NOT FOR PUBLICATION
MADELINE COX ARLEO, District Judge.
This matter comes before the Court by way of Plaintiffs Obasi Investment Limited, Jingli Shao, Robin Dartell, Lixin Wu, and Jason Helton's (collectively "Plaintiffs") motion for class certification. Dkt. No. 156. Defendants Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, L. McCarthy Downs III, and Hayden Zou oppose the motion on typicality and adequacy grounds. Dkt. No. 168. For the reasons stated below, the motion is granted and the class will be certified.
This matter concerns allegedly false statements and material omissions contained in Tibet Pharmaceuticals, Inc.'s ("Tibet") registration statement and prospectus issued in connection with its initial public offering on January 24, 2011. Tibet owns two subsidiaries: China Tibetan Pharmaceuticals Limited, incorporated in Hong Kong, and Yibo Information Consulting (Shenzen) Company Ltd., incorporated in China.
The proposed class period extends from January 24, 2011, the date of Tibet's misstatements, to April 3, 2012, when Tibet stock halted trading on NASDAQ and the stock plummeted in value. Allegedly, Tibet made several misrepresentations by (1) overstating Tibet's assets, (2) misrepresenting Tibet's indebtedness, and (3) failing to disclose a series of adverse court judgments for millions of dollars entered against Tibet and the freezing of the assets of Tibet's sole operating entity.
Tibet is a British Virgin Islands Corporation with its headquarters and operations located in China. In its initial public offering ("IPO"), Tibet sold three million shares of Tibet common stock for $16.5 million to investors. Though Tibet's registration statement and prospectus represented Tibet as financially sound, it had actually defaulted on $4.54 million in loans from the Agricultural Bank of China. On September 10, 2010, a Chinese court entered judgment against Tibet for $4.54 million. When Tibet failed to pay, the court entered an order permitting the Agricultural Bank of China to seize all Tibet's assets. Tibet's Registration Statement and Prospectus for its IPO did not disclose any of this information.
On February 17, 2012, the Agricultural Bank of China began to auction off the assets of Yunnan Tibetan, Tibet's operating subsidiary. The same day, a Chinese website disclosed, in Chinese language, that Tibet's assets were being sold. On February 27, 2012, Tibet issued a press release stating that the announcement of the public auction was "untrue and incorrect." On April 3, 2012, NASDAQ halted the trading of Tibet's stock for "additional information requested." Tibet failed to provide that information. Its stock was subsequently delisted on NASDAQ and began trading over the counter on pink sheets on April 27, 2012. The stock became essentially worthless, dropping to $.01 per share.
The following class representatives sought class certification initially: Obasi Investment Limited, Jingli Shao, Lixin Wu, Jason Helton, and Robin Dartell. Rosen Decl. Exs. 2-6. Sean Carithers was subsequently proposed as an additional class representative to provide a class representative who purchased securities directly from the IPO. Fuks Decl. Ex. 1. All of these class representatives purchased shares of Tibet during the proposed class period.
Defendants moved to dismiss in July 2014. Dkt. Nos. 96, 101-102, 104. Those motions were denied. Dkt. No. 156. Subsequently, the parties engaged in class discovery and filed the instant motion for (and opposition to) class certification.
Defendants oppose class certification on two grounds. First, they argue the proposed lead plaintiffs are not typical of the class because (1) no lead plaintiff has produced evidence showing they purchased shares traceable to the IPO and (2) no lead plaintiff suffered damages, because they purchased their shares over a year after the IPO and weeks after information concerning the fraud was disclosed, so the market had already incorporated the information concerning the fraud. Second, Defendants oppose certification of particular proposed class representatives because the timing of their purchase, their performance in depositions, and a variety of credibility issues preclude them from adequately representing the class. The Court addresses these issues in turn.
II. LEGAL STANDARD
Federal Rule of Civil Procedure 23 sets forth the requirements that must be fulfilled before a case may proceed as a class action. There are four basic prerequisites for class action treatment:
Fed. R. Civ. P. 23(a). These are known as the numerosity, commonality, typicality, and adequacy requirements.
A plaintiff "must affirmatively demonstrate" that Rule 23's requirements are satisfied,
A. Uncontested Class Certification Requirements
This matter alleges securities violations under Section 11 and Section 12.
Numerosity is met here. Numerosity requires that "the class is so numerous that joinder of all members is impracticable."
A proposed class meets the commonality requirement if "there are questions of law or fact common to the class."
Many common questions of law and fact exist here. For example, both the existence of misrepresentations in the Registration Statement and Prospectus and the adequacy of Acquavella's audit investigation are common disputes to be resolved for all members of the class. The Plaintiffs all seek to establish that Defendants provided fraudulent statements and material omissions in their Registration Statement and Prospectus. Commonality is met.
Rule 23(b)(3)'s predominance inquiry requires the Court to determine whether common questions of law or fact predominate over questions affecting only individual class members. "Plaintiffs need not have identical claims to be certified as a class, but if the facts present individual questions these must be outweighed by common ones."
Defendants do not challenge predominance here. The essential dispute here is plainly common: whether the Registration Statement and Prospectus contained material misrepresentations. Because Defendants do not point to anything to defeat predominance, and all facially critical issues are common, the Court finds common issues of fact and law predominate in this case.
