Opinion ID: 2789180
Heading Depth: 2
Heading Rank: 1

Heading: Ms. Sung

Text: We turn first to the investors’ allegation that Ms. Sung confirmed false reports of Jiangbo’s cash balances in SEC filings and shareholder conference calls.9 On appeal, the investors assert the following bases for an inference that Ms. Sung acted with scienter with respect to overstated cash balances: the magnitude of the overstatements; the internal control problems at Jiangbo that were revealed in the resignation letter; the existence of an SEC investigation; Ms. Sung’s position 9 We need only discuss whether there is a strong inference that Ms. Sung acted with scienter when she overstated Jiangbo’s cash balances. In Part II.A.3, infra, we show that the investors’ failure to plead the timing of the Hilead transaction precludes any inference of scienter that might have arisen from the transaction. 10 Case: 14-10213 Date Filed: 03/25/2015 Page: 11 of 24 as CFO; Ms. Sung’s alleged involvement in obstructing the Audit Committee’s internal investigation; and Ms. Sung’s resignation effective March 31, 2011.10 Ms. Sung argues that the opposing inference, that she acted without scienter, is more compelling in the light of several factors: the absence of particularized allegations that Ms. Sung actually knew about or was on notice of any alleged deficiencies in Jiangbo’s reporting; ambiguities and other weaknesses in the investors’ allegations of incorrect cash balances; Ms. Sung’s residency in Florida, on a different continent from Jiangbo’s day-to-day operations; Ms. Sung’s assertion that she resigned for family reasons and her decision to continue working with Jiangbo as a part-time consultant after her resignation; and the complaint’s failure to allege that Ms. Sung sold any shares during the class period or otherwise profited from the alleged fraud. From the outset, we note that the investors allege no particularized facts that directly show Ms. Sung intended to deceive shareholders or knew about or was severely reckless with respect to deficiencies in reporting. See Thompson, 610 F.3d at 634. The investors offer no allegations describing Ms. Sung’s day-to-day practices as CFO or identifying any specific misconduct apart from confirming incorrect cash balances within filings and on conference calls. Instead, the 10 The investors also assert as a basis for an inference of scienter the fact that Ms. Sung misrepresented her status as a Certified Public Accountant (“CPA”) in SEC filings. We agree with the district court that any discrepancy in Ms. Sung’s representation that she was a licensed CPA is immaterial. 11 Case: 14-10213 Date Filed: 03/25/2015 Page: 12 of 24 investors’ theory is essentially that Ms. Sung must have been aware of the misrepresentations in Jiangbo’s filings, given (1) her role as CFO in a company plagued with serious fraud and (2) her suspicious actions during Jiangbo’s rapid decline. We begin our analysis by assessing whether the allegations regarding the scope of the fraud, in the light of Ms. Sung’s position as CFO, can support a strong inference of scienter by themselves. Keeping in mind the relative strength of those allegations, we then turn to whether the allegations that Ms. Sung resigned in the midst of Jiangbo’s decline and that she participated in the obstruction of the internal investigation are sufficient to establish a strong inference of scienter.
The investors assert that the alleged fraud was so significant and obvious that Ms. Sung must have known about it, or else she was severely reckless in avoiding knowledge of the fraud. First, the investors claim that the disparity between Jiangbo’s actual and reported cash balances must have been extreme—in the tens or hundreds of millions of dollars—so that it would have been difficult or impossible for Ms. Sung not to have known about it in her capacity as CFO. To support this inference of scienter, the investors continue to rely heavily on their allegations supporting the underlying inference that Jiangbo’s accounts were overstated. Those allegations include: the company’s failure to make payments on debts in amounts that were a small fraction of the stated cash on hand, irregularities 12 Case: 14-10213 Date Filed: 03/25/2015 Page: 13 of 24 in payments to auditors and lawyers in similarly small amounts, the overt concern of the independent board members that cash balances were stated inaccurately, and the lack of cooperation from Jiangbo’s top management during the internal investigation. Second, the investors allege that a number of red flags should have put Ms. Sung on notice of the fraud. The investors argue that the existence of the SEC investigation supports an inference of scienter in two ways: the investigation should have put Ms. Sung on notice that Jiangbo’s financial reporting required more of her own scrutiny, and the fact of the investigation itself suggests that the fraud was significant in its scope. Further, the investors cite the following deficiencies in Jiangbo’s management of its financial reporting during the class period that, according to the investors, should have prompted Ms. Sung to look for and discover the fraud: “(1) weaknesses among the accounting and finance personnel, (2) dysfunctional internal controls, and (3) inadequate segregation of duties in the financial reporting function.” Doc. 43 at ¶ 196. The investors rely on the two arguments above to establish successive inferences: that material misrepresentations occurred and that Ms. Sung