IN RE CHINACAST EDUCATION CORPORATION SECURITIES LITIGATION, COSTA BRAVA PARTNERSHIP III LP, individually and on behalf of all other persons similarly situated, Plaintiff-Appellant,
CHINACAST EDUCATION CORPORATION; NED SHERWOOD; STEPHEN MARKSCHEID; DEREK FENG; DANIEL TSEUNG, Defendants-Appellees
Argued and Submitted April 7, 2015, Pasadena, California
Appeal from the United States District Court for the Central District of California. D.C. No. 2:12-cv-04621-JFW-PLA. John F. Walter, District Judge, Presiding.
Reversing the dismissal of a securities fraud claim, the panel held that a CEO's fraud could be imputed to his corporate employer, even though his alleged embezzlement and misleading of investors through omissions and false statements were adverse to the company's interests.
Taking the allegations in the complaint as true, the panel agreed with the Third Circuit and concluded that the CEO's fraudulent misrepresentations--and, more specifically, his scienter or intent to defraud--could be imputed to the company because the CEO acted with apparent authority on behalf of the company, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.
Jeremy A. Lieberman (argued), Marc I Gross, and Emma Gilmore, Pomerantz Grossman Hufford Dahlstrom & Gross, LLP, New York, New York; Patrick V. Dahlstrom, Pomerantz Grossman Hufford Dahlstrom & Gross, LLP, Chicago, Illinois; Laurence M. Rosen, The Rosen Law Firm, P.A., Los Angeles, California; Philip Kim, The Rosen Law Firm, P.A., New York, New York, for Plaintiff-Appellant.
Israel David (argued), Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York, for Defendants-Appellees.
Before: Stephen Reinhardt, M. Margaret McKeown, and Milan D. Smith, Jr., Circuit Judges.
McKEOWN, Circuit Judge:
Under Rule 10b-5 of the Securities Exchange Act of 1934, " it is unlawful for 'any person, directly or indirectly, . . . [t]o make any untrue statement of a material fact' in connection with the purchase or sale of securities." Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 131 S.Ct. 2296, 2301, 180 L.Ed.2d 166 (2011) (alteration in original) (quoting 17 CFR § 240.10b-5(b)). Both parties agree such deception occurred in this case: ChinaCast founder and CEO Ron Chan embezzled millions from his corporation and misled investors through omissions and false statements--textbook securities fraud. The sole question on appeal is a purely legal one and an issue of first impression in this circuit: Can Chan's fraud be imputed to ChinaCast, his corporate employer, even though Chan's looting of the corporate coffers was adverse to ChinaCast's interests? Taking the allegations in the complaint as true, we conclude that Chan's fraudulent misrepresentations--and, more specifically, his scienter or intent to defraud--can be imputed to ChinaCast.
Significantly, imputation is proper because Chan acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business. We reverse the district court order dismissing the complaint under Federal Rule of Civil Procedure 12(b)(6).
The facts are drawn from Costa Brava's complaint, which we accept as true for purposes of the Rule 12(b)(6) motion to dismiss. Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). ChinaCast, founded in 1999, is a forprofit postsecondary education and e-learning services provider that sells distance learning and " multimedia education content" over the Internet and from three campuses in China. Before its abrupt downfall, ChinaCast boasted a market capitalization topping $200 million and was listed on the NASDAQ ...