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John W. Sheller (SBN 67519)

[email protected] endy Wen Yun Chang (SBN 180114)

wchanghinshawlaw.com Renee C. Ohlendorf(SBN 263939) rohlendorf(hinshawlaw. corn HINSHAW& CULBERTSON LLP 11601 Wilshire Blvd. Suite 800 Los Angeles, CA 90025 Telephone: 310-909-8000 Facsimile: 310-909-8001

ANTOINE DE SEJOURNET, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,

Plaintiff,

vs.

GOLDMAN KURLAND & MOHIDIN, LLP and AHMED MOHIDIN,

Defendants.

ATTORNEYS OF RECORD HEREIN:

Case No. 2:13-CV-01682-DMG (MRW)

(Assigned to the Honorable Dolly M. Gee Courtroom" 7")

DEFENDANTS GOLDMAN KURLAND & MOHIDIN, LLP AND AHMED MOHIDIN'S NOTICE OF MOTION AND MOTION TO DISMISS FIRST AMENDED COMPLAINT PURSUANT TO RULE 12(B)(6)

DATE: OCT. 25, 2013 TIME: 9:30 A.M.

Attorneys for Defendants GOLDMAN KURLAND & MOHIDIN, LLP and AHIvIED MOHIDIN

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION

TO THIS HONORABLE COURT, ALL PARTIES AND TO THEIR

PLEASE TAKE NOTICE THAT on October 25, 2013 at 9:30 a.m., in

Courtroom 7 of the above-entitled Court, located at 312 N. Spring Street, Los

Angeles, CA 90012-4701, Defendants Goldman Kurland & Mohidin, LLP ("GKM")

1 DEFENDANTS' RULE 12(13)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT

315048310 0945434


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and Ahmed Mohidin ("Mohidin," collectively, "Defendants"), will and hereby do

move for an order pursuant to Federal Rule of Civil Procedure 12(b)(6), in that:

1. The first claim for violation of Section 10(b) of the Securities Exchange

Act of 1934 and SEC Rule lOb-5, fails to state a claim upon which relief can be

granted; and

2. The second claim for violation of Section 20(a) of the Securities

Exchange Act of 1934 fails to state a claim upon which relief can be granted.

The Motion to Dismiss is based upon this Notice, the Memorandum of Points

and Authorities in support thereof, the Request for Judicial Notice, all other

pleadings and records on file in this action, as well as such oral argument that this

Court may consider at the hearing of this Motion.

This Motion is made following the conference of counsel pursuant to L.R. 7-3,

which took place on September 6 and 9, 2013.

I I : I IJKIJ Sol1 iiI I Y',1SJ P 1 1[I)I Pa'

By: Is! Renee C. Ohlendorf John W. Sheller Wendy Wen Yun Chang Renee C. Ohlendorf Attorneys for Defendants GOLDMAN KURLANI) MOHIDIN, LLP and AHMED MOHIDIN

DEFENDANTS' RULE 12(B)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT 3150483 lvi 0945434

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TABLE OF CONTENTS

Pace I. INTRODUCTION........................................................................................1

II. FACTUAL BACKGROUND ON THE ROLE OF AUDITORS .....................2

III. LEGALSTANDARD........................................................................................4

IV. PLAINTIFFS FAIL TO STATE A CLAIM FOR VIOLATION OF SECTION 10(B) AND RULE 1OB-5 ................................................................ 5

No Misrepresentation Alleged.................................................................6

No Mistake or Fraud by Chinese Auditors Alleged Which Would Be Attributable to GKM .................................................... 7

2. No Facts Alleged That GKM's Statement That Audit Was in Accordance with PCAOB Standards Was False.......................8

Scienter Not Alleged ...............................................................................9

1. PSLRA Requirements for Pleading Scienter and Doing So Using Confidential Witnesses ..................................................... 10

2. The Allegations that Defendants Failed to Obtain and Review Deer's Tax Filings in China Do Not Raise a Strong Inference of Scienter ................................................................... 11

3. The Allegations that the Chinese Audit Firm Was Untrained But Participated in the Audit Do Not Raise a Strong Inference of Scienter........................................................14

4. The Allegations that Defendants Failed to Investigate Deer's "Abnormally Strong Performance" During a Global Recession Do Not Raise a Strong Inference of Scienter.............15

5. The Allegations that Defendants Failed to Investigate After a Report Was Posted on the Alfred Little Website Claiming Deer Had Overstated Its Revenues Do Not Raise a Strong Inference of Scienter ................................................................... 15

6. The AllegationsRegarding Purported Misconduct by Benjamin Wey With Respect to His Other Companies, Do Not Raise a Strong Inference of Scienter Against Defendants................................................................................... 16

7. The Allegations that Defendants are "Financially Beholden to Wey" and Derive the Majority of Its Profits from Wey's Companies, Do Not Raise a Strong Inference of Scienter .......... 17

Loss Causation Not Alleged..................................................................18

p.]i1

C.

DEFENDANTS' RULE 12(B)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT 3 150483 lvi 0945434

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1 V. PLAINTIFFS FAIL TO STATE A CLAIM FOR VIOLATION OF SECTION20(A)..............................................................................................20

2 VI. NO PSLRA CERTIFICATIONS FILED BY PLAINTIFFS HELMCK

3 AND HOLDER................................................................................................22

4 VII. LEAVE TO AMEND SHOULD BE DENIED...............................................23

5 VIII. CONCLUSION................................................................................................23

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DEFENDANTS' RULE 12(B)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT 31504831v1 0945434


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TABLE OF AUTHORITIES

Page(s)

Cases

Ashcroft v. Jqbal, US , 129 S.Ct. 1937 (2009)..................................................................... 4

Buy v. Arthur Young & Co., 3 Cal.4th 370 (1992) ............................................................................................3

Dronsejko v. Grant Thornton, 632 F.3d 658 (10th Cir. 2011) .......................................................................... 2,3

DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385 (9th Cir. 2002)............................................................11, 12,15 5 17

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)....................................................................................... 6, 18

Fidel v. Farley, 392 F.3d 220 (6th Cir. 2004)..............................................................................18

In re Hansen Natural Corporation Securities Litigation, 527 F.Supp.2d 1142 (C.D. Cal. 2007) ..................................................... 5, 20, 22

Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991)................................................................................. 5

Lee v. City of Los Angeles, 250 F.3d 668 (9th Cir. 2001)................................................................................ 5

Metzler v. Investment GMBH v. Corinthian Colleges, 540 F.3d 1049 (9th Cir. 2008).......................................................................... 4, 6

Miller v. Champion Enterprises, Inc., 346 F.3d 660 (6th Cir. 2003)..............................................................................23

