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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------X PAUL FILA, INDIVIDUALLY AND ON BEHALF : OF ALL OTHERS SIMILARLY SITUATED, : Civil Action No.: 15 Civ. 00267 (AJN) : Plaintiff, : : AMENDED COMPLAINT FOR - against - : VIOLATIONS OF THE FEDERAL : SECURITIES LAW PINGTAN MARINE ENTERPRISE LTD., XINRONG : ZHUO, ROY YU, JIN SHI, AND XUESONG SONG, : CLASS ACTION : Defendants. : JURY TRIAL DEMANDED : ------X
Lead Plaintiff Fu Sung Peter Wu and Plaintiffs Paul Fila and Tyler R. Warriner
(collectively, "Plaintiffs"), individually and on behalf of all other persons similarly situated, by
their undersigned attorneys, for their complaint against Defendants, allege the following based
upon personal knowledge as to themselves and their own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through their attorneys, which included, among other things, a review of the Defendants' public documents,
United States Securities and Exchange Commission ("SEC") filings, and information readily obtainable on the Internet.
NATURE OF THE ACTION
1. Plaintiffs allege that Pingtan Marine Enterprise Ltd. ("Pingtan Marine" or the
"Company") and Individual Defendants Xinrong Zhuo, Roy Yu, Lin Bao, Yeliang Zhou,
Zengbiao Zhu, Xuesong Song, and Jin Shi (collectively with the Company, the "Defendants")
violated the federal securities laws by making false and misleading statements and omissions of
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material fact and knowingly engaging in a scheme to defraud US public investors, or deliberately
turning a blind eye to their, each other's, and the Company's fraudulent activities.
2. Pingtan Marine is a Cayman Islands shell company that resulted from a "reverse merger" in February 2013.
3. As a part of the reverse merger Pingtan Marine through, a web of subsidiaries that it wholly owned, entered contracts with two companies incorporated in the People's Republic of
China (the "PRC") to operate its business. These two companies did business in the PRC and
comprised the sole operations for Pingtan.
4. The subject of this lawsuit is the business relationship between Pingtan Marine (through
its subsidiary) with one of those two PRC companies with which it entered a contract. The name
of that PRC company is Fujian Provincial County Ocean Fishing Group, Ltd. ("Pingtan
Fishing").
5. Pursuant to Pingtan Marine's contract (through its subsidiary) with Pingtan Fishing,
Pingtan Marine had full control over Pingtan Fishing's operations and finances, and Pingtan
Fishing was required to pay Pingtan Marine (through its subsidiary) all of Pingtan Fishing's
profits.
6. Pingtan Marine's proxy statement, quarterly reports, and annual reports filed with the
SEC stated that Pingtan Marine derived just short of half of its profits from Pingtan Fishing's
business in 2013 and derived all of its profits from Pingtan Fishing's business in 2014.
7. Pingtan Marine's proxy statement, quarterly reports, and annual reports filed with the
SEC: 1) stated that it entered the aforementioned contract with Pingtan Fishing; 2) filed the
contract with its proxy statement; and 3) repeated over and over again quarter after quarter, year
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after year, that Pingtan Fishing was, in fact, paying to Pingtan Marine, through its subsidiary, all of Pingtan Fishing's profits.
8. Yet, Pingtan Fishing never paid any of its profits to Pingtan Marine, through its subsidiary. Rather, all of the profits that Pingtan Fishing earned remained in the accounts of
Pingtan Fishing.
9. Evidence that Pingtan Fishing never paid Pingtan Marine, through Pingtan Marine's subsidiary, any of Pingtan Fishing's profits is found in the filings made by Pingtan Fishing and the subsidiary of Pingtan Marine with the local PRC government offices that include financial statements of the respective PRC companies, which accurately reports their respective finances.
10. The family members of Xinrong Zhuo, the majority shareholder, Founder, CEO, and
Chairman of Pingtan Marine, were also the owners of Pingtan Fishing and the managers of
Pingtan Fishing.
11. In fact, Xinrong Zhuo himself was the Chairman of Pingtan Fishing.
12. One of Xinrong Zhuo's family members was the manager of the subsidiary of Pingtan
Marine with which Pingtan Fishing entered the contract.
13. The fraud of Pingtan Marine strikes at the core of the Company's operations. Indeed,
Pingtan Marine did not receive a single dollar from the operations of Pingtan Fishing in 2014 despite that Defendants reported to the SEC that Pingtan Marine received $85.8 million in profits from Pingtan Fishing that year.
14. All of the Defendants had to have known of Pingtan Marine's defrauding the US investors, especially Xinrong Zhuo, the mastermind behind this world-class fraud, who was on both sides of the contract that he caused Pingtan Fishing to breach.
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15. The Class Period began on June 19, 2013, the date the Company's Form S-3 filed with the SEC on June 17, 2013 became effective, and ended on November 10, 2014, the date of the last corrective disclosure of Defendants' fraud.
16. Thus, the "Class Period" is June 17, 2013 to November 10, 2014, both dates inclusive.
JURISDICTION AND VENUE
17. The claims asserted herein arise under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5
promulgated thereunder by the SEC, 17 C.F.R. 240.10b-5.
18. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§
1331 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
19. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15 U.S.C. §
78aa and 28 U.S.C. § 1391(b). Pingtan Marine securities were traded during the Class Period, on
the NASDAQ Stock Market ("NASDAQ"), which is located in the Southern District of New
York.
20. In connection with the challenged conduct, Defendants, directly or indirectly, used the
means and instrumentalities of interstate commerce, including, but not limited to, the United
States mails, interstate telephone communications and the facilities of the national securities
markets.
PARTIES
21. Lead Plaintiff Fu Sung Peter Wu purchased Pingtan Marine common stock at artificially inflated prices during the Class Period and has been damaged thereby. Fu Sung Peter Wu's
PSLRA certification was previously filed with the Court.
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22. Plaintiff Paul Fila purchased Pingtan Marine common stock at artificially inflated prices during the Class Period and has been damaged thereby. Paul Fila's PSLRA certification was
previously filed with the Court.
23. Plaintiff Tyler R. Warriner purchased Pingtan Marine common stock at artificially
inflated prices during the Class Period and has been damaged thereby. Tyler R. Warriner's
PSLRA certification is attached hereto as Exhibit 1.
24. Defendant Pingtan Marine is incorporated in the Cayman Islands with its headquarters
located in Fuzhou in the PRC. The Company is currently an ocean fishery business and until
December 2013 was both an ocean fishery business as well as a dredging services business.
During the Class Period, the Company's stock was traded on the NASDAQ under the symbol
"PME."
25. Defendant Xinrong Zhuo is and was the Company's Founder, Chief Executive Officer
and Chairman of the Board of Directors at all relevant times during the Class Period. Xinrong
Zhuo beneficially owned 44.4 million shares, 56.2%, of Pingtan Marine's common stock as April
28, 2014 as well as March 10, 2015.
26. Defendant Roy Yu ("Yu") is and was the Company's Chief Financial Officer at all
relevant times during the Class Period.
27. Defendant Lin Bao ("Bao") is and was a Director on the Company's Board at all relevant
times during the Class Period.
28. Defendant Yeliang Zhou ("Zhou") is and was a Director on the Company's Board at all
relevant times during the Class Period. During the Class Period, Zhou served on the Company's
Audit Committee.
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29. Defendant Zengbiao Zhu ("Zhu") is and was a Director on the Company's Board at all
relevant times during the Class Period. During the Class Period, Zhu served on the Company's
Audit Committee.
30. Defendant Xuesong Song ("Song") is and was a Director on the Company's Board at all
relevant times during the Class Period. During the Class Period, Song served on the Company's
Audit Committee. Song beneficially owned 4.8 million shares, 6.1%, of Pingtan Marine's common stock as April 28, 2014. Song resigned as a Company Director on February 26, 2015, according to a Form 8-K that the Company filed with the SEC on March 4, 2015.
31. Defendant Jin Shi ("Shi") is and was a Director on the Company's Board at all relevant
times during the Class Period. Shi beneficially owned 4.8 million shares, 6.1%, of Pingtan
Marine's common stock as April 28, 2014. Shi resigned as a Company Director on February 26,
2015, according to a Form 8-K that the Company filed with the SEC on March 4, 2015.
32. Xinrong Zhuo, Yu, Bao, Zhou, Zhu, Song, and Shi are collectively referred to hereinafter as the "Individual Defendants."
BACKGROUND
The Notorious Chinese Reverse Mergers
33. To become a publicly-traded U.S. company, Pingtan Marine employed a device called a
"reverse merger." In a typical reverse merger, a publicly-traded shell company acquires a private company seeking to go public. In exchange, the shareholders of the former private company receive a controlling share of the public company. Reverse mergers allow companies to enter the
American capital markets while bypassing the typical regulatory scrutiny and sell-side due diligence that usually precede an initial public offering.
34. In the past four years, widespread fraud allegations pertaining to Chinese reverse
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merger or reverse take-over stocks became one of the latest trends in corporate wrongdoing
and securities fraud in the United States.
35. The number of China-based companies, with their principal places of business in the
PRC, listed on U.S. Exchanges has skyrocketed in the past decade. The Public Accounting
Oversight Board ("PCAOB") identified 159 reverse mergers by companies primarily based in the PRC between January 1, 2007, and March 31, 2010.1 Not every PRC company that began
to trade on a U.S. stock exchange engaged in fraudulent activity, but a substantial number
have. In fact, as disclosed in an April 27, 2011, letter from Mary Schapiro (then-Chairman of
the SEC) to Congressman McHenry (Chairman of the Subcommittee on TARP, Financial
Services, and Bailouts of Public and Private Programs), the SEC had identified no fewer than
24 PRC-based companies that had filed Forms 8-K disclosing auditor resignations, accounting
problems or both – in March and April of 2011 alone.
