1

15-2100 

In re Puda Coal Securities Inc. Litigation

1 UNITED STATES COURT OF APPEALS 

2 FOR THE SECOND CIRCUIT

3 

4 SUMMARY ORDER

5 

6 RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER 

7 FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF 

8 APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY 

9 ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX 

10 OR AN ELECTRONIC DATABASE (WITH THE NOTATION ASUMMARY ORDER@). A PARTY CITING A SUMMARY 

11 ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. 

12 

13 At a stated term of the United States Court of Appeals for 

14 the Second Circuit, held at the Thurgood Marshall United States 

15 Courthouse, 40 Foley Square, in the City of New York, on the 

20th 16 day of May, two thousand sixteen. 

17 

18 PRESENT: DENNIS JACOBS, 

19 BARRINGTON D. PARKER, 

20 REENA RAGGI, 

21 Circuit Judges. 

22 

23 - - - - - - - - - - - - - - - - - - - -X 

24 SALOMON QUERUB, HOTEL VENTURES, HOWARD 

25 PRITCHARD, HARRIET GOLDSTEIN, 

26 individually and on behalf of all 

27 others similarly situated, THOMAS 

28 ROSENBERGER, STEVEN WEISSMANN, TRELLUS 

29 MGMT. CO. LLC, 

30 Plaintiffs-Appellants, 

31 

32 -v.- 15-2100 

33 

34 MOORE STEPHENS HONG KONG, 

35 Defendant-Appellee. 

36 

37 PUDA COAL, INC., MING ZHAO, LIPING ZHU, 

38 QIONG LABY WU, YAO ZHAO, CARRET & CO., 

39 LLC, MACQUARIE CAPITAL (USA) INC., 
2

1 JIANFEI NI, C. MARK TANG, LAWRENCE 

2 WIZEL, BREAN MURRAY, CARRT & CO., LLC, 

3 MOORE STEPHENS INT’L LTD., MOORE 

4 STEPHENS, P.C., 

5 Defendants. 

6 

7 - - - - - - - - - - - - - - - - - - - -X 

8 

9 FOR APPELLANTS: LAURENCE M. ROSEN, The Rosen Law 

10 Firm, P.A., New York, NY; Glancy 

11 Prongay & Murray LLP, Los Angeles, 

12 CA; Pomerantz LLP, Chicago, IL; 

13 Kirby McInerney LLP, New York, NY. 

14 

15 FOR APPELLEE: BRIAN J. MASSENGILL (James C. 

16 Schroeder, Dana Douglas, Justin A. 

17 McCarty, on the brief), Mayer 

18 Brown LLP, Chicago, IL. 

19 

20 Appeal from a judgment of the United States District Court 

21 for the Southern District of New York (Forrest, J.). 

22 

23 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND 

24 DECREED that the judgment of the district court be AFFIRMED. 

25 

26 Plaintiffs-appellants, investors in Puda Coal, Inc. 

27 (“Puda”), appeal from the judgment of the United States District 

28 Court for the Southern District of New York (Forrest, J.) 

29 dismissing on summary judgment their securities class action 

30 against defendant-appellee Moore Stephens Hong Kong (“Moore 

31 Stephens”). We assume the parties’ familiarity with the 

32 underlying facts, the procedural history, and the issues 

33 presented for review. 

34 Until April 2011, Puda was a publicly-traded, U.S.-listed 

35 company headquartered in China, which purportedly held, as its 

36 sole asset, a 90% ownership stake in Shanxi Puda Coal Group Co., 

37 Ltd. (“Shanxi Coal”), a coal supplier for steel manufacturing. 

38 In fact, in September 2009, Puda’s chairman transferred Puda’s 

39 entire interest in Shanxi Coal to himself, leaving Puda a shell 

40 company. This transfer was reflected in shareholder meeting 

41 minutes for Shanxi Coal and in various documents filed in 
3

1 China’s State Administration of Industry and Commerce. But 

2 Puda’s financial statements for 2009 and 2010 included all of 

3 the assets, liabilities, revenues, expenses, and net income for 

4 Shanxi Coal. 

5 Moore Stephens is a Hong Kong-based audit firm that issued 

6 “clean opinions” for Puda’s 2009 and 2010 financial statements 

7 pursuant to Public Company Accounting Oversight Board (“PCAOB”) 

8 standards. After April 2011, when the Shanxi Coal transfer 

9 became public, Moore Stephens resigned as Puda’s auditor and 

10 announced that its 2009 and 2010 audit opinions could no longer 

11 be relied upon. 

