1

E2LVADVC Fairness Hearing

1 UNITED STATES DISTRICT COURT
1 SOUTHERN DISTRICT OF NEW YORK
2 ------------------------------x
2
3 IN RE: ADVANCED BATTERY
3 TECHNOLOGIES, INC.
4 SECURITIES LITIGATION,
4 11 CV 2279 (CM)
5 ------------------------------x
5 UNITED STATES DISTRICT COURT
6 SOUTHERN DISTRICT OF NEW YORK
6 ------------------------------x
7
7 CARL BRAUN, derivatively on
8 behalf of Advanced Battery
8 Technologies, Inc.,
9
9 Plaintiff,
10
10 v. 11 CV 4383 (CM)
11
11 ZHIGUO FU, ET AL,
12
12 Defendants.
13
13 ------------------------------x
14
14
15
15 New York, N.Y.
16 February 21, 2014
16 9:37 a.m.
17
17 Before:
18
18 HON. COLLEEN MCMAHON,
19
19 District Judge
20
20 APPEARANCES
21
21 POMERANTZ LLP
22 Attorneys for Lead Plaintiff
22 BY: MURIELLE J. STEVEN WALSH
23
23 LEVI & KORSINSKY
24 Attorneys for Plaintiff Carl Braun
24 BY: SHANNON L. HOPKINS
25
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E2LVADVC Fairness Hearing
1 APPEARANCES (continued)
2 McLAUGHLIN & STERN
2 Attorneys for Defendant
3 Advanced Battery Technologies, Inc.
3 BY: LEE S. SHALOV
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1 (Case called)
2 THE COURT: The matter is on for a fairness hearing;
3 and though it's a continuation of a fairness hearing to seek
4 approval of the settlement in a derivative action -- two
5 derivative actions, two parallel derivative actions, one
6 pending here and one pending in New York State Supreme Court,
7 and the securities class action that was also brought
8 precipitated by the undramatic decline in the fold of ABAT
9 stock. And we consolidated the two hearings because at the
10 original fairness hearing on the derivative actions, Mr. Kaplan
11 and his confrères appeared, having sent me a number of letters,
12 which they have continued to do, and objected to various
13 aspects of the proposed security or proposed derivative suit
14 settlement.
15 And the derivative suit settlement, in brief, provided
16 that ABAT and defendants would establish something called the
17 financial reconciliation committee, and something called the
18 related transactions committee, and some public disclosure
19 responsibility with respect to material litigation and SEC or
20 government investigations, and the setting up of a toll-free
21 voicemail box to receive anonymous complaints, good corporate
22 government procedures.
23 Mr. Kaplan, who is a shareholder in ABAT, and several
24 other shareholders, were concerned -- not that they
25 particularly minded that the case was going to settle or that
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E2LVADVC Fairness Hearing
1 the class action was going to settle, and the class action
2 settlement is contingent on the derivative pursuit. Is that
3 still correct?
4 MS. WALSH: As it currently stands, yes, your Honor.
5 THE COURT: As it currently stands.
6 They had some problems with the derivative suit
7 settlement. And while some of them I view as tangential, and
8 one of them was based on a misunderstanding, that
9 misunderstanding being that courts always retain jurisdiction
10 to enforce settlements, one was a little troubling to me, it
11 was the assertion by Mr. Kaplan that ABAT had not made --
12 registered securities in the United States had not made any
13 10-Q or 10-K filings with the SEC for some time. And, of
14 course, his very great concern is that this is one of many
15 Chinese companies that have been set up in the United States
16 for the purpose of doing what this company did, which was to
17 raise capital, and which have taken the money and gone home.
18 The money goes to China; it's not available to do anything like
19 satisfy shareholder funds, which sounds like a bad scam to me.
20 And the fact that, according to Mr. Kaplan, ABAT was
21 not filing with the SEC was problematic, and he wanted me
22 unilaterally to add some compliance terms in that regard to the
23 settlement. He also wanted to have some discussions with the
24 parties about how to settle, and everybody variously describes
25 what those discussions involve. They do seem to have involved
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1 an attempt by the three objectors who have shown up in the
2 class action to get themselves bought out. That's at least
3 part of it. But they also raised some issues.