B. Contested Class Certification Requirements
"While commonality `looks at the relationship among the class members generally,' typicality focuses on `the relationship between the proposed class representative and the rest of the class.'"
Defendants challenge the typicality of the proposed class representatives on two grounds. First, Defendants argue that the class representatives cannot trace their shares to the IPO. Second, the proposed class representatives purchased their shares after purported corrective disclosures on February 17, 2012 and February 27, 2012. The proposed class representatives, therefore, cannot be typical of the class because they are subject to the unique defense that they do not have standing.
Neither of these arguments preclude class certification here because Plaintiffs have provided an alternate class representative to which these arguments do not apply. Proposed lead Plaintiff Sean Carithers purchased 6,000 shares of Tibet stock in the IPO directly from Anderson & Strudwick. Fuks Decl. Ex. 1. The timing and directness of his purchase ensures that at least one class representative will be able to represent the class, even if Defendants' arguments that post-IPO purchases cannot be traced to the IPO were to prevail on summary judgment.
Furthermore, Defendants' argument that Plaintiffs cannot trace their shares to the IPO fails at this stage. "By its terms, Section 11 provides that `any person acquiring' a security issued pursuant to a materially false registration statement may sue (unless the purchaser knew about the false statement)."
As of the date of the Registration Statement and Prospectus, 11,812,500 shares of Tibet stock were outstanding. Three million shares were subsequently issued in the IPO. 33,400 shares were then issued to Trilogy Partners. Lockup agreements precluding sale of the restricted shares expired on April 24, 2011 and August 2, 2011, and Defendants claim that no class representative can trace their stock to the public offering because there are over fourteen million shares of Tibet stock.
Plaintiffs reply that the public market for Tibet securities contained only shares issued during the IPO. There was no public market for Tibet shares prior to the IPO. Fuks Decl. Ex. 2. All shares issued outside of the IPO were restricted stock, which required (1) a legal opinion proving exemption from registration requirements and (2) removal of the restricted legend or filing of registration statement concerning the stock in order to sell the shares on the public stock market. No registration statement for these shares was filed with the SEC, nor was any form 4 filed evidencing insider sales of stock. Defendants produce no contrary evidence to show that any of the restricted shares were sold or could be sold on the public market. As such, Plaintiffs have produced evidence indicating that the only shares available on the public market were those issued in the IPO.
Defendants' second argument that the proposed class representatives (other than Mr. Carithers) purchased their shares after certain corrective disclosures in this case similarly does not prevail because Defendants have not shown that either of the purported disclosures were corrective.
That "the plaintiff knew of the untruth or omissions at the time of his or her acquisition of the security," is a dispositive affirmative defense to a section 11 claim.
Two potential disclosures are disputed here.
Defendants' only citation in support of the alleged February 17, 2012 corrective disclosure is Plaintiff's Amended Complaint at paragraph 58. Dkt. No. 50. This paragraph merely states that a Chinese-language website announced that Tibet's assets were being auctioned. Court actions in China were also published on the Supreme People's Court website. Am. Compl. ¶ 61. Subsequently, Tibet's chairman denied the rumors of a public auction.
Furthermore, these rumors were subsequently denied by the relevant company management in the February 27, 2012 press release. Far from being a corrective disclosure of all allegedly actionable fraud, the February 27, 2012 press release entrenched the alleged fraud by stating that the rumors were "untrue and incorrect" and were the result of a completely "mistaken report." Am. Compl. ¶ 59. The company announced that it would conduct a further investigation, but there is no indication that the outcome of that investigation was already known. The Court therefore cannot find on the information available at this stage that either the February 17, 2012 website posting or the February 27, 2012 press release constituted corrective disclosures which would preclude certification of a class following those disclosures. Defendants' argument that Plaintiffs' class representatives are not typical fails.
Defendants contest whether the proposed lead plaintiffs are adequate to represent the class. Rule 23(a)(4) permits class certification when the class representatives "will fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a)(4). There are two criteria to determine adequacy. "First, the adequacy of representation inquiry tests the qualifications of the counsel to represent the class. . . Second, it serves to uncover conflicts of interest between named parties and the class they seek to represent."
There is no contest that Plaintiffs' counsel is adequate to represent the class in this matter.
None of these issues are substantial enough to preclude any of the class representatives from effectively representing the class here. The timing of Robin Dartell's purchase coincides with many others in the class and does not preclude him from being adequate. Defense counsel's concerns about Lixin Wu and Jingli Shao seem to stem only from minor difficulties during depositions which do not rise to the level of precluding them from representing the class. Jason Helton and Edmund Obasi both sought to profit from Tibet stock, despite there being some indicator that the stock was of questionable quality. But they both have explanations for their activity, and none of their activity rises to a level sufficient to destroy their credibility. The Court therefore rejects Defendants' adequacy challenge. This class will be certified with the following lead plaintiffs: Obasi Investment Limited, Jingli Shao, Lixin Wu, Jason Helton, Robin Dartell, and Sean Carithers.
For the foregoing reasons, the Court grants Plaintiffs' motion to certify the class. An appropriate order accompanies this opinion.