UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
THOMAS ROSENBERGER, on behalf of Case No
„
himself and all others similarly situated,
//if/
CLASS ACTIONPlaintiff,
vs. CLASS ACTION COMPLAINT FORVIOLATIONS OF FEDERAL
PUDA COAL, INC., LIPING ZHU, QIONG SECURITIES LAWSWU, and MING ZHAO,
Defendants. JURY TRIAL DEMANDED
Thomas Rosenberger ("Plaintiff'), by his attorneys, on behalf of himself and all others
similarly situated, alleges the following based upon the investigation of plaintiff's counsel,
except as to allegations specifically pertaining to plaintiff, which are based on personal
knowledge. The investigation of counsel included, among other things, a review of Puda Coal
Inc's ("Puda Coal" or the "Company") public filings with the United States Securities and
Exchange Commission ("SEC"), press releases issued by the Company, media, and news reports
about the Company, and other publicly available data, including, but not limited to, publicly
available trading data relating to the price and trading volume of Puda Coal common stock and
analyst reports.
1. This action is a securities action brought under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder
by the SEC, and under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act") by
Plaintiff on behalf of a class of all persons and entities who purchased the common stock of Puda
Coal between September 15, 2009 and April 8, 2011, inclusive (the "Class Period") to recover
damages caused to the Class by defendants' violations of the securities laws.
2. The Company describes itself as a supplier of premium high grade cleaned coking
coal used to produce coke for steel manufacturing in the People's Republic of China (the
"PRC"). In the Company's most recent annual report filed on Form 10-K for the year ending
December 31, 2010 ("2010 10-K"), the Company states that within its core Coal Washing
Business, Puda Coal's operations are "conducted exclusively by an entity in China, Shanxi Puda
Coal group Co., Ltd ("Shanxi Coal").
3. Throughout the Class Period, the Company reported revenues and earnings, but
failed to disclose that there were improper transfers of core Company assets, most notably the
transfer of ownership of Shanxi Coal, by its Chairman of the Board, Mr. Ming Zhao ("Zhao"), to
himself such that Puda Coal's assets and value was in reality materially less than disclosed to its
investors.
4. During the Class Period, the Company's stock materially increased based on the
Defendants' positive statements about the Company's prospects, reaching a 52-week high of
$16.97 per share on December 2, 2010. The Company took advantage of the artificially inflated
stock price by selling 9,000,000 shares of common stock on December 8, 2010 at the artificially
inflated price of $12 per share.
5. On April 8, 2011, the first disclosures of wrongful transfers of ownership of
Company assets to Chairman Zhao emerged in a publicly circulated news article entitled "Puda
Coal Chairman Secretly Sold Half The Company and Pledged The Other Half To Chinese PE
Investors". Following the circulation of this article, on April 8, 2011, Puda Coal announced in a
press release that it was currently reviewing the allegations regarding improper share transactions
by Chairman Zhao.
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6. The material facts adversely affecting the Company were not fully disclosed until
April 11, 2011, when, before the opening of trading, Puda Coal issued a press release that stated,
in part, the following:
Puda Coal Commences Investigation
TAIYUAN, SHANXI PROVINCE, China, April 11, 2011 — Puda Coal, Inc.(NYSE AMEX: PUDA) ("Puda Coal" or the "Company) today announced that itsBoard of Directors has unanimously ratified the Audit Committee's decision tolaunch a full investigation into the allegations raised in a recent article allegingvarious unauthorized transactions in the shares of a subsidiary company, ShanxiCoal. The Audit Committee has retained professionals in the United States andChina to assist it in its investigation. The full board, including Mr. Ming Zhao, theChairman of Puda Coal, has agreed to cooperate in the investigation.
Although the investigation is in its preliminary stages, evidence supports theallegation that there were transfers by Mr. Zhao in subsidiary ownership that wereinconsistent with disclosure made by the Company in its public securities filings.Mr. Zhao has agreed to a voluntarily leave of absence as Chairman of the Boardof the Company until the investigation is complete. The New York StockExchange has halted trading in the Company's stock.
7. Since the April 11, 2011 disclosure, Puda Coal's stock continues to be halted by
the New York Stock Exchange rendering it effectively worthless to its shareholders who are
unable to sell the Company's stock.
JURISDICTION AND VENUE
8. The claims asserted arise under Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder and under Sections 11 and 15 of the Securities Act.
Jurisdiction is conferred by Section 27 of the Exchange Act and Section 22 of the Securities Act.
Venue is proper as defendant Puda Coal's common stock trades on the NYSE Amex in this
District and the underwriters of Puda Coal's December 8, 2010 secondary common stock
offering, Macquarie Capital (USA) Inc. and Brean Murray, Carret & Co., LLC, have offices in
this District.
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III. THE PARTIES
9. Plaintiff purchased Puda Coal common stock as detailed in the certification
attached hereto and was damaged thereby.
10. Defendant Puda Coal is a Delaware corporation and has its headquarters in
Taiyuan, Shanxi Province, China at 426 Xuefu Street, Taiyuan, Shanxi Province, The People's
Republic of China.
11. Defendant Ming Zhao ("Zhao") is a co-founder of the Company and has been the
Chairman of the Board of Directors at all relevant times. Pursuant to the Company's April 11,
2011 press release, defendant Zhao is currently taking a leave of absence until Puda Coal's
investigation is complete. Among other things, Zhao signed the Company's annual report filed
on March 31, 2010 with the Securities and Exchange Commission ("SEC") on Form 10-K for the
year ended December 31, 2009 ("2009 10-K") and annual report filed on March 16, 2011 with
the SEC for the year ended December 31, 2010 ("2010 10-K").
