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POPE INVESTMENTS II, LLC v. DEHENG LAW FIRM
POPE INVESTMENTS II, LLC, JAYHAWK PRIVATE EQUITY FUND, L.P., GUERILLA PARTNERS, L.P., ALDER OFFSHORE MASTER FUND, L.P., PARAGON CAPITAL, L.P., DAYBREAK SPECIAL SOLUTIONS MASTER FUND, LTD., AAMAXIN TRANSPORT GROUP, INC., ASIA BUSINESS MANAGEMENT GROUP, LTD., and SHANGHAI ANHANTE (BEIJING) MEDICAL TECHNOLOGY CO., LTD., Plaintiffs,
v.
DEHENG LAW FIRM and HELEN LV, Defendants.
No. 10 Civ. 6608 (LLS).
United States District Court, S.D. New York.
August 15, 2012.
OPINION AND ORDERLOUIS L. STANTON, District Judge. Plaintiffs' first amended complaint in this action did not allege with particularity that these and other defendants acted with scienter in committing the alleged securities fraud. The Court dismissed that claim under Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act ("PSLRA") of 1995, 15 U.S.C. § 78u-4(b)(3)(A), declined to exercise supplemental jurisdiction over plaintiffs' state law claims, and granted plaintiffs leave to replead. See Pope Invs. II LLC v. Deheng Law Firm, 10 Civ. 6608 (LLS), 2011 WL 5837818 (S.D.N.Y. Nov. 21, 2011). Plaintiffs now bring a second amended complaint; however, it lies against only Deheng Law Firm and Helen Lv, a former partner at Deheng. Deheng moves to dismiss the second amended complaint, arguing that its additional allegations do not sufficiently allege Deheng's scienter and thus do not cure the first amended complaint's defects. Deheng incorporates by reference its arguments asserted in its motion to dismiss the amended complaint — that Deheng is not subject to personal jurisdiction in New York, that Deheng was never served with process in this action, and that plaintiffs fail to state a claim upon which relief can be granted — which were unnecessary for the Court to reach in its prior opinion. And, for the first time, Deheng invokes the Supreme Court's recent decision in Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), and argues that since the securities transaction giving rise to the alleged fraud did not take place in the United States but in China, plaintiffs cannot obtain relief under section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder.1 BackgroundThe SMT Transactions
1. Section 10(b) makes unlawful, "in connection with the purchase or sale of any security," the use of "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission [i.e., the Securities and Exchange Commission] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Under Rule 10b5, 17 C.F.R. § 240.10b-5,
It shall be unlawful for any person, directly or indirectly, by the use of any mans or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make an untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates as a fraud or deceit upon any person, in connection with the purchase or sale of a security.
2. Rule 10b-5 "was promulgated under § 10(b), and `does not extend beyond conduct encompassed by § 10(b)'s prohibition.' United States v. O'Hagan, 521 U.S. 642, 651 (1997). Therefore if § 10(b) is not extraterritorial, neither is Rule 10b-5." Morrison, 130 S. Ct. at 2881. Thus, the discussion of plaintiffs' section 10(b) claims in this Opinion and Order applies equally to their claims under Rule 10b-5.
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