Case 1:14-cv-05308-GBD Document 19 Filed 02/17/15 Page 1...

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THE ROSEN LAW FIRM, P.A. Laurence M. Rosen Phillip Kim Jonathan Horne 275 Madison Avenue, 34th Floor New York, New York 10016 Telephone: (212) 686-1060 Fax: (212) 202-3827

Counsel for Lead Plaintiffs

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

In re CHINA XD PLASTICS COMPANY LIMITED Securities Litigation.

This Document Relates to: All Actions

) )

Case No.: 14-cv-05308-GBD ) ) )

CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Lead Plaintiffs Terry Frishkorn and James Wang (“Plaintiffs”), individually and on

behalf of all other persons similarly situated, by their undersigned attorneys, for their complaint

against defendants China XD Plastics Co. Ltd. (“China XD”), Jie Han, Taylor Zhang, Lawrence

W. Leighton, Linyuan Zhai, and Feng Li (collectively, the “Defendants”), allege the following

based upon personal knowledge as to themselves and their own acts, and information and belief

as to all other matters.

I. NATURE OF THE ACTION

1. This is a federal securities class action on behalf of a class consisting of all

persons other than Defendants who purchased the common stock of China XD Plastics Company

Limited (“China XD” or the “Company”) between March 25, 2014 and July 10, 2014 (the “Class


Period”), inclusive, and who did not sell such shares before July 10, 2014, seeking to recover

damages caused by Defendants’ violations of the federal securities laws and pursue remedies

under the Securities Exchange Act of 1934 (the “Exchange Act”).

2. In recent years, a rash of nominally U.S. but China-based companies ravaged U.S.

capital markets. These companies came to U.S. capital markets keeping two sets of books. They

used the first set, which was accurate, in filings with the Chinese State Administration For

Industry and Commerce (the “SAIC”), because that agency could punish them. They used the

second set, which overstated their financial position, in filings with the U.S. SEC, because as a

practical matter, they would suffer no consequences from their fraud.

3. China XD, which sells modified plastics, purports to be a modern industrial

miracle. It claims higher profits than all its competitors, on less revenue. Its purported revenues

per employees are almost 2.3 times that of its nearest competitor; its net income per employee

almost 3.5 times as much. In 2013, according to its SEC filings, it generated more net profits, by

dollar, than Kingfa Science and Tech. Co. Ltd. (“Kingfa”), its principal competitor, the market

leader - on about 43% of the revenue.

4. The jewel in China XD’s crown, what it tells investors is the cause of its

purported dominance, is its R&D department. It claims its business is highly customized – it

works with customers to produce exactly the plastic they want. It claims to have a massive R&D

department – a purported 237 researchers as of the end of 2013, or almost one quarter of its

entire workforce. Thus, China XD claims its high profitability is simply the reward for its

outsized investment in R&D.

5. But China XD is neither as profitable nor as invested in R&D as it claims in its

SEC filings. In fact, in 2013-2014, China XD really had only about 40 researchers in its vaunted

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R&D team. Nor were these employees particularly skilled. They were paid – at best – the market

rate, and worked harder than the competition. Predictably, they sought to leave as soon as they

could. Indeed, China XD pays a substantial portion of these employees’ compensation – up to

50% - as an annual bonus, which it withholds until September 1 of the following year, and keeps

it if the employee leaves before then – a policy apparently designed to prevent or at least push

back the predictable employee departures. And China XD provides these employees with little

training, and that mostly through outside academic tutors. As a result, China XD’s few technical

employees are not the market leaders, but relatively unskilled and inexperienced compared to its

competitors.

6. Thus, China XD’s claim that its superior profitability is driven by its substantial

investment in R&D is false. It is no surprise, then, that China XD’s claim to superior profitability

is itself false.

7. In fact, as confirmed by its SAIC filings, China XD’s 2013 SEC filed-financial

statements overstated its revenues by over 75%, its net income by over 550%, and, because it

had less income, its income tax expense by over 1,400%.

8. Using the overstated financials in its SEC filings, China XD raised $150 million it

desperately needed to expand its production to take advantage of temporarily high growth in its

industry.

9. On July 10, 2014, analyst firm Bleecker Street Research published an article

calling into question the profitability reported in China XD’s SEC filings. That day, China XD’s

stock price fell $1.17 per share (over 15%) to close at $6.48 per share on heavy trading volume.

II. JURISDICTION AND VENUE

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10. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, (15 U.S.C. §78j (b) and 78t (a)), and Rule 10b-5 promulgated thereunder (17

C.F.R. §240.10b-5).

11. This Court has jurisdiction over the subject matter of this action pursuant to §27

of the Exchange Act (15 U.S.C. §78aa) and 28 U.S.C. § 1331.

12. Venue is proper in this Judicial District pursuant to §27 of the Exchange Act, 15

U.S.C. § 78aa and 28 U.S.C. § 1391(b) as a substantial part of the conduct complained of herein

occurred in this District.

13. In connection with the acts, conduct and other wrongs alleged in this Complaint,

Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

including but not limited to, the United States mails, interstate telephone communications and

the facilities of the national securities exchange.

III. RELEVANT PERSONS

A. Plaintiffs

14. Lead Plaintiffs Terry Frishkorn and James Wang, as set forth in their PSLRA

certifications previously filed on the Court’s docket and incorporated by reference herein,

purchased China XD Plastics common stock at artificially inflated prices during the Class Period

and have been damaged thereby.

B. Defendants

15. Defendant China XD is a Nevada Corporation with its principal executive offices

at No. 9 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin Development Zone,

Heilongjiang, P.R. China and an office in New York, New York. Through its subsidiaries,

Defendant China XD purportedly engages in the research, development, manufacture, and sale of

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modified and engineering plastics products primarily for use in the fabrication of automobile

parts and components in the People’s Republic of China (“PRC”)

16. Defendant Jie Han (“Han”) has been China XD’s Chairman and CEO at all

relevant times. He previously also served as its CFO until May 1, 2009.

