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From Securities Regulation Daily, July 15, 2014

Underwriters were "makers" of statements in offering documents

By Rodney F. Tonkovic, J.D.

Motions to dismiss securities claims against the underwriters of a stock offering were denied by a district court. The court concluded that underwriters had sufficient authority over the information contained in Puda Coal, Inc.'s offering documents to make the statements attributable to them. There was also sufficient evidence to show that one of the underwriters must have been aware of, but disregarded, the alleged fraudulent transfer at issue (In re Puda Coal Securities, Inc. Litigation, July 14, 2014, Forrest, K.).

Background. In September 2009, Ming Zhao, the chairman of Puda Coal, arranged to transfer Puda’s 90 percent interest in a subsidiary to himself. This left Puda Coal a shell corporation with neither operations nor any source of revenue. Puda Coal’s public filings, however, indicated that it still maintained a 90 percent interest in the subsidiary. The stripping of Puda Coal’s assets was first brought to light in an April 2011 report published by Alfred Little. Following this disclosure, Puda Coal’s shares declined 34 percent and the SEC ultimately ended up halting the trading in Puda Coal’s shares entirely. For additional background, see the Securities Regulation Daily Wrap Up for June 19, 2014 and October 2, 2013.

During the class period, Puda Coal conducted two separate public offerings. The motions in this case relate to offering documents filed by Puda Coal with the SEC in connection with an offering in December 2010. This offering was co-underwritten by Brean Murray, Carret & Co. (Brean Murray) and Macquarie Capital (USA) Inc. (Macquarie). According to the plaintiffs, the offering documents were false and misleading because they represented that Puda Coal still owned 90 percent of the subsidiary.

"Making" a statement. The underwriters argued that Puda Coal made any contested statements in the offering documents. The court disagreed, finding that the complaint alleged that the underwriters had sufficient authority over the information contained in the offering documents to make the statements attributable to them. The offering documents would not have been filed without the underwriters' approval, the court found, and their "intricate" involvement was communicated to investors in several ways, including the display of their names on the front cover of the prospectus.

Underwriters' scienter. The court then found that the complaint alleged enough circumstantial evidence of recklessness to raise a strong inference of scienter. According to the court, the transfer was so obvious that Brean Murray must have been aware of, but consciously disregarded it. In fact, after Alfred Little revealed the transfer, Brean Murray's CEO remarked in an email, "Wasn't this news talked about and dismissed a while ago?" This, the court said, was enough to show that Brean Murray was aware of the transfer. Moreover, the transfer was recorded in public files in China, and other parties were able to obtain documentation of the transfer from the State Administration for Industry and Commerce (SAIC).

Statute of limitations. Next, the court concluded that, due to equitable tolling, Securities Act claims brought by an intervening party were not time-barred. While Trellus Management Company LLC (Trellus) moved to intervene after the statute of limitations on its claims in fact expired, it could reasonably believe that the plaintiffs had standing and that Trellus could benefit from American Pipe tolling. Trellus, the court found, acted with reasonable diligence and could benefit from equitable tolling.

Standing. Finally, Trellus had standing to assert a Section 12(a)(2) claim against Macquarie. While Trellus purchased its shares from Brean Murray, Macquarie's direct participation in preparing the offering materials and soliciting the purchase of Puda shares by Trellus made it a statutory seller under Section 12, the court found.

The case is No. 11-cv-2598.

Attorneys: Kevin F. Ruf (Glancy Binkow & Goldberg LLP) for Salomon Querub and Hotel Ventures. Laurence Matthew Rosen (Glancy Binkow & Goldberg LLP) for Trellus Management Company LLC. Brian James Massengill (Mayer Brown LLP) for Moore Stephens Hong Kong. Joseph Alexander Baratta (Baratta Baratta & Aidala LLP) for Moore Stephens, PC.

Companies: Brean Murray, Carret & Co.; Hotel Ventures; Trellus Management Company LLC; Puda Coal, Inc.; Macquarie Capital USA, Inc.; Moore Stephens Hong Kong; Moore Stephens, PC.

MainStory: TopStory FraudManipulation NewYorkNews SecuritiesOfferings

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