Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd. ( 2021 )


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  • 20–3074
    Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.
    In the
    United States Court of Appeals
    FOR THE SECOND CIRCUIT
    AUGUST TERM 2020
    No. 20-3074
    ALTIMEO ASSET MANAGEMENT AND ODS CAPITAL LLC,
    INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,
    Plaintiffs-Appellants,
    v.
    QIHOO 360 TECHNOLOGY CO. LTD., ERIC X. CHEN,
    Defendants-Appellees,
    HONYI ZHOU, XIANGDONG QI,
    Defendants. *
    On Appeal from the United States District Court
    for the Southern District of New York
    ARGUED: JUNE 3, 2021
    DECIDED: NOVEMBER 24, 2021
    Before:         CALABRESI, POOLER, and MENASHI, Circuit Judges.
    *   The Clerk of Court is directed to amend the caption as set forth above.
    Plaintiffs-Appellants Altimeo Asset Management and ODS
    Capital LLC brought this putative class action on behalf of investors
    who traded Qihoo 360 Technology securities between December 18,
    2015, and July 15, 2016. The proxy materials given to the investors
    explained that the company was being taken private, that there were
    no “current plans, proposals or negotiations” for an “extraordinary
    corporate transaction,” and that in the future, the company “may
    propose or develop plans and proposals” to relist. The investors
    agreed to sell their securities, and sixteen months after the company
    was taken private, it was announced that it would be relisted in the
    Chinese public market. The investors sued Qihoo 360 Technology Co.
    Ltd. and its controlling officers, alleging that the defendants-appellees
    violated the Exchange Act by, among other things, deceiving
    investors about the plan to relist the company. The district court
    dismissed the complaint, holding that the investors failed adequately
    to allege a material misstatement or omission of fact. Because the
    allegations in the complaint were sufficient to survive a motion to
    dismiss on that ground, we vacate the dismissal and remand to the
    district court for further proceedings.
    JEREMY A. LIEBERMAN (Michael Grunfeld, on the brief),
    Pomerantz LLP, New York, NY, for Plaintiffs-Appellants.
    DAVID KISTENBROKER (Joni Jacobsen, Angela Liu, Brian
    Raphel, on the brief), Dechert LLP, Chicago, IL, for
    Defendants-Appellees.
    2
    20–3074
    Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.
    MENASHI, Circuit Judge:
    In this case, we must decide whether the appellants,
    representing a putative class of investors, plausibly alleged a
    misstatement or omission of material fact sufficient to state a claim for
    securities fraud and therefore to survive a motion to dismiss. The
    appellants claim that the appellees represented to shareholders that
    there were no plans to relist the company following a shareholder
    buyout, when in fact the company had such a plan at the time of the
    buyout. Usually, to survive a motion to dismiss a complaint need only
    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 (2007). However,
    “[f]or complaints alleging securities fraud, we apply heightened
    pleading requirements imposed by Federal Rule [of Civil Procedure]
    9(b) and the [Private Securities Litigation Reform Act].” In re
    Synchrony Fin. Sec. Litig., 
    988 F.3d 157
    , 166 (2d Cir. 2021). The district
    court considered the sources and contents of the pleaded facts, and it
    held that the appellants’ complaint did not meet those requirements.
    We disagree. We hold that the appellants adequately alleged a
    misstatement or omission of material fact. In the complaint, the
    appellants included facts from which we can infer that, in order for
    the company to have been relisted when it was, the appellees must
    have been planning to relist at the time of the shareholder vote. The
    appellants also included references to news articles indicating that,
    before the shareholder vote, the appellees were already planning to
    relist the company. We therefore vacate the district court’s dismissal
    of the appellants’ claim and remand for further proceedings.