17. Defendant Taylor Zhang has been China XD’s CFO since May 1, 2009. From

May 2008 to March 2009, Defendant Zhang served as CFO of Advanced Battery Technologies,

Inc. Advanced Battery collapsed in the wake of a 2011 report alleging that it had committed

accounting fraud, including during Zhang’s entire tenure. The NASDAQ, the exchange on which

its shares traded, ordered that it be delisted in November 2011 because it had, among other

things, failed to provide to the NASDAQ confirmation that the cash on its balance sheet in its

SEC filings was accurate though the NASDAQ specifically requested confirmation. 1

18. Defendant Lawrence W. Leighton has been one of China XD’s directors since

May 2009, at which time he was also appointed chair of its audit committee, a position he retains

to this day. In 2013, Leighton was paid $110,000, including $60,000 in cash, for his work.

19. Defendant Linyuan Zhai has been one of China XD’s directors since May 2009,

at which time he was appointed to its audit committee, a position he retains to this day.

20. Defendant Feng Li has been one of China XD’s directors since November 2012,

at which time he was appointed to the audit committee, a position he retains to this day.

21. Collectively, Defendants Han, Zhang, Leighton, Zhai, and Li are the “Individual

Defendants”.

22. China XD’s audit committee’s responsibilities include among other things:

1 Advanced Battery blamed its CFO’s resignation and its CEO’s purported illness for its purported inability to provide the confirmation. The NASDAQ does not appear to have believed it.

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(a) Reviewing the Audit Committee’s charter, annual report to stockholders

and reports submitted to the SEC;

(b) Appointing the Company’s independent auditors, confirming and

reviewing their independence, and approving their fees;

(c) Reviewing the independent auditors’ performance;

(d) Discussing with the independent auditor and management the

independent auditor’s judgment about the quality, not just the acceptability, of the

Company’s accounting principles;

(e) Following an audit, reviewing significant difficulties encountered during

the audit; and

(f) Reviewing significant disagreements among management and the

independent auditors in the preparation of the Company’s financial statements.

23. The audit committee held four meetings in 2013.

C. Confidential witnesses

24. This Complaint relies upon allegations drawn from conversations with former

employees of China XD. The sources’ position and tenure are set out below:

CW Position Job function Tenure CW 1 R&D Director Oversaw research team; responsible for September

customer development; responsible for 2013 - planning of Sichuan branch. Reports to December 2014

China XD R&D head. CW 2 Quality Managed procurement for China XD; August 2010 -

control/head of oversaw procurement department January 2013 procurement planning

CW 3 Sales Manager Responsible for China XD’s sales of March 2011 – raw materials to other plastics August 2014 companies or trading firms. Also responsible for overseas procurement, logistics, and customs clearance

CW 4 R&D Director Oversaw research team. Responsible for July 2014 – Shanghai City and Hubei Provinces. November

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2014 CW 5 Operator Manufacturing quality control. January 2013 –

March 2014 CW 6 R&D Director Oversaw four-member research team June 2013 –

responsible for Heilongjiang, Jilin, and December 2014

Liaoning Provinces, which comprise China’s industrial base. Accordingly, this witness’s team is responsible for a large proportion of China XD’s total sales. Reports to China XD R&D head.

CW 7 Internal audit Responsible for internal audit April 2012 – director

procedures, including managing the end of 2014 internal audit process and providing testing reports. China XD’s internal audit department cycles its internal auditors through each of its subsidiaries each month. Thus, as an internal auditor, this witness cycled between China XD’s subsidiaries on a monthly basis, giving him knowledge of each one.

CW 8 Internal audit Responsible for internal audit of China November director XD, including internal control 2013 – May

procedures, item auditing, and checking 2014 draft financials. Supervises procurement demand, execution, and approval authorization. As an internal auditor, this witness cycled between China XD’s subsidiaries on a monthly basis, giving her knowledge of each one.

CW 9 Sichuan HR Responsible for HR for Sichuan January 2014 – department subsidiaries. Among other things, this January 2015

witness conducts interviews and provides salary information to interviewees.

IV. BACKGROUND

A. Reverse Chinese Mergers (“RCM”)

25. China XD came to U.S. capital markets through a reverse merger.

26. In a reverse merger, a non-operating U.S. publicly-traded company “buys” a

closely-held company. In return, the closely-held company's owners receive substantially all of

the shares of the publicly-traded company. The reverse merger process, particularly where the

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closely-held company is Chinese, has raised concerns among regulators that it is too open to

fraud. In a speech on April 4 2011, SEC commissioner Luis Aguilar stated that “a growing

number of [Chinese reverse-merged companies] are proving to have significant accounting

deficiencies or being vessels of outright fraud.” 2 As of June 19, 2012, 67 China-based issuers had

had their auditors resign, and 126 issuers had been delisted from U.S. exchanges or simply

stopped filing reports with the SEC. 3 Even Chinese regulators have expressed contempt for these

companies, noting that the companies could not have listed on major Chinese exchanges. 4

According to a recent peer-reviewed research article, in 2010 and 2011, nearly fifty Chinese

companies were delisted, and the SEC filed fraud cases against more than forty Chinese issuers

and their executives. 5

27. These companies have caused immense damages to U.S. capital markets. A 2011

Cornerstone study found that the market capitalization decline in only the 33 RCM that had at

that time been sued for fraud by investors exceeded $8 billion. 6

28. China XD’s reverse merger was completed in December 2008. Its “acquiror” was

NB Telecom, Inc., a company with assets, as of September 30, 2008, of $5,877, and liabilities of

$311,968.

2 Full text available at: http://www.sec.gov/news/speech/2011/spch040411laa.htm 3 Lewis H. Ferguson, Investor Protection Through Audit Oversight, Speech delivered in Shanghai SEC Conference, June 19, 2012, available at < http://pcaobus.org/News/Speech/Pages/06192012_FergusonSECConference.aspx >. 4 Statement of Professor John C. Coffee, Jr., at Hearings Before the Subcommittee on Capital Markets and Government Sponsored Entities of the Committee on Financial Services of the United States House of Representatives, at 3, available at http://financialservices.house.gov/uploadedfiles/hhrg-112-ba16-wstate-jcoffee-20120726.pdf. 5 Gang Hu et al, GAAP Difference or Accounting Fraud? Evidence from Chinese Reverse Mergers Delisted from U.S. Markets, Journal of Forensic & Investigative Accounting, Vol. 7, Issue 1, January 2015, at 122. 6 Cornerstone Research, Investigations and Litigation Related to Chinese Reverse Merger Companies, available at < https://www.cornerstone.com/GetAttachment/2f082047-f409-4e38- bab2-f62829b8087a/Investigations-and-Litigation-Related-to-Chinese-R.pdf>.