Reiger v. PricewaterhouseCoopers LLP, 117 F.Supp.2d 1003 (S.D. Cal. 2000)....................................................11, 12, 17


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In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (9th Cjr. 1999)................................................................................ 5

South Cherry St. v. Hennessee Group, 573 F.3d 98 (2d Cir. 2009).................................................................................10

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)............................................................................................. 5

Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003).............................................................................. 5

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d981 (9thCir. 2009)........................................................................10,11

Statutes

15 U.S.C. §78u-4(a)(2)(A)......................................................................................22

15 U.S.C. §78u-4(b)..................................................................................................4

15 U.S.C. §78u-4(b)(1) .............................................................................................6

15 U.S.C. §78u-4(b)(2)(A)......................................................................................10

15 U.S.C. §78u-4(b)(3)(A)........................................................................................5

15 U.S.C. §78u-4(b)(4) ...........................................................................................18

Section 20(a) of the Exchange Act .............................................................. 20, 21, 22

Private Securities Litigation Reform Act..................................................................2

Private Securities Litigation Reform Act of 1995 ....................................................4

PSLRA..............................................................................................................passim

Sarbanes-Oxley Act of 2002.....................................................................................3

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b)4, 5, 12, 20

Sections 10(b) and 20(a) of the Securities Exchange Act of 1934...........................1

Other Authorities

17 C.F.R. §240.lOb-5 ................................................................................................ 5 iv



1

F.R.E. 201..................................................................................................................

2 Rule9(b)....................................................................................................................4

4 Rule10b5 ........................................................................................................ passim

5 Rule12(b)(6).............................................................................................................4

6 Rule 15(a)................................................................................................................ 23

7 www.alfredlittle.com .................................................................................................9

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1

MEMORANDUM OF POINTS AND AUTHORITIES

2 1 INTRODUCTION

3

This class action lawsuit for securities fraud was filed by Plaintiff Antoine de

4 Sejournet on March 8, 2013. Apparently recognizing the deficiencies therein,

5 Plaintiffs voluntarily amended their initial pleading and filed the operative First

6 Amended Complaint ("FAC") on July 30, 2013. The FAC alleges violations of

7 Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Securities

8 Exchange Commission Rule lOb-5, arising out of audit reports prepared by

9 Defendants Goldman Kurland & Mohidin, LLP ("GKM") and Ahmed Mohidin

10 ("Mohidin", collectively, "Defendants"), on behalf of Deer Consumer Products, Inc.

11 ("Deer") for the fiscal years 2008 through 2011.

12

The crux of Plaintiffs' securities fraud claim appears to be that Defendants

13 falsely represented in its reports that its audits were conducted in accordance with

14 PCAOB standards. Plaintiffs assert those statements are false because Defendants

isl were not independent auditors by PCAOB standards. Though not clear from the

16 pleadings, it appears Plaintiffs claim violation of AU 543 promulgated by the

17 PCAOB, which provides guidance for auditors who use the work and reports of other

18 independent auditors, regarding if, how, and when the work of the other auditor

19 should be disclosed. FAC ¶134. Generally, Section 534 provides that principal

20 auditor must make reference to the work of the auditor unless principal auditor takes

21 reasonable steps to satisfy himself as to the independence and professional reputation

22 of the other auditor, and takes steps to satisfy himself as to the audit performed.

23

In this case, Plaintiffs claim Defendants had little to no role in conducting the

24 audit or drafting the Deer audit reports, which were handled by Deer's Chinese

25 auditors, Beijing Ever Trust CPAs Co. Ltd. ("BET") and Beijing Anshun

26 International CPAs Co., Ltd. ("Anshun"). Instead, Plaintiffs allege that Defendants

27 largely functioned as a rubber stamp for BET and Anshun, which, in addition to

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being purportedly incompetent, were puppets of Deer's stock promoter, Benjamin

Wey.

Plaintiffs baldly contend that all the audits overstated Deer's revenues, but that

Defendants signed off on the audit reports because they too, were financially

dependent upon and controlled by Wey. Plaintiffs thus seek to impute any errors or

fraud by BET or Anshun to Defendants. Specifically, Plaintiffs allege that

Defendants overlooked a number of red flags that Deer's revenues were overstated,

including Deer's strong financial performance during a recession, discrepancies

between Deer's SEC filings and Deer's tax filings for the Chinese government, a

report posted on the Alfred Little website that Deer's revenues were overstated, and

purported misconduct by Wey in his dealings with companies other than Deer.

However, these conclusory allegations fail to meet the heightened pleading

standards imposed upon securities fraud actions by the Private Securities Litigation

Reform Act. The FAC critically fails to plead with the requisite particularity facts

which establish the elements of falsity, scienter, and loss causation, as discussed

fully herein.

II. FACTUAL BACKGROUND ON THE ROLE OF AUDITORS

As Plaintiffs acknowledge, auditors do not guarantee that the audited

company's financial statements are free from error. FAC ¶15. Thus, "[m]anagement

is responsible for adopting sound policies and for establishing and maintaining

internal control that will, among other things, initiate, authorize, record, process, and

report transactions. AU §110.03,1 See also Dronsejko v. Grant Thornton, 632 F.3d

658, 663 (10th Cir. 2011) ("A company's management - not the auditor - is

responsible for the information contained in its financial statements and the propriety

of its underlying accounting policies, including compliance with GAAP.")

Additionally, the auditor's knowledge of the audited entity's transactions and related

AU provisions codify the currently effective Statements on Auditing Standards, published by the Auditing Standards Board of the AICPA.


13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 10 of 31 Page ID #:223

1 assets, liabilities and equity or limited to those obtained through the audit. AU

2 110.03.

3

Generally, auditing a company's financial statements in accordance with

4 Generally Accepted Auditing Standards ("GAAS") is "a complex process involving

5 discretion and judgment on the part of the auditor at every stage." Buy v. Arthur

6 Young & Co., 3 Cal.4th 370, 763 (1992). An auditor's objective is to gather

7 sufficient competent evidential mater to enable the auditor to express an opinion as

8 to whether the company prepared its financial statements in accordance with GAAP.

9 Thus, an auditor typically "examine[s] sample transactions," but "[for practical

10 reasons of time and cost, an audit rarely, if ever, examines every accounting

11 transaction in the records of a business. Id. at 749. As a result, an auditor only

12 obtains "reasonable, but not absolute, assurance that material misstatements are

13 detected." AU §110.02.

14

In this case, Defendants audited Deer's financial statements for the fiscal years

15 2008 through 2011. By way of background, Deer is a Chinese company that

16 manufactures small consumer household appliances, and maintains its operations and

17 business offices in China. Deer's accounting and business records are kept in China,

18 and are in the Chinese language.

