Southern District Of New York Dismisses Securities Fraud Action Against Chinese Internet Company Based On Confidential Witness Statements
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  • Southern District Of New York Dismisses Securities Fraud Action Against Chinese Internet Company Based On Confidential Witness Statements
     
    08/25/2020
    On August 14, 2020, United States District Judge Paul A. Engelmayer dismissed with prejudice a putative securities class action against a Chinese internet company (the “Company”) and its co-founders and a director under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 and Rule 10b-5.  Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co., et al., 19 Civ. 10067 (PAE) (S.D.N.Y. Aug. 14, 2020).  Plaintiffs, relying on statements from a confidential witness (the “CW”) and several media reports, alleged that defendants deliberately withheld the Company’s plans to relist on a Chinese stock exchange after they took the Company private in a merger transaction.  The Court granted defendants’ motion to dismiss because the CW statements and newspaper articles failed to provide the type of particularized facts needed to state a claim under the securities laws. 

    More than 15 months after the Company went private in the merger transaction with 99.8% of the shareholder vote, a different company listed on the Shanghai Stock Exchange announced that it was merging its business with the Company’s main internet business.  This allowed the Company’s internet business to be listed on the Shanghai Stock Exchange without an initial public offering.  Plaintiffs alleged that the relisting substantially increased the Company’s value and that the Company deliberately withheld information regarding its plans to relist from the proxy materials issued in connection with the go-private merger transaction.
     
    The Court held that the Company’s proxy materials “explicitly disclosed the possibility of a future relisting.”  Thus, the only possible basis for plaintiffs’ claims was to plead that, at the time of the go-private transaction, the Company had already adopted an undisclosed, concrete plan to relist.  The Court ruled the complaint’s allegations, which primarily relied on statements from a CW—a “relatively senior” Public Relations personnel from headquarters—and newspaper articles that ostensibly revealed that plan to relist, were inadequate to support that theory. 
     
    The Court first found that the CW’s statements were an insufficient basis for plaintiffs’ claims because they were not independently corroborated by other facts or by any independent investigation by counsel.  Specifically, the Court held that the CW’s position and job details were not described with sufficient particularity to “indicate a high likelihood that [the CW] actually knew facts underlying [his or her] allegations.”  Instead, the CW was described as “working at least two degrees of separation” from the senior executive defendant alleged to have known about the plan.  In addition, the CW’s allegations were described as “uncommonly hazy,” “devoid of detail,” and “entirely generic.”  There also was nothing in the complaint to demonstrate that plaintiffs’ counsel did anything to confirm the CW’s statements.

    The Court also found that media reports cited by plaintiffs did not help.  According to the Court, the articles failed to describe the existence of an actual concrete relisting plan at the time of the go-private transaction.  Instead, the articles reported that there was a possibility of a relisting at the time of the go-private transaction, which was also disclosed in the proxy materials.  Other articles cited in the complaint that described secretive dynamics among the Company’s executives failed to allege any wrongdoing.  Stating that “[c]onclusory allegations of wrongdoing are no more sufficient if they come from a newspaper article than from plaintiffs’ counsel,” the Court held that the newspaper articles failed to describe with sufficient particularity the existence of an actual concrete relisting plan at the time of the merger. 

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