Court Opinion

ID: 3205390
Source: CourtListenerOpinion
Date Created: 2016-05-20 15:00:42.119498+00
Date Added: 2024-06-11T14:28:52.564596
License: Public Domain

15-2100
     In re Puda Coal Securities Inc. Litigation

 1                       UNITED STATES COURT OF APPEALS
 2                           FOR THE SECOND CIRCUIT
 3
 4                                SUMMARY ORDER
 5
 6   RULINGS  BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER
 7   FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
 8   APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
 9   ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX
10   OR AN ELECTRONIC DATABASE (WITH THE NOTATION ASUMMARY ORDER@). A PARTY CITING A SUMMARY
11   ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
12
13         At a stated term of the United States Court of Appeals for
14   the Second Circuit, held at the Thurgood Marshall United States
15   Courthouse, 40 Foley Square, in the City of New York, on the
16   20th day of May, two thousand sixteen.
17
18   PRESENT: DENNIS JACOBS,
19            BARRINGTON D. PARKER,
20            REENA RAGGI,
21                          Circuit Judges.
22
23   - - - - - - - - - - - - - - - - - - - -X
24   SALOMON QUERUB, HOTEL VENTURES, HOWARD
25   PRITCHARD, HARRIET GOLDSTEIN,
26   individually and on behalf of all
27   others similarly situated, THOMAS
28   ROSENBERGER, STEVEN WEISSMANN, TRELLUS
29   MGMT. CO. LLC,
30             Plaintiffs-Appellants,
31
32                -v.-                                           15-2100
33
34   MOORE STEPHENS HONG KONG,
35            Defendant-Appellee.
36
37   PUDA COAL, INC., MING ZHAO, LIPING ZHU,
38   QIONG LABY WU, YAO ZHAO, CARRET & CO.,
39   LLC, MACQUARIE CAPITAL (USA) INC.,

                                                1
 1   JIANFEI NI, C. MARK TANG, LAWRENCE
 2   WIZEL, BREAN MURRAY, CARRT & CO., LLC,
 3   MOORE STEPHENS INT’L LTD., MOORE
 4   STEPHENS, P.C.,
 5            Defendants.
 6
 7   - - - - - - - - - - - - - - - - - - - -X
 8
 9   FOR APPELLANTS:              LAURENCE M. ROSEN, The Rosen Law
10                                Firm, P.A., New York, NY; Glancy
11                                Prongay & Murray LLP, Los Angeles,
12                                CA; Pomerantz LLP, Chicago, IL;
13                                Kirby McInerney LLP, New York, NY.
14
15   FOR APPELLEE:                BRIAN J. MASSENGILL (James C.
16                                Schroeder, Dana Douglas, Justin A.
17                                McCarty, on the brief), Mayer
18                                Brown LLP, Chicago, IL.
19
20        Appeal from a judgment of the United States District Court
21   for the Southern District of New York (Forrest, J.).
22
23        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED AND
24   DECREED that the judgment of the district court be AFFIRMED.
25
26        Plaintiffs-appellants, investors in Puda Coal, Inc.
27   (“Puda”), appeal from the judgment of the United States District
28   Court for the Southern District of New York (Forrest, J.)
29   dismissing on summary judgment their securities class action
30   against defendant-appellee Moore Stephens Hong Kong (“Moore
31   Stephens”). We assume the parties’ familiarity with the
32   underlying facts, the procedural history, and the issues
33   presented for review.

34        Until April 2011, Puda was a publicly-traded, U.S.-listed
35   company headquartered in China, which purportedly held, as its
36   sole asset, a 90% ownership stake in Shanxi Puda Coal Group Co.,
37   Ltd. (“Shanxi Coal”), a coal supplier for steel manufacturing.
38   In fact, in September 2009, Puda’s chairman transferred Puda’s
39   entire interest in Shanxi Coal to himself, leaving Puda a shell
40   company. This transfer was reflected in shareholder meeting
41   minutes for Shanxi Coal and in various documents filed in

                                    2
 1   China’s State Administration of Industry and Commerce. But
 2   Puda’s financial statements for 2009 and 2010 included all of
 3   the assets, liabilities, revenues, expenses, and net income for
 4   Shanxi Coal.