36. The Chairman of the PCAOB, James R. Doty, stated that there are "significant risks
associated with audits of operations of U.S. [listed] companies in China. For example, we are
finding through our oversight of U.S. firms that even simple audit maxims, such as maintaining
the auditor's control over bank confirmations, may not hold given the business culture in
China."2 Therefore, Doty concluded that "[i]n light of these risks, the PCAOB's inability to
inspect the work of registered firms from China is a gaping hole in investor protection."3
1 Research Note 2011-P1, Activity Summary and Audit Implications for Reverse Mergers Involving Companies from the China Region: January 1, 2007, through March 31, 2010, Public Company Accounting Oversight Board (March 14, 2011). 2 Testimony Concerning the Role of the Accounting Profession In Preventing Another Financial Crisis: Hearing Before the Subcommittee on Securities, Insurance, and Investment of the Senate Committee on Banking, Housing and Urban Affairs, 112th Cong. (2011) (statement of James Doty, Chairman, PCAOB), available at http://www.sec.gov/news/testimony/2011/ts040611jlk.htm. 3 Id. -7-
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37. The reverse merger is the technique du jour for fraudulent companies to bypass the
typical registration process that allows the SEC to examine a company prior to it selling shares
on U.S. stock exchanges. In a typical registration process for an initial public offering of stock
("IPO"), a Company submits its registration statement to the SEC's Division of Corporate
Finance where it undergoes a rigorous examination process, which often includes detailed
questions from the SEC about the company's disclosures. In a reverse merger, however, a private operating company based in the PRC is "acquired" by a previously registered U.S.- based publicly traded "shell company," thereby bypassing the rigorous IPO registration process as described by the WALL STREET JOURNAL:
In reverse mergers, a foreign company is "bought" by a publicly traded U.S. shell company. But the foreign company assumes control and gets the shell's U.S. listing without the level of scrutiny that an initial public offering entails. Though companies from other countries also engage in reverse mergers, such deals are especially common among the Chinese. The PCAOB says nearly three-quarters of the 215 Chinese companies listing in the U.S. from 2007 to early 2010 did so via reverse merger.4
38. This loophole has allowed numerous unscrupulous foreign companies to avoid SEC scrutiny. A large number of shady stock promoters in recent years have come from the PRC.
In May 2011, there were 19 stocks in which the NASDAQ had halted trading; an astonishing 15 of these 19 companies were PRC-based. Reporters have blamed inadequate auditing procedures by both Chinese and U.S. auditing firms for this disturbing trend. The WALL STREET JOURNAL revealed in June of 2011, that the SEC had begun examining accounting and disclosure issues regarding Chinese companies that had engaged in reverse mergers.5 The investigation specifically targets the work of Chinese auditors:
4 Michael Rappaport, SEC Probes China Auditors, WALL STREET JOURNAL (June 3, 2011). 5 Id.
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People familiar with the matter say the investigation also includes auditors, which hadn't previously been known. As part of its inquiry, the SEC has suspended trading on some Chinese companies, questioning their truthfulness about their finances and operations.
The Public Company Accounting Oversight Board, or PCAOB, the government's accounting regulator, said it is investigating some audit firms over whether their audits of Chinese clients are stringent enough. * * * "Right now, the auditing and regulation of U.S.-listed Chinese companies isn't working very well," said Paul Gillis, a visiting professor of accounting at Peking University's Guanghua School of Management.
* * * Since February, about 40 Chinese companies have either acknowledged accounting problems or seen the SEC or U.S. exchanges halt trading in their stocks because of accounting questions.6
39. Additionally, according to the article, although some auditors say, in response, that they
are "intensifying their efforts" and "doing everything they can to perform strong audits," that
simply "may raise questions about whether their past efforts were strong enough."7
40. SEC Commissioner Luis A. Aguilar has also spoken out on the subject. In a speech on
April 4, 2011, he said that using reverse mergers as a form of "backdoor registration" was a
"disturbing trend". He said, "a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud." The "billions in U.S. savings and investment dollars [that] have been entrusted with these companies" are, therefore, at risk.
Pingtan Marine's Corporate Structure
41. Pingtan Marine is one of those frauds.
6 Id. 7 Id.
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42. During the Class Period through a complex web of the Company's subsidiaries that controlled via contract, but did not own, entities that actually conducted operations in the PRC,
Pingtan Marine reported that it earned all of its revenues.
43. Since the beginning of the Class Period began through December 2013, Pingtan Marine earned revenues through two kinds of operations conducted in the PRC: ocean fishery and dredging services.
44. Since December 2013, Pingtan Marine's operations consisted only of the ocean fishery business.
Ocean Fishery
45. Pingtan Marine wholly owns Merchant Supreme Co. Ltd. ("Merchant Supreme"), a company incorporated under the laws of the British Virgin Islands.
46. Merchant Supreme in turns wholly owns Prime Cheer Corporation Ltd. ("Prime Cheer"), a company incorporated under the laws of Hong Kong.
47. Prime Cheer in turn owns 100% of Pingtan Guansheng Ocean Fishing Co. Ltd., a company incorporated under the laws of the PRC.
48. Pingtan Guansheng Ocean Fishing Co. Ltd. is known as a "wholly foreign-owned enterprise" or a "WFOE" in the Chinese investment nomenclature because it is wholly owned by a non-PRC company. Pingtan Guansheng Ocean Fishing Co. Ltd. specifically is also referred to herein as "WFOE."
49. According to Pingtan Marine's SEC filings, WFOE, through a series of contractual agreements that were binding until February 9, 2015, had effective full control over the operations of Pingtan Fishing. WFOE was also entitled to receive all the economic benefits derived from Pingtan Fishing, but did not actually own Pingtan Fishing. Pingtan Fishing is a
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company incorporated under the laws of the PRC. All of Pingtan Marine's fishing operations have been and are carried out exclusively through Pingtan Fishing.
50. In other words, Pingtan Marine, Merchant Supreme, Prime Cheer, and WFOE are all holding companies that do not generate revenue or carry out business operations (i.e., fishing
operations) of their own.
51. Specifically, Pingtan Marine states in its SEC filings that pursuant to a contract entered
into in October 2012 (the "Contracted Management Agreement," as included with the Schedule
14A filed by the Company with the SEC on February 6, 2013, and attached hereto as Exhibit 2),
WFOE fully controlled Pingtan Fishing's business operations, policies, and management, and in
exchange for the "business management services" that Pingtan Fishing received from WFOE,
WFOE was paid 100% of the net profits of Pingtan Fishing by Pingtan Fishing during the Class
Period. According to the proxy statement that the Company filed on Schedule A with the SEC
on February 6, 2013, "[t]he net profit means the gross profits of Pingtan Fishing minus its costs
and expenses including the payable tax." This type of corporate structure is known as a "variable
interest entity," or "VIE" structure.
52. Chinese companies employ the VIE structure because PRC law imposes certain
limitations on direct equity ownership of PRC companies operating in certain strategic industries
by wholly foreign-owned enterprises such as WFOE.
53. Therefore, any cash or revenue originating in its ocean fishery business that Pingtan
Marine reported in its SEC filings are derived from its contractual agreement, through its wholly-
owned subsidiary WFOE, with Pingtan Fishing.
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54. Pingtan Fishing is 70% owned by Honghong Zhuo, who is the daughter of Xinrong Zhuo,
Pingtan Marine's Founder, CEO, Chairman of the Board, and majority stockholder. Pingtan
Fishing is 30% owned by Zhiyan Lin, the father-in-law of Xinrong Zhuo's brother.
Dredging Services
55. Pingtan Marine also wholly owned China Dredging Group Co., Ltd ("China Dredging"), a company incorporated under the laws of the British Virgin Islands.
56. Through various subsidiaries and VIE contractual relationships, China Dredging had effective full control over the operations of Fujian Service Port Service Co., Ltd ("Fujian
Service"), was the recipient of all the economic benefits derived therefrom, and directly owned
50% of the equity interests of Fujian Service. Fujian Service, is a company incorporated under the laws of the PRC. All of Pingtan Marine's dredging services were carried out exclusively through Fujian Service.
57. In December 2013, Pingtan Marine completed the sale of China Dredging to Fuzhou
Honglong Ocean Fishery Co. Ltd. ("Hong Long"). The wife of Pingtan Marine's Founder, CEO,
Chairman of the Board, and majority stockholder Xinrong Zhuo was the majority shareholder and controller of Hong Long.
58. The following chart shows Pingtan Marine's corporate structure as of December 31,
2014:
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Related-Party Transactions Galore at Pingtan Marine
59. Numerous related-party transactions were occurring at Pingtan Marine throughout the
Class Period. Indeed, Pingtan Marine's operations at essence consisted of a hodgepodge of
related-party transactions, touching every aspect of Pingtan Marine's business.
60. The samples of the Company's related-party transactions described in the following paragraphs in this section are alleged in order to provide background information on the highly questionable conduct that was and continues to be pervasive at Pingtan Marine, but are not meant to be construed as allegations of falsity themselves.
61. Prepaid fuel costs: As of December 31, 2014, Pingtan Marine had pre-paid more than $7 million in fuel costs to five companies that are either owned or controlled by the Zhuo family.
62. Prepaid fishing license application fee: Pingtan Marine engaged PT. Avona Mina
Lestari (owned by Xinrong Zhuo's family) and Hong Long (owned by Xinrong Zhuo's wife) as
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agents to apply for fishing licenses. On December 31, 2014, Pingtan Marine had prepaid the two companies approximately $1.03 million to apply for fishing licenses.
63. Accounts payable: As of December 31, 2013, Pingtan Marine owed more than $13 million to five companies owned or controlled by Xinrong Zhuo's family. As of December 31,
2014, Pingtan Marine still owed Hong Long $2.6 million. These accounts payable are "payable on demand."
64. Advances from related parties: For the year ended December 31, 2014, Pingtan Marine received $1 million in advances from Hong Fa Shipping Limited, a company owned by Xinrong
Zhuo, and also $1.35 million in advances from Xinrong Zhuo himself.
65. Sales to related parties: For the year ended December 31, 2013, Pingtan Marine sold more than $10 million of frozen fish and other marine catches to Shenzhen Western Coast
Fisherman Pier Co. Ltd, a company owned by Xinrong Zhuo. In 2012, Pingtan Marine's sales to companies owned by Xinrong Zhuo and to his sister and cousin totaled more than $13 million.
