Xu v. Gridsum Holding Inc.Xu v. Gridsum Holding Inc.
OPINION & ORDER
18-cv-3655-GHW
Woods, D.J.:
At issue is whether defendants Guosheng Qi, Michael Peng Zhang, and Ravi Sarathy (collectively, the “Individual Defendants”) were “makers” of the April 2018 press release and, therefore, can be held liable for its statements. Because Qi had “ultimate authority” over the press release, he was a “maker” of its statements, and the Individual Defendants’ motion to dismiss is denied as to him. But because there are insufficient allegations that Zhang or Sarathy was a “maker” of the statements in the press release, the motion to dismiss is granted as to them.
I. BACKGROUND
The facts underlying this case are described in detail in this Court’s March 2020 and February 2021 Orders. See Docs. 201, 236. The Court assumes the reader’s familiarity with those opinions and will not repeat all of the facts of this case here. For present purposes, an abbreviated summary suffices.
Plaintiffs brought this action against Gridsum, its former accounting firm, the underwriters of its 2016 initial public offering, and various of its current and former officers and directors, alleging violations of Sections 11 and 15 of the
a. The Individual Defendants
The Individual Defendants are current officers of Gridsum. Qi co-founded Gridsum in 2005 and has served at all relevant times as its Chief Executive Officer (“CEO”) and chairman of its Board of Directors (the “Board”). ¶ 25. Qi also serves as a member of the Board’s Compensation and Nominating and Corporate Governance Committees. Id. According to Gridsum’s 2017 Form 20-F, as of December 31, 2018, Qi beneficially owned 29.9% of Gridsum’s total ordinary shares. Id. And
Zhang is Gridsum’s Vice President of Corporate Development. ¶ 26. He served as Gridsum’s Chief Financial Officer (“CFO”) from February 2014 to April 2017 and as co-CFO from April 2017 until September 30, 2019. Id.
Sarathy is Gridsum’s current CFO. ¶ 27. He served as Chief Strategy Officer from October 2016 to April 2017, and as co-CFO, with Zhang, from April 2017 until September 30, 2019. ¶ 27.
b. The April 2018 Press Release
On April 23, 2018, Gridsum issued a press release titled “Gridsum Reports Suspension of Audit Report on Financial Statements.” ¶ 99. The press release was attached to a Form 6-K,2 which was filed with the Securities and Exchange Commission (“SEC”). Id. The press release stated, in relevant part:
Gridsum Holding Inc. (“Gridsum” or “Company”) . . . today reported that on April 20, 2018, PricewaterhouseCoopers Zhong Tian LLP (“PwC”), the Company’s independent registered public accounting firm, notified the Company’s Board of Directors and Audit Committee that PwC’s audit report for the Company’s financial statements for the year ended December 31, 2016 should no longer be relied upon. Therefore, investors should not rely on that audit opinion.
In its letter, dated April 16, 2018 (“PwC Letter”), PwC informed the Company of certain issues it had identified in conducting its audit of the Company’s financial results for the year ended December 31, 2017. Those issues relate to certain revenue recognition, cash flow, cost, expense items, and their underlying documentation which PwC had previously raised with the Company. Of the items specifically identified in the PwC Letter, the Company estimates a 2016 revenue impact of approximately RMB 2 million and a 2016 expense impact of approximately RMB 6 million. There can be no assurance that the
Company or PwC will not identify more items as the Company finalizes the review. The Audit Committee Chairman and the Company’s Co-Chief Financial Officer have discussed the topics covered by the PwC Letter with representatives of PwC. The Company’s Audit Committee is fully investigating these issues with assistance from external legal and accounting advisors and is working diligently toward an expeditious conclusion of the investigation. The Company undertakes no obligation to update its disclosures on this topic until the Audit Committee investigation is complete. Because PwC will not be in a position to issue reports on the Company’s financial statements until the Audit Committee completes its review and PwC is satisfied that any outstanding issues have been satisfactorily addressed, the Company’s 20-F filing will be delayed until such audit is completed.