12 Puda’s investors filed a securities class action shortly 

13 after news broke of the Shanxi Coal transfer, alleging that 

14 Moore Stephens (and others) violated Section 11 of the 

15 Securities Act of 1933 and Section 10(b) of the Securities 

16 Exchange Act of 1934 (and Rule 10b-5). In support, plaintiffs17 appellants proffered Anita C.M. Hou as an expert who testified 

18 that Moore Stephens failed to comply with the auditing standards 

19 of Hong Kong and/or the People’s Republic of China. However, 

20 she admitted that she was not an expert on PCAOB and could not 

21 opine on whether the audits complied with PCAOB standards. 

22 Moore Stephens proffered Alexander H. Mackintosh as an expert 

23 in PCAOB standards who opined that Moore Stephens’s 2009 and 

24 2010 audits fully complied with PCAOB standards. 

25 At summary judgment, the district court struck 

26 plaintiffs-appellants’ sole accounting expert, Hou, and 

27 granted summary judgment in favor of Moore Stephens. The 

28 district court reasoned that Hou did not have the requisite 

29 expertise to offer opinions on any matters relevant to the case 

30 because she had no experience or expertise in PCAOB audits and 

31 because PCAOB provides the standard of conduct that Moore 

32 Stephens allegedly failed to satisfy. Without competent 

33 evidence on PCAOB auditing standards, plaintiffs-appellants 

34 could not raise a triable issue of fact regarding whether Moore 

35 Stephens egregiously departed from applicable professional 

36 standards of care. The district court further concluded that 

37 plaintiffs-appellants failed to proffer any evidence that Moore 

38 Stephens issued subjectively false opinions. This appeal 

39 followed. 
4

1 We review for abuse of discretion the admission or 

2 exclusion of expert testimony. Major League Baseball Props., 

3 Inc. v. Salvino, Inc., 542 F.3d 290, 311 (2d Cir. 2008). We 

4 review de novo a district court’s grant of summary judgment. 

5 Noll v. Int’l Bus. Machs. Corp., 787 F.3d 89, 93 (2d Cir. 2015). 

6 1. An expert witness is “permitted wide latitude to offer 

7 opinions, including those that are not based on firsthand 

8 knowledge or observation,” but only after a trial judge has 

9 determined “whether the expert is proposing to testify to (1) 

10 scientific knowledge that (2) will assist the trier of fact to 

11 understand or determine a fact in issue”; “[e]xpert testimony 

12 which does not relate to any issue in the case is not relevant 

13 and, ergo, non-helpful.” Daubert v. Merrell Dow Pharm., Inc., 

14 509 U.S. 579, 591-92 (1993). In other words, the expert must 

15 be qualified to testify as to a certain issue; the expert must 

16 offer an opinion on that issue that is informed by reliable 

17 information and methodology; and the probative value of the 

18 expert testimony must not be substantially outweighed by the 

19 danger of, inter alia, confusion of the issues or misleading 

20 the jury. Nimely v. City of New York, 414 F.3d 381, 397 (2d 

21 Cir. 2005). 

22 The district court appropriately struck Hou as an expert 

23 witness. As she admitted, Hou lacks experience and expertise 

24 in conducting or reviewing audits done according to PCAOB 

25 standards and is therefore not qualified to opine on PCAOB 

26 auditing standards. Because Puda was a U.S.-listed company, 

27 the only auditing standards in question are those promulgated 

28 by PCAOB – not those of Hong Kong or PRC – so Hou is not qualified 

29 as an expert on the sole relevant auditing standard. Opinions 

30 on Hong Kong and/or PRC auditing standards would not be helpful 

31 to the jury on any relevant issue, and would risk muddling the 

32 issue of the applicable standard of care. Finally, Hou’s 

33 testimony that auditing standards in Hong Kong or PRC do not 

34 materially differ from PCAOB standards is speculative. 

