pkirn idtosenlegal . cora - Stanford Universitysecurities.stanford.edu/filings-documents/1045/ONP... · executive officers, agents, and/or directors of ONP, its subsidiaries, and/or

1 Laurence M. Rosen, Esq. (SBN 219683)

2 THE ROSEN LAW FIRM, P.A.333 South Grand Avenue, 25 1h Floor

3 Los Angeles, CA 90071

4 Telephone: (213) 785-2610Facsimile . (213) 226-4684

5 Email: lrosen(&;rosenlegal.com

6 -and-

Phillip Kim, Esq.THE OSEN LAW FIRM, P.A.

8 350 5 Avenue, Suite 5508New York, New York 10118


10 Email: pkirn idtosenlegal . cora

Counsel for Plaintiff

12 UNITED STATES DISTRICT COURT

13CENTRAL DISTRICT OF CALIFORNIA

14 XMARK HENNING, INDIVIDUALLY AND

15ON BEHALF OF ALL OTHERS CASE No.:

16 SIMILARLY SITUATED,

17Plaintiff, COMPLAINT

18

19vs. CLASS ACTION

20 ORIENT PAPER, INC.; ROTH CAPITAL

21 PARTNERS, LLP, ZHENYONG LIU; JURY TRIALWINSTON C. YEN; ZHAO DAHONG; DEMANDED

22 TING HAO, XIADONG LIU; FUZENG

23 LIU; CHEN LI; DREW BERNSTEIN;WENBING CHRISTOPHER WANG; and

24 ZHAOFANG WANG,

25Defendants.

26 X

27

28

1 Class Action Complaint for Violation of the Federal Securities Laws

1

2 Plaintiff Mark Henning ("Plaintiff'), individually and on behalf of all other

3 persons similarly situated, by his undersigned attorneys, for his complaint against

4Defendants, alleges the following based upon personal knowledge as to himself and

5

6 his own acts, and information and belief as to all other matters, based upon, inter

7 alia, the investigation conducted by and through his attorneys, which included,

8among other things, a review of the defendants' public documents, conference calls

9

10 and announcements made by defendants, United States Securities and Exchange

11 Commission ("SEC") filings, wire and press releases published by and regarding12

Orient Paper, Inc. ("ONP," or the "Company"), securities analysts' reports and13

14 advisories about the Company, and information readily obtainable on the Internet.

15 Plaintiff believes that substantial evidentiary support will exist for the allegations16

17 set forth herein after a reasonable opportunity for discovery.

18 NATURE OF THE ACTION

19 1. This is a federal securities class action on behalf of a class consisting20

21 of all persons, other than Defendants, who purchased common stock of ONP

22 between March 27, 2009, and July 22, 2010, inclusive, seeking to recover damages

23 caused by Defendants' violations of federal securities laws.24

JURISDICTION AND VENUE 25

26 2. The claims asserted herein arise under and pursuant to Sections 10(b)

27 and 20(a) of the Securities Exchange Act, Rule 10b-5 promulgated thereunder (1728


1 C.F.R. §240.10b-5), and under Sections 12(a)(2) and 15 of the Securities Act of

21933 (the "Securities Act").

3

4 3. This Court has jurisdiction over the subject matter of this action

5 pursuant to Section 22(a) of the Securities Act, 15 U. S.C. §77v(a), Section 27 of the

6Exchange Act (15 U.S.C. §78aa), and 28 U.S.C. § 1331.

7

8 4. Venue is proper in this Judicial District pursuant to §27 of the

9 Exchange Act, 15 U.S.C. § 78aa, and 28 U. S.C. § 1391(b). Defendant Roth

10Capital Partners underwrote and sold over $25 million of the Company's securities

11

12 in and from this District.

13 5. In connection with the acts, conduct, and other wrongs alleged in this14

Complaint, Defendants, directly or indirectly, used the means and instrumentalities15

16 of interstate commerce, including, but not limited to, the United States mails,

17 interstate telephone communications, and the facilities of the national securities18

exchange19

20 PARTIES

21 6. Plaintiff, as set forth in the accompanying certification, incorporated22

23 by reference herein, purchased ONP securities at artificially inflated prices during

24 the Class Period, and has been damaged thereby.

257. Defendant ONP purports to engage in the production and distribution26

27 of paper products such as corrugating medium paper, offset printing paper, and

28 writing paper. ONP operates through Dongfang Zhiye Holding Limited ("Dongfang


1 Holding"), its wholly-owned subsidiary. Dongfang Holding was formed on

2November 13, 2006, under the laws of the British Virgin Islands, and is an

3

4 investment holding company. Dongfang Holding, in turn, has the controlling right

5 on Hebei Baoding Orient Paper Milling Company Limited ("HBOP"), its operating

6company subsidiary. Thus, ONP controls HBOP, and conducts substantially all of

7

8 its business operations through HBOP. At all relevant times herein, the Company's

9 common stock was actively traded on the AMEX under ticker "ONP."