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V. DEFENDANTS’ MISCONDUCT

A. Defendants’ false statements

29. The Class Period begins on March 25, 2014, when China XD filed its 10-K for

the year ended December 31, 2013 (the “2013 10-K”).

30. The 2013 10-K was signed by Defendants Han, Zhang, Leighton, Li, and Zhai.

Defendants Han and Zhang separately executed certifications, required by the Sarbanes-Oxley

Act of 2002 (“SOX Certifications”), in which they declared under penalty of perjury that (a) the

2013 10-K did not contain any untrue statement of material fact or omit to state a material fact

necessary to make the statements made not misleading, and (b) they had designed and evaluated

internal controls to provide reasonable assurance that China XD’s financial reporting was

accurate.

31. On May 14, 2014, China XD filed its 10-Q for the quarter ended March 31, 2014

(the “Q1 2014 10-Q”).

32. The Q1 2014 10-Q was signed by Defendants Han and Zhang. Defendants Han

and Zhang separately executed SOX Certifications in which they declared under penalty of

perjury that (a) the Q1 2014 10-Q did not contain any untrue statement of material fact or omit to

state a material fact necessary to make the statements made not misleading, and (b) they had

designed and evaluated internal controls to provide reasonable assurance that China XD’s

financial reporting was accurate.

33. The 2013 10-K and Q1 2014 10-Q made two types of false statement: statements

about China XD’s revenues, net income, and tax expense; and statements about its workforce,

principally about its research & development (“R&D”) workforce.

i. Statements about revenue, net income, and tax expense.

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34. The 2013 10-K included China XD’s financial statements for the years ended

December 31, 2013 and 2012. These financial statements included entries for China XD’s

revenues, tax expenses, net income, and gross margin.

35. The 2014 Q1 10-Q included China XD’s financial statements for the quarter

ended March 31, 2014.

36. China XD kept two sets of books. It used the first set in its accurate financial

statements, which it filed in China with the Chinese State Administration for Industry and

Commerce (the “SAIC”). It used the second overstated in its SEC filings. For the reasons set out

in ¶¶ 45-61_below, the revenue, net income, and tax figures reported in the 2013 10-K and Q1

2014 10-Q were overstated and therefore false. The SEC-reported values for these financial

metrics, along with the amount of the overstatement, is set out in Table 1, below.

ii. False statements about China XD’s workforce.

37. China XD manufactures modified plastics primarily for automotive applications

and sells them in China.

38. China XD claims to be a premium manufacturer, providing premium products at

competitive prices. 7

39. Modified plastics are a booming industry in China. According to a report China

XD commissioned from analyst firm Frost & Sullivan, which is prominently featured in China

XD’s SEC filings, Chinese revenues from modified plastics grew from RMB 126.0 billion in

2008 to RMB 276.5 billion in 2012, a compound annual growth rate (“CAGR”) of 21.7%. In

turn, China XD claims that its market-leading position will allow it to stake out some of this

market.

7 2013 10-K, at 23.

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40. China XD boasts that its business uses “advanced technologies”, which acts as a

high barrier to competitors’ entry, explaining its high profitability. 8 China XD specifically

reports that it has “technological expertise.” 9

41. Indeed, according to China XD, the key to its “competitive strength and success”

is its “ongoing additions to [its] technology through advanced development methods[.]” 10 China

XD claims to use “state-of-the-art methods, equipment, and [] technological expertise to produce

plastics of the highest quality that are cost-efficient for our customers.” 11

42. China XD lists its competitive strength to include:

High Quality Products with Lower Costs . [] Compared to our domestic competitors, we believe our long-standing manufacturing experience, in-depth market knowledge, significant scale of economy and strong R&D capabilities enable us to provide higher quality products at competitive prices. 12

Strong Customer-Oriented R&D Capabilities . The modified plastics industry is characterized by rapid development and increasing demand for high quality products. We have strong R&D capabilities that allow us to have successfully passed OEM automakers’ certification processes in the past and continually introduce new and high quality products to the market. Compared to international plastic supply models, which target larger scale applications of common plastics and involve less customization and specialization, we provide customer-oriented product development through our certification process. By working closely with our customers, we are able to adjust our product features to better satisfy the specific needs of each customer. To achieve this, we have staffed our R&D team with 163 [sic] professionals, of whom 72 have Ph.D. and Master’s degrees. On average, our R&D employees have worked with us for more than three years, and some key experts have more than 10 years of experience in our industry. We have also cooperated with a number of the leading technology centers in China. Besides providing specialized research and development skills, these relationships help us formulate cutting edge research programs aimed at developing new technologies and applications in plastics engineering. We currently have 1 approved patent and 108 patent applications pending with the State Intellectual Property Office of the PRC, or SIPO.. 13

8 2013 10-K, at 21. 9 2013 10-K, at 2. 10 2013 10-K, at 13. 11 2013 10-K, at 13. 12 2013 10-K, at 23, emphasis added. 13 2013 10-K, at 24.

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43. China XD claims that it is “committed to enhancing our sales and profitability

through [] strategies” including:

Focus on R&D and Develop New Product Offerings . We are currently utilizing our research and development capabilities to obtain further product certifications,

develop new products, applications and technologies. Approximately 90% of our

automotive plastics product certification applications are currently undergoing trial

manufacturing periods to obtain the necessary certifications. In addition, we are

developing new products for automotive applications to expand our product

portfolio, including initiating R&D on modified plastic for use in electric vehicles.

We are also developing specialty engineering plastics and bio-plastics for use in

other applications, such as high-speed trains, vessel-propulsion systems, mining and

oil-field equipment and aerospace equipment. We are the first non State-Owned-Enterprise awarded National Level Enterprise Technology Center, in Heilongjiang

Province. In addition, we have Post-PhD and Academy Member WorkStation in

Heilongjiang Province enhancing our research and development capabilities. 14

44. China XD attributes this purportedly market-leading technological position

principally to its customer-focused R&D team, which it locates in two of its subsidiaries, the

Xinda Material Research Center and Xinda Group Technology Center (the “Xinda R&D Team”)

China XD claims in the 2013 10-K that the Xinda R&D Team included 237 professionals, 72 of

whom purportedly have Ph.D. and Master’s degrees, and 154 of whom purportedly have

Bachelor’s degrees, as well as 12 consultants. 15 According to its SEC filings, the Xinda R&D

Team account for almost a quarter of its total workforce as of December 31, 2013, of 965.