66. Purchases from related parties:
a. During the year ended December 31, 2014, Pingtan Marine purchased $85.9
million of fuel, fishing nets, and other on-board consumables from companies
owned or controlled by Xinrong Zhuo, up from $15.5 million in 2013.
b. During the year ended December 31, 2014, Pingtan Marine purchased nearly $7
million of "vessel maintenance services" from companies owned or controlled by
Xinrong Zhuo, up from $2.9 million in 2013.
c. For the year ended December 31, 2014, Pingtan Marine paid $17.5 million for
"transportation services" to companies owned or controlled by Xinrong Zhuo, up
from $9.1 million in 2013.
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d. For the year ended December 31, 2014, Pingtan Marine paid $2.5 million to
companies owned or controlled by Xinrong Zhuo to apply for and renew
Indonesian fishing licenses, up from $1 million in 2013.
67. Operating lease: In 2012, Pingtan Marine entered into a lease for office space with Ping
Lin, Xinrong Zhuo's wife. The lease called for annual payments of approximately $14,000 each
year through 2015.
68. Administrative service agreement: Pingtan Marine has a service agreement with Hai Yi
Shipping Limited, a company owned by Xinrong Zhuo, pursuant to which Pingtan Marine
receives administrative services as well as a rental office in Hong Kong in exchange for monthly
payments of approximately $38,000. For the year ended December 31, 2014, Pingtan Marine
paid approximately $461,934 to Hai Yi Shipping Limited.
69. Loans to related parties: For the year ended December 31, 2012, Pingtan Marine issued nearly $50 million in interest-free loans to related parties. The loans were also not collateralized and did not have specific repayment terms.
70. The Company provided a list of its related-party transactions, including the aforementioned transactions, in its Form 10-K for year ended December 31, 2014 filed with the
SEC on March 10, 2015. It is attached hereto as Exhibit 3. Also attached as Exhibit 4 is the list of related party transactions that appear in Pingtan Marine's Form 10-K/A for the year ended
December 31, 2013 filed with the SEC on November 10, 2014.
Seeking Alpha Raises Questions About "Fishy Business" at Pingtan Marine
71. On June 12, 2014, Seeking Alpha published a report titled "Fishy Business at Pingtan
Marine Enterprise" (the "Seeking Alpha Report"). The Seeking Alpha Report raised questions
about Pingtan Marine's corporate structure, and drew attention to the ubiquitous related-party
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transactions at Pingtan Marine. The Seeking Alpha Report became publicly-available the next day, on June 13, 2014.
72. The Seeking Alpha Report describes Pingtan Marine's VIE structure as "especially cumbersome" and concludes that "Pingtan appears to be structured so that money will never move from the VIE to the NASDAQ-listed entity."
73. The Seeking Alpha Report further noted that "there are various difficulties related to the enforcement of these contractual arrangements" and that "injunctive relief is not likely to be available under PRC law in the circumstances of a breach of these arrangements."
DEFENDANTS' ACTIONABLE FALSE AND MISLEADING STATEMENTS AND OMISSIONS AND FRAUDULENT SCHEME
Pursuant to the Contracted Management Agreement, Pingtan Fishing was Required to Pay WFOE, Pingtan Marine's Subsidiary, All of Pingtan Fishing's Profits
74. On February 6, 2013, Pingtan Marine filed a Schedule 14A with the SEC (the "Proxy
Statement"). The Proxy Statement set forth information relevant to the Contracted Management
Agreement.
75. The Proxy Statement stated that the Contracted Management Agreement must have been executed by the time of the closing of the Pingtan Marine reverse merger on February 25, 2013.
76. Pingtan Marine filed a Form 8-K with the SEC on March 1, 2013 confirming that the
Contracted Management Agreement was, in fact, executed by February 25, 2013.
77. The Proxy Statement stated that pursuant to the Contracted Management Agreement,
WFOE, the wholly-owned subsidiary of Pingtan Marine, "is entitled to all the future payments by Pingtan Fishing to the shareholders, together with all the profits of Pingtan Fishing."
78. The Proxy Statement disclosed that the two owners of Pingtan Fishing are the daughter of
Pingtan Marine's Founder, CEO, Chairman of the Board, and majority stockholder Xinrong Zhuo
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and the father-in-law of his brother. The Proxy Statement thus stated, "Pingtan Fishing's current
equity interest owners are Honghong Zhuo and Zhiyan Lin. Honghong Zhuo is the daughter of
Xinrong Zhuo and Zhiyan Lin is father-in-law of Longjie Zhuo, the brother of Xinrong Zhuo."
79. The Proxy Statement also disclosed that from 2004 through the present, since long before the reverse merger, while Pingtan Fishing was owned by Pingtan Marine's Founder, CEO,
Chairman of the Board, and majority stockholder Xinrong Zhuo's family members and certain
others, the beneficial owner of and the exclusive controller of Pingtan Fishing was Xinrong
Zhuo. The Proxy Statement thus stated:
Pursuant to a Family Agreement executed on November 23, 2004, among Xinrong Zhuo and his certain family members (the "Family Members"), including Longjie Zhuo, Lifei Zeng and Zhiyan Lin, each of the Family Members delegates Xinrong Zhuo to be the sole decision maker of Pingtan Fishing and Xinrong Zhuo shall be responsible for all of Pingtan Fishing's operation and management, including financial management. The Family Agreement further provides that Xinrong Zhuo shall be the sole decision maker with regard to all Pingtan Fishing's operations and management, even when a non-Family Member is entrusted with equity interest in Pingtan Fishing by a Family Member.
.... Xinrong Zhuo and the Family Members are the ultimate beneficial owners of Pingtan Fishing, while Xinrong Zhuo is the person controlling Pingtan Fishing.
80. The English translation of the Contracted Management Agreement was filed with the
SEC together with the Proxy Statement (as stated above, it is attached hereto as Exhibit 2).
81. The Contracted Management Agreement states that "[d]uring the term of contracted
management, WFOE is entitled to 100% of the net profits of Pingtan Fishing. The net profit
means the gross profits of Pingtan Fishing minus its costs and expenses including the payable
tax."
82. The Contracted Management Agreement also states that "[d]uring the Term of this
Agreement the WFOE shall have the right to .... receive 100% of the net profits of Pingtan
Fishing pursuant to the terms of this Agreement."
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83. Thus, Pingtan Marine's SEC filings informed the investing public that, through its wholly owned subsidiary WFOE, Pingtan Marine would be paid by Pingtan Fishing all of the profits earned by Pingtan Fishing, its VIE, which is the only entity that engages in Pingtan Marine's ocean fishery business, but which was not owned by WFOE or Pingtan Marine (until February 9,
2015 upon which date the Contracted Management Agreement was terminated).
Pingtan Fishing's Profits Comprised just under 50% in 2013, and 100% in 2014, of Pingtan Marine's Profits
84. The amount of Pingtan Fishing's profits that Pingtan Fishing failed to pay WFOE, on
behalf of Pingtan Marine, was so material that for the year 2013 it comprised almost 50% of the
net income, and for the year 2014 100% of the net income, that Pingtan Marine reported in its filings with the SEC.
85. Indeed, Pingtan Fishing's net income for the year ended December 31, 2013 as reported in Pingtan Marine's SEC filings and in Pingtan Fishing's filings with the Chinese State
Administration for Industry and Commerce ("SAIC")8 publicly accessible database was over $45
million.
86. As reported by Pingtan Marine in its SEC filings, for the year ended December 31, 2013,
the net income derived from China Dredging, the only other source of Pingtan Marine's net income during that period, was $52 million.
8 The SAIC is a governmental authority in the People's Republic of China that is responsible for a overseeing a variety of corporate and commercial matters at issue here. Chinese corporations must register with the SAIC upon formation, and must timely disclose a variety of information to the SAIC, including but not limited to periodic financial statements and the identities of corporate officers. Some of this information is accessible to the public and is used by Chinese investors. Under PRC law, failure to timely and accurately file with SAIC annual reports including accurate financial statements will result in the revocation of a company’s business license making it impossible for the company to operate. -18-
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87. Pingtan Fishing's net income for the year ended December 31, 2014 as reported in
Pingtan Marine's SEC filings and in Pingtan Fishing's SAIC filings was over $85 million.
88. As reported by Pingtan Marine in its SEC filings, for the year ended December 31, 2014,
the net income derived from Pingtan Fishing was the only source of Pingtan Marine's net income
during that period.
Defendants' Scheme Not to Pay Pingtan Fishing's Profits to WFOE, Pingtan Marine's Subsidiary
89. Each of the Individual Defendants engaged in a scheme in which they caused the
investing public to believe that the company that the investing public owned, Pingtan Marine,
was being paid by Pingtan Fishing the profits that Pingtan Fishing earned pursuant to the
Contracted Management Agreement from February 25, 2013 through February 9, 2015 (when
the Contracted Management Agreement was terminated).
90. Yet, since February 25, 2013 when the reverse merger formed Pingtan Marine through
February 9, 2015 when the Contracted Management Agreement was terminated, Pingtan Fishing never paid WFOE, and thus never indirectly paid WFOE's parent, Pingtan Marine, any of
Pingtan Fishing's profits.
91. The Individual Defendants schemed to cause Pingtan Fishing to breach the Contracted
Management Agreement by never paying to WFOE any of the profits that Pingtan Fishing earned from February 25, 2013 through February 9, 2015.
92. The Individual Defendants achieved their desired result from the scheme they engaged in by causing all of Pingtan Fishing's profits to be kept within Xinrong Zhuo's family.
93. Indeed, Xinrong Zhuo's daughter, Honghong Zhuo, and the father-in-law of his brother,
Zhiyan Lin, as the only owners of Pingtan Fishing's equity, owned all of Pingtan Fishing's assets,
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which, due to Pingtan Fishing's breach of contract and the Individual Defendants' scheme, increased by the amount of Pingtan Fishing's profits.
94. As, pursuant to the Family Agreement executed on November 23, 2004, Xinrong Zhuo was the beneficial owner of Pingtan Fishing's equity, the value of Xinrong Zhuo's beneficial equity interest in Pingtan Fishing increased by the amount of Pingtan Fishing's profits due to
Pingtan Fishing's breach of contract and the Individual Defendants' scheme.
Defendants' False and Misleading Statements and Omissions of Material Fact
95. All of Pingtan Marine's annual reports filed with SEC between February 25, 2013 and the present contained false and misleading statements of material fact that affirmatively stated that, since February 25, 2013 when the reverse merger formed Pingtan Marine through February 9,
2015 when the Contracted Management Agreement was terminated, Pingtan Fishing was paying
WFOE, and thus indirectly paying WFOE's parent, Pingtan Marine, all of Pingtan Fishing's profits.
