465 F.Supp.3d 393
S.D.N.Y.2020Background
- Sogou Inc., a Beijing internet-search company and Sohu subsidiary, completed an IPO on November 9, 2017 (45,000,000 ADS at $13); plaintiffs bought ADS and sued under Sections 11 and 15 of the Securities Act.
- The Registration Statement and Prospectus disclosed PRC internet-law compliance obligations, cautioned that PRC regulation and future laws could affect operations, and described Sogou’s smart-hardware and AI strategy.
- In June–July 2018 (post-IPO) Douyin ads mocking martyr Qiu Shaoyun were served on Sogou’s platform; Beijing authorities investigated, fined Sogou (~RMB1,000,000) and ordered minor disgorgement, and Sogou suspended part of advertising and enhanced screening and AI-based controls.
- After launching AI-enabled translation devices in early–mid 2018, Sogou accelerated a shift to AI-enabled hardware and announced phasing out some legacy Teemo watches, warning of reduced near-term hardware revenues.
- Plaintiffs alleged the Offering Documents omitted that (a) Sogou’s ad-content controls were materially inadequate at the time of the IPO and (b) hardware disclosures misled about AI capabilities and the timing/impact of the strategy change; defendants moved to dismiss under Rules 9(b) and 12(b)(6).
- The Court granted the motions and dismissed the Third Amended Complaint with prejudice, holding plaintiffs failed to plead an actionable false statement or omission existing or known at the registration statement’s effective date and could not cure the fundamental defects.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Offering Documents omitted materially inadequate ad-content controls (§11) | Sogou concealed that its monitoring/screening systems were materially inadequate at IPO | Disclosures were generic, accurately warned of regulatory risks, and there was no known noncompliance at IPO | Dismissed — no actionable false statement/omission; plaintiffs failed to show any existing, known defect at IPO |
| Whether Sogou had a duty to disclose that its compliance measures would prove insufficient after future law changes | Omission of later-upgraded controls shows prior inadequacy and misled investors | No duty to predict future law; upgrades were adopted in response to a post-IPO event and a law enacted after the IPO | Dismissed — Securities Act claims are judged as of the registration effective date; no clairvoyance duty |
| Whether hardware disclosures misled about AI capabilities and imminent revenue impact | Sogou failed to disclose plan to phase out non-AI hardware and implied all hardware was AI-enabled, causing short-term revenue decline | Offering Documents disclosed AI strategy and only later product launches (post-IPO) triggered accelerated strategy; Sogou did not claim all hardware was AI-enabled | Dismissed — no false or misleading statements at time of effectiveness; timing of decisions was post-IPO |
| Whether leave to amend should be allowed | Plaintiffs previously amended but did not seek further leave in response to latest dismissal | Defendants sought dismissal with prejudice | Dismissed with prejudice — fourth complaint; court finds defects incurable and plaintiffs did not request repleading |
Key Cases Cited
- Meyer v. JinkoSolar Holding Co., 761 F.3d 245 (2d Cir. 2014) (registration statements describing detailed compliance measures can be actionable if those measures were failing at the offering)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus., 575 U.S. 175 (2015) (an issuer must not make truthful statements that are misleading in context)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (materiality standard for omitted information)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading requirements; legal conclusions not assumed true)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for pleading a strong inference of scienter)
- Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011) (Item 303 and duty to disclose known trends or uncertainties)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (Rule 9(b) applies to securities claims sounding in fraud)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (when a company speaks on a topic, it must not omit facts necessary to make statements not misleading)
- Ganino v. Citizen Utils. Co., 228 F.3d 154 (2d Cir. 2000) (materiality requires a substantial likelihood that disclosure would have significantly altered the total mix of information)