1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PETER B. MORRISON (SBN 230148) peter.morrison@skadden.com VIRGINIA F. MILSTEAD (SBN 234578) virginia.milstead@skadden.com CATHERINE H. THOMPSON (SBN 313391) catherine.thompson@skadden.com SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071-3144 Telephone: (213) 687-5000 Facsimile: (213) 687-5600 Attorneys for Defendants Yirendai Ltd., Yihan Fung, Yu Cong, and Ning Tang UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION ALEXANDRU LEFTER, individually and on behalf of all others similarly situated, Plaintiff, v. YIRENDAI LTD., et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CASE NO.: 2:16-CV-06437-MWF- AGR (1) NOTICE OF MOTION AND MOTION TO DISMISS AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS; (2) MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF; (3) REQUEST FOR JUDICIAL NOTICE (filed under separate cover); and (4) [PROPOSED] ORDER (lodged under separate cover). Judge: Hon. Michael W. Fitzgerald Courtroom: 5A Date: June 19, 2017 Time: 10:00 a.m. Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 1 of 31 Page ID #:300 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 i TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE that on June 19, 2017 at 10:00 a.m. or at the nearest available date at which counsel may be heard, in Courtroom 5A of the above- referenced Court located at 350 West First Street, Los Angeles, CA 90012, Defendants Yirendai Ltd. ("Yirendai"), Yihan Fung, Yu Cong and Ning Tang (collectively, "Individual Defendants" and with Yirendai, "Defendants") will, and hereby do, present for hearing by the Court this Motion to Dismiss Amended Class Action Complaint For Violation of the Federal Securities Laws ("Motion"). The Motion seeks dismissal of the Amended Class Action Complaint For Violation Of The Federal Securities Laws ("Complaint") brought by Lead Plaintiffs Peggy Dern and Shun Wah So ("Plaintiffs") for failure to state a claim upon which relief may be granted. Defendants' Motion is filed pursuant to Federal Rules of Civil Procedure 8(a), 9(b), 12(b)(6), and 15 U.S.C. §§ 78u-4, et seq., and is based on the accompanying memorandum of points and authorities, the concurrently filed Request for Judicial Notice and exhibits attached to the Declaration of Virginia F. Milstead, all pleadings and papers filed in this action, and such additional papers and arguments as may be presented at or in connection with the hearing. This Motion is made following the conference of counsel pursuant to Local Rule 7-3, which took place on March 24, 2017. DATED: March 28, 2017 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP By: /s/ Peter B. Morrison Peter B. Morrison Attorneys for Defendants Yirendai Ltd., Yihan Fung, Yu Cong, and Ning Tang Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 2 of 31 Page ID #:301 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ii TABLE OF CONTENTS TABLE OF AUTHORITIES ....................................................................................... iii I. PRELIMINARY STATEMENT .............................................................. 1 II. FACTUAL BACKGROUND .................................................................. 4 A. Yirendai, The Peer-To-Peer Industry, And The Draft Measures ........................................................................................ 4 B. Yirendai Discloses Risks From The Draft Measures, Including Limitations On Offline Business ................................... 5 C. The Draft Measures Become Law, And Plaintiffs File Suit .......... 7 III. PLAINTIFFS FAIL TO STATE A CLAIM UNDER SECTION 10(b) ......................................................................................................... 8 A. Plaintiffs Fail To Allege An Actionable Misstatement Or Omission ........................................................................................ 8 1. Plaintiffs Fail To Show That The Measures Actually Limit Yirendai's Offline Customer Sourcing ...................... 9 2. Yirendai's Disclosures Regarding The Draft Measures Were Not Misleading ........................................ 12 (a) No Description Of Article 16 Was Required Because The Draft Measures Were Publicly Available ................................................................. 13 (b) Yirendai's Risk Warnings Did Not Create A Misimpression ......................................................... 14 B. Plaintiffs Fail To Allege Scienter ................................................ 17 1. Allegations Based On Defendants' Positions Are Insufficient ......................................................................... 17 2. Lack Of Motive Negates An Inference Of Scienter .......... 20 3. Viewed Holistically, Plaintiffs' Allegations Fail To Raise An Inference Of Scienter ......................................... 21 C. Plaintiffs Fail To Allege Loss Causation ..................................... 22 IV. PLAINTIFFS FAIL TO STATE A CLAIM UNDER SECTION 20(a) ....................................................................................................... 25 V. CONCLUSION ...................................................................................... 25 Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 3 of 31 Page ID #:302 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iii TABLE OF AUTHORITIES CASES Alexander v. Citigroup Global Markets Inc., Case No. SACV 12-00813 JVS (ANx), 2013 WL 12077818 (C.D. Cal. Apr. 10, 2013), aff’d, 607 F. App’x 696 (9th Cir. 2015) .................................................................................................. 16 In re AXIS Capital Holdings Ltd., Securities Litigation, 456 F. Supp. 2d 576 (S.D.N.Y. 2006) ................................................................ 9 In re Bank of America AIG Disclosure Securities Litigation, 980 F. Supp. 2d 564 (S.D.N.Y. 2013), aff’d, 566 F. App’x 93 (2d Cir. 2014) ................................................................................................................. 22 Basic, Inc. v. Levinson, 485 U.S. 224 (1988) ......................................................................................... 14 In re Blue Earth, Inc. Securities Litigation, Case No. CV 14-08263-DSF (JEMx), 2015 WL 12001274 (C.D. Cal. Nov. 3, 2015) ................................................. 23 Bonanno v. Cellular Biomedicine Group, Inc., Case No. 15-cv-01795-WHO, 2016 WL 4585753 (N.D. Cal. Sept. 2, 2016) ................................................... 23 Bonanno v. Cellular Biomedicine Group, Inc., Case No. 15-cv-01795-WHO, 2016 WL 2937483 (N.D. Cal. May 20, 2016) ................................................. 24 Brody v. Transitional Hospitals Corp., 280 F.3d 997 (9th Cir. 2002) .................................................................. 2, 12, 16 Chipman v. Aspenbio Pharma, Inc., Civil No. 11-cv-00163-REB-KMT, 2012 WL 4069353 (D. Colo. Sept. 17, 2012) .................................................. 16 Christine Asia Co. v. Alibaba Group Holding Ltd., 192 F. Supp. 3d 456 (S.D.N.Y. 2016) .................................................. 