Miao v. Fanhua, Inc.

442 F.Supp.3d 774

LONG MIAO, individually and on behalf of all others similarly situated, Plaintiff,

v.FANHUA, INC., Chunlin Wang, Peng Ge, and Qiuping Lai, Defendants.

18 Civ. 8183 (PAE)

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

Signed March 2, 2020

Cara Joy David, Jeremy Alan Lieberman, Marc Ian Gross, Pomerantz LLP, New York, NY, for Plaintiff.

Adam Thomas Humann, Kirkland & Ellis LLP, Washington, DC, Matthew Osborn Solum, Alex Stone Zuckerman, Kirkland & Ellis LLP, New York, NY, for Defendant Fanhua, Inc.

Adam Thomas Humann, Kirkland & Ellis LLP, Washington, DC, Matthew Osborn Solum, Kirkland & Ellis LLP, New York, NY, for Defendants Chunlin Wang, Peng Ge, Qiuping Lai.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

In this putative class action arising under the federal securities laws, lead plaintiff Long Miao claims that a Chinese financial services provider's failure to disclose alleged related-party dealings violated federal securities law. In his First Amended Class Action Complaint, Dkt. 27 ("FAC"), Miao claims that Fanhua, Inc. ("Fanhua"), and two of its officers, defendants Chunlin Wang and Peng Ge, made false and misleading statements or omissions regarding Fanhua's alleged undisclosed dealings with defendant Qiuping Lai—a former president and director of Fanhua who remained a principal shareholder of the company during the Class Period.

Miao brings this lawsuit on behalf of all persons (other than defendants) who purchased U.S.-traded securities of Fanhua between April 20, 2018 and January 16, 2019 (the "Class Period"). Miao alleges violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and the corresponding rule of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 ("Rule 10b-5").¹

Pending now are defendants' motions to dismiss the FAC for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the following reasons, the Court grants the motion and dismisses the FAC in its entirety.

I. Background²

A. The Parties

Fanhua—known before December 2016 as CNinsure, Inc. ("CNinsure")—is a financial services provider incorporated in the Cayman Islands, with principal executive offices in China. FAC ¶¶ 2, 19. Through its online platforms and offline sales-and-service network, Fanhua offers a variety of property-and-casualty and life insurance products and services. Id. ¶¶ 2, 36, 42. The company's distribution and service network covers 31 provinces in China and consists of approximately 754 sales and service outlets, 579,000 sales agents, and 1,200 claims adjustors. Id. ¶ 42. Fanhua's American Depositary Shares ("ADSs") are listed on NASDAQ under the symbol "FANH."³ Id. ¶ 19.

The individual defendants are Qiuping Lai, Chunlin Wang, and Peng Ge.

Lai co-founded Fanhua's predecessor entity in 1998 and, between 2004 and 2016, served as its president and as a director. Id. ¶ 22, 35–36. On March 29, 2016, Lai retired from his leadership positions at Fanhua, id. ¶ 23, which was then embroiled in a scandal involving the People's Insurance Company (Group) of China. Id. ¶¶ 4, 23. Thereafter, Lai was no longer an officer or director of Fanhua, but he remained its largest principal shareholder. Id. ¶ 4.

Wang has served as Fanhua's chief executive officer ("CEO") since 2011, as a director on Fanhua's board since 2016, and as chairman of its board since 2017. Id. ¶ 20. Wang joined Fanhua's predecessor entity at its founding in 1998. See id. ¶ 37.

Ge has served as Fanhua's chief financial officer ("CFO") since 2008 and as a director on Fanhua's board since 2016. Id. ¶ 21. Ge joined Fanhua's predecessor entity in 1999. Id. ¶ 38.

Lead plaintiff Miao, an individual shareholder, bought Fanhua ADSs during the Class Period. Id. ¶¶ 1, 18.

B. Fanhua's Alleged Business Activities

Miao alleges that "[d]efendants engaged in a brazen undisclosed scheme whereby Lai used Fanhua's cash and assets for his personal benefit." Id. ¶ 44. Miao alleges three undisclosed schemes, involving: (i) related-party dispositions to Lai; (ii) financial guarantees for investment products that Lai issued; and (iii) an ADS repurchase from Lai in connection with an employee incentive plan.

In support of these allegations, Miao relies almost exclusively on three short-seller reports,⁴ which his FAC incorporates and from which it quotes extensively: (1) an August 27, 2018 report by Seligman Investments, Humann Decl., Ex. 6 (the "Seligman Report"); (2) a January 17, 2019 report published by J Capital Research USA LLC, id. , Ex. 4 (the "JCap Report"); and (3) a February 7, 2019 report by GeoInvesting, id. , Ex. 9 (the "GeoInvesting Report").

1. Fanhua's Alleged Related-Party Dealings with Lai

In 2011, CNinsure acquired 100% equity interests in two insurance agencies, Guangdong Huajie and Dongguan Zhongxin Insurance Agency Co., Ltd. ("Dongguan Zhongxin"), from Chengdu Jingshi Investment Co., Ltd. FAC ¶ 39. The purchase price was approximately 25 million China Yuan Renminbi ("RMB") (equal to about $8 million). Id. Lai—then president and a director of Fanhua's predecessor—was, through a series of corporate entities, the 100% owner of Guangdong Huajie. Id.

