” can reasonably be

inferred to mean “stock trading methods that run afoul of NYSE regulations

and would lead to delisting if discovered.” The allegation that Company

employees participated in improper trading is based on the Company’s own

2017 Annual Report, in which the Company stated that the NYSE was

investigating its knowledge of “trading conducted by certain persons, including

a number of Company employees, in the Company’s stock during certain

periods in 2015 and 2016.” (1AC ¶ 54). That implication is supported by a key

subsequent fact: The NYSE delisted the Company “based on an investigation . .

. that brought to light the existence of events that made . . . listing . . . contrary

to the public interest and not in keeping with sound public policy . . .” (Id. ¶

56).

Taken together, these facts — the surrounding circumstances of which

are particularly described —serve as the basis for Plaintiffs’ belief that the

Company was improperly trading and should have disclosed that information

to investors in its October 2015 and September 2016 Press Releases. Plaintiffs

cannot be expected at this stage to have a grasp of the exact contours of the

improper trading scheme; those facts, assuming they occurred, would more

likely be in the control of Defendants and others. What matters is that, as to

the October 2015 and September 2016 Press Releases, Plaintiffs have pled with

the requisite particularity both the misleading statements and the basis for the

belief that the statements would mislead an investor as to the underlying facts.

b) SOX Certifications

Applying a similar analysis, Plaintiffs argue that the 2015, 2016, and

2017 SOX certifications were likewise misleading. In those SOX certifications,

Lai and Cheung each certified that the accompanying annual reports did not

contain any untrue statement of material fact and that they had disclosed to

the audit committee any fraud conducted by management. According to

Plaintiffs, the annual reports ought to have disclosed the stock manipulation

scheme carried out by Company employees. In failing to disclose that

information, the annual reports were misleading. Therefore, by certifying in the

2015, 2016, and 2017 SOXs that misleading reports were true, Lai and Cheung

made statements that were false and misleading.

Here, Defendants argue only that the SOX certifications cannot be

actionable because they were knowledge-qualified. That argument is more

appropriately leveled at the element of scienter, which I consider separately.

See Section III.A.2, infra.

Plaintiffs cite two cases for the proposition that misleading SOX

certifications are actionable under Section 10(b). Both held that the SOX

certifications were misleading because they vouched for misleading financials

and related information contained in the accompanying annual report. See In

re Toronto Dominion Bank Sec. Litig., Civ. No. 17-1665, 2018 WL 6381882, at

*10 (D.N.J. Dec. 6, 2018) (holding that SOX certifications were actionable

because plaintiffs had pled that the company’s internal controls were deficient);

City of Roseville Employee’s Retirement System v. Horizon Lines, Inc., 686 F.

Supp. 2d 404, 419 (D. Del. 2009) (holding that financial report was misleading

because the company did not disclose that some of its revenue was obtained

unlawfully).

SOX certifications are not disclosure documents per se. Rather, they

verify the accuracy and completeness of disclosures, i.e., the information

contained in the annual report. Plaintiffs’ argument that a SOX certification

was misleading must rest on a sufficient allegation that the corresponding

annual report was misleading. I therefore analyze each annual report and SOX

certification in tandem.

As for the 2015 Annual Report and 2015 SOX, Plaintiffs have not pled

any facts indicating that misleading statements were contained in the annual

report. In fact, Plaintiffs do not cite to any language in the 2015 Annual Report

at all. For the Court to draw a reasonable inference that the annual report was

misleading, Plaintiffs must put forth some facts regarding the contents of the

annual report, along with a clear explanation of why those statements are

misleading. Because Plaintiffs have failed to do so, the 2015 SOX is not

sufficiently alleged to be actionable.

The same analysis applies to the 2016 Annual Report and 2016 SOX.

Because Plaintiffs have not pled any facts as to the contents of the 2016

Annual Report, it cannot be inferred that the 2016 SOX was misleading.

Whether this could be alleged, as Plaintiffs seem to argue in their brief, is not

the point; it has not been alleged.

As to the 2017 SOX, however, Plaintiffs have tied their allegations to

specific statements in the 2017 Annual Report that were rendered misleading.

