DECISION AND ORDER
Lead Plaintiffs Jeff Schram and Linda Schram (“Lead Plaintiffs”), individually and on behalf of all others similarly situated, filed an amended class action complaint (the “Amended Complaint”) against defendants CNinsure Inc. (“CNinsure”), Yinan Hu (“Hu”), Qiuping Lai (“Lai”), and Peng Ge (“Ge,” and collectively, “Defendants”), asserting two counts; (1) violation of Securities Exchange Act § 10(b) (“Section 10(b)”) as well as Securities and Exchange Commission (“SEC”) Rule 10b-5 (“Rule 10b-5”) promulgated thereunder, and (2) violation of Securities Exchange Act § 20(a) (“Section 20(a)”). (See Dkt. No. 12.) CNinsure subsequently moved to dismiss the Amended Complaint (see Dkt. No. 13), and the parties completed briefing on the motion (see Dkt. Nos. 14, 17 & 19).
I. BACKGROUND
Plaintiff Pieter Van Dongen, individually and on behalf of all others similarly situated, initially filed this action on October 17, 2011. (See Dkt. No. 1.) The Court subsequently granted the motion of Jeff and Linda Schram for appointment as lead plaintiffs, and for the approval of the law firm of Robbins Gellar Rudman & Dowd LLP as lead counsel, {see Dkt. No. 10), and the Amended Complaint followed on August 1, 2012 (see Dkt. No. 12).
Lead Plaintiffs represent a class of purchasers of American Depositary Shares (“ADSs”) of CNinsure issued between March 2, 2010 and November 21, 2011 (the “Class Period”). CNinsure’s ADSs trade on the NASDAQ Global Select Market. CNinsure is a Cayman Islands corporation headquartered and operating in the People’s Republic of China. CNinsure is an insurance intermediary. It distributes insurance products underwritten by others through its network of sales agents. CNinsure does not assume underwriting risk; it generates revenues by receiving commissions from insurance companies. All three individuals named as defendants served as executives of CNinsure during the Class Period: Hu served as Chief Executive Officer and Chairman of the Board of Directors, Lai served as President and Executive Director, and Ge- served as Chief Financial Officer.
Briefly stated, Lead Plaintiffs allege that Defendants defrauded purchasers of CNinsure ADSs by disseminating misstatements and/or omitting material facts regarding the compensation of CNinsure’s sales agents. As a result, class members purchased the ADSs at artificially inflated prices, and Defendants were able to raise capital in a secondary offering in July 2010 resulting in roughly $109.6 million in net proceeds.
A. INITIAL MISSTATEMENTS AND THE OPENING OF THE CLASS , PERIOD
Lead Plaintiffs assert that the Class Period begins on March 2, 2010 with the issuance of CNinsure’s press release announcing its financial results for the fourth quarter and full year ending December 31, 2009 (the “March 2, 2010 Press Release”). CNinsure reported an increase in net revenues, and primarily attributed this success to enhanced sales and marketing efforts, including a 33.9% year-over-year increase in the number of sales agents. Lead Plaintiffs allege that this statement identifying enhanced sales and marketing as the driver for increased revenues was materi
Lead Pláintiffs allege that Defendants’ misstatements and/or omissions regarding the equity incentive compensation plan continued with CNinsure’s filing of its annual report with the SEC on May 7, 2010 (the “May 7, 2010 Annual Report”). The report, signed by defendant Hu, stated in relevant part that sales agents were compensated only by commissions, and further detailed how the commissions were calculated (e.g., based on a percentage of the sale and fees generated by the sale), depending on the type of insurance policy at issue. Roughly two months later, on July 9, 2010, CNinsure announced that it priced a secondary offering, which closed on July 15, 2010 and resulted in $109.6 million in net proceeds for the company. The registration statement filed with the SEC in connection with the secondary offering likewise did not mention the equity incentive compensation plan that forms the basis of Lead Plaintiffs’ claims (the “July 15, 2010 Registration Statement”).
B. OLP REPORTS AND CNINSURE’S RESPONSE
On November 22, 2010, OLP Global LLP (“OLP”), a self-described alternative research and consulting firm focused on publicly listed Chinese companies, issued an analyst report (the “November 22 Report”) focusing on then-recent regulations promulgated by the China Insurance Regulatory Commission (“CIRC”) that restricted the use of equity incentive compensation plans by insurance intermediaries. The November 22 Report detailed some relevant points from the CIRC regulations and noted that, based on OLP’s knowledge, CNinsure had been offering equity incentives to its sales agents since 2007. The November 22 Report further predicted that the regulatory changes would slow CNinsure’s aggressive hiring of sales agents and result in ■ curtailed revenue growth, and that CNinsure may be forced to raise commission payments to its sales agents which would result in increased overall compensation expenses for the company..