13, 14, 15 City of Dearborn Heights Act 345 Police & Fire Retirement System v. Waters Corp., 632 F. 3d 751 (1st Cir. 2011) ........................................................................... 21 Communications Workers of America Plan for Employees’ Pensions & Death Benefit v. CSK Auto Corp., Nos. CV06-1503-PHX-DGC, (Lead), CV06-1580-PHX-JWS, 2007 WL 951968 (D. Ariz. Mar. 28, 2007) ..................................................... 19 In re Cutera Securities Litigation, 610 F.3d 1103 (9th Cir. 2010) .......................................................................... 12 In re Downey Securities Litigation, No. CV 08-3261-JFW, 2009 WL 2767670 (C.D. Cal. Aug. 21, 2009) ................................................. 11 Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 4 of 31 Page ID #:303 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iv In re Downey Securities Litigation, No. CV 08-3261-JFW, 2009 WL 736802 (C.D. Cal. Mar. 18, 2009) ............................................. 11, 20 Dura Pharmaceutics, Inc. v. Broudo, 544 U.S. 336 (2005) ..................................................................................... 1, 25 Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) ...................................................................... 17, 18 In re Harmonic Inc. Securities Litigation, 163 F. Supp. 2d 1079 (N.D. Cal. 2001) ....................................................... 3, 16 In re Herbalife, Ltd. Securities Litigation, No. CV 14-2850 DSF (JCGx), 2015 WL 1245191 (C.D. Cal. Mar. 16, 2015) ................................................. 24 In re IAC/InterActiveCorp Securities Litigation, 695 F. Supp. 2d 109 (S.D.N.Y. 2010) .............................................................. 12 In re JP Morgan Chase Securities Litigation, 363 F. Supp. 2d 595 (S.D.N.Y. 2005) .............................................................. 10 Karam v. Corinthian Colleges, Inc., No. CV 10-6523-GHK (PJWx), 2012 WL 8499135 (C.D. Cal. Aug. 20, 2012) ........................................... 23, 25 Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir. 2002) .................................................................... 19, 20 Loos v. Immersion Corp., 762 F.3d 880 (9th Cir. 2014) ............................................................................ 22 Matrixx Initiatives, Inc v. Siracusano, 563 U.S. 27 (2011) ........................................................................................... 12 Melot v. JAKKS Pacific, Inc., Case No. LA CV13-05388 JAK (SSx): Consolidated Case: LA CV13- 05487 JAK (SSx), 2016 WL 6902093 (C.D. Cal. Nov. 18, 2016) ................................................. 23 Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049 (9th Cir. 2008) ............................................................ 3, 8, 14, 23 In re Nimble Storage, Inc., Case No. 15-cv-05803-YGR, 2016 WL 7209826 (N.D. Cal. Dec. 9, 2016) ................................................... 16 In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014), ........................................................................ 17 Oregon Public Employees Retirement Fund v. Apollo Group Inc., 774 F.3d 598 (9th Cir. 2014) ...................................................................... 22, 23 Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 5 of 31 Page ID #:304 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 v Paskowitz v. Pacific Capital Bancorp, No. CV 09-6449 ODW (JCx), 2009 WL 4911850 (C.D. Cal. Nov. 6, 2009) ................................................... 13 Police Retirement System of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051 (9th Cir. 2014) ........................................................ 11, 18, 19, 20 Reinschmidt v. Zillow, Inc., No. C12-2084 RSM, 2014 WL 5343668 (W.D. Wash. Oct. 20, 2014) ............................................. 12 Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017) ............................................................................ 9 In re Rigel Pharmaceuticals., Inc. Securities Litigation, 697 F.3d 869 (9th Cir. 2012) .................................................... 12, 13, 14, 20, 22 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001) ............................................................................ 11 In re Silicon Graphics, Inc. Securities Litigation, 183 F.3d 970, 984, 985 (9th Cir. 1999) ............................................................ 17 Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 552 U.S. 148 (2008) ........................................................................................... 8 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ................................................................................... 17, 21 Velti PLC Securities Litigation, Case No. 13-cv-03889-WHO, 2015 WL 5736589 (N.D. Cal. Oct. 1, 2015) ..................................................... 9 In re Wet Seal, Inc. Securities Litigation, 518 F. Supp. 2d 1148 (C.D. Cal. 2007) ............................................................ 22 Wozniak v. Align Technology, Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012) ........................................................... 15 In re Yukos Oil Co. Securities Litigation, No. 04 Civ. 5243(WHP), 2006 WL 3026024 (S.D.N.Y. Oct. 25, 2006) .................................................. 10 Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996) ............................................................. 12, 13 Zucco Partners, LLC v. Digimarc Corp, 552 F.3d 981 (9th Cir. 2009) .......................................................... 18, 19, 20, 25 STATUTES AND REGULATIONS 15 U.S.C. § 78u-4(b) ..................................................................................................... 8 17 C.F.R. § 229.503(c) ............................................................................................... 14 Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 6 of 31 Page ID #:305 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. PRELIMINARY STATEMENT This case is about the occurrence of a commonplace event that ordinarily creates no occasion for a lawsuit: the price of a publicly traded security declined in reaction to an "industry-specific" development that stock market participants fully foresaw. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 343 (2005). In particular, on December 28, 2015, the China Banking Regulatory Commission ("CBRC") published a draft of proposed regulations ("Draft Measures") aimed at regulating the peer-to-peer ("P2P") lending industry in China. (Amended Complaint for Violation of the Federal Securities Laws (ECF No. 30) ("AC" or "Complaint") ¶ 7.) Defendant Yirendai Ltd. ("Yirendai"), a China-based company that operates an online consumer marketplace for such P2P lending (AC ¶ 2), filed its annual report on Form 20-F with the Securities & Exchange Commission ("SEC") on April 27, 2016, discussing the Draft Measures and the risks they posed to Yirendai's future operations in "great detail" (AC ¶¶ 10, 50). Among other things, the Form 20-F disclosed that the Draft Measures included a "limitation of offline business," and if any of Yirendai's practices were deemed to violate the Draft Measures in the event they were enacted, Yirendai could be "materially and adversely affected." (AC ¶¶ 49, 52; Ex. 1 at 3.) 