Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 1 of 31

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1 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 1 of 31 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE SINOHUB SECURITIES LITIGATION This Document Relates to: All Actions No. 1:12-cv WHP LEAD PLAINTIFF S MEMORANDUM IN SUPPORT OF UNOPPOSED MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT

2 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 2 of 31 TABLE OF CONTENTS PAGE I. INTRODUCTION... 2 II. FACTUAL BACKGROUND... 3 A. Nature of the Claims and Procedural History... 3 B. Summary of the Proposed Settlement... 5 III. ARGUMENT... 6 A. The Settlement Merits Preliminary Approval The Standards to Be Applied in Granting Preliminary Approval of the Settlement Preliminary Approval of the Settlement Should Be Granted... 7 a. The Complexity, Expense, and Likely Duration of the Litigation Support Approval of the Settlement... 8 b. The Reaction of the Class to the Settlement... 9 c. The Stage of the Proceedings... 9 d. The Risks of Establishing Liability and Damages e. The Risks of Maintaining the Class Action Through Trial f. The Ability of Defendants to Withstand a Greater Judgment g. The Reasonableness of the Settlement in Light of the Best Possible Recovery and the Attendant Risks of Litigation IV. CERTIFICATION OF THE SETTLEMENT CLASS UNDER FEDERAL RULE OF CIVIL PROCEDURE 23 IS APPROPRIATE A. The Proposed Class Satisfies Rule 23(a) The Proposed Class Is so Numerous that Joinder of All Members Is Impracticable There Exist Questions of Law and Fact Common to the Members of the Class The Claims of the Lead Plaintiff Are Typical of Those of the Class Lead Plaintiff and Its Counsel Have Fairly and Adequately Represented the Proposed Class B. Lead Plaintiff Satisfies the Rule 23(b)(3) Requirements Common Questions of Law or Fact Predominate A Class Action Is Superior to Other Available Methods for the Efficient Adjudication of This Controversy V. THE PROPOSED FORM AND METHOD OF CLASS NOTICE AND THE FORM OF THE PROOF OF CLAIM AND RELEASE ARE APPROPRIATE A. The Scope of the Notice Program B. The Scope of the Notice Program Is Adequate C. The Proposed Form of Notice Comports with the Requirements of Due Process, the Private Securities Litigation Reform Act of 1995, and Rule 23 and Is the i

3 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 3 of 31 Same or Similar to the Form(s) of Notice Routinely Approved By Courts in this Jurisdiction VI. PROPOSED SCHEDULE VII. CONCLUSION ii

4 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 4 of 31 TABLE OF AUTHORITIES CASES Page(s) Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997)...17 Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52 (2d Cir. 2000)...16 Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975)...18 Cent. States Se. & Sw. Areas Health and Welfare Fund v. Merck-Medco Managed Care, L.L.C., 504 F.3d 229 (2d Cir. 2007)...13, 14, 15 Chatelain v. Prudential-Bache Sec., Inc., 805 F. Supp. 209 (S.D.N.Y. 1992)...7 China Tire Holdings Ltd. v. Goodyear Tire & Rubber Co., 91 F.Supp. 2d 1106 (N.D. Ohio 2000)...11 City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974)...6, 8, 10, 11 Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473 (2d Cir. 1995)...13 Darquea v. Jarden Corp., No. 06 Civ. 722, 2008 WL (S.D.N.Y. March 6, 2008)...18 Epstein v. Moore, No. 87 Civ 2984, 1988 WL (D.N.J. June 13, 1988)...15 Frank v. Eastman Kodak Co., 228 F.R.D. 174 (W.D.N.Y. 2005)...11 Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147 (1982)...15 Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975)...10 Goldberger v. Integrated Resources, Inc., 209 F.3d 43 (2d Cir. 2000)...6 iii

5 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 5 of 31 Green v. Wolf Corp., 406 F.2d 291 (2nd Cir. 1968)...14, 20 Hicks v. Stanley, No. 01 Civ (RJH), 2005 WL (S.D.N.Y. Oct. 24, 2005)...8 In re Alloy, Inc. Sec. Litig., No. 03 Civ (WHP), 2004 WL (S.D.N.Y. Dec. 2, 2004)...10 In re Amerifirst Sec. Litig., 139 F.R.D. 423 (S.D. Fla. 1991)...13 In re AMF Bowling Sec. Litig., No. 99 CIV (DC), 2002 WL (S.D.N.Y. Mar. 26, 2002)...19 In re AOL Time Warner, Inc. Sec. & ERISA Litig., No. MDL 1500, 2006 WL (S.D.N.Y. Apr. 6, 2006)...8, 10 In re Arakis Energy Corp. Sec. Litig., No. 95-cv-3431 (ARR), 1999 WL (E.D.N.Y. April 27, 1999)...17, 19 In re Blech Sec. Litig., 187 F.R.D. 97 (S.D.N.Y. 1999)...19 In re China Sunergy Sec. Litig., No. 07 Civ (DAB), 2011 WL (S.D.N.Y. May 13, 2011)...11 In re Currency Conversion Fee Antitrust Litig., No. 01 MDL 1409, 2006 WL (S.D.N.Y. Nov. 8, 2006)...7 In re Genta Sec. Litig., No , 2008 WL (D.N.J. May 28, 2008)...10 In re Gilat Satellite Networks, Ltd., No. CV (CPS), 2007 WL (E.D.N.Y. Apr. 19, 2007)...21 In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436 (S.D.N.Y. 2004)...10 In re Heritage Bond Litig., No. 02-ML-1475, 2005 WL (C.D. Cal. June 10, 2005)...9 In re Interpublic Sec. Litig., No. 02 CIV (DLC), 2003 WL (S.D.N.Y. Nov. 6, 2003)...14 In re IPO Sec. Litig., 260 F.R.D. 81 (S.D.N.Y. 2009)...13, 14, 15, 17 iv

