In re Shanda Games Ltd. Sec. Litig.

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IN RE SHANDA GAMES LIMITED SECURITIES LITIGATION

No. 1:18-CV-2463-ALC

United States District Court, S.D. New York

March 31, 2022

OPINION AND ORDER

ANDREW L. CARTER, JR. UNITED STATES DISTRICT JUDGE

This lawsuit is a putative class action involving alleged federal securities fraud and insider trading in the context of a merger. Lead Plaintiff David Monk (“Plaintiff) brings this action, individually and on behalf of a class of former stockholders and former owners of American Depository Shares (“ADS”), against Defendants Shanda Games Limited (“Shanda”), Capitalcorp Limited and Capitalhold Limited (together, the “Capital Defendants”), as well as Defendants Yingfeng Zhang (“Zhang”), Li Yao, Lijun Lin, Heng Wing Chan, Yong Gui, Shaolin Liang, and Danian Chen (collectively, the “Individual Defendants”), alleging violations of the Securities and Exchange Act of 1934 (“the Exchange Act”). Defendant Shanda individually, as well as Zhang and the Capital Defendants jointly, move to dismiss the Second Amended Class Action Complaint (the “SAC”) under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. ECF Nos. 90, 95. For the reasons stated herein, the motions to dismiss are hereby DENIED IN PART and GRANTED IN PART.

I. FACTUAL BACKGROUND

Defendant Shanda Games Ltd. (“Shanda” or the “Company”) is a global online video game company incorporated in the Cayman Islands with its principal executive offices in Shanghai, China. SAC ¶¶ 33, ECF No. 72. In 2009 Shanda underwent an initial public offering and listed American Depository Shares (“ADS”) on the NASDAQ and registered those ADS with the Securities and Exchange Commission. Id. ¶ 5. In mid-2013, Shanda started developing a mobile version of one of its most popular computer games, Mir II PC, which is entitled Mir II Mobile. SAC ¶¶ 7. Defendant Yingfeng Zhang (“Zhang”) became CEO of Shanda beginning October 2014 and Chairman of the Board beginning November 2014. SAC ¶ 36.

On April 3, 2015, Shanda announced a proposed merger (the “Transaction”) that would allow the Company to buy all Shanda securities held by unaffiliated holders, with Shanda as the surviving entity, which would allow the Company to go private. Id. ¶ 10. Although the Buyer Group controlled enough votes to execute the merger, the Company was required to file initial and final proxy statements (collectively, the “Proxies”) to allow shareholders to determine whether they wanted to exercise appraisal rights. Shanda subsequently published an initial proxy statement on May 5, 2015, which included summaries of financial projections from March 2014 and March 2015. SAC ¶¶ 11. From December 2014 through August 2015, Shanda made public statements about its optimism for Mir II Mobile. SAC ¶¶ 13-14. On August 3, 2015, Shanda launched Mir II Mobile and Shanda employees, including Zhang, publicly recognized its success. SAC ¶¶ 15-16. On October 13, 2015, Shanda published a final proxy statement that included the same projections from the initial proxy statement. Id. ¶¶ 18-20.

Shareholders approved the merger on November 18, 2015 at the Extraordinary Shareholders Meeting. Id. ¶¶ 22. Defendant Capitalcorp, wholly owned and controlled by Defendant Capitalhold, merged with Shanda as part of the merger. SAC ¶¶ 34-35. Under the merger agreement, Shanda common stock owned by unaffiliated holders (all except the Buyer Group) was effectively sold at $3.55 per share and $7.10 per ADS. Id. ¶¶ 22, 148. A few dissenting shareholders exercised their appraisal rights and sued Shanda, seeking the Grand Court of the Cayman Islands' determination of the fair value of its shares. Id. ¶¶ 23, 24. The Grand Court awarded the dissenters $16.68 per ADS. Id. ¶ 25. This award was partially reversed by the Court of Appeal of the Cayman Islands that determined the fair value of the shares was $12.84 per ADS. Id.