That same day, CNinsure held a conference call with analysts and investors during which company representatives were asked about equity incentive compensation. CNinsure representatives characterized the plan as a scorecard akin to airline mileage programs, and explicitly denied that it was an equity compensation program. Lead Plaintiffs allege that the price of CNinsure’s ADSs dropped roughly 13% by the close of market on November 23, 2010 as a result of the November 22 Report — and that CNinsure’s misleading representations on the ensuing conference call prevented further decline.
On December 2, 2010, OLP issued another analyst report (the “December 2 Report”) offering more details as to how CNinsure compensated its sales agents. OLP concluded in the December 2 Report that CNinsure’s plan was no different from an equity-based plan, was a growth-driver for CNinsure, and that the equity incentive compensation earned by CNinsure’s sales agents was not properly reflected in the
On December 3, 2010, CNinsure held a conference call with analysts and investors during which Hu addressed the December 2 Report. In particular, he reiterated that the company’s equity incentive compensation plan was a scorecard system that allowed sales agents to accumulate points and participate in rewards programs. Hu noted that, under certain situations, sales agents could use these points to acquire stock options in CNinsure or CNinsure’s affiliated subsidiaries, and that sales agents may become eligible to become full-time employees under the points program. He also stated that the program should not be recognized as costs under accounting principles and that it was misleading to characterize the program as no different from an equity incentive compensation plan. In addition, Hu stated that CIRC was aware of and approved CNinsure’s scorecard program.
On the subject of Finestart, Hu stated that it was registered in the British Virgin Islands, and that it provided CNinsure and its employees and sales agents with stock trading services; but he repeatedly emphasized that it was independent from CNinsure. When faced with an analyst question requesting details about Fines-tart, Hu responded that Finestart had its origins in a company called Chengdu Jingshi, with which CNinsure also collaborated, and that Chengdu Jingshi actually had an incentive plan whereby CNinsure sales agents could earn stock.
On the same day, OLP issued a followup analyst report (the “December 3 Report”) and also published documents supporting its research on CNinsure. The December 3 Report characterized these supporting documents as CNinsure’s presentations to existing and prospective sales agents touting the company’s compensation plans, and reiterated OLP’s belief that CNinsure’s financial statements should account for the equity incentive compensation plan ■ described in the presentations. The December 3 Report also highlighted the recent sale of CNinsure stock by two senior executives (not named as defendants in this case) as evidence of an erosion in confidence in the company. Lead Plaintiffs allege that the price of CNinsure’s ADSs dropped again by the close of market on December 3, 2010, and that the price of the company fell 24% in response to the December 2 Report and the December 3 Report.
CNinsure responded on December 6, 2010 with a press release entitled “Statement of Clarification from CNinsure.” The press release again stated that the equity incentive compensation plan described by OLP was nothing more than a scorecard, and that Finestart had no economic ties to CNinsure. The press release also disclaimed CNinsure’s authorship of any presentations regarding an equity incentive compensation plan and claimed that any contrary representation was a misunderstanding by lower level affiliates. Later in the same day, OLP published another analyst report and supporting doc
On December 10, 2010, CNinsure hosted an event in China for analysts and investors during which it conducted a presentation (the “December 10 Presentation”) addressing compensation for CNinsure sales agents and Finestart. On the topic of sales agent compensation, the December 10 Presentation stated that the plan did not involve equity incentive compensation (commissions are paid in cash), and OLP’s assertion that sales agents could convert their compensation into CNinsure shares that CNinsure was obligated to buy back at a fixed price was inaccurate. The December 10 Presentation stated that the points awarded to sales agents under the program did not have any monetary value. Further, the December 10 Presentation relayed that CNinsure investigated the presentation cited by OLP and determined that it was not an official document produced or approved by CNinsure, and that it was located on an internet forum provided by the company to sales agents and not the company’s official website. . On the topic of Finestart, the December 10 Presentation again reiterated that Finestart was a BVI-registered company, and that it was independent from CNinsure.