12. Defendant Liping Zhu ("Zhu") has been the President and Chief Executive
Officer at all relevant times. Among other things, Zhu signed the Company's 2009 10-K, 2010
10-K, quarterly report for the third quarter ended September 30, 2009 filed on November 13,
2009 on Form 10-Q ("Q3 2009 10-Q"), quarterly report for the first quarter ended March 31,
2010 filed on May 17, 2010 on Form 10-Q ("Q1 2010 10-Q"), quarterly report for the second
quarter ended June 30, 2010 filed on August 16, 2010 on Form 10-Q ("Q2 2010 10-Q"), and
quarterly report for the third quarter ended September 30, 2010 filed on November 15, 2010 on
Form 10-Q ("Q3 2010 10-Q").
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13. Defendant Qiong Wu ("Wu") has been the Company's Chief Financial Officer at
all relevant times. Among other things, Wu signed the Company's 2009 10-K and 2010 10-K
during the Class Period.
14. The individuals named as defendants in 'Ill 11 - 13 are referred to herein as the
"Individual Defendants". The Individual Defendants, because of their positions with the
Company, possessed the power and authority to control the contents of Puda Coal's press
releases and presentations to securities analysts, money and portfolio managers and institutional
investors, i.e., the market. Each defendant was provided with copies of the Company's press
releases alleged herein to be misleading prior to or shortly after their issuance and had the ability
and opportunity to prevent their issuance or cause them to be corrected. Because of their
positions and access to material non-public information available to them but not to the public,
each of these defendants knew that the adverse facts specified herein had not been disclosed to
and were being concealed from the public and that the positive representations which were being
made were then materially false and misleading.
IV. CLASS ACTION ALLEGATIONS
15. Plaintiff brings this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of a class of all persons and entities who purchased the
publicly traded common stock of Puda Coal between September 15, 2009 and April 10, 2011,
inclusive, including persons or entities who purchased Puda Coal's common stock pursuant
and/or traceable to the Company's materially false and misleading registration statement and
prospectus supplement dated December 8, 2010 (the "Class").
16. The members of the Class are so numerous that joinder of all members is
impracticable. While the exact number of Class members is unknown to plaintiff at the present
5
time and can only be ascertained through appropriate discovery, plaintiff believes that there are
hundreds of members of the Class located throughout the United States. As of March 7, 2011,
Puda Coal had over 30 million shares of common stock outstanding.
17. Plaintiff's claims are typical of the claims of the members of the Class. Plaintiff
and all members of the Class have sustained damages because of defendants' unlawful activities
alleged herein. Plaintiff has retained counsel competent and experienced in class and securities
litigation and intends to pursue this action vigorously. The interests of the Class will be fairly
and adequately protected by plaintiff. Plaintiff has no interests which are contrary to or in
conflict with those of the Class that plaintiff seeks to represent.
18. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy. Plaintiff knows of no difficulty to be encountered in the
management of this action that would preclude its maintenance as a class action.
19. 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 and
omissions as alleged herein;
(b) whether defendants misstated and/or omitted to state material facts in their public
statements and filings with the SEC;
(c) whether defendants participated directly or indirectly in the course of conduct
complained of herein; and
(d) whether the members of the Class have sustained damages and the proper
measure of such damages.
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V. FALSE AND MISLEADING STATEMENTS
20. On September 15, 2009, the Company issued a press release concerning its
application for listing on the NYSE Amex LLC ("NYSE Amex") in which it stated, in part as
follows:
On September 15, 2009, the Board of Directors of Puda Coal, Inc. (the"Company") amended and restated the Company's Audit Committee Charter tobe in compliance with the requirements of the NYSE Amex LLC (the"Exchange") in connection with its application for listing on the Exchange. TheAmended and Restated Audit Committee Charter is attached hereto as Exhibit 3.1and incorporated herein by reference. . . .
On September 15, 2009, the Board of the Company also adopted a Code ofBusiness Conduct and Ethics in order to be in compliance with the requirementsof the Exchange. The Code is attached hereto as Exhibit 3.2 and incorporatedherein by reference.
21. The Puda Coal Code of Business Conduct and Ethics attached to the September
15, 2009 press release states, in pertinent part, that
Conflicts of Interest
The Company recognizes and respects the right of its directors, officers andemployees to engage in outside activities which they may deem proper anddesirable, provided that these activities do not impair or interfere with theperformance of their duties to the Company or their ability to act in theCompany's best interests. In most, if not all, cases this will mean that ourdirectors, officers and employees must avoid situations that present a potential oractual conflict between their personal interests and the Company's interests.
A "conflict of interest" occurs when a director's, officer's or employee's personalinterest interferes with the Company's interests. Conflicts of interest may arise inmany situations. For example, conflicts of interest can arise when a director,officer or employee takes an action or has an outside interest, responsibility orobligation that may make it difficult for him or her to perform the responsibilitiesof his or her position objectively and/or effectively in the Company's bestinterests. Conflicts of interest may also occur when a director, officer oremployee or his or her immediate family member receives some personal benefit(whether improper or not) as a result of the director's, officer's or employee'sposition with the Company. Each individual's situation is different and inevaluating his or her own situation, a director, officer or employee will have toconsider many factors.
