RAMOS, District Judge:
This consolidated class action arises from an alleged bribery scheme at the Chinese oil and gas company, PetroChina Company, Ltd. ("PetroChina" or "the Company") during the period between April 26, 2012 and December 17, 2013 (the "class period"). According to the Second Amended Class Action Complaint ("SAC"), during the class period, PetroChina falsely
PetroChina moves to dismiss Count One of the SAC under Rule 12(b)(6) of the Federal Rules of Civil Procedure.
PetroChina is the largest oil and gas producer and distributor in the People's Republic of China ("PRC"). SAC ¶ 2. PetroChina's American Depositary Shares ("ADS") have been listed on the New York Stock Exchange since April 6, 2000. Id. The SAC identifies China National Petroleum Corporation ("CNPC") as PetroChina's parent company.
The class period begins on April 26, 2012, when the Company filed its annual report ("2011 annual report") with the SEC on Form 20-F, which was signed by Li. Id. ¶ 47. The Company's 2011 annual report stated that the Chairman evaluated the effectiveness of PetroChina's disclosure controls and procedures and concluded
The report also contained a required Sarbanes-Oxley Act of 2002 ("SOX") certification, signed by Jiang. Id. ¶ 54. As part of the SOX certification, Jiang swore that the annual report did not contain any "untrue statement of a material fact." Id. Jiang attested to the fact that he and the other certifying officer had put into place and evaluated PetroChina's disclosure controls and procedures to ensure that material information is made known and the reliability of financial reporting is assured. Id. Jiang also certified that, based on the "most recent evaluation of internal control over financial reporting," he had disclosed to the Company's auditors two items of information: (1) "all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;" and (2) "any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting." Id.
The 2011 annual report indicated that the Company adopted two codes of ethics, one for its senior management, and a separate one for its employees. Id. ¶ 50. The report acknowledged that the Company did not currently have a code of business conduct and ethics for directors and that its directors were required to comply with the Model Code for Securities Transactions by Directors of Listed Companies, pursuant to the Hong Kong Stock Exchange ("HKSE") Listing Rules. Id. Finally, the report stated that, under PRC Company Law and HKSE Listing Rules, the CEO of PetroChina is not required to certify to the NYSE each year that he is not aware of any violation by the company of NYSE corporate governance listing standards and therefore would not be submitting such a certification. Id.
The code of ethics for employees at PetroChina, prohibited them from accepting "any valuable gratuity that may affect their decision-making and disturb their independent judgment, or allow their relatives or any third party to accept this kind of gratuity." Id. ¶ 51. Similarly, PetroChina's code of ethics for senior management prohibited the acceptance of gifts "of a value that may tend to influence business decisions or compromise independent judgment" by senior management, along with their close family members. Id. Employees and senior management alike were required by the code of ethics to comply with local laws and regulations. Id. Meanwhile, the Company's website separately stated that PetroChina has "always and conscientiously complied with the requirements of the China Securities Regulatory Commission, the Stock Exchange of Hong Kong ... the New York Stock Exchange, Inc. and the United States Securities and Exchange Commission as well as other regulatory requirements[.]" Id. ¶ 52. The website also stated that the Company "has been regulating its internal management
On April 26, 2013, the Company filed a second annual report with the SEC on Form 20-F ("2012 annual report"), which contained the same language about the Company's internal controls and compliance. Id. ¶ 55. Once again, Li certified the 2012 annual report. See Paskowitz Decl., Doc. 44, Ex. A at 10.
Under the leadership of the PRC's current president, the government began "cracking down" on corruption in state-owned enterprises, such as PetroChina.
The SAC claims that the corruption at PetroChina consisted of "bribery, political corruption, and undisclosed related party transactions." Id. ¶ 23. On August 26, 2013, the PRC Ministry of Supervision Company announced that CNPC Vice President Wang Yongchun was also under investigation for "gross violation [sic] of party discipline." Id. ¶ 26. On August 27, 2013, PetroChina announced that SASAC had launched an investigation Li, Ran, and PetroChina chief geologist Wang Daofu for "severe breaches of discipline."
In early September 2013, the PRC news media reported that one of PetroChina's suppliers, Wison Engineering Services, was under investigation for corruption. Id. ¶ 29. The investigation resulted in the PRC freezing the supplier's bank accounts, the CFO stepping down, and the Chairman and controlling shareholder being arrested. Id. ¶ 30. During this time, the media also reported that a second PetroChina supplier, Mingxing Cable ("Mingxing"), was also under investigation in connection with the Company. Id. ¶ 31.
