Gao v. Yang
- James Oetken
- 1:20-cv-07285
- U.S. District Court · Southern District of New York
- 5
In Gao v. Yang, Judge Oetken granted defendants’ motion to dismiss Gao’s federal securities claims, declined state-law jurisdiction, and allowed amendment.
The ruling affected Yunzhi Gao’s federal securities-fraud claims against Yong Yang and Emperor Auto, Inc. The court granted defendants’ motion to dismiss, declined jurisdiction over Gao’s remaining state-law claims, and allowed Gao to amend the complaint within 21 days.
What happened
In Gao v. Yang, Yunzhi Gao alleged that Yong Yang persuaded Gao to invest $200,000 for a 40 percent share of Emperor Auto, Inc., promising the money would fund the company and help obtain a profitable distributorship. Gao alleged that Yang instead used the money for personal expenses, including a luxury vehicle.
The court held that Gao’s securities-fraud allegations did not meet the heightened pleading rules requiring detailed facts explaining why each statement was misleading and showing a strong inference of fraudulent intent. The court also declined to decide Gao’s remaining state-law claims after dismissing the only federal claims.
Judge Oetken granted defendants’ motion to dismiss and gave Gao 21 days to file an amended complaint. If Gao does not amend, the court will enter judgment permitting an appeal.
The detailed version
- Gao v. Yang · No. 1:20-cv-07285
- James Oetken
- Aug. 4, 2021
Background
Yunzhi Gao sued Yong Yang and Emperor Auto, Inc. Gao asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, along with state-law claims for breach of contract, fraud, breach of the implied duty of good faith and fair dealing, and piercing the corporate veil.
According to the complaint, Yang, Emperor Auto’s sole shareholder and sole corporate officer, solicited Gao’s investment in late 2018. Gao purchased 80 shares, representing 40 percent of Emperor Auto, for $200,000. The purchase agreement stated that the investment would be deposited into the corporation’s bank account as working capital. Gao alleged that Yang soon withdrew the money and used it for personal expenses, including buying a luxury vehicle, and that none of the investment was used to pursue the proposed distributorship.
Legal Standard
The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court explained that securities-fraud claims face heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. A plaintiff must identify each allegedly misleading statement, explain why it was misleading, and plead particular facts supporting a strong inference that the defendant acted with fraudulent intent.
Court’s Analysis
Gao appeared to rely on three statements by Yang: that Emperor Auto was seeking a distributorship that could significantly increase revenue and profit; that Gao’s investment was needed for that effort; and that the investment would be deposited into Emperor Auto’s bank account and used exclusively as working capital to pursue the distributorship.
The court found that Gao’s complaint was too sparse to satisfy the heightened pleading requirements. It lacked sufficient dates and details explaining why the statements were misleading. The court also noted that expressions of optimism generally do not support securities-fraud claims without specific facts showing how they misled investors. Gao attempted to supplement the complaint with an affidavit, but the court did not consider that material on a motion to dismiss because it was outside the complaint and the materials properly considered with it.
The defendants argued that the loss of Gao’s investment resulted from the COVID-19 pandemic and the resulting economic downturn. The court stated that the complaint did not provide enough facts to support a strong inference that the loss resulted from fraud instead. The court therefore concluded that Gao’s federal securities claims failed to meet the required pleading standard.
Because the securities claims were Gao’s only federal claims, the court declined to exercise jurisdiction over the remaining state-law claims. The opinion did not decide the merits of those state-law claims.
Disposition
The court granted defendants’ motion to dismiss. It granted Gao leave to amend, requiring any amended complaint to be filed within 21 days after the opinion and order. If Gao chose not to amend, the court directed him to notify the court by letter by the same deadline, after which the court would enter judgment permitting an appeal. Judge J. Paul Oetken directed the Clerk of Court to close the motion.
Read the full 5-page opinion on CourtListener, the free public archive maintained by the Free Law Project.