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

Heading: The nature of the alleged fraud

Text: As required by securities law governing publicly traded companies, Jiangbo submitted filings to the SEC that disclosed the company’s finances and other material information. 5 The investors’ consolidated amended complaint (the “complaint”) alleges, inter alia, that Ms. Sung and Frazer misrepresented the company’s cash balances and failed to disclose a material related-party transaction in statements within or appurtenant to those filings, in violation of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b–5, 17 C.F.R. 5 These filings included Form 10-Ks, Form 10-Qs, and Form 8-Ks. 4 Case: 14-10213 Date Filed: 03/25/2015 Page: 5 of 24 § 240.10b–5. 6 The alleged related-party transaction involved a $31 million transfer to Shandong Hilead Biotechnology Co., Ltd. (“Hilead”), a company controlled by Jiangbo chairman Cao Wubo, who is a defendant in the underlying action.
During the class period, Jiangbo consistently reported in its filings with the SEC that its cash balances were near or above $100 million. As CFO, Ms. Sung certified to the SEC that Jiangbo had sufficient internal controls and procedures to ensure that the filings were accurate and that no material information was missing. 7 In addition to signing these certifications within Jiangbo’s filings, Ms. Sung participated in multiple conference calls with shareholders in which she reiterated cash balances from the filings. During these calls, Ms. Sung emphasized to shareholders that the company’s growth and cash position were “strong.” Doc. 43 at ¶¶ 150, 158, 170. The investors allege that Jiangbo’s cash balances were overstated in the SEC filings and, consequently, that Ms. Sung’s formal certifications and verbal confirmations of the figures were material misrepresentations. The complaint lists 6 The complaint also alleges that Jiangbo overstated its accounts receivable and failed to disclose the SEC investigation in filings that followed, but the investors do not assert these claims on appeal. 7 After Ms. Sung stepped down, she ceased to certify filings or make public statements about Jiangbo’s financial position on behalf of the company. Accordingly, the investors assert no claims against Ms. Sung based on misrepresentations or omissions occurring after her resignation became effective on March 31, 2011. 5 Case: 14-10213 Date Filed: 03/25/2015 Page: 6 of 24 irregularities in Jiangbo’s management of its finances that support an inference that its cash balances were actually much lower. First, Jiangbo defaulted in early 2011 on a relatively small principal payment—$3.5 million—that it owed on debt from its initial financing years earlier. Second, Jiangbo failed to make timely payments to Cadwalader and E&Y for their assistance in the internal investigation, and when the company ultimately made a partial payment of only RMB 2.2 million,8 the funds appeared to have come from the personal account of a Jiangbo employee. The investors reason that if Jiangbo’s cash balances really had been in excess of $100 million for most of the class period, Jiangbo would not have had trouble meeting such minimal obligations.
The investors additionally allege that Jiangbo was involved in a material related-party transaction with Hilead that none of Jiangbo’s principal officers, including Ms. Sung, properly disclosed in filings or public statements. The investors first learned that this transaction might have occurred from the resignation letter, dated June 6, 2011, of two of Jiangbo’s independent board members who sat on the Audit Committee (the “resignation letter”). The resignation letter noted that the Audit Committee had issued unsatisfied requests for bank slips showing receipt of the same amount—RMB 200 million, or roughly 8 Using the conversion rate contained in the complaint, the dollar equivalent would have been approximately $341,000. 6 Case: 14-10213 Date Filed: 03/25/2015 Page: 7 of 24 $31 million—from both Jiangbo and Hilead. The letter further stated that the Audit Committee was awaiting an “Auditor’s Verification Report on the capital injection in relation to the RMB 200 million capital of Hilead . . . .” Doc. 43-1 at 20-21. Given Mr. Cao’s control of Hilead and the size of the transaction relative to Jiangbo’s stated cash balances, the investors allege that any such transaction was necessarily “material” and should have been disclosed. Thus, the investors claim that Ms. Sung’s certification of filings and statements to shareholders made material omissions under the meaning of 17 C.F.R. § 240.10b-5 insofar as they did not reference the Hilead transaction.
The investors allege that Frazer is liable for the same two material misrepresentations or omissions as Ms. Sung, citing a single unqualified audit report that Frazer issued regarding the fiscal year ending in June 2010, which Jiangbo included in its September 2010 filings with the SEC. The investors argue that Frazer’s confirmation of the integrity of Jiangbo’s reporting amounts to the same material misrepresentations and omissions within Jiangbo’s filings themselves.