On April 14, 2014, several months after the class period ended, PRC authorities detained Yan Cunzhang, a PetroChina General Manager, in connection with the corruption investigation of the Company. Id. ¶ 36. On May 16, 2014, the news media reported that Bo Qiliang, PetroChina's Overseas Operations Chief, was under official investigation. Id. ¶ 37. On June 20, 2014, the Shaanxi Chinese People's Political Consultive Conference revoked Ran's membership "for serious violation [sic] and criminal conduct," an action which Plaintiffs maintain only happens in cases of serious misconduct. Id. ¶ 38. The Supreme People's Procuratorate filed criminal bribery charges against Jiang on July 14, 2014; Jiang was later expelled from the Communist Party on October 23, 2013. Id. ¶ 40. On July 16, 2014, a Canadian news outlet reported that Li Zhiming ("Zhiming"), a PetroChina executive in charge of the Company's Canadian operations, had been arrested by the Chinese government for corruption. Id. ¶ 42. At the end of the month, on July 29, 2014, the Canadian news media reported that PetroChina's chief business representative in Canada recently resigned from the Company and had been missing ever since. Id. ¶ 43. Meanwhile, the General Manager of PetroChina's Indonesia operations, along with the General Manager of Iran operations, were arrested for corruption. Id. Finally, on October, 10, 2014, a Chinese news outlet reported that Wang Lixin ("Lixin"), the Chairman of PetroChina's supervising committee, was detained by government officials in connection with the corruption investigation. Id. ¶ 44.
On September 3, 2013, Johan Broux, individually and on behalf of purchasers of PetroChina securities between April 26, 2012 and August 27, 2013, filed a Complaint against PetroChina, Jiang, and three other PetroChina officials. See Doc. 1. On September 6, 2013, Sandy Hsu, individually and on behalf of purchasers of PetroChina securities between April 26, 2012 and August 27, 2013, filed a Complaint against PetroChina alone. See Hsu v. PetroChina Company Ltd., No. 13-cv-06274, Doc. 1. Both actions accused the defendants of violating § 10(b) of the Exchange Act, Rule 10b-5. See id., see also Doc 1. On November 11, 2013, Jeffrey Klein and Samuel Ayoub filed a motion to consolidate the two cases, appoint the two of them as Lead Plaintiffs, and approve their selection of the Rosen Law Firm, P.A. as Lead Counsel. Doc. 3. The Court granted Plaintiffs' motion on April 4, 2014. Doc. 16.
Plaintiffs filed a consolidated Amended Complaint on June 6, 2014 against PetroChina, Jiang, Li, and Ran. Doc. 17. The Amended Complaint alleged violations of
Plaintiffs filed the SAC on November 14, 2014. Doc. 37. On February 13, 2015, PetroChina filed its motion to dismiss the § 10(b) and Rule 10b-5 claims. Doc. 42.
Plaintiffs take issue with the annual report, PetroChina's codes of ethics, certain representations made on PetroChina's website, and Jiang's SOX certification, arguing that Defendants failed to disclose the following:
SAC ¶ 56.
Plaintiffs claim that, as a result of PetroChina's August 27, 2013 announcement that several PetroChina's officials were resigning in connection with SASAC's investigation, trading in PetroChina shares halted that day. Id. ¶ 27. When trading resumed on August 28, 2013, PetroChina shares declined $3.93 per share, closing at $107.82 per share. Id. ¶ 28. Plaintiffs claim that "[n]early $950 million in market capitalization was wiped out[.]" Id. Plaintiffs further allege that the investigations into PetroChina's suppliers, together with the arrest of PetroChina Supervisor Qingshan, caused PetroChina's stock to fall from $109.43 per share to $106.99 per share on December 17, 2013, a nearly $600 million market capitalization decline.
Plaintiffs also point to a Bloomberg LP report from September 3, 2013, stating that Templeton Asset Management Ltd.
When ruling on a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir.2014). The court is not required to credit "mere conclusory statements" or "threadbare recitals of the elements of a cause of action." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)); see also id. at 681, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 551, 127 S.Ct. 1955). "To survive a motion to dismiss, a complaint must contain sufficient factual matter... to `state a claim to relief that is plausible on its face.'" Id. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). More specifically, the plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. If the plaintiff has not "nudged [his] claims across the line from conceivable to plausible, [the] complaint must be dismissed." Twombly, 550 U.S. at 570, 127 S.Ct. 1955; Iqbal, 556 U.S. at 680, 129 S.Ct. 1937.
The question in a Rule 12 motion to dismiss "`is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'" Sikhs for Justice v. Nath, 893 F.Supp.2d 598, 615 (S.D.N.Y.2012) (quoting Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir.1995)). "[T]he purpose of Federal Rule of Civil Procedure 12(b)(6) `is to test, in a streamlined fashion, the formal sufficiency of the plaintiff's statement of a claim for relief without resolving a contest regarding its substantive merits,'" and without regard for the weight of the evidence that might be offered in support of Plaintiffs' claims. Halebian v. Berv, 644 F.3d 122, 130 (2d Cir.2011) (quoting Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 155 (2d Cir.2006)).
