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John Bird v. Moore Stephens

June 29, 2011

JOHN BIRD PLAINTIFF,
v.
MOORE STEPHENS, P.C.,
DEFENDANTS.



The opinion of the court was delivered by: Hon. Dennis M. Cavanaugh

NOT FOR PUBLICATION

OPINION

DENNIS M. CAVANAUGH, U.S.D.J.:

This matter comes before the Court upon motion by Moore Stephens, P.C. ("Defendant") to dismiss Plaintiff's Complaint pursuant to Federal Rule of Civil Procedure 12(c).*fn1 Pursuant to Federal Rule of Civil Procedure 78, no oral argument was heard. For the reasons set forth below, Defendant's motion is granted.

I. BACKGROUND*fn2

China Sky One Medical, Inc. ("CSKI") is a publicly-traded corporation operating and doing business in the People's Republic of China, and the common stock of CSKI trades on the NASDAQ under the symbol CSKI. John Bird ("Plaintiff") is a "short seller" of shares of common stock of CSKI, meaning that he has sold shares of CSKI stock he borrowed from a broker expecting to replace them with other shares of CSKI stock purchased at a later time and at a lower cost.

In 2008, Moore Stephens, P.C. ("Defendant" or "MSPC") was engaged to audit the financial statements of "CSKI." According to its Form 10-K for the year ending December 31, 2008 (the "2008 10-K"), which was filed by Defendant with the United States Securities and Exchange Commission ("SEC") on April 15, 2009, CSKI, through its subsidiaries, is engaged in the development, manufacture, marketing, and sale of over-the-counter, branded nutritional supplements and over-the-counter plant and herb based pharmaceutical and medical products in China and elsewhere.

In the course of its engagement as CSKI's auditors, Defendant audited CSKI's financial statements for the year ending December 31, 2008 (the "2008 CSKI Financial Statements"). In connection with Defendant's audit of the 2008 CSKI Financial Statements, Defendant issued the 2008 Report of Independent Registered Public Accounting Firm ("2008 Opinion Letter"), which stated in relevant part:

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Sky One Medical, Inc. and Subsidiaries as of December 31, 2008 and the results of their operations and their cash flows for the year then ended in conformity with United States generally accepted accounting principles.

After April 15, 2009, Plaintiff began to research CSKI by investigating the accuracy of the 2008 CSKI Financial Statements. Plaintiff alleges that he discovered several material misstatements and/or inaccuracies in the 2008 CSKI Financial Statements. Plaintiff alleges he "realized that the dissemination to the public of MSPC's unqualified opinion, and the materially false financial statements which it had audited, had misled stock market investors, resulting in an overinflated stock price." Compl. ¶ 22.

Between June 16, 2009 and November 30, 2009, and after conducting the research described above, "Plaintiff established a substantial short position in CSKI stock," with the "expectation that the market would soon realize that CSKI's stock price was overvalued, and thereafter would decline once the corrected information was disseminated into the market." Id. at ¶ 26. In August 2009, Plaintiff submitted information to Defendant indicating that the 2008 CSKI Financial Statements were materially false and inaccurate, as was the 2008 Opinion Letter. Defendant failed to withdraw the 2008 Opinion Letter.

Plaintiff engaged a Chinese patent law firm to conduct an investigation into the truthfulness of the 2008 CSKI Financial Statements regarding seven patents allegedly owned by CSKI. The law firm issued a report concluding that neither CSKI nor its subsidiaries owned any patents. Upon receiving the report, Plaintiff advised Defendant of the findings and asked Defendant to revise its 2008 Opinion Letter. Defendant did not revise or withdraw its 2008 Opinion Letter.

Plaintiff alleges that once Plaintiff alerted Defendant to the material misstatements in the 2008 CSKI Financial Statements, Defendant had a duty to correct the information in the 2008 Opinion Letter. Plaintiff also alleges that as a result of Defendant's failure to issue corrected statements or withdraw support from the 2008 Opinion Letter regarding the accuracy of the 2008 CSKI Financial Statements, the value of CSKI stock has been, and remains, artificially inflated. Due to the artificially high stock prices, Plaintiff incurred losses totaling $89,108 when he was forced to cover part of his short position by buying-in CSKI stock in a series of transactions, principally between November 27, 2009 and December 28, 2009.

Plaintiff subsequently brought a claim against Defendant alleging Defendant violated Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Defendant initially filed an Answer to the ...


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