96. On March 10, 2014 Pingtan filed with the SEC its annual report for the year ended
December 31, 2013 on Form 10-K (the "2013 10-K").
97. The 2013 10-K made the following false and misleading statement of material fact:
"Under the VIE Agreements, we, among other things, fully control Pingtan Fishing's business operations, policies and management, approve all matters requiring shareholders' approval, and receive 100% of the annual net income earned Pingtan Fishing." (Emphasis added.)
98. The 2013 10-K made the additional false and misleading statement of material fact: "As consideration for its business management services, the WFOE pays an annual fee to Pingtan
Fishing, and Pingtan Fishing pays to the WFOE 100% of the net profits of Pingtan Fishing."
(Emphasis added.)
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99. The 2013 10-K was signed by Defendants Xinrong Zhuo, Yu, Bao, Yeliang Zhou, Zhu,
Song, and Shi.
100. Accompanying the 2013 10-K were certifications pursuant to Rule 13a-14(a) and 15d-
14(a) under the Exchange and the Sarbanes-Oxley Act of 2002 ("SOX") signed by Defendants
Xinrong Zhou and Yu attesting to their accuracy.
101. On November 10, 2014 Pingtan filed with the SEC its amended annual report for the year ended December 31, 2013 on Form 10-K/A (the "Restated 2013 10-K"), which contained restatements of the false financial statements contained in Pingtan Marine's 2013 10-K.
102. A summary of the false and misleading statements of material fact contained in the 2013
10-K and the corresponding restatements contained in the Amended 2013 10-K is alleged below, in the section entitled "Pingtan Marine Restated Previously-Issued Financial Statements."
103. The Restated 2013 10-K made the following false and misleading statement of material fact: "Under the VIE Agreements, we, among other things, fully control Pingtan Fishing's business operations, policies and management, approve all matters requiring shareholders' approval, and receive 100% of the annual net income earned Pingtan Fishing." (Emphasis added.)
104. The Restated 2013 10-K made the additional false and misleading statement of material fact: "As consideration for its business management services, the WFOE pays an annual fee to
Pingtan Fishing, and Pingtan Fishing pays to the WFOE 100% of the net profits of Pingtan
Fishing." (Emphasis added.)
105. The Restated 2013 10-K was signed by Defendants Xinrong Zhuo, Yu, Bao, Zhou, Zhu,
Song, and Shi.
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106. Accompanying the Restated 2013 10-K were certifications pursuant to Rule 13a-14(a)
and 15d-14(a) under the Exchange Act and SOX signed by Defendants Xinrong Zhuo and Yu
attesting to their accuracy.
107. On March 10, 2015 Pingtan filed with the SEC its annual report for the year ended
December 31, 2014 on Form 10-K (the "2014 10-K").
108. The 2014 10-K made the following false and misleading statement of material fact:
"Under the VIE Agreements, we, among other things, fully control Pingtan Fishing's business
operations, policies and management, approve all matters requiring shareholders' approval, and
receive 100% of the annual net income earned Pingtan Fishing." (Emphasis added.)
109. The 2014 10-K made the additional false and misleading statement of material fact: "As
consideration for its business management services, the WFOE pays an annual fee to Pingtan
Fishing, and Pingtan Fishing pays to the WFOE 100% of the net profits of Pingtan Fishing."
(Emphasis added.)
110. The 2014 10-K was signed by Defendants Xinrong Zhuo, Yu, Bao, and Zhu, and
Company Directors Lin Lin and XingAn Lin.
111. Accompanying the 2014 10-K were certifications pursuant to Rule 13a-14(a) and 15d-
14(a) under the Exchange Act and SOX signed by Defendants Xinrong Zhuo and Yu attesting to their accuracy.
112. All of Pingtan Marine's quarterly reports filed with SEC between February 25, 2013 and the present made omissions of material fact that, since February 25, 2013 when the reverse merger formed Pingtan Marine through February 9, 2015 when the Contracted Management
Agreement was terminated, Pingtan Fishing never paid WFOE, and thus never indirectly paid
WFOE's parent, Pingtan Marine, any of Pingtan Fishing's profits.
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113. The quarterly reports containing such omissions of material fact that were filed by
Pingtan Marine with the SEC are as follows: Form 10-Q filed on May 14, 2013, Form 10-Q filed on August 9, 2013, Form 10-Q filed on November 14, 2013, Form 10-Q filed on May 7, 2014,
Form 10-Q filed on August 6, 2014, Form 10-Q filed on November 10, 2014, Form 10-Q/A filed on December 3, 2014, Form 10-Q/A filed on December 4, 2014, and Form 10-Q filed on May
11, 2015.
114. Each of the quarterly reports containing such omissions of material fact that were filed by
Pingtan Marine with the SEC since February 25, 2013 through the present were signed by
Defendants Xinrong Zhuo and Yu.
Evidence that Pingtan Fishing Did Not Pay Its Profits to WFOE, Pingtan Marine's Subsidiary
115. Because both Pingtan Fishing and WFOE are companies incorporated under the laws of
the PRC, they are both required under the laws of the PRC to follow PRC accounting rules.
116. Under PRC accounting rules, if a VIE makes a payment to a WFOE in the amount of the
profits that the VIE earned, the WFOE must report the same amount of that payment as revenue
on the income statement -- for the year during which the payment was made -- that the WFOE files with the SAIC.
117. In the same vein, under PRC accounting rules, if a VIE makes a payment to a WFOE in the amount of the profits that the VIE earned, the VIE must include the amount of that payment as an expense on the income statement -- for the year during which the payment was made -- that
the VIE files with the SAIC.
118. Plaintiff alleges that the Pingtan Fishing's and WFOE's financial statements included in
their respective filings with the SAIC are accurate.
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WFOE's 2013 and 2014 Income Statements Filed with the SAIC Prove that during 2013 and 2014 Pingtan Fishing did Not Pay WFOE Any of the Profits Earned by Pingtan Fishing in 2013 and 2014
119. The income statements for each of the years ended December 31, 2013 and December 31,
2014 that WFOE (the subsidiary of Pingtan Marine) filed with the SAIC stated that the WFOE's
revenue was $0 and $0, respectively, and that WFOE's profits were negative $12,017 and negative $8,122, respectively.
120. Therefore, pursuant to the governing PRC accounting rules, the WFOE did not receive payment for even RMB 1 (about 16 cents)9 from the VIE -- and, similarly, the VIE did not make
a payment for even RMB 1 to WFOE -- at anytime from January 1, 2013 through December 31,
2014.
121. Moreover, the income statements for each of the years ended December 31, 2013 and
December 31, 2014 that Pingtan Fishing filed with the SAIC corroborate, and independently
prove, that Pingtan Fishing did not pay any of its profits that it earned at anytime to WFOE at
anytime from January 1, 2013 through December 31, 2014.
Pingtan Fishing's 2013 Income Statement Filed with the SAIC Independently Proves that during 2013 Pingtan Fishing did Not Pay WFOE Any of the Profits Earned by Pingtan Fishing in 2013
122. Pingtan Fishing's income statement for the year ended December 31, 2013 that was filed
with the SAIC stated that Pingtan Fishing received revenues in the amount of $122.64 million
and earned profits in the amount of $49.97 million.
9 Renminbi ("RMB") is the currency used in the PRC. The 2014 10-K stated that the "average exchange rate used in translating the results of operations and cash flows for the years ended December 31, 2014 and 2013 from RMB to U.S. dollars was 6.1432 and 6.1412..." Plaintiff assumed a rate of 6.142 for the conversion of U.S. dollars to RMB, which is the same as 0.1628 for the conversion of RMB to U.S. dollars. -24-
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123. The 2014 10-K report on the portion of Pingtan Marine's revenue for the year ended
December 31, 2013 that was derived from Pingtan Fishing's operations,10 $122.67 million, is the
exact same amount as Pingtan Fishing reported to the SAIC, $122.64 million (assuming that
Plaintiff's estimated conversion rate to U.S. dollars of the RMB that was reported in the SAIC
filings is inaccurate by about 0.02%).
124. The 2014 10-K report on the portion of Pingtan Marine's profits for the year ended
December 31, 2013 that was derived from Pingtan Fishing's operations,11 $47.14 million, is for
about the same amount as Pingtan Fishing reported to the SAIC, $49.97 million.
125. As a shell company, Pingtan Marine's expenses reported for the year ended December 31,
2013 in the 2014 10-K in the amount of $75.53 million -- including fuel cost, freight, labor cost,
maintenance fee, fishing license and agent fee, depreciation, spare parts, selling expenses, and
administrative expenses, less income tax -- were the expenses that Pingtan Fishing was reported
to the SEC as actually having paid during the year ended December 31, 2013.
126. Therefore, the revenue in the amount of $122.64 million, less the profits in the amount of
$49.97 million, as each of which were reported to the SAIC in Pingtan Fishing's income
statement for the year ended December 31, 2013, which is equal to $72.67 million, is what paid
Pingtan Fishing actually paid during that year for its expenses.
127. If Pingtan Fishing had paid WFOE during the year ended December 31, 2013 its profits
(revenue less expenses), such payment to WFOE would have been an expense for Pingtan
Fishing under PRC accounting rules.
10 The 2014 10-K states that any revenue reported in Pingtan Marine's financial statements for the year ended December 31, 2013 other than the $122.67 million was derived from China Dredging's business. 11 The 2014 10-K states that all net income, or profits, reported in Pingtan Marine's financial statements for the year ended December 31, 2013 other than the $47.14 million was derived from China Dredging's business. -25-
Case 1:15-cv-00267-AJN Document 22 Filed 07/07/15 Page 26 of 53
128. Thus, if Pingtan Fishing paid WFOE during the year ended December 31, 2013 its profits
of $49.97 million, then Pingtan Fishing's expenses reported in its SAIC filings would not have
been only $72.67 million, but rather would have been equal to the sum of $72.67 million and
$49.97 million, which is $122.64 million.