4 So when we left the matter, I adjourned the settlement
5 hearing on the derivative action, and I asked for some
6 information about SEC compliance. There was an assertion, it
7 was kind of off the top of some lawyer's head -- the lawyer was
8 not an expert in these matters -- that SEC filings were no
9 longer required of ABAT because it had been delisted.
10 And I said, Well, let's get to the bottom of that.
11 And we have gotten to the bottom of it. I got a letter --
12 where is that letter from counsel? I'd like to know where that
13 letter is.
14 I got a letter dated January 13th from Mr. Brantel,
15 who has served as securities counsel for Advanced Battery
16 Technologies since 2004, and who, at the request of litigation
17 counsel for ABAT, McLaughlin & Stern, at their request he
18 responded to my inquiry. And the response was not consoling to
19 me.
20 Tell me if I'm reading this wrong.
21 Mr. Brantel first sets out the rule promulgated by the
22 SEC, pursuant to Section 13(a) of the Exchange Act, the '34
23 Act, which mandates that any issuer with securities that are
24 registered under Section 12, as ABAT is, must file annual and
25 quarterly reports with the SEC. And further indicated that
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1 ABAT had made timely filings of its 10-Qs and 10-Ks from 2004
2 until November of 2011; and that ABAT then stopped making
3 filings, suspended filing with the SEC, and hasn't filed
4 anything with the SEC since. And it's still registered. It's
5 delisted from NASDAQ, but it's still registered, therefore.
6 And we did some research, Diana, my law clerk, did some
7 research on this. It is legally required to file.
8 And the SEC, it was asserted, was looking into ABAT's
9 prior '34 Act filings in 2011, and sent a letter to ABAT in
10 November of 2011 saying, Where is your 10-Q for the quarter
11 ending September 30th.
12 And ABAT said, Well, we expect to file that in January
13 of 2012. But it did not do so and has not done anything, has
14 not filed anything since. Mr. Brantel notes that no further
15 comment from the SEC has been received. But during the next
16 two subsequent years, the SEC has been busy revoking the
17 registration of companies like ABAT, and has revoked the
18 registration of 53 China-based issuers with delinquent filings,
19 and has not revoked ABAT's registration, from which I gather I
20 am supposed to take some comfort that the SEC, which is the
21 sole enforcer of this obligation, there being no private right
22 of action, doesn't seem to be having any problems with ABAT.
23 That is not the conclusion I draw.
24 The conclusion that I draw based on the SEC's
25 performance over the last five years as an enforcement agency,
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1 the kindest conclusion I can draw, is that they're so
2 overwhelmed with enforcement matters, that they simply haven't
3 gotten around to ABAT yet. I could draw a more various
4 conclusion, I choose not to.
5 The settlement with which I have been presented in the
6 derivative action does not require the company to comply with
7 its obligations under the '34 Act. Indeed, the settlement
8 appears to be structured in a manner that gives it an out, not
9 a legal out, but the law is the law, but an out within the
10 settlement from -- the settlement anticipates that there will
11 not be compliance, let me put it that way.
12 The settlement anticipates that there will not be
13 compliance with the filing requirements, because, for example,
14 the financial reconciliation committee is to establish rules to
15 ensure that the company's year-end publicly-filed statements,
16 whether filed with regulators in the U.S. or China, suggests
17 they may not be filing in the U.S., even though they are
18 legally required to do so, are consistent with one another to
19 the extent required under applicable accounting rules and
20 regulations. I don't know what that means, but what little I
21 know about China's suggested GAAP doesn't carry a lot of weight
22 there.
23 In truth and in fact, I'm not prepared to be a party
24 to this. Just getting right down to the bottom line, I'm a
25 federal judge who has been apprised. And I thank Mr. Brantel
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E2LVADVC Fairness Hearing
1 very much, and I thank McLaughlin & Stern for getting me
2 information from a '33 and '34 Act lawyer. And I thank Diana
3 Conner, my law clerk, for doing a lot of research and
4 confirming this.
5 I am aware that this company is in violation of the
6 law, and has been in violation of the law for two and-a-half
7 years. And it's still registered. I can't stop the SEC from
8 deregistering it, and I can't add terms to the settlement. The
9 settlement is not court-imposed.
10 See, Mr. Kaplan, you keep wanting me to amend the
11 settlement. I can't do that. The settlement is what they
12 agreed to. I either say, Okay, fine, or, No, I'm not blessing
13 it.