1 On August 26, 2016, China officially passed the Draft Measures into law. (AC ¶ 62.) As the stock market speculated that the risks about which Yirendai had warned were potentially coming to fruition, "[t]he promulgation of the Draft Measures" caused the price of Yirendai's American Depository Shares ("ADS") traded on the New York Stock Exchange to decline that day. (AC ¶ 64.) However, over the next two quarters, Yirendai continued its prior business practices and posted strong quarterly results. (See Ex. 2, Ex. 99.1 at 1; Ex. 3, Ex. 99.1 at 1-2.) Despite Yirendai's full disclosure of the Draft Measures and associated risks, 1 All references to "Ex." refer to exhibits attached to the Declaration of Virginia F. Milstead in support of Defendants' Request for Judicial Notice, filed contemporaneously herewith. All internal quotations and citations are omitted unless otherwise indicated. Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 7 of 31 Page ID #:306 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 Plaintiffs assert that Yirendai and members of its senior management ("Individual Defendants") committed securities fraud in violation of sections 10(b) and 20(a) of the Securities Exchange Act ("Exchange Act"). Plaintiffs do not allege that Defendants misrepresented a single fact to investors; nor could they. Instead, their sole contention is that Yirendai's Form 20-F risk disclosure should have provided more detail about the alleged "limitation of offline business" contained in the already-public Draft Measures. (AC ¶¶ 12, 52.) This assertion falls far short of stating a claim for at least three reasons. First, Yirendai disclosed the alleged limitation on offline business in its Form 20-F disclosure, and section 10(b) does not permit claims based on mere allegations that true statements were lacking in detail. See Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002). Plaintiffs allege that more disclosure was warranted because the regulation had the potential to restrict revenue from customers sourced from offline channels. However, neither the plain language of the regulation nor Yirendai's customer sourcing practices and financial results before or after implementation of the regulation support Plaintiffs' conclusory interpretation. Plaintiffs do not and cannot allege that Yirendai ceased sourcing customers offline or suffered a decline in revenues after the Draft Measures were implemented. In any event, Plaintiffs fail to allege facts showing that Yirendai's risk disclosure concerning the "limitation of offline business" was misleading just because it was not more detailed. See Brody, 280 F.3d at 1006 ("Often, a statement will not mislead even if it is incomplete or does not include all relevant facts."). After all, "[n]o matter how detailed and accurate disclosure statements are, there are likely to be additional details that could have been disclosed but were not." Id. The Draft Measures themselves were publicly available, and Yirendai stated that the limitation of offline business, like all of the Draft Measures, posed a risk to Yirendai. Any additional details Plaintiffs seek would have merely reinforced this disclosure, not contradicted it. See id. at 1007 (rejecting claim based on omitted information Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 8 of 31 Page ID #:307 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 when omitted information was consistent with information disclosed). Plaintiffs allege that Yirendai provided more details about other aspects of the Draft Measures, which "served to obfuscate and divert attention away" from the disclosure concerning the limitation on offline business. (AC ¶ 12.) However, the securities laws make materially misleading statements actionable, not alleged failures to emphasize the matters a plaintiff deems most important. See In re Harmonic Inc. Sec. Litig., 163 F. Supp. 2d 1079, 1093, 1093 n.12 (N.D. Cal. 2001) (rejecting "'gloss + context = falsity' theory of liability" and concluding that a plaintiff must demonstrate that a particular statement was misleading for failure to disclose particular information). Just because, in Yirendai's judgment, other aspects of the Draft Measures merited more discussion, does not make its accurate disclosure concerning the limitation of offline business misleading. Second, Plaintiffs have failed to allege facts raising a strong inference that any Individual Defendant acted with scienter. Plaintiffs allege that Defendants made a "conscious decision to gloss over" the limitation of offline business in order to conceal the negative effect it would have on "Yirendai's revenue stream and customer pipeline." (AC ¶ 56.) However, Plaintiffs plead no facts to show that any Defendant had any information about the Draft Measures that was different from the information that was already public, much less information showing the Draft Measures would have such a negative effect. The more plausible conclusion- supported by Plaintiffs' inability to allege that Yirendai has ceased sourcing customers offline-is that Defendants did not share in Plaintiffs' interpretation of the Draft Measures and thus did not consider additional disclosure necessary. Third, Plaintiffs have not alleged that any omission concerning the limitation of offline business caused their alleged loss. To allege "loss causation," a plaintiff must allege that the omitted information was revealed to the market, and upon such revelation, the price of the securities at issue declined. See Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1063 (9th Cir. 2008). Plaintiffs cannot allege Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 9 of 31 Page ID #:308 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 that the price of Yirendai's ADS declined because information about the limitation of offline business or its effects on Yirendai was newly revealed. The content of the Draft Measures was publicly known long before China formally adopted them, and the alleged negative effects on Yirendai's offline customer sourcing and revenues have not even allegedly occurred, let alone been revealed. The only new information that Plaintiffs allege caused a decline in the price of their ADS was that the Draft Measures became final. However, as the finalization of the Draft Measures-a development the market could foresee-did not reveal any fraud by Yirendai, this development cannot show that the alleged fraud caused Plaintiffs' loss. Thus, the Court should dismiss Plaintiffs' Complaint with prejudice. II. FACTUAL BACKGROUND A. Yirendai, The Peer-To-Peer Industry, And The Draft Measures Yirendai provides P2P lending services to consumers in China, connecting lenders to borrowers through an online consumer marketplace. (AC ¶ 2.) Yirendai sources its borrowers from both