The US District Court for the Southern District of New York recently denied a defendant’s motion to dismiss a securities fraud class action, accepting as sufficient factual allegations of scienter that were drawn from a Securities Exchange Commission civil action, which a defendant had settled without admitting liability.

In 2009 and 2010, Keyuan Petrochemicals, Inc. allegedly purchased raw materials from entities owned by its chairman of the board. Keyuan became a publicly listed company in the United States in May 2010. The company first disclosed the transactions in its October 2011 Form 10-K filing. The transactions were not disclosed in offering materials distributed in connection with private sales of Keyuan shares in 2010 or in prior regulatory filings. In February 2013, the SEC brought a civil fraud action against Keyuan and its CFO Aichun Li, in part for nondisclosure of the related-party transactions. Li agreed to a consent judgment with the SEC without admitting or denying the SEC’s allegations. As a result, Li was enjoined from future violations of the securities laws and paid a $25,000 penalty. Keyuan shareholders later brought the current case.

Li filed a motion to dismiss claiming, among other things, that the plaintiffs failed to allege that she knowingly failed to disclose the transactions. Li argued that the plaintiffs could not rely on allegations taken from the SEC complaint to establish that she knew of the transactions. The District Court held that there was no absolute rule barring plaintiffs from relying on government pleadings, and that even if the evidence was not admissible at trial it was enough to defeat Li’s motion to dismiss.

Vanleeuwen v. Keyuan Petrochemicals, Inc., No. 13 Civ. 6057 (PAC) (S.D.N.Y. Aug. 8, 2014).