On February 21, 2014, Judge Alison J. Nathan of the U.S. District Court for the Southern District of New York granted Ernst & Young Hua Ming’s (“EYHM”) Motion to Dismiss a shareholder class action involving its former audit client SinoTech Energy Limited. Plaintiff’s complaint against EYHM alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and claimed that the auditor “acted with scienter in that they either knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of [SinoTech] were materially false or misleading.” In dismissing the action against EYHM, however, Judge Nathan agreed with EYHM’s argument that Plaintiff failed to plead scienter with the particularity and corroborating detail required for alleging securities fraud against auditors.
This case is another in a series of actions arising out of a share price drop and subsequent delisting of a China-based firm that was traded on a US exchange. In this particular case, the class settled with the company and some of its advisors and then brought an action against EY Hua Ming, the China member firm of EY. The dismissal of the claims against EY Hua Ming is notable because the class was unable to demonstrate even a colorable basis for its allegations that EY Hua Ming acted recklessly or with intent to defraud investors, and, in actuality, the facts were more consistent with efforts by the company, SinoTech, to deceive the auditor, which ultimately resigned and reported the company to the SEC.
The Orrick team representing EYHM was led by Richard Martin and Robert Cohen, and included Danielle Van Wert and Anushila Shaw.