14 This one I can't bless. I can't bless this because I
15 am aware of violations of United States law that are not only
16 not redressed by the settlement, but that are permitted under
17 the express terms of the settlement to be perpetuated. If ABAT
18 wants to operate that way, we can litigate. But I'm not going
19 to be a party to that kind of a settlement. I don't think
20 that's consistent with my obligations as an enforcer of the
21 law.
22 Now, if somebody can tell me why I'm wrong about that,
23 I'll be happy to hear why I'm wrong about that. But I must
24 tell you that as this unfolded over the course of the last few
25 weeks, I had a gut reaction; and that gut reaction has only
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E2LVADVC Fairness Hearing
1 grown stronger over time. So if somebody wants to explain to
2 me why my gut reaction is wrong, I'm prepared to listen; but I
3 didn't see any reason not to lay it right out and tell you
4 where I am in my thought process on this.
5 And if that means that the securities fraud class
6 action case doesn't settle, well, then the securities fraud
7 class action case doesn't settle and we litigate it. That
8 settlement looks pretty good to me, given that I'm sure there's
9 no money.
10 As much as Mr. Kaplan and his friends would like to
11 get their money back, I'm sure that that money has gone beyond
12 the reach of this Court to pull it back. But if there's any
13 hope for them to get money back, the market in this company
14 needs to get reestablished, and it's not going to be
15 reestablished as long as the company is not complying with its
16 statutory obligations. Why should I sign off on that? Why
17 should I bless that?
18 Who wants to say something?
19 Counsel, good morning.
20 MS. HOPKINS: I definitely can appreciate your Honor's
21 concerns here. I think there's a couple of points here.
22 First of all, the settlement agreement here is the
23 first point that you pointed to is not meant to say this was
24 definitely not anticipated, they weren't in compliance. The
25 purpose of this was to make sure that the filings in China and
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1 the United States were consistent and that shareholders had a
2 reconciliation to see between the two of them.
3 THE COURT: There's nothing in here that requires them
4 to bring themselves into compliance with the law.
5 MS. HOPKINS: I understand, your Honor.
6 As your Honor just said, there's no private right of
7 action to enforce that. Even if we had it in the settlement,
8 there's case law out there that when it falls within the
9 purview of the SEC, that you can't bring --
10 THE COURT: Well, fine. Then I'm not prepared to sign
11 off on settlement -- I'm simply not prepared to sign off on a
12 settlement in which the company doesn't recognize its
13 obligations and agree to abide by them, which it may do
14 voluntarily. It has no private right of action about it.
15 The company, having been sued for other matters, now
16 needs/wants to get out from under the lawsuit. If it wants to
17 get out from under the lawsuit in front of me, it has to agree
18 to bring itself into compliance with U.S. law. I'm not
19 prepared to sign off on a settlement that doesn't authorize
20 that. The fact that you couldn't bring a lawsuit to force them
21 to do it in the first place is a totally different question
22 from having brought a lawsuit, does a United States District
23 Judge bless a settlement that allows illegal activity to
24 continue to perpetuate itself. Once I become an actor, the
25 rules change.
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1 Now, do you want to make a motion to dismiss the
2 lawsuit on the ground that there's no private right of action?
3 Fine. I didn't have such a motion; nobody made a motion in the
4 derivative suit.
5 MS. HOPKINS: The point of our settlement is to
6 address the disclosure issues that came out.
7 THE COURT: There's no disclosure. They are not
8 filing.
9 MS. HOPKINS: The lawsuit that we brought, they were
10 filing at that time. This lawsuit doesn't contain any such
11 allegations for us to settle. It's something that happened
12 after the fact.
13 THE COURT: That's fine. But it's happened. And now
14 they are not disclosing anything at all. It's a sham
15 settlement. This is not pejorative as against you. You were
16 faced with a different situation when you brought the lawsuit.
17 I understand that. I appreciate that. But I have to figure
18 out what's going on on the ground now. And what's going on on
19 the ground now is not the same thing that was going on on the
20 ground in 2011. That's obvious. The company seems to have
21 withdrawn itself.
22 What I know about this, I know about a little bit of
23 context that there are a bunch of ABATs out there who have gone
24 down this road, and then who have just plain disappeared.