In the 2017 Annual Report, the Company discussed the NYSE’s investigation

into its trading practices. The Company accurately disclosed that the NYSE

requested information regarding its knowledge of trading conducted by

Company employees, and it further disclosed that this investigation might lead

to delisting. Plaintiffs argue that these disclosures were nonetheless misleading

because the Company downplayed the risk of delisting. The Company,

according to plaintiffs, did not merely know that it was being investigated; it

knew it was guilty of the conduct the NYSE was investigating. Plaintiffs argue

that the risk of delisting, an event which would affect the stock price, was

therefore much higher than the disclosure implied.

Plaintiffs cite Menaldi v. Och-Ziff Capital Management Group LLC, 164 F.

Supp. 3d 568, 583-584 (S.D.N.Y. 2016) for the proposition that downplaying

the materiality of an investigation is actionable under Section 10(b). However,

the statements at issue in that case were of a different nature. The company

disclosed generally that it was, like other companies, subject to regulatory

scrutiny; it also stated that it was not then facing any investigation that it

expected would have a material impact on its business. Id. at 583. This was

misleading because the company had in fact been subpoenaed by the SEC and

the Department of Justice, and the investigation was likely to have a material

impact on its business. Id. at 584.

Here, the 2017 Annual Report did not downplay the extent of the

investigation, as did the disclosure in Menaldi. But the Company did allegedly

fail to apprise investors of the risk that the investigation would lead to

delisting. True, the Company disclosed the existence of the investigation and

some attendant risk. But an investor reading that disclosure would draw a very

different conclusion than an investor apprised of critical facts that the

Company withheld. Those critical facts were that the trading practices being

investigated had in fact occurred; that they were in fact improper; and that the

Company knew it. That is an adequate allegation that the disclosure of the

investigation in the 2017 Annual Report was misleading.

The complaint specifies exactly which statements in the 2017 Annual

report were misleading and why they were misleading. And, as discussed

above, Plaintiffs have pled a basis for their belief that improper trading had

occurred. Accordingly, Plaintiffs have pled that the 2017 Annual Report was

actionably misleading under Section 10(b).

The 2017 SOX certified that the information contained in the 2017

Annual Report was accurate. That information, however, has been adequately

alleged to be misleading. This certification is therefore adequately alleged to be

misleading as well, and the 2017 SOX is sufficiently alleged to be actionable

under Section 10(b).

I summarize: Of the statements cited by Plaintiffs, the following are

actionable under Section 10(b): the October 2015 Press Release, the September

2016 Press Release, the 2017 Annual Report, and the 2017 SOX. Plaintiffs

have described these statements with particularity by alleging the specific

statements that were misleading and the reasons why they were misleading.

They have also pled a factual basis for their reasoning. That is sufficient at this

stage for the first prong of the analysis. Other statements, such as those

contained in the 2015 and 2016 Annual Reports and corresponding SOX

certifications, have not been adequately alleged to be misleading.

2. Scienter

To establish scienter on the part of the Defendants, Plaintiffs must “state

with particularity facts giving rise to a strong inference that the Defendants

acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). That state of

mind the Third Circuit has “described as one ‘embracing [an] intent to deceive,

manipulate, or defraud,’ either knowingly or recklessly.” In re

Hertz Glob. Holdings Inc, 905 F.3d 106, 114 (3d Cir. 2018) (quoting Avaya, 564

F.3d at 252).

A strong inference of scienter is pled “only if a reasonable person would

deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at

324 (2007). That is not to say, however, that a plaintiff must “come forward

with ‘smoking-gun’ evidence to meet the PSLRA’s pleading requirements.” In re

Hertz Glob. Holdings Inc, 905 F.3d at 114. “Rather, in conducting the scienter

analysis, courts must analyze the complaint holistically to determine whether

its allegations, ‘taken collectively, give rise to a strong inference of scienter, not

whether any individual allegation, scrutinized in isolation, meets that

standard.’” Tellabs, 551 U.S. at 323. “‘In assessing the allegations holistically

as required by Tellabs, the federal courts certainly need not close their eyes to

circumstances that are probative of scienter viewed with a practical and

common-sense perspective.’” Avaya, 564 F.3d at 272-73 (3d Cir.

2009) (quoting S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008)).

Thus the case may be a circumstantial one, but the requirement of a strong

inference of scienter is not thereby undermined. See In re Burlington Coat

Factory Sec. Lit., 114 F. 3d 1410, 1418 (3d Cir. 1997) (“The requisite ‘strong

inference’ of fraud may be established either (a) by alleging facts to show that

defendants had both motive and opportunity to commit fraud, or (b) by alleging

facts that constitute strong circumstantial evidence of conscious misbehavior

or recklessness.”) (quoting Acito v. IMCERA Group, Inc., 47 F. 3d 47, 52 (2d Cir.