¶ 99. The press release also included the following quotation from Qi:
For many years, starting well before our IPO, we have been committed to transparency and good corporate governance and remain so. When we became aware of certain accounting issues, we immediately took measures to address this situation. Our Audit Committee started an investigation and appointed a respected global law firm to conduct that review with the assistance of ‘big four’ forensic accounting specialists. This work is still ongoing. I have full confidence in the integrity and professionalism of all parties involved and we hope to report our results as soon as practicable after that work concludes. Meanwhile, we continue to make good progress in our efforts to grow the Company and expand our product range and client base. Our fundamentals and business prospects remain robust, and we look forward to continuing to work toward increasing shareholder value.
Id.
Gridsum’s American Depository Shares (“ADS”) listed on NASDAQ dropped over 16 percent that day and continued to drop thereafter. ¶ 100. On April 30, 2018, Gridsum filed a notice with the SEC that its Form 20-F for 2017 would be delayed, and that its audit committee would be conducting an investigation. ¶ 101.
c. Procedural History
On March 30, 2020, the Court issued an opinion and order in response to a motion to dismiss filed by Gridsum and one of its former directors, Thomas Melcher. See Doc. 201. In that opinion, the Court considered, among other claims, Plaintiffs’ claims under Section 10(b) of the
In its opinion, the Court found that Plaintiffs had properly pleaded an omission under the
Plaintiffs filed a third amended complaint (“TAC”), see Doc. 209, on May 7, 2020, which several of the defendants, in three separate motions, moved to dismiss.3 While those motions were pending, the Individual Defendants (all of whom work and reside outside the United States) entered the case, having agreed to voluntarily accept service of summons. See Docs. 230–32. In response to the motions to dismiss, the Court issued an opinion and order on February 23, 2021, dismissing a number of claims4 and directing Gridsum,
On April 23, 2021, Gridsum and Melcher filed an answer to the TAC. Doc. 239. And on June 3, the Individual Defendants moved to dismiss the TAC, arguing that they—like Melcher—were not “makers” of the April 2018 press release and, as such, cannot be held liable for its alleged misstatements. Therefore, the issue before the Court is a narrow one: whether the Individual Defendants were “makers” of the April 2018 press release.
II. LEGAL STANDARD
To survive a motion to dismiss under
A securities fraud claim under Section 10(b) of the
In the securities context, a court may consider not only the complaint itself, but also “any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
III. DISCUSSION
a. “Makers” of the Press Release
In Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court held that, in order to be liable for a violation of
Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said.
Id. at 142–3. “In the post-Janus world, an executive may be held accountable where the executive had ultimate authority over the company’s statement; signed the company’s statement; ratified and approved the company’s statement; or where the statement is attributed to the executive.” In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 473 (S.D.N.Y. 2012), aff’d, 525 F. App’x 16 (2d Cir. 2013).
While explicit attribution can be a strong indication of Janus’s “ultimate authority,” it also can be found if implicit in surrounding circumstances, or, in other words, evidenced by various indicia of control. See City of Roseville Employees’ Ret. Sys. v. EnergySolutions, Inc., 814 F. Supp. 2d 395, 418 (S.D.N.Y. 2011) (quoting Janus, 564 U.S. at 142–43); see also In Re Weight Watchers Int’l Inc. Sec. Litig., 504 F. Supp. 3d 224, 261–62 (S.D.N.Y. 2020) (“Whether the defendant is the ‘maker’ of the misstatement may depend on inferential or circumstantial evidence.”); IOP Cast Iron Holdings, LLC v. J.H. Whitney Capital Partners, LLC, 91 F. Supp. 3d 456, 473 (S.D.N.Y. 2015) (finding
At the outset, the Court notes that Plaintiffs do not allege that any of the Individual Defendants signed, ratified, or approved the press release. Instead, Plaintiffs generally allege that all three Individual Defendants “participated directly or indirectly in the preparation and/or issuance of the . . . press release[],” and that, as a result of their positions as CEO and Co-CFOs, they controlled its content. ¶¶ 269, 273, 280.
