Boluka Garment Co. v. Canaan Inc.

547 F.Supp.3d 439

BOLUKA GARMENT CO., LIMITED, et al., individually and on behalf of all others similarly situated, Plaintiffs,

v.CANAAN INC., et al., Defendants.

20-CV-7139 (JPO)

United States District Court, S.D. New York.

Signed July 8, 2021

Jeffrey S. Ratliff, Ransom Gilbertson Martin & Ratliff, LLP, Portland, OR, Jing Chen, Laurence Matthew Rosen, The Rosen Law Firm, P.A., New York, NY, for Plaintiffs Boluka Garment Co., Limited, Hongkou Tang.

Jeffrey S. Ratliff, Ransom Gilbertson Martin & Ratliff, LLP, Portland, OR, Jing Chen, The Rosen Law Firm, P.A., New York, NY, for Plaintiff Phillippe Lemieux.

Daniel Lucas Cantor, O'Melveny & Myers LLP, New York, NY, Jonathan W. Monson, Cable Huston LLP, Portland, OR, William Pao, Pro Hac Vice, William Ka Hing Pao, O'Melveny & Meyers LLP, Meg Kalikman Lippincott, Los Angeles, CA, for Defendant Canaan, Inc.

Audra Jan Soloway, Susanna Michele Buergel, Yahonnes Sadiki Cleary, Paul Weiss, New York, NY, Jonathan W. Monson, Cable Huston LLP, Portland, OR, for Defendant Citigroup Global Markets Inc.

Audra Jan Soloway, Susanna Michele Buergel, Yahonnes Sadiki Cleary, Paul Weiss, New York, NY, for Defendants China Renaissance Securities (Hong Kong) Limited, Galaxy Digital Advisors LLC, Huatai Financial Holdings (Hong Kong) Limited, Tiger Brokers (NZ) Limited, ViewTrade Securities, Inc.

OPINION AND ORDER

J. PAUL OETKEN, District Judge:

Boluka Garment Co., Limited ("Boluka"), and Hongkuo Tang, individually and on behalf of all others similarly situated, bring suit against Canaan Inc., five of its senior executives, and a number of companies involved in underwriting its initial public offering (together, "Defendants"), alleging violations of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Defendants have moved to dismiss the complaint for failure to state a claim. For the reasons that follow, the motion is granted.

I. Background

The following facts, drawn from the amended complaint, are presumed true for the purposes of this motion. (See Dkt. No. 51 ("AC").)

Canaan Inc., a Cayman Islands company headquartered in China, designs and manufactures computer hardware used for mining Bitcoin. (AC ¶ 2.) Between 2016 and 2018, Canaan made three unsuccessful attempts to go public on various Asian stock exchanges, each time abandoning its plans after regulatory scrutiny. (AC ¶¶ 38-41.) Canaan then set its sights on the United States. On November 21, 2019, after filing the relevant paperwork with the U.S. Securities and Exchange Commission, Canaan made an initial public offering of ten million shares on the Nasdaq Global Market. (AC ¶¶ 52, 53.)

On February 20, 2020, a short seller using the pseudonym Marcus Aurelius published an online report accusing Canaan of deceptive business practices. (AC ¶ 8.) In the report, Aurelius claimed that Canaan had inflated its customer base, overstated its financial prospects, and failed to disclose certain related-party transactions between the company and its executives or major shareholders. (See Dkt. No. 56-4.) The day the report was published, the value of Canaan's stock fell more than 6.8 percent. (AC ¶ 8.)

In the wake of the report, Lead Plaintiffs Boluka and Tang ("Plaintiffs") brought this action¹ on behalf of those who bought or otherwise acquired Canaan securities between November 20, 2019, and February 20, 2020, alleging that Defendants omitted material information from Canaan's registration statement—the set of documents a company must file with the SEC before proceeding with a public offering—and seeking remedies under the Securities Act and the Exchange Act. (AC ¶ 1.) In particular, Plaintiffs allege that the registration statement failed to disclose (1) that Yongjie Yao, who held 8.8 percent of Canaan's total shares, also served as a senior executive in charge of Canaan's international sales and marketing; (2) that Grandshores Technology Group Limited ("Grandshores"), a company controlled by Yao, had announced a "strategic cooperation framework agreement" to purchase or distribute Canaan blockchain equipment worth up to $150 million; and (3) that Zhejiang Suanli Network Science and Technology Company Ltd. ("Zhejiang Suanli"), a company controlled in part by two of Canaan's directors, Defendants Jianping Kong and Qifeng Sun, had purchased roughly $149,697 worth of Canaan products between January and April 2017. (AC ¶¶ 5-7.) Defendants have filed a motion to dismiss for failure to state a claim under Federal Rule of Procedure 12(b)(6). (See Dkt. No. 54.)

