United States: Southern District Of New York Dismisses With Prejudice Securities Fraud Action Against Chinese Technology Company, Finding Statement That Company Was "Worth Billions" Nonactionable Puffery

On February 27, 2018, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York dismissed with prejudice a putative securities fraud action brought against Chinese mobile internet service provider NQ Mobile, Inc. ("NQ") and its CEO and Vice President.  Finocchiaro, et al v. NQ Mobile Inc., et al., No. 1:15-cv-06385 (S.D.N.Y. Feb. 27, 2018).  Plaintiffs—shareholders of NQ—alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act by making affirmative misstatements about NQ's value and failing to disclose to investors certain material facts relating to NQ's corporate acquisition strategy, allegedly causing plaintiffs to suffer losses when the truth was revealed and NQ's stock dropped.  The Court held that the alleged affirmative misrepresentation was mere puffery which plaintiffs could not have reasonably relied upon and that the alleged material omissions were in fact properly disclosed.  Accordingly, the Court dismissed the complaint with prejudice. 

The Court first considered plaintiffs' allegation that NQ's CEO and Vice President misrepresented to investors that NQ "was worth billions" and that the company would not accept a non-binding offer it had received from a third party (to acquire all of NQ's outstanding ordinary shares and ADSs for a fixed cash consideration of $9.80 per share) because "that offer was too low."  The Court found the alleged misrepresentation to be immaterial, noting that rather than being an affirmative, specific representation concerning NQ's share or enterprise value, the defendants' statement that NQ was "worth billions" amounted to "obviously non-actionable puffery" made in connection with their disclosure that NQ intended to reject what defendants viewed as an undervalued acquisition offer.  The Court noted that the statement was, in light of information publicly available to plaintiffs, an "extraordinarily optimistic view of NQ's value"—which had a publicly disclosed total market cap of $479 million—and "precisely the type of vague and rosy affirmation of a company's current state of affairs that amounts to no more than immaterial puffery."  The Court added that defendants' other alleged misstatement—that NQ would not accept the buyout offer—was, in fact, true, because NQ ultimately rejected the acquisition attempt.  The Court also held that plaintiffs had not adequately alleged justifiable reliance on the alleged misstatements, because NQ's financial history, which clearly demonstrated that the company was in fact not worth billions, was fully available to plaintiffs, including in the publicly filed prospectus.  Finding that plaintiffs failed to adequately plead materiality or justifiable reliance, the Court held that plaintiffs had not stated an actionable claim based on defendants' alleged misrepresentations.

The Court then turned to plaintiffs' allegations that defendants deliberately omitted or delayed disclosure of material information relating to certain acquisitions that resulted in dilution of shares.  The Court noted that "silence, absent a duty to disclose, is not misleading under Rule 10(b)-5," and that such a duty arises only if there is a corporate insider trading on confidential information, a statute that requires disclosure, or a corporate statement that is otherwise inaccurate, incomplete, or misleading.  The Court determined that plaintiffs failed to plead a duty pursuant to which NQ was obligated to disclose its acquisitions to investors earlier than it did.  The Court noted that, to the contrary, defendants would have violated securities laws had they made disclosures in the private meetings referenced by plaintiffs, because such private disclosure of the details of NQ's acquisitions to only certain investors would violate SEC Regulation FD, which prohibits selective disclosure.  Adding that plaintiffs had not identified any filings in which the acquisitions should have been, but were not, disclosed prior to NQ's October 2014 disclosure—and that plaintiffs made no allegations that NQ's CEO or Vice President engaged in insider trading—the Court concluded that plaintiffs had not alleged an actionable omission.  The Court thus dismissed plaintiffs' Section 10(b) claims in their entirety. 

Because plaintiffs had failed to allege a primary violation under Section 10(b), the Court dismissed plaintiffs' Section 20(a) control liability claims against NQ's CEO and Vice President.  The Court also denied plaintiffs leave to amend, noting that in their first four complaints, plaintiffs "had more than an adequate opportunity to plead an actionable complaint of securities fraud," and finding that the proposed new allegations would not cure the substantial deficiencies identified in the prior complaints.

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