SCOTT BRUCE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, Plaintiff,
SUNTECH POWER HOLDINGS CO. LTD., ZHENGRONG SHI, DAVID KING, JULIAN RALPH WORLEY, AMY YI ZHANG AND DAVID HOGG, Defendants.
ORDER GRANTING MOTION TO DISMISS WITH LEAVE TO AMEND
RICHARD SEEBORG, District Judge.
This shareholders' putative class action arises from a steep decline in the share price of Suntech Power Holding Co. Ltd. ("Suntech") after the company disclosed it may have been the victim of a fraud. Plaintiffs allege defendant Suntech and individual defendants Zhengrong Shi, David King, and Amy Yi Zhang (Suntech's CEO, CFO, and former CFO, respectively) knew or should have known that 560 in German government bonds pledged by a third party as part of a loan guarantee extended by Suntech did not exist and therefore the company and its executives made material misrepresentations about the extent of Suntech's liabilities during the class period.
Defendants Suntech, Shi, and King brought motions to dismiss under Federal Rule of Civil Procedure 12(b). On October 21, 2013, defendant Suntech filed a notice of an involuntary petition for bankruptcy resulting in an automatic stay under 11 U.S.C. § 362. Individual defendants Shi and King are not subject to the automatic stay; this order concerns their individual motions to dismiss as well as those arguments set forth by the corporation in which they join. Because the factual allegations are insufficient to support a claim under the applicable standards of pleading, defendants' motions to dismiss will be granted, with leave to amend. Pursuant to Civil Local Rule 7-1(b), defendants' motions to dismiss (ECF Nos. 76 and 78) are suitable for disposition without oral argument, and the hearing set for January 23, 2014, is vacated.
The Consolidated Amended Class Action Complaint (hereinafter CAC), the factual averments of which must be taken as true for purposes of this motion, set forth the following scenario. Suntech is a solar energy company based in China and incorporated in the Cayman Islands. Suntech designs, manufactures, and markets photovoltaic products used to provide electric power for residential, commercial, industrial, and public utility customers in Europe, North America, the Middle East, Australia, and Asia. In 2008, Suntech formed the Global Solar Fund, S.C.A., Sicar ("GSF") to invest in private companies that own or develop solar energy projects. In May 2010, Suntech entered into a 554.2 million guarantee of a loan granted by the China Development Bank to GSF's largest investee company. As further security, Suntech was required to maintain approximately 30.0 million in a cash collateral account. Collectively, these two amounts are referenced herein as the "Loan Guarantee." As Suntech later explained in response to an SEC inquiry, Suntech received a pledge of 560 in German government bonds from GSF Capital Pte Ltd (GSF Capital), the parent of the general partner of GSF, as security for the Loan Guarantee. In light of this pledge, Suntech stated that the fair value of the Loan Guarantee liability was approximately 2 million.
On July 30, 2012, Suntech announced that it may have been the victim of fraud in connection with GSF Capital's pledge of German government bonds as security for the Loan Guarantee. Suntech's outside counsel found evidence that the documentation regarding GSF's German bond pledge "may have been fabricated." According to Shi, "Full investigation made it apparent that these bonds may never have existed and that GSF Capital and its principal may have committed fraud." King added that Suntech was informed in 2010 that GSF Capital did not own the bonds in question but had borrowed them from another registered company in Europe. On this news, shares of Suntech declined $0.23 per share, or 14.65%, to close on July 30, 2012, at $1.34 per share, on unusually heavy volume, and further declined, with similar heavy trading, another $0.21, or 15.67%, to close at $1.13 per share on July 31, 2012. Suntech's convertible notes declined from $69.00 just prior to the disclosure to $45.00 at the close of trading on July 31, 2012, a drop of nearly 35%, on heavy volume. Suntech later clarified that the security interest pledged by GSF Capital did not in fact exist, that Suntech accordingly had been the victim of fraud, and that the company would herefore revise its valuation of its liability for the Loan Guarantee from 2 million to between $60 million and $80 million, with a corresponding reduction in net income for the year ended. Based on these events, plaintiffs initiated this suit for violation of the Securities and Exchange Act of 1934.
III. LEGAL STANDARD
A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). While "detailed factual allegations" are not required, a complaint must include sufficient facts to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007)). A claim is facially plausible "when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. Claims grounded in fraud are also subject to Rule 9(b), which provides: "In allegations of fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed.R.Civ.P. 9(b). To satisfy that rule, a plaintiff must allege the "who, what, where, when, and how" of the charged misconduct. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997).
A motion to dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal under Rule 12(b)(6) may be based either on the "lack of a cognizable legal theory" or on "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). When evaluating such a motion, the court must accept all material allegations in the complaint as true, even if doubtful, and construe them in the light most favorable to the non-moving party. See Twombly, 550 U.S. at 555. "[C]onclusory allegations of law and unwarranted inferences, " however, "are insufficient to defeat a motion to dismiss for failure to state a claim." Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996); see also Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555) ("[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements" are not taken as true). In actions governed by the Private Securities Litigation Reform Act ("PSLRA"), such as this one, these general standards are subject to further refinement, as discussed in more detail below.
A. Count I-Section 10(b) of the Exchange Act
Section 10(b) of the Exchange Act makes it unlawful for "any person... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Pursuant to Section 10(b), the Securities and Exchange Commission ("SEC") has promulgated Rule 10b-5, which provides, inter alia, "It shall be unlawful for any person... [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(c).
To establish a violation of Rule 10b-5, a plaintiff must demonstrate "(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss." In re Daou Systems, Inc. Securities Litigation, 411 F.3d 1006, 1014 (9th Cir. 2005). To survive a motion to dismiss, a complaint asserting claims under Section 10(b) and Rule 10b-5 must satisfy the dual pleading requirements of Rule 9(b) and the PSLRA. Zucco Partners v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).
A false or misleading statement is an essential element of any cause of action for securities fraud. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008). Under the PSLRA, plaintiffs must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief... state with particularity all facts on which that belief is formed." 15 U.S.C. 78u-4(b)(1). In this case, plaintiffs challenge as false or misleading Suntech's (a) disclosures about the adequacy of its internal and financial controls, (b) opinions about the fair ...