The opinion of the court was delivered by: Dean D. Pregerson United States District Judge
ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS AND STRIKE [Docket Nos. 79-83]
Lead Plaintiff aAd Partners LP alleges that it purchased shares of common stock of Yuhe International, Inc. ("Yuhe"), during the class period, including in the October 20, 2010 secondary offering of Yuhe shares. (Supplemental Consolidated Class Action Complaint ("CAC") ¶ 17, Docket No. 70.) There are three groups of Defendants in this case (collectively "Defendants"). The "Yuhe Defendants" are comprised of Yuhe ("Yuhe"), and the "Individual Defendants": Zhentao Gao ("Gao"), Yuhe's CEO, Chairman of the Board, and largest shareholder, Hu Gang ("Gang"), Yuhe's CFO; and Jiang Yingjun ("Yingjun"), Yuhe's Chief Accounting Officer. (Id. ¶¶ 19-21.) The second group is comprised only of Child, Van Wagoner & Bradshaw ("the Auditor Defendant"), which was Yuhe's independent auditor from March 12, 2008 to December 7, 2009, and from March 9, 2010 to June 17, 2011. (Id. ¶ 27.) The third group is called the "Underwriter Defendants." They are Roth Capital Partners, LLC ("Roth"); Brean Murray, Carret & Co., LLC; and Global Hunter Securities, LLC, and they were the underwriters for Yuhe's October 20, 2010 public offering, with Roth serving as the "book-running manager of the Offering". (Id. ¶¶ 23, 25-26.)*fn1
The CAC alleges four claims, with the first and second falling under the Securities Exchange Act of 1934 and the third and fourth under the Securities Act of 1933. Lead Plaintiff's first claim alleges the Yuhe Defendants violated Section 10(b) of the Exchange Act. The second claim alleges the Individual Defendants were control persons, who violated Section 20(a) of the Exchange Act. The third claim alleges that all Defendants violated Sections 11 and 15 of the Securities Act. Lead Plaintiff's fourth claim alleges that the Underwriter Defendants violated Section 12(a)(2) of the Securities Act. All Defendants have moved to dismiss all claims against them. The Yuhe Defendants and the Underwriter Defendants have also moved to strike Lead Plaintiff's CAC. For the reasons stated below, the Court DENIES the Defendants' motions, with the exception of GRANTING dismissal of the Section 11 claim against the Underwriter Defendants, GRANTING Dismissal of the Section 10(b) claim against Gang, and GRANTING dismissal of the Section 12(a)(2) and Section 11 claims of all subclass members whose Yuhe shares are only traceable to the second offering. Dismissal is without prejudice, except as to the Section 12(a)(2) claims.
Yuhe sells broiler chickens. (CAC ¶ 18.) On December 31, 2010, Yuhe filed a Form 8-K announcing that it entered into an agreement with Waifang Dajiang ("Dajiang") to purchase thirteen breeder farms, and that Yuhe had already paid the first of two installments on those farms. (Id. ¶ 44.) Another Form 8-K, filed on January 4, 2010, attached a press release that was entitled "Yuhe International, Inc. Increases Number of Breeder Farms to 27." (Id. ¶ 45.) Gao was quoted in this press release as stating, "By purchasing these thirteen breeder farms, we are able to quickly increase our production capacity of day-old broilers." (Id.) The acquisition was touted as increasing Yuhe's "capacity by 60%." (Id. ¶ 46.) On March 11, 2010, Yuhe reported that its independent auditor, Grant Thornton, resigned on March 5, 2010. (Id. ¶ 47.) Yuhe's Form-10k Annual Report for 2009 was filed on March 31, 2010, and repeated that Yuhe contracted to purchase thirteen breeder farms from Dajiang, and had paid 80% of the total consideration by December 31, 2009. (Id. ¶ 49.) Gao, Gang, and Yingjun signed the Form 10-K, and Gao and Gang signed its Sarbanes-Oxley certification. (Id. at ¶ 50.) Between March and October 2010 a number of Yuhe's SEC filings indicated that it had acquired the thirteen breeder farms from Dajiang. (Id. at ¶¶ 46, 48, 49, 53-59.) Yuhe's October 20, 2010 Prospectus Supplement incorporated many of the SEC filings discussed above. (Id. at ¶¶ 71-72.) It also incorporated the Auditor Defendant's opinion, which contained various alleged misrepresentations about the Dajiang acquisition. (Id. at ¶¶ 90-101.) From October 20, 2010, to November 2, 2010, Yuhe sold $4,140,000 newly-issued shares at $7 each pursuant to its second offering. (Id. at ¶¶ 60,61.) The Underwriter Defendants were awarded shares pursuant to this offering. (Id.)
