UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------------------------X
IN RE CHINA MEDIAEXPRESS HOLDINGS,
INC. SHAREHOLDER LITIGATION
:
:
:
:
:
No. 11-CV-804-VM
----------------------------------------------------------X
DEFENDANTS’ OMNIBUS REPLY MEMORANDUM OF LAW
IN FURTHER SUPPORT OF THEIR MOTIONS TO DISMISS
PLAINTIFFS’ AMENDED AND CONSOLIDATED COMPLAINT
LOEB & LOEB LLP
Eugene R. Licker (EL-0334)
John A. Piskora (JP-1224)
345 Park Avenue
New York, NY 10154
Attorneys for Defendant China MediaExpress
Holdings, Inc.
HUGHES HUBBARD & REED LLP
William R. Maguire
Savvas A. Foukas
Jesse James
One Battery Park Plaza
New York, New York 10004
Attorneys for Defendant Deloitte LLP
MORRISON COHEN LLP
Donald H. Chase (DC-6708)
Edward P. Gilbert (EG-3730)
909 Third Avenue
New York, New York 10022
Attorneys for Defendants
Theodore Green and Malcolm Bird
LATHAM & WATKINS LLP
Miles N. Ruthberg
Christopher Harris
Kevin M. McDonough
885 Third Avenue
New York, NY 10022-4834
KRAMER LEVIN NAFTALIS &
FRANKEL LLP
Michael J. Dell
1177 Avenue of the Americas
New York, NY 10036
Attorneys for Defendant Deloitte Touche
Tohmatsu Limited
MICHAEL E. MARR, ATTORNEY-AT-LAW
Michael E. Marr (pro hac vice)
3107 Tyndale Avenue
Baltimore, Maryland 21214-3429
Attorneys for Defendant A.J. Robbins P.C.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 1 of 30
i
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ........................................................................................................ iii
ARGUMENT ................................................................................................................................ 1
I. PLAINTIFFS’ SECTION 10(B) CLAIM AGAINST CCME SHOULD BE
DISMISSED ...................................................................................................................... 1
II. PLAINTIFFS’ CLAIMS AGAINST GREEN AND BIRD SHOULD BE
DISMISSED ...................................................................................................................... 6
A. PLAINTIFFS FAIL TO PLEAD FRAUD WITH THE REQUISITE
PARTICULARITY AGAINST DEFENDANTS GREEN AND BIRD ............... 6
B. PLAINTIFFS’ ALLEGATIONS OF SCIENTER AGAINST
DEFENDANTS GREEN AND BIRD ARE INSUFFICIENT TO STATE
A CLAIM .............................................................................................................. 9
III. PLAINTIFFS’ CLAIM AGAINST ROBBINS SHOULD BE DISMISSED ................. 11
A. FAILURE OF PLAINTIFFS’ FACTUAL ALLEGATIONS TO
CONSTITUTE INFERENCES OF PROPERLY PLED FALSE
STATEMENTS BY DEFENDANT ROBBINS ................................................. 11
B. PLAINTIFFS’ IMPROPER RELIANCE ON CITED CASE LAW IN
SUPPORT OF ITS ASSERTIONS AGAINST DEFENDANT ROBBINS ....... 12
C. ROBBINS’ ALLEGED PCAOB VIOLATIONS ARE IRRELEVANT ............ 13
IV. THE OPPOSITION PROVIDES NO BASIS TO SUSTAIN PLAINTIFFS’
CLAIMS AGAINST DTTL OR DELOITTE U.S. ......................................................... 15
A. THE SECTION 20(A) CLAIMS AGAINST DTTL AND DELOITTE
U.S. ARE INADEQUATE .................................................................................. 15
B. THE OPPOSITION PROVIDES NO SUPPORT FOR THE SECTION
10(B) CLAIMS ................................................................................................... 18
1. Vicarious Liability Claims Do Not Survive Janus ................................. 18
2. The Amended Complaint Fails To Adequately Allege Respondeat
Superior Liability .................................................................................... 19
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 2 of 30
ii
3. The Alter Ego Theory Against Deloitte U.S. Fails ................................. 20
C. THERE IS NO BASIS FOR PLAINTIFFS’ IMPROPER REQUEST FOR
DISCOVERY ....................................................................................................... 21
V. LEAVE TO AMEND SHOULD BE DENIED ............................................................... 22
CONCLUSION ........................................................................................................................... 23
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 3 of 30
iii
TABLE OF AUTHORITIES
Page(s)
CASES
Am. Fuel Corp. v. Utah Energy Dev. Co.,
122 F.3d 130 (2d Cir. 1997) ………………… ....................................................................... 21
Anwar v. Fairfield Greenwich Ltd.,
728 F. Supp. 2d 372 (S.D.N.Y. 2010) ………………… ............................................ 17, 18, 19
Anwar v. Fairfield Greenwich Ltd.,
Nos. 09 Civ. 0118, 10 Civ. 2878, __ F. Supp. 2d __,
2011 WL 6288406 (S.D.N.Y. Dec. 14, 2011) ………………… ............................................ 20
Ashcroft v. Iqbal,
556 U.S. 662 (2009) ………………… ................................................................................... 22
Arfa v. Mecox Lane Ltd.,
No 10 Civ. 9053, 2012 WL 697155 (S.D.N.Y. Mar. 5, 2012) ………………… ..................... 4
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
493 F.3d 87 (2d Cir. 2007) ………………… ......................................................................... 17
Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007), rev’g,
Twombly v. Bell Atlantic Corp., 425 F.3d 99 (2d Cir. 2005) ………………… ..................... 22
Beno Varghese et al. v. China Shenghuo Pharmaceutical Holdings, Inc., et al.,
672 F. Supp. 2d 596 (S.D.N.Y. 2009) ………………… ................................................... 12-13
Bd. of Trustees of City of Ft. Lauderdale Gen. Employees Ret. Sys. v. Mechel OAO,
No. 09 Civ. 3617 (RJS), 2011 WL 350201 (S.D.N.Y. Aug. 9, 2011) ………………… ...... 1-2
City of Monroe Employees’ Ret. Sys. v. Hartford Fin. Servs. Grp., Inc.,
No. 10 Civ. 2835, 2011 WL 4357368 (S.D.N.Y. Sept. 19, 2011) ………………… ............. 22
City of Roseville Employees’ Ret. Sys. v. Horizon Lines, Inc.,
686 F. Supp. 2d 404 (D. Del. 2009) ………………… ............................................................. 6
Compudyne Corp. v. Shane,
453 F. Supp. 2d 807 (S.D.N.Y. 2006) ………………… ........................................................ 18
Dean v. China Agritech, Inc.,
No. CV 11-01331, 2011 WL 5148598 (C.D. Cal. Oct. 27, 2011) ………………… ............... 5
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 4 of 30
iv
Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc.,
595 F. Supp. 2d 1253 (M.D. Fla. 2009) ………………… ................................................ 14-15
Fidel v. Farley,
392 F.3d 220 (6th Cir. 2004) ………………… ...................................................................... 15
Fin. One, Inc. v. Timeless Apparel, Inc.,
No. 09 Civ. 9397, 2011 WL 1345030 (S.D.N.Y. Mar. 29, 2011) ………………… .............. 21
Freudenburg v. E*Trade Financial Corporation,
712 F. Supp. 2d 171 (S.D.N.Y. 2010) ………………… ........................................................ 14
Fulton County Employees Ret. Sys. v MGIC Inv. Corp.,
675 F.3d 1047 (7th Cir. 2012) ………………… ................................................................... 19
Gary Redwen v. Sino Clean Energy Inc.,