On December 13, 2010, OLP published another analyst report (the “December 13 Report”) and supporting documents regarding the disputed presentation on sales agent compensation. The December 13 Report refuted CNinsure’s contention that the presentation was unauthorized, and pointed to a number of documents it suggested demonstrated that the existence of an equity incentive compensation plan was common knowledge in China, including: a news article from 2007 discussing two types of equity incentives at CNinsure; articles published on CNinsure’s website and Hu’s statements regarding equity incentives; and two essays written in 2010 by CNinsure employees regarding their views on equity incentives. The December 13 Report also raised questions about Finestart’s role in the equity incentive compensation plan: specifically, if sales agents were offered shares in Finestart with a fixed value as part of the plan, how many shares were outstanding and what was the price per share?
As with previous OLP reports, the December 13 Report focused on CNinsure’s apparent promise to its sales agents to buy back the equity incentive shares at a fixed price at any time — a feature that, as noted above, CNinsure repeatedly denied existed. The December 13 Report also revealed a new development: links and images on CNinsure’s website relating to the equity incentive presentation recently had been disabled. OLP opined that this evidenced CNinsure’s intent to impede research on this issue. Lead Plaintiffs allege that the price of CNinsure’s ADSs dropped again by the close of market on December 14, 2010 and December 15, 2010, and that the price of the company fell another 20.4% in response to the December-13 Report.
On January 6, 2011, OLP published an analyst report (the “January 6 Report”) and supporting documents reporting more details on Finestart. In particular, the January 6 Report outlined OLP’s belief that equity incentive shares earned by CNinsure’s sales agents could be converted into ownership in Finestart, a detail that again raised questions about Fines-tart’s relationship to CNinsure. OLP reiterated in the January 6 Report its belief that CNinsure’s equity incentive compensation plan should be (but had not been) reflected in the company’s financial statements, as well as its belief that CNinsure
C. CNINSURE’S NOVEMBER 21, 2011 PRESS RELEASE, AND THE CLOSE OF THE CLASS PERIOD
On November 21, 2011, CNinsure issued a press release detailing its financial results for the third quarter of 2011. While the company reported an 18.9% increase in total net revenues for that period, this growth was lower than the year-over-year growth CNinsure had reported in past quarters. The press release contained a statement from CNinsure’s chief executive officer noting the company’s dependence on a people-driven sales model, and that rising labor costs and operating expenses placed that model under increasing pressure. Further, the release reported a 40.5% increase in commission and fee expenses for the third quarter of 2011 over the third quarter of 2010. CNinsure attributed this to an increase in the rate of commissions paid to sales agents. Lead Plaintiffs allege that the price of CNinsure’s ADSs dropped again on November 22, 2011 and November 23, 2011, and that the price of the company fell nearly 26% in response to this press release. In total, Lead Plaintiffs allege that the price of CNinsure’s ADSs dropped more than 78% as investors learned the truth about the company’s equity incentive compensation plan.
D. SALES OF CNINSURE ADSs BY CNINSURE EXECUTIVES
During the Class Period, a number of CNinsure executives sold CNinsure ADSs, resulting in proceeds in excess of $34 million. In particular, Hu and Lai controlled another entity called Kingsford Resources Limited that sold 955,057 shares of CNinsure ADSs during the class period for proceeds of more than $25.2 million, and two other CNinsure executives not named as defendants sold ADSs between November 24, 2010 and December 1, 2010 (between the first and second OLP reports) for combined proceeds of more than $1.3 million.
E. CNINSURE’S ACQUISITIONS FROM CHENGDU JINGSHI
In November 2010, analysts at Piper Jaffray & Co. (“Piper Jaffray”) raised concerns about CNinsure’s acquisition of interests in insurance agencies from Chengdu Jingshi — the same company that invested in Finestart. Specifically, Piper Jaffray questioned CNinsure’s relationship with Chengdu Jingshi based in large part on the fact that CNinsure appeared to be paying Chengdu Jingshi inflated prices for insurance agencies that Chengdu Jingshi had purchased for comparatively small amounts of money.
In addition, Piper Jaffray questioned CNinsure’s reported margins during the Class Period, noting that they were significantly higher than those of its competitors. CNinsure attributed its higher margins to the fact that it was larger than its competitors, which allowed it to earn bonus commissions based on sales volume and service quality. However, CNinsure’s IPO prospectus filed with the SEC in 2007 listed bonus commissions as accounting for 1.1% of its total commissions in 2006. Both OLP and Piper Jaffray questioned this explanation, with Piper Jaffray further questioning CNinsure’s transparency in its disclosures.