1995)).

Applying that standard, I will discuss each alleged basis for scienter and

evaluate the potential plausible opposing inferences. The inquiry remains,

however, whether the allegations as a whole support a strong inference of

scienter. In re Toronto-Dominion Bank Sec. Litig., No. 17-1665, 2018 WL

6381882, at *12 (D.N.J. Dec. 6, 2018).

China Zenix’s knowledge is imputed through principles of respondeat

superior, so its scienter necessarily depends on the knowledge of its employees.

Here, the relevant employees are Cheung and Lai.

As to Cheung, the only relevant fact pled is that he was the Chief

Financial Officer of the Company. (1AC ¶ 21). Beyond that, the complaint offers

no specific allegations of Cheung’s knowledge, and Plaintiffs do not point to any

such facts in their briefing. Plaintiffs have therefore failed to allege that Cheung

acted with the requisite scienter, and the Section 10(b) claim must be

dismissed as to him individually.

As to Lai, however, the complaint does adequately set forth allegations of

knowledge that the statements were misleading. Scienter is knowledge that the

statements were misleading and an intent for them to be so. It is a

commonsense inference that the Company’s CEO was familiar with the

existence and contents of the press releases and annual reports. But Lai

cannot have intended the statements to be misleading unless he knew about

the underlying stock manipulation scheme.

The factual allegations regarding Lai’s knowledge of the scheme may be

summarized as follows: (1) He is the founder, Chairman and CEO of the

Company (1AC ¶ 20); (2) he indirectly owns approximately 70% of the ADS (Id.

¶ 28); and (3) he runs the Company like a family business, having installed

multiple relatives in senior executive positions (Id. ¶ 29). Also relevant to the

inference of scienter are four additional facts: (4) No other director or executive

officer of the Company owns more than 1% of the Company’s total outstanding

ordinary shares (Id. ¶ 32); (5) the Company has not offered employees the

opportunity to own shares in the Company (Id. ¶ 33); (6) the NYSE’s

investigation of the Company, according to its disclosure in the 2017 Annual

Report, questioned improper trading by “certain persons, including a number

of Company employees” (Id. ¶ 54); and (7) the NYSE delisted the Company

following that investigation for actions in contravention of public policy (1AC ¶

56).

Plaintiffs’ case is concededly a circumstantial one. Lai controlled the

Company as if it were a family business and was the only person who owned a

significant portion of it. The NYSE evidently believed that Company employees

were involved in the manipulation scheme. Given his control, if any of his

employees were improperly trading, then he must have been aware of it, even if

he did not directly participate. And indeed, the employees’ improper trading is

most easily understood as having been done at the behest of Lai; it would not

have benefited themselves, but him. And assuming Lai was aware of the

scheme, then he must have intended to mislead investors by not disclosing the

scheme in the various statements and disclosures.

Plaintiffs argue conversely that the innocent counter-inference is simply

implausible. That innocent inference would be that certain Company employees

with no significant financial stake in the Company independently conspired to

keep the Company listed on the NYSE, to the benefit of the Company’s CEO

and only major stockholder, but without his knowledge.

Defendants draw a different inference from the employees’ lack of a

significant stake in the stock trading scheme. Because the Company employees

are not allowed to own stock in the Company, say Defendants, “there is no

connection between the Defendants and Company employees when it comes to

stock ownership and trading.” (Def. Brf. at 11). While it may be true that the

employees had nothing to gain from the stock trading scheme, they were

subject to taking instructions and orders from Lai, who is alleged to run the

Company like a family business.

Other innocent inferences can be imagined. It could be that the NYSE

was mistaken, and that any improper trading was unrelated to Company

employees or executives. Or the NYSE’s decision to delist the Company could

have had nothing to do with improper trading, despite its statements at the

time. All of this does not rise above the level of speculation, however.

It is true that the Defendants disclosed the NYSE’s inquiry in the 2017

Annual Report, which they say rebuts any intent to conceal. But that was only

a disclosure of the existence of the inquiry, not a disclosure of improper

trading. If Defendants had disclosed, for example, that they had uncovered

improper trading by Company employees, that might support an inference that

the Defendants (specifically Lai) were not culpable. But that was not the nature

of the disclosure.