As to the conclusory allegation that the Individual Defendants “participated” in the preparation or issuance of the release, Plaintiffs do not offer any factual enhancement that would elevate the allegation to be something other than merely conclusory. The allegation does not pass muster under Rule 8. Much less do they provide sufficient detail to meet the heightened pleading standard under Rule 9. In any event, the Janus Court expressly rejected the notion that it was sufficient for a defendant to have been involved in “creating” the challenged statement by “participating in the drafting of” the statement or by “prepar[ing] or publish[ing] a statement on behalf of another.” 564 U.S. at 144–46.
In any event, to the extent that Plaintiffs allege additional “indicia of control,” these are enough to show that Qi had “ultimate authority” over and, therefore, was a “maker” of the press release, but they are not enough as to Sarathy and Zhang. In other words, while Plaintiffs put forth sufficient facts when taken together to adequately plead that Qi “made” the press release, their arguments as to Sarathy and Zhang fall short. As such, Qi can be held liable for the press release’s alleged misstatements and omissions, but Sarathy and Zhang cannot.
i. Qi was a “Maker” of the Press Release
Plaintiffs plausibly allege that Qi had “ultimate authority” over the press release’s content. In particular, Plaintiffs point to a number of indicia of control which, when taken together, are sufficient to adequately plead that Qi was a “maker” of the press release. As set out above, Qi is Gridsum’s co-founder and CEO; he is also the chairman of its Board and a member of the Board’s Compensation and Nominating and Corporate Governance Committees. ¶ 25. As of December 31, 2018, Qi beneficially owned 29.9% of Gridsum’s total ordinary shares, and he beneficially owns all its Class A shares. Id. According to Gridsum’s registration statement and 2016 Form 20-F, Qi is Gridsum’s “chief operating decision maker” with respect to “allocating [Gridsum’s] resources and assessing [its] performance.” ¶ 229.
Beyond this, the press release contains a lengthy statement from Qi. See ¶ 99. In that statement, Qi explains, “When we became aware of certain accounting issues, we immediately took measures to address
It is clear that the “accounting issues” to which Qi refers in his statement are the same “issues” identified by PwC and referenced in the first two paragraphs of the press release. As stated above and as relevant here, Plaintiffs argue the press release is materially false and misleading because it omitted to disclose a specific detail about PwC’s report, namely that PwC also advised Gridsum that the issues it identified “raised questions related to its ability to rely upon the representations of management.” Id. As Plaintiffs point out, this detail is not mentioned in the press release: it is omitted from the opening paragraphs of the release as well as from Qi’s statement. In any event, Qi’s statement indicates that he had knowledge of the “issues” that prompted the release, as well as of Gridsum’s strategy and next steps in responding to those issues. In other words, Qi’s statement within the release—reporting on Gridsum’s work to “address th[e] situation” and setting out his hope and confidence in that work—plausibly alleges that Qi had at least some degree of control over the message and its content, and more broadly suggests his general authority over Gridsum’s communications.
Qi’s status as co-founder, CEO, and Board member; his share-ownership and voting power; his decision-making authority; and his statement within the release—evidencing knowledge of the identified issues and control over company communication, as well as the content of the release in which his quotation was embedded,—together support an inference that he was a “maker” of the release. Courts in this district have found similar indicia of control sufficient to show that defendants had “ultimate authority” over statements and, as such, were “makers” under Janus. See, e.g., In re Cannavest Corp. Sec. Litig., 307 F. Supp. 3d 222, 240 (S.D.N.Y. 2018) (finding defendant was “maker” of company press release where he was president, treasurer, secretary, and sole board member of company, and where the release contained statements made by him); IOP Cast Iron Holdings, 91 F. Supp. 3d at 473 (defendants were “makers” where (1) they owned an overwhelming majority of the company’s shares; (2) their employees formed a majority of the company’s board; (3) they decided whether to sell the company; (4) their employees allegedly negotiated the Stock Purchase Agreement; and (5) one of their executives signed the Agreement on behalf of the company); Roseville, 814 F. Supp. 2d at 418 (defendant holding company was a “maker” of registration statements signed by EnergySolutions, Inc. where it was sole owner of outstanding stock in EnergySolutions at the time of the IPO, was selling stockholder in both offerings, and controlled more than 50% of EnergySolutions’ voting power).
