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Southern District Of New York Narrows Claims In Putative Class Action Against China Based Real Estate Brokerage Company
03/26/2024On February 26, 2024, Judge Gregory H. Woods of the United States District Court for the Southern District of New York narrowed claims in a putative class action asserting claims under the Securities Exchange Act of 1934 and Securities Act of 1933 against a China-based real estate brokerage company, certain of its executives, and the underwriters in connection with a secondary offering by the company. Saskatchewan Healthcare Emps.’ Pension Plan v. KE Holdings Inc., 2024 WL 775195 (S.D.N.Y. Feb. 26, 2024). Plaintiff alleged, based largely on a short-seller report, that the company made misrepresentations that significantly overstated the gross transaction value (“GTV”) of real estate transactions facilitated by the company, the number of agents and stores using its online platform, and the commissions the company received. Id. at *3–7. The Court held that plaintiff adequately alleged misrepresentations with respect to certain statements but failed to adequately allege scienter, and therefore largely declined to dismiss the Securities Act claim but dismissed the Exchange Act claim with leave to replead.
The Court first rejected plaintiff’s allegation that the company failed to disclose the number of stores or agents that were not “active” on its platform, determining that a reasonable investor would not expect that all agents and stores using the company’s platform were equally active. Id. at *20–21. The Court observed that the company’s disclosures indicated that not all of its stores or brokers had high activity, which undermined the allegation that the company was “required to break out that information.” Id. at *21. And the Court further explained that, because the company did not restate any of its prior disclosures when it later disclosed the number of agents and stores that were active, this indicated that the “incremental disclosure did not affect the [c]ompany’s revenues or GTV.” Id. at *22.
Next, the Court held that the short-seller report was alleged to be sufficiently reliable to support plaintiff’s allegations that the company’s statements about its revenue and GTV were false. Id. at *23. The Court emphasized that the report explained the methodology it used to calculate the number of active stores and agents and had even developed a computer program to analyze the data published on the company’s platform. Id. The report also noted that its authors had conducted in-person site visits, spoken with store agents and managers, cross-checked their results with other publicly available databases, and had included in the report photographs, transcripts, and screenshots, all of which made the report distinguishable from those at issue in certain other cases in which claims did not survive the motion-to-dismiss stage because they were based on short-seller reports that were less robust. Id. at *23–24. While defendants argued that plaintiff did not independently corroborate the information in the report, the Court held that there was “no such categorical rule” requiring them to do so. Id. at *24. And although defendants contested the report’s reliability and methodology, the Court held those challenges all raised factual issues that could not be resolved on a motion to dismiss. Id.
The Court, however, held that certain other challenged statements were non-actionable statements of opinion. These included statements that “[w]e believe a large and active network of agents, brokerage stores and brokerage brands across China provides a solid foundation for serving a large number of housing customers” and “[w]e believe our reputation for high-quality service among the large housing customer base and our growing network of real estate brokerage stores and agents that transact actively on our platform well position us to increase cooperation with existing and new real estate developers,” which the Court explained were “clearly signaled” as opinions that plaintiffs had not alleged were false or believed by defendants to be false. Id. at 25 & n.8. The Court also noted that these statements were not representations about the actual number of the company’s stores or agents but were simply descriptions of why a large market share was important to its business, and while the statements used descriptive terms like “large” and “growing,” those were not actionable because they were not quantifiable and were subject to interpretation. Id. at *26. The Court also held that the company’s disclosure as a risk factor—that it relied on various metrics like GTV to evaluate its business and that inaccuracies in those measurements could negatively impact the company—was not actionable because it was a forward-looking statement and plaintiffs had not established that the risk had materialized at the time the statement was made. Id. at *26–27.
The Court next assessed plaintiff’s allegations of scienter and found them all lacking both in their totality and when considered individually. Id. at *28. The Court held that the individual defendants’ roles in the company did not establish scienter merely because they held significant roles within the company and were involved in its daily operations. Id. Moreover, the Court noted that, while plaintiff alleged that the executives had received or had control over information about the company’s operations, there were no specific allegations as to what contradictory information they had access to. Id. at *29. While plaintiff pointed to the company’s response to the short-seller report as suggestive of scienter, the Court rejected this argument, noting that the company performed an internal investigation after the report was released. Id. And while the company removed certain data from its platform that had been referenced in the short-seller’s report, the Court concluded that it did so after the company made the alleged misstatements and that the removal therefore did not suggest the company acted with scienter at the time the statements were made. Id. Finally, the Court explained that defendants’ desire to maintain the company’s stock price and keep the company profitable were not suggestive of scienter since this was a motive common to all corporate officers. Id. at *30. Because plaintiff failed to adequately allege scienter, the Court dismissed all of plaintiff’s Exchange Act claims. Id.
While the failure to adequately allege scienter was enough to dismiss the Exchange Act claims, the Court also analyzed plaintiff’s allegations regarding loss causation and concluded that plaintiff adequately alleged loss causation because the market price of the company’s stock allegedly reacted negatively to the short-seller report, including based on intraday price fluctuations. Id. at *33.
With respect to the Securities Act claims, the Court also held that other requirements were adequately alleged. The Court held plaintiff had sufficiently pleaded standing to pursue a Securities Act claim because it allegedly purchased shares pursuant to or traceable to the company’s secondary offering. Id. at *31. The Court next held that plaintiff’s Securities Act claims did not sound in fraud and that plaintiff did not need to allege scienter or plead their claims with specificity. The Court observed that the complaint specifically disclaimed any allegation or inference of fraud with respect to the Securities Act claims, and that the complaint was structured to draw a distinction between conduct that was alleged to be merely negligent as opposed to that which was alleged to be fraudulent. Id. at *31–32. In particular, the Court noted that the Securities Act allegations were predicated on the factual information revealed in the short-seller report, rather than on the short-seller report’s broader assertion that the company committed fraud. Id. at *32.
