PAUL A. ENGELMAYER, District Judge:
In this putative class action arising under the federal securities laws, lead plaintiff Long Miao claims that a Chinese financial services provider's failure to disclose alleged related-party dealings violated federal securities law. In his First Amended Class Action Complaint, Dkt. 27 ("FAC"), Miao claims that Fanhua, Inc. ("Fanhua"), and two of its officers, defendants Chunlin Wang and Peng Ge, made false and misleading statements or omissions regarding Fanhua's alleged undisclosed dealings with defendant Qiuping Lai—a former president and director of Fanhua who remained a principal shareholder of the company during the Class Period.
Miao brings this lawsuit on behalf of all persons (other than defendants) who purchased U.S.-traded securities of Fanhua between April 20, 2018 and January 16, 2019 (the "Class Period"). Miao alleges violations of §§ 10(b) and 20(a) of the
Pending now are defendants' motions to dismiss the FAC for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the following reasons, the Court grants the motion and dismisses the FAC in its entirety.
Fanhua—known before December 2016 as CNinsure, Inc. ("CNinsure")—is a financial services provider incorporated in the Cayman Islands, with principal executive offices in China. FAC ¶¶ 2, 19. Through its online platforms and offline sales-and-service network, Fanhua offers a variety of property-and-casualty and life insurance products and services. Id. ¶¶ 2, 36, 42. The company's distribution and service network covers 31 provinces in China and consists of approximately 754 sales and service outlets, 579,000 sales agents, and 1,200 claims adjustors. Id. ¶ 42. Fanhua's American Depositary Shares ("ADSs") are listed on NASDAQ under the symbol "FANH."
Lai co-founded Fanhua's predecessor entity in 1998 and, between 2004 and 2016, served as its president and as a director. Id. ¶ 22, 35-36. On March 29, 2016, Lai retired from his leadership positions at Fanhua, id. ¶ 23, which was then embroiled in a scandal involving the People's Insurance Company (Group) of China. Id. ¶¶ 4, 23. Thereafter, Lai was no longer an officer or director of Fanhua, but he remained its largest principal shareholder. Id. ¶ 4.
Wang has served as Fanhua's chief executive officer ("CEO") since 2011, as a director on Fanhua's board since 2016, and as chairman of its board since 2017. Id. ¶ 20. Wang joined Fanhua's predecessor entity at its founding in 1998. See id. ¶ 37.
Ge has served as Fanhua's chief financial officer ("CFO") since 2008 and as a director on Fanhua's board since 2016. Id. ¶ 21. Ge joined Fanhua's predecessor entity in 1999. Id. ¶ 38.
Lead plaintiff Miao, an individual shareholder, bought Fanhua ADSs during the Class Period. Id. ¶¶ 1, 18.
Miao alleges that "[d]efendants engaged in a brazen undisclosed scheme whereby Lai used Fanhua's cash and assets for his personal benefit." Id. ¶ 44. Miao alleges three undisclosed schemes, involving: (i) related-party dispositions to Lai; (ii) financial guarantees for investment products that Lai issued; and (iii) an ADS repurchase from Lai in connection with an employee incentive plan.
In support of these allegations, Miao relies almost exclusively on three short-seller reports,
In 2011, CNinsure acquired 100% equity interests in two insurance agencies, Guangdong Huajie and Dongguan Zhongxin Insurance Agency Co., Ltd. ("Dongguan Zhongxin"), from Chengdu Jingshi Investment Co., Ltd. FAC ¶ 39. The purchase price was approximately 25 million China Yuan Renminbi ("RMB") (equal to about $8 million). Id. Lai—then president and a
In 2016, Fanhua divested Guangdong Huajie and Dongguan Zhongxin. Id. ¶ 45. According to Miao, these transactions were disclosed in Fanhua's 2017 Form 20-F, but Fanhua failed to disclose that Lai was the recipient of these assets at the "bargain basement price[]" of RMB 30,712. Id. In fact, the disclosure cited by the FAC states that that price is recited "[i]n thousands," such that the actual consideration Fanhua disclosed receiving was RMB 30,712,000. See Zuckerman Decl., Ex. 14 (April 20, 2018 Form 20-F) ("2017 Form 20-F") at F-31; id., Ex. 15 (April 19, 2017 Form 20-F) ("2016 Form 20-F") at F-26. In other words, Miao's FAC omitted three zeros from the sale price, and Fanhua, in fact, recognized gain of approximately RMB 3 million on the divestiture. The JCap Report, on which the FAC relies, contained the same error. JCap Rpt. at 32 ("In 2011, the company paid its co-founder and president Lai Qiuping about $7.9 m[illion] for two companies he owned, Guang[dong] Huajie and Dongguan Zhongxin, which Fanhua then divested in 2016 for about $30,000 [to Lai].").
Additionally, in October 2017, Fanhua disposed of 19 property and casualty subsidiaries to the entity Beijing Cheche Technology Co., Ltd. ("Cheche"), for approximately RMB 225.4 million ($34.6 million). Id. ¶ 46. Miao alleges that—despite Fanhua's disclosure in its 2017 Form 20-F that Cheche was a "third party" buyer— Cheche:
Id. ¶ 47. The JCap Report, on which the FAC relies for the Cheche allegations, further states that "[t]he shared location is not itself proof of a connection; the address accommodates hundreds of companies." JCap Rpt. at 16. Rather, the address is that of a "Shenzhen government agency that handles registration and bookkeeping for companies for a fee." Id. at 17.
In a June 15, 2018 Form 6-K filed with the SEC, Fanhua disclosed a plan to provide incentive compensation in the form of 15 million Fanhua ADSs
Although Fanhua disclosed that 8.5 million of the 15 million ADSs were going to be repurchased from "a principal shareholder,"
In short, Miao alleges that "whereas Fanhua presented this stock acquisition plan as intended to fund an employee incentive program, it was in fact a cover for a buyout of most of Lai's Fanhua shares and funneling of a substantial portion of the Company's cash on hand into his coffer." Id. ¶ 62.
In the "Off-Balance Sheet Commitments and Arrangements" section of the 2017 Form 20-F, Fanhua disclosed that it "ha[s] not entered into any financial guarantees or other commitments to guarantee the payment obligation of third parties." Id. ¶ 48; 2017 Form 20-F at 67. Based entirely on interviews of Fanhua personnel conducted by JCap, Miao alleges that, despite this disclosure, "Fanhua guarantees handsome returns" on "financial products that Lai issues in China to investors." FAC ¶ 49. Miao's allegations as to this scheme are phrased entirely in terms of what "interviewees" stated to JCap on a confidential basis; there is no allegation that Miao or Miao's counsel had any contact with the interviewed personnel. See id. ¶¶ 33-34, 48-55, 64.