Construed in Plaintiffs’ favor, all these facts are sufficient to plead that Qi had ultimate authority over the press release as a whole, not merely his quote within it. Qi’s authority is “implicit from surrounding circumstances” alleged in the complaint. Janus, 564 U.S. at 142. In other words, with all factual allegations assumed to be true and all reasonable inferences drawn in Plaintiffs’ favor, Plaintiffs’ allegations are sufficient at this stage to meet the heightened pleading requirements
ii. Neither Sarathy nor Zhang was a “Maker” of the Press Release
As to Sarathy and Zhang, however, Plaintiffs do not allege sufficient facts showing that either was a “maker” of the press release. As such, neither can be held liable for the press release’s alleged misstatements and omissions.
1. That Sarathy and Zhang were CFOs is Not Enough
At the outset, as to the allegation that Sarathy and Zhang controlled the content of the release simply because they were senior executives, plaintiffs do not cite to any law showing that an officer’s position within a company—without more—is enough to render that officer a “maker” of the company’s statements.5 As this Court has found with respect to the viability of the group-pleading doctrine after Janus, see infra Section III(b), “a mere presumption that a person worked on a statement by virtue of his . . . role within the company must [] fall short” of “Janus’s requirement that the individual have ultimate authority over the statement.” In re Banco Bradesco, 277 F. Supp. 3d 600, 641 (S.D.N.Y. Sept. 29, 2017) (internal quotation marks and citation omitted). Accordingly, that Sarathy and Zhang were co-CFOs is not enough to make them “makers” of the press release.
2. Reference to Conduct of “the Co-Chief Financial Officer” in the Release is Not Enough
Beyond this, plaintiffs make much of the fact that the press release contains a reference to Gridsum’s “Co-Chief Financial Officer.” Specifically, the press release states that the “Audit Committee Chairman and the Company’s Co-Chief Financial Officer have discussed the topics covered by the PwC Letter with representatives of PwC.” See ¶ 99.
But the press release does not specify who the “Co-Chief Financial Officer” is—whether it is Sarathy or Zhang or someone else6—and, in any event, even if the press release had referred
to Sarathy or Zhang by name, such a reference is not enough to establish either as its “maker.” Plaintiffs do not cite to any law supporting the argument that a reference to or description of an officer or her actions in a statement is evidence that that officer is the statement’s “maker.”
In any event, Sarathy and Zhang at most are identified—or described—in the press release—and even then, only by title. This is not enough. That the press
3. That Zhang Signed the Form 6-K is Not Enough
As to the argument that Zhang is the “maker” of the press release because he signed the Form 6-K attached to the press release, this argument also fails. Zhang did not sign the release
itself, but only signed the Form 6-K to which the press release was attached.
In support of their argument, Plaintiffs cite to In re Banco Bradesco, 277 F. Supp. 3d, where this Court found a defendant was adequately alleged to have “made” various misstatements in press releases where he signed the Forms 6-K furnishing those press releases to the SEC. But plaintiffs ignore that in addition to signing the Forms 6-K, the defendant in that case also signed the press releases. See Doc. 251-1, 251-2. In the instant case, Zhang signed only the Form 6-K. As such, Banco Bradesco, where the Court says nothing about whether a person who signs the Form 6-K—and nothing else—is a “maker” of the document attached to the Form 6-K, is inapposite here.