19

To perform the audits, Defendants worked in conjunction with BET, a Chinese

20 audit firm, to reconcile Deer's accounting records with the differences in accounting

21 standards between the U.S. GAAP and the Chinese GAAP. BET has been registered

22 with the Public Company Accounting Oversight Board ("PCAOB") since 2006. See

23 RJN ¶J 5-8 and Exhs. E-H thereto. The PCAOB is a nonprofit corporation

24 established by Congress pursuant to the Sarbanes-Oxley Act of 2002 to oversee the

25 audits of public companies. Any public accounting firm that issues an audit report

26 for a public company, or plays a substantial role in the preparation of an audit report,

27 must be registered with the PCAOB, and is subject to the PCAOB's rules and

28 regulations. As reflected in the PCAOB filings of both BET and Anshun, of which



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Defendants are requesting judicial notice, only BET participated in the Deer audits

for the fiscal years 2008 through 2011.

III. LEGAL STANDARD

A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of the claim or

claims alleged in the complaint. The U.S. Supreme Court has held that "[fl survive

a motion to dismiss, a complaint must contain sufficient factual matter, accepted as

true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal US

129 S.Ct. 1937, 1949 (2009), quoting Bell Atlantic Corp. v. Twombly, 550 US

544, 570, 127 S.Ct. 1955, 1974 (2007) (emphasis added). However, "while the court

assumes the facts in a complaint are true, it is not required to indulge unwarranted

inferences in order to save a complaint from dismissal." Metzler v. Investment

GMBH v. Corinthian Colleges, 540 F.3d 1049, 1064-65 (9th Cir. 2008) (citations

omitted).

A complaint that only shows "a sheer possibility that the defendant acted

unlawfully" is insufficient. Iqbal at 1949. Thus, in order to meet the "plausibility"

requirement, a defendant must plead more than factually unsupported conclusions.

Id. The "plausibility" requirement governs complaints in all federal civil actions. Id.

In addition, Plaintiffs alleging securities fraud based upon Section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. §78j(b) and Securities and Exchange

Commission Rule 1 Ob-5, promulgated thereunder, must comply with the heightened

pleading requirements of the Private Securities Litigation Reform Act of 1995

("PLSRA", 15 U.S.C. §78u-4(b)). Section 78u-4(b) requires that a securities fraud

complaint

shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

Securities fraud plaintiffs must also meet the heightened pleading requirements of

Rule 9(b), which requires plaintiffs to state the "who, what, when, where and how" 4


Case 2:13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 12 of 31 Page ID #:225

1 of the false representation. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1120 (9th

2 Cir. 2003); In re Hansen Natural Corporation Securities Litigation, 527 F.Supp.2d

3 1142, 1153 (C.D. Cal. 2007).

4

Courts may take judicial notice of matters of public record in considering a

5 motion to dismiss. F.R.E. 201; Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.

6 308, 322 (2007); Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001)

7 (citations omitted). Courts may also consider SEC filings. Kramer v. Time Warner,

JI Inc., 937 F.2d 767, 773-74 (2d Cir. 1991); see e.g. In re Silicon Graphics Inc.

9 Securities Litigation, 183 F.3d 970, 986 (9th Cir. 1999) (abrogated on other grounds).

10

Private securities actions that do not meet these pleading requirements shall be

11 dismissed by the court. 15 U.S.C. §78u-4(b)(3)(A). As discussed below, the FAC

12 must be dismissed because Plaintiffs fail to allege sufficient facts to support their

13 claims of securities fraud.

14 IV. PLAINTIFFS FAIL TO STATE A CLAIM FOR VIOLATION OF

15

SECTION 10(B) AND RULE 1OB-5

16

Section 10(b) of the Securities Exchange Act of 1934 prohibits any person

17 from the "use or employ[ment], in connection with the purchase of any security

18 registered on a national securities exchange or any security not so registered, or any

19 securities-based swap agreement any manipulative or decetive device or contrivance

20 in contravention of such rules and regulations as the Commission may prescribe. . ."

21 15 U.S.C. §78j(b).

22

Rule 1 Ob-5 proscribes fraudulent acts and practices, as well as the making of

23 "any untrue statement of a material fact or to omit to state a material fact necessary

24 in order to make the statements made, in light of the circumstances under which they

25 were made, not misleading." 17 C.F.R. §240.lOb-5.

26

Plaintiffs alleging violations of Section 10(b) and Rule 1 Ob-5 must establish

27 the following elements: (1) a material misrepresentation (or omission), (2) scienter,

28 i.e. a wrongful state of mind, (3) a connection with the purchase or sale of a security, 5



1 (4) reliance, often referred to in cases involving public securities markets (fraud-on-

2 the-market cases) as 'transaction causation,' (5) economic loss, and (6) 'loss

3 causation,' i.e., a causal connection between the material misrepresentation and the

4 loss. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42 (2005) (emphasis

5 and citations omitted).

6

A. No Misrepresentation Alleged

7

It is well-established that "[t]he PSLRA has exacting requirements for

8 pleading 'falsity", and "[a] litany of alleged false statements, unaccompanied by the

9 pleading of specific facts indicating why those statements were false, does not meet

10 this standard." Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d

11 1049, 1070 (9th Cir. 2008) (citing Falkowski v. Imation Corp., 309 F.3d 1123, 1133

12 (9th Cir. 2002)). Specifically, the PSLRA requires plaintiffs to "specify each

13 statement alleged to have been misleading, the reason or reasons why the statement

14 is misleading, and, if an allegation regarding the statement is made on information

15 and belief, the complaint shall state with particularity all facts on which that belief is

16 formed." 15 U.S.C. §78u-4(b)(1). Thus, the Ninth Circuit Court of Appeals "has

17 consistently held that the PSLRA's falsity requirement is not satisfied by conclusory

18 allegations that a company's class period statements regarding its financial well-

19 being are per se false based on the plaintiffs allegations of fraud generally."

20 Metzler, 540 F.3d at 1070.

21

The FAC fails to meet the PSLRA standard. Plaintiffs claim that GKM's

22 statement that its audit reports on behalf of Deer for the 2008 through 2011 fiscal

23 years complied with PCAOB standards was false because GKM failed to review

24 Deer's tax filings, failed to visit Deer's factories, and did not properly conduct the

25 audits, instead delegating the audit to BET, a purportedly incompetent Chinese

26 auditing firm controlled by Wey. FAC ¶J3 8, 39, 113, 118. Plaintiffs further contend

27 that "any mistake or fraud BET or Anshun committed is attributable to GKM." FAC

28 ¶ 136, see also FAC ¶J95, 118. None of these allegations rise to the level of fraud. 6



1 1. No Mistake or Fraud by Chinese Auditors Alleged Which Would

Be Attributable to GKM

Nowhere in the FAC is there any allegation of any mistake or fraud committed

by either BET or Anshun in the Deer audits. As Plaintiffs acknowledge, it was BET

that participated in the Deer audits, not Anshun. FAC ¶J 47, 67, 69, 118, 126; see also FUN ¶ 1-8 and Exhs A-H thereto Plaintiffs do not identify any error by BET

Nor do Plaintiffs identify any statement made by BET, much less facts describing the

authority of the representative to make such statement, to whom the statement was

made, when it was made, how it was made, and how it was false.