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Any transaction or relationship that reasonably could be expected to give rise to aconflict of interest should be reported promptly to the Compliance Officer. TheCompliance Officer may notify the Board of Directors or a committee thereof ashe or she deems appropriate. Actual or potential conflicts of interest involving adirector or officer should be disclosed directly to the Chairman of the Board ofDirectors.
Compliance with Laws, Rules and Regulations
The Company seeks to conduct its business in compliance with both the letter andthe spirit of applicable laws, rules and regulations. No director, officer oremployee shall engage in any unlawful activity in conducting the Company'sbusiness or in performing his or her day-to-day company duties, nor shall anydirector, officer or employee instruct others to do so.
Protection and Proper Use of the Company's Assets
Loss, theft and misuse of the Company's assets has a direct impact on theCompany's business and its profitability. Employees, officers and directors areexpected to protect the Company's assets that are entrusted to them and to protectthe Company's assets in general. Employees, officers and directors are alsoexpected to take steps to ensure that the Company's assets are used only forlegitimate business purposes. [Emphasis in original].
22. On September 18, 2009, the Company issued a press release announcing that
Puda Coal's common stock was approved to begin trading on the NYSE Amex on September 22,
2009:
Puda Coal expects to begin trading on NYSE Amex on Tuesday, September 22,2009, until which time its shares will continue to trade on the Over-The-Counter(OTC) Bulletin Board. . . .
"We are very pleased to soon begin our next phase as a public company bymoving our stock listing from OTC Bulletin Board to NYSE Amex," said Mr.Lining Zhu, President and CEO of Puda Coal, Inc. "We are honored to join theNYSE group of companies, and this milestone represents our continuous efforts toraise our profile within the investment community, improve our stock's liquidity,expand our transparency and enhance our corporate governance."
23. On November 13, 2009, the Company issued a press release concerning its
financial results for the third quarter ended September 30, 2009. Among other things, the
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Company reported net revenue of $56.1 million, gross profit of $5.4 million, operating income of
$4.0 million and a net loss of $0.6 million, or $0.04 per fully diluted share for the third quarter of
2009. Additionally, the Company made the following statements regarding Shanxi Coal:
Recent Events
On September 30, 2009, the Shanxi provincial government appointed Puda Coal'ssubsidiary Shanxi Puda Coal Group Co., Ltd as a consolidator of eight coal minesin Yucheng City, Pinglu County, The Company has commenced the technicalgeological prospecting process for the targeted coal reserves and the Companywill also perform a comprehensive financial analysis of the project and thendetermine the most efficient plan to develop and construct the targetedconsolidated coal mines. The eight mines will be consolidated into five,expanding the total area of the coal mines by 94.5% to 35.6 square kilometers,increasing coal reserves by 232.8% to 163.9 million metric tons and improvingcoal mine production capacity by 118.2% to 3.6 million metric tons.
24. On November 13, 2009, Defendants caused the Company to file its Q3 2009 10-Q
for the quarter ended September 30, 2009 with the SEC. The Q3 2009 10-Q, which was signed
by Defendant Zhu, stated, in part, the following:
As of September 30, 2009, the percentages owned by Mr. Ming Zhao and Mr.Yao Zhao in the Group companies are as follows:
Puda Coal, Inc.: Mr. Ming Zhao (approximately 49%); Mr. Yao Zhao(approximately 12%) held directly.
Puda Investment Holding Limited: Mr. Ming Zhao (approximately 49%);Mr. Yao Zhao (approximately 12%) held indirectly through Puda.
Shanxi Putai Resources Limited: Mr. Ming Zhao (approximately 49%);Mr. Yao Zhao (approximately 12%) held indirectly through Puda andBVI.
Shanxi Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%); Mr. Yao Zhao(2%) held directly, Mr. Ming Zhao (approximately 44%); Mr. Yao Zhao(approximately 11%) held indirectly through Puda, BVI and Putai.
After the above reorganization and as of September 30, 2009, the organizationalstructure of the Group is as follows:
9
Puda Coal, Inc."Puda" 100%
Puda Investment Ming Zhao (8%)Holding Limited and
"BVI" Yao Zhao (2%) 100%
Shanxi Putai Resources Limited 90% Shanxi Puda Coal Group Co., Ltd."Putai" "Shanxi Coal"
25. The Q3 2009 10-Q also includes the following statement:
The accompanying unaudited consolidated financial statements as of September30, 2009 and for the three and nine month periods ended September 30, 2009 and2008 have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form 10-Q and of Regulation S-X.
26. The Q3 2009 10-Q includes certifications pursuant to the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley") Section 302, signed by Defendants Zhu and Wu, which represented as
follows:
1. I have reviewed this Quarterly Report on Form 10-Q of Puda Coal, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:
a) Designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those
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entities, particularly during the period in which this report is beingprepared;
b) Designed such internal control over financial reporting, or causedsuch internal control over financial reporting to be designated under oursupervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controlsand procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internalcontrol over financial reporting that occurred during the registrant's mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting;and
5. The registrant's other certifying officer and I have disclosed, based on our mostrecent evaluation of internal control over financial reporting, to the registrant'sauditors and the audit committee of registrant's board of directors (or personsperforming the equivalent functions):
a) All significant deficiencies and material weaknesses in the designor operation of internal controls over financial reporting which arereasonably likely to adversely affect the registrant's ability to record,process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant's internalcontrol over financial reporting.