25 As I said, I can't stop the SEC from deregistering. I
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1 don't know why the SEC has not gotten around to deregistering
2 them, but they've been busily deregistering Chinese companies
3 that haven't filed. And I don't conclude that the fact that
4 they haven't gotten around to ABAT means that they think it's
5 somehow better than other companies. I conclude that they
6 haven't gotten around to ABAT. That's what I conclude.
7 I'm uncomfortable signing off on a settlement that
8 doesn't acknowledge the current condition. And the company is
9 perfectly free in the context of a voluntary settlement with
10 anybody in the world to settle on any terms, including terms
11 that could not be encompassed by a lawsuit brought by you, but
12 would instead have to be brought by the SEC. That's all I'm
13 saying. I accuse you of no bad faith at all. On the contrary.
14 I understand that you're in an interesting situation as
15 counsel.
16 MS. HOPKINS: It is, because this is something -- even
17 if we had in our settlement agreement that we couldn't
18 necessarily ask the Court to enforce, because it's not within
19 the Court's jurisdiction, so we are in a very interesting
20 predicament.
21 THE COURT: You are in a very interesting position.
22 I won't sign off on a settlement if this company is
23 not going to bring itself into compliance. You're in no
24 position to ask me to do that, because only the SEC can ask me
25 to do that.
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1 I think the appropriate thing to do is for me to
2 notify the SEC of what's going on, and to ask them to come in
3 and weigh in. If you want to go forward with this, I think
4 that's the appropriate thing to do.
5 Meanwhile, the folks in the class action have to
6 decide whether they want to continue to hang with the
7 derivative plaintiffs or not. There's nothing wrong with the
8 sort of general framework that you've worked out, except that
9 it anticipates this very large loophole for continued
10 noncompliance with United States law.
11 MS. HOPKINS: At the time we entered into it, there
12 was no noncompliance, so it wasn't ever --
13 THE COURT: Wait. You entered into this settlement in
14 2011, and you're just getting around in like 2013 to asking the
15 Court to -- I don't think you reached a settlement in 2011.
16 MS. HOPKINS: No, I'm sorry, I meant at the time of
17 the lawsuit, what the lawsuit was based on.
18 THE COURT: The settlement is in 2013, and I'm
19 approving it in 2014, or not approving it, as the case may be,
20 in 2014. And I have to look at the situation the way it is
21 now. I can't pretend that it's 2011.
22 MS. HOPKINS: On our part, we weren't anticipating
23 noncompliance. The point of the settlement --
24 THE COURT: I appreciate that. When you brought the
25 lawsuit, you weren't anticipating noncompliance. When it got
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1 around to being time to settle the lawsuit, you were in the
2 interesting position that there was noncompliance with U.S.
3 law, which you, as a matter of law, were not supposed to be the
4 party seeking redress.
5 If this is okay with the SEC, it's okay with me.
6 MS. HOPKINS: Thank you, your Honor.
7 THE COURT: Yes, sir.
8 MR. SHALOV: Lee Shalov, your Honor.
9 I'm not optimistic I'll be able to change your mind,
10 but I just --
11 THE COURT: You understand why I'm troubled. Oh, come
12 on. Yeah, you do. If you were sitting up here --
13 MR. SHALOV: I do, your Honor.
14 But if I could just make a couple of points. I'll do
15 my best to change your view, as I said. And I respect your
16 view, your Honor, and I understand it, but a couple of things
17 that occurred to me.
18 The first thing that occurs to me is that just as a
19 general legal proposition, settlements are designed to address
20 issues challenged in the litigation. We understand that. So
21 the issues that were challenged and raised in the litigation
22 had nothing to do with the timeliness of filings with the SEC;
23 they had to do with things like supposed improper transactions
24 or discrepancies between SAIC filings and SEC filings.
25 And so the settlement here, like all settlements, are
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1 designed to deal with and address the supposed transgressions.
2 And that's all they are here, is just supposed, but the
3 supposed transgressions that exist at the time. They are not
4 designed, from a legal perspective, to deal with subsequent
5 issues that affect the company that have absolutely no bearing
6 and absolutely no relevance to any of the issues that are
7 challenged in the litigation.
8 So simply from a legal perspective, you respectfully
9 should be addressing the propriety and adequacy of the
10 settlement as it relates to the core allegations in the case,
11 not to any subsequent transgressions and misdeeds that you
12 perceive exist in the company.