The sole allegation that even remotely touches on the nature and extent BET's

role in the audit comes from Confidential Witness 4 ("CW 4"), an assistant auditor

employed at BET from March to November 2008, and who purportedly worked on a

Deer audit .2 FAC TT 84-85. CW 4 states:

CW 4 charges that BET prepared audit working -Papers, including Deer's audit working papers. CW 4 adds that BEY then sent the working papers for review by GKM, and that BET then made adjustments based on GKM 's comments, but that GK]VI did not itself collect any evidence to be used in the audit papers. FAC ¶85.

CW 4 does not specify which Deer audit to which he refers. There is no allegation in

Paragraph 85 or anywhere else in the FAC that there was any error by BET in the

process of conducting the audit, or any errors in the working papers prepared by

BET. Plaintiffs do not even describe the steps that BET took in conducting the Deer

audits, the contents of any of BET's audit working papers, if or how they were

erroneous or false.

Further, Plaintiffs' allegations of BET and Anshun's unreliability are negated

by their registration with the PCAOB during the times alleged in the FAC. RJN ¶J

1-8 and Exhs. 5-8 thereto. Pursuant to their registration, the Chinese auditors were

2 Though Plaintiffs cite to the reports of six confidential witnesses in support of its claim, only Confidential Witness 4

is alleged to have personally actually worked on any Deer audit. FAC ¶f70-90. Two confidential witnesses were not employed by BET (FAC ¶1186-90), and the none of the other three witnesses allege they ever worked on an audit for Deer (FAC ¶1170-83 , 86-88).

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1 authorized to substantially participate in the preparation of the audits for Deer, and

2 subject to Sarbanes-Oxley and the rules and regulations of the PCAOB just like U.S.

3 auditors. 15 U.S.C. §7216, RJN ¶J 1-8 and Exhs. A-H thereto.

4 - 2. No Facts Alleged That GKM's Statement That Audit Was in

5

Accordance with PCAOB Standards Was False

6

Plaintiffs allege that GKM used BET to conduct the audits of Deer and

7 prepare the audit reports, but that BET was not an independent auditor by PCAOB

8 standards because BET was purportedly "controlled" by Deer's stock promoter,

9 Benjamin Wey. FAC ¶J 118, 121, 143-152. As such, Plaintiffs conclude that

10 GKM's statements that its audits complied with PCAOB standards were false. FAC

11 ¶118.

12

There are no facts pled in support of the element of falsity. The FAC is silent

13 as to Wey's role, responsibilities and duties at BET, if he supervised any BET

14 employees, and if so, the identities of those he supervised, how he supervised them,

15 and for how long he was a supervisor. The only indicia of Wey's control that

16 Plaintiffs allege are the following:

17

(1) BET's general manager is likely Wey himself or Wey's relative

18

because, like Wey, the BET general manager uses the same Chinese

19

character for his last name and also runs a financial consulting company

20

for Chinese companies listing on U.S. stock exchanges, FAC ¶J118,

21

121, 143-145, 152;

22

(2) BET's office was located next door to Wey's consulting company,

23

NYGG, and the two companies shared a door, FAC ¶J1 18, 121, 146-

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150; and

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(3) BET and NYGG purportedly share a server. FAC ¶J 118, 121, 151.

26

These purported "facts" are not facts and do not add up to control. See e.g.

27 Arzate v. Bridge Terminal Transport, Inc., 192 Cal.App.4 th 419, (2011) (right to

28 control work details is most significant consideration in determining control to

DEFENDANTS' RULE 12(B)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT - 3150483 lvi 0945434

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1 determine whether a worker is an independent contractor or employee). First,

2 Plaintiffs have no personal knowledge whether Wey or one of his relatives was the

3 manager of BET during the times alleged in the FAC. Based only on a purported

4 shared last name and similar job description, they ask this Court to infer that Wey

5 was one and the same as the BET manager "Wei". Even Plaintiffs acknowledge that

6 they do not know who manages BET when they say "the general manager of BET is

7 likely Benjamin Wei or a relative." FAC ¶152 (emphasis added). It is possible for

8 two persons to have the same last name without being a familial relation, and to even

9 perform the same types of jobs without being related. Second, an adjacent office

10 location, without more, is insufficient to establish the control of one person over

11 another.

12

Plaintiffs have not alleged facts showing that BET was not an independent

13 auditor, and thus its allegations are legally deficient as to the element of falsity.

14 There can be no fraud action absent a misrepresentation.

15

B. Scienter Not Alleged

16

Though the grounds for a strong inference of scienter are not clear from the

17 long and rambling FAC, it appears that Plaintiffs ask this Court to infer scienter

18 based on the following factors: (1) Defendants' failure to obtain and review Deer's

19 tax filings, (2) Defendants' failure to investigate Deer's "abnormally strong"

20 financial performance during a global recession, (3) Defendants' failure to

21 investigate after analyst Jon Carnes posted a report on the Alfred Little website

22 (www.alfredlittle.com) that Deer had overstated its revenue, (4) Defendants ignored

23 Wey's purported misconduct with respect to other companies, and (5) Defendants

24 were "financially beholden" to Wey because most of their revenue was derived from

25 auditing Wey's companies.

26


27

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1 1. PSLRA Requirements for Pleading Scienter and Doing So Using

Confidential Witnesses

As to the element of scienter, a complaint must allege that false or misleading

statements were made intentionally or with deliberate recklessness. Zucco Partners,

LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009). "Deliberate

recklessness" is defined as "a highly unreasonable omission, involving not merely

simple, or even inexcusable negligence, but an extreme departure from the standards

of ordinary care, and which presents a danger of misleading buyers and sellers that is

either known to the defendant or is so obvious that the actor must have been aware of

it. Id. (citations omitted). However, facts that show mere recklessness or a motive

and opportunity to commit fraud, without more, "are not sufficient to establish a

strong inference of deliberate recklessness. Id. (citations omitted); see also South

Cherry St. v. Hennessee Group, 573 F.3d 98, 110 (2d Cir. 2009) ("[f]or recklessness

on the part of a non-fiduciary accountant [to] satisfy [the] requirement of scienter, it

must 'approximate an actual intent to aid in the fraud being perpetrated by the

audited company.'").