Beyond the requirements of Rule 12(b)(6), a complaint alleging securities fraud must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA") by stating the circumstances constituting fraud with particularity. See, e.g., ECA & Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.2009) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319-20, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). Specifically, Rule 9(b) requires
The Court may consider a document that is attached to the complaint, incorporated by reference or integral to the complaint, provided there is no dispute regarding its authenticity, accuracy or relevance. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir.2010) (internal citations omitted). "To be incorporated by reference, the [c]omplaint must make a clear, definite and substantial reference to the documents." Mosdos Chofetz Chaim, Inc. v. Vill. of Wesley Hills, 815 F.Supp.2d 679, 691 (S.D.N.Y.2011) (internal quotation marks and citation omitted). The SAC cites and primarily relies on PetroChina's 2011 and 2012 annual reports, thereby incorporating them by reference. Thus, the Court will consider them in deciding the present motion.
Section 10(b) of the Exchange Act prohibits using or employing, "in connection
To state a private civil claim under Section 10(b) and Rule 10b-5, a plaintiff must plead that: (1) the defendant made a material misrepresentation or omission, (2) with scienter, i.e., a wrongful state of mind, (3) in connection with the purchase or sale of a security, and (4) that the plaintiff relied on the misrepresentation or omission, thereby (5) causing economic loss. Dura, 544 U.S. at 341-42, 125 S.Ct. 1627; see also, e.g., Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 153 (2d Cir. 2007); Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir.2001). PetroChina argues that Plaintiffs have not plead facts that raise a strong inference of scienter, and fail to plead an actionable misstatement or omission. Defs.' Mem. L. Supp. Mot. Dismiss, Doc. 43 at 2. PetroChina also maintains that Plaintiffs have not plead loss causation. Id. at 2-3.
In order to survive a motion to dismiss, Plaintiffs must establish that Defendants "made a statement that was `misleading as to a material fact.'"
With respect to material omissions, a defendant's silence is not misleading absent a duty to disclose. Basic, 485 U.S. at 239 n. 17, 108 S.Ct. 978. "Disclosure of an item of information is not required, however, simply because it may be relevant or of interest to a reasonable investor." Resnik v. Swartz, 303 F.3d 147, 154 (2d Cir.2002). Rather, "[a] duty to disclose arises whenever secret information renders prior public statements materially misleading, not merely when that information completely negates the public statements." In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268 (2d Cir.1993). The
Here, the primary source of the purported misrepresentations is the 2011 annual report, filed on April 26, 2012. See SAC ¶¶ 47-54, 56; see also Paskowitz Decl., Ex. B, Doc. 44. PetroChina's 2011 annual report was signed by Li, and included the required SOX certification, signed by Jiang. Id. ¶¶ 47, 54. The annual report also referenced two codes of ethics, which were posted on PetroChina's website. Id. ¶ 50. The SAC alleges that, on April 26, 2013, PetroChina filed its 2012 annual report, which "repeated the same misstatements about the effectiveness of the Company's internal controls and compliance with corporate governance matters and laws and regulations." Id. ¶ 55. The Court notes that, although the SAC states that PetroChina's 2012 annual report was essentially identical to the prior year, Jiping, rather than Jiang, signed the 2012 SOX certification. See Paskowitz Decl., Doc. 44, Ex. A. at 13.
As an initial matter, rather than precisely identifying the statements that Plaintiffs purport to have been falsely made, the SAC simply contains large block quotations taken directly from PetroChina's annual reports, codes of ethics, and website. See SAC ¶¶ 49-54. Most of these block quotes are several paragraphs long and are preceded by a conclusory assertion that they were falsely made. See id. The Second Circuit has commented that district courts should not have to "search the long quotations in the complaint for particular false statements, and then determine on its own initiative how and why the statements were false and how other facts might show a strong inference of scienter." Boca Raton Firefighters & Police Pension Fund v. Bahash, 506 Fed.Appx. 32, 38 (2d Cir.2012).
In their papers, Plaintiffs identify three false statements by PetroChina. Pls.' Mem. L. Opp., Doc. 47 at 10-14. First, they point to Jiang's SOX certification, attached to the 2011 annual report, which states that he disclosed "any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting" to the Company's auditors and board of directors. See id. at 10-11; see also SAC ¶ 54. Second, Plaintiffs identify Jiang's statement in the SOX certification that he had disclosed significant internal control deficiencies to PetroChina's auditor. Id. Finally, Plaintiffs claim that PetroChina falsely stated that its internal controls were adequate, presumably in both its 2011 and 2012 annual reports. Id. The SAC also alleges that PetroChina falsely claimed that it was in compliance with local laws, regulations, corporate governance directives and code of ethics, although Plaintiffs did not discuss this allegation in their papers. SAC ¶ 56.