6 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 6 of 31 In re Luxotica Group S.p.A. Sec. Litig., No. CV (JBW), 2005 WL (E.D.N.Y. Nov. 15, 2005)...21 In re Mego Fin. Corp., Sec. Litig., 213 F.3d 454 (9th Cir. 2000)...10 In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., No. 02 MDL 1484 (JFK), 2007 WL (S.D.N.Y. Feb. 1, 2007)...20 In re Michael Milken & Assocs. Sec. Litig., 150 F.R.D. 57 (S.D.N.Y. 1993)...7 In re The Mills Corp. Sec. Litig., 257 F.R.D. 101 (E.D. Va. 2009)...14 In re Oxford Health Plans, Inc. Sec. Litig., 191 F.R.D. 369 (S.D.N.Y. 2000)...14 In re Prudential Sec. Inc. Ltd. P ships Litig., 164 F.R.D. 362 (S.D.N.Y. 1996), aff d, 107 F.3d 3 (2d Cir. 1996)...21 In re Stock Exchs. Options Trading Antitrust Litig., No. 99 Civ (RCC), 2006 WL (S.D.N.Y. Dec. 4, 2006)...21 In re Twinlab Corp. Sec. Litig., 187 F. Supp. 2d 80 (E.D.N.Y. 2002)...16 In re Veeco Instruments, Inc., Sec. Litig., 235 F.R.D. 220 (S.D.N.Y. 2006)...14 In re Warner Chilcott Ltd. Sec. Litig., No. 06 Civ (WHP), 2008 WL (S.D.N.Y. Nov. 20, 2008)...6 In re Warner Commc ns Sec. Litig., 618 F. Supp. 735 (S.D.N.Y. 1985)...9 Maley v. Del Global Techs. Corp., 186 F.Supp. 2d 358 (S.D.N.Y. 2002)...12 Menkes v. Stolt-Nielsen S.A., 270 F.R.D. 80 (D. Conn. 2010)...7, 13 Moore v. PaineWebber, Inc., 306 F.3d 1247 (2d Cir. 2002)...17 Ohman v. Kahn, No. 87 CIV (JFK), 1990 WL (S.D.N.Y. June 27, 1990)...15 v

7 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 7 of 31 Port Auth. Police Benevolent Ass n v. Port Auth. of New York and New Jersey, 698 F.2d 150 (2d Cir. 1983)...14 Strougo ex rel. Brazilian Equity Fund, Inc. v. Bassini, 258 F. Supp. 2d 254 (S.D.N.Y. 2003)...9 Weigner v. City of New York, 852 F.2d 646, 649 (2d Cir. 1988)...20 Weinberger v. Kendrick, 698 F.2d 61 (2d Cir. 1982)...9, 21 STATUTES, RULES AND REGULATIONS Federal Rules of Civil Procedure Rule , 13, 21 Rule 23(a)...12, 13, 15, 17 Rule 23(a)(1)...13, 14 Rule 23(a)(2)...14 Rule 23(a)(3)...15 Rule 23(a)(4)...16, 17 Rule 23(b)...12 Rule 23(b)(3)...17, 18 Rule 23(e)...7 OTHER AUTHORITIES 2 Herbert B. Newberg, Alba Conte, NEWBERG ON CLASS ACTIONS (3d ed. 1992)...7 vi

8 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 8 of 31 Lead Plaintiff Ellsworth Investments Limited ( Lead Plaintiff or Plaintiff ) respectfully submits this Memorandum of Law in support of its unopposed motion for entry of an order: (i) granting preliminary approval of the proposed settlement (the Settlement ) set forth in the Stipulation and Agreement of Settlement dated January 21, 2015 (the Stipulation ); (ii) conditionally certifying, for settlement purposes only, the Proposed Settlement Class; (iii) approving the form and manner of giving notice of the Settlement to the Proposed Settlement Class; and (iv) setting a hearing date for final approval of the Settlement and its terms, including the proposed Plan of Distribution (the Settlement Fairness Hearing ). 1 I. INTRODUCTION The proposed Settlement now submitted to the Court for preliminary approval provides for the payment of six hundred, twenty-five thousand dollars ($625,000) in cash (the Settlement Fund ) for the benefit of the Proposed Settlement Class. As discussed in detail below, Lead Plaintiff and its counsel, Scott+Scott, Attorneys at Law, LLP ( Plaintiff s Lead Counsel ) submit that the proposed Settlement is in the best interests of the Proposed Settlement Class and falls within the range or reasonable settlement outcomes particularly given the high likelihood that no judgment would ever be collectible. Therefore, the Settlement provides an immediate and significant recovery for the Proposed Settlement Class in the face of substantial challenges to any recovery after continued litigation, trial, and appeals. Furthermore, the Settlement was negotiated by lawyers experienced in complex litigation through exhaustive arm s-length negotiations. Accordingly, Plaintiff respectfully moves for preliminary approval and submits this Memorandum of Law in support of the proposed Settlement. 1 Unless otherwise noted, all capitalized terms are defined in the Stipulation, which, along with its exhibits, is attached to the Declaration of Joseph P. Guglielmo ( Guglielmo Decl. ) filed concurrently herewith. 2