The PSLRA requires plaintiffs to "state with particularity facts giving rise to

strong inference that the defendant acted with the required state of mind". 15 U.S.C.

§78u-4(b)(2)(A) (emphasis added). The U.S. Supreme Court has held that courts

evaluating whether a complaint has complied with the "strong inference" required by

the PSLRA

must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged. An inference of fraudulent intent may be plausible yet less cogent than other, nonculpable explanation for the defendant's conduct. To qualify as "strong" within the intendment of [the PSLRA], we hold, an inference of scienter must be more than be more than merely plausible or reasonable - it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. Tel/abs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).

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Additionally, where, as here, a plaintiff relies upon confidential witnesses to

establish the element of scienter, a two-prong test is applied to determine whether the

confidential witness statements satisfy the heightened PSLRA pleading standards:

(1) the confidential witness must be described with sufficient particularity to

establish his or her reliability and personal knowledge, and (2) the statements which

are reported by the confidential witness with sufficient reliability and personal

knowledge must themselves be indicative of scienter. Zucco Partners, LLC v.

Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009). In evaluating whether sufficient

personal knowledge is alleged, courts "look to 'the level of detail provided by the

confidential sources, the corroborative nature of the other facts alleged (including

from other sources), the coherence and plausibility of the allegations, the number of

sources, the reliability of the sources, and similar indicia.'" Id.

In this case, the FAC fails to plead sufficient and particularized facts which

would give rise to a strong inference of scienter.

2. The Allegations that Defendants Failed to Obtain and Review

Deer's Tax Filings in China Do Not Raise a Strong Inference of

Scienter

Courts consistently hold that "mere allegations that an accountant negligently

failed to closely review files or follow GAAP cannot raise a strong inference of

scienter." DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th

Cir. 2002). Thus,

[scienter] requires more than a misapplication of accounting principles. The [plaintiff] must prove 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 fats. In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1426 (9"' Cir. 1994).

Violations of GAAP or GAAS standing alone "can never established scienter under

Rule lOb-S and the [PSLRA]." Reiger v. PricewaterhouseCoopers LLP, 117


Case -01682-DMG-MRW Document 21 Filed 09/13/13 Page 19 of 31 Page ID #:232

1

F.Supp.2d 1003, 1010 (S.D. Cal. 2000). Without additional factual allegations,

2

GAAP or GAAS violations "merely suggest that either management or the

3

accountant missed something, and may have failed to prepare or review the financial

4

statements in accordance with an accepted standard of care." Id.

5

For example, in DSAM Global Value Fund v. Altrist Sofiare, plaintiff 6

shareholders brought a Section 10(b) securities fraud action against the accounting

7

firm PricewaterhouseCoopers, LLP ("PWC"), alleging that PWC failed to properly

8

recognize revenue from software sales for its client Altris Software in accordance

9

with GAAP, and failed to test Altris' sales to provide a reasonable basis for its audit

10

opinion. Plaintiffs stated that PWC missed various red flags that should have alerted

11

it that the revenue recognition was "highly suspicious". These included, among

12

other things, start-up fees that were much higher than those in the past. PWC then

13

certified that the Altris' financial statements complied with GAAP and that the audit

14

complied with the Generally Accepted Auditing Standards ("GAAS"). Plaintiffs

15

contended PWC's certifications were fraudulent.

16

The Ninth Circuit Court of Appeals affirmed the district court's dismissal

17

without leave to amend. Specifically, the DSAM court found plaintiffs "failed to

18

allege any facts to establish that Pricewaterhouse knew or must have been aware of

19

the improper revenue recognition, intentionally or knowingly falsified the financial

20

statements, or that the audit was 'such an extreme departure' from reasonable

21

accounting practice that [Pricewaterhouse] 'knew or had to have known' that its

22

conclusions would mislead investors." DSAM, 288 F.3d at 390-91.

23

In this case, Plaintiffs contend that had Defendants obtained Deer's Chinese

24

tax filings, it would have realized there was a discrepancy in the revenue reported to

25

China and the revenue reported in the U.S. FAC 1203. However, there is no

26

assertion in the FAC that review of a company's foreign tax filings is required under

27

the accepted auditing standards in the U.S. Even assuming arguendo that a such 28

review is required, just like the plaintiffs in DSAM Plaintiffs here fail to plead

DEFENDANTS' RULE 12(B)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT 3150483 1vi 0945434

12


1 sufficient facts to establish the element of scienter. Such failure might constitute

2 negligence, at best.

3

Plaintiffs allege only that "[h]ad 0KM and Mohidin obtained Deer's own tax

4 filings . . . it [sic] would have determined Deer's financial statements misstated its

5 performance." FAC ¶ 203. No other facts are pled which would establish scienter.

6 There are no facts alleged that Defendants ever received any of Deer's U.S. or China

7 tax filings, who provided the tax filings, when they were provided to Defendants,

8 who provided them, and how Defendants responded after receiving the tax filings.

9 There are no facts alleged that Defendants were ever given access to Deer's tax

10 filings at any point in time. There are no facts alleged as to what documents and

11 materials were provided to Defendants by Deer for the audit, when they were

12 provided, and who provided them. There are no facts alleged as to what documents

13 and materials Defendants actually reviewed for any of the audits, and when they

14 were reviewed.

15

In short, there are no facts pled which would shed any light whatsoever on

16 Defendants' mental state at any point in time, or which would demonstrate that

17 Defendants' audit was "an extreme departure" from the reasonable accounting

18 practices. There are no facts pled as to what Defendants knew and when they knew

19 it. There are also no facts pled as to how any of the audits were conducted, what

20 documents were or were not reviewed, and how Defendants reached their

21 conclusions. At best, the only inference that may be drawn is that Defendants

22 overlooked the tax filings during their audit. That is not the stuff of fraud. Further,

23 as Plaintiffs themselves acknowledge, "Auditors . . . do not guarantee that the

24 financial statements are accurate." FAC ¶15.

25

To the extent that Plaintiffs allege a misrepresentation based upon GKM's

26 Deer financial statements complied with GAAP (FAC ¶113), that also fails for the

27 reasons discussed herein.


28 1

Case 13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 21 of 31 Page ID #:234

1

3. The Allegations that the Chinese Audit Firm Was Untrained But

2

Participated in the Audit Do Not Raise a Strong Inference of

3

Scienter

4

There are no facts alleged in the FAC that BET's participation in the audit was

5

improper. BET was registered with the PCAOB, and subject to its rules and

6 regulations. RIN ¶J 5-8 and Exh. E-H thereto. Thus, even if it did substantially

7

participate in the Deer audits by obtaining evidence and preparing audit working

8

papers, as Plaintiffs allege, they were permitted to do so by virtue of their PCAOB

9 registration. See PCAOB Rule 2100. Further, as discussed in Section IV.A.1, supra,

10

there is no claim of error or fraud by BET.