The SAC's primary defect is that it relies on allegations of bribery and corruption that postdate the time period covered by the 2011 and 2012 annual reports. Most of the SAC's allegations involving PetroChina officials took place in 2014, months after the public statements at issue were made and after the class period ended. See id. ¶¶ 36-39, 42-44. Plaintiffs fail to establish that any statement in the 2011 annual report, including Jiang's SOX certification, was falsely made because they do not allege a single fact that precedes the
Furthermore, the only vague allegation of fraud that predates the filing of the 2012 annual report is the claim that, on March 18, 2013, Jiang resigned from PetroChina and was "promoted" to Director of SASAC. Id. ¶ 22. However, the SAC does not suggest that, from PetroChina's perspective, it was clear that his departure indicated that he was engaged in fraud of any sort. Nor is it necessarily implied by the fact that the Chinese media reported that he was removed from his post at PetroChina to prevent him from interfering with the PRC's investigation.
Plaintiffs' strongest claim is that, one day after PetroChina filed its 2012 report, it announced that the PRC was investigating three of its officials, including Li and Ran, and that all three were resigning. Id. ¶ 27. In fact, the actual text of the announcement states that CNPC informed PetroChina of the investigation on April 26, 2013 — the same day the Company filed its annual report. See Paskowitz Reply Decl., Doc. 51, Ex. 5 at 4. However, nowhere does it indicate that Li and Ran were being investigated for "severe breaches of discipline" or corruption, as the SAC alleges. See SAC ¶ 27. Rather, the announcement states that three officials were resigning for "personal reasons" and that Ran confirmed that "there is no other matter that should be brought to the attention of the shareholders of the Company." See Paskowitz Reply Decl., Doc. 51, Ex. 5 at 4. Given that this is the sole allegation against Ran and Li in connection with PetroChina, Plaintiffs have not established how the vague announcement rendered false any portion of the 2012 annual report discussing internal controls, corporate governance, or disclosure of fraud. Moreover, the statements contained in the report reflect the Company's activities as of December 31, 2012 and Plaintiffs have not alleged any facts that occurred prior to March 2013.
Plaintiffs counter that "[n]o court has ever held that the only way to plead that bribes took place is to plead the specifics of the transactions." Doc. 47 at 10. However, this Court is not requiring that Plaintiffs allege a detailed account of the particular illicit deals that PetroChina officials were allegedly engaged in. Plaintiffs are required, nonetheless, to establish — at a bare minimum — that the underlying fraud took place during the time period covered by the purportedly false public statements and that someone at PetroChina knew or had reason to know about it. In support of their argument, Plaintiffs cite a District of Utah case, which they interpreted as having found that an auditor's statement that the defendant was aware of bribery sufficed to establish that the bribery took place. See id. at 10 (citing In re Nature's Sunshine Products Sec. Litig., 486 F.Supp.2d 1301, 1307 (D.Utah 2007)). However, the Utah court's holding was narrower than Plaintiffs suggest. The court observed that the plaintiffs alleged that the company's CEO made a payment in violation of the Foreign Corrupt Practice Act and that the company's auditor made written statements that its special committee viewed "certain electronic communications" to reach the conclusion that the CEO knew of the fraud. Id. Most significantly, the plaintiffs asserted that the CEO knew of the material fraud before any of the false statements were made. Id. at 1308.
Although Plaintiffs' failure to establish that the underlying fraud occurred during the applicable timeframe is in itself dispositive, the SAC is insufficiently plead for numerous other reasons. For example, Plaintiffs have not demonstrated that PetroChina falsely stated that its internal controls were adequate. In In re Gentiva Sec. Litig., 932 F.Supp.2d 352, 370 (E.D.N.Y.2013), which PetroChina cites, the plaintiff similarly alleged that the defendants' SOX certifications were misleading because the company's "disclosure controls and procedures and internal controls over financial reporting were not `effective.'" However, the court found that the plaintiff did not "allege any particularized facts which would suggest that the actions articulated in the SOX Certifications were not undertaken by the individual defendants or for that matter any factual allegations concerning [the company's] financial reporting processes." Id. It further noted that the plaintiff did not allege "any facts pertaining to the Company's internal structure for financial controls," nor challenged the defendants' accounting. Id. (quoting City of Monroe Employees' Ret. Sys. v. Hartford Fin. Servs. Grp., Inc., No. 10 Civ. 2835(NRB), 2011 WL 4357368, at *22 (S.D.N.Y. Sept. 19, 2011) (finding that the plaintiffs' allegation of lack of internal controls was conclusory)) (internal quotation marks omitted).