9 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 9 of 31 II. FACTUAL BACKGROUND A. Nature of the Claims and Procedural History On November 20, 2012, the above-captioned class action was filed. On March 4, 2013, the Court appointed Ellsworth Investments Limited as Lead Plaintiff and Scott+Scott, Attorneys at Law, LLP ( Scott+Scott ) as Lead Counsel. The operative complaint in the Action is the First Amended Class Action Complaint (the Complaint ), filed in this Court on September 16, The Complaint alleges violations of 10(b) of the Securities Exchange Act of 1934 (the Exchange Act ) and Rule 10b-5 enacted thereunder as well as violations of 20(a) of the Exchange Act on behalf of the proposed Class and against Defendants. The putative Class is all persons who purchased common stock of the Company within the Class Period, which is May 17, 2010 through August 21, The Complaint alleges that Defendants engaged in a scheme to defraud investors and the public by misrepresenting the internal controls in place at SinoHub, the Company s adherence to Generally Accepted Accounting Principles ( GAAP ), the manner and amount by which revenue was being recognized, and the prospects and health of key segments of the Company. The Complaint likewise alleges that Baker Tilly, the Company s former auditor, clearly participated, or was at a minimum, aware of the Company s lack of internal controls, by reviewing and signing off on flawed financial statements. The Complaint alleges that, as the truth about the Company s financial condition, management, and internal controls slowly leaked out, the Company s stock price dropped, causing losses to investors. From the inception of the Action, it has been hard-fought and wrought with difficulties, especially given that the Defendants are located in Asia. Indeed, it was trying for Plaintiff s Counsel to even serve the Defendants and necessitated the use of a personal investigator to locate the whereabouts of the Defendants (some of whom, to this day, cannot be located) while 2 Excluded from the Class are the Defendants, officers, and directors of the Company, as well as their families and the families of the Defendants, those holding 5% or more of SinoHub s outstanding shares, and any member of the Class who has validly and timely requested exclusion from the Class. 3

10 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 10 of 31 examining the transgressions at the Company. Although the Action was filed in November, 2012, Plaintiff was only initially able to serve SinoHub through counsel in the United States. Plaintiff sought a Rule 4(f) motion to serve the remaining SinoHub Defendants through SinoHub s counsel, the Court granted that motion only as to Defendant Cochran. While such motion was pending, though, Defendant Cochran died. 3 Therefore, Plaintiff spent months using international services and investigators to attempt service on the remaining Defendants. Ultimately, in July 2014, Plaintiff had perfected service on SinoHub, Defendant De Hui Li, and Baker Tilly, all of whom moved to dismiss the Complaint. Plaintiff replied to all three motions to dismiss on December 10, Throughout this drawn-out process, the Parties began to discuss mediation of the Action and exchanged insurance policy documents. The Parties held an in-person meeting to discuss resolution of the Action on October 9, Although they were unable to resolve the Action then, they continued to discuss settlement and ultimately decided to meet again in-person on November 18th, At that meeting, numerous settlement proposals were exchanged, considered and rejected. Following that meeting, the Parties continued to discuss settlement telephonically. The negotiations included discussions not only about the merits of the claims, but also about the Company s financial condition and assets. Ultimately, during the week of December 15, 2014, the Parties were able to reach an agreement in principle on the resolution of this Action and, on January 21, 2015, the Parties executed the Stipulation, which is subject to the approval of the Court. Lead Plaintiff, while continuing to believe its case is meritorious, recognizes the significant risks of going forward, and the limited resources available on which to collect any judgment at all. Defendants adamantly deny that they did anything wrong, and have similarly expressed their belief that they will prevail at trial. The Defendants also explained that they have very limited assets, and Plaintiff was extremely concerned that Defendants would be 3 Plaintiff s Counsel attempted to proceed in state court in Massachusetts regarding Defendant Cochran s estate and communicated with his daughter. 4

11 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 11 of 31 unable to pay a judgment. Indeed, in the course of settlement discussions, Defendants produced documents reflecting minimal insurance coverage applied to Lead Plaintiff s claims and that their assets, the majority of which are located in the People s Republic of China ( China ) are not significant to withstand a multi-million dollar judgment, thus making recovery of any judgment against them unlikely. B. Summary of the Proposed Settlement The Settlement will be funded by a $625,000 cash payment by or on behalf of, the Defendants. The SinoHub Defendants will contribute $325,000 and Baker Tilly will contribute $300,000. Within 20 days after the Court enters an order preliminarily approving the Settlement and the Court s entry of an order granting Lead Plaintiff s motion to compel or enforce the settlement agreement reached with plaintiff s counsel in the Li Derivative Action, Defendants shall cause $100,000 of the Settlement Amount to be deposited into the escrow account to cover the anticipated costs of settlement administration and notice to the Class. On or before five business days after the Court s order granting final approval of the Settlement, Defendants shall cause the balance of the Settlement Amount to be deposited into the escrow account. The detailed terms of the Settlement are set forth in the Stipulation. The $625,000 in cash, less attorneys fees and any expenses awarded by the Court, including notice and administration expenses, and any taxes payable from the Settlement Fund (the Net Settlement Fund ), will be distributed to Authorized Claimants (i.e., Class Members who file timely and valid Proof of Claim and Release forms) in accordance with the Plan of Distribution described fully in the Notice of Pendency and Proposed Settlement of Class Action (the Long Notice ), which is Exhibit A-1 to the Stipulation. See Guglielmo Decl., Ex. A. Lead Counsel will file a written request with the Court for an award of attorneys fees and expenses incurred in connection with the prosecution of the Action as well as reimbursement to Plaintiff of its reasonable costs and expenses directly relating to its representation of the Class. The Plan of Distribution, which was developed by Plaintiff s damages expert, is based on her and Plaintiff s theory of loss causation and damages and treats all potential claimants in a fair 5