108. Defendant Roth Capital Partners LLP ("Roth" or "Roth Capital") is a

11

12 licensed securities broker-dealer and underwriter; it has offices in Los Angeles, and

13 is headquartered in Newport Beach, California. On March 31, 2010, Roth Capital,14

acting as underwriter, sold 3 0 million shares of ONP common stock to class15

16 members at $8.25/share, pursuant to a registration statement and prospectus filed

17 with the SEC as of that date.18

199. Defendant Liu Zhenyong ("Liu") was the Company's CEO and

20 Director at all relevant times herein.

21 10. Defendant Zhou Dahong ("Dahong") was the Company's Secretary at22

all relevant times herein.23

24 11. Defendant Jing Hao ("Hao") was the Company's CFO from November

25 16, 2007 until her resignation on May 1, 2009.26

27

28


1 12. Defendant Winston Yen ("Yen") was the Company's CFO from May

21, 2009 through the present. Upon information and belief, Mr. Yen resides and

3

4 works in Los Angeles County.

5 13. Defendant Xiadong Liu ("Xiadong"), Zhenyong's brother, was a

6director of the Company at the time of the filing of the Company's 10-K for fiscal

7

8 year 2008.

9 14. Defendant Fuzeng Liu ("Fuzeng") was a director of the Company at all

10relevant times herein.

11

12 15. Defendant Chen Li ("Li") was a director of the Company at the time of

13 the filing of the Company's 10-K for fiscal year 2008.14

16. Defendant Drew Bernstein ("Bernstein") was a director of the15

16 Company at the time of the filing of the Company's 10-K for fiscal year 2009.

17 Upon information and belief, Mr. Bernstein resides and works in New York City.18

1917. Defendant Wenbing Christopher Wang ("Wenbing Wang") was a

20 director of the Company at the time of the filing of the Company's 10-K for fiscal

21 year 2009.22

2318. Defendant Zhaofang Wang ("Zhaofang Wang") was a director of the

24 Company at the time of the filing of the Company's 10-K for fiscal year 2009.

25 19. Zhenyong, Dahong, Hao, Yen, Xiadong, Fuzeng, Li, Bernstein,26

27 Wenbing Wang, and Zhaofang Wang are collectively referred to hereinafter as the

28 "Individual Defendants."


1 20. During the Class Period, each of the Individual Defendants, as senior

2executive officers, agents, and/or directors of ONP, its subsidiaries, and/or

3

4 affiliates, was privy to non-public information concerning the Company's business,

5 finances, products, markets, and present and future business prospects via access to

6internal corporate documents, conversations and connections with other corporate

7

8 officers and employees, attendance at management and Board of Directors meetings

9 and committees thereof, and via reports and other information provided to them in

10connection therewith. Because of their possession of such information, the

11

12 Individual Defendants knew or recklessly disregarded the fact that the adverse facts

13 specified herein had not been disclosed to, and were being concealed from, the14

investing public.15

16 21. Because of the Individual Defendants' positions with the Company,

17 they had access to the adverse undisclosed information about the Company's18

19 business, operations, operational trends, financial statements, markets, and present

20 and future business prospects via access to internal corporate documents (including

21 the Company's operating plans, budgets, forecasts, and reports of actual operations22

23 compared thereto), conversations and connections with other corporate officers and

24 employees, attendance at management and Board of Directors meetings and

25 committees thereof, and via reports and other information provided to them in26

connection therewith.27

28


1 22. It is appropriate to treat the Individual Defendants as a group for

2pleading purposes and to presume that the false, misleading, and incomplete

3

4 information conveyed in the Company's public filings, press releases and other

5 publications, as alleged herein, resulted from the collective actions of the narrowly

6defined group of defendants identified above. Each of the above officers and

7

8 directors of ONP, its subsidiaries, and/or affiliates, by virtue of his or her position

9 with the Company, directly participated in the management of the Company, was

10directly involved in the day-to-day operations of the Company at the highest levels,

11

12 and was privy to confidential proprietary information concerning the Company, its

13 business, operations, growth, financial statements, and financial condition, as14

alleged herein. Said Defendants were involved in drafting, producing, reviewing,15

16 and/or disseminating the false and misleading statements and information alleged

17 herein; were aware of, or recklessly disregarded, that the false and misleading18

19 statements were being issued regarding the Company; and approved or ratified

20 these statements, in violation of the federal securities laws.

21 23. As officers, directors and controlling persons of a publicly-held22

23 company that was traded on the Amex and governed by the provisions of the

24 federal securities laws, and whose securities were and are registered with the SEC

25 pursuant to the Exchange Act, the Individual Defendants each had a duty to26

27 promptly disseminate accurate and truthful information with respect to the

28 Company's financial condition, performance, growth, operations, financial


1 statements, business, markets, management, earnings, present and future business

2prospects, and to correct any previously-issued statements that had become

3

4 materially misleading or untrue, so that the market price of the Company's publicly-

5 traded securities would be based upon truthful and accurate information. The

6Individual Defendants' misrepresentations and omissions during the Class Period

7

8 violated these specific requirements and obligations.

9 24. The Individual Defendants participated in the drafting, preparation,

10and/or approval of the various public, shareholder, and investor reports, and other

11

12 communications complained of herein; were aware of, or recklessly disregarded,

13 the misstatements contained therein, and omissions therefrom; and were aware of14

their materially false and misleading nature. Because of their Board membership15

16 and/or executive and managerial positions with ONP, each of the Individual

17 Defendants had access to the adverse undisclosed information about ONP's18

19 financial condition and performance as particularized herein.

20 25. The Individual Defendants, because of their positions of control and

21 authority as officers, directors, agents, and/or controlling persons of the Company,22

23 were able to and did control the content of the various SEC filings, press releases,

24 and other public statements pertaining to the Company during the Class Period.