F. CNINSURE’S PROPOSED GOING PRIVATE TRANSACTION
On May 16, 2011, CNinsure announced that it had received a non-binding proposal from a consortium of investors (including Kingsford Resources Limited, controlled
II. LEGAL STANDARD
A. STANDARD FOR DISMISSAL UNDER RULE 12(b)(6)
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
Plaintiffs claiming securities fraud must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) (“Rule 9(b)”) by “stat[ing] with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b); see ATSI Commnc’ns, Inc. v. Shaar Fund, Ltd.,
B. THE EXCHANGE ACT
In pertinent part, Section 10(b) declares it unlawful for any person, directly or indirectly, by the use of any means of interstate commerce, the mails, or national securities exchange:
to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b).
Rule 10b-5, promulgated by the SEC to implement Section 10(b), “more specifically delineates what 'constitutes a manipulative or deceptive device or contrivance.” Press v. Chemical Inv. Servs. Corp.,
(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
Section 10(b) operates as a “broad” prohibition against manipulation, whether in the form of false statements or market manipulation. United States v. Royer,
1. Misstatements or Omissions of Ma- , terialFact
In order to satisfy Rule 9(b) and PSLRA pleading requirements, “[a] securities fraud complaint based on misstatements must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Id. at 99. An omission is actionable “only when the [defendant] is subject to a duty to disclose the omitted facts.” In re Time Warner Inc. Sec. Litig.,
Whether a misstatement or omission is material is “an inherently fact-specific finding ... that is satisfied when a plaintiff alleges a statement or omission that a reasonable investor would have considered significant in making investment decisions.” Litwin v. Blackstone Grp. L.P.,
2. Scienter
Scienter, “a mental state embracing intent to deceive, manipulate, or defraud,” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
A complaint has sufficiently alleged “motive and opportunity to commit fraud” if it pleads facts showing that the defendant “benefited in some concrete and personal way from the purported fraud.” Novak v. Kasaks,
Where plaintiffs fail to allege scienter through motive and opportunity, the securities fraud claim may still be sufficiently stated by allegations demonstrating “strong circumstantial evidence of conscious misbehavior or recklessness,” Kalnit,
Finally, “in determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account plausible opposing inferences.” Tellabs,
3. Reasonable Reliance and Loss Causation
A plaintiff claiming securities fraud under Section 10(b) and Rule 10b-5 must also establish that it reasonably relied on the defendant’s alleged misrepresentations or omissions, and that the fraud caused the plaintiffs loss. Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc.,
Reliance may be presumed in two circumstances. - First, “in the case of omissions, reliance on the omitted information may be presumed where such information is material.” Black v. Finantra Capital, Inc.,
Loss causation is not subject to the heightened pleading standards of Rule 9(b) or the PSLRA. See In re Citigroup Inc. Sec. Litig.,
III. DISCUSSION
Defendants argue that the Court must dismiss the Amended Complaint because Lead Plaintiffs have failed to adequately plead 1) the falsity of Defendants’ statements, 2) scienter, and 3) loss causation.
A. FALSITY
Defendants argue that Lead Plaintiffs have failed to plead falsity because CNinsure’s statements regarding the particulars of its compensation program provide a more likely explanation than OLP’s “miseharacterizations.” (Dkt. No. 14 at 15.) Specifically, Defendants note that CNinsure has publicly disclosed that it has an Entrepreneurial Agent Program, a Share Incentive Plan, and the so-called scorecard program, and that in revealing an “undisclosed” equity incentive compensation plan, it is more plausible that OLP in fact mischaracterized the existing scorecard program and conflated it with the other two programs, which have equity incentives. Defendants further attempt to cast doubt upon OLP’s conclusions by highlighting the fact that its employees may have held positions in CNinsure’s stock that could represent a conflict of interest.
