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Southern District Of New York Allows Class Action Claims To Proceed, Finding General Disclosures Insufficient To Shield Defendants From Obligation To Disclose Known Risks
02/28/2017On February 22, 2017, Judge J. Paul Oetken of the United States District Court for the Southern District of New York denied a motion to dismiss a putative class action lawsuit brought against Chinese mobile game developer iDreamSky Technology Ltd. (“iDreamSky”), its officers and directors and four underwriters. In re: iDreamSky Technology Limited Securities Litigation, No. 15-CV-2514 (S.D.N.Y. Feb. 22, 2017). The complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 and Section 20(a) of the Exchange Act, as well as Sections 11, 12(a)(1), 12(a)(2), and 15 of the Securities Act of 1933 (“Securities Act”), based on allegations that the Company omitted to disclose the adverse financial impact of delays in the release of iDreamSky’s Cookie Run game in China, as well as the alleged lack of an adequate third-party billing platform.
With respect to the Securities Act claims, which were based on iDreamSky’s August 2014 initial public offering, defendants argued that the allegedly-omitted information was disclosed and/or was not material. The Court first declined to decide if the Securities Act claims were subject to the heightened pleading requirements of Rule 9(b), finding that plaintiffs’ allegations were sufficient, regardless. The Court then held that the offering materials for the IPO “provided only generalized disclosures” describing the risk of a delayed Cookie Run launch in China and the significance of third-party billing platforms, and otherwise failed to disclose “any specific information.” The Court also held that the complaint sufficiently alleged the claimed omissions were material, noting that “releasing Cookie Run in China represented a significant opportunity.”
The Court also rejected the underwriter defendants’ arguments that the Securities Act claims should be dismissed because plaintiffs failed to identify the specific defendant from which they purchased securities in the IPO. The Court found plaintiffs’ allegations that the underwriters offered the securities sufficient to allege standing under Section 12(a)(2).
Turning to the Exchange Act claims, the Court rejected arguments that the alleged misstatements were inactionable statements of opinion, observing that defendants’ “failure to acknowledge the then-known delays in the launch of Cookie Run and to update the 2014 revenue projections . . . is precisely the type of omission that, even if included in the context of an opinion, would be misleading to a reasonable investor.” The Court also held that the complaint sufficiently supported a strong inference of scienter because (i) several confidential witnesses claimed defendants were aware of the allegedly undisclosed issues, (ii) allegedly misleading fourth-quarter projections were made less than one month before the close of the quarter and (iii) plaintiffs are not required to allege scienter with respect to each individual defendant but can allege scienter as to those defendants based on allegations with respect to the “corporate entity.”
Although complaints based on product delays are frequently dismissed because plaintiffs typically have a hard time alleging that a company knew or should have known that the product would not launch on schedule, the Court’s decision underscores that such complaints likely will not be dismissed where plaintiffs can marshal at least allegations that a company made statements confirming that schedule when it knew delays were already happening.