25 Each Individual Defendant was provided with copies of the documents alleged26

27 herein to be misleading prior to, or shortly after, their issuance and/or had the

28 ability and/or opportunity to prevent their issuance, or to cause them to be


1 corrected. Accordingly, each of the Individual Defendants is responsible for the

2accuracy of the public reports and press releases detailed herein and is therefore

3

4 primarily liable for the representations contained therein.

5 26. Each Defendant, by disseminating materially false and misleading

6statements and/or concealing material adverse facts, is liable as a participant in a

7

8 fraudulent scheme and course of business that operated as a fraud or deceit on

9 purchasers of ONP securities. The scheme (i) deceived the investing public

10regarding ONP's business, operations, management and the intrinsic value of

11

12 ONP's securities; and (ii) caused Plaintiff and other members of the Class to

13 purchase ONP securities at artificially inflated prices.14

PLAINTIFF'S CLASS ACTION ALLEGATIONS15

16

17 27. Plaintiff brings this action as a class action pursuant to Federal Rules18

19 of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons

20 who purchased the common stock of ONP during the Class Period, and who were

21 damaged thereby. Excluded from the Class are Defendants, the officers and22

23 directors of the Company at all relevant times, members of their immediate

24 families, their legal representatives, heirs, successors or assigns, and any entity in

25 which Defendants have or had a controlling interest.26

28. The members of the Class are so numerous that joinder of all members27

28 is impracticable. Throughout the Class Period, ONP's securities were actively


1 traded on the NASDAQ Bulletin Board. While the exact number of Class members

2is unknown to Plaintiff at this time, and can only be ascertained through appropriate

3

4 discovery, Plaintiff believes that there are at least hundreds of members in the

5 proposed Class. Members of the Class may be identified from records maintained

6by ONP or its transfer agent, and may be notified of the pendency of this action by

7

8 mail, using a form of notice customarily used in securities class actions.

9 29. Plaintiffs claims are typical of the claims of the members of the Class,

10as all members of the Class are similarly affected by Defendants' wrongful conduct

11

12 in violation of federal law that is complained of herein.

13 30. Plaintiff will fairly and adequately protect the interests of the members14

of the Class and has retained counsel competent and experienced in class and15

16 securities litigation.

17 31. Common questions of law and fact exist as to all members of the Class18

19 and predominate over any questions solely affecting individual members of the

20 Class. Among the questions of law and fact common to the Class are:

21 (a) whether the federal securities laws were violated by Defendants'22

acts as alleged herein;23

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

25 during the Class Period misrepresented material facts about the business, operations26

and management of ONP; and27

28


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

2and what the proper measure of those damages ought to be.

3

4 32. A class action is superior to all other available methods for the fair and

5 efficient adjudication of this controversy because joinder of all its members is

6impracticable. Furthermore, as the damages suffered by individual Class members

7

8 may be relatively small, the expense and burden of individual litigation make it

9 impossible for members of the Class to redress individually the wrongs done to

10them. There will be no difficulty in the management of this action as a class action.

11

12 SUBSTANTIVE ALLEGATIONS

13 33. During the Class Period, ONP issued materially false and misleading14

statements and omitted to state material facts that rendered their affirmative15

16 statements misleading as they related to the Company's financial performance,

17 business prospects, and financial condition. As a result of these materially false and18

19 misleading statements, the price of the Company's securities was artificially

20 inflated to a Class Period high of over $15.00 per share. As the truth of the

21 Company's materially false and misleading statements entered the market, the price22

23 of the Company's stock plummeted, falling to a low of just $4.11 per share on July

24 1,2010.

25 34. The Class Period begins on March 27, 2009, when the Company filed26

27 its annual report for the year ending December 31, 2008 on Form 10-K with the

28 SEC. The 10-K was signed by Defendants Liu, Hao, Zhou, Xiadong, Fuzeng, and


1 Li and, pursuant to Sarbanes-Oxley Act of 2002 ("SOX"), was separately certified

2by Liu and Hao. In the 10-K, the Company claimed to have generated over $65

3

4 million in net revenue during fiscal year 2008, and claimed to hold over $52 million

5 in assets at year's end. Of this $52 million, the category of "property, plant, and

6equipment" ("PP&E") accounted for $45.3 million The 10-K also included a list of

7

8 the Company's top ten customers (by revenue). Among those ten were Baoding

9 Dadi Colour Printing Company Limited ("Dadi") and China Lucky Offset Group

10Integrated Services Limited Company ("Lucky"). The Company claimed in its 10-

11

12 K to have earned $2 7 million in revenue from Dadi's orders, and to have earned

13 $2.4 million in revenue from Lucky's orders.14

35. On December 8, 2009, the Company issued a press release in which it15

16 claimed to have entered into an agreement to purchase all of the assets owned by

17 Hebei Shuangxing Paper Co., Ltd., including two digital photo paper coating18

19 production lines. The press release stated that the production lines would cost

20 approximately $13 6 million, and that the Company "believe[s] the digital photo

21 paper segment will significantly contribute to [its] revenue and net income growth22

in fiscal 2010."23

24 36. On March 29, 2010, the Company filed an annual report for the year

25 ended December 31, 2009 on Form 10-K with the SEC. The 10-K was signed by26

27 Defendants Liu, Yen, Fuzeng, Bernstein, Wenbing Wang, and Zhaofang Wang.

28 The 10-K repeated the Company's prior claims regarding its asset values, revenue


1 for fiscal year 2008, and revenue earned from each of its top ten customers during

2fiscal year 2008.