No. 11-CV-03936 PA (SSx) (C.D. Cal. Jan. 20, 2011) ………………… ....................... 3, 4, 5
Henning v. Orient Paper, Inc.,
No. CV 10-5887, 2011 WL 2909322 (C.D. Cal. July 20, 2011) ………………… ................. 3
In re Alstom SA Sec. Litig.,
406 F. Supp. 2d 433 (S.D.N.Y. 2005) ………………… ...................................... 16, 18, 21, 22
In re China Educ.,
No. CV 10-9239, 2011 WL 4978483 (C.D. Cal. Oct. 11, 2011) ………………… ............. 3, 5
In re China Intelligent Lighting & Elecs., Inc. Sec. Litig.,
No. CV 11-2768 (C.D. Cal. Feb 16, 2012) ………………… .................................................. 4
In re Doral Fin. Corp. Sec. Litig.,
563 F. Supp. 2d 461 (S.D.N.Y. 2008),
aff’d, 344 F. App’x 717 (2d Cir. 2009) ………………… ........................................................ 2
In re Health Mgmt. Inc. Sec. Litig.,
970 F. Supp. 192 (E.D.N.Y. 1997) ………………… ............................................................ 10
In re KeySpan Corp. Sec. Litig.,
383 F. Supp. 2d 358 (E.D.N.Y. 2003) …………………........................................................ 10
In re Optimal U.S. Litig.,
No. 10 Civ. 4095,
2011 U.S. Dist. LEXIS 119141 (S.D.N.Y. Oct. 14, 2011) ………………… ........................ 19
In re NTL Inc. Sec. Litig.,
347 F. Supp. 2d 15 (S.D.N.Y. 2004) ………………… .......................................................... 11
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 5 of 30
v
In re Scottish Re Group Sec. Litig.,
524 F. Supp. 2d 370 (S.D.N.Y. 2007) ………………… ................................................... 13-14
In re Sotheby’s Holdings, Inc. Sec. Litig.,
No. 00 Civ. 1041,
2000 U.S. Dist. LEXIS 12504 (S.D.N.Y. Aug. 31, 2000)………………… .......................... 10
In re Take-Two Interactive Sec. Litig.,
551 F. Supp. 2d 247 (S.D.N.Y. 2008) ………………… .......................................................... 8
In re Tronox, Inc. Sec. Litig.,
No. 09 Civ. 6220, 2010 WL 2835545 (S.D.N.Y. June 28, 2010) ………………… ................ 2
Janus Capital Group, Inc. v. First Derivative Traders,
_ U.S. _, 131 S. Ct. 2296 (2011) ………………… ...................................................... 8, 18-19
Kalnit v. Eichler,
264 F.3d 131 (2d Cir. 2001) ………………… ................................................................... 5, 10
Katz v. China Century Dragon Media, Inc., No. CV 11-02769 JAK,
2011 WL 6047093 (C.D. Cal. Nov. 30, 2011) ………………… ...................................... 3, 4-5
Kerr v. Exobox Tech. Corp.,
No. H-10-4221, 2012 WL 201872 (S.D. Tex. Jan. 23, 2012) ………………… .................... 19
Munoz v. China Expert Tech., Inc.,
No. 07 Civ. 10531,
2011 U.S. Dist. LEXIS 128539 (S.D.N.Y. Nov. 4, 2011) ………………… ......................... 22
Orlan v. Spongetech Delivery Sys., Inc.,
No. 10-CV-4093,
2012 U.S. Dist. LEXIS 44253 (E.D.N.Y. Mar. 29, 2012)………………… ............................ 8
Scott v. ZST Digital Networks, Inc.,
No. CV 11-03531, 2012 WL 538279 (C.D. Cal. Feb. 14, 2012) ………………… ................. 5
SEC v. Youmans,
729 F.2d 413 (6th Cir. 1984) ………………… ...................................................................... 14
STMicroelectronics v. Credit Suisse Grp.,
775 F. Supp. 2d 525 (E.D.N.Y. 2011) …………………........................................................ 18
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308 (2007) ………………… ........................................................................... 1, 5, 10
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 6 of 30
Defendants China MediaExpress Holdings, Inc. (“CCME”); Theodore Green and
Malcolm Bird; A.J. Robbins, P.C. (“Robbins”); Deloitte Touche Tohmatsu Limited (“DTTL”)
and Deloitte LLP (“Deloitte U.S.”) respectfully submit this omnibus reply memorandum of law
in further support of their respective motions to dismiss Plaintiffs’ Amended and Consolidated
Complaint pursuant to Fed. R. Civ. P. 12(b)(6).1
ARGUMENT
I. PLAINTIFFS’ SECTION 10(B) CLAIM AGAINST CCME2 SHOULD BE DISMISSED
Plaintiffs do not dispute that their Section 10(b) claims must satisfy the heightened
pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995
(“PSLRA”). See Opp. Mem. at 21-22. Accordingly, Plaintiffs not only must “set forth what is
false or misleading about a statement, and why it is false” (15 U.S.C. § 78u-4(b)(1); Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007)), but Plaintiffs must also “state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind.” § 78u–4(b)(2). Further, because Plaintiffs’ allegations are based upon information
supplied by anonymous witnesses (i.e., “Muddy Waters”), Plaintiffs must plead corroborating
details sufficient to demonstrate that the witness was in a position to know the information
provided. See Bd. of Trustees of City of Ft. Lauderdale Gen. Employees Ret. Sys. v. Mechel
OAO, No. 09 Civ. 3617 (RJS), 2011 WL 3502016, at *22 (S.D.N.Y. Aug. 9, 2011); In re Doral
1 Defendants submit this single omnibus reply pursuant to the Court’s order of March 15, 2012.
2 Plaintiffs feign “confusion” as to whether CCME’s counsel represents and has appeared on behalf of
defendants Zheng Cheng and Jacky Lam. See Opp. Mem. at 1 and n.1. CCME’s counsel, however, has
repeatedly informed Plaintiffs’ counsel that CCME’s counsel does not now and has never represented
Lam or Cheng (neither of whom has been served) in connection with this litigation (indeed, Lam has been
represented by different counsel in the related shareholder and derivative litigations pending in Delaware
state and federal courts). Similarly, CCME’s counsel has also repeatedly advised Plaintiffs that the
Company’s motion to dismiss was erroneously filed on Cheng’s behalf, an error that CCME’s counsel
promptly corrected by amendment and prior to any opposition.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 7 of 30
2
Fin. Corp. Sec. Litig., 563 F. Supp. 2d 461, 466 (S.D.N.Y. 2008), aff’d, 344 F. App’x 717 (2d
Cir. 2009). As set forth in CCME’s moving papers and further below, Plaintiffs have fallen
woefully short of meeting these heightened pleading requirements here. Accordingly, Plaintiffs’
claims against the Company should be dismissed.
Plaintiffs simply do not dispute that their allegations are almost entirely derived from
self-interested short seller “reports.”3 Plaintiffs nonetheless argue in opposition that these
allegations should be accepted as true, and that the anonymous sources are somehow reliable
because they contain statements detailing the short-sellers’ purported investigations. See, e.g.,
Opp. Mem. at 22 & n.20, 22; at 39.4 While Plaintiffs would abdicate their duties and
responsibilities (under Fed. R. Civ. P. 11, and otherwise) to conduct an independent investigation
of the allegations of falsity contained in the short sellers’ reports and invite this Court to condone
their failure to do so, this Court should decline Plaintiffs’ invitation and dismiss the Complaint.
See In re Tronox, Inc. Sec. Litig., No. 09 Civ. 6220, 2010 WL 2835545, at *6 (S.D.N.Y. June 28,
2010) (documentary evidence must qualify as a “reliable source for pleading purposes”).