Plaintiffs have also failed to establish that PetroChina's statements about its compliance practices were false or misleading. The statements contained in PetroChina's annual reports simply confirm that the Company has codes of ethics in place and that its "corporate governance framework is subject to the mandatory provisions of the PRC Company Law and the Corporate Governance Rules as well as the securities laws, regulations and the listing rules of Hong Kong and the United States." SAC ¶ 50. In its annual reports, PetroChina does not claim to be in compliance with any of the corporate governance rules and regulations that it concedes to be subject to. Quite the contrary, it discloses that "[o]ur CEO is not required under the PRC Company Law and the HKSE Listing Rules to submit, and our CEO does not currently submit" a certification that he "is not aware of any violation by the company of NYSE corporate governance listing standards." Id. Although the Company's codes of ethics prohibit bribery and other forms of fraudulent conduct, they do not claim that PetroChina's officers are abiding by them. Since the SAC does not challenge the actual existence of these rules, nor PetroChina's description of them, Plaintiffs have not demonstrated that the Company's statements were false or misleading. See In re FBR Inc. Sec. Litig., 544 F.Supp.2d 346, 359 (S.D.N.Y. 2008) (finding that the complaint failed to claim securities fraud where it did not allege "that the risk management program did not exist, or that it did not have the abovementioned aims").
Although PetroChina's website affirmatively represented that the Company was in compliance with certain requirements, Plaintiffs have also failed to establish that it contained a material misrepresentation or omission. PetroChina's website broadly stated that the Company "has always and conscientiously complied with the requirements of the China Securities Regulatory Commission, The [sic] Stock Exchange of Hong Kong Limited ... The [sic] New York Stock Exchange, Inc. and the United States Securities and Exchange Commission as well as other regulatory requirements[.]" Id. ¶ 52. It also indicated that that PetroChina "has been regulating its
Plaintiffs proceed under the theory that, if the SAC establishes scienter on behalf of the Individual Defendants, their state of mind can be imputed to PetroChina. See Doc. 47 at 17. The SAC states that "[t]he scienter of the Individual Defendants and other employees and agents of the Company is similarly imputed to PetroChina under respondeat superior and agency principles." SAC ¶ 18.
"When the defendant is a corporate entity ... the pleaded facts must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter." Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir.2008). The "most straightforward way to raise such an inference for a corporate defendant" in most cases is "to plead it for an individual defendant." Id. In sum, "[a] plaintiff can raise an inference of corporate scienter by establishing scienter on behalf of an employee who acted within the scope of his employment." Vining v. Oppenheimer Holdings Inc., No. 08 Civ. 4435(LAP), 2010 WL 3825722, at *12 (S.D.N.Y. Sept. 29, 2010) (internal citation omitted).
PetroChina invokes the adverse interest doctrine, maintaining that the knowledge of the Individual Defendants cannot be imputed to the Company because their actions were adverse to PetroChina and solely for their own self-interest. Doc. 43 at 13. However, "the adverse interest exception to such imputation is narrow[.]" Stream SICAV v. Wang, 989 F.Supp.2d 264, 277 (S.D.N.Y. 2013). In Wang, the court rejected the adverse interest exception and held that the individual defendant's scienter could be imputed to the holding company for which he served as CEO.
Wang, 989 F.Supp.2d at 277 (S.D.N.Y. 2013) (quoting Kirschner v. KPMG LLP, 15 N.Y.3d 446, 468, 912 N.Y.S.2d 508, 938 N.E.2d 941, 952 (2010)) (emphases added) (alteration in original). The Wang court pointed out that the CEO's failure to correct his and the holding company's public statements "did not operate as fraud on the corporation;" rather, his concealment of a material fact allowed the company "to survive — to attract investors and customers and raise funds for corporate purposes." Id. (quoting Kirschner, 15 N.Y.3d at 468, 912 N.Y.S.2d 508, 938 N.E.2d 941) (internal quotation marks omitted). In Kirschner, the New York Court of Appeals case quoted by Wang, the court stated that "for the adverse interest exception to apply, the agent `must have totally abandoned his principal's interests and be acting entirely for his own or another's purposes,' not the corporation's." Kirschner, 15 N.Y.3d at 468, 912 N.Y.S.2d 508, 938 N.E.2d at 953 (emphases added). It went on to note that "[t]he disclosure of corporate fraud nearly always injures the corporation." Id. at 469, 912 N.Y.S.2d 508, 938 N.E.2d at 953. Otherwise, "a corporation would be able to invoke the adverse interest exception and disclaim virtually every corporate fraud — even a fraud undertaken for the corporation's benefit — as soon as it was discovered and no longer helping the company." Id.