12 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 12 of 31 and equitable fashion. Each Authorized Claimant will be paid the pro rata share of the Net Settlement Fund based on each Authorized Claimant s Recognized Claim as defined in the Plan of Distribution. The pro rata share is based on each Claimant s Recognized Claim compared to the total Recognized Claims of all Authorized Claimants. As set forth below, the Settlement meets the standards for preliminary approval as it falls well within the range of possible approval, was the product of hard-fought litigation and arm slength settlement negotiations between experienced counsel, and contains no facial deficiencies. The proposed form of the Notice advises Class Members of the key elements of and considerations in evaluation of the Settlement, and the proposed notice program is the best practicable under the circumstances, and should be approved. III. ARGUMENT A. The Settlement Merits Preliminary Approval As discussed herein, the proposed Settlement is an excellent result for Lead Plaintiff and the Class, especially in consideration of Defendants limited insurance coverage applicable to Lead Plaintiff s claims and the high risk that any judgment against the SinoHub Defendants would be utterly uncollectible. Plaintiff further respectfully submits that an analysis of the Grinnell factors (City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974), abrogated on other grounds by Goldberger v. Integrated Resources, Inc., 209 F.3d 43 (2d Cir. 2000)), set forth below, which apply to a court s determination of final approval of a settlement, also supports preliminary approval of this settlement. See also In re Warner Chilcott Ltd. Sec. Litig., No. 06 Civ (WHP), 2008 WL , at *2 (S.D.N.Y. Nov. 20, 2008) ( Although a complete analysis of [the Grinnell] factors is required for final approval, at the preliminary stage, the Court need only find that the proposed settlement fits within the range of possible approval to proceed. ). 4 4 Unless otherwise noted, citations are omitted and emphasis is added. 6

13 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 13 of The Standards to Be Applied in Granting Preliminary Approval of the Settlement Federal Rule of Civil Procedure 23(e) requires that any compromise of claims brought on a class basis be subject to judicial review and approval. The issue of whether a proposed settlement should be approved is within the sound discretion of the district court, which should be exercised in the context of public policy strongly favoring the pretrial settlement of class action lawsuits. 2 Herbert B. Newberg, Alba Conte, NEWBERG ON CLASS ACTIONS (3d ed. 1992). Where the proposed settlement appears to be the product of serious, informed, noncollusive negotiations, has no obvious deficiencies, and falls within the range of approval, preliminary approval is generally granted. See Menkes v. Stolt-Nielsen S.A., 270 F.R.D. 80, 101 (D. Conn. 2010); In re Currency Conversion Fee Antitrust Litig., No. 01 MDL 1409, 2006 WL , at *4-*5 (S.D.N.Y. Nov. 8, 2006). Recognizing that a settlement represents an exercise of judgment by the negotiating parties, the Second Circuit has noted a strong initial presumption of fairness that attaches to proposed settlements that, as here, are reached by experienced counsel after arm s-length negotiations with the assistance of a mediator. See In re Michael Milken & Assocs. Sec. Litig., 150 F.R.D. 57, 66 (S.D.N.Y. 1993); Chatelain v. Prudential-Bache Sec., Inc., 805 F. Supp. 209, 212 (S.D.N.Y. 1992). The general standard by which courts are guided when deciding whether to grant preliminary approval of a class action settlement is whether the proposed settlement falls within the range of what could be found fair, reasonable and adequate, so that notice may be given to the proposed class and a hearing for final approval can be scheduled. Currency Conversion, 2006 WL , at *5. As demonstrated below, the Settlement satisfies the criteria for preliminary approval. 2. Preliminary Approval of the Settlement Should Be Granted The Second Circuit has identified nine factors that courts should consider in deciding whether to grant final approval of a class action settlement including: the complexity, expense, and likely duration of the litigation; the reaction of the class; the stage of the proceedings; the risks of establishing liability and establishing damages; the risks of maintaining the class action 7

14 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 14 of 31 through trial; the ability of defendants to withstand a greater judgment; the range of reasonableness of the settlement fund in light of the best possible recovery; and the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation. Grinnell, 495 F.2d at 463. As discussed in detail below, the applicable Grinnell factors also supports preliminary approval of the Settlement. a. The Complexity, Expense, and Likely Duration of the Litigation Support Approval of the Settlement Courts have consistently recognized the complexity, expense, and likely duration of litigation as critical factors in evaluating the reasonableness of a settlement, especially where the settlement being evaluated is a securities class action. See, e.g., Hicks v. Stanley, No. 01 Civ (RJH), 2005 WL , at *5 (S.D.N.Y. Oct. 24, 2005); see also In re AOL Time Warner, Inc. Sec. & ERISA Litig., No. MDL 1500, 2006 WL , at *8 (S.D.N.Y. Apr. 6, 2006) (due to their notorious complexity, securities class actions often settle to circumvent[] the difficulty and uncertainty inherent in long, costly trials ). This case is a complex securities class action involving a complicated subject matter and international companies. As such, the litigation will involve a great deal of expensive expert testimony related to damages, loss causation, the adequacy of internal controls, and financial accounting. The complexity will only add to the cost and duration of the litigation and create additional risks to the litigants, making the outcome even harder to predict. In contrast to the aforementioned risks, approval of the Settlement will mean a present recovery for eligible claimants. While Plaintiff believed, and continues to believe, that the Action has merit and that it would ultimately prevail upon its claims, continued litigation would last many years before a final judgment in the Class s favor. If not for this Settlement, Plaintiff would have been required to continue to litigate the three pending motions to dismiss as well as a (certain to be) contested motion for class certification; negotiate and then complete fact and expert discovery; and brief and argue long and detailed summary judgment motions, the outcomes of which are far from certain. Additionally, if the case survived summary judgment, a 8