On this point as well, Defendants’ arguments are premature. Defendants’ efforts amount to an appeal to the referee to call a foul while the opposing team is still announcing its lineup and taking the field. Defendants’ arguments regarding the truthfulness of CNinsure’s statements about the scorecard program and the nature of the deleted presentation — i.e., that the presentation was unauthorized (and that it would be easy for a third party to reproduce the company logos featured on the presentation), and that its deletion was routine — amount to fact-based disputes that the Court will not credit on a motion to dismiss. See In re Advanced Battery Techs., Inc. Sec. Litig., No. 11 Civ. 2279,
Moreover, the Court is not convinced that Defendants have demonstrated that CNinsure’s explanation is more plausible than Lead Plaintiffs’ theory of the case. Defendants’ attempts to rub dirt on the OLP reports are unavailing. The Court cannot find, based on the Defendants’ examples, that it is more plausible than not that OLP was so confused and/or disingenuous in its description that it simply conjured the details of the equity incentive compensation plan, and that Defendants, in denying the existence of the plan— including by deleting from the CNinsure server a presentation with CNinsure logos on it regarding this alleged plan — were in the right. ■ Again, these matters are all fraught with factual issues which either are strongly contested by Lead Plaintiffs’ allegations, or about which Defendants’ theory would require the Court to make findings based on an inadequate evidentia
To begin, Defendants’ argument that OLP simply confused CNinsure’s disclosed equity plans with the scorecard plan is based on two examples in the supporting documentation cited by the OLP reports that could appear to be in reference to either the Entrepreneurial Agent Program or the Share Incentive Plan instead of an undisclosed equity incentive compensation plan. Defendants point out that a quote from Hu describing equity compensation uses the word “entrepreneurs,” and further point out that one of the articles describing the supposed undisclosed plan was written by an “entrepreneur team leader” who would have been eligible for the Entrepreneurial Agent Program. (Dkt. No. 14 at 16-17.) But this highly selective exercise ignores the host of other materials OLP relied on in formulating its reports (in addition to the disputed presentation). It fails entirely, for example, to address allegations regarding the role of Finestart. (Tellingly, Defendants do not point to any disclosures regarding the Entrepreneurial Agent Program or the Share Incentive Plan that relate to shares in Finestart.)
Put another way, these two discrepancies, in the face of the remaining supporting documentation, do not make it more plausible than not that the undisclosed equity incentive compensation plan did not in fact exist — a necessary predicate to finding that Defendants’ statements were not false. Further, Defendants’ suggestion that OLP’s analysis should be discounted or dismissed because OLP disclosed that it' may have a conflict of interest is premature. See Lewy v. SkyPeople Fruit Juice, Inc., 11 Civ. 2700,
In this case, Lead Plaintiffs have done what the law requires: they have alleged that CNinsure’s statements regarding its compensation of sales agents were false, the reason why the statements were misleading, and the facts that support these allegations. See In re Advanced Battery Techs., Inc. Sec. Litig.,
Plaintiffs allege that the positive statements about CNinsure’s growth in the March 2, 2010 Press Release, as well as the representations in the May 7, 2010 Annual Report, and the July 15, 2010 Registration statement that sales agents are “only compensated by commissions” were misleading because these statements misrepresented and failed to disclose the presence of the equity incentive compensation plan, and that this undisclosed plan was in fact responsible for CNinsure’s positive future statements. These statements are arguably examples of the longstanding maxim, “Some literally accurate statements can, ‘through their context and manner of presentation, [become] devices which mislead investors.’ ” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC,
B. SCIENTER
Piggybacking on their theory that their explanations for this whole episode is more plausible than Lead Plaintiffs’ allegations, Defendants argue that Lead Plaintiffs have failed to plead the requisite strong inference of scienter, characterizing the multi-faceted allegations in the Amended Complaint as little more than a “kitchen sink.” (Dkt. No. 14 at 18.) Specifically, Defendants argue that: (1) Lead Plaintiffs’ allegations that Defendants knew or recklessly disregarded that their statements were false and misleading are- simply too broad and conclusory; (2) the insider stock sales are not unusual and therefore do not support scienter; (3) CNinsure’s removal of documents from its server does not support scienter because the documents were unauthorized; (4) CNinsure’s July 2010 secondary offering does not support scienter because it occurred months before the first OLP report; and (5) CNinsure’s alleged failure to properly account for the equity incentive compensation plan does not support scienter.
Lead Plaintiffs respond that they have adequately pled a strong inference of scienter because they have alleged that defendants have acted with conscious misbehavior or recklessness, and, in the alternative, they have alleged Defendants’ motive and opportunity. The question before the Court with respect to scienter is, “ ‘When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?’ ” ECA,
Lead Plaintiffs have presented strong circumstantial evidence that Defendants acted with conscious misbehavior or recklessness. As the Second Circuit noted in Novak:
[Securities fraud claims typically have sufficed to state a claim based on recklessness when they have specifically alleged defendants’ knowledge of facts or access to information contradicting their public statements. Under such circumstances, defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation.