27. On February 16, 2010, the Company filed a Prospectus Supplement with the SEC
on Form 424(b)(2) in connection with the public offering of 3,284,000 shares of Puda Coal
common stock including the underwriters option to purchase additional shares. The offering was
priced at $4.75 per share and raised net proceeds of about $14.6 million. The Prospectus
Supplement, among other things, incorporates by reference the Q3 2009 10-Q. The Prospectus
Supplement, which was issued pursuant to a Registration Statement filed with the SEC on Form
11
S-3 dated February 12, 2010 signed by Defendants Zhu, Wu, and Zhao, among others, stated, in
part, the following:
Puda Coal, Inc. ("Puda" or the "Company") is a supplier of high-grademetallurgical coking coal to the industrial sector of the People's Republic ofChina. Its processed coking coal is primarily purchased by coke and steelproducers for the purpose of making the coke required for the steel manufacturingprocess. Its operations are conducted exclusively by an entity in China, ShanxiPuda Coal Group Col., Ltd. ("Shanxi Coal"), which it controls through 90%indirect equity ownership.
28. On March 24, 2010, the Company issued a press release concerning its financial
results for the fourth quarter and year ended December 31, 2009. Among other things, the
Company reported revenue of $60.2 million, gross profit of $5.3 million, operating income of
$4.9 million and net income of $2.3 million, or $0.14 per fully diluted share for the fourth
quarter.
29. On March 31, 2010, Defendants caused the Company to file its 2009 10-K for the
year ended December 31, 2009 with the SEC. The 2009 10-K, which was signed by Defendants
Zhu, Wu, and Zhao, among others, included certifications pursuant to the Sarbanes-Oxley
Section 302 of Defendants Zhu and Wu substantially the same as above in 1- 26, and stated, in
part, the following:
We are a supplier of high-grade metallurgical coking coal to the industrial sectorin the People's Republic of China (the "PRC" or "China"). Our processed cokingcoal is primarily purchased by coke and steel producers for the purpose of makingthe coke required for the steel manufacturing process. Our operations areconducted exclusively by an entity in China, Shanxi Puda Coal Group Co., Ltd("Shanxi Coal"), which we control through 90% indirect equity ownership.
30. The 2009 10-K also includes the following statement:
The discussion and analysis of Puda's financial condition and results ofoperations is based upon Puda's consolidated financial statements which havebeen prepared in accordance with accounting principles generally accepted in theUnited States.
12
31. On May 13, 2010, the Company issued a press release concerning its financial
results for the first quarter ended March 31, 2010. Among other things, the Company reported
revenue of $62 million, gross profit of $10.3 million, operating income of $9.1 million and net
income of $5.4 million, or $0.31 per fully diluted share for the first quarter. Additionally, the
Company made the following statements regarding Shanxi Coal:
As part of the Shanxi provincial government's policies to consolidate andredevelop the coal mining industry, new guidelines were enacted by thegovernment in February 2010 to require the registered capital of coal mineconsolidators to be at least RMB200 million (US$29.3 million). The currentregistered capital of Shanxi Coal is RMB22.5 million (about US$3.3million). Since Shanxi Coal has been previously approved as an acquirer andconsolidator of two coal mine projects, Shanxi Coal plans to increase itsregistered capital to RMB500 million (US$73.2 million), 90% of which (i.e.,RMB430 million) will be funded by Shanxi Coal's 90% shareholder, Putai, and10% of which (i.e., RMB48 million) will be funded by Shanxi Coal's 10%shareholder, Mr. Ming Zhao and his brother, Mr. Yao Zhao. The loan will be usedto pay for the increase of the registered capital of Putai's 90% subsidiary, ShanxiPuda Coal Group Co., Ltd. ("Shanxi Coal").
32. On May 17, 2010, Defendants caused the Company to file its Q1 2010 10-Q for
the first quarter ended March 31, 2010 with the SEC. The Ql 2010 10-Q, which was signed by
Defendant Zhu, included certifications pursuant to the Sarbanes-Oxley Section 302 substantially
the same as above in 1126 of Defendants Zhu and Wu, and stated, in part, the following:
As of March 31, 2010, the percentages owned by Mr. Ming Zhao and Mr. YaoZhao in the companies are as follows:
Puda Coal, Inc.: Mr. Ming Zhao (approximately 39%); Mr. Yao Zhao(approximately 10%) held directly.
Puda Investment Holding Limited: Mr. Ming Zhao (approximately 39%);Mr. Yao Zhao (approximately 10%) held indirectly through Puda.
Shanxi Putai Resources Limited: Mr. Ming Zhao (approximately 39%);Mr. Yao Zhao (approximately 10%) held indirectly through Puda andBVI.
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Shanxi Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%); Mr. Yao Zhao(2%) held directly, Mr. Ming Zhao (approximately 35%); Mr. Yao Zhao(approximately 9%) held indirectly through Puda, BVI and Putai.
After the above reorganization and as of March 31, 2010, the organizationalstructure is as follows:
Puda Coal, Inc."Puda" 100%
Puda Investment Ming Zhao (8%)Holding Limited and
"BVI" Yao Zhao (2%) 100%
Shanxi Putai Resources Limited 90% Shanxi Puda Coal Group Co., Ltd."Putai" "Shanxi Coal"
33. The Q1 2010 10-Q also includes the following statement:
The accompanying unaudited consolidated financial statements as ofMarch 31, 2010 and 2009 have been prepared in accordance withgenerally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and of Regulation S-X.