Plaintiffs’ wholesale recitation of the accusations of self-interested short sellers (who disclaim
the accuracy of these very statements) does not begin to satisfy Plaintiffs’ obligation to plead a
violation of the Securities Act with particularity. See, e.g., Katz v. China Century Dragon
3 Plaintiffs’ arguments that the uninvestigated short seller accusations have purportedly been “confirmed”
by DTT HK (CCME’s former auditor), the resignations of former directors, and/or SEC administrative
proceedings must be rejected. As set forth in CCME’s moving papers (at 18), the resignation of directors
and DTT HK simply raised questions, and did not present factual conclusions. Nor does the initiation of
SEC administrative proceedings provide Plaintiffs with factual conclusions – especially where, as here,
those proceedings were commenced solely based upon allegations that the Company has not timely
submitted all required financial statements and reports.
4 Fatal here is that Plaintiffs’ allegations not only rely entirely on pseudonymous short sellers’ reports –
but also the short sellers’ anonymous sources and “investigators” without pleading any facts
demonstrating that such pseudonymous and anonymous sources are reliable or are likely to possess the
information they claim. Plaintiffs, having conducted no independent investigation, have no idea whether
or not what the short sellers are saying is true, and they are simply not in a position to vouch for the
accuracy of those statements.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 8 of 30
3
Media, Inc., No. CV 11-02769 JAK, 2011 WL 6047093 (C.D. Cal. Nov. 30, 2011); Gary
Redwen v. Sino Clean Energy Inc., No. 11-CV-03936 PA (SSx) (C.D. Cal. Jan. 20, 2011)
(dismissing claims against China-based issuers where allegations were based upon short seller
accusations).
Plaintiffs’ arguments in opposition (Opp. Mem. at 39) that a challenge to the reliability of
unsubstantiated short-seller accusations is somehow “irrelevant” is flatly wrong, and Plaintiffs’
reliance in opposition upon the decisions in Henning v. Orient Paper, Inc., No. CV 10-5887,
2011 WL 2909322 (C.D. Cal. July 20, 2011) and In re China Educ., No. CV 10-9239, 2011 WL
4978483 (C.D. Cal. Oct. 11, 2011) is entirely misplaced. In Henning, defendant did not even
challenge (and, thus, the court did not consider) the propriety of allegations based upon a short-
seller report. See In re China Educ., 2011 WL 2909322 at *4 (noting that “the authorship of the
[short seller] report was not explicitly challenged” in Henning). In China Educ., which relied
solely upon Henning, the court concluded, based upon the facts presented, that a report by
Kerrisdale Capital “[did] not implicate the same skepticism as a ‘traditional’ anonymous source.”
Id. at *4. Such skepticism is surely present here. In any event, if these decisions purport to stand
for the proposition that plaintiff may rely wholesale on any published “report,” regardless of its
source and without any independent factual investigation, then they must be rejected. See, e.g.,
Katz, 2011 WL 6047093; Sino Clean, No. 11-CV-03936 PA.
Plaintiffs also wrongly argue (Opp. Mem. at 22-25) that their Complaint adequately
alleges that CCME purportedly overstated its revenue and cash balances in the Company’s SEC
filings, as evidenced by certain filings made to the China State Association of Industry and
Commerce (“SAIC”) which reported lower amounts of revenues and cash for a CCME operating
subsidiary. While Plaintiff attempts to make much of this “apples to oranges” comparison,
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 9 of 30
4
Plaintiffs have not alleged (and cannot allege) that these financial filings (i.e., disclosures to
different government regulators pursuant to different laws and applying different accounting
methods and rules) should be the same. Without a factual basis to support the conclusion that the
SEC and SAIC filings should be the same, any purported “inconsistency” between them means
nothing, and Plaintiffs’ allegations as to a difference between these filings does not satisfy
Plaintiffs’ burden of pleading facts in support of their claim that CCME’s revenue statements
were false when made, let alone satisfy the heightened pleading requirements for fraud claims
under Rule 9(b) and the PSLRA. See, e.g., Arfa v. Mecox Lane Ltd., No 10 Civ. 9053, 2012 WL
697155 (S.D.N.Y. Mar. 5, 2012) (dismissing claims under lower Rule 8 standard); China
Century Dragon, 2011 WL 6047093 (dismissing complaint); Sino Clean, No. 11-CV-03936
(same).
In Arfa – a decision from this District wholly ignored by Plaintiffs – Judge Sweet
considered SAIC-based allegations and granted dismissal despite allegations that the company
reported net income of $3.5 million for 2008 in its SEC registration statement, but only $825,544
for the same year to the SAIC. See Arfa, 2012 WL 697155 at *12. Concluding that plaintiffs
“[did] not allege that the registration statement’s 2008 figures to be false, only that a different
figure was filed with the Chinese government,” the court dismissed plaintiffs’ claim holding that
“the Amended Complaint fails to plead how this discrepancy [with the SAIC filing] makes the
… registration [statement] untrue or misleading.” Id. Contrary to Plaintiffs’ selective citation to
California case law (Opp. Mem. at 23-24), the vast majority of California District Court opinions
are in accord and have squarely held that a purported inconsistency between Chinese regulatory
filings and SEC filings is not sufficient to plead falsity. See In re China Intelligent Lighting &
Elecs., Inc. Sec. Litig., No. CV 11-2768 (C.D. Cal. Feb 16, 2012); Katz v. China Century Dragon
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 10 of 30
5
Media, Inc., No. CV 11-02769 JAK, 2011 WL 6047093 (C.D. Cal. Nov. 30, 2011); Sino Clean,
No. 11-CV-03936.5
Independently, Plaintiffs have failed to plead facts supporting a “strong inference of
scienter.” See Tellabs, 551 U.S. at 324 (“[T]he inference of scienter must be more than merely
‘reasonable’ or ‘permissible’ – it must be cogent and compelling, thus strong in light of other
explanations.”) (emphasis added); Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001) (In the
absence of motive, a plaintiff may also raise a strong inference of scienter based upon
circumstantial evidence of conscious misbehavior or recklessness, but “the strength of the
circumstantial allegations must be correspondingly greater.”). Plaintiffs here simply attempt to
“bootstrap” a finding of scienter based upon their allegations of purported falsity (arguing that
their “smoking gun” is the difference between the SEC and SAIC filings) and upon the after-the-
fact resignation of auditors and directors, and the Company’s delisting (which do not establish
either falsity or scienter). See Opp. Mem. at 29-30. As set forth above, however, Plaintiffs have
failed to establish that the Company made any material misstatements in its SEC filings and,
thus, those allegations cannot support an inference of scienter. Nor do subsequent events
(resignations or delisting) establish a “strong inference” of scienter here, because such events
may just as easily be based upon “other explanations.” Plaintiffs’ Complaint fails to make any
5 In both China Educ., 2011 WL 4978483, and Dean v. China Agritech, Inc., No. CV 11-01331, 2011 WL
5148598 (C.D. Cal. Oct. 27, 2011), the courts simply accepted the inconsistent filings without any
analysis as to whether such accounting inconsistencies were sufficient to create a plausible inference that
the SEC filings were false. In Scott v. ZST Digital Networks, Inc., No. CV 11-03531, 2012 WL 538279
(C.D. Cal. Feb. 14, 2012), the court did not uphold the sufficiency of a complaint “solely” upon alleged
discrepancies between a company’s SEC and Chinese filings, as Plaintiffs claim. Rather, the court in ZST
Digital construed the particular allegations before it, denying dismissal where (a) plaintiffs alleged a
marked difference between the SEC filings and Chinese filings “along with the Company’s subsequent
and ambiguous explanation of those discrepancies;” and (b) plaintiffs expressly and factually alleged that
differences in accounting standards could not be the reason for the differences in the SAIC and SEC
filings. See ZST Digital, 2012 WL 538279 at *8-9. Thus, even if ZST Digital were controlling, which it
is not, Plaintiffs have failed to make any such factual allegations here.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 11 of 30
6
factual allegation concerning scienter, other than wholly conclusory allegations that the
Company’s directors and officers “had knowledge” and “were aware of the problems.” Opp.