b. The Group Pleading Doctrine No Longer Applies
Plaintiffs argue that even if they do not meet the “maker” test set out in Janus, the Individual Defendants should nonetheless
The group-pleading doctrine allowed securities fraud plaintiffs to rely on a presumption that group-published documents were the collective work of—and therefore attributable to—corporate insiders. In re Am. Int’l Grp., Inc. 2008 Sec. Litig., 741 F. Supp. 2d 511, 530 (S.D.N.Y. 2010) (citation omitted). This doctrine was recognized by the Second Circuit at least as early as 1987. See DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
At the outset, this Court noted that since Janus, courts in this district have reached opposing conclusions regarding its impact on the group-pleading doctrine’s viability. See, e.g., In re UBS AG Securities Litigation, No. 07 Civ. 11225 (RJS), 2012 WL 4471265, at *10 (S.D.N.Y. Sept. 28, 2012) (finding “a theory of liability premised on treating corporate insiders as a group cannot survive a plain reading of the Janus decision.”); City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corp., 875 F. Supp. 2d 359, 374 (S.D.N.Y. 2012) (rejecting argument that Janus abrogated the group-pleading doctrine). The Second Circuit has not yet addressed the question, but the doctrine has been expressly rejected by other Courts of Appeals.8
As this Court explained in Banco Bradesco, the Janus Court expressly rejected the notion that it was sufficient for a defendant to have been involved in “creating” the challenged statement by “participating in the drafting of” the statement or by “prepar[ing] or publish[ing] a statement on behalf of another.” 564 U.S. at 144–46. And, as this Court further noted, the group-pleading
doctrine significantly predates Janus, and it was not designed to create a presumption of ultimate authority.
Instead, it create[d] a presumption that group-published documents are “the collective work” of corporate insiders, see In re Am. Int’l Grp., 741 F. Supp. 2d at 530. But in Janus, the Court held that participation in the creation of a statement was not enough. 564 U.S. at 144–45. If undeniable proof that an individual worked on a statement does not meet Janus‘s requirement that the individual have “ultimate authority over the statement, including its content and whether and how to communicate it,” id. at 142, a mere presumption that a person worked on a statement by virtue of his or role within the company must also fall short.
As this Court found, a presumption that corporate insiders, as a group, are “makers” of a statement because the statement is deemed to be attributed to those insiders is inconsistent with Janus’s description of attribution as a limiting mechanism. See 564 U.S. at 142–43. In other words, while under Janus attribution can be a means of determining who among the many who participated in creating and disseminating a statement had the ultimate authority over the statement, group pleading would simply sweep in that entire group, if not an even larger one.
In light of this—and in particular given the particularity requirements imposed on securities fraud pleadings by Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”)—this Court found that the group-pleading doctrine is insufficient to meet the requirements of Janus and thus is no longer viable. Accordingly, rather than rely on the presumption created by the group-pleading doctrine, a securities fraud plaintiff must allege facts showing, either directly or circumstantially, that the individual defendants named in the complaint possessed ultimate authority over the statements at issue. See Banco Bradesco, 277 F. Supp. 3d at 641.
As such—because the group-pleading doctrine is no longer viable—the Court rejects Plaintiffs’ argument that, pursuant to that doctrine, the Individual Defendants are liable for the press release’s alleged misstatements and omissions.
IV. LEAVE TO AMEND
The Court grants Plaintiffs leave to replead the dismissed claims against Zhang and Sarathy. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991) (“It is the usual practice upon granting a motion to dismiss to allow leave to replead.”); see also
V. CONCLUSION
For the reasons discussed above, the Individual Defendants’ motion to dismiss is GRANTED as to Sarathy and Zhang, and is DENIED as to Qi.
The Clerk of Court is respectfully directed to terminate the motion pending at Doc. 246.
It is SO ORDERED.
Dated: August 29, 2022
New York, New York
Gregory H. Woods, U.S.D.J.