Case 2:11-cv-03936-PA -SS Document 41

Filed 01/30/12 Page 1 of 5 Page ID #:1022

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL Case No. Title CV 11-3936 PA (SSx) Gary Redwen, et al. v. Sino Clean Energy, Inc., et al. Date January 30, 2012

Present: The Honorable Paul Songco Deputy Clerk

PERCY ANDERSON, UNITED STATES DISTRICT JUDGE Not Reported Court Reporter N/A Tape No.

Attorneys Present for Plaintiffs: N/A Proceedings: IN CHAMBERS - ORDER

Attorneys Present for Defendants: N/A

Before the Court is a Motion to Dismiss filed by defendant Sino Clean Energy, Inc. (Sino Clean). (Docket No. 26.) Lead Plaintiff Perritt Micro Cap Opportunities Fund (Plaintiff) has filed an Opposition. Pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, the Court finds that this matter is appropriate for decision without oral argument. The hearing calendared for January 30, 2012, is vacated, and the matter taken off calendar. I. Background

Defendant Sino Clean is a holding company that, through its subsidiaries, is a commercial producer and distributor of coal-water slurry fuel in China. Plaintiffs First Amended Class Action Complaint (FAC) alleges that defendants Sino Clean, Baowen Ren, Wen Fu, Albert Ching-Hwa Pu, Hon Wan Chan, Wenjie Zhang, Zhixin Jing, and Peng Zhou (Defendants) made materially false and misleading statements about Sino Clean by vastly overstating Sino Cleans revenues and operations. The claims are brought on behalf of a class consisting of all persons and entities who acquired the common stock of Sino Clean pursuant to and/or traceable to the December 21, 2010 Registration Statement and Prospectus (Offering) for the secondary offering of 5,465,00[0] of the Company offered at a price of $5.25 per share. (FAC, 1.) Plaintiff alleges that defendant Sino Clean is responsible for the preparation of the Offering, and that the individual Defendants were all officers or directors or both of Sino Clean who signed the Offering. The FAC alleges that (1) Defendants overstated their revenues for fiscal year 2009 by a factor of more than twenty, (2) Defendants owned ghost factories, used strictly for show, which had no operations, and (3) Defendants identified customers which were not doing any business with Sino Clean. The FAC further alleges that on or about April 26, 2011, the material misstatements in the Offering began to come to light . . . when investment analyst firm Geoinvesting, LLC issued a report to its subscribers delineating certain false representations. (FAC, 4.) On April 28, investment analyst firm Alfred Little published a report with more detailed allegations that included Chinese tax filings allegedly showing that Sino Clean had virtually no substantive operations. (FAC, 4.) The report, entitled Sino Clean Energy is a Complete Hoax and its Shares are Worthless, detailed results of a surveillance of three of Sino Cleans plants, conducted
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Case 2:11-cv-03936-PA -SS Document 41

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL Case No. Title CV 11-3936 PA (SSx) Gary Redwen, et al. v. Sino Clean Energy, Inc., et al. Date January 30, 2012

during a four-month period, encompassing the peak season for Sino Cleans products. According to the Alfred Little report, the investigation showed virtually no business activity at these key plants, even though Sino Clean had represented in the Offering that it was generating thousands of tons of coal-water slurry fuel from these plants. According to the FAC, beginning April 25, 2011, Sino Cleans stock price fell from the offering price of $5.25 to $2.47, a drop of more than fifty percent. Alfred Little also reported that Sino Clean paid virtually no corporate income tax to Chinas State Administration of Taxation (SAT). The FAC also alleges that the Offering represents that Sino Clean had $13.42 million in revenue in fiscal year 2008, but that documents filed with the SAT show that Sino Cleans only operating subsidiary producing coal-water slurry fuel in 2008 earned $0.06 million that year. Consistent with the Private Securities Litigation Reform Act, the Court previously appointed Perritt Micro Cap Opportunities Fund (Perritt Fund or Plaintiff) as Lead Plaintiff, and approved the Perritt Funds selection of Gold Bennett Cera & Sidener LLP as lead counsel. On September 8, 2011, Plaintiff filed the FAC, asserting two causes of action: (1) violation of Section 11 of the Securities Act against all defendants and (2) violation of Section 15 of the Securities Act against the individual defendants as control persons responsible for Sino Energys alleged Section 11 violations. Sino Clean contends that the FACs Securities Act claims fail to satisfy Federal Rule of Civil Procedure 9(b)s heightened pleading standards for causes of action sounding in fraud, and move to dismiss all causes of action pursuant to Rule 12(b)(6). II. Legal Standard