35 Because she is not qualified to opine on PCAOB standards, she 

36 has no basis for comparing them with other standards. 

37 2. A violation of Section 10(b) requires “scienter, a 

38 mental state embracing intent to deceive, manipulate, or 

39 defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 
5

1 U.S. 308, 319 (2007) (internal quotation marks omitted). 

2 Recklessness satisfies the scienter requirement when the 

3 conduct is “highly unreasonable, representing an extreme 

4 departure from the standards of ordinary care.” Rothman v. 

5 Gregor, 220 F.3d 81, 98 (2d Cir. 2000) (internal quotation marks 

6 omitted). For an auditor, the conduct “must, in fact, 

7 approximate an actual intent to aid in the fraud being 

8 perpetrated by the audited company.” Id. In essence, 

9 recklessness requires a showing that the “audit [was] so 

10 deficient as to amount to no audit at all.” In re Advanced 

11 Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir. 2015). 

12 Plaintiffs-appellants cannot raise a triable issue of fact 

13 as to whether Moore Stephens was sufficiently reckless to be 

14 liable under Section 10(b). They fall short regardless of 

15 whether they are required to proffer expert testimony to 

16 establish scienter for this claim. If expert testimony is 

17 necessary, plaintiffs-appellants have no factual basis for 

18 alleging that the 2009 and 2010 audits were “extreme 

19 departure[s]” from PCAOB standards “amounting to no audit at 

20 all” because they cannot establish the PCAOB standard of 

21 ordinary care. The uncontested expert testimony is that Moore 

22 Stephens fully complied with PCAOB standards. If expert 

23 testimony is not required, plaintiffs-appellants still fail to 

24 show Moore Stephens conducted the audits recklessly. The 

25 purported “red flags” were not obvious signs of fraud; at its 

26 core the complaint alleges “fraud by hindsight,” which is 

27 inadequate. See Advanced Battery, 781 F.3d at 645-46; see also 

28 Special Situations Fund III QP, L.P. v. Deloitte Touche Tohmatsu 

29 CPA, Ltd., 2016 WL 1392280, at *2 (2d Cir. Apr. 8, 2016). 

30 3. Statements of opinion are actionable under Section 11 

31 as false or misleading only if (i) “the issuer of the opinion 

32 held a subjective belief inconsistent with the opinion,” or (ii) 

33 the “opinion ‘omits material facts about the issuer’s inquiry 

34 into or knowledge concerning a statement of opinion, . . . if 

35 those facts conflict with what a reasonable investor would take 

36 from the statements [of opinion] itself.” Special Situations 

37 Fund, 2016 WL 1392280, at *3 (quoting Omnicare, Inc. v. Laborers 

38 Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1329 

39 (2015)). Audit reports, labeled “opinions” and involving 

40 considerable subjective judgment, are statements of opinion 
6

1 subject to the Omnicare standard for Section 11 claims. Id. 

2 There is no evidence that Moore Stephens did not believe 

3 its “clean audit opinions” for Puda’s 2009 or 2010 financial 

4 statements. Nor is there evidence that Moore Stephens omitted 

5 material facts about the basis for its audit reports. 

6 Plaintiffs-appellants cannot sustain their Section 11 claim. 

7 Accordingly, and finding no merit in plaintiff-appellants’ 

8 other arguments, we hereby AFFIRM the judgment of the district 

9 court. 

10 FOR THE COURT: 

11 CATHERINE O’HAGAN WOLFE, CLERK