3

4 37. On March 31, 2010, Roth Capital Partners LLC sold 3 0 million shares

5 of ONP stock in an underwritten public offering at $8.25/share, raising $24.75

6million

7

8 38. On April 12, 2010, the Company issued a press release in which it

9 claimed that it had entered into a definitive equipment purchase agreement with

10Henan Qinyang First Paper Machine Limited to purchase a corrugating medium

11

12 paper production line with an annual production capacity of 360,000 tons. The

13 press release stated that the price of the production line was approximately $27.814

million Defendant Liu, the Company's CEO, added that "[Ole newly acquired15

16 production line will increase our total production capacity from the existing

17 280,000 tons to reach 640,000 tons by 2011. Corrugating medium paper production18

19 capacity is expected to increase over 200%."

20 TRUTH BEGINS TO EMERGE

21 39. The relevant truth began to enter the market and/or materialize through22

23 partial disclosures. After market close on June 28, 2010, an entity calling itself

24 Muddy Waters released its inaugural investment report (the "Report"). The thirty-

25 page Report rated the Company's stock as a "strong sell" and set forth a host of26

27 detailed criticisms that questioned the veracity of the information contained in the

28 Company's financial statements and press releases. The Report shocked the market


1 and caused the Company's stock to decline from its closing price of $8.33 on June

228 to a closing price of $7.23 on June 29, 2010—a decline of roughly 13%. As the

3

4 market continued to digest the content of the Report, the Company's stock fell

5 further and would eventually reach a low of $4.11 per share on July 1, 2010.

640. The most damning of the Report's findings was that the Company had

7

8 overstated its fiscal year 2008 revenue by 2,700%. The Report determined this by

9 examining the financial statements that the Company's operating subsidiary,

10HBOP, filed with the government of the People's Republic of China ("PRC"). The

11

12 audited 2008 PRC financial statements filed by ONP (through its operating

13 subsidiary HBOP) show revenue of only $2.4 million, a mere fraction of the $65.414

million that the Company claimed on its Form 10-K filed with the SEC on March15

16 27, 2009.

17 41. The Report also revealed that the Company had overstated the value of18

19 its assets by 200%. While the Form 10-K that the Company filed with the SEC on

20 March 27, 2009 listed assets totaling $52 8 million, the financial statements that the

21 Company filed in the PRC (through its subsidiary HBOP) listed assets of roughly22

23 $24.3 million And even that figure, the Report surmised, may have been inflated

24 by a fraudulent appraisal.

25 42. The Report's analysis of the Company's customer list indicated that26

ONP had falsified the amount of revenue earned from certain customers. As set27

28 forth above, the Company stated in its Form 10-K filed on March 27, 2009 that it


1 had earned $2 7 million in revenue from Baoding Dadi Colour Printing Company

2Limited ("Dadi") and another $2 4 million from China Lucky Offset Group

3

4 Integrated Services Limited Company ("Lucky"). The Report revealed that Dadi, in

5 response to the inquiries of the Report's authors, had indicated that its total annual

6revenue was only $1.5 million Likewise, Lucky's total annual revenue was only

7

8 $1.3 million Even if both companies spent the entirety of their revenue on orders

9 placed to ONP, they could not have generated the amount of revenue that the

10Company claimed to have received from them.

11

12 43. The Report also exposed the falsity of the Company's claims regarding

13 its planned asset purchases. Although the Company has previously stated that it14

would spend $27.8 million on a 5.6m corrugating medium paper production line15

16 that would have a production capacity of 360,000 tons, the Report found both

17 figures to be false. The purported supplier of the production line, Henan Qinyang18

19 First Paper Machine Ltd. ("Henan") told the Report's authors that the most

20 expensive line it produced cost only $4.4 million Henan also stated that its highest

21 capacity production line has an annual production capacity of only 150,000 tons.22

23 Moreover, the other four Chinese papermaking equipment manufacturers whom the

24 Report's authors contacted had similar reactions: the most expensive production

25 line that any of them sold cost just $7 3 million, and none had a capacity in excess26

27 of 200,000 tons annually. Thus, the report surmised that the Company had

28 misappropriated much of the funds that it claimed to be spending on a production


1 line, and that its production capacity would be far lower than the 360,000 tons per

2year that it claimed it would be capable of producing

3

4 44. The Company responded two days later, with a mid-day press release

5 dated June 30, 2010 (the "June 30 Press Release"). Therein, the Company claimed

6that the Report had erroneously examined an entity that had no relationship to the

7

8 Company. According to ONP, while the Report examined the PRC financial

9 statements filed by He Bei Oriental Paper Co., Ltd., the Company's actual

10operating subsidiary is Hebei Baoding Orient Paper Milling Co., Ltd. The Company

11

12 claimed that the latter of these two entities, whose financials were far more robust,

13 was its actual operating subsidiary. In addition to its plea of mistaken identity, the14

Company argued that it had not misappropriated any of the monies it previously15

16 claimed to have allocated towards the purchase of the 5.6m corrugating paper

17 production line costing $27.8 million The Company claimed: a) that the production18

19 line's alleged cost and volume, though heretofore unprecedented, were in fact

20 accurate because the Company's line was the largest and most expensive of its kind

21 ever to be built in China; and b) that the $22 million the Company had not yet paid22

23 for the production line, and that seemed to have disappeared from the Company's

24 coffers, was kept safely in ONP' s bank account, statements from which the

25 Company would post online at some future date.26

2745. Shareholders were dissatisfied with the Company's vague and

28 incomplete response to Muddy Water's allegations of fraud because the Company


1 failed to address most of the concerns that the Report had raised. As a result of the

2Company's inadequate response, the Company's share price dropped substantially.

