### 1 15-2100 In re Puda Coal Securities Inc. Litigation



### UNITED STATES COURT OF APPEALS 1


### FOR THE SECOND CIRCUIT 2 3 

# SUMMARY ORDER 4

5

**R ULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT**  **. C**  **ITATION TO A SUMMARY ORDER** 6

**FILED ON OR AFTER J** **ANUARY 1,**  **2007, IS PERMITTED AND IS GOVERNED BY**  **F EDERAL**  **R ULE OF**  7

**A PPELLATE**  **P ROCEDURE**  **32.1 AND THIS COURT**  = **S L**  **OCAL R**  **ULE 32.1.1.**  **W HEN CITING A SUMMARY**  8

**ORDER IN**  **A DOCUMENT**  **FILED WITH**  **THIS COURT**  **, A**  **PARTY MUST**  **CITE EITHER**  **THE F**  **EDERAL A**  **PPENDIX** 9

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

**ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL .**  11
12 

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

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

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


### 20 **th** 

### day of May, two thousand sixteen. 16

17 

### PRESENT: DENNIS JACOBS, 18 

### BARRINGTON D. PARKER, 19 

### REENA RAGGI, 20 

### Circuit Judges. 21

22



### - - - - - - - - - - - - - - - - - - - -X 23 

### SALOMON QUERUB, HOTEL VENTURES, HOWARD 24 

### PRITCHARD, HARRIET GOLDSTEIN, 25 

### individually and on behalf of all 26 

### others similarly situated, THOMAS 27 

### ROSENBERGER, STEVEN WEISSMANN, TRELLUS 28 

### MGMT. CO. LLC, 29 

### Plaintiffs-Appellants, 30
31


### -v.- 15-2100 32
33 

### MOORE STEPHENS HONG KONG, 34 

### Defendant-Appellee. 35
36 

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

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

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

### 2 **JIANFEI NI, C. MARK TANG, LAWRENCE** 1 

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

### MOORE STEPHENS INT’L LTD., MOORE 3 

### STEPHENS, P.C., 4 

### Defendants. 5
6



### - - - - - - - - - - - - - - - - - - - -X 7
8


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

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

### Prongay & Murray LLP, Los Angeles, 11 

### CA; Pomerantz LLP, Chicago, IL; 12 

### Kirby McInerney LLP, New York, NY. 13

14


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

### Schroeder, Dana Douglas, Justin A. 16 

### McCarty, on the brief), Mayer 17 

### Brown LLP, Chicago, IL. 18
19 

### Appeal from a judgment of the United States District Court 20 

### for the Southern District of New York (Forrest, J.). 21
22 

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


### DECREED that the judgment of the district court be **AFFIRMED**

. 24

25 

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

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

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

### dismissing on summary judgment their securities class action 29 

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

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

### underlying facts, the procedural history, and the issues 32 

### presented for review. 33



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

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

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

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

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

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

### company. This transfer was reflected in shareholder meeting 40 

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

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

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

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

### Shanxi Coal. 4



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

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

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

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

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

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

### be relied upon. 11



### Puda’s investors filed a securities class action shortly 12 

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

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

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

### Exchange Act of 1934 (and Rule 10b-5). In support, plaintiffs16 

### appellants proffered Anita C.M. Hou as an expert who testified 17 

### that Moore Stephens failed to comply with the auditing standards 18 

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

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

### opine on whether the audits complied with PCAOB standards. 21 

### Moore Stephens proffered Alexander H. Mackintosh as an expert 22 

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

### 2010 audits fully complied with PCAOB standards. 24



### At summary judgment, the district court struck 25 

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

### granted summary judgment in favor of Moore Stephens. The 27 

### district court reasoned that Hou did not have the requisite 28 

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

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

### because PCAOB provides the standard of conduct that Moore 31 

### Stephens allegedly failed to satisfy. Without competent 32 

### evidence on PCAOB auditing standards, plaintiffs-appellants 33 

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

### Stephens egregiously departed from applicable professional 35 

### standards of care. The district court further concluded that 36 

### plaintiffs-appellants failed to proffer any evidence that Moore 37 

### Stephens issued subjectively false opinions. This appeal 38 

### followed. 39

### 4 We review for abuse of discretion the admission or 1 

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

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

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

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



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

### opinions, including those that are not based on firsthand 7 

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

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

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

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

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

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

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

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

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

### information and methodology; and the probative value of the 17 

### expert testimony must not be substantially outweighed by the 18 

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

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

### Cir. 2005). 21



### The district court appropriately struck Hou as an expert 22 

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

### in conducting or reviewing audits done according to PCAOB 24 

### standards and is therefore not qualified to opine on PCAOB 25 

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

### the only auditing standards in question are those promulgated 27 

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

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

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

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

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

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

### materially differ from PCAOB standards is speculative. 34 

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

### has no basis for comparing them with other standards. 36



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

### mental state embracing intent to deceive, manipulate, or 38 

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

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

### Recklessness satisfies the scienter requirement when the 2 

### conduct is “highly unreasonable, representing an extreme 3 

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

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

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

### approximate an actual intent to aid in the fraud being 7 

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

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

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

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



### Plaintiffs-appellants cannot raise a triable issue of fact 12 

### as to whether Moore Stephens was sufficiently reckless to be 13 

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

### whether they are required to proffer expert testimony to 15 

### establish scienter for this claim. If expert testimony is 16 

### necessary, plaintiffs-appellants have no factual basis for 17 

### alleging that the 2009 and 2010 audits were “extreme 18 

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

### all” because they cannot establish the PCAOB standard of 20 

### ordinary care. The uncontested expert testimony is that Moore 21 

### Stephens fully complied with PCAOB standards. If expert 22 

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

### show Moore Stephens conducted the audits recklessly. The 24 

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

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

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

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

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



### 3. Statements of opinion are actionable under Section 11 30 

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

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

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

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

### those facts conflict with what a reasonable investor would take 35 

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

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

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

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

### considerable subjective judgment, are statements of opinion 40

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



### There is no evidence that Moore Stephens did not believe 2 

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

### statements. Nor is there evidence that Moore Stephens omitted 4 

### material facts about the basis for its audit reports. 5 

### Plaintiffs-appellants cannot sustain their Section 11 claim. 6



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

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



### court. 9



### FOR THE COURT: 10 

### CATHERINE O’HAGAN WOLFE, CLERK 11