    BACKGROUND
    “We review a district court’s grant of a motion to dismiss de
    novo, accepting as true all factual claims in the complaint and drawing
    all reasonable inferences in the plaintiff’s favor.” Henry v. County of
    Nassau, 
    6 F.4th 324
    , 328 (2d Cir. 2021) (internal quotation marks
    omitted). We therefore rely on the facts as alleged in the complaint in
    deciding this appeal.
    I
    Appellee Qihoo 360 Technology Co. Ltd. (“Qihoo”) is an
    internet company, incorporated under the laws of the Cayman
    Islands and headquartered in Beijing. It was founded by Hongyi
    Zhou and Xiangdong Qi; Zhou served as the chairman and chief
    executive officer of Qihoo, while Qi served as its president and a
    director. 1 In 2011, Qihoo listed its American depository shares on the
    New York Stock Exchange. Zhou and Qi owned Qihoo securities
    through their holding vehicles Global Village Associates Limited and
    Young Vision Group Limited, respectively.
    In May 2015, Zhou discussed with two investment funds the
    possibility of taking Qihoo private. He also discussed the possibility
    with Qi. On June 17, Zhou—along with four investment funds, Global
    Village, Young Vision, and other investors (the “Buyer Group”)—
    provided Qihoo’s board with a proposal to acquire all outstanding
    shares not owned by the board (the “Merger”). The proposal
    prompted the board to form a Special Committee chaired by director
    Eric Chen, who is also an appellee in this case. The Special Committee
    retained J.P. Morgan Securities (Asia Pacific) Limited to evaluate the
    1The complaint named Zhou and Qi as defendants, but they were never
    successfully served.
    4
    proposal. Ultimately, J.P. Morgan gave the Special Committee its
    opinion that the proposal was fair, and in December 2015 the Special
    Committee “expressly adopted” J.P. Morgan’s “analyses and
    opinion.” J. App’x 403, 405. The Special Committee and the board
    approved the Merger, and the board recommended that the
    shareholders approve it as well. On December 18, 2015, Qihoo
    executed the Merger with the Buyer Group.
    The shareholders still had to vote on the Merger for it to be
    consummated. In anticipation of the shareholder vote on the Merger,
    Qihoo     published   proxy    statements,   amended      three   times
    (collectively, the “Proxy Materials”). The Proxy Materials stated that
    “[u]pon the completion of the Merger, the Surviving Company will
    become a private company beneficially owned solely by the Buyer
    Group.” Id. at 754. The documents also stated that, “except as set forth
    in this proxy statement, the Buyer Group does not have any current
    plans, proposals or negotiations that relate to or would result in an
    extraordinary corporate transaction involving the Company’s
    corporate structure, business, or management, such as a merger,
    reorganization, liquidation, relocation of any material operations, or
    sale or transfer of a material amount of the Company’s assets.” Id. at
    758. The Proxy Materials further stated that, “subsequent to the
    consummation of the Merger, the Surviving Company’s management
    and Board … may propose or develop plans and proposals, …
    including the possibility of relisting the Surviving Company or a
    substantial part of its business on another internationally recognized
    stock exchange.” Id. The Merger was approved with 99.8 percent of
    the votes cast at the shareholder meeting, and it was closed on July
    15, 2016. The outstanding shares were purchased for $9.4 billion.
    5
    After the Merger, Qihoo spun off its main businesses into 360
    Technology Co. Ltd. On November 2, 2017, SJEC—an elevator-
    manufacturing company listed on the Shanghai Stock Exchange—
    “announced that it would be conducting a backdoor listing,” that is,
    a reverse merger, with 360 Technology Co. Ltd. Id. at 419. About four
    months later, on February 28, 2018, the necessary asset restructuring
    was completed and Qihoo shares effectively began trading on the
    Shanghai Stock Exchange. By the end of the first trading day, Qihoo
    had a market capitalization of $62 billion.
    II
    Altimeo Asset Management (“Altimeo”) is a portfolio
    management company based in France. ODS Capital LLC (“ODS”) is
    a Florida limited liability company with its primary office in Jupiter,
    Florida. Both Altimeo and ODS, the appellants in this case, traded
    Qihoo securities during the period from December 2015 to June 2016.