3

4 Just hours after the issuance of the June 30 Press Release, ONP's stock closed at

5 $6.68 per share, a decline of $1.08, or nearly 14%, from the day's open of $7.76 per

6share.

7

8 46. The next day, Muddy Waters issued a reply to the June 30 Press

9 Release (the "Muddy Waters July 1 Response"). Therein, Muddy Waters rebutted

10the Company's conclusory claim that the Report had analyzed the wrong operating

11

12 subsidiary. While there were indeed slight differences between the English-

13 language name of the operating subsidiary that the Company claimed to control and14

the English-language name of the entity whose financials the Report had examined,15

16 the two entities possessed the same Chinese-language name The Mandarin name of

17the entity whose financial statements the Report had analyzed is "A.JEigif

18

19MWZiagEERIM q ." That appellation is identical to the name used to identify

20

21 the Company's operating subsidiary in a contract attached as exhibit 10.5 to the22

23 Company's Form 10-Q(a) filed with the SEC on February 2, 2010.

24 47. The Muddy Waters July 1 Response offered further proof that the

25 Report had analyzed the proper operating subsidiary: the most recent business26

27 license for that entity, which had been issued on April 11, 2006, listed as its "Legal

28


1Representative" none other than 1115A, or Zhenyong Liu, the CEO of ONP.

2

3 Moreover, the PRC financial statements of the operating subsidiary that the Report

4had analyzed bore Liu's personal seal.

5

6 48. This powerful rebuttal of the Company's claims caused ONP's share

7 price to plummet. The Company's stock, which had opened at $6.50 per share, lost8

$1.41 per share, or more than 21%, to close at $5.09, and hit an intra-day low of9

10 just $4.11 per share.

11 49. Soon thereafter, investors with long positions in ONP stock published12

articles defending the Company. The first such article, by Rick Pearson, appeared13

14 on Thestreet.com after market close on July 1, 2010. The second defense of the

15 Company was written by Eric Jackson, another investor with a long position in16

ONP stock and, like Pearson, a "contributor" to Thestreet.com . Jackson, in an17

18 article published just after 2:00 p.m. on July 2, repeated many of Pearson's and

19 ONP's criticisms of the Report and its authors. He also attempted to explain the20

21 evidence cited in the Report supporting the allegations of fraud.

22 50. These articles attempted to refute the allegations of fraud in the

23 Report, and had the effect of temporarily inflating ONP's share price and mitigating24

25 the decline caused by the disclosure of the fraud. On July 2, the Company's stock

26 closed at $7.29 per share; the next day, it opened at $7.39.

27

28


1 51. The Company did not issue its riposte to the Muddy Waters July 1

2Response until July 6. In a press release issued that day (The "ONP July 6 Press

3

4 Release"), ONP disputed many of the Report's arguments, mainly with conclusory

5 denials, vague assertions of propriety, and implications that the motives of the

6Report's authors were impure. The market, however, was not convinced: ONP's

7

8 share price dropped after the publication of the Company's unconvincing 4,500-

9 word public denial, from an open of $7.39 per share to a close of $6.77 per share.

1052. Additional adverse disclosures came to light on July 15, 2010. That

11

12 day, an article published on Seekingalpha.com set forth the case of fraud against

13 ONP. The article noted that from 2008 to 2009, the Company's claimed employee14

count, according to its SEC filings, remained static at 600 even while ONP claimed15

16 to have grown its revenues by 57%. No less implausible was the Company's claim

17 that it had tripled its sales within three years but spent only $655 on advertising and18

19 promotion during 2008 and 2009 combined. In response, the Company's share

20 price dropped from an open of $7.01 to $6.31 at closing.

21 53. The following day, on July 16, 2010, the Company shocked the market22

23 by announcing that it would retain law firm Loeb & Loeb LLP and an unnamed Big

24 Four audit firm to conduct an independent investigation into the issues raised by

25 Muddy Waters. In response, the Company's share price declined from an open of26

27 $6.15 per share to a close of $5.89 per share.

28


1 54. The fraud caused ONP stock to fall further on July 22, 2010, when

2Muddy Waters posted on its website an English-language translation of an article

3

4 published by the 21 st Century Business Herald, which Muddy Waters described as

5 "one of China's most respected business publications." The article revealed, among

6other things, that the entity analyzed in the Report was, in fact, ONP's actual

7

8 operating subsidiary. The article also explained that Xushui County Dongfang

9 Trading Co. Ltd. ("Dongfang Trading"), which is ONP's single largest raw

10materials supplier, is actually a shell company with little to no revenue. Moreover,

11

12 the article revealed that the first shareholder of Dongfang Trading was Zhenyong

13 Liu, the CEO of ONP. Dongfang Trading's second shareholder was Li Chen, a14

former director of ONP. And most darrming was that Dongfang Trading's address15

16 is identical to the address of HBOP, ONP's operating subsidiary. The Company's

17 apparent failure to disclose the related-party transaction described in the article18

19 shocked the market, causing the Company's share price to decline from an open of

20 $5.00 to a low of just $4.13 and a close of $4.46.

