     13-616-cv
     Vaughn Leroy Meyer v. JinkoSolar Holding Co.


 1                      UNITED STATES COURT OF APPEALS

 2                           FOR THE SECOND CIRCUIT

 3                              August Term, 2013

 4     (Argued:     September 18, 2013           Decided: July 31, 2014)

 5                            Docket No. 13-616-cv

 6   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

 7   VAUGHN LEROY MEYER, RICHARD MATKEVICH, ABDULLAH AL MAHMUD,
 8   AZRIEL SHUSTERMAN, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
 9   SIMILARLY SITUATED,
10
11              Plaintiffs-Appellants,

12   MARCO PETERS, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS
13   SIMILARLY SITUATED,
14
15              Plaintiff,

16                    v.

17   JINKOSOLAR HOLDINGS CO., LTD., STEVEN MARKSCHEID, CREDIT SUISSE
18   SECURITIES (USA) LLC, OPPENHEIMER & CO., INC., ROTH CAPITAL
19   PARTNERS, LLC, COLLINS STEWART LLC,
20
21              Defendants-Appellees,

22   WILLIAM BLAIR & CO., XIANDE LI, KANGPING CHEN, XIANHUA LI, WING
23   KEONG SLEW, HAITAO JIN, ZIBIN LI, LOGGEN ZHANG,
24
25              Defendants.*
26
27   - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

28   B e f o r e:     WINTER, WALKER, and WESLEY, Circuit Judges.

29



          *
            The clerk is instructed to modify the party caption to conform to this
     opinion.
 1        Appeal from an order of the District Court for the

 2   Southern District of New York (J. Paul Oetken, Judge)

 3   dismissing a complaint alleging violations of the federal

 4   securities laws.   We vacate the dismissal of the complaint on

 5   the ground that the failure to disclose ongoing serious

 6   pollution problems rendered misleading statements describing

 7   measures taken to comply with Chinese environmental

 8   regulations.

 9                            MICHAEL STEPHEN BIGIN (Uri Seth
10                            Ottensoser, Joseph R. Seidman, Jr.,
11                            Laurence Jesse Hasson, on the
12                            brief), Bernstein Liebhard LLP, New
13                            York, NY, for Plaintiffs-
14                            Appellants.
15

16                            BRIAN H. POLOVOY (Jerome S. Fortinsky,
17                            on the brief), Shearman & Sterling
18                            LLP, New York, NY, for Defendants-
19                            Appellees JinkoSolar Holdings Co.,
20                            Ltd. and Steven Markscheid.
21

22                            WILLIAM J. SUSHON (Bradley J. Butwin,
23                            B. Andrew Bednark, on the brief),
24                            O’Melveny & Meyers LLP, New York, NY,
25                            for Defendants-Appellees Credit Suisse
26                            Securities (USA) LLC, Oppenheimer &
27                            Co., Inc., Roth Capital Partners, LLC,
28                            and Collins Stewart LLC.
29

30   WINTER, Circuit Judge:

31        Various purchasers of securities issued by JinkoSolar

32   Holdings Co., Ltd. in two public offerings appeal from Judge

33   Oetken’s dismissal of their complaint alleging violations of the


                                     2
 1   federal securities laws.   We hold that appellees’ failure to

 2   disclose ongoing, serious pollution problems rendered misleading

 3   statements in a prospectus describing prophylactic measures taken

 4   to comply with Chinese environmental regulations.      We therefore

 5   vacate and remand.

 6                               BACKGROUND

 7        In reviewing a dismissal under Rule 12(b)(6), we view the

 8   facts alleged in the complaint as true.      N.J. Carpenters Health

 9   Fund v. Royal Bank of Scot. Grp., PLC, 709 F.3d 109, 119 (2d Cir.

10   2013).

11        Primarily using facilities in China, JinkoSolar manufactures

12   various photovoltaic products (“PV products”), that is, solar

13   cells and solar panel products.       JinkoSolar’s size and range of

14   products rapidly increased after its July 2009 acquisition of

15   Zhejiang Sun Valley Energy Application Technology Company, Ltd.

16   (“Sun Valley”).   Its main production plants are located in the

17   Jiangzi and Zhejiang provinces in China, which are regulated by

18   the Haining Environmental Protection Bureau (“EPB”).