11

Plaintiffs' allegations regarding BET's role in the audit are based solely on the

12

statements of four confidential witnesses employed by BET. None of the four

13

confidential witnesses (CW 1 through 4) are described with sufficient particularity to

14

establish his or her reliability and personal knowledge. See Zucco, 552 F.3d at 995.

15

For example, Confidential Witnesses 1, 2, and 3 all allege they worked for BET, but

16

none state they actually worked on any audits for Deer, or in what capacity. FAC

17

¶J70-83. Thus, their statements cannot establish scienter as to the Deer audits and

18

must be disregarded.

19

Only Confidential Witness 4 states that he worked at BET on a Deer audit as

20

an assistant auditor, but he was employed at BET only from March to November

21 1 2008. FAC ¶84. However, there are no allegations as to the nature and extent of his

22

responsibilities on the Deer audit, and thus his reliability and personal knowledge are

23

not established. Even assuming arguendo that CW 4 has the requisite personal

24

I knowledge, he alleges only that BET prepared audit working papers, GKM reviewed

25

the working papers, and BET revised them in response. FAC ¶85. That is hardly

26

sufficient to establish an intent to deceive or defraud.

27

DEFENDANTS' RULE 12(13)(6) MOTION TO DISMISS THE FIRST AMENDED COMPLAINT 3150483 lvi 0945434

28 14


1

4. The Allegations that Defendants Failed to Investigate Deer's

2

"Abnormally Strong Performance" During a Global Recession

3

Do Not Raise a Strong Inference of Scienter

4

Plaintiffs also claim that Defendants' failure to investigate Deer's high

5 revenues and profits margins during a global recession, as well as its failure to

6 investigate the closure of Deer's production facilities, is indicative of scienter. FAC

7 ¶J 192-200, 209-218. It is not. That is an erroneous and conclusory allegation based

8 on a flawed assumption that Deer could not have performed well from 2008 to 2011

9 because Deer's competitors did not perform well, though the FAC is devoid of any

10 facts as to Deer's profit margins as compared with those of its competitors.

11

More importantly, any alleged failure to review or account for Deer's rate of

12 growth, profit margins and subsequent factory closure in their audit opinion does not

13 raise a strong inference of scienter. DSAM Global Value Fund v. Altris Software,

14 Inc., 288 F.3d 385, 390 (9th Cir. 2002).

15

5. The Allegations that Defendants Failed to Investigate After a

16

Report Was Posted on the Alfred Little Website Claiming Deer

17

Had Overstated Its Revenues Do Not Raise a Strong Inference of

18

Scienter

19

Plaintiffs would also invite this Court to infer scienter based on a March 2011

20 report by Jon Carnes and posted on the Alfred Little website. FAC ¶f 10, 18, 19,

21 182, 183, 204-208. However, there are no facts alleged that Defendants even knew

22 of Carnes' report, and if so, when they learned of it. Nor are there any facts alleged

23 as to why Defendants should have known of the report, as it does not appear that the

24 Alfred Little site is a mainstream financial news outlet. The Carnes report does not

25 establish scienter.

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6. The Allegations Regarding Purported Misconduct by Benjamin

2

Wey With Respect to His Other Companies, Do Not Raise a

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Strong Inference of Scienter Against Defendants

4

Similarly, Plaintiffs purport to allege a litany of wrongdoing by Deer, Wey

5 and Wey's other companies that should have served as "red flags" for Defendants,

6 such as the following:

7 • Deer's payment of $350,000 to brokerage firm First Merger Capital to

8

sell its stock, without disclosure of the payment, FAC ¶219;

9 • Insider trading of Deer stock by Wey's sister, Tian Yi Wei, FAC ¶J223-

10

226;

11

• Suspension of Wey's NASD license in 2002, FAC ¶98;

12 • Censure and barring of Wey from brokerage and investment advising

13

activities by the Oklahoma Department of Securities, FAC ¶98;

14

• Wey's termination from Benchmark Capital as director, CEO, and

15

majority shareholder for insider trading and misappropriation of funds

16

in 2002, FAC ¶ 98;

17

• Revocation of Bodisen listing on NYSE Amex exchange for

18

"incomplete, inaccurate, and/or misleading information related to its

19

relationship with, and payments to [the NYGG and other Wey entities],

20

and Bodisen's subsequent termination of Mohidin in 2006, FAC ¶J 100-

21

101;

22

• Deliberate omission of closing of mixed debt/equity $20 million private

23

placement arranged and underwritten by Wey and NYGG in disclosures

24

to NASDAQ by CleanTech, a company audited by GKM, FAC ¶103;

25

• Wey's violation of securities laws, misleading of the public, and use of

26

NYGG as a front for illegal activities (citing court order finding such

27

statements by Wey colleague to be substantially true). FAC ¶ 104.


28 16

Case 2 :13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 24 of 31 Page ID #:237

1

Critically, however, the FAC is devoid of facts that Defendants were

2

personally involved with any of the purported misconduct by Wey. Nor are there

3

any facts pled that Defendants ever knew of any of Wey's misconduct, when they

4

became aware of misconduct, how they came to learn of it, and when, much less any

5

intent to help perpetrate any wrongdoing. Further, the vast majority of Wey's

6

purported misconduct pertain to dealings with companies other than Deer, and thus

7

have no bearing on this case. See Defendants' concurrently filed Motion to Strike.

8

7. The Allegations that Defendants are "Financially Beholden to

9

Wey" and Derive the Majority of Its Profits from Wey's

10

Companies, Do Not Raise a Strong Inference of Scienter

11

A strong inference of scienter requires plaintiffs to "state facts that come

12

closer to demonstrating intent, as opposed to mere motive and opportunity." DSAM,

13

288 F.3d at 389 (quoting Silicon Graphics, 183 F.3d at 974). An auditor's fees are

14

not a proper basis for pleading scienter. This is because an auditor has no incentive

15

to join in a client's purported fraud, as it "has no ability to line its pockets through

16

insider trading, and no incentive to cover up corporate mismanagement." Reiger v.

17

PricewaterhouseCoopers, LLP, 117 F.Supp.2d 1003, 1007 (S.D. Cal. 2000), aff'd

18

sub nom. DSAM Global v. Altris Software, 288 F.3d 385 (91h Cir. 2002). As such, to

19

state a claim under the PSLRA, the allegations must "overcome the irrational

20

inference that the accountant would risk its professional reputation to participate in

21

the fraud of a single client." Reiger, 117 F.Supp.2d at 1007.