Federal Rule of Civil Procedure 12(b)(6) allows dismissal of a complaint for failure to state a claim upon which relief can be granted. In order to survive a Rule 12(b)(6) motion, typically a complaint need only give a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. R. Civ. P. 8(a)(2). All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403 (9th Cir. 1996) (quoting In re Wells Fargo Sec. Litig., 12 F.3d 922, 925 (9th Cir. 1993)). [A] plaintiffs obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 196465, 167 L. Ed. 2d 929 (2007). Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact). Id. (citations omitted). Under Section 11 of the Securities Act, any purchaser of a security covered by a registration statement may sue based on material omissions or misrepresentations in that statement. 15 U.S.C. 77k(a). Persons liable under Section 11 are those who signed the registration statement, directors of or partners in the issuer, professionals who participated in the preparation of the registration statement, and underwriters of the security. In re Harmonic Inc. Sec. Litig., 163 F. Supp. 2d 1079, 1085 (N.D. Cal. 2001). To state a claim under Section 11, a plaintiff must plead (1) that the registration statement
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Case 2:11-cv-03936-PA -SS Document 41

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL Case No. Title CV 11-3936 PA (SSx) Gary Redwen, et al. v. Sino Clean Energy, Inc., et al. Date January 30, 2012

contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment. Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009) (quoting In re Daou, Sys., Inc., 411 F.3d 1006, 1027 (9th Cir. 2005). Section 15 of the Securities Act imposes joint and several liability upon every person who controls any person liable under Section 11. Thus, violation of Section 15 is predicated upon violation of Section 11. In re Harmonic, 163 F. Supp. 2d at 1085. In order to prove a prima facie case under [Section 15], plaintiff must prove: (1) a primary violation of federal securities laws . . . and (2) that the defendant exercised actual power or control over the primary violator. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). A plaintiff need not prove that a defendant was a culpable participant. S.E.C. v. Todd, 642 F.3d 1207, 1223 (9th Cir. 2011). Rather, actual authority over the preparation and presentation to the public of financial statements is sufficient to demonstrate control. Id. The FAC attempts to avoid triggering the heightened Rule 9(b) pleading standards by stating, This Complaint asserts no allegations or claims sounding in fraud and This claim is not based on fraud, does not allege fraud, and does not sound in fraud. (FAC, 3 & 33.) Merely disclaiming fraud does not, however, necessarily preclude the application of Rule 9(b)s standards: Although [plaintiff] nowhere uses the word fraud in these allegations, the pleading requirements of Rule 9(b) cannot be evaded simply by avoiding the use of that magic word. Where, as here, the averments in the complaint necessarily describe fraudulent conduct, Rule 9(b) applies to those averments. Further, where, as here, the entire complaint against a particular defendant alleges a unified course of fraudulent conduct, it is grounded in fraud, and Rule 9(b) applies to the whole of that complaint. Vess v. Ciba-Geigy Corp., 317 F.3d 1097, 1108 (9th Cir. 2003). Although no scienter or reliance is required for liability under [Section 11] . . . because the PSLRA does not apply to claims under the 1933 Act, and defendants may be liable even for innocent or negligent misstatements or omissions, the particularity requirements of Federal Rule of Civil Procedure 9(b) apply to such claims if the allegations sound in fraud, even if the complaint states otherwise. Adoption of the Rule 9(b) pleading standard is appropriate where the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims.) In re Harmonic, 163 F. Supp. 2d at 108889 (citations omitted) (quoting In re Stac Electronics, 89 F.3d at 1405 n.2). If Rule 9(b) applies, the statement of the claim must . . . aver with particularity the circumstances constituting the fraud. Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir.
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Case 2:11-cv-03936-PA -SS Document 41

