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Resh v. China Agritech, Inc.

United States Court of Appeals, Ninth Circuit

May 24, 2017

Michael H. Resh, On Behalf of Himself and All Others Similarly Situated; William Schoenke; Heroca Holding, B. V.; Ninella Beheer, B. V., Plaintiffs-Appellants,
v.
China Agritech, Inc.; Yu Chang, Company's CEO, President, Secretary, and Chairman of the Board; Yau-Sing Tang, AKA Gareth Tang, Company's Chief Financial Officer; Gene Michael Bennett, Director of CAGC; Xiao Rong Teng, Director of CAGC; Ming Fang Zhu; Lun Zhang Dai, Director of CAGC; Charles Law, AKA Charles C. Law, AKA Charles Chien-Lee Law, AKA Charles Chien-Lee Loh, AKA Chien-Lee C. Loh, Director of CAGC; ZHENG WANG, Director of CAGC, Defendants-Appellees.

          Argued and Submitted December 5, 2016 Pasadena, California

         Appeal from the United States District Court for the Central District of California No. 2:14-cv-05083-RGK-PJW R. Gary Klausner, District Judge, Presiding

          Matthew M. Guiney (argued), Wolf Haldenstein Adler Freeman & Herz LLP, New York, New York; Betsy C. Manifold, Francis M. Gregorek, Rachele R. Rickert, and Marisa C. Livesay, Wolf Haldenstein Adler Freeman & Herz LLP, San Diego, California; David A.P. Brower, Brower Piven, New York, New York; for Plaintiffs-Appellants.

          Seth Aronson (argued), Brittany Rogers, and Michelle C. Leu, O'Melveny & Myers LLP, Los Angeles, California; Abby F. Rudzin, O'Melveny & Myers LLP, New York, New York; for Defendants-Appellees.

          Before: Stephen Reinhardt, William A. Fletcher, and Richard A. Paez, Circuit Judges.

         SUMMARY[*]

         Class Actions

         The panel reversed the district court's order dismissing as untimely a would-be class action alleging that China Agritech, Inc. and its managers and directors violated the Securities Exchange Act of 1934, and remanded for further proceedings.

         The panel explained that the district court's invitation to file a complaint in a separate individual suit does not render non-appealable the district court's dismissal of the class action complaint. The panel also wrote that appellate jurisdiction is proper, notwithstanding that the plaintiffs did not wait for the district court to set forth its judgment in a separate document, because the district court's order was a full adjudication of the issues that clearly evidenced its intention that the order be final.

         The panel held that the plaintiffs' would-be class action is not time barred, where (1) the plaintiffs were unnamed plaintiffs in two earlier would-be class actions against many of the same defendants based on the same underlying events; (2) class action certification was denied in both cases; (3) the earlier actions were timely; and (4) under American Pipe & Construction Co v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), the statute of limitations for the individual claims of would-be class members in the earlier actions was tolled during the pendency of those actions.

         The panel wrote that permitting future class-action named plaintiffs, who were unnamed members in previously uncertified classes, to avail themselves of American Pipe tolling would advance the policy objectives that led the Supreme Court to permit tolling in the first place. The panel wrote that to the degree that the panel's conclusion may be thought likely to lead to abusive filing of repetitive class actions, the current legal system - including Fed.R.Civ.P. 23 and principles of preclusion and comity -- is adequate to respond to such a concern.

          OPINION

          W. FLETCHER, Circuit Judge:

         Plaintiffs bring a would-be class action alleging that China Agritech, Inc. ("China Agritech") and its managers and directors violated the Securities Exchange Act of 1934 ("Exchange Act"). Plaintiffs were unnamed plaintiffs in two earlier would-be class actions against many of the same defendants based on the same underlying events. Class action certification was denied in both cases. Under American Pipe & Construction Co v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), the statute of limitations was tolled during the pendency of these two suits for plaintiffs' individual claims. There is thus no time bar preventing plaintiffs from bringing the present suit as joined individual claims rather than as a class action. The question before us is whether plaintiffs are time-barred from pursuing their suit as a class action.

         For the reasons that follow, we hold that plaintiffs are not time-barred from bringing a class action.

         I. Background

         China Agritech is a holding company incorporated in Delaware with its principal place of business in Beijing, China. The company claims to operate through various subsidiaries that manufacture and sell organic compound fertilizers and related products to farmers in twenty-eight Chinese provinces. China Agritech began listing its shares on the NASDAQ Stock Exchange in 2005. In a 2009 filing with the U.S. Securities and Exchange Commission ("SEC"), China Agritech reported a net revenue of $76 million, which was triple the $25 million in revenue it reported for 2005.

         On February 3, 2011, LM Research, a market research company, published a report entitled "China Agritech: A Scam" ("LM Report"). The report, written by individuals who held a short position in China Agritech stock, asserted that China Agritech was "not a currently functioning business that [was] manufacturing products, " but instead was "simply a vehicle for transferring shareholder wealth from outside investors into the pockets of the founders and inside management." Alleging idle factories, minimal investments, and fictitious contracts, the report concluded that China Agritech had "grossly inflated its revenue, failed to account for tens of millions of investor dollars, and [had] virtually no product in the market." Upon release of the LM Report, China Agritech's shares declined from $10.78 per share on February 2, 2011, to $9.85 per share on February 3, 2011.

         China Agritech denied the allegations in an eight-page letter to shareholders. On February 15, 2011, Bronte Capital, a hedge fund that also held a short position in China Agritech, responded to China Agritech's letter in an article sarcastically titled, "China Agritech: China's amazing productivity levels" ("BC Article"). The BC Article contended that photos released by China Agritech in its letter did not show the most basic equipment required for operations of the magnitude that China Agritech claimed. For example, the pictures showed 40 kg fertilizer bags being moved manually by individual human laborers rather than with forklifts, calling into question how a factory reported to manufacture 100, 000 tons of granular fertilizer annually could possibly operate as depicted. China Agritech's stock value declined to $7.44 per share the next day.

         On March 13, 2011, China Agritech announced the formation of a Special Committee of its Board of Directors to investigate the allegations of fraud. The next day, China Agritech dismissed its independent auditor, Ernst & Young Hua Ming ("E&Y"), and publicly disclosed that E&Y had insisted, in December 2010, that the board commence an investigation of accounting problems it had previously identified. Also on March 14, 2011, NASDAQ halted trading in China Agritech stock and initiated delisting proceedings. On October 17, 2012, the SEC issued an enforcement order revoking the registration of China Agritech stock.

         II. Procedural History

         A. The Dean Action

         On February 11, 2011, Theodore Dean, on behalf of himself and all others similarly situated, filed a would-be class action against China Agritech and several of its managers and directors. See Dean v. China Agritech, Inc., Case No. 2:11-cv-1331-RGK-PJW (C.D. Cal.) (the "Dean Action"). Dean alleged that China Agritech had materially misstated its net revenue and income for the third quarter in 2009 on its SEC Form 10-Q filing, and had materially misstated its net revenue and income for fiscal years 2008 and 2009 in its 2009 SEC Form 10-K filing. The ...


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