Similarly, China XD’s 2014 10-Q claims that the Xinda R&D Team included 243 professionals

and 2 consultants. 16

14 2013 10-K, at 25. 15 2013 10-K, at 2, 26, 42. According to China XD, as of September 30, 2014, the Xinda R&D Team still consisted of 237 professionals. 16 Q1 2014 10-Q, at 15.

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Period Number of R&D employees Percentage of total China XD employees who work in Xinda R&D Team

As of March 31, 2014 243 Not provided As of December 31, 2013 237 24.6% As of December 31, 2012 118 19.5%

B. In truth, China XD is a marginal, barely profitable manufacturer with barely a fifth of the R&D workforce it claimed in its SEC filings

i. China XD overstated its revenue, net income, and income tax expense

45. During the Class Period, China XD overstated its revenues and net income.

46. China XD’s SEC filings dramatically overstate its revenue, net income, taxes

paid, and gross margin. Far from the most profitable modified plastics manufacturer, China XD

is relatively unprofitable, with net income of just $20.4 million in 2013, compared to the $133.9

million it claimed in its SEC filings.

47. China XD keeps two sets of books. It filed the accurate set with the Chinese

SAIC, as it has the practical ability to shut China XD down. It filed the inflated set with U.S.

authorities to attract U.S. investors, because as a practical matter U.S. authorities cannot take

action when a company whose assets are located entirely in China and its China-based officers

commit securities fraud in the U.S.

48. China XD’s SAIC-reported revenue and profitability metrics, 17 presented in

accordance with PRC GAAP, show that it overstated its financial metrics:

17 Lead Plaintiffs obtained SAIC filings for all of China XD’s subsidiaries that have filed them, other than those responsible for China XD’s Sichuan subsidiary – i.e., Sichuan Xinda Enterprise Group Co. Ltd., Sichuan Xinda Group Meiyuan Enterprise Management Service Co., Sichuan Xinda Group Software Development Co. Ltd., and Sichuan Xinda Group Sales Co. Ltd. (collectively, the “Sichuan Subsidiaries”). The Sichuan Subsidiaries’ function is to build a plant in Sichuan that China XD reports will become operational in 2015. China XD broke ground on the Sichuan Plant in December 2013 and, according to CW 1, will not begin manufacturing until 2015. Accordingly, the Sichuan Subsidiaries did not earn any revenues during the Class Period.

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For the Financial SEC-reported True value Overstatement ($) Overstatement year ended metric value derived from (%) December SAIC filings 31 2013 Revenue $1,050,816,364.00 $589,671,726.17 $461,144,637.83 78.20%

Tax $46,697,120.00 $3,038,808.74 $43,658,311.26 1436.69% expense Net $133,838,845.00 $20,370,000.67 $113,468,844.33 557.04% income

2012 Revenue $599,818,968.00 $476,172,618.94 $123,646,349.06 25.97%

Tax $29,516,193.00 $3,243,191.92 $26,273,001.08 810.10% expense Net $85,867,747.00 $9,382,236.51 $76,485,510.49 815.22% income

Table 1. 49. The figures reported by China XD in its SAIC filings are accurate -- rather than

those reported to the SEC -- for four reasons. First, as a practical matter, China XD’s China-

based officers and China-based operating companies suffer few consequences if it misrepresents

its finances in SEC filings. China does not extradite its nationals, 18 U.S. judgments are not

enforced in China, 19 and because service of process depends on the cooperation of authorities in

China,20 whose cooperation is not always forthcoming, the SEC is rarely even able to serve

defendants in China. 21 Thus, China-based defendants have a diminished fear of criminal or civil

sanctions. 22

18 Extradition Law of the People’s Republic of China, Article 8(1). 19 Donald C. Clark, The Enforcement of United States Court Judgments in China: A Research Note, 2004, at 1, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=943922 (“At present, at least, the answer is straightforward: U.S. judgments will not be enforced [in China].”) 20U.S. Department of State, International Judicial Assistance – China (noting that service must be made through the Chinese Central Authority for the Hague Service Convetino <available at http://travel.state.gov/content/travel/english/legal-considerations/judicial/country/china.html > 21 Securities and Exchange Commission v. Zhao , 12 Civ. 1318-DLC-HBP, Dkt. # 50, at ¶4 (noting that the Chinese Central Authority had only executed 16 of the SEC’s 70 requests for service of process in China). 22 See Erica Fund, Regulatory Competition in International Capital Markets: Evidence from China in 2004-2005, 3 N.Y.U. J. L. & Bus. 243, 271 (2006) (“Overall, Chinese issuers’ concern over liability issues are still limited to the extent that many of them have assets that are largely, if not totally, in China.”).

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50. Under PRC law, penalties for filing false SAIC filings include fines and

revocation of the entity’s business license. 23 If an entity’s business license is revoked, the

People’s Bank of China24 requires the bank account of that entity to be closed. 25 Without a

business license the entity cannot legally conduct business in the PRC. Thus, China XD’s

subsidiaries had a strong incentive to file accurate annual reports with the SAIC because its

business could be shut down if it was caught filing false financial statements with SAIC.

51. Reflecting their importance, SAIC filings must be signed by the legal

representative of the entity submitting it. The legal representative must state “I confirm that the

content of the submitted company’s annual inspection report is true.”

52. Second, professionals who conduct due diligence in China regularly obtain SAIC

filings and rely upon them because they are accurate. For example, attorney Dan Harris “strongly

suggest[s]” that due diligence include obtaining the entire SAIC file. 26 Forays to the SAIC office

“usually give us a massive amounts [sic] of documents in Chinese, which we then either translate

for our clients or, more typically, summarize.” 27 Dan Harris is co-head of the China practice at

the law firm Harris Moure, where he advises U.S. companies on doing business in China. He has

been quoted by The Economist, The Wall Street Journal, and the New York Times, and blogs on

the “indispensable” China Law Blog. 28 He has testified before the Congressional U.S.-China

Economic and Securities Review Commission.