129. In that event, Pingtan Fishing's revenue ($122.64 million) for the year ended December
31, 2013 would have been equal to its expenses, and, in turn, its profits (revenue less expenses)
reported for that year in its SAIC filings would have been $0.
130. Indeed, in that event, WFOE would have reported profits for the year ended December
31, 2013 in the amount of $49.97 million (instead of $0).
131. Thus, were Pingtan Marine's statements in its SEC filings that Pingtan Fishing paid
WFOE 100% of Pingtan Fishing's profits actually true, then Pingtan Fishing's financial
statements for the year ended December 31, 2013 filed with the SAIC would have stated that its
revenues were $122.64 million, but its profits were $0, and, moreover, WFOE's financial statements for the year ended December 31, 2013 filed with the SAIC would have stated that its
revenue was $49.97 million and its profits were $49.96 million (after deducting from the $49.97
million the $12,017 net loss that WFOE actually reported).
Pingtan Fishing's 2014 Income Statement Filed with the SAIC Independently Proves that during 2014 Pingtan Fishing did Not Pay WFOE Any of the Profits Earned by Pingtan Fishing in 2013 and 2014
132. Pingtan Fishing's income statement for the year ended December 31, 2014 that was filed
with the SAIC stated that Pingtan Fishing received revenues in the amount of $233.45 million
and earned profits in the amount of $90.58 million.
133. The 2014 10-K report on Pingtan Marine's revenue for the year ended December 31,
2014, all of which was derived from Pingtan Fishing's operations, $233.42 million, is the exact
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same amount as Pingtan Fishing reported to the SAIC, $233.45 million (assuming that Plaintiff's estimated conversion rate to U.S. dollars of the RMB that was reported in the SAIC filings is inaccurate by only about 0.01%).
134. The 2014 10-K report on Pingtan Marine's profits for the year ended December 31, 2014,
all of which was derived from Pingtan Fishing's operations, $85.76 million, is for about the same
amount as Pingtan Fishing reported to the SAIC, $90.58 million.
135. As a shell company, Pingtan Marine's expenses reported for the year ended December 31,
2014 in the 2014 10-K in the amount of $147.66 million -- including fuel cost, freight, labor cost,
maintenance fee, fishing license and agent fee, depreciation, spare parts, selling expenses, and
administrative expenses, less income tax -- were the expenses that Pingtan Fishing was reported
to the SEC as actually having paid during the year ended December 31, 2014.
136. Therefore, the revenue in the amount of $233.45 million, less the profits in the amount of
$90.58 million, as each of which were reported to the SAIC in Pingtan Fishing's income
statement for the year ended December 31, 2014, which is equal to $142.87 million, is what paid
Pingtan Fishing actually paid during that year for its expenses.
137. If Pingtan Fishing had paid WFOE during the year ended December 31, 2014 its profits
(revenue less expenses), such payment to WFOE would have been an expense for Pingtan
Fishing under PRC accounting rules.
138. Thus, if Pingtan Fishing paid WFOE during the year ended December 31, 2014 its profits
of $90.58 million, then Pingtan Fishing's expenses reported in its SAIC filings would not have
been only $142.87 million, but rather would have been equal to the sum of $142.87 million and
$90.58 million, which is $233.45 million.
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139. In that event, Pingtan Fishing's revenue ($233.45 million) for the year ended December
31, 2014 would have been equal to its expenses, and, in turn therefore, its profits (revenue less
expenses) reported for that year in its SAIC filings would have been $0.
140. Indeed, in that event, WFOE would have reported profits for the year ended December
31, 2014 in the amount of $90.58 million (instead of $0).
141. Thus, were Pingtan Marine's statements in its SEC filings that Pingtan Fishing paid
WFOE 100% of Pingtan Fishing's profits actually true, then Pingtan Fishing's financial
statements for the year ended December 31, 2014 filed with the SAIC would have stated that its
revenues were $233.45 million, but its profits were $0, and, moreover, WFOE's financial
statements for the year ended December 31, 2014 filed with the SAIC would have stated that its
revenue was $90.58 million and its profits were $90.57 million (after deducting from the $90.58
million the $8,122 net loss that WFOE actually reported).
DEFENDANTS' SCIENTER
Xinrong Zhuo's Scienter
142. During the Class Period, Pingtan Fishing, the only company that engaged in Pingtan
Marine's business during the Class Period since December 2013, and one of only two companies
that engaged in Pingtan Marine's business during the Class Period before December 2013, and the company with which Pingtan Marine (through WFOE) entered into the Contracted
Management Agreement, was majority-owned by Honghong Zhuo.
143. Honghong Zhuo owned 70% of Pingtan Fishing during the Class Period. She is the
daughter of Pingtan Marine's Founder, CEO, Chairman of the Board, and majority stockholder
Xinrong Zhuo.
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144. Additionally, during the Class Period, Honghong Zhuo was one of five Directors at
Pingtan Fishing, according to Pingtan Fishing's SAIC filings.
145. As Xinrong Zhuo's daughter was prominently involved at Pingtan Fishing, Honghong
Zhuo would have discussed Pingtan Fishing's business and finances with Xinrong Zhuo.
146. During the Class Period, Zhiyan Lin, who owned the remaining 30% of Pingtan Fishing, was Pingtan Fishing's Legal Representative, Pingtan Fishing's Manager (one of two officers listed in Pingtan Fishing's SAIC filings), and was also a "Supervisor" at WFOE (one of the three officers listed in the WFOE's SAIC filings).
147. Zhiyan Lin is the father-in-law of the brother (Longjie Zhuo) of Xinrong Zhuo, according to the Proxy Statement.
148. As a family member of Xinrong Zhuo and one who is prominently involved at both
WFOE and Pingtan Fishing, Zhiyan Lin would have discussed WFOE's and Pingtan Fishing's business and finances with Xinrong Zhuo.
149. Longjie Zhuo, the son-in-law of Zhiyan Lin (discussed directly above), and the brother of
Xinrong Zhuo, was another of the five Directors at Pingtan Fishing, according to Pingtan
Fishing's SAIC filings.
150. As yet another family member of Xinrong Zhuo who was also prominently involved at
Pingtan Fishing, Longjie Zhuo would have participated in the family discussions between
Honghong Zhuo, Zhiyan Lin, and Xinrong Zhuo that pertained to their respective ownership
interests in and management positions at Pingtan Fishing and WFOE.
151. Moreover, during the Class Period, according to Pingtan Fishing's SAIC filings, Xinrong
Zhuo himself was Pingtan Fishing's Chairman! Thus, Xinrong Zhuo himself was on both sides
of the transactions between Pingtan Fishing and WFOE that caused Pingtan Marine to be pilfered
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by Pingtan Fishing. I.e., Xinrong Zhuo was the Chairman and beneficial owner of Pingtan
Fishing and was the CEO, Chairman, and majority shareholder of Pingtan Marine, the shell
company that wholly owned and controlled WFOE.
152. For the foregoing reasons, Xinrong Zhuo had to have first-hand knowledge that Pingtan
Fishing was not paying any of its profits to WFOE.
153. Even if Xinrong Zhuo was not Chairman at Pingtan Fishing, even if Pingtan Fishing was
not owned and managed by his close family members, and even if WFOE was not managed by
his family members, merely by dint of his carrying out his duties as the CEO, Chairman, and
majority shareholder of Pingtan Marine, Xinrong Zhuo had to have reviewed the bank accounts,
books and records, and SAIC filings of each of WFOE and Pingtan Fishing.
154. After all, Pingtan Fishing, through WFOE, was the source of all of Pingtan Marine's income in 2014, and just short of half of Pingtan Marine's income in 2013.
155. Given all of the above circumstances, it is inconceivable for Xinrong Zhuo to have been
unaware that Pingtan Fishing was breaching the Contracted Management Agreement by failing
to pay any of Pingtan Fishing's profits to WFOE from January 1, 2013 through December 31,
2014.
156. Nonetheless, Xinrong Zhuo signed all of Pingtan Marine's SEC filings during the Class
Period that falsely stated that Pingtan Fishing was paying all of its profits to WFOE.
157. The most plausible explanation for why Pingtan Marine, Xinrong Zhuo, and the rest of
the Defendants allowed Pingtan Fishing to "get away" with non-payment of all of its profits to
WFOE is that, as Pingtan Fishing was owned by Xinrong Zhuo's daughter and his brother's father-in-law, all of Pingtan Fishing's profits were thus "kept in the house" at Pingtan Fishing.
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158. Conversely, if Pingtan Fishing had paid its profits to Pingtan Marine (through WFOE), as required under the Contracted Management Agreement, the profits would have been shared by
Xinrong Zhuo's family with the investing public.
159. Unsurprisingly, WFOE's total assets reported in its SAIC filings as of December 31, 2013 and December 31, 2014 were in the amounts of $149,895 and $134,183, respectively. Total assets that WFOE thus reported included both cash and accounts receivable.
CFO Yu's and the Audit Committee Members Zhou's, Zhu's, and Song's Scienter
160. Defendant Yu served as Pingtan Marine's CFO during the Class Period.
161. As CFO of Pingtan Marine, Yu was required to establish and maintain effective internal controls over financial reporting, as described in Exchange Act Rules 13a-15(f) and 15d-15(f).
Under the Exchange Act, internal control is defined to require, among other things "reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer" and "reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements."
162. Yu was on notice of his duty as CFO to create internal controls in order to prevent unauthorized transactions, and that upper management was a key area of concern for internal control violations.
163. Defendants Zhou, Zhu, and Song served on Pingtan Marine's Audit Committee during the
Class Period. According to Pingtan Marine's Restated 2013 10-K, the Audit Committee was responsible for, among other things: (a) reviewing and discussing [Pingtan Marine's] financial
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statements and financial reports with management and the independent auditor, (b) reviewing the effectiveness and adequacy of [Pingtan Marine's] internal control structure and procedures for financial reporting, and (c) overseeing the adequacy of [Pingtan Marine's] internal controls and procedures to promote compliance with accounting standards and applicable laws and regulations.
164. Yu and the Audit Committee members were also on notice of a heightened risk of fraud because many employees of Pingtan Marine were family members of Xinrong Zhuo and many of the parties with which Pingtan Marine engaged in transactions were owned and controlled by family members of Xinrong Zhuo. A company at which many or most employees are family members of the CEO, Chairman, and majority shareholder is at a heightened risk for fraud because family members are likely to be more willing to collude with each other than with mere unrelated co-workers.