13 THE COURT: But the core allegations in the compliant
14 derive -- I'm sorry to use that verb -- from perceived
15 inadequacies in the documents that were being filed in the
16 olden days between the company's real performance and what it
17 was saying or between what it was saying in China and what it
18 was saying in the United States. So it's not quite fair to say
19 that the allegations of the complaint have nothing whatsoever
20 to do with the filing situation, that they were grounded in
21 inadequate filings, which have now become inadequate to the
22 point of disappeared filings.
23 MR. SHALOV: They are related only in the sense, your
24 Honor, that they both concern the SEC and SEC filings.
25 Yes, on the one hand the case challenges the adequacy
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1 and sufficiency of SEC filings; on the other hand, your concern
2 doesn't really, at this point, as I perceive it, have anything
3 to do with the substance of the SEC filings; it only has
4 something to do with the timeliness or lack thereof of SEC
5 filings.
6 THE COURT: It's hard for me to have concern about the
7 substance of filings that haven't been made for three years.
8 There are no filings.
9 MR. SHALOV: I understand that.
10 All I'm trying to convey to your Honor is that just
11 looking at this in terms of your role, I would respectfully
12 submit that the Court's views and the Court's observations --
13 and this is just me speaking and me interpreting the case law
14 concerning settlements -- the focus should be on the redressing
15 of the underlying substantive allegations, and not the
16 redressing of matters, in my view, unrelated to the issues
17 raised --
18 THE COURT: Okay. Let's say I were to sign off on it.
19 Would it not be an unenforceable settlement, since the company
20 is not doing any filing in the United States? So if Mr. Kaplan
21 and his friends came back and said, We're not getting any
22 information, there would be, according to you, nothing that I
23 could do to enforce the settlement.
24 MR. SHALOV: Oh, I'm not saying that at all, Judge.
25 I'm sorry if I gave --
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1 THE COURT: I don't study Chinese filings.
2 MR. SHALOV: I certainly didn't mean to suggest that.
3 THE COURT: I don't think there are Chinese filings.
4 MR. SHALOV: There are, your Honor. There are Chinese
5 filings.
6 But certainly, as you recognized, you retain
7 jurisdiction over the settlement to enforce the terms of the
8 settlement. And to the extent -- and I think you even
9 recognized this when we were here before you -- there is an
10 issue about the compliance or the noncompliance with the
11 therapeutic measures set forth in the settlement, you have the
12 right and the ability to address that. I'm not disputing that
13 at all.
14 THE COURT: My problem is that as long as -- remember
15 the last time you were here I thought they had no filing
16 obligation. Now I know they do. Now I know that they
17 delisted, though they'd be, that they do.
18 And the right I have is a sham right; because we know
19 that I will never get out of China the kind of information that
20 I would need to make an evaluation of whether the terms of the
21 settlement were being complied with through Chinese filings.
22 It would require Chinese banking information, it would require
23 Chinese legal information, it would require all kinds of stuff
24 that, I'm sorry, I'm not naive, China is not handing out. They
25 do business differently than we do. We do business
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1 transparently.
2 The Chinese, with all respect, have other traditions,
3 which is why I personally would never invest money in a company
4 like ABAT. But there are people who are willing to run that
5 risk. And they run that risk because the company has
6 securities registered in the United States, which means there's
7 a certain degree of transparency required.
8 This settlement, especially in view of the context in
9 which it is presented to me, not the context in which the
10 lawsuit arose, but the context in which it is presented to me,
11 has no discernible transparency. What am I supposed to do? I
12 mean I could approve it to get it off my docket, but that is
13 really a bad reason for me to approve a settlement.
14 MR. SHALOV: Let me approach it from a different
15 perspective.
16 THE COURT: Okay.
17 MR. SHALOV: I failed my first effort, but I tried.
18 Let's look at this from sort of a pragmatic
19 perspective, if we could.
20 So you don't approve the settlement, and we litigate
21 the derivative case.
22 THE COURT: Yes.
23 MR. SHALOV: So the first thing that I do as a defense
24 lawyer is I move to dismiss the complaint, because the
25 plaintiff has to show, among other things, that demand here is
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1 futile; that they couldn't make a demand that would be
2 considered disinterestably and objectively by the board.
