Court: District Court, E.D. New York; March 31, 2019; Federal District Court
Plaintiff Zhong Zheng initiated a securities class action against Pingtan Marine Enterprises Ltd. and its executives, Xinrong Zhuo and Roy Yu, alleging securities fraud stemming from a May 10, 2017 article that claimed Pingtan was involved in human trafficking and poaching, leading to a 28% decrease in its stock price. Zheng purchased Pingtan securities during the class period from March 9, 2016, to May 10, 2017, and seeks class certification under Sections 10(b) and 20(a) of the Exchange Act. The amended complaint, filed on May 29, 2018, accuses Pingtan of making false statements regarding its fishing licenses in Indonesian and Timorese waters, asserting that these misrepresentations significantly misled investors. Zheng identifies five public documents containing these alleged misstatements, including Pingtan's 2015 10-K and 2016 Q1 10-Q filings, which inaccurately claimed licenses for fishing operations that Pingtan did not possess. Defendants filed a motion to dismiss the case, which was granted.
As of June 30, 2016, Pingtan owns 107 trawlers, 4 longline fishing vessels, 2 squid jigging vessels, and 2 drifters, with exclusive operating licenses for 20 additional drifters. These vessels are licensed for fishing in the Indonesian, Indian, and Western and Central Pacific Oceans. The same fleet composition was reported as of September 30, 2016. In its 2016 10-K report, Pingtan indicated it operates 135 fishing vessels, with specific activities outlined in various regions, including Indo-Pacific waters, the Bay of Bengal, and international waters of the Atlantic and Pacific Oceans. Some vessels are temporarily inactive due to a moratorium, and Pingtan holds licenses for 104 of these vessels.
The plaintiff alleges that Pingtan made misleading statements regarding its fishing licenses in Timor-Leste, claiming that on August 4, 2016, it announced that 13 vessels obtained licenses from the Ministry of Agriculture and Fisheries of Timor-Leste. However, the plaintiff asserts that these licenses were actually granted to a different company owned by an associate of Defendant Zhuo. Further, the plaintiff references the Aurelius Article, which questions Pingtan's legitimacy and suggests it may have engaged in fraudulent activities, contributing to a significant drop in Pingtan's stock price.
The plaintiff argues that the knowledge and intent (scienter) of individual defendants, including Zhuo and Yu, should be attributed to Pingtan. They allege these individuals were deeply involved in Pingtan’s management and operations, possessed confidential information, participated in disseminating misleading statements, and failed to ensure proper internal controls, thereby being aware of or willfully ignorant of the inaccuracies in Pingtan's public disclosures.
Plaintiff claims Zhuo is deeply involved in Pingtan's operations, while Yu allegedly led other fraudulent companies in the U.S. Pingtan's public filings reveal its reliance on third parties for fishing licenses, with its 2016 10-K emphasizing that business growth hinges on securing these licenses. Pingtan disclosed operations in Indonesia, stating that PT. Avona Mina Lestari and PT. Dwikarya Reska Abadi are its agents for fishing license applications and renewals, for which Pingtan pays service fees. Key disclosures include:
1. Pingtan ceased operations in Indonesian waters in February 2015, which significantly affected its revenue, as the majority of it was derived from that area.
2. Multiple filings (2015 and 2016 10-Ks and Q1-Q3 10-Qs) reiterated that the suspension of fishing operations in Indonesia would have a continuing negative impact on the company, highlighting that 117 of 135 vessels operated in Indonesian waters prior to the suspension.
These disclosures collectively reinforce the significant adverse effects of the operational suspension on Pingtan's financial performance.
Pingtan disclosed its acquisition of fishing licenses in Timor-Leste through a related third party, Hong Long, which is majority-owned by Ping Lin, the spouse of Pingtan's CEO, Xinrong Zhuo. In its August 4, 2016 press release and corresponding 8-K, Pingtan stated that thirteen vessels it controls hold licenses from the Timorese Ministry of Agriculture and Fisheries. The company's 2015 and 2016 10-K filings clarify that Pingtan acquired 46 boats from Hong Long in June 2013 and that while registration transfers were pending, Pingtan held full operational rights. Hong Long serves as Pingtan's agent for fishing licenses and related fees. Subsequent 10-Q filings identify Hong Long as a related party and note the licensing of the thirteen vessels.
The amended complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all Defendants, as well as Section 20(a) violations against Zhuo and Yu. The Defendants have moved to dismiss the complaint under Rule 12(b)(6), arguing that the Plaintiff has not adequately pleaded loss causation, misrepresentation regarding fishing license usage, or Defendants' intent related to the alleged fraud. To survive this motion, a complaint must present a plausible claim for relief, which requires more than vague allegations but does not necessitate detailed factual assertions. A mere consistency with liability is insufficient; the allegations must cross the threshold of plausibility.