To support an adequate plea of the scienter element, the Plaintiffs’ guilty

inference need not be the most likely one, or even more likely than not. It need

only be at least as likely as the competing inferences. I find that the inference

that Lai was aware of the improper trading and consciously failed to disclose it

is more likely than the competing innocent inferences. Considering the

complaint as a whole and in the context of the competing innocent inferences, I

find that it adequately alleges that Lai possessed scienter when making the

allegedly misleading statements in the October 2015 and September 2016

Press Releases, as well as the 2017 Annual Report and SOX.

Defendants separately argue that the Plaintiffs overstate Lai’s motive and

opportunity to commit the fraudulent conduct. Whether or not that is accurate,

I need not consider motive and opportunity separately. Analysis of motive and

opportunity can give rise to a strong inference of scienter. But they are not

elements as such; what is necessary is to plead facts that give rise to an

inference of conscious wrongdoing that is just as likely as an innocent

inference.

I therefore find that the First Amended Complaint pleads facts giving rise

to a strong inference of scienter by Lai and, through respondeat superior, the

Company. Plaintiffs have not pled facts giving rise to an inference of scienter by

Cheung.

3. Loss Causation

To prevail in a private securities fraud action, plaintiff investors must

prove “loss causation.” Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804,

807 (2011); Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005). This

requires that the plaintiffs demonstrate that the defendants’ deceptive conduct

caused their claimed economic loss. Erica P. John Fund, 563 U.S. at 807; see In

re DVI, Inc. Sec. Litig., 639 F.3d 623, 630-31 (3d Cir. 2011); McCabe v. Ernst &

Young, LLP, 494 F.3d 418, 425 (3d Cir. 2007). Loss causation has been codified

in the PSLRA, which requires that “the plaintiff shall have the burden of

proving that the act or omission of the defendant ... caused the loss for which

the plaintiff seeks to recover damages.” 15 U.S.C. § 78u-4(b)(4).

“The loss causation inquiry typically examines how directly the subject of

the fraudulent statement caused the loss, and whether the resulting loss was a

foreseeable outcome of the fraudulent statement.” McCabe, 494 F.3d at 430-31

(internal quotation marks and alteration omitted). The Third Circuit takes a

“practical approach [to loss causation], in effect applying general causation

principles.” Id. at 426 (citing EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d

865, 884 (3d Cir. 2000) ); see Pure Earth, Inc. v. Call, 618 F. App'x 119, 123 (3d

Cir. 2015) (recognizing that district court properly considered “general

principles of causation, such as materiality, directness, foreseeability, and

intervening causes.”). “In order to satisfy the loss causation requirement . . . ,

the plaintiff must show that the defendant misrepresented or omitted the very

facts that were a substantial factor in causing the plaintiff’s economic loss.”

McCabe, 494 F.3d at 426; see Semerenko, 223 F.3d at 184-85 (noting that loss

causation element is satisfied when plaintiff shows that price of security at

time of purchase was inflated “due to an alleged misrepresentation,” and that

misrepresentation “proximately caused the decline in the security’s value”).

In the Third Circuit, the loss causation analysis differs as between

typical and non-typical Section 10(b) claims. McCabe, 494 F.3d at 425; see

Pure Earth, 618 F. App'x at 122. A typical Section 10(b) claim is that the

defendant made material public misrepresentations or omissions in order to

affect the price of a publicly traded stock. This is sometimes referred to as

fraud on the market. McCabe, 494 F.3d at 425 n.2; see, e.g., Semerenko, 223

F.3d at 169 (misstating earnings reports in a public statement). A non-typical

case, in contrast, involves a misrepresentation or omission that directly

induces a particular party to enter into a private transaction. See McCabe, 494

F.3d at 420-21 (involving non-typical case of individualized misrepresentation

inducing investors to purchase stock). See also Pure Earth, Inc. v. Call, 531 F.

App'x 256, 260 (3d Cir. 2013) (“public announcements are made to the market

at large in a typical § 10(b) claim, but in a non-typical § 10(b) claim, private

misrepresentations are made to induce a particular individual to buy or sell

securities.”).