21 55. On July 28, 2010, Roth Capital, which had recently sold $25 million of22

23 ONP stock in a secondary public offering and rated the Company a buy with a price

24 target of $16/share, announced it was suspending analyst coverage of ONP pending

25 the results of the third party investigation into Muddy Waters' allegations of fraud,26

and Roth's own due diligence. This caused ONP stock to fall from $5.36/share to27

28 $4.36 share.


1 Applicability of Presumption of Reliance:

2Fraud-on-the-Market Doctrine

3

4

5 56. At all relevant times, the market for ONP's common stock was an

6efficient market for the following reasons, among others:

7

8 (a) ONP's stock met the requirements for listing, and is listed and

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

10(b) During the class period, on average, over several hundred thousands of

11

12 shares of ONP stock were traded on a weekly basis, demonstrating a very active and

13 broad market for ONP stock, and thereby permitting a very strong presumption of an14

efficient market;15

16 (c) As a regulated issuer, ONP filed periodic public reports with the SEC,

17 and was eligible and did file short form registration statements with the SEC on18

Form S-3 during the Class Period;19

20 (d) ONP regularly communicated with public investors via established

21 market communication mechanisms, including through regular disseminations of22

23 press releases on the national circuits of major newswire services and through

24 other wide-ranging public disclosures, such as communications with the financial

25 press and other similar reporting services;26

27(e) ONP was followed by several securities analysts employed by

28 major brokerage firms who wrote reports that were distributed to the sales force


1 and certain customers of their respective brokerage firms during the Class

2Period. Each of these reports was publicly available and entered the public

3

4 marketplace;

5 (0 Numerous NASD member firms were active market-makers in ONP

6stock at all times during the Class Period; and

7

8 (g) Unexpected material news about ONP was rapidly reflected and

9 incorporated into the Company's stock price during the Class Period.

1057. As a result of the foregoing, the market for ONP' s common stock

11

12 promptly digested current information regarding ONP from all publicly available

13 sources and reflected such information in ONP' s stock price. Under these14

circumstances, all purchasers of ONP' s common stock during the Class Period15

16 suffered similar injury through their purchase of ONP's common stock at

17 artificially inflated prices, and a presumption of reliance thereby applies.18

NO SAFE HARBOR19

20 58. The statutory safe harbor provided for forward-looking statements

21 under certain circumstances does not apply to any of the allegedly false statements22

23 pleaded in this Complaint. Many of the specific statements pleaded herein were not

24 identified as "forward-looking statements" when made. To the extent there were

25 any forward-looking statements, there were no meaningful cautionary statements26

27 identifying important factors that could cause actual results to differ materially from

28 those in the purportedly forward-looking statements. Alternatively, to the extent


1 that the statutory safe harbor does apply to any forward-looking statements pleaded

2herein, defendants are liable for those false forward-looking statements because at

3

4 the time each of those forward-looking statements was made, the particular speaker

5 knew that the particular forward-looking statement was false, and/or the forward-

6looking statement was authorized and/or approved by an executive officer of ONP

7

8 who knew that those statements were false when made.

9 FIRST CLAIM

10Violation of Section 10(b) Of

11

12 The Exchange Act Against and Rule 10b-5

13 Promulgated Thereunder Against All Defendants, Except Roth Capital 14

Partners 15

16

17 59. Plaintiff repeats and realleges each and every allegation contained18

above as if fully set forth herein.19

20 60. This claim is brought against all defendants, except Roth Capital

21 Partners.22

2361. During the Class Period, Defendants carried out a plan, scheme and

24 course of conduct which was intended to and, throughout the Class Period, did: (1)

25 deceive the investing public, including plaintiff and other Class members, as26

27 alleged herein; and (2) cause plaintiff and other members of the Class to purchase

28 ONP's common stock at artificially inflated prices. In furtherance of this unlawful


1 scheme, plan and course of conduct, Defendants, and each of them, took the actions

2set forth herein.

3

4 62. Defendants (a) employed devices, schemes, and artifices to defraud;

5 (b) made untrue statements of material fact and/or omitted to state material facts

6necessary to make the statements not misleading; and (c) engaged in acts, practices,

7

8 and a course of business that operated as a fraud and deceit upon the purchasers of

9 the Company's common stock in an effort to maintain artificially high market

10prices for ONP' s common stock in violation of Section 10(b) of the Exchange Act

11

12 and Rule 10b-5 thereunder. All Defendants are sued either as primary participants

13 in the wrongful and illegal conduct charged herein, or as controlling persons as14

alleged below.15

16 63. Defendants, individually and in concert, directly and indirectly, by the

17 use, means or instrumentalities of interstate commerce and/or of the mails, engaged18

19 and participated in a continuous course of conduct to conceal adverse material

20 information about the business, operations, and future prospects of ONP as

21 specified herein.22

2364. These Defendants employed devices, schemes, and artifices to defraud,

24 while in possession of material adverse non-public information, and engaged in

25 acts, practices, and a course of conduct as alleged herein in an effort to assure26

27 investors of ONP's value, performance, and continued substantial growth This

28 included the making of, or participation in the making of, untrue statements of


1 material facts and omitting to state material facts necessary in order to make the

2statements made about ONP, its business operations, and future prospects in the

3

4 light of the circumstances under which they were made, not misleading, as set forth

5 more particularly herein. Moreover, the Defendants engaged in transactions,

6practices, and a course of business that operated as a fraud and deceit upon the

7

8 purchasers of ONP' s common stock during the Class Period.