Filed 01/30/12 Page 4 of 5 Page ID #:1025

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL Case No. Title CV 11-3936 PA (SSx) Gary Redwen, et al. v. Sino Clean Energy, Inc., et al. Date January 30, 2012

1999) (quoting In re GlenFed Sec. Litig., 42 F.3d 1541, 1545 (9th Cir. 1994)). Rule 9(b) requires that, in order for a complaint to allege fraud with the requisite particularity, a plaintiff must set forth more than the neutral facts necessary to identify the transaction. The plaintiff must set forth what is false or misleading about a statement, and why it is false. In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading. Id. (quoting In re GlenFed at 1548). Neutral facts involve the time, place, and content of an alleged misrepresentation. Id. (quoting In re GlenFed, 42 F.3d at 154748). In setting forth what is false or misleading about a particular statement, the plaintiff must explain why the disputed statement was untrue or misleading when made. Id. This falsity requirement can be satisfied by pointing to inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to the defendants. Id. (quoting In re GlenFed, 42 F.3d at 1549). Moreover, Rule 9(b) demands that, when averments of fraud are made, the circumstances constituting the alleged fraud be specific enough to give defendants notice of the particular misconduct ... so that they can defend against the charge and not just deny that they have done anything wrong. Averments of fraud must be accompanied by the who, what, when, where, and how of the misconduct charged. Vess, 317 F.3d at 1106. III. Analysis

The FAC alleges the prospectus and registration statement contained material misrepresentations and omissions regarding the business of Sino Clean [Energy] in that the Companys revenues for Fiscal Year 2009 ending December 31, 2009 were overstated by a factor of twenty (20), several of the Companys purported factories were in fact ghost factories with no business purpose, and Defendants identified the existence of certain customers which were not doing any business with Sino Clean. (Complaint, 2.) With respect to certain matters, the FAC meets Rule 9(b)s heightened pleading standards. For instance, Plaintiff sufficiently pleads which statements are allegedly false and who made these statements. Likewise, Plaintiff adequately pleads that the alleged misrepresentations were material because the data concerned profits and revenues. See S.E.C. v. Seaboard Corp., 677 F.2d 1301, 1306 (9th Cir. 1982) (defining the test for materiality as whether the existence or nonexistence of the fact in question is a matter to which a reasonable man would attach importance in determining his choice of action in the transaction). However, Plaintiff fails to meet Rule 9(b)s heightened pleading standard with respect to the claim that the profit and revenue reports in the Securities and Exchange Commission (SEC) filings were false. Although Plaintiff pleads that the SAT numbers differ from the SEC numbers, this is merely consistent with the SEC numbers being false, and does not suffice to make that claim
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Case 2:11-cv-03936-PA -SS Document 41

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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL Case No. Title CV 11-3936 PA (SSx) Gary Redwen, et al. v. Sino Clean Energy, Inc., et al. Date January 30, 2012

plausible. See Twombly, 550 U.S. at 545. Plaintiff must plead with greater specificity to make plausible the claim that the SEC numbers, not the SAT numbers, are false. Furthermore, the SAT documents only relate to one of Sino Cleans subsidiaries. As for the other information provided in the Alfred Little report, Plaintiff alleges only that, according to surveillance of three plants, Sino Clean engaged in virtually no business activity and that based on these observations, Sino Cleans reported production capacity and sales as represented in the Offering were materially overstated. (FAC, 31.) Regarding the Geoinvesting report, Plaintiff merely alleges that Geoinvesting issued a report delineating certain of the false representations. (FAC, 4.) Therefore, the FACs Section 11 allegations do not satisfy the heightened pleading standards applicable to a cause of action sounding in fraud. Because the Section 11 claim fails, the Section 15 claim also fails. Conclusion For the foregoing reasons, the Court grants Sino Cleans Motion to Dismiss. Plaintiffs Section 11 and Section 15 claims are dismissed with leave to amend. Plaintiff shall file a Second Amended Complaint no later than February 20, 2012. If the Second Amended Complaint is not filed by that date, plaintiff will have been deemed to have elected to stand on the First Amended Complaint as pled and the Court will dismiss the action. IT IS SO ORDERED.

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