23 “Measures for the Annual Inspection of Enterprises” issued in February 24, 2006, Article 20. 24 People’s Bank of China in PRC is equivalent to the Federal Reserve in the U.S. 25 “Measures for the Administration of RMB Bank Settlement Accounts” issued in April 2003 (No.5 [2003]), Article 49. 26 Dan Harris, How to Really Really Investigate a Chinese Company, posted on June 7, 2011, available at < http://www.chinalawblog.com/2011/06/how_to_detect_fake_chinese_companies_public_and_pri

vate.html>. 27 28 Sara Mui, 2013 Blawg 100 Hall of Fame, ABA Journal, available at

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53. Third, for the reasons set out below in ¶¶62-76, China XD’s SEC-reported

financial information is less plausible than that of its SAIC filings, because (a) China XD reports

unrealistically higher margins than its competitors, and (b) China XD’s stated reason for the

higher margins – high technology level – is false.

54. Fourth, after Bleecker Street Research called attention to China XD’s discrepant

SAIC filings, China XD issued a press release disputing the Bleecker report’s claim. There,

China XD admitted that its SAIC and SEC filings should match:

Fact: The Company’s SEC and SAIC Filings are Consistent

Had Bleecker Street Research consolidated our financial statements to include all of the Company’s subsidiaries and done a reconciliation between US GAAP and China accounting principles, it would have concluded that our SAIC and SEC filings are consistent. Bleecker Street Research failed to include the SAIC filings of all subsidiaries of the Company in its calculations. In addition to this failure, such methodology is also flawed because it does not, for example, take into account any eliminations of inter-group transactions .29

55. Differences in accounting standards cannot explain the discrepancies. China XD’s

financial statements purported to have been presented in accordance with U.S. GAAP. China XD

subsidiaries’ SAIC filings’ financial statements were presented in accordance with PRC GAAP.

56. The Committee of European Securities Regulators, in a paper entitled CESR’s

advice on the equivalence of Chinese, Japanese and US GAAPs (2007), noted that there were no

significant differences between US GAAP and International Financial Reporting Standards

(“IFRS”). Pg. 25, at 2nd entry on page. There are no significant differences between IFRS and

PRC GAAP on revenue recognition. Id. at 35, 6th entry on page. Thus, there are no significant

differences between U.S. GAAP and PRC GAAP on revenue recognition.

<http://www.abajournal.com/magazine/article/2013_blawg_100_hall_of_fame/ > 29 China XD Plastics, Inc. Press Release issued July 14, 2014, available at <http://www.sec.gov/Archives/edgar/data/1353970/000107997314000385/ex99x1.htm > (second emphasis added).

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57. The law firm K & L Gates LLP has represented to the U.S. Securities &

Exchange Commission in an October 27, 2010 letter that: “The basic accounting principles and

practice of Chinese GAAP are similar to US GAAP. There are no substantial differences

between Chinese GAAP and U.S. GAAP.”

58. The Chinese accounting standard governing revenue recognition for China XD’s

PRC subsidiaries -- ASBE 14 -- provides, identically to U.S. GAAP:

Chapter II Revenue from Selling Goods Article 4. No revenue from selling goods may be recognized unless the following conditions are met simultaneously:

(1) The significant risks and rewards of ownership of the goods have been transferred to the buyer by the enterprise; (2) The enterprise retains neither continuing management involvement to the degree usually associated with ownership, nor effective control over the goods sold; (3) The relevant amount of revenue can be measured in a reliable way; (4) The relevant economic benefits associated with the transaction will flow to the enterprise; and (5) The relevant costs incurred or to be incurred can be measured in a reliable way.

59. Similarly, there are no differences between U.S. GAAP and PRC GAAP that

could account for the vast differences between China XD’s SEC-reported financial numbers and

those of its subsidiaries filed with SAIC. There are some immaterial differences between U.S.

GAAP and PRC GAAP in calculating net income, such as accounting for intangible assets, assets

impairment, capitalization of borrowing costs, R&D expenses, non-monetary transactions and

deferred tax. These differences principally are:

PRC GAAP

US GAAP

Intangible

All intangible assets should be For long-lived intangible assets assets amortized over the shorter of its that are deemed to have infinite amortization expected useful life and the lives, they are not amortized.

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contractual or legal life, starting in the month in which it is obtained. If there is no contractual or legal life, the expected useful life should be not more than 10 years.

However, they should be reviewed for impairment at least annually.

Assets impairment

Impairment tests should be carried out annually regardless of whether there are triggering events or not.

Except for impairment of goodwill and other long-lived assets, impairment test on assets should be carried out if there is a triggering event.

Borrowing Borrowing costs on project- Borrowing costs (specific or cost specific borrowings should be indirect) relating to the

capitalized as part of the cost of acquisition, construction or acquiring or constructing a production of a qualifying asset tangible fixed asset. must be capitalized.

R&D expenses

Non-monetary transactions

All research and development costs should be recognized as an expense as incurred. The only costs that are capitalized and amortized relating to a self-created intangible are registration fees and legal costs incurred to obtain a legal right to the asset, such as a patent.

No distinction is made between exchange of similar or dissimilar assets and profit or loss is generally not recognized.

Expenditures on research should be recognized as an expense when incurred. An intangible asset arising from development should be capitalized if certain criteria are met.

Exchange of similar assets: no gains or losses should be recognized; Exchange of dissimilar assets: gains and losses are recognized based on fair value of goods received less any cash transferred.

Taxation Three methods are allowed in the accounting for income tax: 1) tax payable method; 2) tax effect accounting - deferral method; 3) tax effect accounting - liability method. Under tax payable method, no deferred tax asset or liability needs to be recognized.

Liability method should be used to account for income tax. Deferred tax asset and liability must be calculated on all temporary differences. Deferred tax asset must be calculated in full; if not realizable, then a valuation allowance is made.

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60. Indeed, in a peer-reviewed academic publication, Hu et al 30 conducted an

empirical study of the impact of these small differences between U.S. GAAP and PRC GAAP.

The authors examined a control group of eight companies listed on both Chinese and American

stock exchanges, who because of their dual listings reported their financials under both PRC

GAAP and either U.S. GAAP or International Financial Reporting Standards (“IFRS”). Using

these points, the authors then calculated the difference between for the same financial data

reported under U.S. GAAP and PRC GAAP, arriving at a mean difference in net income of just

2.1% - nothing like China XD’s 550% difference.