34. On August 16, 2010, the Company issued a press release concerning its financial
results for the second quarter ended June 30, 2010. Among other things, the Company reported
revenue of $82.3 million, gross profit of $12.1 million, operating income of $10.4 million and
adjusted net income of $7.3 million, or $0.36 per fully diluted share for the second quarter.
35. On August 16, 2010, Defendants caused the Company to file its Q2 2010 10-Q for
the second quarter ended June 30, 2010 with the SEC. The Q2 2010 10-Q, which was signed by
Defendant Zhu, included certifications pursuant to the Sarbanes-Oxley Section 302 substantially
the same as above in If 26 of Defendants Zhu and Wu, and stated, in part, the following:
As of June 30, 2010, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao in thecompanies are as follows:
Puda Coal, Inc.: Mr. Ming Zhao (approximately 37%); Mr. Yao Zhao(approximately 9%) held directly.
14
Puda Investment Holding Limited: Mr. Ming Zhao (approximately 37%);Mr. Yao Zhao (approximately 9%) held indirectly through Puda.
Shanxi Putai Resources Limited: Mr. Ming Zhao (approximately 37%);Mr. Yao Zhao (approximately 9%) held indirectly through Puda and BVI.
Shanxi Puda Coal Group Co., Ltd.: Mr. Ming Zhao (10%) held directly,Mr. Ming Zhao (approximately 33%) held indirectly through Puda, BVIand Putai.
After the above reorganization and as of June 30, 2010, the organizationalstructure is as follows:
Rada Coat. Inc.'-Pucla"
1012,,Pu1a D.r.-er,t2nentHo:din!? Ltrattecl Mr Mins' Zhao, (10%)
3 Vi 100'0
p utai P.ource Shanxi Puda Group Cot,Limited tj
"Stianxi C: oar
36. The Q2 2010 10-Q also includes the following statement:
The accompanying unaudited consolidated financial statements as of June30, 2010 and 2009 have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and of Regulation S-X.
37. On November 15, 2010, the Company issued a press release concerning its
financial results for the third quarter ended September 30, 2010. Among other things, the
Company reported revenue of $90 million, gross profit of $9.6 million, operating income of $7.9
million and adjusted net income of $5.0 million, or $0.25 per diluted share for the second
quarter.
38. On November 15, 2010, Defendants caused the Company to file its Q3 2010 10-Q
for the third quarter ended June 30, 2010 with the SEC. The Q3 2010 10-Q, which was signed
by Defendant Zhu, included certifications pursuant to the Sarbanes-Oxley Section 302
15
substantially the same as above in 26 of Defendants Zhu and Wu, and stated, in part, the
following:
As of September 30, 2010, the percentages owned by Mr. Ming Zhao and Mr.Yao Zhao in the companies are as follows:
Puda Coal, Inc.: Mr. Ming Zhao (approximately 37%); Mr. Yao Zhao(approximately 9%) held directly.
Puda Investment Holding Limited: Mr. Ming Zhao (approximately 37%);Mr. Yao Zhao (approximately 9%) held indirectly through Puda.
Shanxi Putai Resources Limited: Mr. Ming Zhao (approximately 37%);Mr. Yao Zhao (approximately 9%) held indirectly through Puda and BVI.
Shanxi Puda Coal Group Co., Ltd.: Mr. Ming Zhao (10%) held directly,Mr. Ming Zhao (approximately 33%) held indirectly through Puda, BVIand Putai.
After the above reorganization and as of September 30, 2010, the organizationalstructure is as follows:
Puda Coat. Inc."P.JcIa.
Pu::aT united lr. Mi:rs, Zhao (1 i))VI : 1::);)c
?:tai Resources Shauxi Pucia Coal Group Co,Ltd.
"Putai C:oar
39. The Q3 2010 10-Q also includes the following statement:
The accompanying unaudited consolidated financial statements as of September30, 2010 and for the three and none month periods ended September 30, 2010 and2009 have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form 10-Q and of Regulation S-X.
40. On December 8, 2010, the Company filed a Prospectus Supplement with the SEC
on Form 424(b)(5) in connection with the public offering of 9,000,000 shares of Puda Coal
16
common stock, including the underwriters option to purchase additional shares. The offering
was priced at $12 per share raising net proceeds of about $101.5 million. The Prospectus
Supplement incorporates by reference the 2009 10-K, the Q1 2010 10-Q, the Q2 2010 10-Q and
certain other documents. The Prospectus Supplement, which was issued pursuant to a
Registration Statement filed with the SEC on Form S-3 dated October 14, 2010 signed by
Defendants Zhu, Wu, and Zhao, among others, states, in part, the following:
Our operations are conducted exclusively in China through our 90% ownedsubsidiary, Shanxi Puda Coal Group Co., Ltd., or Shanxi Coal.
* * *
Capital Increase of Shanxi Coal
As part of the Shanxi provincial government's policies to consolidate andredevelop the coal mining industry, new guidelines were adopted by thegovernment in February 2010 to require the registered capital of coal mineconsolidators to be at least RMB200 million (US$29.3 million). The newrequirement was adopted to ensure that coal mine consolidators have sufficientfinancial strength to consolidate coal mines efficiently. The registered capital ofShanxi Coal at that time was RMB22.5 million (about US$2.7 million). AsShanxi Coal had been approved as an acquirer and consolidator of certain coalmine projects, Shanxi Coal increased its registered capital to RMB500 million(US$73.2 million) as required by the government's policies, 90% of which wouldbe funded by Shanxi Coal's 90% shareholder, Shanxi Putai Resources LimitedCo., or Putai, and 10% of which would be funded by Shanxi Coal's 10%shareholder, Mr. Ming Zhao.