In 2016, Fanhua divested Guangdong Huajie and Dongguan Zhongxin. Id. ¶ 45. According to Miao, these transactions were disclosed in Fanhua's 2017 Form 20-F, but Fanhua failed to disclose that Lai was the recipient of these assets at the "bargain basement price[ ]" of RMB 30,712. Id. In fact, the disclosure cited by the FAC states that that price is recited "[i]n thousands," such that the actual consideration Fanhua disclosed receiving was RMB 30,712,000. See Zuckerman Decl., Ex. 14 (April 20, 2018 Form 20-F) ("2017 Form 20-F") at F-31; id. , Ex. 15 (April 19, 2017 Form 20-F) ("2016 Form 20-F") at F-26. In other words, Miao's FAC omitted three zeros from the sale price, and Fanhua, in fact, recognized gain of approximately RMB 3 million on the divestiture. The JCap Report, on which the FAC relies, contained the same error. JCap Rpt. at 32 ("In 2011, the company paid its co-founder and president Lai Qiuping about $7.9 m[illion] for two companies he owned, Guang[dong] Huajie and Dongguan Zhongxin, which Fanhua then divested in 2016 for about $30,000 [to Lai].").⁵

Additionally, in October 2017, Fanhua disposed of 19 property and casualty subsidiaries to the entity Beijing Cheche Technology Co., Ltd. ("Cheche"), for approximately RMB 225.4 million ($34.6 million). Id. ¶ 46. Miao alleges that—despite Fanhua's disclosure in its 2017 Form 20-F that Cheche was a "third party" buyer—Cheche:

is in fact owned or controlled by Lai, as demonstrated by the following: Shenzhen Ruiyuan Investment Company (Limited Partnership), which is an owner of Cheche, was registered at the same address in Shenzhen, China, and at approximately the same time as several Fanhua subsidiaries and at the same address and time as Lai's investment vehicle Chengchuang Shenzhen. Moreover, several Cheche operating entities in Guangzhou, China, share an office with Fanhua entities and one of Lai's companies.

Id. ¶ 47. The JCap Report, on which the FAC relies for the Cheche allegations, further states that "[t]he shared location is not itself proof of a connection; the address accommodates hundreds of companies." JCap Rpt. at 16. Rather, the address is that of a "Shenzhen government agency that handles registration and bookkeeping for companies for a fee." Id. at 17.

2. Fanhua's Repurchase of ADS from Lai

In a June 15, 2018 Form 6-K filed with the SEC, Fanhua disclosed a plan to provide incentive compensation in the form of 15 million Fanhua ADSs⁶ to its key sales personnel (the "521 Development Plan"). FAC ¶¶ 7, 56. Of the 15 million ADSs, Wang, Ge, and certain board members intended personally to purchase 1 million shares of Fanhua's ADS, and the rest would be purchased by a Fanhua Entrepreneurial Fund ("Fanhua Fund"), to which eligible employees could subscribe in connection with the 521 Development Plan. Id. ¶ 58.

Although Fanhua disclosed that 8.5 million of the 15 million ADSs were going to be repurchased from "a principal shareholder," Miao alleges that Fanhua failed to disclose that these 8.5 million ADSs would be repurchased from Lai, id. ¶ 60, representing 85% of Lai's holdings of Fanhua ADS at the time, id. ¶ 61. Fanhua disclosed that the principal shareholder would receive $29.00 per ADS, representing the average closing price of the 30 trading days prior to June 14, 2018, for a total of approximately $246.5 million.⁷ Id.

In short, Miao alleges that "whereas Fanhua presented this stock acquisition plan as intended to fund an employee incentive program, it was in fact a cover for a buyout of most of Lai's Fanhua shares and funneling of a substantial portion of the Company's cash on hand into his coffer." Id. ¶ 62.

3. Fanhua's Alleged Guarantees of Lai's Investment Products

In the "Off-Balance Sheet Commitments and Arrangements" section of the 2017 Form 20-F, Fanhua disclosed that it "ha[s] not entered into any financial guarantees or other commitments to guarantee the payment obligation of third parties." Id. ¶ 48; 2017 Form 20-F at 67. Based entirely on interviews of Fanhua personnel conducted by JCap, Miao alleges that, despite this disclosure, "Fanhua guarantees handsome returns" on "financial products that Lai issues in China to investors." FAC ¶ 49. Miao's allegations as to this scheme are phrased entirely in terms of what "interviewees" stated to JCap on a confidential basis; there is no allegation that Miao or Miao's counsel had any contact with the interviewed personnel. See id. ¶¶ 33–34, 48–55, 64.

According to Miao, four unnamed "longtime Fanhua employees" told JCap "that the Company guarantees Lai's investment products, including guarantees of both principal and returns of between 6.8% and 8.5% to investors" in Lai's funds, id. ¶ 50, such as Chengchuang Shenzhen, "a fund that manages trusts and private-equity funds," id. ¶ 49. These interviewees, otherwise...