22

No such facts are pled in this case. Here, Plaintiffs simply make the

23

conclusory allegation that Defendants are financially beholden to Wey, and derive

24

most of its revenues from auditing Chinese companies referred by Wey. FAC ¶J 20,

25

21 1 122-24. Yet there is no allegation in the FAC as to how many audits Defendants

26

conduct for Wey's companies, how much revenue Defendants earn from auditing

27

Wey's companies, and how much revenue Defendants earn from providing audit or

28

other accounting services to other individuals and companies. These allegations are



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insufficient to establish scienter. Without more, any auditor that receives fees for its

services could potentially be liable for securities fraud. See e.g. Fidel v. Farley, 392

F.3d 2201 230 (6th Cir. 2004).

C. Loss Causation Not Alleged

Plaintiffs "have the burden of proving that the act or omission of the defendant

alleged to violate the chapter caused the loss for which the plaintiff seeks to recover

damages." 15 U.S.C. §78u-4(b)(4). The U.S. Supreme court has held that the

PSLRA "permit[s] private securities fraud actions for recovery where, but only

where, plaintiffs adequately allege and prove the traditional elements of causation

and loss." Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 3362 346 (2005). An

allegation that a plaintiff purchased a security at an inflated price due to a

defendant's misrepresentation, without more, is insufficient to survive a motion to

dismiss. Dura Pharmaceuticals, 544 U.S. 336. Securities fraud actions are available

"not to provide investors with broad insurance against market losses, but to protect

them against those economic losses that misrepresentations actually cause." Id. at

345.

In Dura Pharmaceuticals, the plaintiffs filed a securities fraud claim on

alleged false statements about future profits and future drug approvals by the Food

and Drug Administration. Plaintiffs stated in their complaint that they "paid

artificially inflated prices for Dura['s] securities' and suffered 'damage[s]". Dura,

544 at 346-47. That was the only allegation as to their loss. The U.S. Supreme

Court upheld the district court's dismissal, ruling that the "artificially inflated

purchase price' is not itself a relevant economic loss", and that the complaint did not

provide notice of what the relevant economic loss was, or the causal connection

between the loss and defendants' misrepresentation. Dura, 544 at 347. The Dura

court explained its ruling as follows:

[A]s a matter of pure logic, at the moment the transaction takes place, the plaintiff has suffered no loss the inflated purchase price is oftset by ownership of a share that at that instant possesses equivalent value.


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Moreover, the logical link between the inflated price share and any later economic loss is not invariably strong. . . . But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss. It the purchaser sells later after the truth makes its way into the marketplace, an initially inflated purchase price might mean a later loss. But that is far from inevitably so. When the purchaser subsequently resells such shares, even at a lower price, that lower price may reflect, not the earlier misrepresentation, but changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price. . . . Other things being equal, the longer the time between purchase and sale, the more likely that this is so, i.e., the more likely that other factors caused the loss. 544 U.S. at 342-43.

In this case, Plaintiffs claim that "all purchasers of Deer's common stock

during the Class Period suffered similar injury through their purchase of Deer's

common stock at artificially inflated prices." FAC ¶252. Their other allegations as

to the element of loss causation are as follows:

238. On March 9, analyst Alfred Little issued a report calling attention to the

fraud committed by Deer. The number of Deer shares traded daily rose

from 188, 300 on March 8 to 1,136,400 on March 9. March 9, 2011

was - till then - the day with the ninth highest number of shares traded

in Deer's history.

239 Deer's stock remained constant; First Merger Capital continued to

buttress it. (emphasis added).

240 On March 14, 2011, Alfred Little issued a follow up report reiterating

his conclusions regarding Deer Consumer Products.

241. Deer's stock price remained constant; First Merger Capital continued to

buttress it. (emphasis added).

242. On March 21, 2011, Alfred Little issued a third report regarding Deer

Consumer Products.

243. Under FINRA' s scrutiny, First Merger allowed Deer's stock price to fall

from $10.68 to $8.37, or almost 22%, damaging investors. (emphasis

added).


1


244. On August 10, 2012, trading in Deer's shares was halted. On January

11, 2013, Deer's stock resumed trading on the over-the-counter

("OTC") market. Deer's stock price fell from $2.26 to $0.35 on heavy

volume.

Plaintiffs' allegation that it suffered loss by purchasing Deer stock at

artificially inflated prices is the exact allegation that was considered and rejected by

the U.S. Supreme Court in Dura. Further, Plaintiffs admit in the FAC that their

purported damages were caused by the manipulation of stock prices by the brokerage

firm First Merger Capital, Inc., and not by any purported misrepresentation by GKM.

Plaintiffs' admission that the fluctuation in Deer stock prices were the result of

intervention by First Merger is fatal.

The Section 10(b) and Rule 1 Ob-5 claim should be dismissed without leave to

amend.

V. PLAINTIFFS FAIL TO STATE A CLAIM FOR VIOLATION OF

SECTION 20(A)

Plaintiffs contend that Mohidin has personal liability under Section 20(a) for

the purported securities violations of GKM. The sole fact alleged in support of this

claim is that Mohidin is a named partner at GKM. That is insufficient to state a

Section 20(a) claim. Section 20(a) provides in pertinent part,

"Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable.. ., unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. §78t(a).

Thus, "[t] o state a claim under Section 20(a), a plaintiff must allege (1) a

primary violation of federal securities laws; and (2) that the defendant exercised

actual power or control over the primary violator. In re Hanson Natural Corp., 527

F.Supp.2d at 1163. Boilerplate allegations are routinely dismissed by courts. Id

(dismissing without leave to amend Section 20(a) claim based on boilerplate

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:13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 28 of 31 Page ID #:241

1 allegation that "[b]y virtue of their high-level positions, and their ownership and

2 contractual rights, participation in and/or awareness of the Company's operations

3 and/or intimate knowledge of the false financial statements . . . the Individual

4 Defendants had the power to influence and control . . . the decision making of the

5 Company").

6

The Section 20(a) claim against Mohidin fails because there is no primary

7 violation of any federal securities law alleged, as set forth in Section V, supra.

8

This claim is also deficient because Plaintiffs plead nothing more than

9 boilerplate and conelusory allegations that Mohidin exercised the requisite control

10 over the purported primary violator, GKM, by virtue of his position as a named

11 partner at GKM. Plaintiffs even admit that their allegations regarding Mohidin

12 consist of nothing more than speculation in Paragraph 267, in which they state

13 Mohidin is "presumed" to have had and exercised controlling power. Plaintiffs plead

14 as follows with respect to Mohidin's alleged "control":

15

266. Mohidin acted as a controlling person of GKM within the meaning of

16

Section 20(a) of the Exchange Act as alleged herein. By virtue of his

17

high position, agency, and his ownership and contractual rights,

18

participation in and/or awareness of GKM' s operations and/or intimate

19

knowledge of the false audit reports filed by GKM with the SEC and

20

disseminated to the investing public, Mohidin had the power to

21

influence and control, and did influence and control, directly or

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indirectly, the decision-making of GKM, including the content and

23

dissemination of the various statements that Plaintiffs contend are false

24 and misleading.