Mem. at 31, citing Compl. at ¶¶ 6, 66, 113. Similar allegations that defendants “must have
known” lack the specificity required to establish a strong inference of scienter. See City of
Roseville Employees’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 422 (D. Del. 2009).
Because Plaintiffs have failed to adequately allege scienter, their Section 10(b) claim
against the Company should be dismissed.6
II. PLAINTIFFS’ CLAIMS AGAINST GREEN AND BIRD SHOULD BE DISMISSED
A. PLAINTIFFS FAIL TO PLEAD FRAUD WITH THE REQUISITE
PARTICULARITY AGAINST DEFENDANTS GREEN AND BIRD
In their Opposition Brief, Plaintiffs merely rehash the conclusory fraud-by-hindsight
allegations set forth in their deficient pleading, and fail to point to a single fraudulent
misrepresentation directly attributable to Defendants Green and Bird. Plaintiffs’ minimal
allegations against Defendants Green and Bird are simply insufficient to make out a claim of
securities fraud as a matter of law and, accordingly, the Complaint should be dismissed as to
these Defendants with prejudice.
First, Plaintiffs gloss over the significant fact that the October 2009 Proxy clearly and
expressly stated that the information supplied by Hong Kong Mandefu was solely Hong Kong
Mandefu’s representation and did not constitute a representation by TM Entertainment and
Media, Inc. (“TM”), and hence, could not possibly be attributed to Defendants Green or Bird.
See Chase Declaration, Ex. B at 193. Without citation to any relevant authority, Plaintiffs now
6 In its moving brief, CCME argued that Plaintiffs’ Section 20(a) claims against Mr. Cheng and Mr. Lam
based on the Company's purported violation of Section 10(b) should be dismissed because it is axiomatic
that there can be no Section 20 liability where Plaintiffs fail to state the underlying claim against the
Company for the violation of Section 10(b). Although Plaintiffs presented argument in opposition on this
issue, as explained above (at n.1), CCME’s counsel does not represent Mr. Cheng or Mr. Lam in
connection with this action.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 12 of 30
7
merely argue that Defendants “should not be allowed to disclaim responsibility by stating that
they were not involved in the preparation of the financial information in the October 2009
Proxy.” Opp. Mem. at 45. Plaintiffs, however, do not explain why Defendants should be
responsible for information they did not provide in connection with the proposed reverse merger
and which TM expressly disclaimed in the Proxy. Nor do they cite a single legal authority to
support their position that company officers should be liable for information supplied by a
different company in these circumstances, particularly when they expressly note that fact and
disclaim responsibility to the public. The authorities that Plaintiffs do cite are uniformly
inapposite because they do not address any analogous disclaimer in a proxy or other public
filing, or even a situation where the information at issue was not within the officer’s knowledge
but rather concerned facts about a separate company’s prior finances and operations. This is not
a situation where officers are seeking to shield themselves from responsibility for matters within
their knowledge or control by not signing a public filing. Here, they expressly disclaimed
responsibility for statements as to the finances and operations of another company as to which
they had limited knowledge. Accordingly, dismissal of the Complaint is warranted as a matter of
law on this basis alone since Plaintiffs simply cannot properly tie Defendants Green and Bird to a
single alleged misstatement.
Second, Plaintiffs’ attempt to tie Defendant Bird to the October 2009 Proxy – a document
he did not sign – likewise fails on its face as a matter of law. As Plaintiffs acknowledge (Opp.
Mem. at 44), in order to invoke the group pleading doctrine, they must at least allege facts
establishing that defendants were corporate insiders with direct involvement in the day-to-day
affairs of the company when the allegedly false statements were made. Yet, as to Bird, Plaintiffs
have not come close to pleading the requisite “insider” status. Plaintiffs’ boilerplate allegations
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 13 of 30
8
regarding Bird’s position within TM only speak to the question of control, but fail altogether to
support an inference that he had direct involvement in TM’s day-to-day affairs, much less the
“insider” status to warrant an inference of knowledge of Hong Kong Mandefu’s finances and
operations as alleged here. See, e.g., In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247,
266-67 (S.D.N.Y. 2008) (group pleading doctrine inapplicable where plaintiffs failed to allege
with particularity that directors were sufficiently involved in the day-to-day operations or
drafting of company statements). Plaintiffs also fail altogether to address, much less to confront
and satisfy, the Supreme Court’s new standard as set forth in Janus Capital Group, Inc. v. First
Derivative Traders, _ U.S. _, 131 S. Ct. 2296, 2302 (2011), as noted in the initial submission of
Defendants Green and Bird. See Orlan v. Spongetech Delivery Sys., Inc., No. 10-CV-4093, 2012
U.S. Dist. LEXIS 44253 (E.D.N.Y. Mar. 29, 2012) (questioning the viability of the group
pleading doctrine following Janus).
Third, Plaintiffs’ Opposition fails to point to any particularized facts in the Complaint to
demonstrate that material representations expressly attributed to Hong Kong Mandefu in the
October 2009 Proxy were false at the time they were made, much less that Defendants Green and
Bird were aware, or even could have been aware, of such alleged falsity. While Plaintiffs’
opposition (Opp. Mem. at 42-43) cites information to show that figures represented by Hong
Kong Mandefu were different at a much later point in time, Plaintiffs do not point to any facts in
the Complaint which definitively demonstrate that Hong Kong Mandefu’s October 2009
representations were false at the time they were made. Thus, for example, Plaintiffs again point
to a Muddy Waters report released on February 3, 2011, itself based largely on unsubstantiated
and anonymous sources, but nothing in that report demonstrates that any statement made in the
Proxy by Hong Kong Mandefu as of October 2009 was in fact false. Likewise, Plaintiffs allege
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 14 of 30
9
that there was a second set of books, but there is no allegation as to the knowledge of Defendants
Green and Bird of the existence of such books, or even that they had any reason to be aware of
such books. Moreover, at best, Plaintiffs refer to 2009 year-end financial representations but
make no effort to address the financial information stated by Hong Kong Mandefu in the October
2009 Proxy covering a separate time period. Plaintiffs also fail to identify what specifically
Defendants Green and Bird failed to do at the time in connection with any due diligence.
B. PLAINTIFFS’ ALLEGATIONS OF SCIENTER AGAINST DEFENDANTS
GREEN AND BIRD ARE INSUFFICIENT TO STATE A CLAIM
Plaintiffs fail to provide the requisite factual support to demonstrate the scienter of
Defendants Green and Bird. Indeed, as previously demonstrated, Plaintiffs’ entire theory of
scienter makes no sense. Plaintiffs’ putative theory is that Defendants Green and Bird
knowingly participated in a fraud in October 2009, with the apparent hope that a major
accounting firm and all of CCME’s professional advisors, sophisticated investors, and market
analysts, would not discover the fraud for at least a year when they could finally sell their
unregistered shares. On its face, this theory is nonsensical and nothing in Plaintiffs’ Opposition
serves to clarify or dispel the specious nature of their theory.