41. On March 14, 2011, the Company issued a press release concerning its financial
results for the fourth quarter and year ended December 31, 2010. Among other things, the
Company reported net revenue of $90.5 million, gross profit of $9.2 million, operating income of
$6.7 million and a net income of $4.4 million, or $0.18 per fully diluted share for the fourth
quarter.
42. On March 16, 2011, Defendants caused the Company to file its 2010 10-K for the
year ended December 31, 2010 with the SEC. The 2010 10-K, which was signed by Defendants
17
Zhu, Wu, and Zhao, among others, included certifications pursuant to the Sarbanes-Oxley
Section 302 of Defendants Zhu and Wu substantially the same as above in If 26, and stated, in
part, the following:
We are a supplier of premium high grade cleaned coking coal used to producecoke for steel manufacturing in the People's Republic of China (the "PRC" or"China"). We have also been appointed by government as a designated acquirerand consolidator of two coal mine consolidation projects, "Pinglu Project" and"Jianhe Project". Our headquarters is located in Taiyuan, Shanxi Province, China.
Coal Washing Business:
Our processed coking coal is primarily purchased by coke and steel producers forthe purpose of making the coke required for the steel manufacturing process. Ouroperations are conducted exclusively by an entity in China, Shanxi Puda CoalGroup Co., Ltd ("Shanxi Coal"), which we control through 90% indirect equityownership.
43. The 2010 10-K also includes the following statement:
The discussion and analysis of Puda's financial condition and results ofoperations is based upon Puda's consolidated financial statements which havebeen prepared in accordance with accounting principles generally accepted in theUnited States.
44. The statements referenced in 20 - 43 were materially false and/or misleading
because Defendants failed to disclose that (1) Puda Coal's ownership interest in certain key
Company assets, most notably the Company's key operating subsidiary, Shanxi Coal, had been
wrongfully transferred to defendant Zhao, (2) as a result of the wrongful transfer of Puda Coal's
ownership interest in Shanxi Coal, its core operating subsidiary, Puda Coal's assets and
corresponding value was materially diminished, (3) Puda Coal's operating results and financial
condition were materially misstated, (4) the Company had material deficiencies in its internal
controls over its financial reporting, (5) the Company's financial statements were materially false
and misleading and not presented in accordance with GAAP, and (6) Defendants had no
reasonable basis for their positive statements about Puda Coal's business and financial results.
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VI. THE TRUTH BEGINS TO EMERGE
45. On April 8, 2011, before the opening of trading, a publicly circulated news article
entitled "Puda Coal Chairman Secretly Sold Half The Company and Pledged The Other Half To
Chinese PE Investors" reported as follows:
Shanghai, China — Chinese RIO Puda Coal, Inc (NYSE AMEX: PUDA)Chairman Ming Zhao transferred the ownership of PUDA's sole Chineseoperating entity, Shanxi Puda Coal Group Co., Ltd ("Shanxi Coal"), to himself in2009 without shareholder approval according to official government filings.
Then, in 2010 Zhao sold 49% and pledged the other 51% of Shanxi Coal to CITICTrust Co., Ltd ("CITIC"), a Chinese private equity fund, for RMB245 million($37.1 million). Zhao then recklessly leveraged Shanxi Coal by borrowingRMB3.5 billion ($530.3 million) from CITIC at an incredibly high 14.5% interestrate (including fees) to finance the development of its coal mines.
PUDA shareholders are completely unaware of these transactions that decimatethe value of its U.S. listed shares.
* * *
On 9/3/09, Yao Zhao (Ming Zhao's brother and the legal representative ofPUDA's WFOE, Shanxi Putai Resources Limited, ("Putai") illegally authorizedPutai to transfer 90% of Shanxi Coal to Ming Zhao, adding to the 8% Ming Zhaoalready held. Additionally, Yao Zhao divided his own 2% of Shanxi Coalbetween Ming Zhao and Wei Zhang. An official copy of the "Notification ofShare Registry Change" can be downloaded here, including a partial translation.The transfers resulted in Ming Zhao owning 99% of Shanxi Coal, leaving U.S.investors with nothing. Incredibly, PUDA's auditor, Moore Stephens, failed tocatch this theft of an entire company that is clearly documented ingovernment ownership filings that any lawyer can obtain direct from thesource. [Emphasis in original.]
After stealing Shanxi Coal from U.S investors, Ming Zhao began looking fordomestic investors to fund his aggressive expansion plans. At the same time,Zhao brazenly continued trying to raise money for PUDA in the U.S., despite thefact PUDA (without Shanxi Coal) was just a shell company. As U.S. capitalmarkets recovered, on 2/19/10 PUDA sold 3.284 million shares in a publicoffering underwritten by Brean Murray and Newbridge Securities raising $14.5million (8-K here), without disclosing to the investors that PUDA no longerowned Shanxi Coal, its sole operating subsidiary in China. Why did BreanMurray fail to perform any basic legal due diligence on the real ownership ofShanxi Coal.