On May 16, 2011, Yuhe filed Form 10-Q with the SEC, with Gao and Gang signing its accompanying Sarbanes-Oxley certifications, which reaffirmed that Yuhe acquired thirteen breeder farms from Dajiang in December 2009, and had already paid Dajiang over $12 million in this transaction. (Id. ¶ 67.)
On June 8, 2011, GeoInvesting spoke with Mr. Xuejing Zheng ("Zheng"), Chairman and General Manager of Dajiang. (Id. ¶ 76.) Zheng told GeoInvesting that Yuhe never purchased breeding farms from Dajiang, nor had the two discussed such an acquisition. (Id. ¶ 77.) The next day, GeoInvesting again spoke with Zheng, in part because it heard that Dajiang and Yuhe actually engaged in acquisition negotiations with Yuhe in 2009. (Id. ¶ 78.) Zheng admitted that the two did talk, but that it was only once, and that Dajiang "did not proceed with this deal." (Id.) Zheng also stated that the only deal Yuhe proposed was a fake deal: "They told us to make a fake deal--it's like I lease your facilities to make a fake deal for my US listing. . . ." (Id. ¶ 78 (internal quotation mark omitted).)
On June 13, 2011, GeoInvesting released transcripts of its conversations with Zheng, and Yuhe's stock price dropped 12.77% that day. (Id. ¶¶ 75-76, 103-104.) The next day, Yuhe held a conference call, where it asserted that Zheng was asked misleading questions, and that Zheng would cooperate with Yuhe to clear up the "misunderstandings." (Id. ¶ 80.) Yuhe's stock closed at $4.35 on that day. (Id. ¶ 105.)
The next day, GeoInvesting had another conversation with Zheng, where he insisted Dajiang and Yuhe never reached an agreement: "Did not reach the agreement. After the failure to do a deal with us, I don't know why Yuhe claims this in the United States. Maybe for cheating money or for cheating to list in the United States?" (Id. ¶ 81.) GeoInvesting released this conversation on June 16, and Yuhe's stock dropped to $1.96 per share that day. (Id. ¶ 107.)
On June 17, 2011, Yuhe hosted a conference call, where its representatives stated that the contract with Dajiang had been retracted, and that the funds for that transaction were put into a different company. (Id. ¶ 83.) Below are excerpts of what the CEO (Gao), CFO, and CAO said on the conference call about what happened with the Dajiang deal, why it was not disclosed, and what the company did with the money it previously asserted was already paid in that deal: C CAO: "[W]e worried that the cancellation of the contract and refunded cash would provoke negative reactions from the capital market."
C CEO: "[M]anagement was under huge pressure to deliver what we had previously promised."
C CFO: "The contract retract happened after our previous auditor
Grant Thorton resigned [March 5, 2010], so CEO worried that a retracted contract would increase negative investor sentiments and adversely affected [sic] the share price."
C CEO: "[I]f the Company just put these [sic] money aside for cash reservation of purchasing additional breeder farms other than those farms from Dajiang, it wouldn't impact the financials or the Company and hence no volatility in the share price."
C When one individual on the call "pointed out that as of May
16, 2011, Yuhe represented that it had possession of the thirteen Dajiang breeding farms," the CEO responded: "After the incident, the management was under huge pressure to deliver what we had previously promised. . . The CEO takes full responsibility for not disclosing the change in a timely manner. . . ." (Id. ¶¶ 47, 83.)
On June 17, 2011, the Auditor Defendant resigned, in light of the "Company's management's misrepresentation and failure to disclose material facts surrounding certain acquisition transactions and off-balance sheet related party transactions." (Id. ¶ 84.) On June 28, 2011, NASDAQ delisted Yuhe, citing the company's "false public disclosures, which persisted for well ...