Initially, Plaintiffs cannot demonstrate that Defendants Green and Bird had the requisite
motive and opportunity to commit fraud. Plaintiffs continue to press that “if the transaction with
Hong Kong Mandefu did not go through, Green and Bird’s approximately $17.2 million of
shares in TM would become ‘worthless.’” Opp. Mem. at 46. Plaintiffs concede, however, that
“TM’s prospectus for its IPO provided that the company had just two years (until October 17,
2009) to effect such a transaction, or the company would dissolve by operation of law, forcing
the company to return to its investors’ $77 million, and rendering Defendants Green and Bird’s
shares (which were in theory valued at $17.2 million on April 23, 2009) worthless.” Opp. Mem.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 15 of 30
10
at 5. Thus, Plaintiffs acknowledge that Defendants’ alleged “motive” to commit fraud was
openly disclosed to TM’s investors two years prior to Defendants’ alleged misrepresentations
and two years before anyone had so much as mentioned the existence of Hong Kong Mandefu.
Simply stated, and contrary to the Plaintiffs’ implication, TM’s endeavor to effectuate a merger
was perfectly legal and proper. One cannot reasonably infer from such an event that the conduct
of Defendants Green and Bird is anything but legal and proper. See Tellabs, 551 U.S. at 314.
Plaintiffs’ reliance on the positions of Defendants Green and Bird as directors and officers
of TM to establish their scienter likewise fails. Opp. Mem. 46. Scienter allegations of this type
have been repeatedly and consistently rejected in the Second Circuit. See Kalnit, 264 F.3d 131;
In re KeySpan Corp. Sec. Litig., 383 F. Supp. 2d 358, 387 (E.D.N.Y. 2003) (plaintiffs’
allegations that defendants may be charged with knowledge of activities by virtue of their high
level positions are insufficient); In re Sotheby’s Holdings, Inc. Sec. Litig., No. 00 Civ. 1041,
2000 U.S. Dist. LEXIS 12504 at *22 (S.D.N.Y. Aug. 31, 2000) (“[B]oilerplate allegations that
defendants knew or should have known of fraudulent conduct based solely on their board
memberships or executive positions are insufficient to plead scienter”); In re Health Mgmt. Inc.
Sec. Litig., 970 F. Supp. 192, 204-05 (E.D.N.Y. 1997) (defendant’s position as a director, her
responsibility for “monitoring the overall management and direction” of the company, and her
access to inside information were insufficient to establish inference of scienter).
Finally, Plaintiffs still do not point to anything unusual whatsoever in the conduct of
Defendants Green and Bird in connection with their shares, and fail otherwise to demonstrate
any conscious misbehavior or recklessness on their part. Although Plaintiffs repeatedly talk
about “red flags” in conclusory terms (Opp. Mem. 46-47), nowhere do Plaintiffs state
specifically what “red flags” Defendants Green and Bird allegedly saw or should have seen.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 16 of 30
11
Instead, Plaintiffs impermissibly rely on these Defendants’ positions with TM to state in
conclusory fashion that they must have had access to Hong Kong Mandefu information relevant
to the alleged fraud. Courts in this Circuit, however, have repeatedly rejected this “access to
information” theory of recklessness, requiring instead particularized allegations of what
information was available to defendants. See In re NTL Inc. Sec. Litig., 347 F. Supp. 2d 15, 28,
33 (S.D.N.Y. 2004). Such a requirement is, of course, even more compelling in this instance
where the information at issue relates to Hong Kong Mandefu’s finances and operations at a time
when Defendants Green and Bird had no involvement or knowledge of same.
III. PLAINTIFFS’ CLAIM AGAINST ROBBINS SHOULD BE DISMISSED
A. FAILURE OF PLAINTIFFS’ FACTUAL ALLEGATIONS TO
CONSTITUTE INFERENCES OF PROPERLY PLED FALSE
STATEMENTS BY DEFENDANT ROBBINS
In their Opposition to Defendant Robbins’ Motion to Dismiss Plaintiffs seem to suggest
that Defendant Robbins believes that Plaintiffs have adequately alleged that Robbins made
materially false and misleading statements in an audit opinion covering CCME’s financial
statements for the years ending December 31, 2008 and December 31, 2007. Opp. Mem. at 47.
Such an opinion is belied by a careful consideration of CCME’s Memorandum in support of its
Motion to Dismiss (“Doc 103”), with the more plausible explanation that short sellers had
engaged in an attack upon CCME’s financial status for their own benefit as CCME stockholders.
Indeed, in its robust defense against Plaintiffs’ allegations, CCME pointed out that reliance on “a
complaint that simply points to and relies entirely on the unsubstantiated and uncorroborated
allegations of short sellers is not sufficiently pleaded.” (citations omitted), Doc 103, p. 2. Rule
9(b), case law, and the PSLRA teach that rather than pleading opinions, Plaintiffs must plead
facts from which a reasonable inference can be drawn that CCME’s SEC filings, in fact, contain
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 17 of 30
12
material misstatements supporting a strong inference that the CCME Defendants, as well as its
auditors, knew or should have known that the filings contained material misstatements. CCME
points out that repetition of short sellers’ allegations frequently based on multiple level hearsay
based upon unidentified and unqualified sources cannot constitute “facts”. Doc 103, p. 2.
Moreover, as CCME articulates in its memorandum, (Doc 103) the questions by its auditor DTT
HK, (Defendant Robbins successor), raised in its March 3, 2011 letter to CCME’s audit
committee:
are just that, questions, none of which were thought by DTT to be sufficiently
important to raise prior to the publication of the short sellers’ “reports.” . . .
While these questions may imply the need for additional audit procedures, as
DTT concluded, Plaintiffs nowhere explain how they translate into the material
overstatement of the Company’s financial results for the years 2006 through 2009
and the first three quarters of 2010, as Plaintiffs contend . . . . Once again,
supposition and innuendo are not substitutes for well pleaded facts. (Doc 103,
p. 3) (emphasis supplied).
Plaintiffs’ opinions about the failures of Defendant Robbins are even more tarnished. In
fact, nowhere has Plaintiffs’ continual drum beat against Defendant Robbins produced anything
except flailing opinions lacking any factual basis.
B. PLAINTIFFS’ IMPROPER RELIANCE ON CITED CASE LAW IN
SUPPORT OF ITS ASSERTIONS AGAINST DEFENDANT ROBBINS
In the five-page Opposition to Robbins’ Motion to Dismiss, Plaintiffs cite this Court to
nine (9) judicial opinions in an effort to bolster their claims against Defendant Robbins. Quite
naturally, they attempt to rely most heavily upon this Court’s Opinion in Beno Varghese et al. v.
China Shenghuo Pharmaceutical Holdings, Inc., et al., 672 F. Supp. 2d 596 (S.D.N.Y. 2009).
However, Plaintiffs seem to have missed the crucial distinction that the individual defendants
charged, collectively known as the CSP Defendants, admitted that disclosed financial results
were false and presented in violation of GAAP. CSP also announced that it was re-stating
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 18 of 30
13
financials for fiscal years ending December 31, 2007 and the first quarter of 2008. See id. at 603,
604. As a consequence of CSP’s admissions, affecting both CSP Defendants and auditor,
Hansen Barnett and Maxwell, P.C., (“HB&M”), this Court concluded that the Plaintiffs had
properly alleged GAAS violations made by HB&M while conducting its audit. See id. at 609.
This Court also concluded that the Plaintiffs properly pled scienter inasmuch as Plaintiffs alleged
that HB&M was aware through CSP’s own disclosures and CSP’s SEC filing that there were
ongoing serious problems with CSP’s financial reporting.