According to Miao, four unnamed "longtime Fanhua employees" told JCap "that the Company guarantees Lai's investment products, including guarantees of both principal and returns of between 6.8% and 8.5% to investors" in Lai's funds, id. ¶ 50, such as Chengchuang Shenzhen, "a fund that manages trusts and private-equity funds," id. ¶ 49. These interviewees, otherwise undescribed, included an employee "working at Fanhua in a financial role" and a sales agent. Id. ¶ 51.
Additionally, Miao alleges that: "[s]everal interviewees" told JCap that "Fanhua's sales professionals and agencies also sell Lai's investment products, including those from Chengchuang Shenzhen ... [and] Chengdu Chuangjiarui," id. ¶ 52; "[a]t least one sales agent that works with Fanhua and Lai's investment products," told JCap that "Fanhua's guarantees are in the purchase contracts that Lai's investment clients are able to review after they commit capital to Lai's funds," id. ¶ 53; "[a] manager at Puyi Wealth Management, which Fanhua owns a stake of and whose financial products Fanhua sells, told JCap that Fanhua agreed to make the payment on Lai's trust products if there are defaults," id. ¶ 54; and "former employees" in Fanhua's "finance divisions" told JCap that "Fanhua backed and paid for two defaults by Lai's entities," id. ¶ 55.
On April 20, 2018, Fanhua filed its 2017 Form 20-F with the SEC. Id. ¶ 6. Wang and Ge signed the 2017 Form 20-F and provided certifications under Sections 302
In the 2017 Form 20-F, Fanhua stated, with regard to the disposition of Guangdong Huajie and Dongguan Zhongxin:
Id. ¶ 67. Miao claims that these statements were materially false and misleading because, as described above, Fanhua allegedly failed to disclose that these assets were conveyed at "bargain basement prices" to an entity owned by Lai. Id. ¶ 68.
Similarly, with regard to the disposition of property-and-casualty subsidiaries to Cheche, Fanhua stated:
Id. ¶ 65. Miao claims that these statements were materially false and misleading because, as described above, Lai allegedly had a substantial stake in Cheche, which therefore was not an independent third party. Id. ¶ 66.
In the 2017 Form 20-F, Fanhua further stated, with regard to "Off-Balance Sheet Commitments and Arrangements":
Id. ¶ 63. Miao claims that these statements were materially false and misleading because, as described above, Fanhua allegedly provided financial guarantees for the principal and returns of up to 8.5% for investment products that Lai issued. Id. ¶ 64.
In the 2017 Form 20-F, Fanhua also disclosed a "[r]isk[] [r]elated to [o]ur ADSs" that:
2017 Form 20-F at 21; see FAC ¶¶ 4, 25. Miao alleges that Lai, as a principal shareholder, "could exert substantial influence over matters requiring approval by our shareholders...." FAC ¶¶ 4, 25.
On June 15, 2018, Fanhua filed a Form 6-K with the SEC, which Wang signed. Id. ¶¶ 56, 69. In the June 15, 2018 6-K, Fanhua disclosed, with regard to the 521 Development Plan, that "[o]f the 14 million ADSs available to participants in [the incentive compensation plan] and the 1 million ADS to be purchased by management and board members,
Id. The FAC alleges that these statements were materially false and misleading in several respects. First, Miao alleges that the true beneficiary of the 521 Development Plan was not the company but Lai, who was selling 85% of his Fanhua ADS holdings through the Plan. Id. ¶ 70. Second, Miao claims that Fanhua failed to disclose that the Plan "would suck out a substantial portion of [the company's] cash on hand, again for the sole benefit of Lai." Id. And, third, Miao alleges that the Plan was actually a related-party transaction between the company and Lai, due to Lai's stock ownership and alleged influence within the company. Id.
On June 18, 2018,
Conference Call Tr. at 4 (emphasis added).
The FAC alleges two corrective disclosures during the Class Period.
First, on Monday, August 27, 2018, short-seller Seligman Investments published the Seligman Report on the website "Seeking Alpha." FAC ¶ 71. The Seligman Report stated, with regard to the 521 Development Plan that Fanhua had disclosed in June 2018:
Second, on Thursday, January 17, 2019, short-seller JCap published the JCap Report. FAC ¶ 73. As reviewed above, it accused Fanhua of, inter alia: (i) divesting Guangdong Huajie and the property-and-casualty subsidiaries to Lai-controlled entities at bargain basement prices; (ii) guaranteeing financial products sold by Lai's privately-owned company; and (iii) using the 521 Development Plan to enrich Lai. Id. JCap also disclosed that it "or [its] clients may be short shares of FANH, and for this reason, there might be a conflict of interest." JCap Rpt. at ECF p. 3. After publication of the JCap Report, Fanhua's ADS price fell from its Wednesday, January 16, 2019 closing price of $22.95 per share to close at $20.10 on January 17, 2019, FAC ¶ 74, although the stock price recovered to close at $23.01 the next day. Humann Decl., Ex. 8 (Fanhua historical stock prices).
On February 7, 2019, after the alleged Class Period, short-seller "GeoTeam" published the GeoInvesting Report. FAC ¶ 76. GeoInvesting is a research firm that publishes information regarding stocks, options, futures, bonds, derivatives, commodities, currencies, or other securities. Id. The GeoInvesting Report disclosed that the GeoTeam was "[s]hort FANH at [the] time of [the] report." GeoInvesting Rpt. at 4. The GeoInvesting Report agreed with the JCap Report, concluding that "[w]e believe [Fanhua's] denial [of the allegations in the JCap Report] is an outright lie." FAC ¶ 78 (emphasis omitted) (quoting at length the GeoInvesting Report). Among other issues, the GeoTeam pointed to "the divestment of the 19 [property-and-casualty] subsidiaries to Cheche" as potentially "involv[ing] funneling money/interests." Id. (quoting the GeoInvesting Report). The GeoInvesting Report also faulted Fanhua for a "general lack of trustworthiness." Id.
On February 13, 2019, Fanhua announced that its board had formed an independent special committee to conduct an independent review of the issues raised in JCap, Seligman, and GeoInvesting Reports. Id. ¶ 80.
On September 7, 2018, Miao filed his initial complaint, citing the then-recently published Seligman Report. Dkt. 1. On November 6, 2018, Miao filed the lone lead-plaintiff application in this litigation. Dkt. 12. On December 13, 2018, the Court granted Miao's motion for appointment as lead plaintiff and approved his counsel as lead counsel. Dkt. 21.
On April 1, 2019, Fanhua filed a motion to dismiss, Dkt. 33, a memorandum in support, Dkt. 34 ("Fanhua Mem."), and the Humann Declaration. At that time, the Individual Defendants, who reside abroad, had not yet been served. On May 1, 2019, Miao filed a memorandum in opposition. Pl. Mem. On May 24, 2019, Fanhua filed a reply, Dkt. 40 ("Fanhua Reply"), and the Zuckerman Declaration.