    In August 2019, Altimeo and ODS, on behalf of themselves and
    similarly situated plaintiffs, filed a putative class action complaint in
    the U.S. District Court for the Central District of California. The
    complaint alleged that Qihoo, Zhou, Qi, and Chen violated § 10(b),
    § 20(a), and § 20A of the Exchange Act, as well as SEC Rule 10b-5. The
    complaint alleged that the Buyer Group had a plan to relist Qihoo in
    the Chinese capital market at the time of the Merger and that the
    financial projections the appellees provided to the Buyer Group
    differed from the projections provided in the Proxy Materials.
    Because the appellants did not know of the plan to relist or these more
    optimistic projections, they sold their securities at “artificially
    deflated prices.” J. App’x 500.
    6
    To support its allegations, the complaint refers to several
    sources. It refers to a confidential witness who “worked in Qihoo’s
    Public Relations department” from 2014 to 2017 and “reported to a
    senior editor in the department.” Id. at 435. Among other things, the
    witness claims that, in mid-2015, the witness “attended a department
    meeting where Defendant Qi directed the attendees that they needed
    to keep a low profile concerning the relisting plan and should ‘not
    release this information outside the company.’” Id. at 436. The
    complaint also incorporates news articles in Chinese publications
    from November and December 2015 in which the authors report that
    the privatization plan Qihoo distributed to the Buyer Group included
    plans to relist the company. And the complaint further alleges that
    “[i]t typically takes companies at least a full year on the quickest
    possible timeline, and usually longer, from the time they first start to
    consider a backdoor listing until they reach agreement with a shell
    company to conduct a reverse merger.” Id. at 422-23. 2 Moreover, the
    complaint states that “Qihoo’s fundamental restructuring of its
    businesses was particularly complex and would have required a
    significant amount of time to complete following the Merger.”
    J. App’x 424.
    The case was transferred to the U.S. District Court for the
    Southern District of New York on October 30, 2019. The appellees
    2 The complaint lists eight distinct steps: “[h]iring a financial advisor (or
    investment bank) and a legal advisor”; “[i]dentifying potential shell
    companies”; “[r]eaching a preliminary agreement with a shell company”;
    “[c]onducting auditing and compliance work”; “[b]oth sides to the
    transaction performing due diligence on each other”; “[c]onducting
    regulatory assessments”; “[n]egotiating the transaction terms”; and
    “[c]onducting corporate restructurings.” J. App’x 423.
    7
    filed a motion to dismiss for failure to state a claim under Federal Rule
    of Civil Procedure 12(b)(6). The district court granted the motion,
    holding that the complaint “does not adequately allege any material
    misrepresentations or omissions by defendants.” Altimeo Asset Mgmt.
    v. Qihoo 360 Tech. Co. Ltd., No. 19-CV-10067, 
    2020 WL 4734989
    , at *8
    (S.D.N.Y. Aug. 14, 2020). In particular, the district court held that the
    complaint did not adequately plead “that defendants, as of the
    Merger, had in place a concrete plan to relist Qihoo” as opposed
    merely “to envisioning a possible future relisting.” Id. at 17.
    Altimeo and ODS now appeal.
    DISCUSSION
    We review the district court’s dismissal of a complaint de novo.
    Synchrony Fin. Sec. Litig., 988 F.3d at 166. The appellants’ complaint
    contains three counts. Count I alleges that the appellees are liable for
    false or misleading statements in violation of § 10(b) of the Exchange
    Act and SEC Rule 10b-5. Count II claims that Qihoo, Zhou, and Qi
    traded Qihoo securities while in possession of insider information in
    violation of § 20A of the Exchange Act. Finally, Count III asserts that
    Zhou, Qi, and Chen violated § 20(a) of the Exchange Act as
    controlling persons of Qihoo during the time Qihoo violated § 10(b).
    The district court dismissed the complaint in its entirety. We address
    each count in turn.
    I
    First, we consider the appellants’ claim under § 10(b) and Rule
    10b-5. Section 10(b) provides that it is unlawful “[t]o use or employ,
    in connection with the purchase or sale of any security registered on
    a national securities exchange or any security not so registered, … any
    manipulative or deceptive device.” 15 U.S.C. § 78j(b). Rule 10b-5
    8
    implements that statute by prohibiting “mak[ing] any untrue
    statement of a material fact or [omitting] to state a material fact
    necessary in order to make the statements made, in the light of the
    circumstances under which they were made, not misleading, … in
    connection with the purchase or sale of any security.” 
    17 C.F.R. § 240
    .10b-5. The appellants allege that four groups of statements
    violate those provisions: (1) “statements throughout the Proxy
    Materials stating clearly that there were no plans in place for …
    relisting Qihoo on a Chinese stock exchange”; (2) “statements
    throughout the Proxy Materials stating clearly that there were no
    alternatives to the Merger that would be more beneficial” to
    shareholders; (3) “statements concerning the fairness of the Merger”;
    and (4) statements “[c]oncerning the [r]easons for the Merger.”
    J. App’x 448-49.
    To state a claim for relief under § 10(b) and Rule 10b-5, “a
    plaintiff must allege that the defendant (1) made misstatements or
    omissions of material fact, (2) with scienter, (3) in connection with the
    purchase or sale of securities, (4) upon which the plaintiff relied, and
    (5) that the plaintiff’s reliance was the proximate cause of its injury.”
    Setzer v. Omega Healthcare Invs., Inc., 
    968 F.3d 204
    , 212 (2d Cir. 2020)
    (quoting ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 
    493 F.3d 87
    , 105 (2d
    Cir. 2007)). In addition, because such a claim sounds in fraud, the
    plaintiff “must state with particularity the circumstances constituting
    fraud.” Fed. R. Civ. P. 9(b); see also 15 U.S.C. § 78u-4(b)(1) (“[I]f an
    allegation regarding the [misleading] statement or omission is made
    on information and belief, the complaint shall state with particularity
    all facts on which that belief is formed.”).
    The district court held that the appellants failed adequately to
    allege the first element of a Rule 10b-5 claim—specifically, the
    9
    complaint     “[did]      not   adequately      allege    any     material
    misrepresentations or omissions by defendants.” Altimeo Asset Mgmt.,
    
    2020 WL 4734989
    , at *8. The district court considered the appellants’
    allegation that, at the time the Proxy Materials were sent to
    shareholders, “the Buyer Group already planned to relist Qihoo at a
    far-higher valuation in China post-transaction.” 
    Id.
     (internal
    quotation marks omitted). But the district court disregarded the
    confidential witness’s allegations as unreliable, and it found that the
    news articles did not describe “a concrete plan to relist”—that is, the
    articles did not provide the “terms, participants, profitability, or
    mechanics” of the alleged plan. Id. at *16. The district court therefore
    dismissed the appellants’ claim under § 10(b) and Rule 10b-5.
    We disagree that the appellants failed adequately to allege any
    material misrepresentations or omissions. Although pleading
    standards are heightened for securities fraud claims, “we must be
    careful not to mistake heightened pleading standards for impossible
    ones.” Synchrony Fin. Sec. Litig., 988 F.3d at 161. “In considering a
    motion to dismiss a [§] 10(b) action, we must accept all factual
    allegations in the complaint as true and must consider the complaint
    in its entirety.” Slayton v. Am. Express Co., 
    604 F.3d 758
    , 766 (2d Cir.
    2010). We “draw all reasonable inferences in favor of the plaintiff,”
    and “dismissal is appropriate only where appellants can prove no set
    of facts consistent with the complaint that would entitle them to
    relief.” Meyer v. JinkoSolar Holdings Co., 
    761 F.3d 245
    , 249 (2d Cir. 2014)
    (alteration omitted).
