Southern District Of New York Dismisses With Prejudice Securities Act Claims For Failure To Allege Actionable Misstatement Or Omission
On April 25, 2022, U.S. District Judge Jesse M. Furman dismissed a putative securities class action alleging that a fintech company (the “Company”) misrepresented its internal control weaknesses and financial results in its prospectus and registration statement (collectively, the “Offering Materials”) in connection with its 2018 initial public offering (the “IPO”) of ADSs in violation of Sections 11 and 15 of the Securities Act of 1933. Yaroni v. Pintec Technology Holdings Limited et al., No. 20-cv-08062 (S.D.N.Y. Apr. 25, 2022). The Court held that the complaint failed to allege that defendants made misstatements and also that the claims based on certain statements were time-barred. The Court dismissed the action with prejudice because “the problems with [p]laintiffs’ claims are substantive.”
The Company, which first began as a business unit of a private parent company and was later spun off, completed its IPO in October 2018. Six months after the IPO, the Company made a series of announcements related to its internal controls and financial results. First, it announced that it had failed to comply with Nasdaq’s listing rules when it failed to file its annual report. Second, the Company announced that certain adjustments had been made to its previous financial statements and that “a material weakness in its internal control over financial reporting . . . resulted in significant outstanding balances due from [its former parent company].” Third, it announced unaudited results showing a 20% decline in total revenue year-over-year and that its prior consolidated financial statements would have to be restated. Plaintiff alleged that the Offering Materials included misstatements related to the Company’s internal controls, cash loans made to its former parent company, dealings with other third parties, revenue recognition practices, and certain line items in the Company’s financial statements. The Court dismissed all claims.
First, the Court dismissed plaintiff’s claims that statements regarding potential risks from weak internal controls were misleading based on numerous risk disclosures in the Offering Materials, explaining that (i) the Company was a “private company with limited accounting personnel and other resources with which to address our internal control and procedures”; (ii) an independent registered public accounting firm had identified a material weakness in its internal control over financial reporting because of lack of personnel with appropriate knowledge of U.S. GAAP and SEC requirements; and (iii) while the Company was implementing measures to address those issues, the weaknesses exposed the Company to risks including potentially being required to restate its financials or having additional deficiencies identified. The Court further held that plaintiff alleged only that the risks were “knowable” at the time of the IPO, not that they were known, as required.
Next, the Court held that the claims based on the Company’s statements regarding its loan exposure from dealings with its former parent and other third parties were time-barred because the Company disclosed those loans in an annual report filed over a year before the complaint was filed. According to the Court, “[the] statements [in the annual report] were sufficient to give reasonably diligent plaintiffs the facts necessary to plead a section 11 claim.”
The Court also dismissed the claims that the “revenue recognition” section of the Registration Statement contained misstatements or omissions of a material fact. For example, although plaintiff claimed that the Offering Materials were misleading because they failed to disclose that certain service fee revenues were being recorded on a net, rather than a gross basis, the Court held that there was “no plausible allegation” that gross profit was material. The Court also dismissed claims based on the Company’s omission of a service cost charge as a line item from its related party transactions because there was no duty to disclose the item at issue.
Finally, the Court dismissed claims based on the Company’s restatements for various reasons including: (i) certain items were “presumptively immaterial” because the downward adjustment in the restatement was less than 5%; (ii) plaintiff failed to allege why these items would have been important for investors to consider; (iii) some of the restated items did not change the Company’s overall cash; and (iv) restatements of financial statements issued after the IPO and could not have made the Offering Materials misleading.
The Court, on its own, denied leave to amend because it determined that amendment would be futile because “the problems with [p]laintiff’s claims are substantive.”