On August 15, 2019, Ge and Lai, who by then had been served, filed a notice of joinder in Fanhua's motion and a motion to dismiss the FAC, Dkt. 48, a memorandum in support, Dkt. 49 ("Indiv. Defs. Mem."), and the second declaration of Adam T. Humann, Dkt. 50. The motion also sought to have the claims against Wang dismissed for insufficient service of process, pursuant to Federal Rule of Procedure 12(b)(5). Indiv. Defs. Mem. at 2-3. On August 29, 2019, Miao filed a memorandum in opposition, Dkt. 51, and the declaration of Cara David in opposition, Dkt. 52. On September 5, 2019, Ge and Lai filed a reply, Dkt. 53.
On October 15, 2019, Wang, who had been served on September 23, 2019, filed a notice of joinder in the two previously filed motions to dismiss. Dkt. 54.
To survive a motion to dismiss under Rule 12(b)(6), a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim will only have "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). A complaint is properly dismissed where, as a matter of law, "the allegations in a complaint, however true, could not raise a claim of entitlement to relief." Twombly, 550 U.S. at 558, 127 S.Ct. 1955. Although the court must accept as true all well-pled factual allegations in the complaint and draw all reasonable inferences in the plaintiff's favor, Steginsky v. Xcelera Inc., 741 F.3d 365, 368 (2d Cir. 2014), that tenet "is inapplicable to legal conclusions," Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.
"Securities fraud claims are subject to heightened pleading requirements that the plaintiff must meet to survive a motion to dismiss." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321-23, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).
First, a complaint alleging securities fraud must meet the requirements of Federal Rule of Civil Procedure 9(b). See ECA & Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) ("ECA"). Rule 9(b) states that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b). "Allegations that are conclusory or unsupported by factual assertions are insufficient." ATSI Commc'ns, 493 F.3d at 99.
Second, such a complaint must comply with the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b). See ECA, 553 F.3d at 196. In particular, where
Miao asserts claims under §§ 10(b) and 20(a) of the Exchange Act, and Rule 10b-5. FAC ¶¶ 94-112.
Section 10(b) of the Exchange Act makes it unlawful to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). The SEC's implementing rule, Rule 10b-5, provides that it is unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5.
To state a claim under § 10(b) of the Exchange Act, a plaintiff must adequately plead "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011) (internal quotation marks and citation omitted).
To state a claim under § 20(a) of the Exchange Act, "a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud." Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 236 (2d Cir. 2014) (quoting ATSI Commc'ns, 493 F.3d at 108) (quotation marks omitted). If a plaintiff has not adequately alleged a primary violation, i.e., a viable claim under another provision of the Exchange Act, then the § 20(a) claims must be dismissed. See id.
Three elements of these statutes are implicated by defendants' challenge to the FAC: those requiring false or misleading statements or omissions, scienter, and loss causation.
To survive a motion to dismiss, the complaint must adequately plead "that the defendant made a statement that was `misleading as to a material fact.'" Matrixx Initiatives, 563 U.S. at 38, 131 S.Ct. 1309 (emphasis omitted) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). Section 10(b) and Rule 10b-5 "do not create an affirmative duty to disclose any and all material information." Id. at 44, 131 S.Ct. 1309; see also Basic, 485 U.S. at 239 n.17, 108 S.Ct. 978. "Disclosure of ... information is not required ... simply because it
The materiality requirement, meanwhile, "is satisfied when there is `a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.'" Matrixx Initiatives, 563 U.S. at 38, 131 S.Ct. 1309 (quoting Basic, 485 U.S. at 231-32, 108 S.Ct. 978). As the Supreme Court has explained, a lower standard—such as defining a "material fact" as any "fact which a reasonable shareholder might consider important"— would lead corporations to "bury the shareholders in an avalanche of trivial information[,] a result that is hardly conducive to informed decisionmaking." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448-49, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). The "materiality hurdle" is, therefore, "a meaningful pleading obstacle." In re ProShares Tr. Sec. Litig., 728 F.3d 96, 102 (2d Cir. 2013). However, because of the fact-intensive nature of the materiality inquiry, the Court may not dismiss a complaint "on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance." ECA, 553 F.3d at 197 (quotation marks omitted).
As noted, Rule 9(b) and the PSLRA require plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). "For an inference of scienter to be strong, `a reasonable person [must] deem [it] cogent and at least as compelling as any opposing inference one could draw from the facts alleged,'" and "the court must take into account plausible opposing inferences." ATSI Commc'ns, 493 F.3d at 99 (quoting Tellabs, 551 U.S. at 324, 127 S.Ct. 2499) (alteration and emphasis in original). The requisite mental state is one "embracing intent to deceive, manipulate, or defraud." Tellabs, 551 U.S. at 319, 127 S.Ct. 2499 (quotation marks and citation omitted).
Plaintiffs "may satisfy this requirement by alleging facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness." ATSI Commc'ns, 493 F.3d at 99. Where plaintiffs do not sufficiently allege that defendants had a motive to defraud the public, they "must produce a stronger inference of recklessness." Kalnit v. Eichler, 264 F.3d 131, 143 (2d Cir. 2001).
Recklessness is "a state of mind approximating actual intent, and not merely a heightened form of negligence." S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009) (citation and emphasis omitted). To qualify as reckless, defendants' conduct must have been "highly unreasonable" and "an extreme departure from the standards of
A plaintiff can establish recklessness by adequately alleging that "defendants knew facts or had access to non-public information contradicting their public statements" and therefore "knew or should have known they were misrepresenting material facts." In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 76 (2d Cir. 2001) (citing Novak, 216 F.3d at 308). In other words, defendants have acted recklessly if they "understood that their public statements were inaccurate, or were `highly unreasonable' in failing to appreciate that possibility." In re Sanofi Sec. Litig., 87 F.Supp.3d 510, 534 (S.D.N.Y. 2015) (quoting Novak, 216 F.3d at 308), aff'd sub nom. Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016). "The key, of course, is the honest belief of the management in the truth of information issued to the public." In re AstraZeneca Sec. Litig., 559 F.Supp.2d 453, 470 (S.D.N.Y. 2008), aff'd sub nom. State Univ. Ret. Sys. of Ill. v. Astrazeneca PLC, 334 F. App'x 404 (2d Cir. 2009).
To state a claim for securities fraud under § 10(b) and Rule 10b-5, plaintiffs must also adequately plead loss causation. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008).
"Loss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff." In re Lehman Bros. Sec. & Erisa Litig., 799 F.Supp.2d 258, 304 (S.D.N.Y. 2011) (internal quotation marks omitted). "To make out loss causation, `a plaintiff must allege ... that the subject of the fraudulent statement or omission was the cause of the actual loss suffered.'" Id. (quoting In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 511 (2d Cir. 2010)). A plaintiff may establish loss causation by demonstrating either "(1) a corrective disclosure or (2) a materialization of a concealed risk." In re Lehman Bros. Sec. & Erisa Litig., 799 F. Supp. 2d at 304.