On the facts presented here, the adverse interest exception does not apply. Presumably, it was in PetroChina's interest for any corruption occurring within the Company to remain undisclosed in order to preserve its shareholders' confidence. In contrast, all of the cases that PetroChina cites in support of the application of the adverse interest doctrine involved corporate actors that were deemed to have acted to the company's detriment. For example, in In re ChinaCast Educ. Corp. Sec. Litig., No. 12 Civ. 4621(JFW) (PLAX), 2012 WL 6136746, at *2 (C.D.Cal. Dec. 7, 2012), the CEO allegedly "looted corporate assets." In concluding that the plaintiffs failed to allege scienter against the corporation, the court in ChinaCast quoted an Ohio district court case which stated, "[c]ourts have typically found that an agent who uses his office to loot corporate assets has acted adversely to his principal." Id. at *10 (quoting In re Nat'l Century Fin. Enterprises, Inc., 783 F.Supp.2d 1003, 1016 (S.D.Ohio 2011)). Similarly, in In re JPMorgan Chase & Co. Sec. Litig., No. 06 Civ. 4675, 2007 WL 4531794, at *9 (N.D.Ill. Dec. 18, 2007), another case that PetroChina cites, the court explicitly determined that the plaintiffs' allegations suggested that the CEO and Chairman of the Board of Directors "enriched himself at the expense of the corporate entity" by agreeing to remain as CEO for two years
Furthermore, the Court notes that the pertinent acts here are the Individual Defendants' public statements on behalf of PetroChina, not the alleged underlying fraud. Thus, to the extent that the SAC is able to establish that the Individual Defendants possessed the requisite scienter, it can be imputed PetroChina.
"[W]hile § 10(b) has been described and may have been contemplated as a `catchall' provision, `what it catches must be fraud.'" In re Livent, Inc. Noteholders Sec. Litig., 151 F.Supp.2d 371, 413 (S.D.N.Y.2001) (quoting Chiarella v. U.S., 445 U.S. 222, 234-35, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980)). Section 10(b) and Rule 10b-5 require plaintiffs to allege a state of mind demonstrating "an intent to deceive, manipulate or defraud," also known as scienter. Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir.2000) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)); see also, e.g., In re Philip Servs. Corp. Sec. Litig., 383 F.Supp.2d 463, 469 (S.D.N.Y.2004). To satisfy the PSLRA's pleading requirements for scienter, a plaintiff must allege facts with particularity that would give rise "to a strong inference that the defendant acted with the required state of mind." ECA, 553 F.3d at 198 (quoting 15 U.S.C. § 78u-4(b)(2)(A)) (internal quotation marks omitted). As Supreme Court precedent dictates, a "strong inference" that a defendant acted with a certain intent is one that is "more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at 314, 127 S.Ct. 2499 (emphasis added). This inquiry goes beyond the ordinary Rule 9(b) framework and requires courts to consider "not only inferences urged by the plaintiff ... but also competing inferences rationally drawn from the facts alleged." Id. "The relevant inquiry for the Court `is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.'" In re Magnum Hunter Res. Corp. Sec. Litig., 26 F.Supp.3d 278, 291-92 (S.D.N.Y.2014) (emphasis in original) (citing Tellabs, 551 U.S. at 322-23, 127 S.Ct. 2499).
A plaintiff may establish scienter by alleging facts that either (1) show that the defendant had both the "motive and opportunity" to commit the alleged fraud, or (2) "constitute strong circumstantial evidence of conscious misbehavior or recklessness." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290-91 (2d Cir.2006) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994)).
"A complaint has sufficiently alleged `motive and opportunity to commit fraud' if it pleads facts showing that the defendant `benefited in some concrete and personal way from the purported fraud.'" Van Dongen v. CNinsure Inc., 951 F.Supp.2d 457,
The parties do not appear to dispute that the Individual Defendants, by virtue of their positions at PetroChina, had the opportunity to commit fraud; rather they disagree as to whether Plaintiffs have sufficiently alleged a motive. Plaintiffs maintain that the SAC alleges that all three Individual Defendants received bribes and that, had they told PetroChina's auditor about the bribes or reported that they had violated the Company's code of ethics, they would not be able to continue receiving bribes.
First, the SAC only singles out Jiang as having accepted bribes among the three Individual Defendants. See SAC ¶¶ 39-40. In fact, Jiang is the sole PetroChina officer or employee that the SAC specifically associates with bribery. Although the SAC accuses many other individuals of accepting bribes, none of them — including the country's "former security czar," the chairman of PetroChina's supplier, an ousted PRC Politburo member, the PRC's Vice Minister of Public Security, and China National Petroleum Corporation's Vice President — are alleged to have been employees of PetroChina. Id. ¶¶ 20, 30, 32, 35, 41. As to Ran and Li, the SAC merely alleges that, on August 27, 2013, the Company announced that the SASAC launched an investigation into the two of them, who resigned effective immediately.
Second, since the SAC does not specify when the alleged bribery or corruption took place, it is not clear that it had either occurred or was ongoing during the time period covered by the 2011 and 2012 annual reports.
Because it is not evident from the facts alleged that the Individual Defendants were engaged in corruption that they would benefit from concealing during the timeframe encompassed by the annual reports, the Court cannot determine that they "benefited in some concrete and personal way from the purported fraud." See Van Dongen, 951 F.Supp.2d at 468 (quoting Novak, 216 F.3d at 307-08). Therefore, Plaintiffs have not made a sufficient showing that the Individual Defendants had a motive to commit fraud.