acted with scienter in making those representations. While the totality of the allegations may well be sufficient to support an inference that Jiangbo materially misrepresented its cash balances, we might still harbor uncertainty about that underlying inference 13 Case: 14-10213 Date Filed: 03/25/2015 Page: 14 of 24 when assessing the strength of an inference of scienter. Any “omissions and ambiguities count against inferring scienter, . . . [and] the court’s job is not to scrutinize each allegation in isolation but to assess all the allegations holistically.” Tellabs, 551 U.S. at 326. In a similar vein, this Court has recognized that an inference of scienter is diluted to the extent it is drawn from multiple predicate inferences that are each based on the same allegations. See Garfield v. NDC Health Corp., 466 F.3d 1255, 1265 (11th Cir. 2006). Regarding the investors’ first argument, we agree with the district court and Ms. Sung that several omissions and ambiguities weaken any inference of scienter to be drawn from the magnitude of alleged overstatements or any red flags. First, although the investors emphasize the magnitude by which they allege Jiangbo overstated cash balances, they fail to allege any particular amount or even a range; they merely assert in their briefs that the actual balances were “extremely limited[] and nowhere near” the full cash balances reported. Appellants’ Br. at 38. Without more specifics, the investors cannot persuasively allude to the magnitude of the fraud as a basis for a strong inference that Ms. Sung must have known of the errors as CFO. See Mizzaro, 544 F.3d at 1251 (“[W]e have no reliable way of estimating [the fraud’s] total amount, let alone inferring from the dollar amount the knowledge of senior management.”). 14 Case: 14-10213 Date Filed: 03/25/2015 Page: 15 of 24 As regards the investors’ second argument, we are not persuaded that the red flags the investors identify would have made Jiangbo’s fraud obvious to Ms. Sung, even if we also assume that some overstatement of cash balances occurred, because the complaint provides no explanation as to how these red flags should have alerted her to the fraud. Regarding the SEC investigation, the district court correctly noted that “the [complaint] does not contain any allegations about what [Ms.] Sung knew about the scope of the investigation[].” In re Jiangbo Pharm., Inc., Sec. Litig., 884 F. Supp. 2d 1243, 1263 (S.D. Fla. 2012). The “mere existence of an SEC investigation” likewise does not equip a reviewing court to explain which inferences might be available beyond a general suspicion of wrongdoing. In re Hutchinson Tech., Inc. Sec. Litig., 536 F.3d 952, 962 (8th Cir. 2008). The investors’ allegations of internal control problems suffer from the same limitation. With no explanation as to how these vaguely defined problems would have affected financial reporting or how Ms. Sung would have known about them, we cannot rely on them to add much weight to an inference of scienter. The investors would have us rely solely on Ms. Sung’s position as CFO to overlook these omissions and ambiguities in the complaint. They cite cases in which courts recognized a strong inference of scienter based in part on a senior financial executive’s oversight of the processes that produce the company’s financial statements. However, those cases involve particularized allegations that 15 Case: 14-10213 Date Filed: 03/25/2015 Page: 16 of 24 the executives knew or were severely reckless in disregarding how those processes were distorted by fraud, and so they do not inform our discussion. See Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 270 (3d Cir. 2009) (finding a strong inference that a CFO was at least reckless in endorsing flawed financial projections because of repeated, focused inquiries from analysts that correctly suggested why the projections were implausible); Freudenberg v. ETrade Fin. Corp., 712 F. Supp. 2d 171, 198-99 (S.D.N.Y. 2010) (finding a strong inference that a CFO acted with scienter on the basis of allegations that he personally reviewed erroneous loan valuations, communicated often with other executives and subordinates, and gave “reassurances” to investors regarding the key issues in the case); In re Friedman’s, Inc. Sec. Litig., 385 F. Supp. 2d 1345, 1363 (N.D. Ga. 2005) (finding scienter properly pled where the company’s controller was alleged to have reviewed incriminating documents personally and made specific choices in pursuit of an illegal scheme). Without more particularized allegations, the investors’ claim that Jiangbo’s fraud was too large for Ms. Sung not to have noticed is unpersuasive. We now consider whether the investors’ allegations of Ms. Sung’s suspicious behavior can fill the gaps in their allegations regarding the scope of the fraud. 