"[P]laintiffs need not allege that their entire loss was caused by the misstatements and omissions complained of." Id. at 305. "To plead loss causation, the complaint must allege facts that support an inference that [the defendants'] misstatements and omissions concealed the circumstances that bear upon the loss suffered such that plaintiffs would have been spared all or an ascertainable portion of... that loss absent the fraud." Id. (quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 (2d Cir. 2005)). "Nor are plaintiffs required to allege that the particular misstatements and omissions directly caused the alleged losses.... [M]isstatements or omissions that conceal a risk, the materialization of which causes all or part of the plaintiffs' loss, ... suffice." Id.
Miao brings claims under § 10(b) of the Exchange Act and Rule 10b-5 against Fanhua and the Officer Defendants, and claims under § 20(a) of the Exchange Act against all defendants. Miao's claims stem from three categories of alleged misstatements
Defendants argue that the § 10(b) claims fail as to each category because the FAC does not plead an actionable misstatement or omission, scienter, and loss causation. Defendants argue that the § 20(a) claim fails because the FAC has not pled a primary § 10(b) violation. The Individual Defendants argue that the FAC does not allege that any Individual Defendant was a culpable participant in the alleged fraud. Finally, Lai argues that the FAC fails to allege that he controlled Fanhua.
The Court addresses each category of statements in turn.
The FAC alleges that defendants made false statements regarding two transactions purportedly between Fanhua and Lai: the 2016 disposition of Guangdong Huajie and other insurance agency subsidiaries to a Lai-controlled entity, and the 2017 disposition of 19 property-and-casualty subsidiaries to Cheche. The claim relating to Huajie is based on allegations that Fanhua had received only RMB 30,712 for the subsidiaries, which it had purchased for RMB 25,000,000 just a few years earlier. The claim relating to the property-and-casualty subsidiaries is based on allegations that an entity the FAC alleges is an owner of Cheche shared an address with certain Lai-controlled entities, and, thus, Cheche was likely also Lai-controlled. The FAC quotes the JCap Report in support of the Huajie allegation and both the JCap and GeoInvesting short-seller reports in support of the Cheche allegation.
In challenging these allegations of fraud, Fanhua, in its opening brief, asserted that Miao (and JCap) had carelessly "misread[] the SEC filing" disclosing the Huajie transaction. In fact, Fanhua noted, its filing stated that it had actually received RMB 30,712,000 (not RMB 30,712) for the agency subsidiaries, netting the company a gain on its investment. Fanhua Mem. at 17 (citing 2017 Form 20-F at F-31; 2016 Form 20-F at F-26). Fanhua similarly debunked the FAC's theory that Lai secretly controlled Cheche. Fanhua noted that the JCap Report, on which Miao relies heavily for this claim, itself concedes that the shared address of the alleged Cheche owner and various Lai entities is in fact that of a "Shenzhen government agency that handles registration and bookkeeping for companies for a fee" and "accommodated hundreds of companies."
Notably, without addressing Fanhua's arguments, Miao has abandoned this category of claims. In his opposition to the motion to dismiss, he states: "After further consideration, Plaintiff no longer pleads falsity and materiality in connection with the alleged undisclosed related-party disposals to Lai of Guangdong Huajie and the
The FAC alleges misstatements, in Fanhua's June 15, 2018 Form 6-K, concerning the 521 Development Plan. These allegations, too, are easily put to one side, because the FAC does not plead an actionable misstatement or omission.
The June 15, 2018 6-K disclosed that "[o]f the 14 million ADSs available to participants in [the 521 Development Plan] and the 1 million ADS to be purchased by management and board members, 8.5 million ADSs will be purchased from a principal shareholder at $29.0 per ADS." FAC ¶ 69. The FAC alleges that this disclosure was false or misleading because: (i) it failed to identify Lai as the particular "principal shareholder," of which Miao claims there were several at the time, id. ¶ 60; (ii) Lai allegedly stood to benefit the most from the Plan, id. ¶ 70; (iii) the statement failed to disclose that the Plan "would suck out a substantial portion of [Fanhua's] cash on hand," id.; and (iv) given Lai's "powerfully influential position with the Company, this was not an independent but rather related party transaction," id.
First, Fanhua's disclosures adequately identified the source of shares to be repurchased for use in the 521 Development Plan. The June 15, 2018 Form 6K expressly disclosed that "8.5 million ADSs will be purchased from a principal shareholder at $29.0 per ADS, representing the average closing price of the 30 trading days prior to June 14, 2018." Humann Decl., Ex. 12 (June 15, 2018 Form 6-K) at Ex. 99.1-2 (emphasis added); see FAC ¶ 69. In its 2017 Form 20-F, filed two months before the announcement of the 521 Development Plan, Fanhua disclosed three principal shareholders: (i) Sea Synergy Limited, an entity wholly controlled by co-founder and current director Yinan Hu, which beneficially owned 14.6% of ordinary shares; (ii) Qiuping Lai, who beneficially owned 15.9%, including 15.5% held through his wholly-owned company Master Trend Limited; and (iii) Fosun International Limited ("Fosun"), an outside investor that beneficially owned 6.1% of ordinary shares, but only "693,036 ordinary shares in the form of ADS acquired in the open market." 2017 Form 20-F at 75-76. In other words, by disclosing that the ADSs would be purchased from a principal shareholder, Fanhua necessarily disclosed that the counterparty to the transaction would be one of three major investors in the company, one of whom (Hu) was an actual corporate insider and another of whom (Fosun) clearly did not own 8.5 million ADSs. Fanhua validly notes that its Form 20-F disclosures mathematically isolated Lai as the only principal shareholder who held more than 8.5 million ADSs, see Fanhua Mem. at 18-19. Even if this were not so, Miao does not provide good reason (or case authority) why the "total mix of information" available to a shareholder, Matrixx Initiatives, 563 U.S. at 38, 131 S.Ct. 1309, would have been materially different if the 521 Development Plan announcement had specified that, of the three contenders, the "principal shareholder" was Lai.
Moreover, the next trading day after the filing of the allegedly fraudulent June 15, 2018 Form 6-K, Fanhua held an investor conference call, in which Wang and Ge participated and fielded questions from research analysts. The official transcript of the call was then disclosed on Fanhua's website. See generally Conference Call Tr. On that call, which was devoted to providing the market with more information
Id. at 4 (emphasis added). This explicit disclosure demolishes Miao's claim of a material omission as to the identity of the principal shareholder to whom Fanhua had referred. Miao responds primarily that the Court should not take notice of the conference call. See Pl. Mem. at 15-18. But the Court properly may do so, for the fact that the statements on the call were made. See supra note 9, at 11.
