Wandel v. Jing Gao

590 F.Supp.3d 630

Katherine WANDEL, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.Jing GAO, Derek Boyang Shen, Yan Cui, Wenbiao Li, Erhai Liu, Xian Chen, William Wang, Gang Ji, Edwin Fung, Jianping Ye, Jason Zheng Zhang, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Tiger Brokers (NZ) Limited, US Tiger Securities, Inc., Cogency Global Inc., Richard Arthur and Phoenix Tree Holdings Limited, Defendants.

1:20-cv-03259 (PAC)

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

Signed March 14, 2022

Michael Ira Fistel, Jr., Johnson Fistel, LLP, Marietta, GA, Ralph M. Stone, Stone Law Group PLLC, New York, NY, Avital Malina, Joseph Frank Russello, Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiff.

Michael James Maloney, Felicello Law P.C., New York, NY, for Defendant Wenbiao Li.

Adam Selim Hakki, Daniel Craig Lewis, Shearman & Sterling LLP, New York, NY, for Defendants Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, Tiger Brokers (NZ) Limited, US Tiger Securities, Inc.

Joanna Andrea Diakos, K&L Gates LLP, New York, NY, for Defendants Cogency Global Inc., Richard Arthur.

ORDER & OPINION

PAUL A. CROTTY, United States District Judge This securities case is brought by shareholders of Phoenix Tree Holdings, Limited ("Phoenix Tree" or the "Company"), a residential rental company based in China and with operations in Wuhan. In January 2020—on the cusp of the coronavirus pandemic—Phoenix Tree conducted an Initial Public Offering ("IPO") on the New York Stock Exchange. Plaintiffs allege the IPO documents misled investors about the effect of the pandemic, as well as other financial woes, on the Company's business.

Although many of the defendants (including the Company itself) are not active in this case,¹ two groups of defendants—the Underwriter Defendants and the Cogency Defendants—have moved to dismiss.² For the reasons stated below, the Court GRANTS the motions to dismiss without prejudice and with leave to amend.

BACKGROUND

The following factual allegations are taken from the Amended Complaint ("AC"), ECF No. 32, as well as statements incorporated by reference to the Amended Complaint and public disclosure documents filed with the Securities and Exchange Commission ("SEC"). See Gamm v. Sanderson Farms, Inc. , 944 F.3d 455, 462 (2d Cir. 2019).³ The Court presumes these allegations are true for purposes of these motions to dismiss. See id.

I. Phoenix Tree's Business

Phoenix Tree is a Cayman Islands company that manages and leases apartments in China. AC ¶¶ 2, 14, 32. These apartments are primarily "co-living platforms" where multiple tenants rent individual rooms while sharing common areas such as kitchens and bathrooms. Id. ¶¶ 33, 36, 38. Phoenix Tree does not own the apartments; rather, it leases them from property owners on a long-term basis, relying on outside financing and advance payments from tenants. Id. ¶ 44. It then generates revenue from tenant rents and service fees. Id. ¶ 40. Phoenix Tree's described this triangle-like financing arrangement to investors in the following way:

We provide flexible payment options to our residents .... They may choose to prepay rent on an annual, semi-annual or quarterly basis. We also cooperate with licensed financial institutions that offer rent financing to them. Once a resident opts for rent financing, we will connect the resident with a financing institution we cooperate with. The financial institution will perform a credit assessment on the resident, and if approved, will communicate financing terms and enter into financing agreements with the resident. To ensure proper use of the funds, the financial institutions will make upfront payment to us, and the residents will pay back the loan to the financial institutions in monthly installments.... In the event of the early termination of a resident's lease or a resident's default on repayment of monthly installments, we are required to return the upfront payment for the remaining lease term to the relevant financial institution.

Decl. of Adam J. Goldstein, ECF No. 58 ("Goldstein Decl."), Ex. 1 (the "Registration Statement/Prospectus") at ECF pagination 85.

By September 2019, Phoenix Tree operated over 400,000 apartment units in thirteen Chinese cities. AC ¶ 36. Just three months later, that number had increased by over 38,000 units. Id. ¶ 36. Phoenix Tree operated in Wuhan, "where a portion of its 5,000-plus employees worked." Id. ¶ 3; see also id. ¶ 128 (referring to Wuhan as "a significant operational hub for the Company's business"). Wuhan was the sixth city that Phoenix Tree offered apartment units in. Id. ¶ 66. Although the Company had entered the Wuhan apartment market by the end of 2017, it is not clear from the Amended Complaint how many apartments Phoenix Tree controlled in that city. See id. ¶ 37.