Just as it fell short in the context of falsity, Defendants’ argument is insufficient to amount to a more compelling inference regarding scienter than the one proffered by Lead Plaintiffs. See In re Ambac Fin. Grp., Inc. Sec. Litig.,
In light of this discussion, Defendants’ argument that the allegations are too broad and conclusory amounts, ironically, to little more than boilerplate. The Court finds a strong inference of scienter because Lead Plaintiffs have adequately alleged that defendants were aware of information that contradicted their statements. See, e.g., Heller v. Goldin Restructuring Fund, L.P.,
While perhaps not dispositive, the examples described above support Lead Plaintiffs’ theory that CNinsure, in part through its relationship with Chengdu Jingshi, improperly accounted for the costs associated with compensating its. sales agent, and that certain CNinsure executives were aware of this wrongful action and profited by it through the secondary offering and their sales of stock. Put another way, this is not a case of “ ‘GAAP violations or accounting irregularities, standing alone....’” ECA,
Lead Plaintiffs have also pled scienter by sufficiently demonstrating motive and opportunity.
First, the Court finds that the July 2010 secondary offering can provide a motive for fraud. See Duncan v. Pencer, No. 94 Civ. 321,
Except for the fact that they again erroneously attempt to limit, the relevant time period to post-November 2010, Defendants raise their strongest argument in contending that Lead Plaintiffs’ allegations of insider stock sales do not support motive in this case. Lead Plaintiffs allege that, during the Class Period, CNinsure insiders collectively- sold more than 1.3 million ADSs for proceeds exceeding $34 million. Hu and Lai, through their control of Kingsford Resources Limited, received more than $25 million of these proceeds through sales that occurred between March 2010 and October 2010. Two other executives not named as defendants collectively pocketed roughly $1.3 million in proceeds from sales that occurred after the November 22, 2010 OLP Report. Defendants claim that there is no indication that these sales were “unusual,” and thus they do not support scienter.
The Court notes that the factors usually considered in determining whether trading activity is unusual — including the volume of the stock traded, the profit earned, the identity of the traders, and the timing of the trades — appear in this case to cut in both directions. See In re Scholastic Corp. Sec. Litig.,
On the other hand, none of those considerations prevent a finding of scienter: motive “ ‘is adequately-alleged where the plaintiffs allege that the defendants sold their own shares while at the same time misrepresenting corporate performance in order to inflate stock prices,’ ” In re Refco, Inc. Sec. Litig.,
Ultimately, resolving doubts and drawing all reasonable inferences in favor of the plaintiff, the Court is persuaded that these sales qualify as unusual. The sales by two executives following the November 22, 2010 OLP Report, although comparatively small in amount, can be considered unusual because of their timing: they appear to
Moreover, the fact that multiple CNinsure executives sold stock outweighs the fact that one (Ge) did not. See In re Quintel Entm’t Inc. Sec. Litig.,
C. LOSS CAUSATION
Defendants contend that Lead Plaintiffs failed to plead loss causation because they have not alleged facts showing that CNinsure shifted from an equity incentive compensation plan to a cash compensation plan, or that such a shift caused the decreased revenue growth and increased expenses that CNinsure reported in its November 21, 2011 Press Release. Lead Plaintiffs respond that the Amended Complaint adequately alleges loss causation because the November 21, 2011 Press Release attributed CNinsure’s financial performance in part to exactly what OLP warned about, namely, that the company’s success was predicated on an undisclosed equity incentive compensation plan that allowed it to grow its sales force while keeping reported expenses low, and that any changes to the sales agent compensation model (either due to CIRC regulations or from internal pressure at CNinsure) would negatively impact CNinsure’s growth.