15 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 15 of 31 trial would have occupied weeks of attorney and Court time, and would have required substantial and costly expert testimony on both sides. Then, a judgment favorable to the Class would likely be the subject of post-trial motions and further appeals, which could prolong the case for several more years. Delay, not just at the trial stage but through post-trial motions and the appellate process as well, could force Class Members to wait many more years for any recovery, further reducing its value. See, e.g., In re Warner Commc ns Sec. Litig., 618 F. Supp. 735, 745 (S.D.N.Y. 1985) (delay from appeals is a factor to be considered). Settlement of this litigation ensures a recovery now and eliminates the risk of no recovery at all. It is, therefore, in the best interest of the Class. See In re Heritage Bond Litig., No. 02-ML-1475, 2005 WL , at *6 (C.D. Cal. June 10, 2005) ( In most situations, unless the settlement is clearly inadequate, its acceptance and approval are preferable to lengthy and expensive litigation with uncertain results. ); see also Strougo ex rel. Brazilian Equity Fund, Inc. v. Bassini, 258 F. Supp. 2d 254, 261 (S.D.N.Y. 2003) ( even if a shareholder or class member was willing to assume all the risks of pursuing the actions through further litigation... the passage of time would introduce yet more risks... and would, in light of the time value of money, make future recoveries less valuable than this current recovery ). b. The Reaction of the Class to the Settlement The Settlement is supported by Lead Plaintiff who has participated throughout the prosecution of its claims and was involved in the decision to enter into the Settlement with Defendants. With respect to absent Class Members, Notice regarding the Settlement has not yet been mailed or otherwise distributed. Thus, their reaction cannot be gauged. In the event any objections are received after notice is disseminated, they will be addressed by Plaintiff s Lead Counsel in connection with their motion for final approval of the Settlement. c. The Stage of the Proceedings The stage of the proceedings and the amount of information available to the parties to assess the strength and weaknesses of their cases is one factor that courts consider in determining the fairness, reasonableness, and adequacy of a settlement. See Weinberger v. Kendrick, 698 9

16 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 16 of 31 F.2d 61, 74 (2d Cir. 1982); In re Mego Fin. Corp., Sec. Litig., 213 F.3d 454, 459 (9th Cir. 2000); Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975). At the time the Parties agreed to settle the Action, the Parties were about to embark on costly and time-consuming motions to dismiss reply briefs and oral argument as well as class certification and the discovery phase. The proceedings in this Action were sufficiently advanced to provide Plaintiff with a thorough understanding of the strengths and weaknesses of the claims. In particular, Lead Counsel conducted an extensive investigation into the factual underpinnings of the case, including using the services of private investigators both in the United States and in China who interviewed former employees and obtained SinoHub s Chinese regulatory filings. Furthermore, as described above, three motions to dismiss were briefed by the parties. See, e.g. In re Genta Sec. Litig., No , 2008 WL , at *2 (D.N.J. May 28, 2008) ( The motion to dismiss resolved many of the issues raised in the Amended Complaint, leaving Lead Plaintiffs and Defendants with a solid understanding of the strengths and weaknesses of their respective positions. ). As such, the Settlement was reached only after Lead Counsel had a thorough understanding of the strengths and vulnerabilities of Plaintiff s claims. See In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436, 458 (S.D.N.Y. 2004) ( the question is whether the parties had adequate information about their claims ). Therefore, this Court should find that this factor also supports the Settlement. d. The Risks of Establishing Liability and Damages In assessing the Settlement, the Court should balance the benefits afforded the Class, including the immediacy and certainty of a recovery, against the continuing risks of litigation. See Grinnell, 495 F.2d at 463. Securities class actions present hurdles to proving liability that are difficult for plaintiffs to meet. See AOL Time Warner, 2006 WL , at *11 (noting that [t]he difficulty of establishing liability is a common risk of securities litigation ); In re Alloy, Inc. Sec. Litig., No. 03 Civ (WHP), 2004 WL , at *2 (S.D.N.Y. Dec. 2, 2004) (finding that issues present in securities action presented significant hurdles to proving liability). While Lead Plaintiff believes that many of the false statements alleged in the 10

17 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 17 of 31 Complaint would ultimately be borne out by the evidence, it also recognizes that it would face hurdles to proving liability. There was no guarantee that Lead Plaintiff would have succeeded in defeating the three pending motions to dismiss or in maintaining those claims at the summary judgment or trial stage. Moreover, the fact that most of the documentary evidence and witnesses are located in China presents significant barriers to discovery, given that it could be impossible to collect documents and testimony from China necessary to prove Lead Plaintiff s claims. See In re China Sunergy Sec. Litig., No. 07 Civ (DAB), 2011 WL , at *5 (S.D.N.Y. May 13, 2011); see also China Tire Holdings Ltd. v. Goodyear Tire & Rubber Co., 91 F.Supp. 2d 1106, 1111 (N.D. Ohio 2000) ( [D]iscovery by American attorneys in the [People s Republic of China] may prove to be impossible. ). e. The Risks of Maintaining the Class Action Through Trial While the Class has not yet been certified in this case, should such a motion be granted, certification can be reviewed and modified at any time before trial. There is always a risk that an action, or particular claims, might not be maintained as a class through trial. Frank v. Eastman Kodak Co., 228 F.R.D. 174, 186 (W.D.N.Y. 2005) (noting that [w]hile plaintiffs might indeed prevail [on a motion for class certification], the risk that the case might be not certified is not illusory ). Thus, this factor weighs in favor of the Settlement. f. The Ability of Defendants to Withstand a Greater Judgment A court may also consider a defendant s ability to withstand a judgment greater than that secured by settlement. This Grinnell factor weighs heavily in favor of settlement in this case, because, as discussed above, SinoHub has been delisted and is now defunct. Defendant Cochran (a founder and the Chief Executive Officer) is deceased and left no attachable estate. The remaining SinoHub Defendants have virtually disappeared into China and Hong Kong, while SinoHub maintains only minimal insurance to cover Plaintiff s claims. Thus, further recovery is extremely improbable, if not impossible. 11

