Northern District Of California Dismisses Putative Class Action Against Materials Science Company

On July 7, 2026, Judge Maxine M. Chesney of the United States District Court for the Northern District of California dismissed with leave to amend a putative class action against a materials science company (the “Company”) and its CEO and CFOs (“Individual Defendants” and, together, “Defendants”) asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5.  Nowakowski v. AXT Inc., No. 24-cv-02778-MMC (N.D. Cal. July 7, 2026).  Plaintiffs alleged that Defendants concealed risks to the planned IPO of the Company’s Chinese subsidiary on China’s Science and Technology Innovation Board (the “STAR Market”) of the Shanghai Stock Exchange.  The Court dismissed the claims for failure to plead scienter and loss causation and did not address materiality and falsity arguments raised by Defendants.

In 2020, the Company allegedly announced the IPO of its subsidiary and disclosed that it was raising money from Chinese private equity investors.  The private equity investors could redeem their shares at their original price if the IPO application was rejected or withdrawn.  Plaintiffs alleged that the subsidiary, in the lead up to the IPO, hired an employee of a rival company who was accused of a trade-secret theft, allegedly prompting a criminal investigation.  According to plaintiffs, this investigation threatened to bar the subsidiary from registering on the STAR Market and trigger investor redemptions, materially impairing the Company’s financial condition.  Plaintiffs alleged that the Company failed to disclose the investigation to Chinese regulators, whose approval was required for the IPO to move forward.  A short-selling firm allegedly issued a report covering, inter alia, the alleged theft allegations and investigation.

Plaintiffs alleged that Defendants failed to disclose the allegedly known risks posed to the subsidiary’s IPO.  In granting the motion to dismiss, the Court limited its analysis to scienter and loss causation.  On scienter, the Court first found plaintiffs’ allegations about the Individual Defendants’ seniority, day-to-day involvement, and access to confidential information too generalized to raise a strong inference of scienter.  The Court found it significant that plaintiffs had not alleged particularized facts about whether and what Individual Defendants knew regarding the hiring, the investigation, or the regulatory inquiries, or when.  The Court likewise rejected allegations specific to the Company’s CEO, finding that his alleged personal involvement in the IPO process and his Sarbanes-Oxley certifications did not, even taken together, give rise to a strong inference of scienter.  The Court also declined to apply the “core operations” doctrine, reasoning the IPO was a financing transaction rather than a core Company operation.

The Court also found loss causation inadequately pled.  As a threshold matter, the Court assessed whether the short-seller report qualified as a corrective disclosure.  Defendants argued that it drew upon two previously published Chinese language news articles and thus the alleged stock drop already priced in the underlying information.  The Court concluded that because those articles were in a foreign language and directed at a foreign audience, the articles were not “publicly available.”  Nevertheless, the Court held that plaintiffs failed to tie the report to the alleged stock decline.  The Court observed that just half a page of the 38 page report detailed the alleged theft allegations, investigation, and regulatory inquiries.  In comparison, the report gave far more detail to other unrelated topics.