While this language does not explicitly disclose in flashing neon lights a switch from an equity model to an all-cash model, it nevertheless supports the inference that CNinsure’s compensation model had shifted — or CNinsure’s accounting of the model had shifted — following OLP’s disclosure of CNinsure’s equity incentive compensation plan and that its disclosed costs rose as a result. See Freudenberg v. E*Trade Fin. Corp.,
Defendants rely heavily on Solow v. Citigroup, Inc., No. 10 Civ. 2927,
in Solow, plaintiff alleged that Citigroup took a series of actions in response to its
But both Solow and Kuriakose exhibit fundamental gaps in the chain of causation not present here. In Solow, the court found that loss causation could not be demonstrated for some of plaintiffs allegations because the complaint in that case noted intervening causes, or because plaintiff simply identified “events and dates .... relating] to other negative information about the company” instead of highlighting those that related to his claims. See
By contrast, in this case, Defendants do not argue that an intervening event broke the chain of causation, and the November 21, 2011 Press Release specifically referenced a spike in commissions, rising labor costs, and increasing pressure on CNinsure’s business model — exactly the subject matter of the OLP reports. Defendants’ attempts to find parallels with Solow and Kuriakose fail because their arguments are premised on a too-narrow reading of the November 21, 2011 Press Release. See In re Vivendi Univ., S.A. Sec. Litig.,
For the reasons stated above, it is hereby
ORDERED that the motion (Dkt. No. 13) of defendant CNinsure Inc. to dismiss the amended complaint of lead plaintiffs Jeff Schram and Linda Schram is DENIED.
The parties are directed to confer and prepare a proposed case management plan for review by the Court at the initial conference on this case, which is here scheduled for Friday, July 26, 2013 at 2:00 p.m. SO ORDERED.
Notes
. Lead Plaintiffs have failed to serve any of the individual defendants in this matter. As such, the parties’ briefing and the Court’s analysis will focus entirely on the Section 10(b) claim. The Court lacks jurisdiction over the only parties named in the Section 20(a) claim, and that claim is summarily dismissed. See Barnett v. City of Yonkers, 731
. Except where otherwise noted explicitly, the factual summary below is derived from the Amended Complaint (Dkt. No. 12), and the documents cited or relied upon for the facts pled therein, which the Court accepts as true for the purposes of ruling on a motion to dismiss. See Spool v. World Child Int’l Adoption Agency,
. With the exception of one stray mention on the next-to-last page of their reply brief, Defendants do not challenge the materiality of the statements in question. Defendants also do not contest that the statements were made in connection with the purchase or sale of securities, or that Lead Plaintiffs relied on them. Thus, the Court need not address these issues.
. The intent of company executives acting with scienter can be imputed to the company itself. See City of Pontiac Gen. Emps.' Ret. Sys. v. Lockheed Martin Corp., 875 F.Supp.2d
. The parties dispute the significance of CNinsure's removal of images and disabling of links relating to the equity incentive compensation plan from its server. While the timing of the material's removal — in addition to the fact that it existed on CNinsure's servers in the first place and featured the company's logo — raises suspicions, the Court also recognizes the ease with which unauthorized documents can be produced and disseminated on
. The Court need only focus on the question of motive, as the opportunity to commit fraud can be assumed. See Dodona I,
. The Court declines Defendants’ invitations to depart from existing standards and follow the Fourth Circuit in adopting a heightened pleading standard for loss causation. In the Southern District of New York, ''[l]oss causation is not subject to the heightened pleading standards of Rule 9(b) or the PSLRA.” Dodona I,
. Defendants correctly note that the November 21, 2011 Press Release offers a number of other factors to explain CNinsure’s decrease in growth, including “prevailing macroeconomic turmoil” and ”[h]igh inflation.” (Dkt. No. 14 at 11 (quoting Dkt. No. 12 Ex. 10 at 1).) But, that other factors may be in part responsible for the drop in stock price does not break the chain of loss causation in a motion to dismiss. See In re Bear Stearns Cos., Inc., Sec., Derivative, & ERISA Litig.,
. Plaintiff's claim in Solow that Citigroup’s receipt of bailout funds and loss of foreign deposits represented the materialization of concealed risks regarding capitalization and liquidity failed for a more idiosyncratic, and basic, reason: the government’s TARP Report attributed these events to a "lack of confidence” and not the risks identified by plaintiff. See
. Defendants’ derivative argument that the OLP reports do not establish loss causation because the November 21, 2011 Press Release does not relate to their predictions and findings fails for the same reasons. Likewise, Defendants’ argument that the OLP reports do not establish loss causation because they rely on supporting documentation that was "publicly available” over the internet, although inventive, does not change the result. Even if the fact of internet availability of the supporting documentation is a distinguishing characteristic from earlier cases — and there is no indication that these documents were "available” simply by being dropped into the middle of the internet vortex in a way that functionally and materially distinguishes them from the Chinese-language newspaper articles at issue in In re Fuwei Films Securities Litigation,