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* * *
On 12/16/10 PUDA again tapped the U.S. capital markets, this time for $101.5million by selling 7.85 million shares at $12 per share in a public offeringunderwritten by Macquarie Capital and brean Murray (8-K here). PUDA againfailed to disclose Chairman Zhao's 9/3/09 illegal transfer of 99% of Shanxi Coalto himself, nor Zhao's illegal sale of 49% of Shanxi Coal to CITIC for $37.1million, nor the $530 million 14.5% loan from CITIC secured by the pledge of theremaining 51% of Shanxi Col shares. Why did Macquarie Capital also fail toperform basic legal due diligence on the real ownership of Shanxi Coal, half ofwhich had been already sold to CITIC? Furthermore, at $12 per share, Macquarieinvestors paid over six times the $1.91 valuation CITIC paid for 49% of ShanxiCoal in July. . . .
46. On April 8, 2011, Puda Coal did not deny the allegations, but responded to the
publicly circulated allegations in a press release that stated, in part, as follows:
TAIYUAN, China, April 8, 2011 /PRNewswire-Asia-FirstCall/ Puda Coal,Inc. (NYSE AMEX: PUDA) ("Puda Coal" or the "Company"), a supplier of highgrade metallurgical coking coal used to produce coke for steel manufacturing inChina and consolidator of nine coal mines in Pinglu County Yuncheng Cityknown as Pinglu Project and four coking coal mines in Huozhou County LinfenCity known as Jianhe Project in Shanxi Province, today announced that it iscurrently reviewing the allegations regarding improper share transactions by theCompany's Chairman, Mr. Ming Zhao, which were published on an investorwebsite on April 8, 2011. The Company intends to provide a formal response tothe allegations as soon as practical.
47. On April 8, 2011 shares of Puda Coal declined by $3.10 per share, more than
34%, to close at $6 per share on heavier than usual volume.
48. On April 11, 2011, before the market opened, Puda Coal issued a press release as
set forth in 6 above announcing the commencement of an investigation into "the allegations
raised in a recent article alleging various unauthorized transactions in the shares of a subsidiary
company, Shanxi Coal," admitting that it had already found evidence of transfers by Defendant
Zhao inconsistent with its public securities filings, and indicating that Defendant Zhao was
taking a leave of absence immediately as Chairman of the Board of the Company.
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49. As noted in the Company's April 11, 2011 press release, the Company's stock
was halted from trading prior to the time the market opened and it has continued to be halted
since April 11, 2011.
VII. ADDITIONAL SCIENTER ALLEGATIONS
50. As alleged herein, defendants acted with scienter in that defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their
receipt of information reflecting the true facts regarding Puda Coal, their control over, and/or
receipt and/or modification of Puda Coal's allegedly materially misleading misstatements and/or
their associations with the Company which made them privy to confidential proprietary
information concerning Puda Coal, participated in the fraudulent scheme alleged herein.
51. Defendants knew or recklessly disregarded the falsity and misleading nature of
the information which they caused to be disseminated to the investing public. The ongoing
fraudulent scheme described in this complaint could not have been perpetrated over a substantial
period of time, as has occurred, without the knowledge and complicity of the personnel at the
highest level of the Company, including the Individual Defendants. Defendants had the motive
and opportunity to perpetrate the fraudulent scheme and course of business described herein
because the Individual Defendants were the most senior officers of Puda Coal, issued statements
and press releases on behalf of Puda Coal and had the opportunity to commit the fraud alleged
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herein. Further, Defendants were motivated to commit the fraud alleged in order to complete two
public offerings of Company shares at inflated prices during the Class Period.
VIII. LOSS CAUSATION/ECONOMIC LOSS
52. During the Class Period, as detailed herein, defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated Puda Coal's stock price and
operated as a fraud or deceit on Class Period purchasers of Puda Coal's common stock by
misrepresenting the Company's operating condition and future business prospects. Defendants
achieved this by making positive statements about Puda Coal's business and financial results
while they knew or recklessly disregarded that the Company's Chairman, Defendant Zhao, had
wrongfully transferred the Company's key operating subsidiary to himself Later, however,
when defendants' prior misrepresentations were disclosed and became apparent to the market,
the price of Puda Coal's common stock fell precipitously as the prior artificial inflation came out
of Puda Coal's stock price. As a result of their purchases of Puda Coal common stock during the
Class Period, plaintiff and other members of the Class suffered economic loss, i.e., damages
under the federal securities laws.
IX. FRAUD-ON-THE-MARKET DOCTRINE
53. At all relevant times, the market for Puda Coal's common stock was an efficient
market for the following reasons, among others:
(a) The Company's common stock was actively traded in a highly efficient
market;
(b) As a regulated issuer, the Company filed periodic public reports with the
SEC;
(c) The Company was covered regularly by securities analysts; and
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(d) The Company regularly issued press releases which were carried by
national news wires. Each of these releases was publicly available and entered the public
marketplace.
54. As a result, the market for the Company's common stock promptly digested
current information with respect to Puda Coal from all publicly available sources and reflected
such information in the price of the Company's securities. Under these circumstances, all
purchasers of the Company's common stock during the Class Period suffered similar injury
through their purchase of the common stock of Puda Coal at artificially inflated prices and a
presumption of reliance applies.
X. NO SAFE HARBOR
55. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were no
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements. Alternatively, to the
extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, defendants are liable for those false forward-looking statements because at the time each
of those forward-looking statements was made, the particular speaker knew that the particular
forward looking statement was false, and/or the forward-looking statement was authorized and/or
approved by an executive officer of Puda Coal who knew that those statements were false when
made.