However, such was not the case with Defendant Robbins. Not one fact pled by Plaintiffs
shows an admission by CCME that it made any false or misleading statements. Not one fact pled
by Plaintiffs shows that Defendant Robbins made any false or misleading statement of fact
constituting an admission or other inference that its audits were not conducted in accordance
with GAAS, and that its financial statements were not in conformity with GAAP. Accordingly,
Plaintiffs have not properly pled in accordance with Rule 9(b) and PSLRA’s particularity
requirements. Nor have they properly pled scienter. Under the stringent standards for alleging
scienter against auditors, as this Court observed in Varghese:
In the context of fraud claims against an auditor, plaintiffs must allege that the
accounting practices were so deficient that the audit amounted to no audit at all,
or an egregious refusal to see the obvious, or to investigate the doubtful, or that
the accounting judgments which were made were such that no reasonable
accountant would have made the same decisions if confronted with the same
facts.
Id. at 609-10 (citing In re Scottish Re Group Secs. Litig., 524 F. Supp. 2d 370, 398 (S.D.N.Y.
2007) (internal quotation marks omitted).
C. ROBBINS’ ALLEGED PCAOB VIOLATIONS ARE IRRELEVANT
In their Opposition and without particularization, Plaintiffs cite this Court to
Freudenburg v. E*Trade Financial Corporation, 712 F. Supp. 2d 171 (S.D.N.Y. 2010), and SEC
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 19 of 30
14
v. Youmans, 729 F.2d 413, 415 (6th Cir. 1984) as support for their contention that Robbins’
PCAOB violations provide a relevant factor in determining the likelihood of future securities
laws violations. Neither case is persuasive. In Freudenburg, the complaint pled multiple facts of
defendants involved in fraudulent activities that were properly alleged and based upon a plethora
of material facts, unlike the instant case where Plaintiffs engage in “[s]imply repeating short
sellers’ allegations, which frequently are based on multiple-level hearsay bottomed on
information from unidentified and unqualified sources, . . . [where] . . . the short seller reports
traffic in hyperbole rather than facts . . . .” Doc 103, p. 2. Perusal of the opinion in Freudenburg
reveals that there is no relationship between the activities in that case with anything regarding
any of the Defendants in this case. SEC v. Youmans also fails to provide a helpful analysis and
there is no basis to compare the Robbins PCAOB decisions with the facts and circumstances set
forth in Freudenburg. Accordingly, Freudenburg is simply inapposite to the instant case. See
Complaint, Doc 1, and Consolidated Amended Class Action Complaint, Doc 68, in CM/ECF
S.D.N.Y. Civil Docket No. 1:07-cv-08538-JPO-MHD.
In SEC v. Youmans, the facts are also inappropriate to argue in this case. The Sixth
Circuit opinion reveals that the record on appeal established that two defendants, Holliday and
Chepul, with scienter, engaged in serious and repeated violations of the securities laws over a
four-year period. Such is not the instant case. Plaintiffs’ PCAOB citations about the alleged
behavior of Defendant Robbins are inapposite and inappropriate. See also Edward J. Goodman
Life Income Trust v. Jabil Circuit, Inc., 595 F. Supp. 2d 1253, 1285-86 (M.D. Fla. 2009)
(PCAOB finding of previous deficiency involving different company insufficient to satisfy
strong inference test); Fidel v. Farley, 392 F.3d 220, 231 (6th Cir. 2004) (settlement of claims
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 20 of 30
15
arising from one audit fails to create strong inference of scienter involving different financial
records).
IV. THE OPPOSITION PROVIDES NO BASIS TO SUSTAIN PLAINTIFFS’
CLAIMS AGAINST DTTL OR DELOITTE U.S.
Plaintiffs fall far short of stating a claim against either DTTL or Deloitte U.S. under
Sections 20(a) and 10(b). As to Section 20(a), the Amended Complaint fails to allege facts
showing any of the three required elements: (1) that DTTL had actual control over DTT HK, or
that Deloitte U.S. had actual control over DTTL, (2) that either DTTL or Deloitte U.S. had actual
control over DTT HK’s audit of CCME, much less (3) that they culpably participated in that
audit. Instead, the Opposition relies almost exclusively on Parmalat, even though this Court and
the Second Circuit have recently rejected the standard applied in Parmalat, and, in marked
contrast to the current case, Parmalat alleged specific involvement in the audit itself. (DTTL Br.
at 11-14; Deloitte U.S. Br. at 13-14.) As to Section 10(b), not only does Janus strongly suggest
that Plaintiffs can no longer state a vicarious liability claim, but, even if they could, the Section
10(b) claims would still fail because the Amended Complaint does not and cannot allege that
DTTL or Deloitte U.S. had any involvement in the CCME audit. Plaintiffs’ last-ditch request for
“targeted discovery” is barred by the PSLRA, and the claims against DTTL and Deloitte U.S.
should be dismissed with prejudice.7
A. THE SECTION 20(A) CLAIMS AGAINST DTTL AND DELOITTE U.S.
ARE INADEQUATE
To state a Section 20(a) claim against DTTL or Deloitte U.S., Plaintiffs must adequately
allege (in addition to a primary violation by the allegedly controlled person): (1) actual control
over a primary violator, (2) actual control over the audit at issue, and (3) culpable participation in
7 We understand that DTT HK will shortly file its motion to dismiss, which if granted would require
dismissal of the claims against DTTL and Deloitte U.S. as well.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 21 of 30
16
the audit. See In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 486-87 (S.D.N.Y. 2005) (Alstom
III). The Amended Complaint satisfies none of these elements.
Actual Control Over A Primary Violator. As explained in DTTL’s opening brief, the
Amended Complaint’s broad allegations that DTTL promulgates and enforces quality control
standards and that DTTL and its members are one firm—the only “control” allegations the
Opposition cites as to DTTL—are insufficient to create a plausible inference of actual control
over DTT HK. (DTTL Br. at 8-11.)8 Similarly, as explained in Deloitte U.S.’s opening brief,
the Amended Complaint’s generic allegations raise no plausible inference that Deloitte U.S. had
actual control over DTTL. (Deloitte U.S. Br. at 9-12.) The Opposition simply fails to address
the cases cited by DTTL and Deloitte U.S., including decisions from this Court and the Second
Circuit demonstrating the insufficiency of Plaintiffs’ allegations.
Actual Control Over The Audit. The Opposition refuses to recognize (Opp. Mem. at 69
and n.61) what this Court has made clear: that Section 20(a) requires Plaintiffs to allege facts
sufficient to support a plausible inference that DTTL and Deloitte U.S. had “actual control over
the transaction in question.” Alstom III, 406 F. Supp. 2d at 487 (quotation omitted). There is not
a single allegation in the Amended Complaint that DTTL or Deloitte U.S. played any role
whatsoever in the CCME audit, much less a controlling role. As to DTTL, the conclusory
allegations that DTTL established quality control standards for Deloitte member firms are clearly
insufficient to support an inference that DTTL had actual and specific control over DTT HK’s
audit of CCME. (See DTTL Br. at 11-14.) Recognizing this weakness, Plaintiffs now suggest
8 Indeed, accepting Plaintiffs’ theory of control against DTTL would mean that every membership
accounting organization would be liable for all conduct of all of its members, and more generally every
membership organization that promulgates and enforces quality control standards would be liable for any
alleged misconduct by its members. For instance, a state bar association could have vicarious liability for
member attorneys’ ethical violations or malpractice. This never has been the law, nor is it sound policy to
discourage membership organizations from promulgating quality standards.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 22 of 30
17
for the first time in their Opposition that DTTL undertook a role with respect to DTT HK’s
CCME engagement after the audit was completed and after CCME’s alleged fraud was revealed.