    The    appellants     adequately    alleged   misstatements     and
    omissions on the part of the appellees. The appellants allege in the
    complaint that, according to “[a]n expert in Chinese and United States
    M&A and capitals market transactions,” it “typically takes companies
    10
    at least a full year on the quickest possible timeline, and usually
    longer, from the time they first start to consider a backdoor listing
    until they reach agreement with a shell company to conduct a reverse
    merger.” J. App’x 422-23. The complaint goes on to list the multiple
    steps required to perform a backdoor listing. See supra note 2.
    Additionally, the appellants provide two news articles from 2015
    which report that a privatization plan was provided to the Buyer
    Group that involved relisting the company on the Chinese stock
    market. J. App’x 422, 424. We can infer from these allegations, taken
    together, that the statement in the Proxy Materials that “the Buyer
    Group does not have any current plans” to relist Qihoo—as well as
    its omission of any such plan—was misleading. Id. at 758; see also Fecht
    v. Price Co., 
    70 F.3d 1078
    , 1083 (9th Cir. 1995) (“A plaintiff may …
    satisfy Rule 9(b) with allegations of circumstantial evidence if the
    circumstantial evidence alleged explains how and why the statement
    was misleading when made.”). 3 The allegations create a plausible
    inference that a concrete plan was in place at the time Qihoo issued
    the Proxy Materials.
    The alleged misstatements and omissions were also material. A
    3The district court disregarded the statements attributed to the confidential
    witness, finding that those statements bore “none of the indicia of reliability
    that have led courts … to sustain [confidential witness] allegations as
    worthy of crediting.” Altimeo Asset Mgmt., 
    2020 WL 4734989
    , at *14. Because
    the other facts alleged in the complaint sufficiently plead material
    misstatements and omissions, we need not consider whether the district
    court’s treatment of the confidential witness’s statements was correct. See
    Novaks v. Kasaks, 
    216 F.3d 300
    , 314 (2d Cir. 2000) (“[W]here plaintiffs rely on
    confidential personal sources but also on other facts, they need not name
    their sources as long as the latter facts provide an adequate basis for
    believing that the defendants’ statements were false.”).
    11
    statement    is   materially   misleading     when    “the    defendants’
    representations, taken together and in context, would have misled a
    reasonable investor.” Rombach v. Chang, 
    355 F.3d 164
    , 172 n.7 (2d Cir.
    2004) (quoting I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 
    936 F.2d 759
    , 761 (2d Cir. 1991)). Omissions are material when “there is a
    substantial likelihood that the disclosure of the omitted fact would
    have been viewed by the reasonable investor as having significantly
    altered the total mix of information made available.” Matrixx
    Initiatives, Inc. v. Siracusano, 
    563 U.S. 27
    , 38 (2011) (internal quotation
    marks omitted). In Basic Inc. v. Levinson, the Supreme Court
    concluded that “materiality will depend at any given time upon a
    balancing of both the indicated probability that the event will occur
    and the anticipated magnitude of the event in light of the totality of
    the company activity.” 
    485 U.S. 224
    , 238 (1998) (internal quotation
    marks omitted).
    For the purpose of surviving a motion to dismiss, the alleged
    misstatements and omissions meet our standard for materiality.
    “[B]ecause the materiality element presents a mixed question of law
    and fact, it will rarely be dispositive in a motion to dismiss.” In re
    Morgan Stanley Info. Fund Sec. Litig., 
    592 F.3d 347
    , 360 (2d Cir. 2010)
    (internal quotation marks omitted); Ganino v. Citizens Utils. Co., 
    228 F.3d 154
    , 163 (2d Cir. 2000) (“We held that the materiality of merger
    negotiations depends on the specific facts of each case.”). “[A]
    complaint may not properly be dismissed … on the ground that the
    alleged misstatements or omissions are not material unless they are
    so obviously unimportant to a reasonable investor that reasonable
    minds could not differ on the question of their importance.” Goldman
    v. Belden, 
    754 F.2d 1059
    , 1067 (2d Cir. 1985). In SEC v. Shapiro,
    information concerning merger negotiations was material even when
    12
    “negotiations had not jelled to the point where a merger was
    probable.” 