3 THE COURT: I think you might lose that motion.
4 MR. SHALOV: I'm sure your Honor will keep an open
5 mind.
6 THE COURT: I always keep an open mind. But I would
7 suggest to you that I would view that motion perhaps
8 differently than a motion made with respect to General Motors,
9 because I know a lot less about Chinese boards of directors and
10 their reaction to demand requirements. I know a lot about
11 General Motors and its reaction to demand requirements and
12 futility law.
13 MR. SHALOV: That's fair, your Honor.
14 But I know that you'll follow the legal guidelines
15 about showing that a majority of the board is either interested
16 in the transaction or can't reasonably, in good faith, consider
17 and evaluate the demand.
18 THE COURT: Or I could conclude that there would have
19 to be a trial on that issue, a hearing on that issue.
20 MR. SHALOV: Absolutely.
21 THE COURT: I'm just suggesting that you're not likely
22 to prevail on the papers.
23 MR. SHALOV: I'm sure you won't pre-judge the motion.
24 THE COURT: Which is how futility motions usually get
25 judged, in the familiar context of transparent United States
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1 corporations.
2 MR. SHALOV: Let's take this step-by-step.
3 THE COURT: Okay.
4 MR. SHALOV: I have the right to move to dismiss. I
5 will argue that there's no -- because there is none --
6 allegation or any evidence that a majority of the board had
7 anything to do with these supposed insider related
8 transactions; that there's no evidence whatsoever that they
9 knew it was improper, that it was improper. And even if your
10 Honor decides that the motion should be denied, then we go into
11 discovery.
12 THE COURT: First of all, the motion you just outlined
13 is not a futility motion; it's a motion addressed to the
14 merits. I can tell you that motion will be denied right off
15 the bat. You're asking me to make factual findings, findings
16 that the members of the board did not know about alleged
17 insider transactions and were not aware of. Those are factual
18 matters.
19 MR. SHALOV: They've got to plead that with
20 specificity, right, Judge.
21 THE COURT: It's not a fraud case; it's a derivative
22 suit.
23 MR. SHALOV: We're getting into the merits of a
24 prospective motion. But my understanding of the law is that
25 there has got to be some kind of specific detailed allegation
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1 that the majority of the board played a role so that you can
2 reasonably conclude and make a fair inference based upon the
3 pleadings --
4 THE COURT: That demand would be futile?
5 MR. SHALOV: Yes.
6 THE COURT: The answer could very well be that this is
7 a corporation that, I don't know, like other Chinese
8 corporations, is dominated by its controlling shareholder.
9 I've heard of such corporations, the controlling shareholder
10 being the individual who is alleged to have done the conflicted
11 transactions. And that all of the people who are on the board
12 are either his employees or his relatives or his -- I don't
13 know. I don't know what the facts are. The facts could very
14 well be pleaded that would make it difficult for that motion to
15 be granted.
16 MR. SHALOV: Understood, your Honor.
17 They are not there, but that's a question for another
18 day.
19 So all I'm suggesting, your Honor, is if we look at
20 the end result here, which is a rejection of the settlement, no
21 benefits to the company or its shareholders, we engage in
22 protracted discovery, the company has got no money, the
23 individual defendants are in China, so the end result of what
24 will be a relatively expensive process is going to be either
25 the case gets dismissed or the case doesn't get dismissed, we
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1 go into discovery, we have summary judgment motions --
2 THE COURT: I'm expecting it's a real possibility that
3 the case gets abandoned by somebody, I don't know whom. For
4 example, your clients might decide I'm not paying them anymore.
5 MR. SHALOV: Right.
6 THE COURT: In which case they'll default.
7 MR. SHALOV: Which only makes my point, your Honor.
8 THE COURT: That I should approve a settlement because
9 if I don't, your clients are going to walk away from this
10 litigation?
11 MR. SHALOV: No. My point is that perhaps the Court
12 should recognize -- and it has this concern, and I certainly
13 understand it -- about blessing a settlement that you perceive
14 that's giving the company license to continue to --
15 THE COURT: To violate the law.
16 MR. SHALOV: To use your terminology.
17 THE COURT: Actually, I'm using Mr. Brantel's
18 expertise.
19 MR. SHALOV: Okay. He's my partner, so...
20 THE COURT: Right.
21 MR. SHALOV: I vouch for what he says.
22 But so balancing that event, you blessing the
23 settlement, or as against not approving the settlement and what
24 will likely occur if the settlement is not approved, which is
25 no relief to anybody, and continued in protracted litigation.
