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Bruce v. Suntech Power Holdings Co., Ltd.

United States District Court, N.D. California, San Francisco Division

August 12, 2014

SCOTT BRUCE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, Plaintiff,
v.
SUNTECH POWER HOLDINGS CO. LTD. and ZHENGRONG SHI, Defendants

Page 1366

For Scott Bruce, Individually and on Behalf of All Others Similarly Situated, Plaintiff: Casey Edwards Sadler, Lionel Zevi Glancy, Michael M. Goldberg, Robert Vincent Prongay, LEAD ATTORNEYS, Glancy Binkow & Goldberg LLP, Los Angeles, CA; Howard G. Smith, LEAD ATTORNEY, Law Offices of Howard G. Smith, Bensalem, PA.

For James P. Bachesta, Chen Weifeng, Plaintiffs: Michael M. Goldberg, LEAD ATTORNEY, Lionel Z. Glancy, Glancy Binkow & Goldberg LLP, Los Angeles, CA.

For Thanh Le, Plaintiff: Michael M. Goldberg, LEAD ATTORNEY, Lionel Z. Glancy, Glancy Binkow & Goldberg LLP, Los Angeles, CA; Jeremy A Lieberman, PRO HAC VICE, Pomerantz LLP, New York, NY.

For Suntech Investor Group, as lead plaintiff, Plaintiff: Daniel S. Sommers, Elizabeth Aniskevibh, Joshua Michael Kolsky, Steven J. Toll, LEAD ATTORNEYS, Cohen Milstein Sellers Toll PLLC, Washington, DC; Lionel Zevi Glancy, Michael M. Goldberg, LEAD ATTORNEYS, Glancy Binkow & Goldberg LLP, Los Angeles, CA; Louis C. Ludwig, LEAD ATTORNEY, Joshua B. Silverman, Pomerantz LLP, Chicago, IL; Marc Ian Gross, LEAD ATTORNEY, Pomerantz LLP, New York, NY; Patrick V. Dahlstrom, LEAD ATTORNEY, Pomerantz Haudek Block Grossman & Gross LLP, Chicago, IL; Jeremy A Lieberman, PRO HAC VICE, Pomerantz LLP, New York, NY.

For Suntech Power Holdings Co., Ltd, Defendant: Jerome Fortinsky, LEAD ATTORNEY, H. Miriam Farber, Shearman and Sterling, LLP, New York, NY; Stephen D. Hibbard, LEAD ATTORNEY, Shearman & Sterling LLP, San Francisco, CA.

For Zhengrong Shi, David King, Defendants: Jerome Fortinsky, LEAD ATTORNEY, Shearman and Sterling, LLP, New York, NY; Stephen D. Hibbard, LEAD ATTORNEY, Shearman & Sterling LLP, San Francisco, CA.

For TMI Capital Limited, Movant: Laurence M. Rosen, LEAD ATTORNEY, The Rosen Law Firm, P.A., Los Angeles, CA.

For Bader A. Sarmast, Movant: Brian J. Robbins, Robbins Arroyo LLP, San Diego, CA.

For Olivier Resnik, Movant: Brian Joseph Barry, LEAD ATTORNEY, Law Offices of Brian Barry, Los Angeles, CA.

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ORDER DENYING MOTION TO DISMISS

RICHARD SEEBORG, UNITED STATES DISTRICT JUDGE.

I. INTRODUCTION

This is the second motion to dismiss a securities fraud class action brought by shareholders of Suntech Power Holdings, a Chinese manufacturer of solar energy products. In December 2013, the consolidated amended class action complaint (CAC) was dismissed with leave to amend because plaintiffs failed to allege sufficient facts to support their claims under Sections 10(b) and 20(a) of the Exchange Act.

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In particular, the prior order held that plaintiffs failed to plead scienter, an essential element of their first claim. It also identified certain deficiencies in some of plaintiffs' allegations of falsity and loss causation, two other essential elements. The order further dismissed the Section 20(a) claim, which requires a predicate violation of the Exchange Act.

Plaintiffs' second amended complaint (SAC), which includes a host of new factual allegations, fares better. Unlike the prior complaint, plaintiffs' amended pleadings sufficiently aver that defendant Zhengrong Shi acted with scienter when making allegedly false statements during the class period. Also unlike the CAC, the SAC includes sufficient allegations to support the theory that at least some of Shi's statements regarding the fair valuation of Suntech were false when made. Because defendant Shi fails to identify a material defect in either of plaintiffs' claims, the motion is denied.

II. BACKGROUND

This securities fraud action commenced in August 2012 when plaintiff Scott Bruce filed a class action complaint against four defendants: Suntech Power Holdings, Dr. Zhengrong Shi (Suntech's CEO), David King (CFO), and Amy Yi Zhang (former CFO). The complaint was amended via stipulation in early 2013 following the appointment of lead class counsel. By the end of 2013, two of the four defendants were effectively out of the picture. Suntech had filed for bankruptcy in October 2013, resulting in an automatic stay under 11 U.S.C. § 362 of the claims against the company. Meanwhile, plaintiffs voluntarily dismissed their claims against Ms. Zhang. Accordingly, the first motion to dismiss only concerned plaintiffs' claims against individual defendants Zhengrong Shi and David King.[1] The SAC, unlike the CAC, omits King and Zhang as defendants; plaintiffs now contend only that Suntech and Shi are liable under the Exchange Act. In light of the bankruptcy stay, only one defendant--Shi--is implicated in the present motion.

Plaintiffs' claims arise from the rapid July 2012 decline of Suntech's share price following the company's disclosure that it may have been the victim of a fraud. Suntech is a Chinese solar energy company that designs, manufactures, and markets photovoltaic products used to provide electric power for commercial and residential customers around the globe. 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. The fund was allegedly the brain child of Javier Romero, a former Suntech sales agent.

Throughout the class period, Shi served as Suntech's CEO, founder, board chairman, and largest shareholder. He also was heavily involved with GSF and negotiated to have himself placed on the board of managers of Global Solar Fund Partners S.a.r.l. (" GP" ), which functioned as the general partner of the GSF investment fund. As a " class B manager," Shi exercised authority over the strategic decisions that GP made on behalf of GSF. GP's day-to-day management, however, was entrusted to Romero.

In May 2010, Suntech entered into a € 554 million guarantee of a loan granted by the China Development Bank (CDB) to GSF's largest investee company. As further security, Suntech was required to

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maintain approximately € 30 million in a cash collateral account. Collectively, this Loan Guarantee represented the largest financial commitment Suntech had ever provided to a third party. To backstop its exposure under the guarantee, Suntech accepted a pledge of € 560 in German government bonds from GSF Capital Pte Ltd (GSF Capital), the parent of GP, as security. In light of this pledge, Suntech stated publicly that the fair value of the Loan Guarantee liability was approximately € 2 million. As investors later learned, however, the company's exposure was much higher.

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. Suntech's outside counsel found evidence that the documentation regarding GSF's bond pledge may have been fabricated, perhaps by Romero. According to a later statement by Shi, " Full investigation made it apparent that these bonds may never have existed and that GSF Capital and its principal may have committed fraud." (SAC ¶ 129).

The market did not take kindly to this revelation. 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.[2] The following day saw further declines as shares fell another $0.21, or 15.67%, to close at $1.13 per share. 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 therefore ...


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