    494 F.2d 1301
    , 1306-07 (2d Cir. 1974). Here, the appellants
    allege that the relisting process would have similarly required
    negotiations and “[r]eaching a preliminary agreement with a shell
    company.” J. App’x 423. Because the relisting was announced a mere
    sixteen months after the Merger, the appellants allege that these
    negotiations were ongoing—or had already happened—at the time of
    the shareholder vote. We do not find those alleged negotiations “so
    obviously unimportant to a reasonable investor” as to allow the
    dismissal of the appellants’ claims. Goldman, 
    754 F.2d at 1067
    .
    In sum, “even securities plaintiffs need not prove their entire
    case within the confines of the complaint.” Synchrony Fin. Sec. Litig.,
    988 F.3d at 161. Regardless of whether the appellants ultimately prove
    that there are material misstatements or omissions of fact, they have
    alleged enough to survive a motion to dismiss on those grounds. 4
    II
    The appellants also allege violations of § 20(a) and § 20A of the
    Exchange Act. The district court dismissed the appellants’ claims
    under § 20(a) and § 20A because it held that the appellants did not
    adequately allege an independent Exchange Act violation—here, the
    § 10(b) claim. Altimeo Asset Mgmt., 
    2020 WL 4734989
    , at *17.
    4 The appellants also allege that the district court erred when it held that the
    complaint’s “claims of material misrepresentations and omissions all turn
    on” whether the “defendants, as of the Merger, had in place a concrete plan
    to relist Qihoo.” Altimeo Asset Mgmt., 
    2020 WL 4734989
    , at *17. In the
    appellants’ view, the appellees made material misstatements or omissions
    regarding the fairness of the merger price or the reasons for the merger
    independent of whether there was a plan to relist Qihoo. Appellants’ Br. 47-
    52. Because we conclude the appellants plausibly alleged that there was a
    relisting plan, we need not rely on this argument in this appeal.
    13
    Section 20(a) “provides that individual executives, as
    ‘controlling person[s]’ of a company, are secondarily liable for their
    company’s violations of the Exchange Act.” Employees’ Ret. Sys. v.
    Blanford, 
    794 F.3d 297
    , 305 (2d Cir. 2015) (alteration in original)
    (quoting 15 U.S.C. § 78t(a)). Section 20A “provides an express private
    right of action for those who trade contemporaneously with an inside
    trader.” Steginsky v. Xcelera Inc., 
    741 F.3d 365
    , 372 (2d Cir. 2014).
    Actions under either section require an independent violation of the
    Exchange Act. See Boguslavsky v. Kaplan, 
    159 F.3d 715
    , 720 (2d Cir.
    1998) (“In order to establish a prima facie case of liability under § 20(a),
    a plaintiff must show … a primary violation by a controlled person.”);
    Jackson Nat’l Life Ins. Co. v. Merrill Lynch & Co., 
    32 F.3d 697
    , 704 (2d
    Cir. 1994) (holding that a plaintiff, “in order to state a claim under
    § 20A, must plead as a predicate an independent violation of the”
    Exchange Act).
    As we have explained, the district court erred when it held that
    the appellants failed adequately to allege a material misstatement or
    omission. We therefore vacate the district court’s dismissal of the
    § 20(a) and § 20A claims as well.
    CONCLUSION
    Because the district court reached only the question of whether
    the appellants adequately alleged a material misstatement or
    omission, we leave all other aspects of the case to the district court to
    consider in the first instance. We VACATE the district court’s
    dismissal of the complaint and REMAND for further proceedings
    consistent with this opinion.
    14