19        JinkoSolar made two public offerings of American Depository

20   Shares (“ADS”) on the New York Stock Exchange (“NYSE”), one on

21   May 13, 2010, and the other on November 10, 2010.      The May

22   offering consisted of 5,835,000 ADS, which were sold at $11 a

23   share and raised a total of $64,185,000.

24


                                       3
1          The prospectus accompanying the May offering discussed the

2    pollution potential of JinkoSolar’s business, the applicability

3    of Chinese environmental regulations and standards, and

4    JinkoSolar’s efforts at compliance.         It stated:

 5               We generate and discharge chemical wastes,
 6               waste water, gaseous waste and other
 7               industrial waste at various stages of our
 8               manufacturing process as well as during the
 9               processing of recovered silicon material. We
10               have installed pollution abatement equipment
11               at our facilities to process, reduce, treat,
12               and where feasible, recycle the waste
13               materials before disposal, and we treat the
14               waste water, gaseous and liquid waste and
15               other industrial waste produced during the
16               manufacturing process before discharge. We
17               also maintain environmental teams at each of
18               our manufacturing facilities to monitor waste
19               treatment and ensure that [these] waste
20               emissions comply with [People’s Republic of
21               China] environmental standards. Our
22               environmental teams are on duty 24 hours. We
23               are required to comply with all PRC national
24               and local environmental protection laws and
25               regulations and our operations are subject to
26               periodic inspection by national and local
27               environmental protection authorities. PRC
28               national and local environmental laws and
29               regulations impose fees for the discharge of
30               waste materials above prescribed levels,
31               require the payment of fines for serious
32               violations and provide that the relevant
33               authorities may at their own discretion close
34               or suspend the operation of any facility that
35               fails to comply with orders requiring it to
36               cease or remedy operations causing
37               environmental damage. As of December 31,
38               2009, no such penalties had been imposed on
39               us.1


           1
            The November prospectus contained the same language, except, at the
     end of the section it stated, “[a]s of the date of this prospectus, no such
     penalties had been imposed on us.”

                                           4
 1   Amend. Compl. ¶ 80 (emphasis in original).         The May prospectus

 2   also stated:

 3              Compliance with environmental, safe
 4              production and construction regulations can
 5              be costly, while non-compliance with such
 6              regulations may result in adverse publicity
 7              and potentially significant monetary damages,
 8              fines and suspension of our business
 9              operations. We use, store and generate
10              volatile and otherwise dangerous chemicals
11              and wastes during our manufacturing process,
12              and are subject to a variety of government
13              regulations related to the use, storage and
14              disposal of such hazardous chemicals and
15              waste. We are required to comply with all PRC
16              national and local environmental regulations
17              . . . .
18
19   Amend. Compl. ¶ 82 (emphasis in original).2

20        On June 8, 2010, appellees submitted a report to the EPB

21   about JinkoSolar’s recent expansion in solar cell production.

22   The report contained a section entitled “Existing Problems.”              It

23   explained that the Zhejiang plant was “not disposing of hazardous

24   solid waste in accordance with relevant disposal methods, and was

25   emitting high levels of fluorides.”        Amend. Compl. ¶ 5.      It

26   stated:

27                   1. The tube used for the discharge of
28              chlorine (Discharge Tube A) currently has a
29              height of 15 metres. This does not meet the
30              minimum height requirements.
31                   2. According to monitoring data from the
32              Haining City Environmental Protection Bureau,



          2
            The November prospectus contained identical language. This exact
     passage was repeated in the 2010 year-end report on April 25, 2011.

                                          5
 1              HCl concentration levels in the region
 2              surrounding the enterprise have exceeded set
 3              limits . . . . The area surrounding the
 4              project does not have capacity for storing
 5              HCl. If this project continues to use HCl
 6              cleaning processes then once completed this
 7              would worsen the HCl pollution situation in
 8              the local area.
 9                   3. Sludge produced by the enterprise is
10              classed as hazardous solid waste. This has
11              not been disposed of in accordance with
12              relevant State disposal methods.
13                   4. Presently, the tower operated by the
14              enterprise to absorb acidic mist has 35%
15              efficiency in removing inorganic fluorides,
16              which means that industrial emission volumes
17              for fluorides are comparatively large.
18
19   Amend. Compl. ¶ 61.   In a section entitled “Measures for

20   Restructuring and Reform,” the report listed a number of

21   structural changes that would be necessary to ameliorate the

22   problems described in the report.