online and offline channels, including from the "on- the-ground sales network" of its parent company, CreditEase Holdings (Cayman) Ltd. ("CreditEase"). (AC ¶ 41.) CreditEase refers borrowers to Yirendai's "online marketplace. . . . Once a potential borrower is referred to [Yirendai], all the remaining aspects of the transaction life cycle are handled by [Yirendai], with [its] online marketplace facilitating the loan transaction." (Ex. 1 at 49.) When Yirendai entered the market in 2014, the P2P lending industry in China lacked substantial regulation. (AC ¶ 3.) Over the span of three years, the number of P2P lending platforms grew from fewer than 50 to more than 3,800. (AC ¶ 26.) Certain companies-not including Yirendai-were accused of operating Ponzi schemes or facilitating blackmail by lenders against borrowers. (AC ¶¶ 3-5; 28-31.) To address this growing industry, on December 28, 2015, the CBRC publicly released a draft version of the Interim Administrative Measures for the Business Activities of Peer-to-Peer Lending Information Intermediaries (the "Draft Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 10 of 31 Page ID #:309 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 Measures"). (AC ¶ 7.) The Draft Measures included regulations of multiple aspects of the business of P2P lending platforms, including, for example, limitations on "providing 'credit enhancement services.'" (AC ¶¶ 10, 55.) Additionally, the Draft Measures provided for certain limitations on the conduct of business at "physical locations." (AC ¶ 47.) Article 16 of the Draft Measures stated: Except for risk management such as collecting credit information, verification, following up after loaning, managing of pledges and certain necessary operations expressly provided for under regulations regarding online loaning, online lending information intermediaries shall not conduct businesses at any physical locations which are not internet, landline, mobile phones and other electronic means. (AC ¶ 47.) Based on the alleged statement of a former Yirendai employee, Plaintiffs allege that by March 2016, Yirendai "restructur[ed]" its marketing departments by moving employees responsible for offline marketing to its "online business department." (AC ¶ 60.) Plaintiffs allege that Yirendai intended to "reorient its business in order to avoid running afoul of" the draft Article 16. (AC ¶ 59.) On April 13, 2016, the CBRC issued the Implementation Plan for the Special Clean Up Work of P2P Online Lending Risk (the "Implementation Plan"). (AC ¶ 57.) According to Plaintiffs, the Implementation Plan noted that "clean-up work should be conducted on the online and offline operations of the market players," and "related parties" should be regulated based on the "business nature and actual controlling person." (AC ¶ 57.) Plaintiffs allege that the Implementation Plan "suggests" that the Chinese government intended to treat the offline and online operations controlled by the same party as one business and that P2P businesses were "not allowed to conduct offline marketing." (AC ¶ 57.) B. Yirendai Discloses Risks From The Draft Measures, Including Limitations On Offline Business On April 27, 2016, Yirendai filed its 2015 annual report on Form 20-F with the SEC. (See Ex. 1.) In a disclosure spanning more than three single-spaced pages, Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 11 of 31 Page ID #:310 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 Yirendai informed investors of the Draft Measures in the "Risk Factors" section of the filing. (AC ¶ 50; Ex. 1 at 3-6.) Yirendai began by broadly stating: The laws and regulations governing the peer-to-peer lending service industry in China are developing and evolving and subject to changes. If our practice is deemed to violate any [Chinese] laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected. (Ex. 1 at 3.) Yirendai then described the publication of the Draft Measures and their features, including twelve prohibitions on the businesses in which a P2P platform could engage. (Id. at 4.) It further listed "certain additional requirements" for P2P lending platforms, including "the limitation of offline business." (Id.) In the paragraph following its disclosure of the limitation of offline business, Yirendai stated: "Any violation of the Draft Measures by [a P2P platform] after they come into effect, may subject such [platform] to certain penalties as determined by applicable laws[] and regulations." (Id. at 5.) Yirendai cautioned investors that it was unknown whether "the final version [of the Draft Measures] would have any substantial changes to the current draft." (Id.) Yirendai also disclosed that "[it] may have to adjust [its] operating practices" if the Draft Measures were "enacted as proposed," and it provided an example related to potential changes to its "automated investing tool," which could increase operating expenses. (Id.) Yirendai also described certain "policies and procedures" it had already implemented to comply with existing rules, but warned: [D]ue to the lack of detailed rules and the fact that the rules, laws and regulations are expected to continue to evolve in this newly emerging industry, we cannot be certain that our existing practices would not be deemed to violate any existing or future rules, laws and regulations. (Id.) It also cautioned that it could not "rule out the possibility that some of the services [it] provide[s] to investors . . . might be viewed as not being in full compliance." (Id.) It described, without limitation, certain practices that may face scrutiny under the Draft Measures, including its "automated investing tool" and its "risk reserve fund." (Id. at 5-6.) Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 12 of 31 Page ID #:311 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 The Form 20-F also reported that Yirendai relied "on CreditEase for various aspects of [its] operations, such as . . . offline acquisition of new borrowers and investors." (Id. at 20; see also id. at 46 (stating that its borrowers and investors came from a "variety of channels" including "offline sources, such as referrals from CreditEase's on-the-ground sales network").) Yirendai disclosed that 72,390 of its 146,390 total borrowers in 2015 were sourced through offline channels, and 67.0% of the total amount of loans facilitated through its marketplace were sourced offline. (AC ¶¶ 42, 58.) The Form 20-F warned: "[I]f we are unable to continue to use CreditEase as a user acquisition channel for any reason, our business and results of operations may be adversely and materially affected." (Ex. 1 at 21; see also id. at 1 (disclosing harms "[i]f any of our current user acquisition channels become less effective, [or] if we are unable to continue to use any of these channels").) C. The Draft Measures Become Law, And Plaintiffs File Suit On August 24, 2016, the Chinese government allegedly passed the Draft Measures into law, and various "American media" outlets covered the passage. (AC ¶ 62.) According to Plaintiffs, the final regulations ("Measures") were "identical