Southern District Of New York Dismisses Putative Class Action Against Global Commercial Electronic Vehicle Company For Failure To Plead Scienter And Loss Causation
On March 15, 2022, Judge George B. Daniels of the Southern District of New York dismissed a putative class action against a global company that focuses on facilitating the adoption of commercial electronic vehicles (“EV”) through its China-based division (the “Company”) and certain of its directors and officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In re Ideanomics Sec. Litig., No. 20 CIV. 4944 (GBD), 2022 WL 784812 (S.D.N.Y. Mar. 15, 2022). Plaintiffs alleged that the Company’s executives made numerous misstatements about the China-based sales hub (the “Center”) in earnings calls, YouTube interviews, and the press. The Court dismissed the complaint with leave to amend, holding that although the complaint plausibly alleged misstatements, it failed to allege scienter or loss causation.
At issue in the complaint were statements made by defendants from March through June 2020 regarding the development and launching of the Center including that the “[t]he building [was] mostly finished”; the site was “renovated as a permanent EV expo center”; the Center “began operations on May 1”; and that the “Company anticipate[d] that its [China-based unit] will be the largest contributor to revenues in 2020,” among others. Plaintiffs alleged that these statements were false based primarily on two short-seller reports that questioned the accuracy of the existence of the Center and the Company’s ownership of it. According to the short-seller reports, the pictures of the Center shown by defendants in the YouTube interviews were purportedly from 2018, not 2020. The short-seller reports also claimed that the site that was supposed to house the Center was “actually operated by almost 100 sales groups,” none of whom had heard of the Company. Plaintiffs subsequently undertook their own investigation, and alleged that, as of January 2021, the Center was still under renovation and there was a “Coming Soon” banner.
The Court first found that the allegations based on the short-seller reports were sufficiently particularized and corroborated because they included specific dates of their investigation, the EV buyers with whom the short-sellers spoke, and a screenshot of those conversations. Plaintiffs’ subsequent investigation also corroborated the reports. The Court then held that, while several of the alleged misstatements were forward-looking and/or not false, certain others were misleading when read in context. Specifically, the Court held that the complaint adequately alleged that the Company’s statements that the Center had “expanded,” “officially opened,” and had “high levels of activity” were misleading.
However, the Court held that the complaint failed to allege scienter. First, plaintiffs failed to allege that defendants had motive and opportunity to commit fraud. The only relevant allegation was that a single defendant executive who was the largest stockholder converted his debt into equity in an exchange offering. But the exchange offering occurred before the short seller reports were published, and there was no allegation that that defendant realized a profit, and thus no allegation that the executive benefited in a concrete and personal way. Second, plaintiffs’ generalized allegations that defendants acted recklessly because they “must have known” about the true status of the Center were insufficient because the allegations were “founded on nothing more than a defendant’s corporate position, [which] are entitled to no weight.” Plaintiffs also did not include allegations that defendants received any specific reports or other information, and the Court held that allegations that the misstatements related to “core operations” of a company are insufficient without other allegations that independently give rise to a strong inference of scienter.
Finally, the Court held that plaintiffs failed to plead loss causation. Instead, the short seller reports only disclosed that investigators were “unable to establish” that the Center existed and that individuals at the site had not heard of the Company, which the Court held “are not facts.” The Court also noted that the stock price increased four days after the alleged corrective disclosure, which plaintiffs had not explained.