On a motion to dismiss, courts accept all well-pleaded factual allegations as true and draw reasonable inferences in favor of the plaintiff. Complaints alleging securities fraud under Section 10(b) of the Exchange Act must meet two heightened pleading standards: Rule 9(b) requires particularity in stating the circumstances of the fraud, while the Private Securities Litigation Reform Act (PSLRA) mandates specificity in identifying misleading statements, the basis for the belief of their misleading nature, and facts supporting a strong inference of the defendant's state of mind.
Section 10(b) prohibits the use of manipulative or deceptive devices in securities transactions, and Rule 10b-5 makes it unlawful to make untrue statements of material facts or to omit necessary material facts. To establish a claim under Section 10(b) and Rule 10b-5, a plaintiff must plead six elements: (1) a material misrepresentation or omission by the defendant, (2) made with scienter, (3) in connection with a securities transaction, (4) reliance by the plaintiff, (5) economic loss, and (6) loss causation.
Claims based on misstatements must specify the fraudulent statements, identify the speaker, provide the time and place of the statements, and explain their fraudulent nature. Claims based on omissions require demonstrating that the corporation had a duty to disclose the omitted information. Misstatements or omissions must be material, meaning a reasonable investor would find them significant for investment decisions. Materiality is assessed as a mixed question of law and fact, and a complaint cannot be dismissed for lack of materiality unless the alleged misstatements or omissions are deemed obviously unimportant to a reasonable investor.
Scienter refers to a mental state involving intent to deceive, manipulate, or defraud, with a plaintiff able to infer this in claims under Section 10(b) or Rule 10b-5 by alleging facts that demonstrate either the defendants' motive and opportunity to commit fraud or strong circumstantial evidence of conscious misbehavior or recklessness. To establish "motive and opportunity," the complaint must show that the defendants benefitted personally from the fraud. If motive is unclear, circumstantial evidence indicating conscious behavior can suffice, although such allegations must be strong. Intentional misconduct is characterized by deliberate illegal actions, while reckless conduct involves highly unreasonable behavior that significantly deviates from ordinary care, particularly if the danger was known or obvious to the defendant. Securities fraud claims can assert recklessness when they specifically allege that defendants knew facts contradicting their public statements. Under the PSLRA, plaintiffs must detail facts that strongly suggest the required state of mind. The Supreme Court's Tellabs decision outlines a three-step analysis for evaluating scienter: accepting all allegations as true, considering the complaint in totality, and comparing plausible opposing inferences to determine the strength of the inference.
For Section 20(a) claims under the Exchange Act, a plaintiff must demonstrate a primary violation by a controlled entity, the defendant's control over that entity, and the defendant's significant culpability in the fraud. If a primary violation is not sufficiently alleged, Section 20(a) claims will be dismissed.
Plaintiff must demonstrate loss causation to support claims under Section 10(b) by showing that the fraudulent statement or omission caused the actual loss suffered, specifically that it concealed information that, once disclosed, negatively impacted the security's value. Third-party articles expressing negative opinions based on already publicly available information do not qualify as corrective disclosures. Defendants argue that Plaintiff's reliance on the Aurelius Article is flawed since it is based solely on publicly available data and cannot establish loss causation. In contrast, Plaintiff asserts that there are factual questions regarding whether certain foreign articles serve as corrective disclosures and contends that loss causation should not be determined at the motion to dismiss stage. Plaintiff further claims that Defendants’ arguments relate to a "truth on the market" defense and that the foreign sources do not prevent the Court from recognizing corrective disclosures. The Aurelius Article references Pingtan's SEC filings and reproduces public information to support its claims, including assertions about fishing licenses based on prior news articles and Chinese Embassy releases. The case of In re Omnicom Group illustrates that a lack of new information in a publication can hinder a claim for loss causation. Although Plaintiff argues Omnicom is inapplicable since it was resolved at summary judgment, the Second Circuit has applied the principles from Omnicom at the motion to dismiss stage in other cases.
Plaintiff's claim that the Aurelius Article's sources are "obscure" foreign sources and thus not publicly available lacks legal support and fails to consider internet accessibility. The Court concluded that the Aurelius Article did not disclose undisclosed information but expressed the author's opinion that Pingtan's shares may be worthless, which does not establish loss causation. This finding is consistent with precedent from Fila v. Pingtan Marine Enterprises Ltd., where a similar article was dismissed for failing to show that it revealed undisclosed facts necessary for loss causation. The Fila Court emphasized that corrective disclosures must reveal new facts regarding specific misrepresentations, not merely reflect negative opinions based on publicly available information.