18 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 18 of 31 g. The Reasonableness of the Settlement in Light of the Best Possible Recovery and the Attendant Risks of Litigation The Settlement is fair and reasonable in light of the Class s best possible recovery against Defendants, which is severely limited by their inability to pay a judgment. The best possible recovery necessarily assumes Plaintiffs success on both liability and damages covering the full Class Period alleged in the Complaint as well as the ability of Defendants to pay the judgment. Maley v. Del Global Techs. Corp., 186 F.Supp. 2d 358, 365 (S.D.N.Y. 2002) (finding that the settlement provided maximum available cash in light of the limited insurance coverage and poor cash position of the Company ). The amount is sufficient when limited insurance coverage, minimal assets, and significant risk of being unable to collect any judgment are taken into account. Furthermore, the Settlement is reasonable in light of the substantial resources that can be conserved by avoiding the time, cost, rigor and risk of prolonged litigation. IV. CERTIFICATION OF THE SETTLEMENT CLASS UNDER FEDERAL RULE OF CIVIL PROCEDURE 23 IS APPROPRIATE In order to go forward with the settlement approval process, it is necessary that the Court certify the Action as a class action for purposes of settlement. Federal Rule of Civil Procedure 23 provides that an action may be maintained as a class action if each of the four prerequisites of Rule 23(a) is met and, in addition, the action qualifies under one of the subdivisions of Rule 23(b). Rule 23(a) provides that: One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. Rule 23(b) provides, in relevant part: A class action may be maintained if Rule 23(a) is satisfied and if:... (3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. 12

19 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 19 of 31 Here, Lead Plaintiff asks this Court to certify the following Class for settlement purposes only: All persons or entities that purchased or otherwise acquired SinoHub s common stock between May 17, 2010 and August 21, 2012 (the Class Period ). Excluded from the Class are the Defendants, officers, and directors of the Company, as well as their families and the families of the Defendants, those holding 5% or more of SinoHub s outstanding shares, and any member of the Class who has validly and timely requested exclusion from the Class. As set forth below, all of the requirements of Rule 23 are easily met and certification of the Class is clearly appropriate here. A. The Proposed Class Satisfies Rule 23(a) 1. The Proposed Class Is so Numerous that Joinder of All Members Is Impracticable For a class action to be appropriate, the proposed class must be so numerous that joinder of all of its individual members would be impracticable. Fed. R. Civ. P. 23(a)(1). Rule 23 does not require joinder to be impossible, but the difficulty or inconvenience of joining all members of the class [must] make [the] use of the class action appropriate. Cent. States Se. & Sw. Areas Health and Welfare Fund v. Merck-Medco Managed Care, L.L.C., 504 F.3d 229, (2d Cir. 2007). Numerosity is presumed when a class consists of forty or more members. Consol. Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 483 (2d Cir. 1995); In re IPO Sec. Litig., 260 F.R.D. 81, (S.D.N.Y. 2009). Moreover, the numerosity requirement of Rule 23(a)(1) is generally assumed to have been met in class action suits, such as the one here, involving nationally traded securities. In re Amerifirst Sec. Litig., 139 F.R.D. 423, 427 (S.D. Fla. 1991). In fact, in securities class actions relating to publicly owned and nationally listed corporations, the numerosity requirement may be satisfied by a showing that a large number of shares were outstanding and traded during the relevant period. Menkes, 270 F.R.D. at 90; Gerber v. Computer Assocs. Int l, Inc., No. 91 CV 3610 (SJ), 1995 WL , at *2 (E.D.N.Y. Apr. 7, 1995) ( [Defendant s] common stock was listed and actively traded on the New York Stock Exchange; therefore, it is likely that [defendant s] stockholders are not concentrated in any 13

20 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 20 of 31 one geographic location, but rather, are widely dispersed. Hence, given that there will be a variety of residences and numerous claims, joinder would be impractical. ) (citing Green v. Wolf Corp., 406 F.2d 291, 298 (2nd Cir. 1968)). Here, the number and location of the putative Class Members is such that it is impractical to join all of the Class Members in one lawsuit. See In re The Mills Corp. Sec. Litig., 257 F.R.D. 101, (E.D. Va. 2009) ( The numerosity requirement is seldom disputed in securities fraud cases given the large quantity of shareholders who purchase stock in reliance upon a company s public statements. ). SinoHub stock was traded on the NYSE, an open and efficient market, and there are approximately 3,500 shareholders, which is more than sufficient to find that joinder of all parties is impracticable under Rule 23(a)(1). See In re Oxford Health Plans, Inc. Sec. Litig., 191 F.R.D. 369, 374 (S.D.N.Y. 2000). 2. There Exist Questions of Law and Fact Common to the Members of the Class Rule 23(a)(2) requires that plaintiffs grievances share a common question of law or of fact. Cent. States, 504 F.3d at 245; IPO, 260 F.R.D. at Evidentiary proof of the Lead Plaintiff s claims is necessarily common to all members of the Class. Indeed, in determining whether common questions exist, Rule 23(a)(2) requires only that there be a common nucleus of operative fact, not that there be an absolute identity of facts. Gerber, 1995 WL , at *2 (quoting Port Auth. Police Benevolent Ass n v. Port Auth. of New York and New Jersey, 698 F.2d 150, (2d Cir. 1983)); see also In re Veeco Instruments, Inc., Sec. Litig., 235 F.R.D. 220, 238 (S.D.N.Y. 2006); Oxford, 191 F.R.D. at 374 ( Where, as here, there exists a common nucleus of operative facts affecting all members, common questions unquestionably prevail. ). Common questions of law and fact are present where, as here, the alleged securities law violations involve material misrepresentations and omissions in documents circulated to the investing public and filed with the SEC. See, e.g., In re Interpublic Sec. Litig., No. 02 CIV (DLC), 2003 WL , at *3 (S.D.N.Y. Nov. 6, 2003) ( Plaintiffs have raised a number of common issues of law and fact. Among them are whether [defendants ] public filings and 14