An inference of scienter may arise where a complaint sufficiently alleges that the defendants "engaged in deliberately illegal behavior ... knew facts or had access to information suggesting that their public statements were not accurate... or ... failed to check information they had a duty to monitor." Novak, 216 F.3d at 311. When a plaintiff fails to allege a motive to commit fraud, the plaintiff's allegations that indicate a defendant's recklessness "must be correspondingly greater." Kalnit, 264 F.3d at 142 (internal citations omitted). In order to establish scienter under the conscious misbehavior theory, Plaintiffs "must show conduct by defendants that is at the least highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been
Alternatively, "[t]o state a claim based on recklessness, plaintiffs may either specifically allege defendants' knowledge of facts or access to information contradicting defendants' public statements, or allege that defendants failed to check information that they had a duty to monitor." In re Longtop Fin. Techs. Ltd. Sec. Litig., 910 F.Supp.2d 561, 574 (S.D.N.Y.2012) ("Longtop I") (quoting In re Gildan Activewear, Inc. Sec. Litig., 636 F.Supp.2d 261, 272 (S.D.N.Y.2009)) (internal quotation marks omitted). To the extent that plaintiffs assert that defendants had access to contrary facts, the complaint must "specifically identify the reports or statements containing this information." Id. at 574-75 (citing Dynex, 531 F.3d at 196 (quoting Novak, 216 F.3d at 309)). Nonetheless, it is well-settled that "fraud by hindsight" is not a cognizable theory of relief; "fraud is always obvious in retrospect, but it is not reckless to lack clairvoyance." Longtop I, 910 F.Supp.2d at 579.
The SAC claims that the Individual Defendants had actual knowledge of the materially false and misleading statements by virtue of their positions at PetroChina. SAC ¶ 70. However, in order to establish an inference of scienter, Plaintiffs must do more than allege that the Individual Defendants had or should have had knowledge of certain facts contrary to their public statements simply by virtue of their high-level positions. See Johnson v. Siemens AG, No. 09 Civ. 5310(JG)(RER), 2011 WL 1304267, at *15 (E.D.N.Y. Mar. 31, 2011) (finding that the lead plaintiff could not allege that the defendants engaged in deliberately illegal behavior simply by virtue of their high-level positions, general responsibilities, and their access to inside information) (internal citations omitted); see also In re Nokia Oyj (Nokia Corp.) Sec. Litig., 423 F.Supp.2d 364, 406 (S.D.N.Y.2006) (holding that generalized allegations that the individual defendants "knew, or should have known, that they were misrepresenting material facts, based on their senior positions in the company" are insufficient to establish scienter). "[I]t is well established that `accusations founded on nothing more than a defendant's corporate position are entitled to no weight.'" Shemian, 2013 WL 1285779, at *17 (quoting Bd. of Trustees of City of Ft. Lauderdale Gen. Employees' Ret. Sys. v. Mechel OAO, 811 F.Supp.2d 853, 873 (S.D.N.Y.2011) aff'd sub nom. Frederick v. Mechel OAO, 475 Fed.Appx. 353 (2d Cir. 2012)).
In their papers, Plaintiffs once again rely on their argument that, because the SAC alleges that the Individual Defendants accepted bribes, it has established conscious misbehavior because they were obviously aware of their own bribery. However, as noted above, besides Jiang, the SAC does not allege that the other Individual Defendants accepted bribes, nor does it specify when Jiang received bribes. See supra Part IV.B.iii. Plaintiffs' papers also maintain that Jiang "clearly knew" of the bribery because "he took direction from Yongkang, who had so many allies in PetroChina." Doc. 47 at 17. However, the connection that the SAC draws between Yongkang, PetroChina, and Jiang is tenuous, at best. The SAC simply states that Jiang was Yongkang's protégé and that, "Jiang enjoyed a meteoric rise at CNPC," "[u]nder Yongkang's tutelage." SAC ¶ 20-21. Never does the SAC allege that Jiang "took direction" from Yongkang, as Plaintiffs' papers indicate. Moreover, the SAC only obliquely describes Yongkang's own alleged wrongdoing. The
The SAC does list several Yongkang's "allies" that were associated with bribery or corruption.
In short, Plaintiffs' allegations do not demonstrate that the Individual Defendants knew of and either consciously or recklessly disregarded the alleged corruption at PetroChina at the time the purported false statements were made. Therefore, Plaintiffs' § 10(b) claim must fail because the SAC does not raise a "strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter." See Dynex, 531 F.3d at 195.