II. PROCEDURAL HISTORY

On September 30, 2019, this Court granted Shanda's Rule 12(b)(6) motion to dismiss the First Amended Class Action Complaint (the “FAC”) (henceforth, the “2019 Order”). ECF No. 57. On September 30, 2020, on a motion for reconsideration, this Court concluded that Plaintiff failed to state a securities fraud or insider trading claim against Shanda (the “2020 Order”). ECF No. 70. Defendants Shanda, Zhang, Capitalcorp, and Capitalhold (“the Moving Defendants”) moved to dismiss for failure to state a claim on June 11, 2021. ECF Nos. 90-92, 95-96. By omnibus brief, Plaintiff opposed on July 30, 2021. ECF No. 100. On August 27, 2021, Moving Defendants filed reply briefs. ECF Nos. 101, 102. The Court considers both motions to dismiss fully briefed.

III. STANDARD OF REVIEW

A. Rule 12(b)(6)

When deciding a motion to dismiss, the Court must “accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the non-moving party.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). However, the Court need not credit “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Claims should be dismissed when a plaintiff has not pleaded enough facts that “plausibly give rise to an entitlement for relief.” Id. at 679. A claim is plausible “when the plaintiff pleads factual content that allows the Court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678 (citing Twombly, 550 U.S. at 556). While not akin to a “probability requirement, ” the plaintiff must allege sufficient facts to show “more than a sheer possibility that a defendant has acted unlawfully.” Id. (citing Twombly, 550 U.S. at 556). Accordingly, where a plaintiff alleges facts that are “ ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.' ” Id. (quoting Twombly, 550 U.S. at 557).

B. Rule 9(b)

Under Rule 8(a) of the Federal Rules of Civil Procedure, pleadings must contain only “a short and plain statement” of the basis for the court's jurisdiction and of the claim showing that the pleader is entitled to relief, and a demand for the relief sought. Fed. R. Civ P. 8(a). However, where, as here, a plaintiff has alleged fraud claims under § 10(b) of the Exchange Act, the complaint is subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Rule 9(b) requires that the complaint “state with particularity the circumstances constituting fraud or mistake.” To satisfy the particularity requirement, a complaint must “(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.” Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, 783 F.3d 395, 403 (2d Cir. 2015).

The PSLRA holds private securities plaintiffs to an even more stringent pleading standard. Under the PSLRA, a plaintiff must “(1) specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading; and (2) state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (internal citation and quotation marks omitted) (quoting 15 U.S.C. § 78u-4(b)). To determine that an inference of scienter is strong, the court must decide whether “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.

IV. ANALYSIS

The Court granted Plaintiff limited leave to file the SAC to cure deficiencies identified in its 2019 and 2020 Orders ruling on Defendant Shanda's motion to dismiss the FAC. This time around, Plaintiff specifically seeks to remedy two deficiencies: (1) inadequate pleading of reliance under a fraud-on-the-market theory, and (2) failure to sufficiently allege insider trading. Pl.'s Opp. at 10. On reliance, the SAC incorporates expert analysis from Mr. Chad Coffman to raise allegations that Plaintiff traded his ADS in an efficient market. On insider trading, he proffers new factual matter to attempt to state claims under Section 10(b) and 20A. Id.

Shanda, Zhang, and the Capital Defendants argue that the SAC fails to state a claim for relief under the federal securities laws for several reasons. First, the new allegations fail to plead reliance. Second, the SAC does not adequately plead loss causation. Third, there are no properly pleaded actionable misstatements or omissions to plead fraud, and the new insider trading allegations remain insufficient because no defendant purchased ADS from Plaintiff. Fourth and finally, Defendants assert a defense under Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010).

A. Law of the Case

As a preliminary matter, the Parties disagree whether this Court's 2019 and 2020 rulings on Shanda's motion to dismiss the FAC constitute law of the case. The law of the case doctrine “forecloses re-litigation of issues expressly or impliedly decided by the [ ] court.” United States v. Quintieri, 306 F.3d 1217, 1229 (2d Cir. 2002) (internal citations omitted). Absent “cogent or compelling reasons, ” the law of the case controls. See Johnson v. Holder, 564 F.3d 95, 99-100 (2d Cir. 2009) (internal quotations omitted). “[W]hen a court decides upon a rule of law, that decision should continue to...