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 ELECTRON IC 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
28 th 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 P ETROLEUM HOLDINGS LIMITED,WANG HONG JU N, ZHANG YANG, JU GUIZHI, ROBERT C. BRUCE, EDWARD M. RULE, LI JING FU, YU LI GUO,

Defendants-Appellees

. 1

_____________________________________________________

Appearing for Plaintiff-Appellant: TA MAR 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 & Pl impton LLP, New York, NY, for Defendant-Appellee Robert C. Bruce

.

Appeal from the United States District C ourt for the Southern Di strict 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 Distri ct Court for the Southern Dist rict of New York (Cedarbaum, J. ) granting Defendant-Appellee Robe rt C. Bruce’s motion to dism iss, and (2) the January 15, 2015 order of the same district court granting De fendants-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 Securitie s 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 mark s omitted). “[T]o be adequate, scienter allegations must give rise to a stro ng 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 fr aud or (b) otherwise a lleging 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 SE C filings attesting to the company’s internal controls, while allegedly simultaneously loot ing 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 pers onal way from the purported fraud.” (internal quotation marks omitted)). These allegations ar e 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 de fendant is a corporate entity, . . . the pleaded facts must create a strong inference that someone whose in tent 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 allegedly3 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 ag ainst Wang and Ju under Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a ). Section 20(a) “pr ovides that individual executives, as ‘controlling person[s]’ of a comp any, 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) (quoti ng 15 U.S.C. § 78t(a)). “To establish a prima facie case of control person liab ility, a plaintiff must show (1) a primary violation by the controlled person, (2) control of th e primary violator by the defenda nt, and (3) that the defendant was, in some meaningful sense, a culpable participant in the cont rolled 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. Simila rly, as a director of Ch ina North and an alleged participant in the unauthorized transfers, Ju may also be liable as a “controlling person” under Section 20(a). Because the distri ct court never addressed Acticon ’s Section 20(a) claims once it dismissed the underlying Section 10(b) claim agai nst 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 co urt’s decision. With respect to the remaining
Defendants – China North’s directors and officer s – 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 . . . mu st show conscious
recklessness – i.e. , a state of mind approximating actual inte nt, 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 standard s of ordinary care to th e extent that the danger
was either known to the defendant or so obvious th at the defendant must have been aware of it.”
Kalnit , 264 F.3d at 142 (internal quotation marks omitted).

Acticon has failed to meet this standar d, 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 irregu larities, standing alone, are insu fficient to state a securities
fraud claim” in the absence of “evid ence 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 al legations 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 rationa lly drawn from the facts alleged”).4 On remand, the district court may, in its disc retion, 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 amendm ent 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 separa te SEC action against Wang regarding his illicit transfers of China North’s funds. However, this SEC complaint alleges th at China North’s board of directors, on which the remaining Defendant s 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 pro ceedings consistent with this
order.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk