Judge Harold Baer
From 2010 to 2012 China’s Longwei reported that 91 percent of its revenue came from gasoline and diesel fuel sales from three storage facilities in Shanxi province. In a putative class suit, investors owning Longwei shares from Sept. 28, 2010, to Jan. 3, 2013, sought relief under §§10(b) and 20(a) of the Securities Exchange Act. In addition to inaccurate filings with Chinese regulators and the SEC, a Chinese newspaper and Chinese broadcaster corroborated GeoInvesting.com’s disclosure that Longwei’s reported sales were vastly exaggerated and that two of its facilities were nonfunctional. Other than a control person liability claim against the principal audit partner Anderson, the court denied dismissal of plaintiffs’ claims. As to chief financial officer Toups, and audit committee members DeCiccio and Cole, the court found scienter established. Further plaintiffs successfully alleged scienter by auditors Child VanWagoner & Bradshaw and Anderson Bradshaw by pleading a combination of “red flags” that should have raised their suspicion, the enormous scale of Longwei’s fraud, the auditors’ failure to follow generally accepted auditing standards, and the fact that they had been rebuked in the past by the Public Company Accounting Oversight Board.