23         In April 2011, JinkoSolar received a notice from the EPB

24   “informing [JinkoSolar] of high fluoride level in its waste.”     On

25   May 11, 2011, the EPB detected “higher than acceptable levels of

26   fluoride at JKS, this time in its waste water.”   Amend. Compl. ¶

27   6.   In another document submitted to the EPB, JinkoSolar reported

28   again that the water around the plant did not meet environmental

29   standards because of, inter alia, fluoride levels.

30         The complaint further alleges that on September 15, 2011,

31   “news started to break that local residents living near

32   [JinkoSolar’s] solar cell plant in Zhejiang angrily demonstrated

33   outside the facility following a massive die-off of fish over the


                                      6
 1   previous month in the river flowing immediately adjacent to the

 2   plant.”    Amend. Compl. ¶ 9.   At one point, the protest turned

 3   violent and protesters overturned cars, including police cars,

 4   and damaged surrounding buildings.      Within the next few days, the

 5   People’s Republic of China ordered that the plant be closed and

 6   that JinkoSolar take remedial action.      On September 22, 2011,

 7   JinkoSolar issued a press release revealing that JinkoSolar was

 8   fined for non-compliance with environmental regulations in May

 9   2011 and paid local landowners for damage to their crops and

10   death of livestock and wildlife.       The complaint alleges that

11   JinkoSolar’s stock lost 40% of its value by the time the dust had

12   settled.

13        On October 11, 2011, appellants commenced this action

14   against JinkoSolar, several of its officers and directors, and

15   several entities that served as underwriters for the ADS

16   offerings.   Appellants alleged violations of Sections 11 and

17   12(a)(2) of the Securities Act of 1933 and Section 10(b) of the

18   Securities Exchange Act of 1934.       The complaint also alleged

19   controlling person liability against various appellees under

20   Section 15 of the 1933 Act and Section 20(a) of the 1934 Act.

21        Various appellees moved before the district court for

22   dismissal for failure to state a claim for relief under Fed. R.

23   Civ. P. 12(b)(6).   The court granted the motion.

24


                                        7
 1        Central to appellants’ claims were the paragraphs in the May

 2   prospectus (and repeated later) quoted above.      With regard to the

 3   statements about JinkoSolar’s storage of hazardous and dangerous

 4   chemicals, PRC national and local regulations, and the costs of

 5   compliance or non-compliance, the court held that those

 6   statements were not misleading.       However, the court deemed that

 7   the paragraph discussing JinkoSolar’s pollution abatement

 8   equipment and its 24-hour environmental monitoring team “a more

 9   complicated matter” and “arguably a close call.”        Peters v.

10   JinkoSolar Holding Co., No. 11 Civ. 7133 (JPO) (S.D.N.Y. Feb. 27,

11   2013).   However, the court concluded that the reasonable investor

12   would not read the statement about “ensur[ing]” compliance to

13   actually guarantee compliance because “elsewhere in the

14   Prospectuses, Jinkosolar underscored to investors that fines due

15   to pollution are a real possibility.”      Id. at *7.    Because the

16   court did not find any material misstatements or omissions, it

17   dismissed the complaint.   This appeal followed.

18                               DISCUSSION

19        We review the grant of a Section 12(b)(6) motion to dismiss

20   de novo.   N.J. Carpenters, 709 F.3d at 119; Lentell v. Merrill

21   Lynch & Co., 396 F.3d 161, 167 (2d Cir. 2005).       In doing so, we

22   “accept[] all factual allegations [in the complaint] as true and

23   draw[] all reasonable inferences in favor of the plaintiff.”