165. Moreover, Yu must have been aware of the risk of fraud in Chinese companies listed in the United States as the company at which he served as CFO just before coming to Pingtan
Marine, Lihua International, Inc. ("Lihua"), was sued in May 2014, in the middle of the Class
Period, for fraud that occurred for a period of time that include when he was at Lihua. This case is docketed in this Court as: In re Lihua International, Inc. Securities Litigation, Case No: 1:14- cv-05037 (RA) ("Lihua Securities Litigation"). Similarly, Pingtan Marine's Audit Committee members must have been aware that Lihua was sued for securities fraud. Thus, Yu and the Audit
Committee members must have been aware of the spate of scandals involving Chinese companies traded in US markets in the past several years. For instance, in February 23, of 2012,
Floyd Norris of the New York Times reported of a fraud committed by the US-listed Chinese
Company Puda Coal, which provided inaccurate information to American investors, but accurate
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information to the SAIC.12 In recent years, more than a dozen US-listed Chinese companies have committed fraud that would have been apparent through an examination of SAIC filings:
Elliot v. China Green Agriculture, Inc., No. 3:10-CV-0648-LRH-WGC, 2012 WL 5398863, at
*6 (D. Nev. Nov. 2, 2012); Dean v. China Agritech, Inc., No. 11-CV-1331-RGK (PJWx), 2011
WL 5148598, at *3 (C.D. Cal. Oct. 27, 2011); In re China Educ. Alliance, Inc. Sec. Litig., No.
10-CV-9239-CAS (JCx), 2011 WL 4978483, at *6 (C.D. Cal. Oct. 11, 2011); Henning v. Orient
Paper, Inc., No. 10-CV-5887-VBF (AJWx), 2011 WL 2909322, at *5 (C.D. Cal. July 20, 2011);
Scott v. ZST Digital Networks, Inc., No. 110CV03531-GAF (JCx), 2012 WL 538279, at *8 (C.D.
Cal. Feb. 14, 2012); Brown v. China Integrated Energy, Inc., No. 11-CV-2559-MMM (PLAx),
2012 WL 1129909, at *4 (C.D. Cal. April 2, 2012); Brown v. China Integrated Energy, Inc., No.
11-CV-2559-MMM (PLAx875 F. Supp. 2d 1096, 1122 (C.D. Cal. 2012); Snellink v. Gulf
Resources, Inc., No. 11-CV-3722- ODW (MRWx), 870 F. Supp. 2d 930, 934 (C.D. Cal. 2012);
Katz v. China Century Dragon Media, Inc., No. 11-CV-2769-JAK (SSx), 2012 WL 1656929, at
*2 (C.D. Cal. May 7, 2012) (Katz II); Redwen v. Sino Clean Energy, Inc., No. 11-CV-3936, 2012
WL 1991762, at *4 (C.D. Cal. June 4, 2012); Lewy v. SkyPeople Fruit Juice, Inc., No. 11-CV-
2700-PKC, 2012 WL 3957916, at *13-16 (S.D.N.Y. Sept. 10, 2012); In re China Intelligent
Lighting and Elecs., Inc. Sec. Litig., 11-CV-2768-PSG (SSx), 2012 WL 3834815, at *5 (C.D.
Cal. Sept. 5, 2012); In re Advanced Battery Techs, Inc., Sec. Litig., No. 11-CV-2279-CM, 2012
WL 3758085, at *10 (S.D.N.Y. Aug. 29, 2012); Ho v. Duoyuan Global Water, Inc., No. 10-CV-
7233-GBD, 887 F. Supp. 2d 547, 568 (S.D.N.Y. 2012); Miller Inv. Trust v. Morgan Stanley &
Co., Inc., No. 11-CV-12126-JLT, 879 F. Supp. 2d 158, 164-65 (D. Mass. 2012 (quoting Stanger v. China Electric Motor, Inc., No. 11-CV-2794-R, March 26, 2012 Motion Hearing at *5).
12 Available at http://www.nytimes.com/2012/02/24/business/sec-charges-reveal-fraud-in- chinese-company.html?pagewanted=all. -33-
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Given this context, Yu must have known that there was a major risk of fraud in US-listed
Chinese companies, and that such frauds could often be detected by examining SAIC filings.
166. In Pingtan Marine's Form 10-Q for the quarter ended March 31, 2013 that was filed with
the SEC ("2013 Q1 10-Q"), the Company admitted that its internal controls over financial
reporting were not effective. Specifically, the 2013 Q1 10-Q stated: "[M]anagement concluded
that our internal control over financial reporting was not effective as of March 31, 2013, due to
the identification of a material weakness. The material weakness we identified was that none of
our employees had any formal training in U.S. GAAP and SEC rules and regulations."
Statements that were substantially the same as the latter statement about Pingtan Marine's
ineffective internal controls were repeated in the Company's Form 10-Qs for each of the quarters
ended June 30, 2013, September 30, 2013, and March 31, 2014, respectively, as well as Pingtan
Marine's 2013 10-K.
167. Because of Pingtan Marine's self-admitted ineffective internal controls, Yu and the Audit
Committee members should have been on higher alert in order to ensure that the Company's SEC filings, especially statements concerning Pingtan Marine's business and operations, were accurate, and that the Company did not engage in any transactions that would defraud the investing public.
168. Merely by dint of the fact that Yu was CFO, and merely by dint of the fact that Zhou,
Zhu, and Song were Audit Committee members, each had to have carried out their duties by reviewing the bank accounts, books and records, and SAIC filings of each of WFOE and Pingtan
Fishing.
169. Especially due to their awareness of the heightened risk of fraud due to the Company's admitted ineffective internal controls, of the fair chances that any Chinese company selling stock
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in US public markets is engaged in securities fraud, and of the heightened risk of fraud due to
Xinrong Zhuo's family members vastly populating Pingtan Marine and many of the companies
with which Pingtan Marine did business, CFO Yu and Audit Committee members, Zhou, Zhu,
and Song had to have carried out their duties by reviewing the bank accounts, books and records,
and SAIC filings of each of WFOE and Pingtan Fishing.
170. After all, Pingtan Fishing, through WFOE, was the source of all of Pingtan Marine's income in 2014, and just short of half of Pingtan Marine's income in 2013. If CFO Yu and Audit
Committee members, Zhou, Zhu, and Song did not engage in a review of such basic evidence of
the Company's finances and operations, they shirked their duties out of reckless disregard for the
truth.
171. Moreover, as the CFO, Yu signed all of the Company's Form 10-Qs, the 2013 10-K, and
the Restated 2013 10-K during the Class Period and their SOX certifications. As directors, the
Audit Committee members signed the 2013 10-K and the Restated 2013 10-K during the Class
Period. Their having signed the SEC filings that falsely stated that Pingtan Fishing was paying
all of its profits to WFOE supports the inference that they knew of the Defendants' fraudulent
scheme and false and misleading statements of material fact, or that they deliberately turned a
blind eye to the fraud and made their false statements in reckless disregard for the truth.
Scienter of the Other Director Defendants, Too
172. Pingtan Marine's Contracted Management Agreement, through WFOE, with Pingtan
Fishing pertains to Pingtan Marine's only operations in 2014, its ocean fishery business conducted exclusively by Pingtan Fishing. In 2013, Pingtan Marine earned about half of its revenue through Pingtan fishing and the other half through its dredging business.
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173. It is inconceivable that any of the Individual Defendants did not know that in 2014
Pingtan Marine was not receiving even an iota of income from its only operating subsidiary, which was its only source of income. As throughout 2014 Pingtan Marine, through WFOE, had no other operations or sources of revenue other than those derived from its Contracted
Management Agreement with Pingtan Fishing, it is absurd to suggest that management was not aware that Pingtan Marine, through WFOE, was not receiving payments from Pingtan Fishing in
2014.
174. Similarly, in 2013 about half of Pingtan Marine's reported revenue and cash came from its Contracted Management Agreement, through WFOE, with Pingtan Fishing. It is, still, inconceivable for any of the Individual Defendants to have had no knowledge that Pingtan
Marine, through WFOE, was not receiving payments from Pingtan Fishing in 2013.
175. Given that the Pingtan Marine's fraud as alleged herein was pervasive, of great magnitude, and struck at the essence of the Company's core operations, all of the Individual
Defendants had to have known of the fraud.
176. Moreover, all of the Individual Defendants should have been aware of the heightened risk of fraud due to the Company's admitted ineffective internal controls, of the great chances that any Chinese company selling stock in US public markets is engaged in securities fraud, and of the heightened risk of fraud due to Xinrong Zhuo's family members vastly populating Pingtan
Marine and many of the companies with which Pingtan Marine did business.
177. All of the Individual Defendants should have confirmed that the bank accounts, books and records, and SAIC filings of each of WFOE and Pingtan Fishing were consistent with the
2013 10-K and Restate 2013 10-K that they signed during the Class Period that stated that
WFOE was paid by Pingtan Fishing all of Pingtan Fishing's profits.
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178. Thus, if any of the Individual Defendants somehow did not know of Pingtan Marine's all- pervasive fraud, then they deliberately turned a blind eye to the fraud and made their false statements in reckless disregard for the truth.
