Enrique Afr. v. Jianpu Tech.

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ENRIQUE AFRICA, individually and on behalf of all other similarly situated, Plaintiff, v. JIANPU TECHNOLOGY INC. et al., Defendant.

No. 21-CV-1419 (JMF)

United States District Court, S.D. New York

August 23, 2023

OPINION AND ORDER

JESSE M. FURMAN, UNITED STATES DISTRICT JUDGE

In this putative class action, Lead Plaintiff Enrique Africa brings securities fraud claims against Jianpu Technology Inc. (“Jianpu” or the “Company”), and two of Jianpu's executives, David Ye and Yilu (Oscar) Chen (the “Individual Defendants”). Africa alleges that, between May 29, 2018, and February 16, 2021, Defendants engaged in an unlawful scheme to inflate Jianpu's stock price and made material misstatements and omissions regarding the Company's performance and associated risks, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission (“SEC”) Rule 10b-5 (“Rule 10b-5”), 17 C.F.R. § 240.10b-5. In a prior Opinion and Order, familiarity with which is presumed the Court granted Defendants' motion to dismiss the First Amended Complaint without prejudice, finding that - among other issues - Africa's failure to plead scienter required dismissal of all his claims. Africa v. Jianpu Tech. Inc. (“Africa I”), 2022 WL 4537973 (S.D.N.Y. Sept. 28, 2022) (ECF No. 61). Thereafter Africa filed the Second Amended Complaint, adding allegations in an effort to cure the defects the Court identified in the First Amended Complaint. Defendants now move to dismiss again, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that, among other things, Africa still does not establish scienter. The Court agrees. Thus, and for the reasons that follow Defendants' motion is GRANTED, and the Second Amended Complaint is dismissed.

BACKGROUND

The following facts are (unless noted) taken from the Second Amended Complaint, documents it incorporates, and matters of which the Court may take judicial notice; they are construed in the light most favorable to Africa. See, e.g. Kleinman v. Elan Corp., PLC, 706 F.3d 145, 152 (2d Cir. 2013); ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (stating that a court may consider “legally required public disclosure documents filed with the SEC”).

Jianpu is a company incorporated in the Cayman Islands with its principal executive offices in China. ECF No. 64 (“SAC”), ¶ 19. Jianpu's American Depositary Shares trade on the New York Stock Exchange. Id. Jianpu operates an online platform, Rong360, that connects consumers with financial service providers in China. Id. ¶¶ 24-25. Rong360 offers three types of services: (1) loan recommendation services (the “Loan Segment”), (2) credit card recommendation services (the “Credit Card Segment”), and (3) advertising and marketing services (the “Advertising Segment”). Id. ¶¶ 25-28. In the First Amended Complaint, Africa alleged securities violations with respect to each of these three segments, but he now alleges violations only with respect to the Credit Card Segment and the Advertising Segment. See ECF 70 (“Pl.'s Opp'n”), at 2 n.4. The Court will summarize each set of allegations.

A. Credit Card Segment

First, Africa alleges that Jianpu made false or misleading statements relating to the inflation of its Credit Card Segment revenue through “sham transactions” - thereby allowing the company to appear to hit its revenue targets despite decreasing performance in its Loan Segment. SAC ¶¶ 49-50. In quarterly earnings calls between the first quarter of 2018 and the last quarter of 2019, the Individual Defendants reported the rapid growth of their Credit Card Segment, which generates revenue by recommending credit cards to consumers. SAC ¶¶ 45, 46. For example, they stated that, in the first quarter of 2018, credit card volume grew approximately 400% as compared to the same period the prior year; it then grew approximately 6.7% in the second quarter of 2018. Id. ¶¶ 133, 135. During the third quarter of 2018, Jianpu announced that credit card volume increased by approximately 81.8% as compared to the same period the prior year, and the average fee per credit card increased by 47.7%. Id. ¶ 139. This reported growth trend continued through the fourth quarter of 2019. Id. ¶¶ 52, 84, 142, 156, 161, 167, 173.