61. Thus, there are no significant differences between U.S. GAAP and Chinese

GAAP that can explain the differences between China XD’s SEC-reported revenues, net income,

and taxes, and its subsidiaries’ SAIC-reported revenues, net income, and taxes.

ii. China XD’s R&D department is much smaller than it reports in its SEC filings and less qualified than that of its competitors.

62. China XD’s primary competitors report much lower margins and net income,

even as their revenues are comparable or greater:

Year Item China XD China XD Kingfa31 Pret Silver Age (SEC) (SAIC)

2013 Revenu $1,050,816,364 $589,671,726.17 $2,360,090,465 $279,737,193 $158,431,295 es

Net $133,838,845 $20,370,000.67 $122,808,371 $32,275,992 $1,969,908

30 The four authors of Hu et al include Professor Gang Hu, who teaches finance in Hong Kong, Professor Ling Lin, who teaches accounting, and Professor Min Xiao, who teaches finance at Xiamen University, China. 31 China XD’s SEC filings report that its primary competitors are Guangzhou Kingfa Science & Technology Co., Ltd. (“Kingfa”), and Shanghai Pret Composites Co., Ltd. (“Pret”). 2013 10-K, at 22. An industry report adds as a competitor Guandong Silver Age Science & Technology Co., Ltd. (“Silver Age”). Research in China, China Modified Plastics Industry Report, 2013-2015, March 2014. Kingfa data were obtained from its 2012 and 2013 annual statements filed with the Shanghai Stock Exchange. Pret and Silver Age data were obtained from their respective 2012 and 2013 annual statements filed with the Shenzhen Stock Exchange.

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income Profit 12.7% 3.5% 5.2% 11.5% 1.2% margin

2012 Revenu $599,818,968 $476,172,618.94 $1,937,615,477 $191,810,550 $142,021,143 es Net $85,867,747 $3,243,191.92 $122,714,110 $25,109,907 $5,500,392 income Profit 14.3% 0.68% 6.3% 13.1% 3.8% margin

Table 2

63. Thus, China XD’s 2013 SEC-reported financial metrics vastly surpass its

competitors’.

64. China XD’s 2013 SEC-reported financial metrics also vastly surpass its

competitors’ on a per-employee basis, though its SAIC-filed financial metrics show that its

performance is in line with that of its competitors:

China XD China XD Kingfa Pret Silver Age (Using SEC ) (using

SAIC value)

Revenue per $1,088,929 $611,058 $476,401 $344,504 $181,479 employee Net income $138,693 $21,108 $24,790 $39,749 $2,256 per employee

Table 3

65. China XD’s purported explanation for its dominance is as false as its claim to be

dominant.

66. China XD’s SEC filings purport to explain its high performance by referring to its

supposedly superior technological competence, specifically boasting of its vast R&D force – the

237-member Xinda R&D Team.

67. But in 2013, the Xinda R&D Team had less than one fifth as many professionals

as China XD’s SEC filings claim. These researchers are overworked and undertrained compared

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to those employed by China XD’s competitors. Accordingly, there is a constant outflow of

researchers from China XD to its competitors, and China XD’s workforce is less skilled than its

competitors’.

68. The Xinda R&D Team is organized into research teams. Each team is led by an

R&D director. The R&D directors, including CW 1, 4, and 6 report directly to the R&D

department manager, the overall head of research at China XD.

69. The Xinda R&D Team is responsible for all technical work in connection with

China XD’s existing sales and products. The Xinda R&D Team’s primary function is to provide

customers with their customized modified plastic. The Xinda R&D Team will first tailor a

specific product formula to meet the client’s specifications, and then test the product. If the tests

are successful, the formula is sent to the operations department for production. The Xinda R&D

Team also provides pre-sale and post-sale technical support, and testing of raw materials

obtained by China XD.

70. The Xinda R&D Team is much smaller than China XD represented in its SEC

filings. According to CW 1, during his tenure, the Xinda R&D Team had about 30 professionals.

Similarly, CW 4 reports that during her tenure, there were about 30 professionals in the Xinda

R&D Team, organized into 4-5 different teams, but that the Xinda R&D Team also employed

sales representatives. Similarly, CW 6 reported that there were about 50 people in the Xinda

R&D Team, including support staff and non-professionals, also organized into 4-5 teams. CW 7

similarly reported that there were about 40 professionals in the Xinda R&D Team, though by the

end of her tenure in 2014, China XD had hired about 30 additional R&D researchers who

worked in its inoperative Sichuan subsidiaries.

Witness Time period Position Source’s report on the number of researchers in the Xinda R&D Team

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CW 1 September R&D Director 30 researchers 2013 to December 2014

CW 4 August 2014 to R&D Director 30 researchers November 2014

CW 6 June 2013- R&D Director 50 employees, including support December personnel 2014

CW 7 April 2012-end Internal Audit 40 researchers of 2014 Director

Table 4

71. China XD employs fewer researchers, both on a relative and absolute basis, than

its competitors:

Company Total number of researchers 32 Researchers as percentage of workforce

China XD (from SEC filings) 237 (plus Sichuan researchers) 24.5% (not including Sichuan) China XD (from witnesses) 40 (plus Sichuan researchers) 4.1% (not including Sichuan) Kingfa 646 13% Pret 159 19.5% Silver Age 78 8.9% Table 5

72. And these researchers are generally poorly trained. CW 1 reports that there is not

much training at China XD, that technique is not very advanced, and training materials are basic.

CW 1 adds that many of China CD’s employees are not even specialized in macromolecules, the

scientific foundation of China XD’s business, and these employees’ macromolecular skills are

typically poor. CW 4 reports that China XD relies on what its employees learned in university,

supplemented by occasional training provided by academic tutors.

73. According to CW 2, [CW 3, [CW 8, and [CW 9, China XD employees all work

six days a week. [CW 6 adds that these work hours are worse than China XD’s competitors. Six

day workweeks are highly unusual in China. Ministry of Labor and Social Security Circular on

32 Kingfa data were obtained from its 2012 and 2013 annual statements filed with the Shanghai Stock Exchange. Pret and Silver Age data were obtained from their respective 2012 and 2013 annual statements filed with the Shenzhen Stock Exchange.

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the Issues Concerning Employees’ Yearly Average Monthly Work Time and Wages

Calculations, Lao Gong Bu Fa [2008] No. 3. CW 2, CW 3, and CW 9 add that employees usually

work unpaid overtime. According to CW 3 and CW 5 China XD pays wages of, at best, the

market rate.

