PricewaterhouseCoopers International Limited Terminated as a Party to NQ Mobile, Inc. Securities Litigation Based on the Failure to Plead Facts Necessary to Sustain “control” and “culpable participation.”
In In re NQ Mobile, Inc. Securities Litigation, No. 13cv7608, 2015 BL 87523 (S.D.N.Y. 2013), the United States District Court for the Southern District of New York granted PricewaterhouseCoopers International Limited’s (“PwC International”) motion to dismiss for failure to state a claim after determining that Lead Plaintiffs, who filed on behalf of persons who acquired American Depository Shares of NQ Mobile, Inc. (“NQ”), failed to plead facts necessary to sustain “control” and “culpable participation” by PwC International under Section 20(a) of the Securities Exchange Act of 1934 (the “Act”).
Lead Plaintiffs brought a federal securities class action against Defendants NQ, various present and former NQ executives, NQ’s auditors PricewaterhouseCoopers Zhong Tiang (“PwC China”), and PwC International, the coordinating entity of PwC member firms. In the complaint, Lead Plaintiffs alleged that PwC International acted as a “controlling person” based on an underlying violation by PwC China of Section 10(b) and Rule 10b-5 of the Act. PwC International moved to dismiss under FRCP 12(b)(6).
NQ, a Chinese company specializing in security and privacy-related mobile internet services, allegedly overstated its performance and concealed adverse facts about the business in public filings. Lead Plaintiffs alleged PwC China “issued unqualified audit opinions on NQ’s year-end financial statements for FY 2011 and 2012,” and PwC International acted as a “controlling person.”
To establish a prima facie case of control person liability, a plaintiff must show a primary violation, control of the perpetrator by the defendant, and culpable participation in the fraud in some meaningful way. “Control” is established by alleging the defendant possessed the power to direct the management and policies of the controlled person. “Culpable participation” is established by alleging particularized facts of the controlling person’s conscious misbehavior or recklessness.
The court found Lead Plaintiffs’ allegations conclusory, determining that control under Section 20(a) was not satisfied by a coordinating entity merely setting “professional standards and principles” under which the individual offices must operate. Furthermore, because PwC International did not provide any actual professional services for third parties, and the control person must have had actual control over the transaction in question, Lead Plaintiffs did not sufficiently plead that PwC International exerted actual control over the 2011 and 2012 NQ audits.
Lastly, after considering contrary district court opinions, the court reasoned a plaintiff must allege “culpable participation” and plead that element with particularity. Under these standards, the court found Lead Plaintiffs did neither because they failed to allege facts showing direct participation by PwC International in the NQ audits or that “PwC International acted with a culpable state of mind.”
Because the court found Lead Plaintiffs failed to plead facts necessary to sustain the elements of “control” and “culpable participation,” the court held Lead Plaintiffs failed to plead PwC International acted as a “controlling person.” Therefore, the court granted the motion to dismiss the Section 20(a) claim and terminated PwC International as a party.
Primary materials for this case may be found on the DU Corporate Governance website.