Glaser v. The9, Ltd.
2011 U.S. Dist. LEXIS 31989
S.D.N.Y.2011Background
- Lead plaintiffs sue The9 Ltd. and key executives over alleged misrepresentations during 11/15/2006–7/15/2009 about renewal likelihood of The9's WoW license with Blizzard and related growth prospects.
- The WoW contract with Blizzard (initially with Vivendi, then Blizzard) was the core revenue driver, expiring June 7, 2009, with substantial dependence on WoW revenues in 2006–2008.
- Alleged misstatements concern beliefs that renewal was probable, statements about the Blizzard relationship, and optimistic growth signals, allegedly masking tensions with Blizzard and renewal risk.
- During the period, stock price rose around initial positive disclosures but later collapsed after Blizzard announced non-renewal to NetEase; insiders sold stock and The9 adopted corporate actions (poison pill, increased option pool, dividend) alleged to benefit insiders.
- The9 filed SEC 20-Fs acknowledging renewal risks; after the non-renewal announcement, substantial impairments and revisions were disclosed in 2009, aligning with plaintiffs’ theory of misstatements.
- Court granted motion to dismiss for lack of adequately pleaded scienter; leave to replead was granted.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs adequately plead scienter under PSLRA | Plaintiffs contend defendants knew or reckless disregard of falsity; insider sales and related-party transactions support motive; confidential witnesses show knowledge. | Plaintiff fail to plead strong inference; insider sales not unusual; no reliable confidential-witness support; competing inference favors good faith belief in renewal. | No strong inference of scienter; motion to dismiss for lack of scienter granted. |
| Motive and opportunity established by insider sales and corporate actions | Insider stock sales, related-party transactions, dividend, and poison pill show concrete benefits from fraud. | Sales are not clearly suspicious; no unique link between alleged fraud and benefits; corporate actions do not tie to misstatements. | Insider sales and actions do not constitute a strong, unique motive; rejected as insufficient. |
| Whether strong circumstantial evidence supports scienter | Confidential witnesses, core operations, write-downs, contradictory statements, and resignations indicate knowledge of falsity. | CW allegations lack specificity and admissible connection; core-operations and size of write-downs alone are inadequate. | Strong circumstantial evidence insufficient; court adopts competing non-fraudulent inference. |
| Impact of alleged conflicting statements by Zhu and Chen | Earlier statements about renewal discussions contradict later statements; indicates knowledge of falsity. | Contradictions are not directly inconsistent with the truth at time; later statements may reflect ongoing negotiations. | Inconclusive; not enough to establish scienter. |
| Whether Section 20(a) claims survive | Control and participation by individuals in primary violation. | No primary violation pleaded; 20(a) claims fail. | Section 20(a) claims are dismissed. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Supreme Court 2007) (strong inference standard for scienter; inference must be as compelling as any opposing)
- In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001) (motive and inference requirements; nonfraudulent inferences considered)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (scienter must be supported by strong inferences; market context considered)
- In re eSpeed, Inc. Sec. Litig., 457 F.Supp.2d 266 (S.D.N.Y. 2006) (insider trading plan and other evidence evaluated in scienter pleading)
- Local No. 38 Int'l Bhd. of Elec. Workers Pension Fund v. American Express Co., 724 F.Supp.2d 447 (S.D.N.Y. 2010) (framework for pleading scienter including confidential witnesses and competing inferences)
- In re PXRE Group, Ltd. Sec. Litig., 600 F.Supp.2d 510 (S.D.N.Y. 2009) (reliance on confidential sources; require detailed contradictory information)
- Gissin v. Endres, 739 F.Supp.2d 488 (S.D.N.Y. 2010) (highly unreasonable conduct showing conscious misbehavior as circumstantial evidence)