16 Case: 14-10213 Date Filed: 03/25/2015 Page: 17 of 24 2. Ms. Sung’s resignation and alleged obstruction of the Audit Committee The investors argue that two actions Ms. Sung took during Jiangbo’s decline are persuasive, if circumstantial, proof of her knowledge of the fraud: her resignation as CFO and her alleged obstruction of the Audit Committee’s internal investigation. Various courts have recognized that an executive officer’s resignation can strengthen an inference of scienter when it occurs around the same time as an investigation. See, e.g., Fouad v. Isilon Sys., Inc., No. C07–1764, 2008 WL 5412397, at  (W.D. Wash. Dec. 29, 2008). The investors do not offer any reason why Ms. Sung’s resignation would be incriminating other than for its proximity to internal and external investigations, and so they rely on the general intuition that an officer resigning amid allegations of fraud seeks to disassociate herself from any appearance of wrongdoing. Ms. Sung argued in her motion to dismiss that her “family reasons” for resigning and her continued work for Jiangbo as a consultant after her resignation belie any suggestion that she wanted to disassociate herself from fraud. Doc. 51 at 29. We find this explanation more compelling than the investors’ desired inference. Though we do not reflexively credit Ms. Sung’s assertion that she had family reasons for resigning, the fact that she continued to work for the company on a part-time basis equally supports a 17 Case: 14-10213 Date Filed: 03/25/2015 Page: 18 of 24 nonculpable explanation. Her resignation adds weight to an overall inference of scienter, but not a substantial amount of weight. Regarding the investors’ contention that Ms. Sung demonstrated her knowledge of the fraud by assisting Mr. Cao in obstructing the Audit Committee’s internal investigation, we note that obstruction of an investigation supports an inference of scienter, particularly where defendants affirmatively make efforts to conceal fraud. See, e.g., Katz v. Image Innovations Holdings, Inc., 542 F. Supp. 2d 269, 274 (S.D.N.Y. 2008). The investors claim that Ms. Sung refused to turn over materials requested by the Audit Committee because she was waiting for Mr. Cao’s authorization. While the resignation letter makes clear that she did not grant the Audit Committee the access it requested, the letter also explains that she personally prepared the materials for review and preliminarily agreed to turn them over pending the company’s approval. Doc. 43-1 at 13. Even if she neglected a prevailing duty to provide her materials to the committee regardless of the chairman’s wishes, we do not think these facts add much weight to an inference of scienter, given that she apparently was willing to turn the materials over. The investors do not allege that she was otherwise unwilling to cooperate or that she took any steps to conceal documents that might reveal fraud. 18 Case: 14-10213 Date Filed: 03/25/2015 Page: 19 of 24 3. Timing of the Hilead transaction We agree with the district court that the lack of information in the complaint concerning the timing of the Hilead transaction is fatal to the allegation that it was a material omission in Jiangbo’s SEC filings. “A defendant’s omission to state a material fact is proscribed only when the defendant has a duty to disclose.” Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1206 (11th Cir. 2001) (alteration and internal quotation marks omitted). The investors contend that Ms. Sung had a general duty “to promptly disseminate accurate and truthful information” that was material to the market price of the stock. Doc. 43 at ¶ 80. Similarly, they contend that Frazer did not exercise “due professional care” in ensuring the accuracy of its report. Id. at ¶¶ 195-96. Absent any allegation of when the transaction took place, however, we cannot conclude that Ms. Sung or Frazer violated a duty to disclose the transaction. Furthermore, even if the lack of factual allegations regarding timing did not preclude the investors from identifying a duty to disclose with respect to any given filing, the complaint’s barebones information about the alleged transaction would be far from sufficient to tie Ms. Sung to the transaction in any meaningful way. Thus, we do not rely upon the Hilead transaction in conducting our scienter analysis. 19 Case: 14-10213 Date Filed: 03/25/2015 Page: 20 of 24 4. Scienter analysis To complete our scienter analysis as to Ms. Sung, we must consider her additional arguments that weigh against an inference of scienter. See Tellabs, 551 U.S. at 324. First, as a resident of Florida, she was not physically present to observe Jiangbo’s day-to-day operations in China. Second, there is no allegation that she sold Jiangbo stock during the class period or otherwise profited from the alleged fraud beyond receiving a salary. In the light of these observations and those articulated above, we conclude that the complaint does not give rise to a sufficiently strong inference of scienter as to Ms. Sung. We acknowledge that Ms. Sung’s resignation and her failure to cooperate fully with the Audit Committee are grounds for some suspicion, but the investors are hard pressed to explain how this suspicion is more particularized than the general impression that fraud was taking place at Jiangbo in some unknown fashion. We also acknowledge that if the investors’ allegations of overstated cash balances are true, then the investors would have a strong case that Ms. Sung was negligent not to know about these discrepancies. The initiation of two investigations suggests that Ms. Sung may have failed to fulfill basic duties to investors in her capacity as CFO. However, upon drawing all reasonable inferences in the investors’ favor, we do not think the complaint establishes that she must have known about discrepancies in reporting or that she was severely reckless in not knowing about them. The seriousness of 20 Case: 14-10213 Date Filed: 03/25/2015 Page: 21 of 24 Jiangbo’s errors and Ms. Sung’s proximity to those errors at most imply negligence, which is not enough to establish scienter. See Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1281-82 (11th Cir. 1999).