21 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 21 of 31 statements contained material misstatements, whether the defendants acted knowingly or with reckless disregard for the truth in misrepresenting material facts in [defendants ] public filings and press releases, and whether the damages to the investors were caused by the defendants misstatements. ). The misrepresentations and omissions, which form the basis of Lead Plaintiff s claims, are necessarily common to all members of the proposed Class. Thus, the commonality requirement is satisfied. 3. The Claims of the Lead Plaintiff Are Typical of Those of the Class Rule 23(a)(3) requires that the claims... of the representative parties [be] typical of the claims... of the class. 5 The Second Circuit has held that the typicality requirement is satisfied when each class member s claim arises from the same course of events, and each class member makes similar legal arguments to prove the defendant s liability. Cent. States, 504 F.3d at 245; IPO, 260 F.R.D. at 91. In order to meet the typicality requirement, [t]he claims need not be identical, but must derive from the same general, over-all course of fraudulent conduct. Gerber, 1995 WL , at *3 (quoting Epstein v. Moore, No. 87 Civ 2984, 1988 WL 62213, at *2 (D.N.J. June 13, 1988)). The claims here satisfy the typicality requirement in that they all arise from the same false and misleading statements and require similar arguments by Class Members concerning liability. Lead Plaintiff s claims are not only similar to, but virtually identical to, those of the members of the Settlement Class. All Settlement Class Members seek to prove that Defendants made materially false and misleading public statements during the Class Period. As such, Lead Plaintiff and the other Settlement Class Members have been injured by the same course of 5 The Supreme Court noted that the commonality and typicality requirements of Rule 23(a) tend to merge. Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 157 n.13 (1982); accord Ohman v. Kahn, No. 87 CIV (JFK), 1990 WL 97756, at *4 (S.D.N.Y. June 27, 1990) ( The typicality requirement of Rule 23(a)(3) is a close cousin of the commonality requirement. ). Accordingly, inasmuch as commonality has been established, typicality has been established as well. 15

22 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 22 of 31 conduct by the Defendants. Moreover, the damages that they seek arise from the purchases of stock at prices that were artificially inflated as a result of Defendants false and misleading statements, and the subsequent decline in the price of SinoHub s stock when the truth was revealed to the market. Lead Plaintiff stands in precisely the same position as other purchasers of the Company s stock during the Class Period. See In re Twinlab Corp. Sec. Litig., 187 F. Supp. 2d 80, 83 (E.D.N.Y. 2002) ( [T]he element of typicality is met because the class members have been allegedly harmed by the same course of conduct (the distribution of false and misleading information which artificially inflated the stock. ). Accordingly, Lead Plaintiff s claims are typical of those of the Proposed Class. 4. Lead Plaintiff and Its Counsel Have Fairly and Adequately Represented the Proposed Class Rule 23(a)(4) requires that the representative parties will fairly and adequately protect the interests of the class. This requirement is met if a plaintiff does not have interests that are antagonistic to those of the class, and his chosen counsel is qualified, experienced, and generally able to conduct the litigation. See Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 60 (2d Cir. 2000). Lead Plaintiff satisfies both prongs of the adequacy test. Indeed, it already has successfully represented the interests of the proposed Settlement Class and demonstrated its adequacy to prosecute this Action. Moreover, none of Lead Plaintiff s interests are antagonistic to those of the Proposed Class. As discussed above, all members of the Proposed Class allege claims arising from the same wrongful conduct and are based on the same legal theories as the claims advanced by Lead Plaintiff. Lead Plaintiff is committed to the vigorous prosecution of this Action. The interests of the other members of the Proposed Class, therefore, will be protected by Lead Plaintiff, as they have been since the inception of this Action. As to the second prong regarding adequacy of counsel, Lead Plaintiff has retained the law firm of Scott+Scott as Lead Counsel for the Proposed Class, a firm that has substantial 16

23 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 23 of 31 experience in the prosecution of securities class actions. 6 Lead Counsel is clearly qualified to represent the Proposed Class and, along with Lead Plaintiff, have vigorously protected the interests of the Proposed Class. Thus, the requirements of Rule 23(a)(4) are satisfied. B. Lead Plaintiff Satisfies the Rule 23(b)(3) Requirements In addition to meeting the requirements of Rule 23(a), the present action also satisfies Rule 23(b)(3), which requires a proposed class representative to establish that common questions of law or fact predominate over any questions affecting only individual members, and that a class action is superior to other available means of adjudication. 1. Common Questions of Law or Fact Predominate It is well established that in determining whether common questions predominate, a court s inquiry should be directed primarily toward whether the issue of liability is common to members of the class. Generally, the predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation. IPO, 260 F.R.D. at 92. Indeed, [c]lass-wide issues predominate if resolution of some of the legal or factual questions that qualify each class member s case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof. Moore v. PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002). The Supreme Court has noted that the predominance requirement is a test readily met in certain cases alleging consumer or securities fraud. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997). In addition, courts have recognized that common issues of law and fact will generally predominate in actions alleging that materially false representations were made to large groups of investors. See, e.g., In re Arakis Energy Corp. Sec. Litig., No. 95-cv-3431 (ARR), 1999 WL , at *10 (E.D.N.Y. April 27, 1999) ( In securities fraud class actions in which the fraud is alleged to have been carried out through public communications to a wide variety of market participants, common issues of law and fact will generally predominate over individual 6 The firm résumé of Scott+Scott is attached to the Guglielmo Decl. as Exhibit C. 17