In several earnings statements, the Company noted that the revenues it had received from credit card recommendation services increased “due to the increase in both credit card volume and average fee per credit card” and that it was continuing to see “very sharp growth momentum” in its Credit Card Segment, “with 25 credit card banks” on the Rong360 platform. Id. ¶¶ 142, 145, 156. During the earnings call for the fourth quarter of 2018, Chen stated that the Segment comprised about 40% of the Company's total revenue. Id. ¶ 151. During the earnings call for the first quarter of 2019, Ye stated that the Company did not “have any concern about the credit card business growth for the rest of this year.” Id. ¶ 42. Similarly, during the earnings call for the second quarter of 2019, Ye stated that the growth of its Credit Card Segment was “outpacing peers,” despite a “relatively slower” credit card market. Id. ¶ 52.

On April 30, 2020, Jianpu announced that it would be filing its 2019 Form 20-F forty-five days late, relying on an SEC Order permitting public companies to delay filing if they could not meet the deadlines due to COVID-19. Id. ¶ 175. Instead of filing a late Form 20-F, however, the Company filed a Notification of Late Filing on June 15, 2020, informing the SEC that the Company's Audit Committee was “in the process of conducting an internal review of certain matters relating to transactions between the Company and third-party business entities.” Id. ¶ 54. The same day, Jianpu's share price fell 9.5%. Id. ¶ 56.

Jianpu released the results of its internal review on February 16, 2021. Id. ¶ 59. According to the disclosure, the review found:

that certain transactions involved third-party agents (including both upstream agents and downstream suppliers) with undisclosed relationships, and some transactions lacked business substance (“questionable transactions”). As a result, certain revenue and associated expenses were inflated or inaccurately recorded in the financial statements. Evidence suggested that certain employees from the Credit Card [Business Unit] may have known about or been involved in certain of the questionable transactions that resulted in inflated sales commissions to such employees. In relation to the questionable transactions, the Review found that certain employees improperly altered supporting documents that were provided to the Company's external auditor.

Id. The Company further stated that the review had concluded that no member of senior management had known about the questionable transactions other than one business unit head, who had been terminated. Id. Jianpu announced that it would be restating its 2018 financials and that “investors must exercise caution” with respect to its 2019 financial statements. Id. ¶ 60. Following this announcement, share prices fell 13%. Id. ¶ 61.

On April 30, 2021, Jianpu finally filed its 2019 Form 20-F and restated the Credit Card Segment's 2018 revenue as RMB 61.1 million less than the Company had previously disclosed and its 2019 revenue as RMB 163.7 million less. Id. ¶¶ 62, 83. The restated revenue meant that Jianpu did not actually meet its revenue targets for the last three quarters in 2019. Id. ¶ 88. The restatement also resulted in a decrease in Jianpu's expenses (reported under the “sales and marketing” line item) of RMB 61.1 million in 2018 and RMB 153.0 million in 2019. ECF 69, Ex. E (“2019 Form 20-F”), at 105, F-14. The 2019 Form 20-F further disclosed material weaknesses in Jianpu's internal controls related to three areas. SAC ¶ 62. Specifically, the Company stated that it lacked “effective controls . . . to prevent and detect” misstatements related to the contribution of “third party agents” to the Credit Card Segment, which resulted in “overstated revenue, cost[s] and expenses” in its financial statements for the segment. Id. Separately, it described a “failure to design and implement controls . . . related to pre-approval of and complete and accurate disclosures of related party transactions,” resulting in “inaccurate disclosures” in connection with certain 2018 related-party transactions. Id. Finally, Jianpu noted its “lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S. GAAP to design and implement formal period-end financial reporting policies and procedures” necessary to comply with SEC financial reporting requirements. Id.

In the Second Amended Complaint, Africa adds several new allegations concerning the Credit Card Segment. First and most significantly, Africa newly alleges that related-party transactions with Beijing Rongdiandian Information Technology Co., Ltd. (“RDD”), which is 40% owned by Defendant Ye's wife, led to the restatement. Id. ¶¶ 63, 69-73, 78. More specifically, Africa alleges that “Related Party A,” which was identified in the Company's 2019 Form 20-F as a related party that charged Jianpu for advertising and marketing, is RDD. Id. ¶ 78. Africa concludes that Related Party A is the related party “that prompted the restatement” because, for example, the Company's description of the internal control weakness that allowed the sham transactions to go unnoticed and its description of Related Party A's operations both include the word “agents.” Id. ¶ 70. Africa alleges that without the sham revenue generated from transactions with RDD, Jianpu would not have hit its revenue targets in 201...