Wandel v. Gao, 590 F.Supp.3d 630

Background:

Phoenix Tree Holdings (Cayman) operated co-living rental units in China, including Wuhan, and completed a U.S. IPO (ADS) that opened January 17, 2020 and closed January 22, 2020.
Plaintiffs purchased ADS on January 17, 2020 and allege the Offering Documents omitted material facts about: (1) COVID-19 risks, (2) rising renter complaints, (3) increased refunds of upfront payments that softened Q4 2019 results, and (4) specific changes to sales/marketing.
Defendants moving to dismiss included the underwriters (Citigroup, Credit Suisse, J.P. Morgan, Tiger Brokers entities) and Cogency (U.S. IPO representative); other defendants largely inactive.
Plaintiffs brought claims under Sections 11, 12(a)(2), and 15 of the Securities Act and alleged violations of Items 105 and 303 of Regulation S-K/Form F-1/Form 20-F disclosure duties.
The district court held plaintiffs failed plausibly to allege that Phoenix Tree knew, or had unique non-public knowledge, by plaintiffs’ purchase date (January 17) that COVID-19 or the other matters posed material risks; it dismissed the Amended Complaint without prejudice and granted leave to amend.

Issues:

Issue	Plaintiff's Argument	Defendant's Argument	Held
Duty to disclose COVID-19 risk at time of IPO	Phoenix Tree knew (or should have known) by Jan 17 of COVID-19’s material risk—had Wuhan operations and executives aware of advisories	By Jan 17 COVID-19 was not a known or near-certain material threat; generic epidemic risk language in prospectus was adequate; plaintiffs purchased Jan 17 so no later-update duty applies to them	Dismissed: plaintiffs failed to plausibly allege company knew of material COVID-19 risk by Jan 17; generic epidemic warnings sufficed for that date
Failure to disclose rising renter complaints	Plaintiffs: complaints were material, and prior practices made increased complaints foreseeable and should have been disclosed	Defendants: prospectus already disclosed renter satisfaction metrics and warned about reputational risk and consumer complaints; no showing complaints had affected business pre-IPO	Dismissed: disclosures and risk warnings addressed the issue; no plausible allegation that complaints had materially harmed business pre-purchase
Omission of Q4 2019 refunds/softened financials	Plaintiffs: preliminary Q4 metrics omitted abnormal rise in refunds of upfront payments that materially softened results	Defendants: Q4 had only just ended two weeks before IPO; reported metrics were preliminary and prospectus warned that final results might change	Dismissed: no duty to report finalized Q4 figures then; hindsight revisions do not show known falsity at time of disclosure
Regulation S-K Items 105/303 and Sections 12/15 liability	Plaintiffs: independent disclosure duties under Items 105/303 and control-person liability under §15 support claims	Defendants: same factual deficiencies undermine Item 105/303 claims (which require actual knowledge) and Section 15 depends on a primary statutory violation	Dismissed: Item 105/303 claims fail for lack of actual knowledge; Sections 12 and 15 fail because primary Section 11 claim is inadequate

Key Cases Cited

Ashcroft v. Iqbal, 556 U.S. 662 (plausibility pleading standard)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility and rise-above-speculation standard)
Herman & MacLean v. Huddleston, 459 U.S. 375 (elements of Securities Act misstatement/omission claims)
In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (framework for misrepresentation vs omission theories)
New Jersey Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC, 709 F.3d 109 (no reliance requirement for Section 11; caution on imputed knowledge)
Novak v. Kasaks, 216 F.3d 300 (no requirement of clairvoyance; hindsight pleading insufficient)
Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (Item 303 actual-knowledge requirement and timeliness of disclosures)
Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (disclosure of known trends that affect future revenues)
Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85 (Item 303 requires actual knowledge of trend/uncertainty)
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (control-person liability elements)
In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (duty to disclose only when issuer knew or should have known)