to the Draft Measures." (AC ¶ 13.) Plaintiffs allege that the final version of Article 16 read: Online lending information intermediaries may only conduct risk management such as collecting credit information, verification, following up after loaning, managing of pledges and certain necessary operations expressly provided for under regulations regarding online loaning at physical locations which are not internet, landline, mobile phones and other electronic means. (AC ¶ 63.) On that same day, Yirendai's stock closed at $24.52, a loss of $6.92 per share over the previous day's closing price of $31.44. (AC ¶ 64.) An alleged shareholder filed suit against Yirendai two days later, falsely alleging that Yirendai failed to disclose the Draft Measures altogether. (See ECF No. 1 ¶ 19.) Plaintiffs thereafter filed the current, amended Complaint, now acknowledging that Yirendai disclosed the Draft Measures in "great detail," but Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 13 of 31 Page ID #:312 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 claiming that the detailed discussion "served to obfuscate and divert attention away from the one provision most damaging to [Yirendai's] business," Article 16. (AC ¶¶ 10, 12.) According to Plaintiffs, Article 16 prohibits Yirendai from acquiring customers from offline channels, including from referrals from CreditEase, and therefore places "half of [Yirendai's] revenue stream in jeopardy." (AC ¶ 11.) Contrary to Plaintiffs' dire predictions of threats to half of Yirendai's revenue, since passage of the Measures, Yirendai's operations have continued uninterrupted, and it has continued to post strong results. On November 15, 2016, Yirendai reported "another quarter of solid business growth" for the third quarter of 2016. (Ex. 2, Ex. 99.1 at 1.) Notwithstanding Plaintiffs' allegation that Article 16 prohibited offline customer sourcing, Yirendai reported that 59.5% of its loans and 41% of its borrowers for the third quarter were derived from offline sources. (See Ex. 2, Ex. 99.1 at 4, 8, 9.) In its fourth quarter and full year 2016 earnings results, released March 15, 2017, Yirendai again reported strong results, which included loans sourced from offline channels. (See Ex. 3, Ex. 99.1 at 5, 10.) III. PLAINTIFFS FAIL TO STATE A CLAIM UNDER SECTION 10(b) To state a claim under section 10(b) of the Exchange Act, Plaintiffs must allege: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 157 (2008). Plaintiffs have failed to allege a material misrepresentation or omission, scienter, and loss causation. A. Plaintiffs Fail To Allege An Actionable Misstatement Or Omission Plaintiffs' Complaint is subject to the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). See 15 U.S.C. § 78u- 4(b). "The PSLRA has exacting requirements for pleading 'falsity.'" Metzler, 540 F.3d at 1070. Under the PSLRA, Plaintiffs are required to both "allege a Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 14 of 31 Page ID #:313 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 misrepresentation or a misleading omission with particularity and explain why it is misleading." Retail Wholesale & Dep't Store Union Local 338 Ret. Fund v. Hewlett- Packard Co., 845 F.3d 1268, 1274 (9th Cir. 2017). The Complaint challenges one statement from Yirendai's Form 20-F: the statement that the Draft Measures imposed "the limitation of offline business of" P2P lending platforms (AC ¶ 52.) Plaintiffs allege that the statement was misleading because it (i) failed to disclose that Article 16 would "jeopardize more than half of Yirendai's revenue stream and customer pipeline"; (ii) omitted "any meaningful discussion" about "the prohibition on offline business"; and (iii) "gloss[ed] over" Article 16 compared to the disclosures concerning other aspects of the Draft Measures. (AC ¶¶ 51, 56.) Plaintiffs' claim fails for multiple independent reasons. 1. Plaintiffs Fail To Show That The Measures Actually Limit Yirendai's Offline Customer Sourcing Plaintiffs' entire complaint is premised on the conclusion that Article 16 "prohibit[ed] P2P lending platforms from acquiring customers and conducting marketing offline" and therefore would adversely affect Yirendai's revenues. (AC ¶¶ 10, 11, 56, 63.) However, a plaintiff cannot base a securities fraud claim on a false premise. See, e.g., In re Velti PLC Sec. Litig., 2015 WL 573 6589, at *15, *23 (N.D. Cal. Oct. 1, 2015) (rejecting claim that company failed to disclose it was "having difficulty collecting certain receivables" when plaintiff failed to allege facts showing that receivables were "in danger of becoming uncollectible"); In re AXIS Capital Holdings Ltd. Sec. Litig., 456 F. Supp. 2d 576, 585 (S.D.N.Y. 2006) (dismissing nondisclosure claim that was "entirely dependent upon [a] predicate allegation" that plaintiffs had not adequately alleged). Plaintiffs have failed to plead adequately that Article 16 would have, or has had, the effects Plaintiffs describe. Even if assumed to be reliable for purposes of the present motion, Plaintiffs' own translations of Article 16 in its draft and final form (AC ¶¶ 47, 63) do not support the conclusion that Article 16 limits Yirendai's offline customer sourcing. The final version of Article 16 does not appear to limit offline activities at all, but Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 15 of 31 Page ID #:314 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 rather requires P2P companies to conduct risk management at physical locations. (See AC ¶ 63.) The draft version only prohibits P2P companies from "conduct[ing] business [other than risk management activities and certain necessary operations] at any physical locations." (AC ¶ 47.) This vague provision-which Yirendai warned investors lacked "detailed rules" and was "evolving" (Ex. 1 at 3, 5)-does not address customer sourcing at all, much less prohibit Yirendai from acquiring customers from referrals from CreditEase or any other source. It provides no specifics concerning what constitutes "conduct[ing] business" at a "physical location" or what "necessary operations" were excluded from its reach. As Plaintiffs have failed to alleged facts showing that Article 16 even has the import or effects Plaintiffs assume, the entire premise of their claim is flawed. See In re Yukos Oil Co. Sec. Litig., 2006 WL 3026024, at *14 (S.D.N.Y. Oct. 25, 2006) (dismissing claim that defendant omitted facts about its violation of the Russian tax code when plaintiff failed to plead facts showing that the defendant violated the code); In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 632 (S.D.N.Y. 2005) (dismissing claim based on failure to disclose violation of statute when "[p]laintiffs have failed to allege with particularity that [defendants] violated these statutes"). Moreover, even assuming that Article 16 could be interpreted to apply to offline customer sourcing, Plaintiffs do not allege facts to show that Yirendai's business would be affected. Far from it, Plaintiffs allege that no later than March 2016-more than a month before Yirendai filed its Form 20-F describing the Draft Measures-Yirendai supposedly took steps to "restructur[e]" its offline and online marketing departments to avoid "running afoul" of the "new regulation prohibiting offline business." (AC ¶¶ 59, 60.) 