Given these disclosures, Fanhua's statement as to the source of the 521 Development Plan shares thus was not remotely actionable. And the cases finding actionable statements or omissions, on which Miao relies in so arguing, are strikingly far afield. See In re Braskem S.A. Sec. Litig., 246 F.Supp.3d 731, 760 (S.D.N.Y. 2017) (statements about purchase price of company's key raw material "elided a central reality ... [the price] derived from a long-running criminal scheme"); Operating Local 649 Annuity Tr. Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 92-93 (2d Cir. 2010) (disclosure of total amount of fees paid to investment adviser was materially false and misleading for mischaracterizing management fees as "other fees," in violation of SEC rules); In re Fuwei Films Sec. Litig., 634 F.Supp.2d 419, 430 (S.D.N.Y. 2009) (registration statement disclosures of corporate asset sales failed to disclose that defendant executives controlled 100% of the purchaser entity); CNinsure, 951 F. Supp. 2d at 465, 471 (statements regarding sales agents' compensation materially misleading for failing to disclose the presence of an equity-incentive compensation plan—as opposed to failing to disclose name of principal shareholder from whom compensation plan shares would be sourced). Fanhua's disclosure—that the 521 Development Plan would involve the repurchase of shares from a principal shareholder, which the company contemporaneously identified— bears no resemblance the centrally important omissions at issue in those cases.
Second, although Miao declares that Lai was the "primary beneficiary" of the 521 Development Plan, that characterization does not make any statement (or omission) by Fanhua (or any individual defendant) false or misleading. No defendant is alleged to have expressed any views, contrary or otherwise, as to the "primary beneficiary" of the Plan. Miao's assessment that Lai benefitted more than other stakeholders from this transaction does not make Fanhua's disclosures as to it false or misleading.
Fourth, the FAC's claim that "given Lai's ... powerfully influential position with the Company, this was not an independent but rather related party transaction," FAC ¶ 70, does not give rise to a claim of securities fraud. As reviewed, Fanhua disclosed both Lai's relationship with the company and that the 521 Development Plan would involve a repurchase of 8.5 million ADS from a principal shareholder, quickly identified as Lai. Neither the FAC nor the short-seller reports on which it relies concretely allege any undisclosed fact regarding the transaction. Neither substantiates the conclusory claim that Lai improperly brought influence to bear over the company or its board in arriving at the transaction terms.
The FAC therefore fails to plead any actionable misstatement or omission concerning the 521 Development Plan. The Court therefore has no occasion to address defendants' alternative arguments as to this category of allegations (e.g., regarding scienter or loss causation).
The FAC, relying entirely on the JCap Report's summary of statements purportedly made by anonymous interviewees, next alleges that Fanhua failed to disclose that it guaranteed principal and returns on financial products offered by Lai-controlled entities.
In its 2017 Form 20-F, Fanhua stated, with regard to "Off-Balance Sheet Commitments and Arrangements":
FAC ¶ 63. Miao argues that this paragraph was false and misleading because "Fanhua indeed provided financial guarantees for the principal and handsome returns of up to 8.5% offered by investment products that Lai issued." Pl. Mem. at 11 (citing FAC ¶ 64).
As the FAC itself reveals, the FAC's allegations as to financial guarantees are based entirely on what "interviewees" told JCap on a confidential basis. The FAC does not allege that Miao or Miao's counsel had any contact with the interviewees. See FAC ¶¶ 33-34, 48-55, 64. The FAC's basis for the central factual allegation underlying this set of claims thus consists entirely of statements made by anonymous—and often vaguely described—interviewees, with whom plaintiff's counsel has not had contact, but whom counsel has learned about secondhand from citations in a short-seller's report. For the reasons that follow, the Court holds that the FAC's gaunt allegations as to this category cannot sustain a § 10(b) claim, both because they are insufficiently particular to satisfy Rule 9(b) and the PSLRA and because they fail adequately to plead defendants' scienter.
The Court first reviews the case law that has developed in PSLRA cases in which central allegations are attributed to confidential witnesses or to allegations in short-seller reports, insofar as both of these categories are implicated here. The Court then applies the governing standards to the allegations in the FAC regarding financial guarantees.
To satisfy the PSLRA, a complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." ATSI Commc'ns, 493 F.3d at 99 (quoting 15 U.S.C. § 78u-4(b)(1)). In an attempt to meet the heightened pleading standards of the PSLRA and Rule 9(b)—including Tellabs' requirement that any inference of scienter be "at least as compelling as any opposing inference," 551 U.S. at 324, 127 S.Ct. 2499—plaintiffs often rely, at least in part, "on information attributed to `confidential witnesses.'" City of Pontiac Gen. Emps.' Ret. Sys. v. Lockheed Martin Corp., 952 F.Supp.2d 633, 635 (S.D.N.Y. 2013). The case law examining facts attributed to unidentified witnesses, however, reflects the need to view such attributions with caution and care.
The Second Circuit first addressed attributions to confidential sources in a securities fraud complaint in Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000). The Circuit there rejected a district court's holding that such sources must be identified by name for the factual allegations attributed them to be used to satisfy the particularity requirement. Information attributed to confidential sources may be considered, the Circuit explained, in proper circumstances:
Novak, 216 F.3d at 314.
Where a securities fraud complaint relies on uncorroborated confidential witnesses or CWs, courts presented with challenges to particularity have, on occasion, used procedural devices to test whether such CWs in fact had made the statements attributed to them.
More commonly, however, following Novak, courts in this District "will credit confidential source allegations, generally, in two situations." Glaser v. The9, Ltd., 772 F.Supp.2d 573, 590 (S.D.N.Y. 2011). First, "when `independent [adequately pled] factual allegations' corroborate a confidential source's statements, the requirement of a description of the source's job is loosened." Id. (quoting In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F.Supp.2d 474, 493 n.10 (S.D.N.Y. 2004)). Second, in the absence of such well-pled corroborative facts, courts will "credit confidential sources whose positions and/or job responsibilities are described sufficiently to indicate a high likelihood that they actually knew facts underlying their allegations." Id. (citations omitted).
At the same time, the assembled case law reflects at least four contexts in which
First, courts generally have not credited the statements of CWs who are insufficiently described or whose descriptions do not suggest that they had been in position to know the facts attributed to them.
The cases in which securities complaints based on statements attributed to CWs have been sustained as alleging fraud with sufficient particularity supply an illuminating contrast. In Employees' Retirement System of Government of the Virgin Islands v. Blanford, 794 F.3d 297 (2d Cir. 2015), for example, the complaint alleged that a coffee manufacturer had made knowingly false misstatements about its production and inventory levels. Although relying on CWs, the complaint "specifie[d] each [CW's] position, length of employment, and job responsibilities." Id. at 307. It recited that plaintiffs' counsel had had personal contact with these witnesses, and quoted the CWs in detail as giving specific descriptions, for example, as to "the buildup
Short sellers "operate by speculating that the price of a security will decrease." In re Longtop Fin. Techs. Ltd. Sec. Litig., 910 F.Supp.2d 561, 577 (S.D.N.Y. 2012). Although short sellers "can perform a useful function by bringing information that securities are overvalued to the market[,]... they have an obvious motive to exaggerate the infirmities of the securities in which they speculate." Id.
