In In re L&L Energy Securities Litigation, investors filed a class action lawsuit on behalf of all persons who bought L&L Energy common stock between August 13, 2009 and August 2, 2011 (“Plaintiffs”). No. C11-1423RSL, 2013 BL 335037 (W.D. Wash. Dec. 3, 2013). Plaintiffs filed a complaint against L&L Energy and individual defendants Dickson Lee (CEO), Jung Mei Wang (CFO 2009-2011), and Ian Robinson (CFO 2011) (collectively, “Defendants”). The complaint alleged that Defendants overstated the company’s revenues and misled the public regarding ownership of particular mines in China. The purported misrepresentations allegedly caused a decline in share price, resulting in damage to the Plaintiffs. The Defendants moved to dismiss the amended complaint and the motion was denied.
According to the complaint, L&L Energy, a U.S. coalmining corporation, operates related mining ventures in China through its subsidiaries. Plaintiffs alleged that Defendants falsely reported the company’s 2009, 2010, and 2011 consolidated revenue in each respective 10-K filing submitted to the SEC. Allegedly, Defendants did not have ownership or control over two of its claimed assets in China--the DaPuAn Mine and the SuTong Mine. According to the complaint, however, L&L Energy reported revenues from both mines. Purportedly, under Chinese law, legal ownership remained with the son and brother of the original mine owner, who died in 2008, not L&L Energy. Furthermore, Plaintiffs alleged that the individual defendants were aware that these reports were false at the time they were made and that defendants profited from the disposition of L&L stock during the class period.
“In order to state a claim under § 10b of the Exchange Act and Rule 10b-5 plaintiffs must allege: (1) a material misrepresentation (or omission), (2) made with scienter, (3) on which plaintiff relied, (4) that proximately caused (5) economic loss, (6) in connection with the purchase or sale of a security.” A complaint must “as to each act or omission alleged to violate the securities laws, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” To establish scienter, the plaintiff must allege that the defendant “engaged in knowing or intentional conduct.” Lastly, to substantiate a claim under the Private Securities Litigation Reform Act, a plaintiff must allege a causal connection between the defendant’s material misrepresentations and the plaintiff’s loss.
The court first determined that Plaintiffs had adequately alleged loss causation by identifying the three specific false or misleading financial statements. The court noted the publication of a 2011 report by Glaucus Research Group that compared L&L Energy with a larger Chinese competitor and found that L&L’s claims were “ridiculous” and “suspicious” in comparison. The effect of the report was sufficient to show causation. “The Glaucus Report can therefore be construed as a corrective disclosure regarding the allegedly false statements, the immediate effect of which was a significant drop in share price.” The court also determined that Plaintiffs sufficiently alleged particularized facts regarding the falsity of the statements in L&L Energy’s 2009, 2010, and 2011 10-Ks due to the misstatements over the ownership and control of the DaPuAn and SuTong Mines.
Accordingly, the court turned to the element of scienter to determine if these misrepresentations were committed knowingly or recklessly. In light of the significant business interest at stake regarding the revenue reported for the two mines, Plaintiffs argued that Defendants “must have known” that the statements were false due to their individual positions within the company.
Although defendants Lee and Robinson allegedly signed the 2009 10-K, the court found this insufficient to establish scienter. “Merely signing a financial statement does not necessarily give rise to a strong inference that the signer had knowledge of all of the underlying facts . . . .” On the other hand, scienter was adequately plead by allegations that gave rise to an inference that Mr. Lee “was involved in the day-to-day operations of L&L Energy and participated in the business deals related to the contested mines” was sufficient. There were, however, no similar indications “that Mr. Robinson was involved in the operations of the company, that he would have had any reason to suspect the continuing validity of the 2008 agreement and the 2009 supplemental agreements, or that he was familiar with Chinese corporate law.”
Finally, the court addressed Section 20(a) of the Exchange Act, which “imposes secondary liability on persons who ‘control’ persons or entities that have violated the securities laws.” Plaintiffs argued that if the individual defendants had a supervisory role in the day-to-day operations of L&L Energy, then they were controlling persons under the Exchange Act. Defendants’ sole argument was that because there was no primary violation under Section 10b, there could be no violation under Section 20(a). Because the court had already found that the Section 10b claims could proceed, the court denied the motion to dismiss the control-person liability claims.
For the aforementioned reasons, the court denied the Defendants motion to dismiss the class action complaint.
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