2. WHAT IS THIS CASE ABOUT?
On February 2, 2015, this case was filed as a class action in the United States District Court for the District of New Jersey (the “Court”) alleging violations of federal securities laws. The Court has appointed the law firm of Glancy, Prongay & Murray LLP and Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C. as Lead Counsel. Bin Qu is the Court-appointed Lead Plaintiff.
On August 27, 2015, Lead Plaintiff filed the Amended Class Action Complaint for Violation of the Federal Securities Laws and Demand for Jury Trial (the “Complaint”), against Daqing Han, Xiaoli Yu, Hong Li, Ming Li, Lian Zhu, Guanghui Cheng, Guobin Pan, Guangjun Lu, Yuanpin He, Mazars CPA Limited, Mazars Scrl, WeiserMazars LLP, and Telestone.4 The Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Among other things, the Complaint alleges that Defendants materially overstated Telestone’s financial results by improperly recognizing revenue and that these results were contained in Telestone’s 2009, 2010, and 2011 Form 10-K filings with the Securities and Exchange Commission.
Mazars CPA served as Telestone’s outside auditor during this time period. The claims against Mazars CPA relate to the allegedly false and misleading audit opinion letters filed with the 2009, 2010 and 2011 Form 10-Ks (the “Auditor Reports”). Specifically, the Complaint alleges that the Auditor Reports were false and misleading because: (1) Mazars CPA did not conduct its audits in accordance with Public Company Accounting Oversight Board (“PCAOB”) standards; (2) Telestone’s consolidated financial statements did not present fairly, in all material respects, either the financial position of Telestone and subsidiaries as of December 31, 2009, December 31, 2010, or December 31, 2011 or the results of their operations and their cash flows for each of the three years in the periods ended December 31, 2009, December 31, 2010, and December 31, 2011; (3) Telestone’s financial statements were not presented in accordance with Generally Accepted Accounting Principles, rendering the Auditor Reports not in compliance with PCAOB standards; and (4) the Auditor Reports were also false and misleading because Telestone’s internal controls were not effective but were instead plagued by significant material weaknesses. The Complaint further alleges that the price of Telestone’s publicly-traded securities was artificially inflated during the Class Period as a result of Defendants’ allegedly false and misleading statements, and that when the truth was revealed the price of Telestone stock fell, causing damage to purchasers of the Telestone stock during the Class Period.
On October 2, 2015, Mazars CPA filed a Motion to Dismiss the Complaint, in which it argued that the Complaint failed to allege particularized facts sufficient to demonstrate that Mazars CPA made a false statement or acted with scienter. Additionally, Mazars CPA asserted that the claims at issue were barred by the two-year statute of limitations for securities claims. On November 17, 2015, Lead Plaintiff filed his opposition to the Motion to Dismiss, and on December 24, 2015, Mazars CPA filed a reply brief in support of its Motion to Dismiss. On February 21, 2015, the Court issued an opinion and order denying Mazars CPA’s Motion to Dismiss.
On January 21, 2016, Mazars CPA filed its Answer to the Complaint. Thereafter, counsel for Lead Plaintiff and Mazars CPA conducted a Rule 26(f) conference and exchanged initial disclosures. Additionally, the Settling Parties negotiated a joint discovery plan, a protective order, and an ESI protocol governing the production of electronic documents. During these discussions, Lead Plaintiff and Mazars CPA agreed to engage in private mediation to discuss the possibility of settlement.
On June 10, 2016, Lead Plaintiff and Mazars CPA exchanged and submitted to the mediator, Jed D. Melnick, J.D. (the “Mediator”), detailed mediation statements which addressed the issues of both liability and damages. On June 22, 2016, the Settling Parties engaged in a full-day mediation in New York, New York. The session ended without any agreement being reached.
Over the course of the next several weeks, the Mediator conducted further discussions with the Lead Plaintiff and Mazars CPA, which culminated in the reaching of an agreement in principle to settle the Action. Thereafter, the Settling Parties agreed to the material terms of a settlement of this Action and proceeded to draft this Stipulation.
On September 25, 2017, the Court preliminarily approved the Settlement, authorized the Notice to be disseminated to potential Settlement Class Members, and scheduled the Settlement Hearing to consider whether to grant final approval to the Settlement.