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1 So what I'm suggesting to your Honor is to look at
2 your concern in a framework and make a balanced determination
3 about at least providing something to the company and its
4 shareholders in approving a settlement, perhaps amended in some
5 way to --
6 THE COURT: I'm not going to amend it.
7 MR. SHALOV: I understand that the Court has concerns,
8 and we are open to considering a mechanism that accommodates
9 some of these concerns. I certainly can't speak for the
10 company and say that it's prepared to start spend money and
11 retain accountants and go through the process of filing with
12 the SEC, but on the other hand --
13 THE COURT: Well, then maybe it should become
14 deregistered in this country. I'm very sad about what happens
15 to the shareholders, but I don't see why they should have
16 registered securities then.
17 Meanwhile, they've managed to ferret a lot of naive
18 people's money out of the country. Possibly the SEC should
19 stop registering these companies in the first place. Maybe our
20 government should wake up to the fact that it's aiding and
21 abetting a giant fraud on American investors. Possibly I'll
22 call Mrs. White, ask her if she's considered that.
23 MR. SHALOV: I do appreciate your Honor listening to
24 my comments, and certainly respect the Court's sensitivities.
25 And we'll proceed accordingly.
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1 Perhaps if the Court would like to address the merits
2 of the class action settlement --
3 THE COURT: Well, the first thing the class action
4 people have to tell me is if they are going to settle if I
5 don't approve the derivative case.
6 MR. SHALOV: I'll leave that up to Ms. Walsh.
7 MS. WALSH: Your Honor, we are more than happy to
8 untie ourselves from the derivative action.
9 THE COURT: Although Mr. Kaplan is having difficulty
10 hearing.
11 So what Ms. Walsh has said is that the class action
12 folks are willing to untie themselves from the derivative suit
13 and just proceed on the terms of the settlement as proposed,
14 the $250,000 settlement, with the other provisions, except not
15 contingent on the derivative suit.
16 MS. WALSH: Your Honor, let me just qualify that. I'm
17 saying that based on what I've heard today; and I think this is
18 the way we would want to proceed.
19 THE COURT: You think, but you're going to go back and
20 think about it, of course. Why wouldn't you.
21 MS. WALSH: Of course.
22 THE COURT: Meanwhile, it doesn't make any difference
23 to Mr. Kaplan and I think the other two gentlemen who are back
24 there; they've already opted out of the settlement class. So
25 whether you settle the class action or not is of no interest to
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1 them; they are free to bring their own individual lawsuits.
2 MS. WALSH: That's correct.
3 THE COURT: Because they don't want to be represented
4 by you; they don't want to be part of your settlement.
5 MS. WALSH: That's correct.
6 THE COURT: They lack standing to object to the
7 settlement because they've opted out of the class.
8 MS. WALSH: That's right.
9 THE COURT: Right.
10 MS. WALSH: The condition that our settlement be
11 contingent upon the approval of the derivative settlement was
12 requested by defendants. It's not something that we had
13 originally contemplated.
14 THE COURT: Okay. Well, I think that the long and the
15 short of it is that you should go back and think about this.
16 And in the next week or ten days, you should advise me whether
17 you want to go forward with the settlement without that term,
18 and whether the defendants are amenable to proceeding on that
19 basis; they'll need to think about it, too. If that's the
20 case, I can fairly quickly get an opinion out analyzing the
21 Grinnell factors. There are no objectors to that settlement.
22 MS. WALSH: That's correct, your Honor. We have no
23 objections. We have very minimal exclusions. And, in fact, we
24 actually have claims submitted by 1,000 class members so far,
25 and there's still a month to go, which is very supportive of
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1 the fairness of the settlement. We have a lot of people who
2 are interested in participating.
3 THE COURT: Right. It is probably, no final decision,
4 but I think I intimated earlier that if I were just looking at
5 the class action settlement, it looks like, given the fact that
6 I'm not naive and I think that there's probably not a lot of
7 money available and the cost of litigating it to judgment would
8 be very, very, very high, I think it's probably a settlement
9 that meets the Grinnell factors.