ADDITIONAL ALLEGATIONS OF FALSITY AND SCIENTER
Pingtan Marine and Pingtan Fishing do not exist at their registered addresses
179. On June 11, 2015, Plaintiffs' private investigator conducted field visits to Pingtan
Marine's headquarters as well as the registered addresses with the SAIC of Pingtan Fishing, each
of Pingtan Fishing's three subsidiaries, and an entity that became Pingtan Marine's subsidiary in
February 2015. The private investigator's findings during each such field visit are as follows:
a. Pingtan Marine: on its website http://www.ptmarine.com/contact, Pingtan
Marine lists its address as "18F, Tower A, Zhongshan Building, No.154 Hudong Road,
Gulou District, Fuzhou City, Fujian Province, PRC
(福州市鼓楼区湖东路154号中山大厦A座18层A座)." Plaintiff's private investigator
visited this address and did not find Pingtan Marine. There were three companies on the
18th Floor of this address none of which was Pingtan Marine.
b. Pingtan Fishing: its address as registered with the local SAIC office is "Room
No.201, No.3 Building, Wonderful Garden, North Cuiyuan Road, Tancheng Town,
Pingtan County, Fujian Province, PRC
(平潭县潭城镇翠园北路万得福花园3号楼201室)." Plaintiffs' private investigator
visited this address on June 11, 2015 and did not find Pingtan Fishing. Instead, Plaintiffs'
investigator discovered that Building No. 3 is a residential building with two apartment
units on each floor within a development of buildings under construction. Plaintiffs'
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private investigator spoke with some of the residents in this development, and none of
them had even heard of Pingtan Fishing. c. Pingtan Fishing's three subsidiaries that were inactive according to the
Company's SEC filings: Pingtan Fishing purports to have three subsidiaries that it
acknowledges in its SEC filings are "dormant" or inactive: (1) Pingtan Ruiying Fishing
Consultant Co., Ltd.; (2) Pingtan Dingxin Fishing Information Consultant Co., Ltd., (3)
Pingtan Duoying Fishing Information Consultant Co. Ltd. According to SAIC filings,
the three Pingtan Fishing subsidiaries occupy floors 2-4 of No. 65-970, Tudi Hou,
Zhonghu Village, Lancheng Town, Ping Tan County, Fujian Province, PRC
(平潭县岚城乡中湖村土地后65-970号). Plaintiffs' private investigator visited this
address on June 11, 2015 and found that it was an invalid address, as building number 65-
190 at that address simply does not exist! Plaintiffs' private investigator spoke with some
of the local residents in the area, and none of them have ever heard of any of the three
subsidiaries or of Pingtan Marine.
d. Fujian Heyue Marine Fishing Development Co., Ltd.: the registered address
as shown on SAIC filings for Pingtan Marine's newest subsidiary Fujian Heyue Marine
Fishing Development Co., Ltd. ("Fujian Heyue"), incorporated on January 27, 2015, is:
No.1606, 16F, Tower A, Zhongshan Building, No.154 Hudong Road, Gulou District,
Fuzhou City, Fujian Province, PRC
(福州市鼓楼区湖东路154号中山大厦A座16层1606). Plaintiffs' private investigator
visited this address on June 11, 2015, but Fujian Heyue was not located there. Plaintiffs'
private investigator found three businesses at that building's address on the 16th floor (as
"16F" denotes) none of which was Fujian Heyue. Plaintiffs' private investigator asked
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employees of another company located on the 16th floor of this building about Fujian
Heyue, but none of them have ever heard of it.
Pingtan Marine Quickly Moved to Terminate the VIE Arrangement
180. Following the Seeking Alpha Report, Pingtan Marine quickly moved to cover its tracks before the fraud became obvious. In particular, Pingtan Marine was eager to have investors
"forget" about Pingtan Fishing and its VIE contractual relationship with Pingtan Marine, through
WFOE, that was not actually providing Pingtan Marine with any payments.
181. Hence, on January 27, 2015, about six-months after publication of the Seeking Alpha
Report, Pingtan Marine incorporated Fujian Heyue as a wholly-owned subsidiary of WFOE, and
Honghong Zhuo and Zhiyang Lin transferred their equity interest (Xinrong Zhuo's beneficial equity interest) in Pingtan Fishing to Fujian Heyue.
182. Subsequently, on February 9, 2015, Pingtan Marine, through WFOE, terminated the
Contracted Management Agreement with Pingtan Fishing, and then Pingtan Marine assumed direct ownership of Pingtan Fishing.
183. To further lend an air of legitimacy to its business, on February 15, 2015, Pingtan Marine agreed to accept a $65 million from the China Agriculture Industry Development Fund Co. Ltd. in exchange for 8% equity interest in Pingtan Fishing.
184. Pingtan Marine's sudden termination of the VIE structure, and eagerness to accept a government investor, were attempts to cover up the fraud that had been occurring at Pingtan
Marine in 2013 and 2014, during which time Pingtan Fishing never paid Pingtan Marine, through
WFOE any of its profits.
Pingtan Marine Restated Previously-Issued Financial Statements
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185. On November 6, 2014, Pingtan Marine filed a Form 8-K with the SEC announcing that previously-issued financial statements for the years ended December 31, 2012 and December 31,
2013 could no longer be relied upon. In the Form 8-K, Pingtan Marine stated that it would file a restated Form 10-K to correct the errors.
186. On November 10, 2014, Pingtan Marine filed the Restated 2013 10-K. In the Restated
2013 10-K, Pingtan Marine made the following corrections and disclosures, inter alia:
a. Incorrect reflection of certain balances of the shell company before it
changed its name to Pingtan Marine after the reverse merger: The reverse merger
between China Dredging, Merchant Supreme (the parent of the parent of WFOE), and
China Growth Equity Investment Ltd. ("CGEI") that occurred on February 25, 2013
should have been treated as a recapitalization of China Dredging and Merchant Supreme.
(CGEI changed its name to Pingtan Marine as part of the reverse merger.) As such,
Pingtan Marine's consolidated financial statements prior to the reverse merger should
have reflected the assets and liabilities of China Dredging and Merchant Supreme at the
historical cost basis, and CGEI's financials should only have been consolidated with
Pingtan Marine's financial statements after the reverse merger.
b. As a result, for the year ended December 31, 2012, cash was reduced by $3.6
million, total stockholder's equity was reduced by $3.0 million, additional paid-in capital
was reduced by $5.9 million, and net income was increased by $3.0 million.
c. Incorrect accounting treatment of the 20 vessels for which Pingtan Marine
acquired operating rights from Hong Long in consideration for the sale of China
Dredging: Pingtan Marine originally incorrectly classified the 20 vessels as assets and
evaluated them according to their fair market value. The Restated 2013 10-K reclassified
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the Company's operating license rights to the 20 vessels as a capital lease, and evaluated
them according to their historical costs with adjustments for depreciation and
amortization.
d. The reclassification caused the following revisions in the financial statements for
the year ended December 31, 2013: reduction of total assets by $188 million, reduction
of shareholders' equity by $187 million, reduction of liabilities by $1.3 million, and
increased net income by $1.6 million.
e. Additional disclosures concerning the 46 vessels that Pingtan Marine
purchased from Hong Long in 2013: Pingtan Marine clarified that even though it
entered into the agreement with Hong Long to purchase 46 vessels on June 19, 2013,
Pingtan Marine did not receive the vessels until September 2013 due to "additional time
required [to] prepare the vessels for operations." Further, Pingtan Marine disclosed that it
was still in the process of registering the 46 newly-acquired vessels, and as of the date of
the Restated 2013 10-K, it had only been able to complete registration of 9 out of the 46
vessels.
Defendant Yu's Pattern of Serving as Chief Financial Officer at Publicly-Traded Companies that Violate Federal Securities Laws
187. Defendant Yu was the Chief Financial Officer of Lihua International, Inc. from October
2008 until November 2012. Currently, Lihua and its officers and directors are defendants in
Lihua Securities Litigation, a securities fraud class action lawsuit, in this Court for alleged fraudulent financial misconduct some of which occurred while Defendant Yu was Lihua's Chief
Financial Officer. Yu's history of being a top officer at the center of a major securities fraud is
supportive of a strong inference of his scienter as alleged above.
THE TRUTH EMERGES
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188. The truth about Pingtan Marine's operations started to emerge by way of the Seeking
Alpha Report, dated June 12, 2014 and publicly-disseminated on June 13, 2014. The Seeking
Alpha Report described Pingtan Marine's business as "fishy" and pointed specifically to Pingtan
Marine's opaque VIE structure and the suspicious number of related-party transactions at Pingtan
Marine.
189. Concerning the related-party transactions, the Seeking Alpha Report described them as
"huge related-party transactions that seem to transfer assets from shareholders to the CEO's family" and pointed out that "When a company reports over 3 dozen related-party transactions, many involving the CEO's cousins, brothers-in-law, sister, father, niece and numerous companies controlled by the CEO, it makes me wonder whether management is acting strictly in the best interests of shareholders."
190. Regarding Pingtan Marine's VIE structure, the Seeking Alpha Report revealed that "US-
listed shares have little or no real claim on Pingtan Marine's economic activity" because "Pingtan
appears to be structured so that money will never move from the VIE to the NASDAQ-listed
entity."
191. The public release of the Seeking Alpha Report shocked the market and caused Pingtan
Marine's stock to fall by about 25%, or $0.84 per share, to close at $2.47 per share on June 13,
2014 on very heavy volume.
192. On November 6, 2014, Pingtan Marine filed its Form 8-K with the SEC announcing the
Company's plan to restate its financial statements for the years ended December 31, 2012 and
December 31, 2013, as well as provide additional disclosures concerning the transaction in
which Pingtan Marine purchased 46 vessels from Hong Long.
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193. The November 6, 2014 Form 8-K was another corrective disclosure, and caused the
Company's stock to fall $0.10 per share, to close at $1.29 on November 6, 2014.
194. On November 10, 2014, Pingtan Marine filed the Restated 2013 10-K, which stated that
(a) Pingtan Marine's consolidated financial statements prior to the reverse merger should have reflected the assets and liabilities of China Dredging and Merchant Supreme at the historical cost basis, (b) CGEI's (CGEI was the name of Pingtan Marine before the reverse merger) financials should only have been consolidated with Pingtan Marine's financial statements after the reverse merger, (c) disclosed incorrect accounting treatment of the 20 vessels for which Pingtan acquired operating rights from Hong Long in consideration for the sale of China Dredging, and (d) clarified that Pingtan Marine did not receive the 46 vessels that it purchased from Hong Long on
June 19, 2013 until September, 2013, and that it had only registered title in its name of 20% of the newly-acquired vessels.
195. The Restated 2013 10-K caused Pingtan Marine 's stock price to drop further, closing at
$1.19 at the end of trading on November 10, 2014.
196. Therefore, from June 13, 2014, the date that the Seeking Alpha Report was publicly released, to November 10, 2014, when the Restatement was issued, the value of Pingtan Marine stock dropped more than 60%, from $3.12 to $1.19 per share.
CLASS ACTION ALLEGATIONS
197. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil Procedure
23(a) and (b)(3) on behalf of a Class consisting of all persons who purchased the common stock and/or call options of Pingtan Marine during the Class Period and who were damaged thereby.
