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Skeway v. China Natural Gas, Inc.

United States District Court, D. Delaware

June 18, 2014

ROBERT SKEWAY and RAIMUNDO JO-FUNG, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,
v.
CHINA NATURAL GAS, INC., QINAN JI, and DAVID SHE, Defendants.

Seth D. Rigrodsky, Esq., Rigrodsky & Long. P.A., Wilmington, DE. Brian D. Long, Esq., Rigrodsky & Long. P.A., Wilmington, DE. Gina M. Serra, Esq., Rigrodsky & Long. P.A., Wilmington, DE, Liaison Counsel for Plaintiffs.

Laurence M. Rosen, Esq., The Rosen Law Firm, P.A., New York, NY. Phillip Kim, Esq., The Rosen Law Firm, P.A., New York, NY, Lead Counsel for Plaintiffs.

MEMORANDUM OPINION

RICHARD G. ANDREWS, District Judge.

Pending before the Court is Plaintiffs' Motion for Class Certification and Appointment of Class Representatives and Class Counsel (D.I. 88).

Plaintiffs Robert Skeway ("Skeway") and Raimundo Jo-Fung ("Jo-Fung") (collectively "Plaintiffs") brought this action against China Natural Gas, Inc. ("CHNG"), Qinan Ji ("Ji"), and David She ("She") (collectively "Defendants"). (D.I. 55 at 2-5). Plaintiffs' Second Amended Complaint asserts a claim for damages for violations of the Securities Exchange Act of 1934. (D.I. 55 at 2).

Defendant She has not been served, and he therefore has not participated in the litigation. On April 1, 2013, CHNG filed a Notice of Involuntary Petition for Relief under Chapter II of the Bankruptcy Code. (D.I. 70). The bankruptcy petition stayed the case against CHNG. This case continues against Ji.

On September 10, 2013, the Clerk of the Court entered a default against Ji pursuant to Federal Rule of Civil Procedure 55(a) for failure to appear or answer Plaintiffs' Second Amended Complaint. (D.I. 87). Prior to moving for a default judgment against Ji, Plaintiffs seek class certification for all similarly situated investors in CHNG. (D.I. 88 at 1).

BACKGROUND

CHNG is a Delaware corporation with its principal executive offices located in the People's Republic of China. (D.I. 55 at 6).CHNG, through its wholly-owned subsidiaries, engages in the business of distributing compressed natural gas in the People's Republic of China. Id. At the time of the alleged securities law violations, Defendant Ji was the Chief Executive Officer ("CEO"), President, and Principal Executive of CHNG, and Defendant She was the Chief Financial Officer ("CFO") of CHNG. (D.I. 55 at 7).At that time, CHNG's common stock was actively traded on the New York Stock Exchange. (D.I. 55 at 6).

In January 2010, CHNG subsidiaries extended two loans of $9, 858, 240 and $4, 401, 000 to a real estate company to finance a real estate development project (the "Related Party Transactions"). (D.I. 55 at 12-14). Ji's son owned 90% of the real estate company and Ji's nephew owned the other 10% of the company. Id. Ji approved both loans without informing or obtaining the approval of CHNG's board of directors or the CFO. (D.I. 55 at 15). Ji ordered CHNG's internal audit chief to conceal the Related Party Transactions and failed to disclose the true nature of the Related Party Transactions to CHNG's board of directors and its outside auditors. (D.I. 55 at 13-17). Generally Accepted Accounting Principles ("GAAP") and SEC regulations required disclosure of the Related Party Transactions. (D.I. 55 at 18-23; D.I. 89 at 7).

On February 26, 2010, CHNG entered into a bank loan for $17, 676, 000 (the "Bank Loan"). (D.I. 55 at 10; D.I. 89 at 7).The Bank Loan was guaranteed by a CHNG subsidiary and secured by a pledge of the assets of that CHNG subsidiary. (D.I. 55 at 10). Ji signed all of the documents for the Bank Loan, including the guarantee and the pledge of the assets. Id. The $17 million Bank Loan represented more than 33% of CHNG's total liabilities. (D.I. 55 at 11). GAAP and SEC regulations also mandated disclosure of the Bank Loan. (D.I. 55 at 18-23; D.I. 89 at 7). Ji concealed the Bank Loan from CHNG's board of directors, outside auditors, and investors by ensuring it was not reflected in CHNG's financial statements. (D.I. 55 at 12; D.I. 89 at 7).

In June 2010, CHNG admitted that it did not disclose the Bank Loan in its 2009 annual report originally issued on March 10, 2010 or its quarterly report issued on May 7, 2010. (D.I. 55 at 26-27; D.I. 89 at 8).Further, on September 21, 2011, CHNG reported that it had engaged in the undisclosed Related Party Transactions in violation of GAAP and SEC regulations. (D.I. 55 at 36). That same day NASDAQ halted trading of CHNG shares in response to the disclosure of the Related Party Transactions. (D.I. 55 at 37; D.I. 89 at 8). NASDAQ delisted CHNG shares on November 9, 2011. (D.I. 55 at 37; D.I. 89 at 8). CHNG issued four different restatements of its financial reports in order to correct the falsities contained in its financial statements resulting from the concealment of the Bank Loan and the Related Party Transactions. (D.I. 55 at 26-38). With each disclosure, CHNG's share price declined, resulting in losses for investors. (D.I. 89 at 8).

Plaintiffs are investors who purchased CHNG shares. (D.I. 55 at 5). Plaintiffs' Second Amended Complaint, filed on July 27, 2012, asserts claims for damages pursuant to§ 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5) and§ 20(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78t(a)). (D.I. 55 at 5).

On June 20, 2013, Ji was served with a copy of the summons and the Second Amended Complaint at his home and work addresses in the People's Republic of China pursuant to Federal Rule of Civil Procedure 4(f) and the Hague Convention. (D.I 86 at 1; D.I. 83 at 3, 6). On September 9, 2013, pursuant to Federal Rule of Civil Procedure 55(a), Plaintiffs requested an entry of default against Ji for failing to respond in accordance with Federal Rule of Civil Procedure 12. (D.I. 86 at 1).The following day, September 10, 2013, the Clerk of the Court entered a default pursuant to Rule 55(a) against Ji. (D.I. 87). Plaintiffs have not yet moved for default judgment against Ji. (D.I. 89 at 9).

On December 23, 2013, Plaintiffs moved for their appointment as class representatives, the appointment of class counsel, and class certification under Federal Rule of Civil Procedure 23 "on behalf of those persons or entities that purchased or otherwise acquired the public traded common stock of China Natural Gas, Inc. between March 10, 2010 and September 21, 2011, inclusive" (the "Class").[1] (D.I. 88 at 1; D.I. 89 at 6).

DISCUSSION

I. The Effect of the Entry of Default on Plaintiffs' Motion for ...


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