Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 1:11-cv-22556-MGC.
For CHRISTOPHER BROPHY, TARA LEWIS, Plaintiffs - Appellants: Brett M. Amron, Bast Amron, LLP, MIAMI, FL; Ethan David Wohl, Wohl & Fruchter, LLP, NEW YORK, NY; Kristi Stahnke McGregor, Milberg, LLP, NEW YORK, NY.
For ELSA SUNG, Defendant - Appellee: Louise McAlpin, Tracy A. Nichols, Rebecca M. Plasencia, Stephen Patrick Warren, Holland & Knight, LLP, MIAMI, FL.
For FRAZER, LLP, FROST, PLLC, Defendants - Appellees: Scott Allan Cole, Blake S. Sando, Kathryn L. Smith, Cole Scott & Kissane, PA, MIAMI, FL; Louise McAlpin, Holland & Knight, LLP, MIAMI, FL.
For CFO ONCALL, INC., Defendant - Appellee: Louise McAlpin, Holland & Knight, LLP, MIAMI, FL; Mark C. Perry, Attorney at Law, FORT LAUDERDALE, FL.
For SERVICE: Steven J. Brodie, Carlton Fields Jorden Burt, PA, MIAMI, FL; Nancy Joanne Faggianelli, Kevin P. McCoy, Carlton Fields Jorden Burt, PA, TAMPA, FL.
Before TJOFLAT, JILL PRYOR and FAY, Circuit Judges.
JILL PRYOR, Circuit Judge:
This is an interlocutory appeal from an order granting motions to dismiss by two defendants in a securities class action against Jiangbo Pharmaceuticals, Inc. (" Jiangbo" ), its principal officers, and its audit firm. The district court found that plaintiffs Christopher Brophy and Tara Lewis (collectively, the " investors" ) failed to plead sufficiently their allegations of fraud against defendants Elsa Sung, Jiangbo's former Chief Financial Officer (" CFO" ),
and Frazer LLP (" Frazer" ), Jiangbo's external auditor. Applying the heightened pleading standard imposed by the Private Securities Litigation Reform Act (" PSLRA" ), 15 U.S.C. § 78u--4, we affirm.
A. Jiangbo's troubled tenure on NASDAQ
Jiangbo came into existence as a U.S. corporation in 2007 when its Chinese operational arm, Laiyang Jiangbo, executed a reverse merger with a Florida shell company. The day-to-day operations of Jiangbo's pharmaceutical business remained in China. Jiangbo hired Elsa Sung, a Florida resident, to be its CFO in October of 2007. She remained in her position for several years, throughout most of the class period during which the investors allege that Jiangbo engaged in fraud, until she resigned on March 31, 2011. On February 25, 2008, Jiangbo first retained one of Frazer's predecessor entities, Moore Stephens, as its principal accountant. The investors claim that a number of other Chinese corporations created through reverse mergers eventually also retained Moore Stephens's successor entity, Frazer Frost LLP, as their external auditor. Frazer Frost LLP remained Jiangbo's auditor during most of the class period, until approximately the end of March 2011, when Jiangbo replaced it with another firm. Frazer came into being as one of two successor entities when Frazer Frost LLP split on May 1, 2011.
Jiangbo's tenure as a public company was short and fraught with suspicion of misconduct. Shares began trading on NASDAQ on June 8, 2010 and traded on that exchange for just under a year. Only six months after trading began, in December 2010, the Securities and Exchange Commission (" SEC" ) initiated an informal, non-public investigation and requested certain documents from Jiangbo. By February 2011, Jiangbo's internal Audit Committee had launched its own non-public investigation into the SEC's areas of concern and retained Cadwalader, Wickersham & Taft LLP (" Cadwalader" ) and Ernst & Young (" E& Y" ) to assist in that investigation. The company's fortunes unraveled quickly soon thereafter. In or around March 2011, Ms. Sung and Frazer withdrew from their respective roles, and the SEC formalized its investigation, which remained non-public.
Jiangbo made two significant disclosures in late May 2011 that marked the culmination of its decline: it publicly acknowledged the formal SEC investigation for the first time and reported that the company had defaulted on a relatively small principal payment toward debt from its initial financing. Trading ended days later on May 31, 2011, by which time the share price had fallen from a class-period high of $10.49 per share to $3.08. By November 2011, after Jiangbo had moved to another exchange, its shares were trading for just $0.14.
B. The nature of the alleged fraud
As required by securities law governing publicly traded companies, Jiangbo submitted
filings to the SEC that disclosed the company's finances and other material information. The investors' consolidated amended complaint (the " complaint" ) alleges, inter alia, that Ms. Sung and Frazer misrepresented the company's cash balances and failed to disclose a material related-party transaction in statements within or appurtenant to those filings, in violation of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b--5, 17 C.F.R. § 240.10b--5. The alleged related-party transaction involved a $31 million transfer to Shandong Hilead Biotechnology Co., Ltd. (" Hilead" ), a company controlled by Jiangbo chairman Cao Wubo, who is a defendant in the underlying action.
1. Cash balances
During the class period, Jiangbo consistently reported in its filings with the SEC that its cash balances were near or above $100 million. As CFO, Ms. Sung certified to the SEC that Jiangbo had sufficient internal controls and procedures to ensure that the filings were accurate and that no material information was missing. In addition to signing these certifications within Jiangbo's filings, Ms. Sung participated in multiple conference calls with shareholders in which she reiterated cash balances from the filings. During these calls, Ms. ...