2 Although Plaintiffs allege that CreditEase 2 Plaintiffs do not allege how Yirendai was "running afoul" of the draft Article 16 in the first place, and this Court should reject Plaintiffs' implication that Yirendai ever believed it faced a potential restriction on offline customer sourcing. (AC ¶ 59.) Plaintiffs' allegation is based entirely on statements from a single alleged confidential witness, "CW1." (AC ¶ 60.) However, the Complaint fails to include facts as to how CW1 supposedly came to possess knowledge concerning the reach of Article 16 or the reasons Yirendai restructured its marketing department and thus fails to (cont'd) Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 16 of 31 Page ID #:315 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 identifies potential customers from an "on-the-ground sales network" (AC ¶ 41), the Form 20-F discloses that CreditEase refers borrowers to Yirendai's "online marketplace. . . . Once a potential borrower is referred to [Yirendai], all the remaining aspects of the transaction life cycle are handled by [Yirendai], with [its] online marketplace facilitating the loan transaction." (Ex. 1 at 49 (emphasis added).) In other words, Yirendai's part in sourcing customers takes place online, fully consistent with Article 16, and Plaintiffs allege nothing to the contrary. Plaintiffs' attempt to allege that the Implementation Plan placed limitations on customer referrals from CreditEase also fails. (AC ¶¶ 57, 58.) Plaintiffs' description of the "clean-up work" contemplated by the Plan fails to include specific facts showing that the Plan had the force of a regulation, how it was related to Article 16, what it said about offline customer sourcing, what "clean-up work" it contemplated, or how such work would affect Yirendai's business practices. (AC ¶¶ 57, 58.) Thus, Plaintiffs have not shown that Yirendai's sourcing activities were limited by the Plan. See Ronconi v. Larkin, 253 F.3d 423, 432 (9th Cir. 2001) (holding that plaintiff must plead "specific 'contemporaneous statements or conditions' that demonstrate the . . . misleading nature of the statements when made"). Finally, Plaintiffs do not allege any facts demonstrating that Yirendai ceased offline sourcing after the enactment of Article 16, or indeed that its business was affected in any way. In fact, in Yirendai's two subsequent quarterly earnings releases, Yirendai continued to report a significant number of loans derived from ________________________ (cont'd from previous page) "establish with particularity the requisite foundation for reliability and personal knowledge" of the confidential witness. In re Downey Sec. Litig., 2009 WL 2767670, at *10 (C.D. Cal. Aug. 21, 2009). Similarly, the Complaint admits that CW1's allegation that "the prohibition on offline acquisition of customers may cause up to a 20% drop in Yirendai's business" was based purely on CW1's "estimation," but the Complaint provides no basis for that "estimation," and Plaintiffs do not allege that such drop in business ever materialized. (AC ¶ 61 (emphasis added).) Courts disregard the statements of a confidential witness if, as here, they lack "specificity or [are] based on hearsay, rumor, or speculation." In re Downey Sec. Litig., 2009 WL 736802, at *12 (C.D. Cal. Mar. 18, 2009). Such "unsubstantiated statement[s], without substance or context" fail to support a claim for securities fraud. Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1063 (9th Cir. 2014). Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 17 of 31 Page ID #:316 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 offline sources and strong financial results. (See Ex. 2, Ex. 99.1 at 4, 8, 9; Ex. 3 at 5, 10.) This too eviscerates Plaintiffs' claims. See, e.g., Reinschmidt v. Zillow, Inc., 2014 WL 5343668, at *9 (W.D. Wash. Oct. 20, 2014) (statement about customer reaction to new pricing model supported by fact that "revenues in fact increased over the class period"); In re IAC/InterActiveCorp Sec. Litig., 695 F. Supp. 2d 109, 121 (S.D.N.Y. 2010) ("[P]laintiffs have been unable to explain why IAC's travel division performed so well in 2003 and 2004 if, as they say, the travel division was reeling from dissatisfied customers and suppliers who quit using its services."). 2. Yirendai's Disclosures Regarding The Draft Measures Were Not Misleading Regardless of how Article 16 is interpreted, Yirendai's disclosures regarding the Draft Measures were not misleading. Section 10(b) does "not create an affirmative duty to disclose any and all material information." Matrixx Initiatives, Inc v. Siracusano, 563 U.S. 27, 44 (2011). Companies are only required to make disclosures "when necessary 'to make … statements made, in the light of the circumstances under which they were made, not misleading.'" Id. (alteration in original). Accordingly, section 10(b) "prohibit[s] only misleading and untrue statements, not statements that are incomplete." Brody, 280 F.3d at 1006. An omission is misleading only "if it would give a reasonable investor the impression of a state of affairs that differs in a material way from the one that actually exists." In re Cutera Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010). The court's decision in Zeid v. Kimberley, 930 F. Supp. 431, 437 (N.D. Cal. 1996), is instructive. There, the plaintiffs alleged that the defendant's warnings regarding adverse factors that may affect financial performance were "nothing but generic statements." Id. The plaintiffs further alleged that "the reports should have contained specific disclosures of the adverse factors which were then negatively impacting Firefox's business." Id. The court rejected this argument, stating: Plaintiffs' argument is absurd. Defendants' warnings regarding potential adverse factors are not actionable as a matter of law. Plaintiffs do not assert that any of the Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 18 of 31 Page ID #:317 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 warnings were without basis or wrong. Instead, Plaintiffs assert that the warnings should have been more specific. Section 10(b) and Rule 10b-5 are designed to protect against false and misleading statements, not statements that are too abstract. Id. (a) No Description Of Article 16 Was Required Because The Draft Measures Were Publicly Available As in Zeid, any alleged failure to include a more "meaningful" description of the limitations on offline business or to describe the "actual limitations imposed on offline business" in the "risk factor" description of the Draft Measures may make the risk disclosure less specific than Plaintiffs would like, but it does not create a misimpression or provide the basis for a claim. (AC ¶¶ 51, 53, 54.) For one thing, as Yirendai's Form 20-F stated, the Draft Measures had been published previously in their entirety. (Ex. 1 at 4; see also AC ¶ 7.) Because