Regarding Pingtan's alleged misstatements about fishing licenses in Indonesia, Plaintiff asserts that Pingtan falsely claimed licensing by the Indonesian government. However, Defendants argue that Plaintiff's allegations are contradicted by Pingtan's SEC filings, which disclose that licenses were obtained through third parties and that Pingtan ceased fishing operations in Indonesia in February 2015. Thus, Plaintiff has not adequately pleaded material misrepresentation or omission regarding the fishing licenses.
Pingtan's licensing to fish in Indonesia was determined not to be a material misrepresentation or omission to a reasonable investor, as the information in Pingtan's public filings provided sufficient context. The plaintiff's reliance on Pingtan's 2016 10-K statement regarding the necessity of securing fishing licenses does not establish a misleading representation when viewed in totality. The plaintiff's claims about Pingtan's statements regarding Timor-Leste fishing licenses in its 2016 Q2 and Q3 10-Q filings, asserting that these licenses were issued to another company, Hong Long, lack specificity and fail to demonstrate how Pingtan's disclosures were misleading. Pingtan disclosed that it acquired vessels from Hong Long and maintained full operational rights since June 2013, even if not all vessels were registered to it directly. The filings clarify that the licenses were obtained by the vessels themselves, and Pingtan's statements about the licenses being held by its controlled vessels align with its disclosures. Allegations based on a Sydney Morning Herald article further reinforce that the information was consistent with Pingtan's public statements. Overall, the distinction regarding the license issuance does not significantly affect the overall information available to reasonable investors during the relevant period.
Plaintiff has not adequately alleged that Defendants made material misrepresentations or omissions regarding their fishing operations in Timor-Leste. Allegations against Defendants Zhuo and Yu include their direct participation in management and operations of Pingtan, access to confidential information, involvement in disseminating false statements, and oversight of internal controls. However, these claims are deemed conclusory and lack the specificity necessary to support an inference of scienter, which requires evidence that the defendants had knowledge of the fraud or acted recklessly. The core operations theory may suggest that high-level executives possess knowledge of critical information, but the Plaintiff fails to provide particularized facts indicating that Zhuo and Yu had actual knowledge contradicting their public statements. Furthermore, the legal viability of the core operations doctrine post-PSLRA is in question, with courts generally viewing it as supplementary for establishing scienter. Even claims that Zhuo and Yu misrepresented the company's license status in SEC filings, supported by Sarbanes-Oxley Act certifications, are insufficient to establish scienter on their own, as courts have ruled that such certifications require additional supporting facts.
Certifications under the Sarbanes-Oxley Act typically do not contribute significantly to the assessment of scienter, as allowing them to create inferences in every case would undermine the pleading standards established by the Private Securities Litigation Reform Act (PSLRA). The court found that the plaintiff's assertion that the company would not issue a statement to the Sydney Morning Herald without the knowledge of top executives is mere speculation and fails to meet the particularity requirement for fraud under Rule 9(b). Additionally, the representations regarding fishing licenses in Indonesia and Timor-Leste were not deemed dramatic enough to imply corporate scienter, which necessitates a strong inference that corporate officials would have known the statement was false. Consequently, the court concluded that the plaintiff did not adequately plead scienter, leading to the dismissal of the claims under Section 10(b) of the Exchange Act and Rule 10b-5.
Furthermore, the plaintiff’s claims against controlling persons Zhuo and Yu under Section 20(a) of the Exchange Act must also be dismissed, as a primary violation by the controlled entity is required, and the primary claims were dismissed. The plaintiff sought leave to amend her claims but did not provide a proposed amended complaint. The court noted that while leave should generally be granted when justice requires, it can be denied for reasons such as futility, which was determined to be the case here, as the plaintiff's allegations of scienter were insufficient and unlikely to improve in a subsequent amendment. Therefore, the court denied the request for leave to amend and granted the defendants' motion to dismiss, with the plaintiff's claims being dismissed with prejudice.
The document addresses the accuracy of Pingtan's financial reporting and the need for disclosure regarding any material changes to its internal controls and any instances of fraud. The plaintiff does not claim violations of the Sarbanes-Oxley Act (SOX) in the amended complaint. It is stated that the plaintiff incorrectly asserts that Pingtan's 2016 Q2 10-Q was filed with the SEC on May 8, 2016, and misidentifies the reporting period as the second quarter instead of the third quarter. Additionally, Pingtan's 2015 and 2016 10-K filings mention a master agreement made on June 19, 2013, with Fuzhou Honglong Ocean Fishery Co. Ltd. to acquire 46 fishing vessels for a total of $410.1 million. Pingtan has claimed full ownership and operational rights over these vessels, with 20 currently registered under its name, and is in the process of completing the registration according to Chinese law. The document also notes that the plaintiff's counsel in a related case is the same as in this case.