II. Legal Standard

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ).

Plaintiffs alleging securities fraud claims, however, must satisfy "heightened pleading requirements" to withstand a motion to dismiss. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 99 (2d Cir. 2007). Under Federal Rule of Civil Procedure 9(b), a party alleging fraud "must state with particularity the circumstances constituting" that fraud. This means that the complaint 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." Mills v. Polar Molecular Corp. , 12 F.3d 1170, 1175 (2d Cir. 1993). The particularity requirement of Rule 9(b) applies to claims brought under Section 10(b) of the Exchange Act and Rule 10b–5 promulgated thereunder. Rombach v. Chang , 355 F.3d 164, 170 (2d Cir. 2004). It also applies to claims brought under Section 11 of the Securities Act "insofar as the claims are premised on allegations of fraud." Id. at 171.

III. Discussion

Plaintiffs allege that Defendants violated Section 10(b) and Section 20(a) of the Exchange Act, as well as Section 11 and Section 15 of the Securities Act, by failing to disclose three related-party transactions in their SEC filings. (AC ¶¶ 1, 5-7.)

A. Yao and Grandshores

The Court begins by grouping together two of the three claims: (1) Canaan's failure to disclose shareholder Yao's position as senior executive of Canaan's international sales and marketing, and (2) Canaan's failure to disclose the related-party nature of its dealings with Zhejiang Suanli. (See AC ¶¶ 5, 7.)

1. Section 10(b) of the Exchange Act and Rule 10b–5

In connection with the purchase or sale of a security, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit "mak[ing] any untrue statement of a material fact" or "omit[ting] to state a material fact necessary in order to make the statements made ... not misleading." 17 C.F.R. § 240.10b-5. To state a claim under these provisions, a plaintiff must establish "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or a sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Sci.-Atlanta , 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008).

Defendants argue that Plaintiffs have failed to plead (1) a material omission, (2) scienter, and (3) loss causation. (See Dkt. No. 55 at 28.) The Court begins with the third of these arguments. If Defendants have failed to plead loss causation, the Court need not proceed further. See, e.g. , Citibank, N.A. v. K-H Corp. , 968 F.2d 1489, 1496 (2d Cir. 1992) (affirming dismissal where claim failed to satisfy the loss causation requirement under Section 10(b) and Rule 10b–5); In re Merrill Lynch & Co. Rsch. Reps. Sec. Litig. , 568 F. Supp. 2d 349, 365 (S.D.N.Y. 2008) (dismissing Section 10(b) and Rule 10b-5 claims upon holding that plaintiff failed to plead loss causation).

"Loss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff." Lentell v. Merrill Lynch & Co. , 396 F.3d 161, 172 (2d Cir. 2005) (internal quotation marks and citation omitted); see also Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 345, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) (noting that securities statutes exist "not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause"). To plead loss causation, a plaintiff must "allege not only that its loss was foreseeable, but also that the alleged misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security." In re AOL Time Warner, Inc. Sec. Litig. , 503 F. Supp. 2d 666, 677 (S.D.N.Y. 2007) (internal quotation marks and citation omitted). "In its simplest form, this may be achieved by alleging that the market reacted negatively to a corrective disclosure, which revealed an alleged misstatement's falsity or disclosed that allegedly material information had been omitted." Id. (internal quotation marks and citation omitted). A plaintiff may also plead loss causation by alleging that "a defendant's misstatements or omissions concealed a risk that later materialized to cause the plaintiff's loss." Id.

Here, Plaintiffs’ theory of loss causation flows from an alleged corrective disclosure: the release of the Aurelius report.² In their telling, the report "expos[ed] the problems arising from [Canaan's] related-party transactions," which then caused a roughly 6.8 percent dip in the value of Canaan's stock. (AC ¶ 92.) But the report said nothing about...