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O’Melveny & Myers Defeats Motion for Class Certification in Shareholder Complaint against China Agritech

May 9, 2012

 

In what is rarely accomplished in the US courts, on May 3, 2012, O’Melveny & Myers successfully defeated a motion for class certification in Theodore E. Dean v. China Agritech, et al., a shareholder action filed in the U.S. District Court for the Central District of California against O’Melveny’s client China Agritech. This is a significant victory for China Agritech and is also the first court order denying class certification in a proposed securities class action against a China-based U.S. listed company. The O’Melveny team, led by partners Seth AronsonAbby Rudzin and Bingna Guo, successfully persuaded the Court that the plaintiffs were not entitled to class certification because they failed to prove that China Agritech’s stock traded in an efficient market, a prerequisite for maintaining a securities fraud class action for damages.

China Agritech, a leading manufacturer and distributor of organic compound fertilizers headquartered in Beijing and registered in Delaware, and several individual defendants, including the Company’s executive management team and board, were sued in February 2011 by Theodore Dean and other shareholders. The amended complaint, filed in June 2011, alleges violations of Section 20(a) of the Securities Exchange Act of 1934, SEC Rule 10b-5 and Section 11 of the Securities Act of 1933. On October 27, 2011, O’Melveny persuaded the court to dismiss the Section 11 claims, which were the only claims against the individual defendants.

In order to maintain a class action under Federal Rule of Civil Procedure 23, a plaintiff must satisfy the four prerequisites of Rule 23(a) and establish at least one of Rule 23(b)’s three requirements. The Plaintiffs contended that their action met the requirement of Rule 23 (b)(3), which requires the questions of law or fact common to class members to predominate over individual issues.

Because the remaining claim arise under SEC Rule 10b-5, to make this showing the Plaintiffs needed to take advantage of the presumption of reliance that arises from a “fraud on the market” theory. To establish a “fraud on the market,” the Plaintiffs must establish that China Agritech traded in an efficient market under the five “Cammer factors.” O’Melveny convinced the Court that Plaintiffs failed to satisfy the second and fifth Cammer factors. As to the second factor, which is the number of analysts following the stock, the Court found that the Plaintiffs failed to provide sufficient information about the supposed 13 analysts following the Company's stock and therefore the Court could not make a determination as to whether these individuals were indeed analysts. As to the fifth and most important factor, which is a causal relationship between company news and stock price movements, the Court found that the majority of event studies conducted by two of the Plaintiffs’ own experts did not show a correlation at a statistically significant level between new Company information and downward movement in the stock price. Moreover, the Court noted that the two Plaintiff experts differed in their conclusions. Therefore, the Court found that the Plaintiffs had not established this Cammer factor.

Unable to invoke the “fraud-on-the-market” presumption of reliance under SEC Rule 10b-5, the Plaintiffs could not meet the Rule 23(b)(3) requirement that the questions of law or fact common to class members predominate over any questions affecting only individual members. O’Melveny therefore persuaded the Court to deny the motion for class certification. A denial of a motion for class certification in a securities fraud case is exceptionally rare and marks a major victory for China Agritech.

 

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