24 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 24 of 31 issues. ). Where, as here, a complaint alleges that the defendants made uniform false and misleading representations, the issues of law and fact that flow from that conduct predominate over any individual issues, rendering class treatment appropriate. See Blackie v. Barrack, 524 F.2d 891, 902 (9th Cir. 1975). As noted in the discussion of commonality, above, the nature of this case and the elements of Lead Plaintiff s claims involve issues primarily focusing on Defendants alleged misrepresentations and false statements in short, Defendants liability to the Proposed Class. See Darquea v. Jarden Corp., No. 06 Civ. 722, 2008 WL , at *5 (S.D.N.Y. March 6, 2008) (observing that each class member, if they were to bring individual actions, would be required to prove the existence of the alleged activities of the Defendants in order to prove liability ). Lead Plaintiff alleges that Defendants issued materially false and misleading statements and failed to disclose material adverse facts concerning SinoHub s compliance with GAAP, its internal controls, and its revenue recognition, and pursued a common course of conduct that injured Lead Plaintiff and the other members of the Proposed Class. Thus, all members of the Proposed Class are substantially if not identically situated with respect to the alleged claims. In this case, it is difficult to discern any liability issues that are not common to the claims of each member of the proposed Class. Once common questions of liability are resolved, all that remains is the ministerial act of computing the amount of damages suffered by each Class Member. Thus, the predominance requirement is satisfied. 2. A Class Action Is Superior to Other Available Methods for the Efficient Adjudication of This Controversy Not only do common questions predominate in the present litigation, but, as further required by Rule 23(b)(3), a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. Rule 23(b)(3) identifies factors to be considered in making a superiority determination: (a) the interests of members of the class individually controlling the prosecution of separate actions; 18

25 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 25 of 31 (b) (c) the extent and nature of any litigation concerning the controversy already commenced by members of the class; the desirability of concentrating the litigation of the claims in the particular forum; and (d) the difficulties likely to be encountered in the management of a class action. In this litigation, the interest of members of the Settlement Class in individually controlling the prosecution of separate actions is minimal, because the costs and expenses of individual actions, when weighed against the individual recoveries potentially obtainable, would be prohibitive. Thus, the first superiority factor is satisfied. See In re Blech Sec. Litig., 187 F.R.D. 97, 107 (S.D.N.Y. 1999) (superiority requirement satisfied as [m]ultiple lawsuits would be costly and inefficient ). In addition, Lead Plaintiff is not aware of any similar individual suits alleging securities violations currently pending against Defendants. As such, there is no dispute that this Court is a desirable forum for concentrating the litigation of Class Members claims. See In re AMF Bowling Sec. Litig., No. 99 CIV (DC), 2002 WL , at *8 (S.D.N.Y. Mar. 26, 2002) ( For each investor to litigate individually would risk disparate results among those seeking redress,... would exponentially increase the costs of litigation for all, and would be a particularly inefficient use of judicial resources. ) (ellipses in original); Arakis Energy, 1999 WL , at *11 ( In addition, were plaintiffs required to bring individual actions, the potential for duplicative litigation and consequent waste of judicial and party resources would be significant. ). Finally, Lead Plaintiff does not envision any significant difficulties likely to be encountered in the management of this case as a class action or the administration of the proposed Settlement. This Action is appropriate for class treatment, embodying all of the hallmarks, both in form and in substance, of the types of securities actions that are routinely certified in this Circuit and elsewhere. Thus, as the Second Circuit has recognized, a class action is superior to other available methods particularly duplicative individual lawsuits for the fair 19

26 Case 1:12-cv WHP Document 102 Filed 01/30/15 Page 26 of 31 and efficient adjudication of a controversy affecting a large number of securities holders injured by violations of the federal securities laws. See, e.g., Green, 406 F.2d at 296. V. THE PROPOSED FORM AND METHOD OF CLASS NOTICE AND THE FORM OF THE PROOF OF CLAIM AND RELEASE ARE APPROPRIATE A. The Scope of the Notice Program The Claims Administrator, KCC, LLC, anticipates making an initial mailing to the Class Members whose names appear in the Company s transfer records as those shareholders who purchased common preferred stock or options during the Class Period. Lead Counsel also proposes to publish a summary notice in the form attached to the Stipulation as Exhibit A-2 ( Summary Notice ), which provides an abbreviated but informative description of the Action and the proposed Settlement, and also explains how to obtain the more detailed Notice of Pendency and Proposed Settlement of Class Action ( Notice ) and Proof of Claim and Release form. The Summary Notice will be published once in Investor s Business Daily, once over PR Newswire, and on the Claims Administrator s website. In sum, Lead Plaintiff proposes a Post Card Notice to be mailed, a Summary Notice to be published, and a Long Notice to be made available upon request. Each is attached as an exhibit to the Stipulation. B. The Scope of the Notice Program Is Adequate There are no rigid rules that apply when determining the adequacy of notice for a class action settlement. Rather, when measuring the adequacy of a settlement notice in a class action under either the Due Process Clause or the Federal Rules, the court should look to its reasonableness. In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., No. 02 MDL 1484 (JFK), 2007 WL , at *8 (S.D.N.Y. Feb. 1, 2007). It is clearly established that [n]otice need not be perfect, but need be only the best notice practicable under the circumstances, and each and every class member need not receive actual notice, so long as class counsel acted reasonably in choosing the means likely to inform potential class members. Id. (citing Weigner v. City of New York, 852 F.2d 646, 649 (2d Cir. 1988)). In fact, notice programs such as the one proposed by Lead Counsel have been approved as adequate under the Due Process Clause and 20