Fanhua suggests that a complaint's reliance on a short-seller report inherently requires dismissal. Fanhua Mem. at 1. That is wrong. The developing body of case law involving factual attributions to short-seller reports to satisfy pleading requirements in a securities fraud complaint instead reflects the need for similar caution and care as with respect to attributions to CWs. Courts have critically analyzed such attributions, dismissing some but generally sustaining others where independent factual allegations corroborated the factual allegation in the complaint drawn from short-sellers' reports. Compare, e.g., Harris, 135 F. Supp. 3d at 159 (dismissing complaint that "rel[ied] almost entirely on a negative report published by a short seller [GeoInvesting]" and that, as a result, was "long on sound, fury and speculation, but ... short on specifics"), with McIntire v. China MediaExpress Holdings, Inc., 927 F.Supp.2d 105, 124 (S.D.N.Y. 2013) (denying motion to dismiss complaint that relied, in part, on short-seller report), and Ho v. Duoyuan Global Water, Inc., 887 F.Supp.2d 547, 564 (S.D.N.Y. 2012) (same), and In re Longwei Petroleum Inv. Holding Ltd. Sec. Litig., No. 13 Civ. 214 (HB), 2014 WL 285103, at *3-4 (S.D.N.Y. Jan. 27, 2014) (same), and Lewy v. SkyPeople Fruit Juice, Inc., No. 11 Civ. 2700 (PKC), 2012 WL 3957916, at *14 (S.D.N.Y. Sept. 10, 2012) (same).
Relevant here, the case law reflects a particular need for close scrutiny where a short-seller report relied upon by a securities plaintiff itself relies on "confidential" or anonymous sources, without corroboration. In that circumstance, the risk of motivated reporting by the author of the short-seller report is twinned with the reliability concerns presented by anonymous sourcing recognized in Novak. See Harris, 135 F. Supp 3d at 159; cf. In re Lehman Bros., 2013 WL 3989066, at *4. But, where courts have found that well-pled independent and particularized facts corroborate those attributed to anonymous sources in short-seller reports, courts have sustained such complaints. Two decisions from this District supply good examples of this.
Similarly, in Longwei Petroleum, the short seller based its report alleging a petroleum company had fabricated revenue on, inter alia, "video surveillance of Longwei's three facilities between October and December of 2012, ... interviews with local, unnamed residents [who stated that fuel shipments did not go in or out of the neighboring facilities during the relevant period,] ... [and] photographs of the railroad tracks ostensibly used to deliver fuel, which showed overgrowth and rust, suggesting that they had been unused for quite some time." In re Longwei Petroleum, 2014 WL 285103, at *1-2 (internal quotation marks omitted). These findings were, in short order, confirmed and indeed bolstered by reports in the Chinese media. Id. at *2. Crucially, "[p]laintiffs' investigators independently corroborated these reports through similar interviews, photographs, and visits." Id. On this basis, Judge Baer held that plaintiffs had pled their claims with adequate particularity, noting that they did "not rely solely" on the key short-seller report, and that the report itself had exhibited meticulous investigation. Id. at *4.
Here, as noted, the FAC's allegations relating to financial guarantees do no more than recapitulate the JCap Report's characterization of purported interviews with anonymous sources. The FAC does not allege any independent corroborative facts, any independent investigation by counsel, or any contact by plaintiff's counsel with the interviewees. Instead, Miao, makes the following five threadbare allegations, all reliant on JCap's attributions to unnamed persons:
These allegations bear none of the indicia of reliability that have led courts applying Novak to sustain allegations as sufficiently particular.
First, the FAC does not contain any "independent [well-pled] factual allegations" that "corroborate [the] confidential source[s's] statements." Glaser, 772 F. Supp. 2d at 590.
Second, the witnesses' positions and job responsibilities are not described at a sufficient level of particularity to "indicate a high likelihood that they actually knew facts underlying their allegations." Id. The JCap Report cites four "longtime" employees, one of whom worked in a financial role, "several interviewees," and "former employees" in "finance divisions," without any description of these employees' roles or titles. Fanhua, however, is a financial services provider. Describing an employee in a "financial role" therefore does not provides sufficiently particular information about that person's job and responsibilities. The "sales agent" and the manager at Puyi Wealth Management present closer questions, but these descriptions, too, suffer from a failure to specify the anonymous interviewees' roles, the sources of their knowledge (including how non-employees of Fanhua came to learn of the alleged guarantees), and, in the case of the sales agent, the witness's employer. See, e.g., id. at 594-95; In re Sierra Wireless, 482 F. Supp. 2d at 376; In re CMGE, 2016 WL 922711, at *4.
Third, the anonymous interviewees' statements are, aside from the JCap Report's use of the present tense, entirely unmoored in time. The failure to anchor the witness statements in the Class Period is particularly problematic for both the Puyi Wealth manager's purported statement that Fanhua agreed to make the payment on Lai's trust products in the event of are defaults and the former finance division employees' purported statements that Fanhua had backed and paid for two defaults by Lai's entities. In particular, the FAC is silent as to any basis to believe either that these witnesses have knowledge as to Fanhua's current operations or that their statements about past practices apply to the present as opposed to just the period before Lai's resignation. See, e.g., ProNAi Therapeutics, 297 F. Supp. 3d at 409; In re Lululemon, 14 F. Supp. 3d at 580; In re CMGE, 2016 WL 922711, at *4; In re Lehman Bros., 2013 WL 3989066, at *4.
Fourth, the content of the financial-guarantee allegations contained in the JCap Report is insufficiently particular. None of JCap's sources describe which of Lai's investment products the alleged guarantees cover. The FAC contains a conclusory allegation that the financial guarantees are for between 6.5% and 8.5% of principal and returns. But it does not supply any detail as to the who, what, when,
Fifth, plaintiff's counsel in this case appear to have done nothing whatsoever to confirm the identities or statements of the confidential sources cited in the JCap Report. As the district court noted in In re Lehman Brothers: "Allowing counsel to rely on confidential witness statements recounted" in a separate document whose authors had "significant motive and opportunity... to misuse or mischaracterize confidential witness statements ... would provide the Court little assurance that the factual contentions have any evidentiary support." In re Lehman Bros., 2013 WL 3989066, at *4. Such allegations—where neither investigated nor corroborated—sit, at best, uneasily with the requirements of Rule 11. See id.; In re Millennial Media, 2015 WL 3443918, at *11. There is no indication that plaintiff's counsel here tried to locate or contact a single one of the sources on which they rely, or otherwise to corroborate these secondhand accounts.
Significant, too, as noted above with regard to the alleged related-party transactions, the same JCap Report contained significant factual errors. An alert reader of Fanhua's 2017 Form 20-F would have caught these. Yet Miao, far from catching them, reproduced these incorrect facts in the FAC. See Harris, 135 F. Supp. 3d at 159 (noting plaintiff's concession that short-seller report on which its complaint had relied was "wrong in certain respects and ... proven wrong in others by the passage of time"). Miao's failure to recognize and engage with the dubious reliability of the short-seller reports is concerning. It suggests the lack of the reasonable inquiry required on plaintiff's counsel's part before signing and certifying a complaint. See Fed. R. Civ. P. 11. And it necessarily raises doubt as to whether the other factual representations in the same short-seller's report on which the complaint relies can be credited as a reliable basis to establish the factual falsity of Fanhua's representations to the market.