What is alleged here is a typical § 10(b) case, involving public

misstatements that are “made to artificially inflate the pricing of a security in

the public markets.” Id. (citing McCabe, 494 F.3d at 425). To establish loss

causation in a typical § 10(b) case, a plaintiff must show that its “losses are

related specifically to the market’s discovery of the misrepresentation and the

corresponding decrease in price due to that misrepresentation.” Id.; see Payne

v. DeLuca, 433 F.Supp.2d 547, 607 (W.D. Pa. 2006) (“to successfully allege a

cause of action, a plaintiff must allege that the share price fell significantly

after the truth about the misstatement or omission became known.”).3

One way to establish loss causation is by means of a corrective-

disclosure theory. In re Initial Public Offering Securities Litig., 399 F.Supp.2d

298, 307 (S.D.N.Y. 2005). After a misrepresentation has been made, a

corrective disclosure reveals “the falsity of the alleged misrepresentation, and

[introduces] ... new information to the market,” generally resulting in a price

correction. In re DVI, Inc. Sec. Litig., 2010 U.S. Dist. LEXIS 92888, at *24 (E.D.

Pa. Sep. 3, 2010), aff’d, 639 F.3d 623 (3d Cir. 2011) (citing In re Retek Inc. Sec.

Litig., 621 F.Supp.2d 690, 698 (D. Minn. 2009); In re Omnicom Grp., Inc. Sec.

Litig., 541 F.Supp.2d 546, 551 (S.D.N.Y. 2008). To be significant, such a

corrective disclosure “must at least relate back to the misrepresentation and

not to some other negative information about the company.” In re Williams Sec.

Litig.-WCG Subclass, 558 F.3d 1130, 1140 (10th Cir. 2009); see also Lentell v.

Merrill Lynch, 396 F.3d 161, 173 (2d Cir. 2005) (providing that plaintiff must

allege “that the subject of the fraudulent statement or omission was the cause

of the actual loss suffered,’ i.e., that the misstatement or omission concealed

something from the market that, when disclosed, negatively affected the value

of the security.”) (emphasis in original) (quoting Suez Equity Investors, L.P. v.

Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001)), cert. denied, 546 U.S.

3 The theory here has an additional component. The value of the shares would

not merely have been lower absent the manipulation; it would have been low enough

to result in delisting, a circumstance that could further devalue the stock in investors’

eyes.

935 (2005). The corrective disclosure “need not,” however “precisely mirror the

earlier misrepresentation.” In re DVI, Inc. Sec. Litig., 2010 U.S. Dist. LEXIS

92888, at *26 (quotation and citations omitted). Nor need the corrective

disclosure occur all at once; “[i]nstead, the truth may be revealed through a

series of partial disclosures through which the truth gradually ‘leaks out.’” Id.

at *27, (citations omitted); see Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462,

472 (4th Cir. 2011) (“neither a single complete disclosure nor a fact-for-fact

disclosure of the relevant truth to the market is a necessary prerequisite to

establishing loss causation (although either may be sufficient)”).

The Third Circuit has stated that loss causation is ordinarily an issue for

the trier of fact. See EP Medsystems, 235 F.3d at 884. What is required at the

pleading stage is that the plaintiff provide the defendant “with some indication

of the loss and the causal connection that he has in mind.” Dura, 544 U.S. at

347. “[T]he plaintiff is required to plead that the decline in the stock price was

caused by the market’s discovery of defendant’s fraud.” In re Intelligroup Sec.

Litig., 527 F.Supp.2d 262, 295 (D.N.J. 2007). A complaint is not required to

“plead facts indicating that disclosure of the alleged fraud was the sole reason

for the investment’s decline in value,” but “in order to survive defendants’

motion to dismiss, the complaint must contain facts sufficient to indicate that

disclosure of the alleged fraud directly and proximately caused the investment’s

decline in value or, at the very least, substantially contribut[ed to] the damages

sustained by the plaintiff.” Id. at 297 (internal citations and quotations

omitted); see Semerenko, 223 F.3d at 186 (holding that plaintiffs pled loss

causation where they alleged that stock price was inflated by

misrepresentations concerning defendant’s financial condition and its

willingness to complete proposed merger, and that price dropped when truth

was made known by audit report that included findings of “fraudulent financial

reporting” and the announced termination of the planned merger).

Plaintiffs’ contention here is that the stock price plummeted once the

Company revealed it had been delisted following the NYSE investigation. On

this theory, the June 2018 Press Release was a corrective disclosure.