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FIRST CLAIM FOR RELIEF
For Violation of Section 10(b) of the Exchange Actand Rule 10h-5 Promulgated Thereunder Against All Defendants
56. Plaintiff incorporates !II 1 - 55 by reference.
57. During the Class Period, defendants disseminated or approved the false
statements specified above, which they knew or deliberately recklessly disregarded were
materially false and misleading in that they contained material misrepresentations and failed to
disclose material facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
58. Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 in that
they:
(a) Employed devices, schemes and artifices to defraud;
(b) Made untrue statements of material facts or omitted to state material facts
necessary in order to make statements made, in light of the circumstances under which
they were made not misleading; or
(c) Engaged in acts, practices, and a course of business that operated as a
fraud or deceit upon plaintiff and others similarly situated in connection with their
purchases of Puda Coal common stock during the Class Period.
59. Plaintiff and the Class have suffered damages in that, in reliance on the integrity
of the market, they paid artificially inflated prices for Puda Coal's common stock. Plaintiff and
the Class would not have purchased Puda Coal common stock at the prices they paid, or at all, if
they had been aware that the market prices had been artificially and falsely inflated by
defendants' misleading statements.
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60. As a direct and proximate result of these defendants' wrongful conduct, plaintiff
and the other members of the Class suffered damages in connection with their purchases of Puda
Coal common stock during the Class Period.
SECOND CLAIM FOR RELIEF
For Violation of Section 20(a) of the Exchange ActAgainst the Individual Defendants
61. Plaintiff incorporates 1 - 55 by reference.
62. The Individual Defendants acted as controlling persons of Puda Coal within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
positions, participation in and/or awareness of the Company's operations and/or intimate
knowledge of the statements filed by the Company with the SEC and disseminated to the
investing public, the Individual Defendants had the power to influence and control and did
influence and control, directly or indirectly, the decision-making of the Company, including the
content and dissemination of the various statements which plaintiff contends are false and
misleading. The Individual Defendants were provided with or had unlimited access to copies of
the Company's reports, press releases, public filings and other statements alleged by plaintiff to
be misleading prior to and/or shortly after these statements were issued and had the ability to
prevent the issuance of the statements or cause the statements to be corrected.
63. In particular, the Individual Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, are presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
64. As set forth above, Puda Coal and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue
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of their positions each as a controlling person, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act. As a direct and proximate result of Puda Coal's and the
Individual Defendants' wrongful conduct, plaintiff and other members of the Class suffered
damages in connection with their purchases of the Company's common stock during the Class
Period.
THIRD CLAIM FOR RELIEF
Violations of Section 11 of the Securities Act Against All Defendants
65. Plaintiff repeats and realleges each and every allegation contained above,
except for any allegations sounding in fraud or intentional or reckless misconduct.
66. This Count is brought pursuant to Section 11 of the Securities Act, 15 U.S.C.
§77k, on behalf of the Class, against Puda Coal and the Individual Defendants.
67. The Prospectus Supplement dated December 8, 2010, which includes the
Registration Statement filed with the SEC on October 14, 2010 on Form S-3, was inaccurate
and misleading, contained untrue statements of material facts, omitted to state other facts
necessary to make the statements made not misleading, and omitted to state material facts
required to be stated therein.
68. Puda Coal is the issuer. As issuer of the shares, Puda Coal is strictly liable to
Plaintiff and to the members of the Class who purchased pursuant and/or traceable to the
Registration Statement and Prospectus Supplement for the materially untrue statements and
omissions alleged herein.
69. The Individual Defendants were officers and/or directors of Puda Coal and
signed the Registration Statement or authorized it to be signed on their behalf and were
responsible for the contents and dissemination of the Registration Statement.
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70. By reasons of the conduct herein alleged, each defendant violated, and/or
controlled a person who violated, Section 11 of the 1933 Act.
71. Plaintiff and the Class purchased Puda Coal shares pursuant and/or traceable
to the Registration Statement and Prospectus Supplement and sustained damages thereby.
The value of Puda Coal shares has declined substantially subsequent to and due to
defendants' violations.
72. At the time of their purchases of Puda Coal shares, Plaintiff and other
members of the Class were without knowledge of the facts concerning the wrongful conduct
alleged herein and could not have reasonably discovered each of those facts prior to April 11,
2011.
73. This claim was brought within the applicable statute of limitations.
COUNT IVViolations of Section 15 of the Securities Act
Against the Individual Defendants
74. Plaintiff repeats and realleges each and every allegation contained above
except for any allegations sounding in fraud or intentional or reckless misconduct.
75. This Count is brought pursuant to §15 of the Securities Act against Defendants
Zhu, Wu, and Zhao.
76. Defendants Zhu, Wu, and Zhao were each a control person of Puda Coal by
virtue of his position as a director and/or senior officer of Puda Coal.
77. As a control person of Puda Coal, Defendants Zhu, Wu, and Zhao are liable
jointly and severally with and to the same extent as Puda Coal for its violation of Sections 11 of
the Securities Act.
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PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows: declaring this action to be a
proper class action; awarding rescission and/or damages, including interest; awarding
reasonable costs, including attorneys' fees; and such equitable/injunctive relief as the Court may
deem proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: April 19, 2011KAPLAN FOX & KILSHEI ER LLP
By:
Frederic S. FoxDonald R. HallJeffrey P. CampisiPamela A. Mayer850 Third AvenueNew York, NY 10022Telephone: 212-687-1980Facsimile: 212-687-7714Email: [email protected]
[email protected]@kaplanfox.compmayergkaplanfox.com
Counsel for Plaintiff
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