Metropolitan News-Enterprise


Thursday, May 25, 2017


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Ninth Circuit Finds Equitable Tolling, Revives Suit Against Chinese Firm


By a MetNews Staff Writer


A putative class action by shareholders against a Chinese firm accused of misrepresenting the size and scope of its business was timely in light of previous actions brought on behalf of classes that included the plaintiffs, the Ninth U.S. Circuit Court of Appeals ruled yesterday.     

The panel reinstated an action against China Agritech, Inc. U.S. District Judge R. Gary Klausner had ruled that the suit was filed beyond the two years allowed under the Securities Exchange Act of 1934, but Judge William Fletcher said yesterday that equitable tolling applied.

The plaintiffs alleged that the company and its officers issued materially false and misleading financial statements and created separate financial records for the Securities and Exchange Commission and investors which drastically differed from those filed with Chinese authorities. The income and revenues reported to investors between 2009 and 2011 were vastly overstated they alleged in the complaint.

They cited a 2011 report by the analyst firm LM Research that referred to the company as a “scam” with empty, idle factoris, no necessary licenses, and “no value.” They cited financial statements filed with Chinese authorities by a number of the company’s subsidiaries suggesting that the revenue reported in the company’s SEC filings for 2009 was 10 times larger than what the Chinese regulatory reports had shown.

The report caused a dramatic drop in the stock price. Although the company denied the reports, halted trading in March 2011, and the SEC revoked the registration of the company’s stock in October 2012.

A putative class action filed in February 2011 was not certified as a class action because Klausner ruled the plaintiffs did not establish that class issues were predominant. The plaintiffs, he said, failed to establish a fraud-on-the-market theory of reliance.

That ruling was affirmed by the Ninth Circuit in August 2012. The plaintiffs subsequently settled their individual claims.

A similar class complaint was filed in October 2012 and assigned to Klausner, who later ruled that the typicality requirement for a class action was not met because of the relationships between the plaintiffs in the two actions. That action was dismissed with prejudice in January 2014.

The action ruled on yesterday was filed in June 2014. The plaintiffs were members of the putative class members, but not named plaintiffs, in the two prior actions.

Equitable tolling applied, Fletcher explained, because the earlier actions were timely, the statute of limitations as to the plaintiffs’ individual claims was tolled during those actions, and it would be inequitable to hold that the class claims were not similarly tolled.

Allowing suit, he said, “would advance the policy objectives that led the Supreme Court to permit tolling in the first place,” would create “no unfair surprise to defendants” because they were aware from the prior litigation of the nature of the plaintiffs and their claims, and would “promote[ ] economy of litigation by reducing incentives for filing duplicative, protective class actions.”

The courts, he added, can provide remedies to prevent equitable tolling from being used to bring successive, vexatious class actions.

The case is Resh v. China Agritech, Inc., 15-55432.


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