When properly utilized and suitably corroborated or particularized, factual representations by CWs and in short-seller reports may enable a securities fraud complaint to clear the bar set by the PSLRA. See, e.g., Ho, 887 F. Supp. 2d at 564; In re Longwei Petroleum, 2014 WL 285103, at *3-4; SkyPeople Fruit Juice, 2012 WL 3957916, at *14. Not so here. Miao's FAC instead relies exclusively on general statements credited to anonymous interviewees in a secondhand short-seller report which contains demonstrable errors and is uncorroborated by an independent investigation by counsel, if one indeed one was even undertaken. The Court accordingly holds that the FAC fails to plead an actionable misstatement or omission as to related-party guarantees, and therefore fails to do so with respect to any of the categories of subjects on which it relies.
Separately, the FAC fails adequately to plead scienter.
To survive a motion to dismiss, Miao must "state with particularity facts giving rise to a strong inference" of scienter. 15 U.S.C. § 78u-4(b)(2). As noted, "for an inference of scienter to be strong," it must
The FAC entirely fails to plead that Fanhua or the Officer Defendants had motive to commit fraud with respect to the alleged financial guarantees (or any other category of allegedly actionable misstatement). Pleadings "must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter." Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008). Miao's defense of the FAC's pleading as to scienter relies only on "Lai's glaring motive to commit this fraud." Pl. Mem. at 19. But the FAC does not name Lai as a § 10(b) or Rule 10b-5 defendant. See FAC ¶¶ 27, 94-105.
Moreover—although Lai remained a large, though not controlling,
Because Miao has failed to establish motive, he bears a "correspondingly greater" burden in alleging conscious misbehavior or recklessness. Kalnit, 264 F.3d at 142 (internal quotation marks omitted). As noted, to survive dismissal, the complaint must plead behavior which is "highly unreasonable" and "an extreme departure from the standards of ordinary care." Novak, 216 F.3d at 308 (internal quotation marks and citation omitted). In other words, the pled facts must indicate "a state of mind approximating actual intent, and not merely a heightened form of negligence." Id. at 312 (internal quotation marks omitted). The FAC falls well short of this standard.
Miao first alleges that "[d]efendants Wang and Ge were aware of or, at the least, recklessly disregarded that these material financial transactions were being executed with Lai." Id. ¶ 83; see Pl. Mem. at 20. However, beyond this conclusory assertion, Miao does not allege any facts to suggest that Wang or Ge knew of the alleged financial guarantees. Notably, the FAC, while alleging that "Defendants made statements to investors throughout the Class Period specifically concerning the transactions-at-issue, such as the [alleged related-party dispositions] and the [521 Development Plan]," does not so allege as to the purported financial guarantees. FAC ¶ 83. Nor does the FAC allege facts circumstantially suggesting such knowledge. Absent concrete allegations as to the Officer Defendants' knowledge of the alleged financial guarantees, the FAC cannot generate a strong inference of scienter. See In re Aratana Therapeutics Inc. Sec. Litig., 315 F.Supp.3d 737, 765 (S.D.N.Y. 2018).
Next, Miao alleges that the Officer Defendants "were privy to confidential proprietary information" and "had knowledge of the details of Fanhua's internal affairs" because of their senior positions at Fanhua. FAC ¶¶ 98-99; see Pl. Mem. at 20 (noting relevance of "high-level positions"). But "it is practically hornbook law that `accusations' such as these, which are `founded on nothing more than a defendant's corporate position[,] are entitled to no weight." In re Rockwell Med., Inc. Sec. Litig., No. 16 Civ. 1691 (RJS), 2018 WL 1725553, at *14 (S.D.N.Y. Mar. 30, 2018) (collecting cases); see In re Nokia Oyj (Nokia Corp.) Sec. Litig., 423 F.Supp.2d 364, 406 (S.D.N.Y. 2006) (allegations "that the individual [d]efendants knew, or should have known, that they were misrepresenting material facts, based on their senior positions in the company," are "insufficient, as a matter of law, to establish scienter" (citations omitted)).
The cases on which Miao relies are not to the contrary. See Christine Asia Co. v. Ma, 718 F. App'x 20, 23 (2d Cir. 2017) (scienter adequately pled as to failure to disclose secret meeting at which Chinese regulator threatened company in advance of company's initial public offering, based on "the high-level nature of the meeting, the seniority of the attendees, its conduct in secret, and the huge potential impact of the [regulator's] threat made at the meeting on [the company] and its imminent IPO," as opposed to the mere fact of defendants' high-level positions); In re Mylan N.V. Sec. Litig., No. 16 Civ. 7926 (JPO), 2018 WL 1595985, at *13 (S.D.N.Y. Mar. 28, 2018) (setting forth array of well-pled facts supporting scienter and identifying as "most important" that "[the pharmaceutical company's regulator] repeatedly informed [the company] that
The FAC similarly alleges that the "memory of a recent alleged fraud ... should be fresh in the minds of" Lai and Ge, who, as noted, had been defendants in a 2011 securities lawsuit. FAC ¶ 84 (citing CNinsure, 951 F. Supp. 2d at 479). Although this history is cognizable, because the Court must consider "all of the facts alleged, taken collectively," Tellabs, 551 U.S. at 323, 127 S.Ct. 2499 (emphasis in original), it does not constitute a particular allegation that the Officer Defendants, or any executive whose state of mind could be imputed to Fanhua, were aware of the specific alleged financial guarantees at issue here.