74. Accordingly, China XD has difficulty obtaining and retaining highly qualified

employees. CW 5 and CW 8 reported that R&D employees’ salaries were not competitive. CW 6

reports that the excessive work hours meant that China XD employees leave for its competitors

when they can.

75. China XD also imposes significant unusual burdens on its employees. For

example, according to CW 7, China XD employees’ annual bonuses are withheld until

September of the following year, and employees who leave before that September do not receive

their bonus. This is a substantial hardship since, according to CW 9, technical employees can

receive about half of their compensation as their annual bonus. This policy appears to have been

instituted to prevent or at least push off departures.

76. CW 6 reports that the automobile part modified plastics industry technical

requirements are very low, and adds that there is no major technical difference between China

XD and its competitors, who CW 6 identifies as including at least Kingfa and Pret. According to

CW 1, China XD’s level of technique is much less advanced than what he learned in university.

Indeed, CW 6 states that an employee with two to three years of experience is considered an

expert in the modified plastics industry.

VI. LOSS CAUSATION

77. On July 10, 2014, before trading began, analyst firm Bleecker Street Research

issued a report on China XD Plastics entitled “China XD Plastics: When The Numbers Don't

Add Up, There's Over 80% Downside.” The report claimed that China XD’s SEC-reported

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financial figures were overstated, focusing on measures of China XD’s profitability, such as its

net income and gross margins. The report’s claims on this topic were that:

(a) China XD’s profitability was suspiciously much higher than its

competitors;

(b) China XD’s R&D spending was too low to account for its purportedly

much superior profitability; and

(c) China XD’s 2008, 2009 and 2010 SAIC filings reported materially lower

revenue, net income, and taxes paid than its SEC filings.

78. On July 10, the price of China XD Plastics securities declined substantially,

falling $1.17 per share (over 15%) to close at $6.48 per share on heavy trading volume.

VII. OTHER FACTS PROBATIVE OF SCIENTER

79. Though the Class Period begins in March 2014, it is not the first time China XD

committed fraud. Indeed, in August 2011, an analyst with a short position in China XD’s stock

published an article claiming that China XD had fraudulently overstated its 2009 and 2010

results. The article cited differences between China XD’s SEC-reported financial results and

those its subsidiaries reported to the SAIC.

80. China XD has rapidly expanded its operations. As of December 31, 2010, it had

165,000 MT of production capacity, adding 90,000 in December 2011, and 135,000 in December

2012, for a total of 390,000 metric tons at that time. It determined to carry out in 2014-2015 its

largest expansion to date, which will add 300,000 metric tons of production through a new

Sichuan facility. These expansions are necessary for China XD to benefit from the rapidly

expanding modified plastics industry in China. They are also expensive. For example, China XD

is party to an agreement for the construction of the Sichuan plant that calls for it to pay $396

million.

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81. As a marginal modified plastics producer, China XD cannot rely on the minimal

cash its operations generate to fund its expansions. Accordingly, it has become very indebted to

local banks, owing a total of $314.7 million through its various lines of credit as of December 31,

2013 – more than its entire market capitalization at that time, and now.

82. To ease its bank debt and satisfy the banks from which it was held, China XD had

to raise money from US capital markets. Indeed, in a transaction closing in February 2014, China

XD raised $150 million in 11.75% guaranteed senior notes due 2019 (the “Offering”)

specifically to repay its debt.

83. Investors would not have been interested in participating in the Offering had they

known that China XD was barely profitable. Accordingly, Defendants had a potent motive to

inflate China XD’s financial performance to complete the Offering. At the time of the Offering,

China XD’s most recent audited financial statements were for the year ended December 31,

2012, which overstated its financial metrics, as set out above. China XD’s most recent unaudited

financial statements were for the first, second, and third quarters of 2013. These financial

statements were reissued during the Class Period.

VIII. PLAINTIFFS’ CLASS ACTION ALLEGATIONS

84. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil

Procedure 23(a) and (b)(3), on behalf of a Class consisting of all persons who purchased the

common stock of China XD during the Class Period and who were damaged thereby. Excluded

from the Class are Defendants, the officers and directors of the Company at all relevant times,

members of their immediate families and their legal representatives, heirs, successors or assigns

and any entity in which Defendants have or had a controlling interest.

85. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, China XD’s common stock was actively traded on

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the NASDAQ Global Market. While the exact number of Class members is unknown to

Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs

believe that there are at least hundreds of members in the proposed Class. Members of the Class

may be identified from records maintained by China XD or its transfer agent and may be notified

of the pendency of this action by mail, using a form of notice customarily used in securities class

actions.

86. Plaintiffs’ claims are typical of the claims of the members of the Class, as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of

federal law that is complained of herein.

87. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

88. 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 as

alleged herein;

(b) whether statements made by Defendants to the investing public during the

Class Period misrepresented material facts about the business and operations of China

XD; and

(c) to what extent the members of the Class have sustained damages, and the

proper measure of damages.

89. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

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the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to redress

individually the wrongs done to them. There will be no difficulty in managing this action as a

class action.

Applicability of Presumption of Reliance: Fraud-on-the-Market Doctrine

90. At all relevant times, the market for China Plastics common stock was an efficient

market for the following reasons, among others:

(a) China XD’s stock met the requirements for listing, and was listed and

actively traded on the NASDAQ, a highly efficient and automated market;

(b) During the class period, on average, 2,792,300 shares of China XD stock

were traded on a weekly basis, or about 5.6% of China XD’s total outstanding shares,

allowing a very strong presumption that China XD’s stock traded on an efficient market

(c) As a regulated issuer, China XD filed periodic reports with the SEC

during the Class Period;

(d) China XD regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press

releases on the national circuits of major newswire services and through other wide-

ranging public disclosures, such as communications with the financial press and other

similar reporting services;

(e) China XD was followed by at least 6 securities analysts employed by

brokerage firms, including Morgan Stanley, who wrote reports that were distributed to

the sales force and certain customers of their brokerage firms during the Class Period.

Each of these reports was publicly available and entered the public marketplace;

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(f) At least 20 FINRA member firms were active market-makers in China XD

stock during the Class Period;

(g) Unexpected material news about China XD was rapidly reflected and

incorporated into the Company’s stock price during the Class Period.