25

267. Mohidin had direct and supervisory involvement in the day-to-day

26 operations of GKIVI and, therefore, is presumed to have had the power

27

to influence the particular transactions giving rise to the securities

28

violations alleged herein, and exercised the same. (emphasis added).


21


1 This is exactly the type of boilerplate allegation that was considered and dismissed

2 without leave to amend by the Central District in In re Hansen. Thus, Plaintiff's

3 bald allegation that Mohidin was a named partner at GKM at the relevant times,

4 without more, is insufficient. In re Hansen Natural Corporation Securities

5 Litigation, 527 F.Supp.2d 1142, 1163 (C.D. Cal. 2007).

6

To the extent that Plaintiffs attempt to base this claim on their allegations that

7 Mohidin wrote the financial statements for the fiscal years 2008 through 2011 (FAC

8 ¶J1 13-117), that is contradicted by Plaintiffs' allegations that BET, not GKM,

9 conducted the audit and drafted the audit reports at issue. FAC ¶129. Indeed,

10 according to the FAC, the financial statements were not signed or issued by Mohidin

11 personally. FAC ¶J 113-117. The financial statements were issued by GKM.

12

There are no facts pled in the FAC as to what Mohidin's duties and

13 responsibilities were at GKM, no facts pled as to the nature and extent of his control,

14 how he exercised that control, when he exercised that control, or over whom at GKM

15 he exercised control.

16

Plaintiffs' Section 20(a) claim must accordingly be dismissed.

17 VI. NO PSLRA CERTIFICATIONS FILED BY PLAINTIFFS HELNICK

18

AND HOLDER

19

The PSLRA requires each plaintiff seeking to represent a securities fraud class

20 actions to file a sworn certification with his or her complaint, in accordance with 15

21 U.S.C. §78u-4(a)(2)(A). Plaintiffs state that their "PSLRA certifications were

22 previously filed with the Court and are incorporated by reference." FAC ¶44.

23 Antoine de Sejournet was the only named plaintiff in the initial complaint. Dc

24 Sejournet filed his PSLRA on March 20, 2013. [Docket No. 8]. However, the court

25 record reflects no PSLRA certification filed by Plaintiffs Helnick or Holder.

26 Accordingly, their claims must be dismissed.

27


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VII. LEAVE TO AMEND SHOULD BE DENIED

Plaintiffs have had ample opportunity to plead proper causes of action. This

lawsuit was filed on March 8, 2013. Recognizing the deficiencies in the initial

complaint, Plaintiffs voluntarily amended and filed the FAC on July 30, 2013.

Nearly five months later, having conducted further investigation into their

allegations, including interviewing a number of confidential witnesses, interviewing

investigators of financial journalists, and sending an investigator to China, Plaintiffs

are still unable to muster the facts to state a cause of action. That is because no such

facts exist.

Leave to amend should accordingly be denied. See Miller v. Champion

Enterprises, Inc., 346 F.3d 660, 692 (6th Cir. 2003) (denying leave to amend, holding

"it is correct to interpret the PSLRA as restricting the ability of plaintiffs to amend

their complaint, and thus as limiting the scope of Rule 15(a) . . . the purpose of the

PSLRA would be frustrated if district courts were required to allow repeated

amendments to complaints filed under the PSLRA.").

VIII. CONCLUSION

For all the foregoing reasons, Defendants Goldman Kurland & Mohidin, LLP

and Ahmed Mohidin respectfully requests that this Court grant its Motion to Dismiss

in its entirety, without leave to amend, and for any further relief that this Court

deems just.

DATED: September 13, 2013

By: Is! Renee C. Ohlendorf John W. Sheller Wendy Wen Yuri Chang Renee C. Ohlendorf Attorneys for Defendants GOLDMAN KURLAND MOHIDIN, LLP and AHMED MOHIDIN


23 28

Case 2 -01682-DMG-MRW Document 21 Filed 09/13/13 Page 31 of 31 Page ID #:244

PROOF OF SERVICE

STATE OF CALIFORNIA- COUNTY OF LOS ANGELES I am employed in the County of Los Angeles, State of California. I am over

the age of 18 and not a party to the within action; my business address is 11601 Wilshire Blvd., Suite 800, Los Angeles, CA 90025.

5

On September 13, 2013, I served the foregoing documents described as: 6 On

GOLDMAN KURLAND & MOHIDIN, LLP AND AHMED '

MOHIDIN'S NOTICE OF MOTION AND MOTION TO DISMISS FIRST AMENDED COMPLAINT PURSUANT TO RULE 12(B)(6)on the followin attorney(s) of record and/or interested parties in this action by placing a true an

8 correct copy(ies) thereof enclosed in sealed envelope(S), addressed as follows, by the following means:

3

10 Laurence M. Rosen, Esq. THE ROSEN LAW FIRM, P.A. 355 South Grand Avenue, Suite 2540 Los Angeles, CA 90071 213-785-2610 - Telephone 213-226-4684 - Facsimile

14 111 lrosenrosenlegal.com

12

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Attorneys for Plaintiff LEAD PLAINTIFFS

U (BY MAIL): I deposited such envelope in the mail at Los Angeles, California th postage fully prepaid. I am readily familiar with this firm's practice of

collection and processing correspondence for mailing. Under that practice it would be placed for collection and mailing, and deposited with the U.S. Postal Service on that same day with postage thereon fully prepaid at Los Angeles, California, in the ordinary course of business. I am aware that on motion of party served, service is presumed invalid if postal cancellation date or postage meter date is more than 1 day after date of deposit for mailing in affidavit.

LI (BY E-MAIL OR ELECTRONIC TRANSMISSION): Based on a court order or an agreement of the parties to accept service by e-mail or electronic transmission, I caused the document(s) to be sent to the person[s] at the e-mail address[es] set forth herein. I did not receive, within a reasonable time after the transmission, any electronic message or other indication that the transmission was unsuccessful. See Cal.R.Ct.R. 20.

(BY CMIECF SERVICE): I caused such document(s) to be delivered e ectronically via CMIECF as noted herein.

Executed on September 13, 2013, at Los Angeles, California.

(FEDERAL): I declare that I am employed in t o ice o mber of the bar of this Court at whose direction the service wJnaQ. I ci e under penalty of perjury under the laws of the United S e Am ica at he foregoing is true and correct

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2:13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 1 of ...securities.stanford.edu/filings-documents/1050/... · I 2:13-cv-01682-DMG-MRW Document 21 Filed 09/13/13 Page 8 of 31