Plaintiffs' failure to adequately plead either scienter or a misstatement or omission is dispositive. Thus, the Court need not reach the issue of loss causation. See In re UBS AG Sec. Litig., No. 07 Civ. 11225(RJS), 2012 WL 4471265, at *22 (S.D.N.Y. Sept. 28, 2012) aff'd sub nom. City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir.2014) ("Because the issue of scienter... proves fatal to Plaintiffs' Section 10(b)... the Court need not reach the UBS Defendants' arguments regarding ... loss causation[.]"); Hutchinson v. Perez, No. 12 Civ. 1073(HB), 2012 WL 5451258, at *8 (S.D.N.Y. Nov. 8, 2012) amended, No. 12 Civ. 1073(HB), 2013 WL 93171 (S.D.N.Y. Jan. 8, 2013) ("Since the Court must dismiss the Amended Complaint if Plaintiff fails to adequately plead scienter, I need not reach loss causation or misleading statements and omissions under the PSLRA."); Footbridge Ltd. v. Countrywide Home Loans, Inc., No. 09 Civ.4050 (PKC), 2010 WL 3790810, at *22 (S.D.N.Y. Sept. 28, 2010) ("I need not reach the issue of whether the SAC alleges loss causation because the SAC fails to allege a misstatement or that defendants acted with scienter.").
The Court notes, however, that PetroChina's so-called corrective disclosures did not disclose the information that the SAC describes. "Loss causation is typically shown by the reaction of the market to a corrective disclosure which reveals a prior misleading statement, but may also be shown by the materialization of risk method, whereby a concealed risk ... comes to light in a series of revealing events that negatively affect stock price over time.'" Solow v. Citigroup, Inc., 827 F.Supp.2d 280,
Here, Plaintiffs point to two corrective disclosures they claim revealed PetroChina's prior misleading statements. See Doc. 47 at 22. As to the first, Plaintiffs maintain that PetroChina announced on August 27, 2013 that three PetroChina officers were being investigated for "severe breaches of discipline." See id.; see also SAC ¶ 27. However, the actual text of the announcement, which PetroChina attached to its moving papers and the SAC incorporates by reference, simply states that the PRC was investigating three PetroChina officers who were resigning for "personal reasons." Paskowitz Decl., Doc. 44, Ex. C at 4. Even if Plaintiffs had properly alleged that PetroChina's public statements deceptively concealed any corruption that may have been taking place at the Company, it is unlikely that the vague August 27, 2013 announcement called into question the Company's prior representations. It neither stated what the three PetroChina officials were being investigated for, nor which arm of the PRC was conducting the investigation. In their opposition papers, Plaintiffs claim the second corrective disclosure occurred on December 17, 2013, when PetroChina announced that it had fired two of its senior officials for corruption. Doc. 47 at 22. However, the SAC merely alleges that PetroChina's stock fell following the publication of a December 17, 2013 article by Bloomberg LP, which reported that PetroChina Supervisor Qingshan and the head of Chinaoil were taken into custody by PRC authorities in connection with the corruption investigation of PetroChina. SAC ¶ 33. The article itself simply states that Qingshan's resignation is "more of an embarrassment" to "PetroChina and Kunlun Energy"
This Court has the power to dismiss a complaint against the non-moving Individual Defendants, so long as it is exercised cautiously and on notice. See Wachtler v. Cnty. of Herkimer, 35 F.3d 77, 82 (2d Cir.1994) (internal citations omitted) (affirming the district court's dismissal of a claim against a defendant who neither filed an appearance nor moved for dismissal since plaintiff was on notice from motion of other defendants and had an opportunity to be heard); see also Alki Partners, L.P. v. Vatas Holding GmbH, 769 F.Supp.2d 478,
Plaintiffs also bring claims against the Individual Defendants — Jiang, Li, and Ran — under § 20(a) of the Exchange Act, which imposes liability on individuals who control any person or entity that violates § 10. See SAC ¶¶ 77-82; see also 15 U.S.C. § 78t(a). "To assert a prima facie case under Section 20(a), a plaintiff `must show a primary violation by the controlled person and control of the primary violator by the targeted defendant, and show that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person.'" Mechel, 811 F.Supp.2d at 882 (quoting S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir.1996)). Given that a control person liability claim under § 20(a) is predicated on a primary violation of the securities laws, the control person liability claims must be dismissed because Plaintiffs have failed to allege a primary violation under § 10(b). See Rombach, 355 F.3d at 178 ("Because we have already determined that the district court properly dismissed the primary securities claims against the individual defendants, these secondary claims must also be dismissed."); see also Mechel, 811 F.Supp.2d at 859 n. 4, 882 (dismissing § 20(a) claims against individual defendants who resided in Russia and had therefore not been served with the complaint nor joined the company's motion to dismiss).
For the reasons set forth above, PetroChina's motion to dismiss is GRANTED. The Clerk of the Court is respectfully directed to terminate the motion, Doc. 42, and to close this case.
It is SO ORDERED.
