U.S. District Court Denies Motion to Dismiss for Securities Fraud Action: Wins Used False Headquarters to get onto the Russell Index
In Desta v. Wins Fin. Holdings Inc. Et. Al., No. 17-cv-02983-CAS(AGRx), 2018 BL 70590 (C.D. Cal. Feb. 28, 2018), the United States District Court for the Central District of California denied Wins Finance Holdings Inc. (“Wins”), and Wins Co-CEO Jianming Hao, Co-CEO and COO Renhui Mu, and CFO Junfeng Zhao’s, (collectively the “Defendants”) motion to dismiss Michael Desta’s (“Plaintiff”) complaint for failure to state a claim for securities fraud pursuant to Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rules 10b– 5(a) and (c) under, 17 C.F.R. § 240.10b–5(a) & (c). The court held that the Plaintiff alleged sufficient facts to show the elements of falsity, scienter, loss causation, and reliance under the Act, such that a proper claim was pleaded.
According to the complaint, Defendants falsified the location of Wins' principal executive offices in the United States in order to be included on the Russell 2000 Index, which would also affect Wins’ Nasdaq listing. The complaint alleges that since Wins went public in 2006, it conveyed to the U.S. Securities & Exchange Commission (“SEC”) that its principal executive offices were in the People’s Republic of China; however, in 2016, Wins reported in an SEC filing that its principal executive offices were in New York, NY. Thereafter, Wins was included on the Russell 2000 Index where its stock trading volume rapidly increased. After several publications released information as to the falsehood of the principal executive office in New York, Wins’ stock price plummeted. Wins subsequently changed its address back to Beijing. Thereafter, Nasdaq delisted Wins’ shares for, among other things, potential misrepresentations.
In a successful claim under Section 10(b) and Rule 10b–5, a plaintiff must prove six elements: (1) a material misrepresentation or omission; (2) scienter or an intent to deceive or defraud; (3) a connection between the misrepresentation and the purchase or sale of a security; (4) reliance upon the misrepresentation, “often established in ‘fraud-on-the-market’ cases via a presumption that the price of publicly traded securities reflects all information in the public domain”; (5) economic loss; and (6) loss causation, a connection between the wrongful act which amounts to securities fraud and the injury suffered by the plaintiff. Defendants argued that Plaintiff failed to state a claim due to their failure to properly assert material misrepresentation or falsity, scienter, loss causation, and reliance, as such, the court only addressed these elements.
First, the court found the allegations were sufficient to establish falsity by relying on Plaintiff’s assertions that Wins had no presence or actual business activity at the office in New York, other than the infrequent visits by its former president; and therefore, the SEC filings contained false information. Second, the court found the alleged facts support a strong inference of scienter since the individual Defendants, as Win executives, must know the company's principal address and that despite this knowledge they still signed the SEC filings, which falsely alleged having an executive office in New York. Last, the court found that the Plaintiffs’ claims evidenced both loss causation and reliance because Wins’ stock price plunged after the first disclosure revealed the fraudulent disclosure about the New York office. The court also asserted that these elements are all questions of fact and that a motion to dismiss was essentially not proper in order to decide these issues.
For the aforementioned reasons, the court denied Defendant’s motion to dismiss.
The primary materials for this case may be found on the DU Corporate Governance website.