Opp. Mem. at 60-61, 69. Apart from the fact that this assertion is not pleaded in the Amended
Complaint, it is irrelevant. To state a claim, the pleading must allege involvement in and control
over the audit itself, not involvement after the fact. As to Deloitte U.S., there is simply no
allegation at all in the Amended Complaint (or Opposition) that Deloitte U.S. had any
involvement in, much less actual control over, DTT HK’s audit of CCME. (Deloitte U.S. Br. at
12-13.)
Culpable Participation. The Opposition’s argument that culpable participation is not an
element of a Section 20(a) claim plainly contradicts the law of the Second Circuit and this Court,
and should be rejected. See, e.g., ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108
(2d Cir. 2007); Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 413-14 (S.D.N.Y.
2010). Plaintiffs’ alternative argument—that culpable participation has somehow been pleaded
under the theory that DTTL failed to supervise DTT HK’s audit of CCME in the face of red
flags, and that Deloitte U.S. failed to supervise DTTL (Opp. Mem. at 68, 74)—is meaningless.
The allegation that two entities who played no role whatsoever in the audit failed to supervise
it—who indeed are not even alleged to have been aware of the audit—can hardly be spun into an
inference of “culpable participation.” There is simply no way to transform a complete lack of
participation into culpable participation. Plaintiffs’ internally inconsistent, unpleaded,
conclusory allegations thus do not come close to meeting the requirement to plead particularized
facts sufficient to support a strong inference that DTTL and Deloitte U.S. acted with scienter.
See Alstom III, 406 F. Supp. 2d at 491. Simply put, this alternative theory suffers from the same
fatal flaw as the Opposition’s other arguments as to DTTL and Deloitte U.S.: there is no
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 23 of 30
18
allegation that either entity was aware at the time of, much less involved in, the audit in issue.
There is thus nothing in the pleading to show—nor do Plaintiffs allege—that either entity was
aware of the supposed red flags concerning the CCME audit, much less that either acted with
scienter.9
B. THE OPPOSITION PROVIDES NO SUPPORT FOR THE SECTION 10(B)
CLAIMS
1. Vicarious Liability Claims Do Not Survive Janus
As the Opposition concedes (see Opp. Mem. at 66), the Amended Complaint does not
allege that either DTTL or Deloitte U.S. was the “maker” of any statement, i.e., “the person or
entity that ultimately has authority over a false statement.” See Janus Capital, 131 S. Ct. at
2303; see also DTTL Br. at 17-19; Deloitte U.S. Br. at 16-20. Plaintiffs argue that they need not
satisfy Janus, but make no attempt to reconcile their position with Janus’s holding—that the
Court would “not expand liability” beyond the party with ultimate authority over the statement.
Id. The Opposition instead makes the meaningless observation that Janus does not contain the
words “vicarious,” “respondeat superior,” or “alter ego,” and cites only to pre-Janus authority
(Opp. Mem. at 61-63) without addressing the Janus Court’s explicit refusal to expand Section
10(b) to permit Plaintiffs “to disregard the corporate form,” 131 S. Ct. at 2304, which is exactly
what Plaintiffs seek to do here.10
9 The cases Plaintiffs cite in support of their “failure to supervise” argument are inapposite. See
STMicroelectronics v. Credit Suisse Grp., 775 F. Supp. 2d 525, 533, 537, 538 (E.D.N.Y. 2011) (stating in
dicta that culpable participation was met where bank participated in and benefitted financially from the
fraud committed by its brokers); Anwar, 728 F. Supp. 2d at 427 (finding Section 20(a) claim where the
control person (Citco Group) allegedly was aware of numerous, specific red flags such as “that Madoff
served as the investment manager, sub-custodian, and trade execution agency of the Funds, ‘hugely
increasing this risk of fraud, and the need for independent verification’”); Compudyne Corp. v. Shane,
453 F. Supp. 2d 807, 830-31 (S.D.N.Y. 2006) (broker-dealer had “affirmative duty” under the federal
securities laws to supervise employees).
10 Other courts have applied Janus’s directive beyond its specific facts. See In re Optimal U.S. Litig., No.
10 Civ. 4095, 2011 U.S. Dist. LEXIS 119141, at *18-*19 (S.D.N.Y. Oct. 14, 2011) (following Janus’s
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 24 of 30
19
2. The Amended Complaint Fails To Adequately Allege Respondeat
Superior Liability
Even if vicarious liability under Section 10(b) had survived Janus, the Amended
Complaint fails to state any respondeat superior/agency claim, again because it fails adequately
to allege that either DTTL or Deloitte U.S. had any involvement in the CCME audit. See Anwar,
728 F. Supp. 2d at 459-60 (finding that plaintiff must allege specific involvement in the audit at
issue); see also DTTL Br. at 21-24.
Nor have Plaintiffs sufficiently alleged—as they concede they must—that either
DTTL or Deloitte U.S. manifested an intent to grant DTT HK authority to act on their behalf.
Opp. Mem. at 63-64. As to DTTL, the Opposition points only to the conclusory allegations that
DTT HK is a “member firm” of DTTL and that DTTL promulgated quality control standards for
its members to follow. See Id. at 59-60, 69. These allegations do not create a plausible inference
that DTTL agreed that DTT HK would be its agent for the CCME audit. See Anwar, 728 F.
Supp. 2d at 459 (requiring allegations of manifestation by principal that agent shall act for him,
acceptance of undertaking by agent and understanding that principal will control undertaking).
Indeed, the only statements by DTTL referenced in the Amended Complaint are from DTTL’s
website, in which DTTL publicly and expressly disclaims any agency relationship, stating that
instruction not to expand liability “where Congress already imposed liability under other statutory
provisions,” and concluding that a 100% owner was not liable for its subsidiary’s statements); see also
Fulton County Employees Ret. Sys. v MGIC Inv. Corp., 675 F.3d 1047, 1051-52 (7th Cir. 2012)
(rejecting, under Janus, argument that company that invited others to speak at press conference can be
liable under Section 10(b)); Kerr v. Exobox Tech. Corp., No. H-10-4221, 2012 WL 201872, at *11 (S.D.
Tex. Jan. 23, 2012) (finding that defendant could not be liable under Section 10(b) simply because he
controlled the “maker” of a statement and that, under Janus, such a claim is properly brought only under
Section 20(a)).
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 25 of 30
20
“DTTL and each DTTL member firm are separate and distinct legal entities, which cannot
obligate each other.” (Ex. 2 to DTTL Br.) (emphasis added).11
As to Deloitte U.S., Plaintiffs assert for the first time in their Opposition that Deloitte
U.S. is liable under an agency theory. Opp. Mem. at 72. Nowhere in the Amended Complaint is
there any assertion of an agency theory against Deloitte U.S., nor is there any factual allegation
that a principal-agent relationship existed between Deloitte U.S. and any other entity. Instead,
the only theory of vicarious liability mentioned with respect to Deloitte U.S. is alter ego.
(Compl. ¶ 32.) But even if Plaintiffs had attempted to plead an agency theory against Deloitte
U.S., it would fail for the same reasons that the agency claim against DTTL fails: there are no
allegations that Deloitte U.S. had any involvement in the CCME audit, much less that it
manifested any intention for DTTL or DTT HK to act as its agent with respect to that audit.
Finally, the Amended Complaint fails to allege, as it must, that DTT HK’s allegedly false
statements are attributable to DTTL and Deloitte U.S. The Opposition instead argues that
attribution is an issue of fact. Opp. Mem. at 66. However, the Amended Complaint is devoid of
any factual allegations to support the inference that anyone attributed DTT HK’s audit opinion to
DTTL or Deloitte U.S. To the contrary, the undisputed (and public) facts, as well as Plaintiffs’
own pleading, make clear that DTT HK alone performed the audit and issued the audit opinion.