 5        Moore Stephens is a Hong Kong-based audit firm that issued
 6   “clean opinions” for Puda’s 2009 and 2010 financial statements
 7   pursuant to Public Company Accounting Oversight Board (“PCAOB”)
 8   standards. After April 2011, when the Shanxi Coal transfer
 9   became public, Moore Stephens resigned as Puda’s auditor and
10   announced that its 2009 and 2010 audit opinions could no longer
11   be relied upon.

12        Puda’s investors filed a securities class action shortly
13   after news broke of the Shanxi Coal transfer, alleging that
14   Moore Stephens (and others) violated Section 11 of the
15   Securities Act of 1933 and Section 10(b) of the Securities
16   Exchange Act of 1934 (and Rule 10b-5). In support, plaintiffs-
17   appellants proffered Anita C.M. Hou as an expert who testified
18   that Moore Stephens failed to comply with the auditing standards
19   of Hong Kong and/or the People’s Republic of China. However,
20   she admitted that she was not an expert on PCAOB and could not
21   opine on whether the audits complied with PCAOB standards.
22   Moore Stephens proffered Alexander H. Mackintosh as an expert
23   in PCAOB standards who opined that Moore Stephens’s 2009 and
24   2010 audits fully complied with PCAOB standards.

25        At summary judgment, the district court struck
26   plaintiffs-appellants’ sole accounting expert, Hou, and
27   granted summary judgment in favor of Moore Stephens. The
28   district court reasoned that Hou did not have the requisite
29   expertise to offer opinions on any matters relevant to the case
30   because she had no experience or expertise in PCAOB audits and
31   because PCAOB provides the standard of conduct that Moore
32   Stephens allegedly failed to satisfy. Without competent
33   evidence on PCAOB auditing standards, plaintiffs-appellants
34   could not raise a triable issue of fact regarding whether Moore
35   Stephens egregiously departed from applicable professional
36   standards of care. The district court further concluded that
37   plaintiffs-appellants failed to proffer any evidence that Moore
38   Stephens issued subjectively false opinions. This appeal
39   followed.

                                    3
 1        We review for abuse of discretion the admission or
 2   exclusion of expert testimony. Major League Baseball Props.,
 3   Inc. v. Salvino, Inc., 542 F.3d 290, 311 (2d Cir. 2008). We
 4   review de novo a district court’s grant of summary judgment.
 5   Noll v. Int’l Bus. Machs. Corp., 787 F.3d 89, 93 (2d Cir. 2015).

 6        1. An expert witness is “permitted wide latitude to offer
 7   opinions, including those that are not based on firsthand
 8   knowledge or observation,” but only after a trial judge has
 9   determined “whether the expert is proposing to testify to (1)
10   scientific knowledge that (2) will assist the trier of fact to
11   understand or determine a fact in issue”; “[e]xpert testimony
12   which does not relate to any issue in the case is not relevant
13   and, ergo, non-helpful.” Daubert v. Merrell Dow Pharm., Inc.,
14   509 U.S. 579, 591-92 (1993). In other words, the expert must
15   be qualified to testify as to a certain issue; the expert must
16   offer an opinion on that issue that is informed by reliable
17   information and methodology; and the probative value of the
18   expert testimony must not be substantially outweighed by the
19   danger of, inter alia, confusion of the issues or misleading
20   the jury. Nimely v. City of New York, 414 F.3d 381, 397 (2d
21   Cir. 2005).