Defendants respond that there was no corrective disclosure of the improper

trading since the Company merely reported that it was being delisted.

The subject of the misleading statements was trading practices in 2015

and 2016. Plaintiffs allege that these actions are what led to the drastic loss in

stock value. The question is then whether the delisting announcements by the

Company and the NYSE qualify as “disclosures” of the improper trading. The

June 2018 Press Release certainly falls short of a confession that any Company

employees improperly traded. But it does tie the NYSE’s delisting decision to

allegations of improper trading leveled at the Company by the NYSE. While it

did not “precisely mirror” the fact of improper trading, it did permit the market

to infer that improper trading had occurred. These announcements injected

into the market’s pricing mechanism the wrongdoing which the Company had

failed to disclose in the October 2015 and September 2016 Press Releases, and

failed to fully disclose in the 2017 Annual Report. And the price dropped

precipitously.

Defendants’ contentions amount to a maximalist position that only an

outright admission of improper trading could support a finding of loss

causation. (Def. Brf. 16-17; Def. Reply Brf. 8-9). Under the cases cited above,

that is not the test; moreover, it cannot be the test, since disclosures of

investigations of potential wrongdoing have been found sufficient for a showing

of loss causation. See Hull v. Global Digital Solutions, Inc., No. 16-cv-5153,

2017 WL 6493148, at *15 (D.N.J. Dec. 19, 2017) (collecting cases

demonstrating that “various courts have held that allegations that a company

was the subject of SEC investigations are sufficient to meet the pleading

requirement for loss causation.”).

True, Plaintiffs have not proven that the Defendants actually traded

improperly, or that they expressly disclosed prior improper trading. But

Defendants’ admission in the June 2018 Press Release that the NYSE had

delisted the Company for reasons relating to the events described in the

October 2015 Press Release, September 2016 Press Release, and the 2017

Annual Report, can reasonably be viewed as a corrective disclosure. Plaintiffs

have also shown that immediately following this corrective disclosure, the stock

price plummeted by 42% in a single day. That is sufficient, not necessarily to

prove, but to plead, loss causation.

Accordingly, having pled the necessary elements of Section 10(b) liability

as to Defendant Jianhui Lai for the October 2015 and September 2016 Press

Releases, the 2017 Annual Report, and the 2017 SOX, the motion to dismiss

Count One against him is denied. Through respondeat superior, liability can be

extended to Defendant China Zenix, and the motion to dismiss Count One as

against China Zenix is denied as well. Because Plaintiffs have failed to plead

scienter or otherwise to allege actionable behavior as to Defendant Martin

Cheung, the motion to dismiss Count One against him is granted.

B. Section 20(a) of the Exchange Act (Count Two)

Defendants seek to dismiss Plaintiffs’ Section 20(a) “control

person” claims against Lai and Cheung for failure to plead underlying

violations that would give rise to Section 20(a) liability.

Section 20(a) of the Exchange Act creates a cause of action against

individual defendants alleged to have been “control persons” of

companies guilty of securities fraud. Section 20(a) provides that

“[e]very person who, directly or indirectly, controls any person

liable under any provision of this chapter ... shall also be liable

jointly and severally with and to the same extent as such

controlled person” unless the purported control person can

demonstrate that he “acted in good faith and did not directly or

indirectly induce the act or acts constituting the violation or cause

of action.” 15 U.S .C. § 78t. To state a Section 20(a) claim, a

plaintiff “must plead facts showing: (1) an underlying violation by

the company; and (2) circumstances establishing defendant's

control over the company's actions.” Jones v. Intelli–Check, Inc.,

274 F. Supp. 2d 615, 645 (D.N.J. 2003).

Dudley v. Haub, No. 11-cv-05196, 2013 WL 1845519, at *20 (D.N.J. Apr.

30, 2013). Claims under Section 20(a) therefore, are “derivative—

requiring proof of a separate underlying violation of the Exchange Act.” In

re Milestone Scientific Sec. Litig., 103 F. Supp. 2d 425, 474 (D.N.J. 2000).

China Zenix’s liability under the Exchange Act has been

established. See Section III.A, supra. As for the second prong, both Lai

and Cheung were high-level officers of the Company during the Class

Period, with control over the Company’s SEC filings. That status easily

places them within the definition of “control persons” for Section 20(a)

liability. Dudley, 2013 WL 1845519 at *20.