Plaintiffs' allegations about the reach and effects of Article 16 are based exclusively on its publicly-available text, Plaintiffs do not identify a single non-publicly available fact that Yirendai should have disclosed. Yirendai can hardly be said to have misleadingly omitted information that it told shareholders was in the public domain. See, e.g., Paskowitz v. Pac. Capital Bancorp, 2009 WL 4911850, at *6 (C.D. Cal. Nov. 6, 2009) ("Securities laws do not require disclosure of information that is readily available in the public domain."); Christine Asia Co. v. Alibaba Grp. Holding Ltd., 192 F. Supp. 3d 456, 471 (S.D.N.Y. 2016) ("[T]he securities laws do not require disclosure of information that is publicly known."). Moreover, the Form 20-F makes it apparent that it is providing only a summary, not a comprehensive description, of the Draft Measures or the limitations on offline business. In listing "certain additional requirements" contained in the Draft Measures, the Form 20-F identifies the "limitation of offline business" "among other things." (AC ¶ 52; Ex. 1 at 4 (emphasis added).) No reasonable shareholder would mistakenly conclude that the Form 20-F provided complete information about any part of the Draft Measures. See In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 19 of 31 Page ID #:318 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 869, 880 (9th Cir. 2012) (rejecting claim that description of safety results from clinical trial was misleading for omitting more information about side effects when "Defendants never claimed that these were all of the safety results or that these results included every occurrence of every possible side effect"). 3 (b) Yirendai's Risk Warnings Did Not Create A Misimpression Yirendai disclosed the risk that the Draft Measures could result in a "limitation of offline business." (AC ¶ 52.) This is entirely consistent with the adverse effects Plaintiffs erroneously claim Article 16 had. (AC ¶¶ 52-54); see Rigel, 697 F.3d at 881 & n.10 (affirming dismissal of claim that press release concerning results of clinical study should have disclosed more side effects, concluding that the side effects reported were "not inconsistent with" and "did not contradict" the effects that were not reported); Metzler, 540 F.3d at 1071 (affirming dismissal of claim based on omission of regulatory investigation when plaintiff failed to identify "some affirmative statement or omission by Corinthian that suggested it was not under any regulatory scrutiny"). Indeed, the reference to "limitation of offline business" falls under a bold italicized heading that states unequivocally that the regulations governing the P2P lending industry are evolving and that if Yirendai's "practice is deemed to violate any . . . regulations, [its] business, financial conditions and results of operations would be materially and adversely affected." (Ex. 1 at 3.) That the reference to "limitation of offline activity" is included under this "risk factor" heading by definition means that it makes Yirendai securities "speculative or risky." (AC ¶ 53); 17 C.F.R. § 229.503(c) (providing that risk factor disclosures 3 Plaintiffs allege that "[a]n ordinary investor in the U.S." would not understand Chinese language or law and therefore could not "understand the extent or materiality of Yirendai's omission." (AC ¶ 56.) However, a company is not required to "attribute to investors a child-like simplicity" and assume they are unable to understand the significance of disclosures. Basic, Inc. v. Levinson, 485 U.S. 224, 234 (1988). Reasonable investors properly take into account their own familiarity, or lack thereof, with Chinese language and law when making a decision to invest in a Chinese company. See Alibaba, 192 F. Supp. 2d at 472 ("[T]his Court would be shocked if investors did not take the fact that China is not the United States into account when making an investment."). Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 20 of 31 Page ID #:319 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 identify what makes an investment "speculative or risky"). Regardless of the level of detail provided, no reasonable investor would expect that information specifically identified as posing a risk to Yirendai would have anything other than a potential adverse effect. Thus, Plaintiffs' claim fails. See Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029, 1041 (N.D. Cal. 2012) (dismissing claim based on omissions when alleged omitted facts "do not contradict" the alleged statements). Although Plaintiffs quibble with the level of detail provided about the limitation on offline business compared to other aspects of the Draft Measures, this does not suggest that the "limitation of offline business" posed no risk. (AC ¶¶ 10, 50.) To the contrary, the Form 20-F discloses that "[i]f the Draft Measures are enacted as proposed, [Yirendai] may have to adjust [its] operating procedures" and then provides non-exhaustive examples. (Ex. 1 at 5; see also id. ("[W]e cannot be certain that our existing practices would not be deemed to violate any existing or future rules, laws and regulations.").) Thus, Yirendai warned that the Draft Measures as a whole-including any limitation on offline business-could adversely affect Yirendai. See Alibaba, 192 F. Supp. 3d at 471 (rejecting fraud claim based on failure to disclose Chinese regulatory guidance when "risk disclosures are sufficiently sober," "do not minimize the risk of regulatory investigations," and sufficiently warned investors of uncertainties in Chinese law). Further, the Form 20-F reported that 67% percent of Yirendai's loans were sourced through offline means. (AC ¶ 58; see also AC ¶ 42.) The Form 20-F also disclosed: "[I]f we are unable to continue to use CreditEase as a user acquisition channel for any reason, our business and results of operations may be adversely and materially affected." (Ex. 1 at 21 (emphasis added); see also id. at 1 (disclosing harms "[i]f any of our current user acquisition channels become less effective, [or] if we are unable to continue to use any of these channels") (emphasis added).) Thus, Yirendai disclosed that (i) it sourced the majority of its loans through offline channels; (ii) if it could not source loans offline "for any reason" it could Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 21 of 31 Page ID #:320 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 suffer adverse effects; (iii) the Draft Measures contained certain limitations on offline business, which were not accompanied by "detailed rules"; and (iv) Yirendai may have to adjust its operating procedures if the Draft Measures were enacted. (Id. at 1, 4-5, 21.) From these data points, an investor would understand that the Draft Measures could potentially affect Yirendai's ability to source customers offline and thus affect its revenues. See Brody, 280 F.3d at 1007 (noting that "the reasonable inferences one could draw from [the provided] information" were consistent with the more detailed information that plaintiffs believed should have been included in a press