9 65. Each of the Individual Defendants' primary liability, and controlling

10person liability, arises from the following facts: (1) the Individual Defendants were

11

12 high-level executives, directors, and/or agents at the Company during the Class

13 Period, and members of the Company's management team or had control thereof;14

(2) each of these defendants, by virtue of his or her responsibilities and activities as15

16 a senior officer and/or director of the Company, was privy to and participated in the

17 creation, development and reporting of the Company's financial condition; (3) each18

19 of these defendants enjoyed significant personal contact and familiarity with the

20 other defendants, and was advised of, and had access to, other members of the

21 Company's management team, internal reports, and other data and information22

23 about the Company's finances, operations, and sales at all relevant times; and

24 (4) each of these defendants was aware of the Company's dissemination of

25 materially false and misleading information to the investing public .26

2766. Defendants had actual knowledge of the misrepresentations and

28 omissions of material facts set forth herein, or acted with reckless disregard for the


1 truth by failing to ascertain and disclose such facts, even though such facts were

2available to them. Such Defendants' material misrepresentations and/or omissions

3

4 were done knowingly or recklessly, and for the purpose and effect of concealing

5 ONP's operating condition and future business prospects from the investing public

6and supporting the artificially inflated price of its common stock. As demonstrated

7

8 by Defendants' overstatements and misstatements of the Company's financial

9 condition throughout the Class Period, Defendants, if they did not have actual

10knowledge of the misrepresentations and omissions alleged, were reckless in failing

11

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

13 necessary to discover whether those statements were false or misleading.14

67. As a result of the dissemination of the materially false and misleading15

16 information and the failure to disclose material facts, as set forth above, the market

17 price of ONP's common stock was artificially inflated during the Class Period. In18

19 ignorance of the fact that market prices of ONP's publicly-traded common stock

20 were artificially inflated, and relying directly or indirectly on the false and

21 misleading statements made by Defendants, or upon the integrity of the market in22

which the common stock trades, and/or on the absence of material adverse23

24 information that was known to or recklessly disregarded by Defendants, but not

25 disclosed in public statements by Defendants during the Class Period, Plaintiff and26

27 the other members of the Class acquired ONP common stock during the Class

28 Period at artificially high prices and were, or will, be damaged thereby.


1 68. At the time of said misrepresentations and omissions, Plaintiff and

2other members of the Class were ignorant of their falsity, and believed them to be

3

4 true. Had Plaintiff and the other members of the Class and the marketplace known

5 the truth regarding ONP's financial results, which were not disclosed by

6defendants, Plaintiff and other members of the Class would not have purchased or

7

8 otherwise acquired their ONP common stock, or, if they had acquired such common

9 stock during the Class Period, they would not have done so at the artificially

10inflated prices that they paid.

11

12 69. By virtue of the foregoing, Defendants have violated Section 10(b) of

13 the Exchange Act, and Rule 10b-5 promulgated thereunder.14

70. As a direct and proximate result of Defendants' wrongful conduct,15

16 Plaintiff and the other members of the Class suffered damages in connection with

17 their respective purchases and sales of the Company's common stock during the18

Class Period.19

20 71. This action was filed within two years of discovery of the fraud, and

21 within five years of each plaintiffs purchases of securities giving rise to the cause22

of action.23

24 SECOND CLAIM

25 Violation of Section 20(a) Of26

27The Exchange Act Against the Individual Defendants

28


1 72. Plaintiff repeats and realleges each and every allegation contained

2above as if fully set forth herein.

3

4 73. The Individual Defendants acted as controlling persons of ONP within

5 the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of

6their high-level positions, agency, and their ownership and contractual rights,

7

8 participation in and/or awareness of the Company's operations and/or intimate

9 knowledge of the false financial statements filed by the Company with the SEC and

10disseminated to the investing public, the Individual Defendants had the power to

11

12 influence and control, and did influence and control, directly or indirectly, the

13 decision-making of the Company, including the content and dissemination of the14

various statements that plaintiff contends are false and misleading. The Individual15

16 Defendants were provided with or had unlimited access to copies of the Company's

17 reports, press releases, public filings and other statements alleged by Plaintiff to18

19 have been misleading prior to and/or shortly after these statements were issued, and

20 had the ability to prevent the issuance of the statements, or to cause the statements

21 to be corrected.22

2374. In particular, each Defendant had direct and supervisory involvement

24 in the day-to-day operations of the Company, and, therefore, is presumed to have

25 had the power to control or influence the particular transactions giving rise to the26

securities violations as alleged herein, and exercised the same.27

28


1 75. As set forth above, ONP and the Individual Defendants each violated

2Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this

3

4 Complaint.

5 76. By virtue of their positions as controlling persons, the Individual

6Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct

7

8 and proximate result of Defendants' wrongful conduct, Plaintiff and other members

9 of the Class suffered damages in connection with their purchases of the Company's

10common stock during the Class Period.

11

12 77. This action was filed within two years of discovery of the fraud and

13 within five years of each Plaintiff's purchases of securities giving rise to the cause14

of action.15

16 THIRD CLAIM

17

18

Against All Defendants19

20 for Violation of §12(a)(2) of the Securities Act

21

22

2378. Plaintiffs repeat and reallege each and every allegation contained

24 above as if fully set forth herein This claim is not based on, and does not allege,

25 fraud.26

79. This Count is asserted against all Defendants for violations of27

28 §12(a)(2) of the Securities Act on behalf of all plaintiffs and members of the Class


1 who purchased ONP common stock directly from the underwriters Roth Capital in

2the March 31, 2010 public offering

3

4 80. Each of the Defendants was a seller, offeror, and/or solicitor of sales of

5 the shares offered in connection with the public offering as defined under §12(a)(2)

6of the Securities Act and pertinent common law.