91. As a result of the foregoing, the market for China XD’s common stock promptly

digested current information regarding China XD from all publicly available sources and

reflected such information in China XD’s stock price. Under these circumstances, all purchasers

of China XD’s common stock during the Class Period suffered similar injury through their

purchase of China XD’s common stock at artificially inflated prices, and a presumption of

reliance applies.

FIRST CLAIM Violation of Section 10(b) of

The Exchange Act and Rule 10b-5 Promulgated Thereunder Against Defendants China XD, Han, and Zhang

92. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein. This count is brought against Defendant China XD, Han, and Zhang.

93. During the Class Period, Defendants China XD, Han, and Zhang carried out a

plan, scheme and course of conduct which was intended to and, throughout the Class Period, did:

(1) deceive the investing public, including Plaintiffs and other Class members, as alleged herein;

and (2) cause Plaintiffs and other members of the Class to purchase China XD Plastics’ securities

at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct,

each of the Defendants took the actions set forth herein.

94. These defendants: (a) employed devices, schemes, and artifices to defraud; (b)

made untrue statements of material fact and/or omitted to state material facts necessary to make

the statements not misleading; and (c) engaged in acts, practices, and a course of business that

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operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to

maintain artificially high market prices for China XD’s securities in violation of Section 10(b) of

the Exchange Act and Rule 10b-5 promulgated thereunder. These defendants are sued either as

primary participants in the wrongful and illegal conduct charged herein or as controlling persons

as alleged below.

95. These defendants, individually and in concert, directly and indirectly, by the use,

means or instrumentalities of interstate commerce and/or of the mails, engaged and participated

in a continuous course of conduct to conceal adverse material information about the business,

operations and future prospects of China XD as specified herein.

96. These defendants employed devices, schemes, and artifices to defraud while in

possession of material adverse non-public information, and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of China XD’s value and

performance and continued substantial growth, which included the making of, or participation in

the making of, untrue statements of material facts and omitting to state material facts necessary

in order to make the statements made about China XD and its business operations and future

prospects in the light of the circumstances under which they were made, not misleading, as set

forth more particularly herein, and engaged in transactions, practices and a course of business

that operated as a fraud and deceit upon the purchasers of China XD’s securities during the Class

Period.

97. Defendant Han and Zhang’s primary liability arises from the following facts: (1)

they each were both high-level executives and directors of the Company during the Class

Period, and were members of the Company’s management team or had control thereof; (2) they

were both, by virtue of their responsibilities and activities as a senior officer and/or director of

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the Company, privy to and participated in the creation, development and reporting of the

Company’s financial condition; (3) they both enjoyed significant personal contact and familiarity

with the other Defendants and were advised of and had access to other members of the

Company’s management team, internal reports and other data and information about the

Company’s finances, operations, and sales at all relevant times; and (4) they were aware of the

Company’s dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

98. China XD, Han, and Zhang had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the truth in that

they failed to ascertain and to disclose such facts, even though such facts were available to them.

These defendants’ material misrepresentations and/or omissions were done knowingly or

recklessly and for the purpose and effect of concealing China XD’s operating condition and

future business prospects from the investing public and supporting the artificially inflated price

of its securities. As demonstrated by these defendants’ overstatements and misstatements of the

Company’s financial condition throughout the Class Period, these defendants, if they did not

have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing

to obtain such knowledge by deliberately refraining from taking those steps necessary to

discover whether those statements were false or misleading.

99. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of China XD’s

securities was artificially inflated during the Class Period. In ignorance of the fact that market

prices of China XD’s publicly-traded securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by these Defendants, or upon the integrity

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of the market in which the common stock trades, and/or on the absence of material adverse

information that was known to or recklessly disregarded by these Defendants but not disclosed in

public statements by these Defendants during the Class Period, Plaintiffs and the other members

of the Class acquired China XD’s securities during the Class Period at artificially high prices and

were or will be damaged thereby.

100. At the time of said misrepresentations and omissions, Plaintiffs and other

members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs

and the other members of the Class and the marketplace known the truth regarding China XD’s

financial results, which was not disclosed by Defendants, Plaintiffs and other members of the

Class would not have purchased or otherwise acquired their China XD securities, or, if they had

acquired such securities during the Class Period, they would not have done so at the artificially

inflated prices that they paid.

101. By virtue of the foregoing, these defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

102. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s securities during the Class Period.

103. This action was filed within two years of discovery of the fraud and within five

years of each plaintiff’s purchases of securities giving rise to the cause of action.

SECOND CLAIM Violation of Section 20(a) of

The Exchange Act Against the Individual Defendants

104. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein. This count is brought against the Individual Defendants.

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105. The Individual Defendants acted as controlling persons of China XD within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, agency, ownership and contractual rights, and participation in and/or awareness of the

Company’s operations and/or intimate knowledge of the false financial 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 that 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 Plaintiffs to have been misleading prior to and/or shortly

after these statements were issued and had the ability to prevent the issuance of the statements or

to cause the statements to be corrected.

106. In particular, each of these Defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is 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.

107. As set forth above, China XD , Han, and Zhang each violated Section 10(b), and

Rule 10b-5 promulgated thereunder, by their acts and omissions as alleged in this Complaint.

108. By virtue of their positions as controlling persons, the Individual Defendants are

liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of

Defendants’ wrongful conduct, Plaintiff and other members of the Class suffered damages in

connection with their purchases of the Company’s securities during the Class Period.

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109. This action was filed within two years of discovery of the fraud and within five

years of each Plaintiffs’ purchases of securities giving rise to the cause of action.

WHEREFORE , Plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action, designating Plaintiffs

as Lead Plaintiffs and certifying Plaintiffs as class representatives under Rule 23 of the

Federal Rules of Civil Procedure and Plaintiffs’ counsel as class counsel;

(b) Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a

result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest

thereon;

(c) Awarding Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

Dated: February 17, 2014 Respectfully submitted,

THE ROSEN LAW FIRM, P.A.

/s/ Laurence M. Rosen Laurence M. Rosen (LR 5733) Phillip Kim (PK 9384) Jonathan Horne (JH 7258) 275 Madison Ave, 34th Floor New York, NY 10016 Phone: (212) 686-1060 Fax: (212) 202-3827

Counsel for Lead Plaintiff

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Case 1:14-cv-05308-GBD Document 19 Filed 02/17/15 Page 1...

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