10 And the gentlemen who do not wish to be included in
11 that and who may wish to bring their own lawsuits and at their
12 own expense litigate the issue to judgment have excluded
13 themselves by opting out. The opt-out decision has been made;
14 it's a final decision. And once you opt out, you can't object
15 to the settlement anymore, because you decided you don't want
16 to be a part of the lawsuit.
17 So it seems to me that you have a decision to make,
18 and you have a decision to make. The gentlemen in the back
19 have no decision to make with respect to the class action. All
20 three of you have opted out; is that correct?
21 UNIDENTIFIED SPEAKER: Not him.
22 THE COURT: Okay. So I have one potential objector.
23 MR. DUCHESNEAU: My name Louis Duchesneau. I'm coming
24 from Montreal, Canada, where we have rules and regulations, as
25 well.
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1 THE COURT: And you are a shareholder, sir?
2 MR. DUCHESNEAU: Yeah, I have a million shares which
3 is about a percent point four of the total flow.
4 THE COURT: And have you filed a notice opting out of
5 the class action settlement, as Mr. Kaplan has?
6 MR. DUCHESNEAU: Yes.
7 THE COURT: This is Mr. Joel Kaplan.
8 MR. KAPLAN: Louie Duchesneau and myself have both
9 opted out. Our friend is not a member of the class.
10 THE COURT: Fine. Okay. Then I should say the two
11 gentlemen.
12 MR. DUCHESNEAU: What I was going to say here, between
13 those two gentlemen, because I've talked to both of them over
14 the years, Mr. Shalov and Mrs. Walsh, she told me the company
15 was in the dark, she says where are we going with this. And
16 Mr. Shalov is only defending the portion of this class action
17 suit.
18 And I opt out of this because they are in the dark. I
19 believe the company does exist. I still believe, after three
20 years, the company exists. Some people have gone, they've seen
21 batteries made up, and they've been sold. The company exists.
22 They went into the dark because a lot of them just went into
23 the dark. They were just afraid of the blushing numbers and
24 whatever.
25 What is it in that settlement that they will produce
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1 in the next four months, five months, all the statement, and
2 put themself up to date with the SEC. What's stopping
3 Mr. Shalov to propose to Mr. Fu, We need this; we'll have a
4 settlement. Not changing any figures of the $250,000. Between
5 themself, not you, because you can't amend it.
6 THE COURT: Thank you. Thank you.
7 As a technical matter, because you've opted out of the
8 class action, you have no standing to object to the settlement,
9 okay.
10 The class action, if I recall correctly, relates not
11 to nonfilings, it relates to material misstatements in prior
12 filings. And the class period does not encompass now. The
13 class period is like in 2010/2011 class period.
14 MR. SHALOV: It's about 2007 to 2011. your Honor.
15 THE COURT: Right. Okay.
16 When the company was filing, that's the perfect
17 example of a case that I can settle, because it's shareholders
18 who were shareholders when they were filing. And the issue of
19 whether they're filing today has no bearing on that settlement.
20 It has a bearing on the derivative suit settlement. It does.
21 So I think that's the course that we will take, is
22 that the litigants in the class action have to decide how they
23 wish to proceed.
24 Mr. Kaplan, I thank you for alerting me to this issue.
25 I do want to say something to you, which is that you've got to
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1 stop emailing my chambers. I don't want the United States
2 Marshals to show up and visit you. When people email my
3 chambers, they get real antsy, okay.
4 MR. KAPLAN: You mean, your Honor, fax.
5 THE COURT: Okay. Okay. But I've heard from you. I
6 have all your letters. And you've obviously gotten through to
7 me, and you've made your point.
8 If anybody wants to say anything else in response to
9 the one issue, and I'm really talking to counsel, I'll give you
10 ten days to get something else in. But I must tell you that
11 right now, unless I knew that the SEC really was indifferent to
12 this, I would be inclined not to approve the derivative action
13 settlement, and then we'll see what happens with the derivative
14 suit.
15 Thank you all for coming in today.
16 MS. WALSH: Your Honor, I'm sorry.
17 One quick question.
18 Does the ten days apply to the time that you would
19 like to hear back from us?
20 THE COURT: Make it 14, like two weeks from today.
21 MS. WALSH: Okay.
22 THE COURT: Two weeks from today. All right?
23 Okay. Thank you.
24 MR. SHALOV: Thank you, your Honor.
25 * * *
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