II. The IPO Process

Phoenix Tree conducted an IPO on the New York Stock Exchange in January 2020, after beginning the process in August 2019. AC ¶ 52. The SEC declared Phoenix Tree's registration statement to be effective on January 16, 2020. Id. ¶ 63. The next day, the Company filed its final prospectus, which incorporated the registration statement (together, the "Offering Documents"). Id. ¶ 64. It continued to amend the Offering Documents until the day before the SEC declared them effective. Id. ¶ 59.

As is typical, the Offering Documents provided a rosy outlook on the Company. Phoenix Tree touted its "big data platform," which the Company employed to analyze a "vast amount of internally-generated data from [its] day-to-day operations, as well as additional rental market-related data and demographic data from public and third-party sources." AC ¶¶ 45–46. The Offering Documents also highlighted the strong demand and "enormous growth potential for co-living platforms in China." Id. ¶¶ 49–50.

Phoenix Tree's IPO opened on January 17, 2020—the same day the Offering Documents were issued in full. AC ¶ 63. That morning, Phoenix Tree executives rang the New York Stock Exchange's opening bell after arriving from China. Id. ¶ 27. Phoenix Tree ultimately sold 9.6 million American Depositary Shares ("ADS") during the IPO, which closed five days later on January 22, 2020. Id. ¶¶ 1, 14, 34, 64. At the price of $13.50 per share, the Company made approximately $128.4 million from the IPO. Id. ¶ 64.

Both Plaintiffs in this case purchased their Phoenix Tree ADS on January 17, 2020: the first day of the IPO. AC ¶ 13.

III. Alleged Omissions in the Offering Documents

Plaintiffs have identified four sets of allegedly misleading omissions from the Offering Documents.

A. Coronavirus Risks

The Offering Documents included a "risk factor" that Phoenix Tree's "business could [ ] be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics," noting that "operations could be disrupted" if employees were infected and financial performance could decline if the Chinese economy was affected. AC ¶ 125. The Offering Documents failed to refer specifically to COVID-19. Id. ¶¶ 128, 131.

That omission is central to Plaintiffs’ claims. They allege that by January 16, 2020 (when the Offering Documents became effective) and "certainly by January 22, 2020" (when the IPO ended), Phoenix Tree "had enough information to know that China—and Wuhan, in particular—was already under siege by the coronavirus, and that it was reasonably likely to have a material adverse effect on the Company's operations and revenues." AC ¶¶ 128–29. In support of this claim, the Amended Complaint presents a timeline of the pandemic in January 2020, including the onset of international travel restrictions and advisories in Taiwan, Hong Kong, and the United States Embassy in Beijing, see id. ¶¶ 69, 71–81, 83, and domestic controls in Wuhan, see id. ¶¶ 84–85, 90, 92. For example, by January 12, "local hospital respiratory wards" in Wuhan "were already reaching maximum capacity." Id. ¶ 86. By January 16, Chinese health officials had confirmed 41 cases of the new virus. See Goldstein Decl., Ex. 15, Wang Xiaodong, Wuhan Intensifies Monitoring of Virus , CHINA DAILY GLOBAL (Jan. 16, 2020); see also COVID-19 and China: A Chronology of Events (December 2019-January 2020) , CONG. RES. SERV. 30 (last updated May 13, 2020), https://crsreports.congress.gov/product/pdf/r/r46354 (providing the same statistic of 41 cases, and noting that Wuhan authorities had not reported any new cases in two weeks).⁴ Human-to-human transmission had not yet been confirmed. See id. But by January 20, there were "over 280 reported coronavirus cases, with 278 in China—258 of which were from Wuhan alone." AC ¶ 89.

In the immediate days after the IPO ended on January 22, the coronavirus situation in China escalated dramatically. On January 22, China announced it would place the 11 million residents of Wuhan on lockdown the next day. AC ¶¶ 93, 127. On January 23, China increased the lockdown to encompass the larger region around Wuhan, bringing the total number of people subject to the lockdown to 25 million.

Id. ¶ 94. A travel ban on January 24 affected 41 million people and prompted Lunar New Year celebrations to be cancelled. Id. ¶ 95. About one week after the IPO ended, China had reported over 10,000 cases of COVID-19. Id. ¶ 96. By January 30, the World Health Organization had announced a global health emergency.⁵

The pandemic, of course, ended up having a major effect on Phoenix Tree's business. In post-IPO filings in March and April 2020, the Company revised its "Recent Developments" section to "extensively" describe the impact of the pandemic and "updat[e] its risk factors to address the virus." AC ¶¶ 105, 107–110. Over the first quarter of 2020, operating expenses increased, in part because of the early termination of rental leases due to COVID-19. Id. ¶ 111.

B. Rise in Renter Complaints

Plaintiffs’...