15-172-cv 

Acticon AG v. China North East Petroleum Holdings Ltd., et al.

 

UNITED STATES COURT OF APPEALS 

FOR THE SECOND CIRCUIT 

SUMMARY ORDER 

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

SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED 

BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. 

WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY 

MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE 

NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY 

OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL. 

 At a stated Term of the United States Court of Appeals for the Second Circuit, held at the 

Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York on the 

28th day of August, two thousand fifteen. 

Present: GUIDO CALABRESI, 

 CHESTER J. STRAUB, 

 ROSEMARY S. POOLER, 

 Circuit Judges. 

____________________________________________________ 

ACTICON AG, 

 Plaintiff-Appellant, 

 v. 15-172-cv 

CHINA NORTH EAST PETROLEUM HOLDINGS 

LIMITED,WANG HONG JUN, ZHANG YANG, 

JU GUIZHI, ROBERT C. BRUCE, EDWARD M. RULE, 

LI JING FU, YU LI GUO, 

 Defendants-Appellees.

1

_____________________________________________________ 

 

Appearing for Plaintiff-Appellant: TAMAR A. WEINRIB (Jeremy A. Lieberman, 

Emma Gilmore, Michele S. Carino, on the brief), 

Pomerantz LLP, New York, NY. 

 

1

 The Clerk of the Court is directed to amend the case caption as above. 
2 

Appearing for Defendants-Appellees: EDWIN G. SCHALLERT (Christine Ford, Jared I. 

Kagan), Debevoise & Plimpton LLP, New York, 

NY, for Defendant-Appellee Robert C. Bruce. 

 Appeal from the United States District Court for the Southern District of New York 

(Cedarbaum, J.). 

ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED, 

AND DECREED that the judgment of said District Court be and it hereby is AFFIRMED IN 

PART, VACATED IN PART, and REMANDED. 

 Plaintiff-Appellant Acticon AG (“Acticon”) appeals from (1) the December 10, 2014 

order of the United States District Court for the Southern District of New York (Cedarbaum, J.) 

granting Defendant-Appellee Robert C. Bruce’s motion to dismiss, and (2) the January 15, 2015 

order of the same district court granting Defendants-Appellees China North East Petroleum 

Holdings Limited (“China North”), Wang Hong Jun (“Wang”), Ju Guizhi (“Ju”), Zhang Yang, 

Edward M. Rule, Li Jing Fu, and Yu Li Guo’s motion to dismiss. We assume the parties’ 

familiarity with the underlying facts, procedural history, and specification of issues for review. 

A claim under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 

and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, is adequately pleaded only if there are sufficient 

allegations of scienter – “an intent to deceive, manipulate or defraud.” Kalnit v. Eichler, 264 F.3d 

131, 138 (2d Cir. 2001) (internal quotation marks omitted). “[T]o be adequate, scienter 

allegations must give rise to a strong inference of fraudulent intent.” Id. (internal quotation marks 

omitted). A plaintiff may “plead scienter by (a) alleging facts demonstrating that defendants had 

both the motive and an opportunity to commit fraud or (b) otherwise alleging facts to show 

strong circumstantial evidence of defendants’ conscious misbehavior or recklessness.” In re 

Scholastic Corp. Sec. Litig., 252 F.3d 63, 74 (2d Cir. 2001). 

Applying these standards, we vacate the district court’s dismissal of the Section 10(b) and 

Rule 10b-5 claims against China North and Wang. Acticon has sufficiently pleaded Wang’s 

scienter with allegations of his motive and opportunity to commit fraud. As China North’s 

former CEO, Wang signed all of the relevant SEC filings attesting to the company’s internal 

controls, while allegedly simultaneously looting China North’s treasury and engaging in 

unauthorized transfers of company funds. See ECA, Local 134 IBEW Joint Pension Trust of Chi. 

v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009) (“[T]o raise a strong inference of 

scienter through motive and opportunity to defraud, [a plaintiff] must allege that [a defendant] or 

its officers benefitted in some concrete and personal way from the purported fraud.” (internal 

quotation marks omitted)). These allegations are also sufficient to support Acticon’s claim 

against China North, because given Wang’s position as China North’s former CEO, his scienter 

can be imputed to the company. See Teamsters Local 445 Freight Div. Pension Fund v. Dynex 

Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008) (“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.”). However, we affirm the dismissal of the Section 

10(b) and Rule 10b-5 claim against Ju. Although Ju was also allegedly responsible for the 

unauthorized transfers, there is no allegation that she reviewed or signed any of the allegedly 
3 

false SEC filings, and thus no basis to conclude that she made a material misrepresentation. See 

S.E.C. v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) 

Having vacated the dismissal of the Section 10(b) claim against China North, we also 

vacate the dismissal of Acticon’s claims against Wang and Ju under Section 20(a) of the 

Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). Section 20(a) “provides that individual 

executives, as ‘controlling person[s]’ of a company, are secondarily liable for their company’s 

violations of the Exchange Act.” Emps.’ Ret. Sys. of Gov’t of V.I. v. Blanford, --- F.3d ---, 2015 

WL 4491319, at *6 (2d Cir. July 24, 2015) (quoting 15 U.S.C. § 78t(a)). “To establish a prima 

facie case of control person liability, a plaintiff must show (1) a primary violation by the 

controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant 

was, in some meaningful sense, a culpable participant in the controlled person’s fraud.” ATSI 

Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007). 

As China North’s CEO, Wang may be liable as an individual who controlled China North 

and played a culpable role in its fraud. Similarly, as a director of China North and an alleged 

participant in the unauthorized transfers, Ju may also be liable as a “controlling person” under 

Section 20(a). Because the district court never addressed Acticon’s Section 20(a) claims once it 

dismissed the underlying Section 10(b) claim against China North, we leave the sufficiency of 

Acticon’s Section 20(b) allegations to be decided on remand. 

We affirm the remainder of the district court’s decision. With respect to the remaining 

Defendants – China North’s directors and officers – Acticon attempts to show scienter through 

these Defendants’ conscious misbehavior or recklessness. A plaintiff relying solely on the 

defendant’s “alleged conscious misbehavior or recklessness . . . must show conscious 

recklessness – i.e., a state of mind approximating actual intent, and not merely a heightened form 

of negligence.” Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 106 (2d Cir. 2015) (internal 

quotation marks omitted). Such conduct must “at the least” be “highly unreasonable and . . . 

represent[] 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 aware of it.” 

Kalnit, 264 F.3d at 142 (internal quotation marks omitted). 

Acticon has failed to meet this standard, premising the remaining Defendants’ 

recklessness on their failure to identify defects in the company’s internal controls and errors in 

the company’s accounting statements. In general, the failure “to identify problems with [a] 

defendant-company’s internal controls . . . does not constitute reckless conduct sufficient for § 

10(b) liability.” Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000). Similarly, “[a]llegations of 

GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities 

fraud claim” in the absence of “evidence of corresponding fraudulent intent.” ECA, 553 F.3d at 

200 (internal quotation marks omitted). Moreover, with respect to Defendant Bruce, any 

inference of scienter is further weakened by allegations describing his affirmative efforts to 

uncover fraud by China North. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 

314 (2007) (stating that a court “must consider, not only inferences urged by the plaintiff, . . . 

but also competing inferences rationally drawn from the facts alleged”). 
4 

On remand, the district court may, in its discretion, grant leave to amend the complaint as 

to Wang, Ju, and China North. However, as to the remaining Defendants, we affirm the district 

court’s denial of leave to amend. “[W]here amendment would be futile, denial of leave to amend 

is proper.” In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 220 (2d Cir. 2005), abrogated 

on other grounds by F.T.C. v. Actavis, Inc., 133 S. Ct. 2223 (2013). Acticon seeks to amend its 

complaint to include allegations from a separate SEC action against Wang regarding his illicit 

transfers of China North’s funds. However, this SEC complaint alleges that China North’s board 

of directors, on which the remaining Defendants served, was not informed of and did not 

approve Wang’s alleged wrongful transfers. Thus, these SEC allegations only further undercut 

the inference of scienter as to the remaining Defendants. 

 Accordingly, the judgment of the district court hereby is AFFIRMED IN PART and 

VACATED IN PART, and this case is REMANDED for further proceedings consistent with this 

order. 

 FOR THE COURT: 

 Catherine O’Hagan Wolfe, Clerk