(DTTL Br. at 4-5; Compl. ¶¶ 23, 70, 71, 88, 101, 114, 122-43.)
3. The Alter Ego Theory Against Deloitte U.S. Fails
As explained in Deloitte U.S.’s opening brief (Deloitte U.S. Br. at 20-24), the only
vicarious liability theory against Deloitte U.S. even mentioned in the Amended Complaint—an
11 For purposes of this motion, this statement need not be considered for its truth, but rather for the fact
that DTTL made the statement. Cf. Anwar v. Fairfield Greenwich Ltd., Nos. 09 Civ. 0118, 10 Civ. 2878,
--- F. Supp. 2d ----, 2011 WL 6288406, at *2 (S.D.N.Y. Dec. 14, 2011) (court may consider documents
attached to, incorporated by reference in, or otherwise integral to complaint when reviewing a motion to
dismiss).
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 26 of 30
21
“alter ego” theory—fails because there is no allegation that Deloitte U.S. had any involvement in
the “transaction at issue,” i.e., the CCME audit, and therefore there can be no allegation that
Deloitte U.S. completely dominated DTTL and DTT HK with respect to that audit. Am. Fuel
Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997); see also Fin. One, Inc. v.
Timeless Apparel, Inc., No. 09 Civ. 9397, 2011 WL 1345030, at *5 (S.D.N.Y. Mar. 29, 2011)
(rejecting alter ego theory as, “[e]ven if the record was sufficient to support a domination
theory,” it was insufficient to show domination “with respect to the transaction at issue”)
(quotation omitted)).
Nor does the Opposition address the cases cited by Deloitte U.S. establishing that the
Amended Complaint fails to meet the high standard for pleading domination. (Deloitte U.S. Br.
at 21-23.) Indeed, the Opposition cites no precedent at all for asserting alter ego liability against
Deloitte U.S. on the bare facts alleged.12
C. THERE IS NO BASIS FOR PLAINTIFFS’ IMPROPER REQUEST FOR
DISCOVERY
Plaintiffs’ request to take “targeted discovery” is without merit. To begin, it violates the
PSLRA discovery stay. See 15 U.S.C. § 78u-4(b)(3)(B) (2012). Moreover, there are simply no
factual allegations on which “targeted discovery” could proceed here because Plaintiffs have
failed to allege any involvement at all by DTTL or Deloitte U.S. in the CCME audit, let alone
“culpable participation.” See Ashcroft v. Iqbal, 556 U.S. 662, 686 (2009) (“Because
respondent’s complaint is deficient under Rule 8, he is not entitled to discovery, cabined or
12 The only case Plaintiffs cite is In re Alstom SA Sec. Litig., 454 F. Supp. 2d 187 (S.D.N.Y. 2006), where
the Court found that, “by a narrow margin,” an alter ego claim could proceed against the parent company
of a wholly-owned subsidiary given allegations that the corporations disregarded corporate formalities
and the parent used its control of the subsidiary to carry out the fraud at issue. Id. at 216. Here, by
contrast, Deloitte U.S. does not own DTTL, and there are no allegations of a disregard of corporate
formalities or of any involvement by either entity in the CCME audit.
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 27 of 30
22
otherwise.”). Plaintiffs’ request for discovery is a last-ditch effort to construct a claim against
DTTL and Deloitte U.S., for which they can plead no factual basis at all.13
V. LEAVE TO AMEND SHOULD BE DENIED
In one sentence on the last page of their Opposition, Plaintiffs make a perfunctory
suggestion that they should be allowed to file a Second Amended Complaint. See Opp. Mem. at
75. Plaintiffs do not provide any description of the content of any new pleading, nor do they
explain how any additional complaint would cure the fatal deficiencies detailed above. Leave to
amend is properly denied in such circumstances. See, e.g., City of Monroe Employees’ Ret. Sys.
v. Hartford Fin. Servs. Grp., Inc., No. 10 Civ. 2835, 2011 WL 4357368, at *23 n.61 (S.D.N.Y.
Sept. 19, 2011).
13 The two cases cited in the Opposition are inapposite. See Munoz v. China Expert Tech., Inc., No. 07
Civ. 10531, 2011 U.S. Dist. LEXIS 128539 (S.D.N.Y. Nov. 4, 2011) (not even addressing “targeted
discovery” to cure inadequate pleading but denying motion to dismiss given factual allegations that
defendant participated in audit and had ultimate authority over audit opinion); Alstom III, 406 F. Supp. 2d
at 503-04 (dismissing several control person claims without permitting discovery, but allowing limited
discovery to resolve “close call” regarding whether two corporate officer defendants, who had culpably
participated in fraud at issue, had actual control over their company, which was the primary violator).
Notably, in granting discovery in Alstom III, the Court relied upon the pleading standard set out in the
Second Circuit’s decision in Twombly v. Bell Atlantic Corp., 425 F.3d 99 (2d Cir. 2005), which was later
reversed in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 28 of 30
23
CONCLUSION
For all of the foregoing reasons, Defendants (and each of them) respectfully request that
the Court grant their respective motions dismissing Plaintiffs’ Amended and Consolidated
Complaint as against them and granting such other and further relief as the Court deems just and
equitable.
Dated: New York, New York Respectfully submitted,
May 14, 2012
As to Sections I and V
LOEB & LOEB LLP
By: /s/ Eugene R. Licker
Eugene R. Licker (EL-0334)
elicker@loeb.com
John A. Piskora (JP-1224)
jpiskora@loeb.com
345 Park Avenue
New York, NY 10154
Telephone: 212.407.4000
Attorneys for Defendant
China MediaExpress Holdings, Inc.
As to Sections II and V
MORRISON COHEN LLP
By: /s/ Donald H. Chase
Donald H. Chase (DC-6708)
dchase@morrisoncohen.com
Edward P. Gilbert (EG-3730)
egilbert@morrisoncohen.com
909 Third Avenue
New York, New York 10022
Telephone: (212) 735-8600
Attorneys for Defendants
Theodore Green and Malcolm Bird
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 29 of 30
24
As to Sections III and V
MICHAEL E. MARR, ATTORNEY-AT-LAW
By: /s/ Michael E. Marr (pro hac vice)
Michael E. Marr (MD Federal Bar # 99)
mmarr@marrlaw.com
3107 Tyndale Avenue
Baltimore, Maryland 21214-3429
Telephone: 410-254-7000
Attorneys for A.J. Robbins P.C.
As to Sections IV and V
HUGHES HUBBARD & REED LLP
By: /s/ William R. Maguire
William R. Maguire
maguire@hugheshubbard.com
Savvas A. Foukas
foukas@hugheshubbard.com
Jesse James
jamesj@hugheshubbard.com
One Battery Park Plaza
New York, New York 10004
Telephone: (212) 837-6000
Attorneys for Deloitte LLP
As to Sections IV and V
LATHAM & WATKINS LLP
By: /s/ Miles N. Ruthberg
Miles N. Ruthberg
Miles.Ruthberg@lw.com
Christopher Harris
Christopher.Harris@lw.com
Kevin M. McDonough
Kevin.McDonough@lw.com
885 Third Avenue
New York, New York 10022
Telephone: (212) 906-1200
KRAMER LEVIN NAFTALIS & FRANKEL LLP
Michael J. Dell
mdell@kramerlevin.com
1177 Avenue of the Americas
New York, NY 10036
Telephone: (212) 715-9100
Attorneys for Deloitte Touche Tohmatsu Limited
Case 1:11-cv-00804-VM Document 133 Filed 05/14/12 Page 30 of 30