22        The district court appropriately struck Hou as an expert
23   witness. As she admitted, Hou lacks experience and expertise
24   in conducting or reviewing audits done according to PCAOB
25   standards and is therefore not qualified to opine on PCAOB
26   auditing standards. Because Puda was a U.S.-listed company,
27   the only auditing standards in question are those promulgated
28   by PCAOB – not those of Hong Kong or PRC – so Hou is not qualified
29   as an expert on the sole relevant auditing standard. Opinions
30   on Hong Kong and/or PRC auditing standards would not be helpful
31   to the jury on any relevant issue, and would risk muddling the
32   issue of the applicable standard of care. Finally, Hou’s
33   testimony that auditing standards in Hong Kong or PRC do not
34   materially differ from PCAOB standards is speculative.
35   Because she is not qualified to opine on PCAOB standards, she
36   has no basis for comparing them with other standards.

37        2. A violation of Section 10(b) requires “scienter, a
38   mental state embracing intent to deceive, manipulate, or
39   defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551

                                     4
 1 U.S. 308, 319 (2007) (internal quotation marks omitted).
 2   Recklessness satisfies the scienter requirement when the
 3   conduct is “highly unreasonable, representing an extreme
 4   departure from the standards of ordinary care.” Rothman v.
 5   Gregor, 220 F.3d 81, 98 (2d Cir. 2000) (internal quotation marks
 6   omitted). For an auditor, the conduct “must, in fact,
 7   approximate an actual intent to aid in the fraud being
 8   perpetrated by the audited company.” Id. In essence,
 9   recklessness requires a showing that the “audit [was] so
10   deficient as to amount to no audit at all.” In re Advanced
11   Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir. 2015).

12        Plaintiffs-appellants cannot raise a triable issue of fact
13   as to whether Moore Stephens was sufficiently reckless to be
14   liable under Section 10(b). They fall short regardless of
15   whether they are required to proffer expert testimony to
16   establish scienter for this claim. If expert testimony is
17   necessary, plaintiffs-appellants have no factual basis for
18   alleging that the 2009 and 2010 audits were “extreme
19   departure[s]” from PCAOB standards “amounting to no audit at
20   all” because they cannot establish the PCAOB standard of
21   ordinary care. The uncontested expert testimony is that Moore
22   Stephens fully complied with PCAOB standards. If expert
23   testimony is not required, plaintiffs-appellants still fail to
24   show Moore Stephens conducted the audits recklessly. The
25   purported “red flags” were not obvious signs of fraud; at its
26   core the complaint alleges “fraud by hindsight,” which is
27   inadequate. See Advanced Battery, 781 F.3d at 645-46; see also
28   Special Situations Fund III QP, L.P. v. Deloitte Touche Tohmatsu
29   CPA, Ltd., 2016 WL 1392280, at *2 (2d Cir. Apr. 8, 2016).

30        3. Statements of opinion are actionable under Section 11
31   as false or misleading only if (i) “the issuer of the opinion
32   held a subjective belief inconsistent with the opinion,” or (ii)
33   the “opinion ‘omits material facts about the issuer’s inquiry
34   into or knowledge concerning a statement of opinion, . . . if
35   those facts conflict with what a reasonable investor would take
36   from the statements [of opinion] itself.” Special Situations
37   Fund, 2016 WL 1392280, at *3 (quoting Omnicare, Inc. v. Laborers
38   Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1329
39   (2015)). Audit reports, labeled “opinions” and involving
40   considerable subjective judgment, are statements of opinion

                                    5
 1   subject to the Omnicare standard for Section 11 claims.    Id.

 2        There is no evidence that Moore Stephens did not believe
 3   its “clean audit opinions” for Puda’s 2009 or 2010 financial
 4   statements. Nor is there evidence that Moore Stephens omitted
 5   material facts about the basis for its audit reports.
 6   Plaintiffs-appellants cannot sustain their Section 11 claim.

 7        Accordingly, and finding no merit in plaintiff-appellants’
 8   other arguments, we hereby AFFIRM the judgment of the district
 9   court.

10                                FOR THE COURT:
11                                CATHERINE O’HAGAN WOLFE, CLERK

                                   6