24   N.J. Carpenters, 709 F.3d at 119 (quoting Litwin v. Blackstone


                                       8
 1   Grp., L.P., 634 F.3d 706, 715 (2d Cir. 2011)).    At this stage,

 2   dismissal is appropriate only where appellants can prove no set

 3   of facts consistent with the complaint that would entitle them to

 4   relief.   Elec. Commc’ns Corp. v. Toshiba Am. Consumer Prods.,

 5   Inc., 129 F.3d 240, 242-43 (2d Cir. 1997).

 6          The complaint, alleging violations of Sections 11 and 12 of

 7   the 1933 Securities Act and Section 10(b) of the 1934 Securities

 8   Exchange Act, raises a host of legal issues with regard to

 9   varying standards of liability and defenses, the various

10   plaintiffs’ standing, the particularity of the pleadings with

11   regard to requisite states of mind and conduct of each defendant,

12   etc.   However, each of the three sections imposes liability for a

13   material misstatement of fact or an omission to state a fact that

14   renders a statement made materially misleading.   See Securities

15   Act of 1933 § 11(a), 15 U.S.C. § 77k(a) (2012) (“In case any part

16   of the registration statement . . . contain[s] an untrue

17   statement of a material fact or omit[s] to state a material fact

18   . . . necessary to make the statements therein not misleading,

19   any person acquiring such security . . . may . . . sue . . . .”);

20   Securities Act of 1933 § 12(a)(2), 15 U.S.C. § 77l(a)(2) (2012)

21   (“Any person who . . . offers or sells a security . . . which

22   includes an untrue statement of a material fact or omits to state

23   a material fact necessary in order to make the statements . . .

24   not misleading . . . shall be liable . . . .”); In re Time Warner


                                       9
 1   Inc. Sec. Litig., 9 F.3d 259, 269 (2d Cir. 1993) (“A duty to

 2   disclose arises whenever secret information renders prior public

 3   statements materially misleading . . . .”).

 4         The district court dismissed the complaint for failure to

 5   meet this requirement.    We disagree and vacate the dismissal.   We

 6   intimate no view on any other issue.

 7         While the statements regarding JinkoSolar being subject to a

 8   variety of pollution regulations and the high cost of both

 9   compliance and non-compliance are not misstatements, they are

10   relevant to the materiality of the prospectuses’ description of

11   JinkoSolar’s potential to cause serious pollution problems and

12   the steps it was taking to avoid those problems.    With regard to

13   that description, we believe the complaint sufficiently alleges

14   that the failure to disclose that the prophylactic steps were

15   then failing to prevent serious ongoing pollution problems

16   rendered that description misleading.

17   a)   Material Omissions

18         In general there is no duty to disclose a fact in the

19   offering documents “merely because a reasonable investor would

20   very much like to know that fact,” In re Time Warner, 9 F.3d at

21   267, but “[d]isclosure is required . . . when necessary ‘to make

22   . . . statements made, in light of the circumstances under which

23   they were made, not misleading.’”     Matrixx Initiatives, Inc. v.

24   Siracusano, 131 S.Ct. 1309, 1321 (2011) (quoting 17 C.F.R. §

25   240.10b-5(b)).

                                      10
 1         Even when there is no existing independent duty to disclose

 2   information, once a company speaks on an issue or topic, there is

 3   a duty to tell the whole truth.        See Caiola v. Citibank, N.A.,

 4   295 F.3d 312, 331 (2d Cir. 2002) (“[T]he lack of an independent

 5   duty is not . . . a defense to . . . liability because upon

 6   choosing to speak, one must speak truthfully about material

 7   issues.   Once Citibank chose to discuss its hedging strategy, it

 8   had a duty to be both accurate and complete.”).3           As we have

 9   stated:

10               The literal truth of an isolated statement is
11               insufficient; the proper inquiry requires an
12               examination of defendants' representations,
13               taken together and in context. Thus, when an
14               offering participant makes a disclosure about
15               a particular topic, whether voluntary or
16               required, the representation must be complete
17               and accurate.
18
19   In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 366

20   (2d Cir. 2010) (internal citations and quotation marks omitted).

21   b)   Application

22         We address only the disclosures of the May prospectus

23   because our conclusion that they could be found by a trier of

24   fact to be materially misleading applies a fortiori to the later

25   repetition of those disclosures.