Third, Miao argues that the Officer Defendants' signatures and certifications, pursuant to §§ 302 and 906 of the Sarbanes-Oxley Act of 2002, on the 2017 Form 20-F, support scienter. Pl. Mem. at 21; see FAC ¶ 63. However, a plaintiff "cannot raise an inference of fraudulent intent based on the signing of a certification without alleging any facts to show a concomitant awareness of or recklessness to the materially misleading nature of the statements." Plumbers & Pipefitters Nat'l Pension Fund v. Orthofix Int'l N.V., 89 F.Supp.3d 602, 615 (S.D.N.Y. 2015) (collecting cases); see Das v. Rio Tinto PLC, 332 F.Supp.3d 786, 816 (S.D.N.Y. 2018). The FAC does not allege specific contrary information known to Wang or Ge at the time they signed and certified the 2017 Form 20-F containing the allegedly false statement regarding financial guarantees. And where a plaintiff "does not adequately allege that [defendants] had actual knowledge" of the alleged activity underlying the allegations of fraud, "it undermines the allegations that they knew that the S[arbanes]-O[xley] certifications were false." Menaldi v. Och-Ziff Capital Mgmt. Grp. LLC, 277 F.Supp.3d 500, 517 (S.D.N.Y. 2017). The Sarbanes-Oxley certifications
Fourth, and finally, Miao argues that Fanhua's undertaking an independent investigation supports scienter. It is unclear why a company's initiation of an independent investigation—after not only the alleged misstatements but also the end of the Class Period—has any bearing on defendants' state of mind at the time of the alleged misstatements. The one case Miao relies on is inapposite, as the court there found that top executives' "reject[ing] calls for a legitimate independent investigation and effectively shut[ting] down the investigation" contributed to a finding of scienter. City of Pontiac Gen. Emps.' Ret. Sys. v. Wal-Mart Stores, Inc., No. 12 Civ. 5162 (SOH), 2014 WL 4823876, at *10 (W.D. Ark. Sept. 26, 2014). In other words, the later obstruction or termination of an independent investigation, as opposed to the initiation of such, may support inferring scienter. Fanhua's initiation of an independent investigation here, if anything, supports the opposite inference. See, e.g., Slayton v. Am. Express Co., 604 F.3d 758, 777 (2d Cir. 2010) ("Ordering an investigation... was a prudent course of action that weakens rather than strengthens an inference of scienter." (internal quotation marks and citations omitted)).
Considering "all of the facts alleged, taken collectively," the FAC does not "give rise to a strong inference" that defendants were reckless as to the purported existence of the alleged financial guarantees. Tellabs, 551 U.S. at 323, 127 S.Ct. 2499. Put differently, Miao has alleged a few facts that would be the proverbial "cherry-on-top" had there been an adequate pleading of scienter, but he has failed to allege the sundae. The Officer Defendants' senior positions and history with Lai could enhance a showing of scienter. But, without significantly more, they do not give rise to a strong inference of scienter.
Accordingly, even if the allegations in the JCap Report were sufficiently particular to allege knowing falsity—and they are not—Miao's financial guarantee allegations would still fail to state a § 10(b) or Rule 10b-5 claim due to a failure to plead scienter.
Miao brings claims against the Individual Defendants under § 20(a) of the Exchange Act. FAC ¶¶ 107-12. To state a claim under § 20(a), a plaintiff must adequately allege "a primary violation by the controlled person." Carpenters Pension Tr. Fund, 750 F.3d at 236 (quoting ATSI Commc'ns, 493 F.3d at 108). Because Miao has not done so, his § 20(a) claims must also be dismissed. See, e.g., In re Lions Gate Entm't Corp. Sec. Litig., 165 F.Supp.3d 1, 24-25 (S.D.N.Y. 2016) (dismissing § 20(a) claim based on failure to adequately allege a primary violation).
Miao seeks, in the alternative, leave to file an amended complaint pursuant to Federal Rule of Civil Procedure 15(a). Pl. Mem. at 25.
Where the problems with a claim are "substantive" rather than the result of an "inadequately or inartfully pleaded" complaint, an opportunity to replead would be "futile" and "should be denied." Cuoco v. Moritsugu, 222 F.3d 99, 112 (2d Cir. 2000) (citing Hunt v. Alliance N. Am. Gov't Income Tr., 159 F.3d 723, 728 (2d Cir. 1998)). Here, for the reasons noted,
However, the Court grants leave for Miao to amend his claim relating to financial guarantees. As of the date of his opposition to the motion to dismiss, Miao's counsel appears not to have done any independent investigation of these matters, having chosen to piggyback instead on the JCap Report. In theory, an independent investigation could substantiate Miao's theory that such an actionable fraud occurred, accompanied by scienter. Assuming a dramatically fortified amended complaint, Miao conceivably might cure "the deficiencies addressed by the court and allege facts sufficient to support the claim." Panther Partners Inc. v. Ikanos Commc'ns, Inc., 347 F. App'x 617, 622 (2d Cir. 2009). The Court will give Miao a brief window in which to try.
For the foregoing reasons, the Court dismisses the FAC in its entirety. The dismissal is with prejudice to all claims save Miao's claims with respect to financial guarantees. Any amended complaint as to this subject is due Thursday, March 20, 2020. Should Miao fail to submit an amended complaint by that date, the Court's dismissal of his claims regarding financial guarantees will also be with prejudice.
The Clerk of Court is respectfully directed to terminate the motions pending at dockets 33 and 48.
SO ORDERED.
Because these documents were incorporated into the FAC by reference, or are matters of public record, they are properly considered on a motion to dismiss. See City of Pontiac Policemen's & Firemen's Ret. Sys. v. UBS AG, 752 F.3d 173, 179 (2d Cir. 2014) (in resolving a motion to dismiss, the court may consider, inter alia, "any statements or documents incorporated in it by reference, as well as public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit"); see also Ganino v. Citizens Utils. Co., 228 F.3d 154, 166 n.8 (2d Cir. 2000) ("[T]he district court may take judicial notice of well-publicized stock prices."). The Court considered these documents "not for the truth of the matters asserted therein," but only "for the fact that the statements were made." Clark v. Kitt, No. 12 Civ. 8061 (CS), 2014 WL 4054284, at *7 (S.D.N.Y. Aug. 15, 2014); see also, e.g., Finn v. Barney, 471 F. App'x 30, 32 & n.1 (2d Cir. 2012) (district court did not abuse its discretion in taking judicial notice of SEC filings, news articles regarding SEC order, and a section of a website containing disclosure information, where judicial notice was "for the purpose of establishing that the information was publicly available ... [and the court] did not consider the documents for their truth"); Staehr v. Hartford Fin. Servs. Grp., 547 F.3d 406, 425 (2d Cir. 2008) ("[I]t is proper to take judicial notice of the fact that press coverage, prior lawsuits, or regulatory filings contained certain information, without regard to the truth of their contents." (emphasis omitted)); Doron Precision Sys., Inc. v. FAAC, Inc., 423 F.Supp.2d 173, 179 n.8 (S.D.N.Y. 2006) ("For purposes of a 12(b)(6) motion to dismiss, a court may take judicial notice of information publicly announced on a party's website, as long as the website's authenticity is not in dispute and it is capable of accurate and ready determination." (internal quotation marks and citation omitted)).
Law Debenture Tr. Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 464 (2d Cir. 2010) (internal quotation marks and citations omitted).
Id. at *4. Differentiating between confidential statements extracted from a complaint in a lawsuit filed by different counsel and facts recounted in newspaper articles and government reports, the court noted that "the probative value of an independent news article or government report is much greater than that of confidential witness statements recounted in another complaint [because there] is significant motive and opportunity for counsel in any case to misuse or mischaracterize confidential witness statements in a pleading." Id. (the "unfairness of permitting a plaintiff in a separate action to rely blindly at the pleading stage primarily on confidential witness statements from another case to meet its pleading burden is patent"); accord In re Millennial Media, 2015 WL 3443918, at *11.
