Christine Asia Co. Ltd. v. Jack Yun Ma
16-2519-cv
| 2d Cir. | Dec 5, 2017Background
- Plaintiffs (Christine Asia Co. Ltd., individual purchasers, and movant Gang Liu) brought a securities-fraud class action under Sections 10(b) and 20(a) against Alibaba and senior executives arising from Alibaba’s IPO (ADSs) for purchases between Sept 19, 2014 and Jan 29, 2015.
- Plaintiffs alleged defendants concealed a July 16, 2014 secret meeting with China’s State Administration for Industry and Commerce (SAIC) in which SAIC warned Alibaba to stop hosting counterfeit-goods sales or face recurring fines of 1% of daily gross merchandise value.
- Plaintiffs claimed the omitted information was material because it forced Alibaba to choose between a major revenue source or massive penalties, and would have affected investor decisions about the IPO.
- Four months after the IPO the concealed information became public and Alibaba’s stock fell ~13% in two days, eliminating about $33 billion in market value; the IPO had raised $25 billion.
- The district court dismissed the complaint under Rule 12(b)(6) for failure to plead misstatements/omissions and scienter; the Second Circuit vacated and remanded, finding the complaint adequately pleaded material omissions and a strong inference of scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint pleads actionable misstatements/omissions | Plaintiffs: Secret SAIC meeting and threat were material and omitted, rendering disclosures misleading | Defendants: No duty to disclose; alleged regulatory paper was unauthorized/withdrawn and not reliable | Held: Alleged omissions were material and plaintiffs sufficiently pleaded a duty to disclose; dismissal was error |
| Whether scienter sufficiently pleaded | Plaintiffs: High-level attendees, secrecy, and large potential financial impact give strong circumstantial inference of recklessness/conscious misbehavior | Defendants: No particularized facts showing intent or recklessness; withdrawn SAIC paper undermines inference | Held: Collective facts permit a strong inference of scienter; dismissal improper |
| Whether individual defendants’ mental state could be imputed to Alibaba | Plaintiffs: Senior managers who attended reported to named executives, supporting imputation | Defendants: Insufficient particularized allegations tying executives to knowledge | Held: Allegations plausibly tie executives to knowledge; scienter imputed to Alibaba |
| Whether Section 20(a) control-person claim survives without underlying violation | Plaintiffs: Control-person liability follows if underlying Section 10(b) claim pleaded | Defendants: Underlying claim fails so Section 20(a) fails | Held: Because Section 10(b) claims survive pleading challenge, Section 20(a) cannot be dismissed on that basis |
Key Cases Cited
- Stratte-McClure v. Morgan Stanley, 776 F.3d 94 (2d Cir.) (pleading standards for securities claims)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir.) (Rule 9(b) and PSLRA pleading requirements)
- Ashcroft v. Iqbal, 556 U.S. 662 (Sup. Ct.) (plausibility standard under Rule 8)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (Sup. Ct.) (pleading standard for plausible claims)
- Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (Sup. Ct.) (test for strong inference of scienter)
- Indiana Public Retirement System v. SAIC, 818 F.3d 85 (2d Cir.) (scienter by reckless disregard)
- Advanced Battery Technologies v. Balint, 781 F.3d 638 (2d Cir.) (extreme departure from ordinary care as evidence of recklessness)
- Rothman v. Gregor, 220 F.3d 81 (2d Cir.) (when danger is known or so obvious as to imply awareness)
- Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir.) (imputing individual defendants' mental state to corporation)
- Basic Inc. v. Levinson, 485 U.S. 224 (Sup. Ct.) (materiality standard for omissions)