7

8 81. The Prospectus contained misstatements of material facts, and omitted

9 to state facts necessary to make the statements made therein not misleading,

10concerning ONP' s financial performance and condition, and business, as set forth

11

12 herein.

13 82. Each of the Defendants' actions of solicitation included participating14

in the preparation of the false and misleading Prospectus and Registration15

16 Statement, including false financial statements, soliciting investors in person, over

17 the telephone, through the mails and through road show presentations. Roth Capital18

and the Individual Defendants attended road show presentations with investors with19

20 the specific intent to solicit the purchase of ONP common stock in the public

21 offering.22

2383. Members of the plaintiff Class purchased or otherwise acquired ONP

24 common stock directly from Roth Capital in the public offering pursuant to or

25 traceable to the false and misleading Registration Statement and Prospectus.26

27

28


1 84. Plaintiff and class members did not know, or in the exercise of due

2diligence could not have known, of the untruths and omissions contained in the

3

4 Registration Statement and Prospectus.

5 85. By reason of the conduct alleged herein, each of the Defendants have

6violated §12(a)(2) of the Securities Act, and plaintiffs and members of the Class

7

8 have suffered damages as a result of such violations.

9 86. Plaintiffs, individually and representatively, hereby elect to rescind

10and tender to those defendants named in this Count those securities that plaintiffs

11

12 and other members of the Class continue to own, in return for the consideration

13 paid for those securities together with interest thereon. Plaintiffs and the other14

members of the class who have sold their ONP common stock seek rescissory15

16 damages.

17 87. This action was brought within one year after the discovery of the18

untrue statements and omissions and within three years after the public offering.19

20 FOURTH CLAIM

21

22

Violations of Section 15 of the Securities Act23

24 Against the Individual Defendants

25

26

27

28


1 88. Plaintiffs repeat and reallege each and every allegation contained

2above as if fully set forth herein. This claim is not based on, and does not allege,

3

4 fraud.

5 89. This claim is asserted against each of the Individual Defendants, each

6of whom was a control person of ONP during the relevant time period.

7

8 90. For the reasons set forth above and pursuant to the third claim, ONP is

9 liable to the plaintiffs and the members of the Class who purchased ONP common

10stock in the public offering based on the untrue statements and omissions of

11

12 material fact contained in the Registration Statement and Prospectus, under

13 §12(a)(2) of the Securities Act.14

91. The Individual Defendants were control persons of ONP by virtue of,15

16 among other things, their positions as senior officers, directors and/or controlling

17 shareholders of the Company. Each was in a position to control and did in fact18

control ONP and the false and misleading statements and omissions contained in19

20 the Registration Statement and Prospectus

21 92. None of the Individual Defendants made reasonable investigation or22

23 possessed reasonable grounds for the belief that the statements contained in the

24 Registration Statement and Prospectus were accurate and complete in all material

25 respects. Had they exercised reasonable care, they could have known of the26

material misstatements and omissions alleged herein.27

28


1 93. This claim was brought within one year after the discovery of the

2untrue statements and omissions in the Registration Statement and Prospectus, and

3

4 within three years after ONP common stock was sold to the Class in connection

5 with the public offering.

694. By reason of the misconduct alleged herein, for which ONP is

7

8 primarily liable, as set forth above, the Individual Defendants are jointly and

9 severally liable with and to the same extent as ONP pursuant to Section 15 of the

10Securities Act.

11

12 WHEREFORE, Plaintiff prays for relief and judgment, as follows:

13 (a) Determining that this action is a proper class action, designating14

Plaintiff as class representative under Rule 23 of the Federal Rules of Civil15

16 Procedure, and designating Plaintiffs counsel as Class Counsel;

17 (b) Awarding compensatory damages in favor of Plaintiff and the18

19 other Class members against all defendants, jointly and severally, for all damages

20 sustained as a result of defendants' wrongdoing, in an amount to be proven at trial,

21 •including interest thereon;22

23(c) Awarding Plaintiff and the Class their reasonable costs and

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

25 (d) Such other and further relief as the Court may deem just and26

27 proper.

28 JURY TRIAL DEMANDED


1 Plaintiff hereby demands a trial by jury.

2Dated: August 3, 2010 Respectfully submitted,

3THE ROSEN LAW FIRM, P.A.

4

5

ah4".6

7Laurence M. Rosen, Esq. (SBN 219683)

8 THE ROSEN LAW FIRM, P.A.

9333 South Grand Avenue, 25 th FloorLos Angeles, CA 90071


11 Email: irosen(arosenlegal.com

12 -and-

13 Phillip Kim, Esq.THE OSEN LAW FIRM, P.A.

14 350 5 Avenue, Suite 5508New York, New York 10118


16 Email: pkirn(itrosenlegal.com

17 Counsel for Plaintiff

18

19

20

21

22

23

24

25

26

27

28


Documents

pkirn idtosenlegal . cora - Stanford Universitysecurities.stanford.edu/filings-documents/1045/ONP... · executive officers, agents, and/or directors of ONP, its subsidiaries, and/or