           3
             Because the May prospectus discussed the risks of pollution inherent
     in JinkoSolar’s business and the general practices JinkoSolar had implemented
     to cabin this risk, it put the issue “in play,” Shapiro v. UJB Financial
     Corp., 964 F.2d 272, 282 (3d Cir. 1992), so we have no need to discuss whether
     it had a duty to disclose such risks.

                                           11
 1        As quoted above, the prospectus discussed JinkoSolar’s

 2   pollution abatement equipment and its provision of monitoring

 3   environmental teams on duty 24 hours a day.   These statements

 4   must be read in the context of the further disclosure by the

 5   prospectus that JinkoSolar generates, uses, and stores “dangerous

 6   chemicals and wastes” and is subject to Chinese regulations

 7   regarding such chemicals and wastes.   Amend. Compl. ¶ 82.   The

 8   prospectus also informed investors that compliance with such

 9   regulations is costly and that non-compliance may lead to bad

10   publicity, fines, and even a suspension of the business.

11        All of the above may be technically true.    However, the

12   description of pollution-preventing equipment and 24-hour

13   monitoring teams gave comfort to investors that reasonably

14   effective steps were being taken to comply with applicable

15   environmental regulations.   To be sure, these descriptions did

16   not guarantee 100% compliance 100% of the time.   Such compliance

17   may often be unobtainable, and reasonable investors may be deemed

18   to know that.   However, investors would be misled by a statement

19   such as that quoted above if in fact the equipment and 24-hour

20   team were then failing to prevent substantial violations of the

21   Chinese regulations.

22        The complaint alleges that in June 2010 JinkoSolar submitted

23   a report to Chinese regulators about “existing problems.”    This

24   report, quoted in detail supra, describes problems of a nature


                                     12
 1   that is sufficient, if proven, to allow a trier of fact, absent

 2   contrary evidence, to draw an inference that the problems

 3   “existing” as of June 8, 2010, were both present and substantial

 4   at the time of the May 13, 2010, offering.

 5        The failure to disclose these problems in the May prospectus

 6   could be found by a trier of fact to be an omission that renders

 7   misleading the comforting statements in the prospectus about

 8   compliance measures.    This misleading omission is not cured by

 9   the additional statement that non-compliance with the

10   environmental regulations may be very costly.   Although this

11   statement warned of a financial risk to the company from

12   environmental violations, the failure to disclose then-ongoing

13   and serious pollution violations would cause a reasonable

14   investor to make an overly optimistic assessment of the risk.      A

15   generic warning of a risk will not suffice when undisclosed facts

16   on the ground would substantially affect a reasonable investor’s

17   calculations of probability.   Rombach v. Chang, 355 F.3d 164, 173

18   (2d Cir. 2004) (“Cautionary words about future risk cannot

19   insulate from liability the failure to disclose that the risk has

20   transpired.”)   One cannot, for example, disclose in a securities

21   offering a business’s peculiar risk of fire, the installation of

22   a comprehensive sprinkler system to reduce fire danger, and omit

23   the fact that the system has been found to be inoperable, without

24   misleading investors.


                                      13
 1        Of course, the misleading omission must be material, that

 2   is, the omission must be of facts that a reasonable investor

 3   would consider important.   In re Morgan Stanley, 592 F.3d at 360.

 4   That requirement is not much of a barrier to appellants’

 5   prevailing on a Fed. R. Civ. P. 12(b)(6) motion in this matter.

 6   At the time the statements regarding pollution prevention and

 7   compliance measures were made, a reasonable investor could

 8   conclude that a substantial non-compliance would constitute a

 9   substantial threat to earnings, if not to the entire venture.

10   Indeed, the prospectus said as much.     Applying the Basic

11   formulation of measuring the importance of the event discounted

12   by the probability of its occurrence, Basic, Inc. v. Levinson,

13   485 U.S. 224, 238 (1988) (quoting SEC v. Texas Gulf Sulphur Co.,

14   401 F.2d 833, 849 (2d Cir. 1968)), a trier of fact could find

15   that the existence of ongoing and substantial pollution problems

16   -- here the omitted facts -- was of substantial importance to

17   investors.

18                               CONCLUSION

19        We therefore vacate the dismissal of the complaint and

20   remand.




                                     14