Excluded from the Class are Defendants herein, the officers and directors of the Company at all
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relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns, and any entity in which Defendants have or had a controlling interest.
198. The members of the Class are so numerous that joinder of all members is impracticable.
Throughout the Class Period, Pingtan Marine's securities were actively traded on the NASDAQ.
While the exact number of Class members is unknown to Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs believe that there are at least hundreds of members in the proposed Class.
199. Members of the Class may be identified from records maintained by Pingtan Marine or its transfer agent and may be notified of the pendency of this action by mail, using a form of notice customarily used in securities class actions.
200. Plaintiffs' claims are typical of the claims of the members of the Class, as all members of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law that is complained of herein.
201. Plaintiffs will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation.
202. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by Defendants' acts as alleged herein;
(b) whether the Company's Proxy Statement and annual and quarterly reports filed with the SEC, as set forth herein, were materially misleading;
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(c) whether public statements made by Defendants to the investing public
during the Class Period omitted material facts about the business, operations and management of
Pingtan Marine; and
(d) to what extent the members of the Class have sustained damages and the
proper measure of damages.
203. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to redress individually the wrongs done to them. There will be no difficulty in the management of this action as a class action.
APPLICABILITY OF PRESUMPTION OF RELIANCE
Affiliated Ute
204. Neither Plaintiffs nor the Class need prove reliance – either individually or as a class
because under the circumstances of this case, which involves a failure to disclose the material
related-party transactions described herein above, positive proof of reliance is not a prerequisite to recovery, pursuant to ruling of the United States Supreme Court in Affiliated Ute Citizens of
Utah v. United States, 406 U.S. 128 (1972). All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered the omitted information important in deciding whether to buy or sell the subject security.
Fraud-on-the-Market Doctrine
205. At all relevant times, the market for Pingtan Marine's common stock was an efficient
market for the following reasons, among others:
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(a) Pingtan Marine's met the requirements for listing on the NASDAQ, a
highly efficient and automated market;
(b) During the Class Period, the Company's shares were liquid and traded
with moderate to heavy volume;
(c) As a regulated issuer, Pingtan Marine filed periodic public reports with the
SEC and was eligible to file, and did file, short form registration statements with the SEC on
Form S-3 during the Class Period;
(d) Pingtan Marine regularly communicated with public investors via
established market communication mechanisms, including through regular disseminations of
press releases on the national circuits of major newswire services and through other wide-
ranging public disclosures, such as communications with the financial press and other similar
reporting services;
(e) Pingtan Marine was followed by several securities analysts employed by
major brokerage firms who wrote reports that were distributed to the sales force and certain
customers of their respective brokerage firms during the Class Period. Each of these reports was
publicly available and entered the public marketplace;
(f) Numerous FINRA member firms were active market-makers in Pingtan
Marine stock at all times during the Class Period; and
(g) Unexpected material news about Pingtan Marine was rapidly reflected and incorporated into the Company's stock price during the Class Period.
206. As a result of the foregoing, the market for Pingtan Marine's common stock promptly
digested current information regarding Pingtan Marine from all publicly available sources and
reflected such information in Pingtan Marine's stock price. Under these circumstances, all
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purchasers of Pingtan Marine's common stock during the Class Period suffered similar injury through their purchase of Pingtan Marine's common stock at artificially inflated prices, and a
presumption of reliance applies.
CLAIMS FOR RELIEF
COUNT I (Against all Defendants for Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder)
207. Plaintiffs repeat and reallege each and every allegation contained above as if fully set
forth herein.
208. This Count is asserted against all of the Defendants and is based upon Section 10(b) of
the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.
209. During the Class Period, the Defendants engaged in a plan, scheme, conspiracy and
course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions,
practices and courses of business which operated as a fraud and deceit upon Plaintiffs and the
other members of the Class; made various untrue statements of material facts and omitted to state
material facts necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading; and employed devices, schemes and artifices to
defraud in connection with the purchase and sale of securities. Such scheme was intended to,
and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiffs and
other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of
Pingtan Marine securities; and (iii) cause Plaintiffs and other members of the Class to purchase
Pingtan Marine securities and options at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, the Defendants took the actions set forth herein.
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210. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the
Defendants made statements identified above in the Proxy Statement, SEC quarterly and annual
reports, and/or press releases that were materially false and misleading in that they failed to
disclose material adverse information and misrepresented the truth about Pingtan Marine's finances and business prospects.
211. As the senior managers and/or directors of Pingtan Marine, the Individual Defendants had knowledge of the details of Pingtan Marine's internal affairs. By virtue of their positions in the Company, and the other facts alleged above, the Defendants had actual knowledge of the materially false and misleading statements and material omissions alleged herein and intended thereby to deceive Plaintiffs and the other members of the Class; or, in the alternative, the
Defendants acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose such facts as would reveal the materially false and misleading nature of the statements made, although such facts were readily available to them. Said acts, statements, and omissions of the Defendants were committed knowingly or with reckless disregard for the truth.
In addition, each of the Defendants knew or recklessly disregarded that material facts were being misrepresented or omitted as described above.
212. Additional information showing that the Defendants acted knowingly or with reckless disregard for the truth is peculiarly within their knowledge and control.
213. The Individual Defendants are liable both directly and indirectly for the wrongs complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the statements of
Pingtan Marine. As officers and/or directors of a publicly-held company, the Individual
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Defendants had a duty to disseminate timely, accurate, and truthful information with respect to
Pingtan Marine's businesses, operations, future financial condition and future prospects.
214. During the Class Period, Pingtan Marine securities were traded on an active and efficient
market. Plaintiffs and the other members of the Class, relying on the materially false and
misleading statements described herein, which the Defendants made, issued or caused to be
disseminated, or relying upon the integrity of the market, purchased shares of Pingtan Marine
securities at prices artificially inflated by the wrongful conduct of the Defendants. Had Plaintiffs and the other members of the Class known the truth, they would not have purchased said securities, or would not have purchased them at the inflated prices that were paid. At the time of the purchases by Plaintiffs and the Class, the true value of Pingtan Marine securities was
substantially lower than the prices paid by Plaintiffs and the other members of the Class. The
market price of Pingtan Marine securities declined sharply upon public disclosure of the facts
alleged herein to the injury of Plaintiffs and Class members.
215. By reason of the conduct alleged herein, the Defendants knowingly or recklessly, directly
or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder.
216. As a direct and proximate result of the wrongful conduct of the Defendants, Plaintiffs and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company's securities during the Class Period.
217. This action was filed within two years of discovery of the fraud and within five years of
Plaintiffs' purchases of securities giving rise to the cause of action.
COUNT II (Against the Individual Defendants for Violation of Section 20(a) of the Exchange Act)
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218. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
219. During the Class Period, the Individual Defendants participated in the operation and
management of Pingtan Marine, and conducted and participated, directly and indirectly, in the
conduct of Pingtan Marine's business affairs. Because of their senior positions, they knew the adverse non-public information about Pingtan Marine's false financial statements.
220. As officers and/or directors of a publicly owned company, the Individual Defendants had
a duty to disseminate accurate and truthful information with respect to Pingtan Marine's financial condition and results of operations, and to promptly correct any public statements issued by
Pingtan Marine which had become materially false or misleading.
221. Because of their positions of control and authority as senior officers, the Individual
Defendants were able to, and did, control the contents of the various reports, press releases and public filings, which Pingtan Marine disseminated in the marketplace during the Class Period concerning Pingtan Marine's results of operations. Throughout the Class Period, the Individual
Defendants exercised their power and authority to cause Pingtan Marine to engage in the wrongful acts complained of herein. The Individual Defendants were therefore "controlling persons" of Pingtan Marine within the meaning of Section 20(a) of the Exchange Act. In this capacity, they participated in the unlawful conduct alleged which artificially inflated the market price of Pingtan Marine securities.
222. Each of the Individual Defendants, therefore, acted as a controlling person of Pingtan
Marine. By reason of their senior management positions and/or being directors of Pingtan
Marine, each of the Individual Defendants had the power to direct the actions of, and exercised the same to cause Pingtan Marine to engage in the unlawful acts and conduct complained of
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herein. Each of the Individual Defendants exercised control over the general operations of
Pingtan Marine and possessed the power to control the specific activities which comprise the primary violations about which Plaintiffs and the other members of the Class complain.
223. By reason of the above conduct, the Individual Defendants are liable pursuant to Section
20(a) of the Exchange Act for the violations committed by Pingtan Marine.
224. This action was filed within two years of discovery of the fraud and within five years of
Plaintiffs' purchases of securities giving rise to the cause of action.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs demand judgment against Defendants as follows:
A. Determining that the instant action may be maintained as a class action under Rule 23 of
the Federal Rules of Civil Procedure, and certifying Plaintiffs as the Class representatives and
designating Plaintiffs' counsel as Class counsel;
B. Awarding damages in favor of Plaintiffs and the other Class members against all
Defendants, jointly and severally, for all damages sustained as a result of Defendants'
wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiffs and the other members of the Class prejudgment and post-judgment
interest, as well as their reasonable attorneys' fees, expert fees and other costs; and
D. Awarding such other and further relief as the Court may deem just and proper.
DEMAND FOR TRIAL BY JURY
Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiffs hereby demand
trial by jury of all issues that may be so tried.
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Dated: July 1, 2015 THE ROSEN LAW FIRM, P.A.
By:___/s/ Yu Shi______Yu Shi (YS-2182) Laurence M. Rosen (LR-5733) Phillip Kim (PK-9384) 275 Madison Avenue, 34th Floor New York, New York 10016 Telephone: (212) 686-1060 Facsimile: (212) 202-3827
Lead Counsel for Plaintiffs and the Class
THE BROWN LAW FIRM, P.C. Timothy W. Brown (TB-1008) 127A Cove Road Oyster Bay Cove, New York 11771 Telephone: (516) 922-5427
Additional Counsel for Plaintiffs and the Class
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CERTIFICATE OF SERVICE
I hereby certify that on this, the 1st day of July, 2015, a true and correct copy of the foregoing document (plus exhibits) was served by CM/ECF to the parties registered to the Court's CM/ECF system.
/s/ Yu Shi
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