One potential wrinkle in this analysis is whether the complaint

must allege the control person’s culpable participation in the underlying

violation. This has been established for Lai, but not for Cheung.

Although courts within the Third Circuit are split on this issue, the

“overwhelming trend” is that culpable participation need not be pled to

survive a motion to dismiss. See id. at * 20 n.5. Therefore, Plaintiffs have

adequately pled a Section 20(a) violation against both Lai and Cheung.

C. Exchange Act Section 9(a)(2) (Count Three)

Plaintiffs allege that the Defendants violated Sections 9(a) and 9(f) of the

Exchange Act. In their opposition to the motion to dismiss, Plaintiffs address

only Section 9(a)(2) specifically. (Pl. Opp. at 25-27). I take that as a concession

that they are pursuing a 9(a)(2) theory, and confine my analysis accordingly.

Section 9(a)(2) of the Exchange Act makes it unlawful for any

person

[t]o effect, alone or with 1 or more other persons, a series of

transactions in any security registered on a national securities

exchange, any security not so registered, or in connection with any

security-based swap or security-based swap agreement with

respect to such security creating actual or apparent active trading

in such security, or raising or depressing the price of such

security, for the purpose of inducing the purchase or sale of such

security by others.

15 U.S.C. § 78i(a)(2). A Section 9(a)(2) claim has five essential elements:

that “(1) a series of transactions in a security creating actual or apparent

trading in that security or raising or depressing the price of that security,

(2) carried out with scienter, (3) for the purpose of inducing the security's

sale or purchase by others, (4) was relied on by the plaintiff, (5) and

affected plaintiff's purchase or selling price.” Fezzani v. Bear, Stearns &

Co., Inc., 384 F. Supp. 2d 618 (S.D.N.Y. 2004).

Here, Plaintiffs have not sufficiently alleged a series of

transactions. The only relevant allegation is that Company employees

traded the ADS in an improper manner. There is no explanation of who

traded, or when and how they traded. While such a vague description of

an improper trading scheme might have been sufficient to allege a

misleading disclosure, it is not sufficient for a charge of market

manipulation. Defendants are not put on notice as to what trades are at

issue.

Moreover, even if the Plaintiffs did describe a series of transactions

more specifically, there are no acts that could give rise to an inference of

9(a) scienter. The closest case would be defendant Lai. Plaintiffs argue

that scienter can be carried over from the Section 10(b) claims. Section

10(b), however, requires only an inference that Lai knew of improper

trading and failed to disclose it; Section 9(a)(2) requires some level of

culpable participation in the trading itself, which is not alleged as to Lai

and is more difficult to infer from the circumstances. Should discovery

reveal such evidence, the plaintiffs may move to amend.

Plaintiffs have not pled enough facts about the alleged

manipulation scheme to support a Section 9(a)(2) claim. Count Three is

therefore dismissed.

D. Personal Jurisdiction

Defendants argue that this Court lacks specific personal

jurisdiction over Lai and Cheung.4 I disagree.

For a court to properly exercise specific personal jurisdiction, the

litigation must arise out of in-forum activities or activities directed

toward the forum, and “it is essential ... that there be some act by

which the defendant purposefully avails itself of the privilege of

conducting activities within the forum [State], thus invoking the

benefits and protection of its laws.” See Covenant Bank for Savings

v. Cohen, 806 F. Supp. 52, 56 (D.N.J. 1992) (quoting Hanson v.

Denckla, 357 U.S. 235, 253, 78 S. Ct. 1228, 2 L. Ed. 2d 1283

(1958)).

A court must also consider whether exercising jurisdiction over the

defendant would violate traditional notions of “fair play and

substantial justice.” Int'l Shoe Co. v. State of Wash., etc., 326 U.S.

310, 66 S. Ct. 154, 90 L. Ed. 95 (1945). A court may not exercise

jurisdiction in such a way as to make litigation “so gravely difficult

and inconvenient that a party is at a severe disadvantage to his

opponent.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 478,

105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985).

In re Royal Dutch/Shell Transport Sec. Litig., 380 F. Supp. 2d 509, 549-

550 (D.N.J. 2005).

In this case, the appropriate “forum” of which defendants must

have purposefully availed themselves is not New Jersey, but the United

States. The Exchange Act allows for nationwide service of process. See

15. U.S.C. § 78aa. For violations of statutes which allow for nationwide

service of process, the appropriate analysis is whether the defendants

have minimum contacts with the United States generally, not the state in

4 Technically this aspect of the motion is brought under Rule 12(b)(2), Fed. R.

Civ. P. Because it is a facial attack on the pleadings which does not rely on extrinsic

evidence, it is subject to the ordinary Rule 12(b)(6) standard of review. See Arrington v.

Colortyme, Inc., 972 F. Supp. 2d 733, 739 (3d Cir. 2013) (“In a facial attack, the

defendant contests the sufficiency of the well-pleaded allegations insofar as they

provide a basis for the court’s exercise of subject-matter jurisdiction; as under Rule

12(b)(6), the court must treat the complaint’s well-pleaded jurisdictional facts as true

and view them in the light most favorable to the plaintiff.”).

which the federal court sits. See Pinker v. Roche Holdings Ltd., 292 F. 3d

361, 369 (3d Cir. 2002).

SEC filings, such as the 2017 Annual Report and the Form 6K

which included the October 2015 and the September 2016 Press

Releases, can give rise to specific personal jurisdiction over the control

persons of the company making the filing. See In re Royal Dutch, 380 F.

Supp. 2d at 551 (“United States courts have frequently asserted personal

jurisdiction over individual defendants who sign or, as control persons,

approve the filing or disseminating of, particular forms required by the

SEC which they knew or should have known would be relied on by U.S.

investors.”) (quoting In re Royal Ahold N.V. Sec. & ERISA Litig., 351 F.

Supp. 2d 334, 352 (D. Md. 2004); Derensis v. Coopers & Lybrand

Chartered Accountants, 930 F. Supp. 1003, 1014 (D.N.J. 1996)

(concluding that two company officers were subject to jurisdiction of the

court because plaintiffs had made a prima facie showing they were

“controlling persons.”).

Defendants argue that an individual’s position in the corporation

cannot alone be the basis of personal jurisdiction. (Def. Brf. at 25). That

proposition is good as far as it goes, but not helpful to Lai and Cheung

here. Defendants cite cases holding that mere status as a board member

is insufficient to establish jurisdiction. See In re AstraZeneca Sec. Litig.,

559 F. Supp. 2d 453, 467 (S.D.N.Y. 2008); In re Alstom SA, 406 F. Supp.

2d 346, 399 (S.D.N.Y. 2005). Lai and Cheung, however, are control

persons who actively managed the Company and its actions. Moreover,

the Plaintiffs have plausibly alleged that Lai consciously intended the

SEC filings to deceive investors. As for Cheung, he is subject to

jurisdiction for signing the very filings alleged to be misleading.5 See In re

5 Both the October 2015 Press Release and the September 2016 Press Release

were filed alongside Form 6-K with the SEC. These filings were signed by Cheung.

Alstom, 406 F. Supp. 2d at 399 (“The signing of documents filed with the

SEC which form the basis for Plaintiff’s claims is sufficient contact with

the jurisdiction to justify this Court’s exercise of jurisdiction over [the

signatory.]”).

Defendants, looking ahead to the merits, make the facile point that

the court lacks jurisdiction over them because they did nothing wrong—

i.e., that because the filings are not actionable, no one responsible for

them is thereby subject to this Court’s jurisdiction. But some of those

filings were actionable, see supra, and Lai and Cheung are responsible

for them as control persons and signatories. Defendants do not put forth

any argument that it would violate fair play or justice to subject control

persons of a company which traded on the NYSE and filed documents

with the SEC to jurisdiction in the United States. Accordingly, I find that

this Court has specific personal jurisdiction over both Lai and Cheung.

IV. CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss is GRANTED as

to Count Three (Section 9(a) of the Exchange Act). Count One (Section 10(b) of

the Exchange Act) is dismissed as to Defendant Cheung only. The Defendants’

motion to dismiss the first amended complaint for failure to state a claim and

for lack of personal jurisdiction is otherwise DENIED.

Dated: June 12, 2020

/s/ Kevin McNulty

____________________________________

HON. KEVIN MCNULTY, U.S.D.J.

Cheung also signed the 2017 SOX. Courts may take judicial notice of SEC filings in a

securities fraud case. See Oran v. Stafford, 226 F. 3d 275, 289 (3d Cir. 2000).