release). In fact, Plaintiffs used these very disclosures to draft the Complaint, and they identify no non-public facts that Yirendai should have disclosed. (AC ¶¶ 40-42, 58.) Yirendai's statements were not misleading. See In re Nimble Storage, Inc., 2016 WL 7209826, at *6-7 (N.D. Cal. Dec. 9, 2016) (dismissing claim that defendant should have disclosed that it capped expenditures where disclosures revealed that expenditures "remained largely consistent for eight quarters[,]" noting that "[s]uch information, therefore, was available to the investing public"). Plaintiffs' allegation that Yirendai made an effort to "gloss over and bury" the disclosure of the limitation on offline business also fails. (AC ¶ 55.) "The pleading of falsity under a 'false impression' gloss-and-spin theory of liability is plainly at odds with the mandates of the PSLRA." Harmonic, 163 F. Supp. 2d at 1093. Instead, a plaintiff must identify particular statements that were misleading and "state exactly what information should have been included in order to make the statement not misleading." Id. at 1094. Mere quibbles with the presentation or conspicuousness of a disclosure do not state a claim. See Alexander v. Citigroup Glob. Mkts. Inc., 2013 WL 12077818, at *5 n.4 (C.D. Cal. Apr. 10, 2013) (rejecting plaintiff's claim that information in defendant's brochure "was not 'conspicuous' and therefore was misleading" and holding that the information was disclosed "under conspicuous headings and in readable type"); Chipman v. Aspenbio Pharma, Inc., 2012 WL 4069353, at *6 (D. Colo. Sept. 17, 2012) ("A disclosure is not 'buried' Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 22 of 31 Page ID #:321 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 simply because it is included in a document properly incorporated by reference and/or situated in the middle of a multi-page document."). B. Plaintiffs Fail To Allege Scienter Under the PSLRA, a plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with" scienter by pleading "specific facts indicating no less than a degree of recklessness that strongly suggests actual intent." Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 742-43 (9th Cir. 2008). "[I]n determining whether the pleaded facts give rise to a 'strong' inference of scienter, the court must take into account plausible opposing inferences." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 310 (2007). The complaint will survive a motion to dismiss "only if 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." Id. at 324. To impute scienter to Yirendai, Plaintiffs must first plead scienter of the Individual Defendants. See, e.g., In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1063 (9th Cir. 2014). Plaintiffs have failed to meet this standard. Indeed, the Complaint offers no factual allegations as to what any Individual Defendant knew or intended about the Draft Measures or their effects on Yirendai's business. Plaintiffs offer only general, conclusory assertions of knowledge by the Defendants as a group. This basic factual void alone dooms the Complaint. See In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 984, 985 (9th Cir. 1999) (holding a plaintiff "must plead in great detail facts" demonstrating scienter and "boilerplate pleadings" will not suffice). 1. Allegations Based On Defendants' Positions Are Insufficient Having failed to plead specific facts, Plaintiffs fall back on boilerplate allegations that by "virtue of their positions at Yirendai" or as "senior managers and/or directors of Yirendai" Individual Defendants knew or were reckless that Yirendai's Form 20-F was misleading. (AC ¶¶ 81-82; see also AC ¶¶ 21-23 (alleging that Individual Defendants had "considerable influence" or "had control over the core Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 23 of 31 Page ID #:322 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 operations of Yirendai").) However, courts reject attempts to plead scienter based on a defendant's position within a company alone. See, e.g., Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1000 (9th Cir. 2009) (rejecting allegation that "facts critical to a business's core operations . . . are so apparent that their knowledge may be attributed to the company and its key officers"); Glazer, 549 F.3d at 746 ("general allegations of defendants' 'hands-on' management style . . . are insufficient to create a strong inference of scienter"). Instead, a plaintiff must allege (i) particular facts that "suggest that defendants had actual access to the disputed information," or (ii) the "rare circumstances where the nature of the relevant fact is of such prominence that it would be absurd to suggest that management was without knowledge of the matter." Intuitive, 759 F.3d at 1062. Plaintiffs make no attempt to meet either of these standards. Plaintiffs fail to allege that any Individual Defendant had actual access to information demonstrating that Yirendai's Form 20-F was misleading. "Proof under this theory is not easy. A plaintiff must produce either specific admissions by one or more corporate executives of detailed involvement in the minutia of a company's operations, such as data monitoring, or witness accounts demonstrating that executives had actual involvement in creating false reports." Id.; see also Zucco, 552 F.3d at 1000 (plaintiff must include "detailed and specific allegations about management's exposure to factual information within the company"). "The complaint lacks allegations of specific admissions" by any Individual Defendant "regarding [her or his] involvement" in assessing the various provisions of the Draft Measures, their significance, or their potential effect on Yirendai. Intuitive, 759 F.3d at 1062. The Complaint fails to allege any facts showing what any Individual Defendant knew about the Draft Measures, much less that any Individual Defendant had any information about the Draft Measures beyond what was in the public domain and Yirendai disclosed. The Complaint fails to identify any report, conversation or meeting that would have provided any Individual Defendant with Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 24 of 31 Page ID #:323 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 information demonstrating that Article 16 would limit Yirendai's customer sourcing or negatively affect Yirendai's revenues, let alone that Yirendai's description of the limitation on offline business in the Form 20-F was misleading. See, e.g., Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1035-36 (9th Cir. 2002) (scienter not alleged where plaintiffs did not "identify any internal reports of 'sales data,' much less plead, in any detail, the contents of any such report or the purported data"). Plaintiffs' conclusory assertion that "Defendants participated directly or indirectly in the preparation and/or issuance" of the Form 20-F does not suggest (much less demonstrate) that Individual Defendants had actual access to information contradicting its statements. (AC ¶¶ 80, 83.) Boilerplate allegations that a defendant played an unspecified role in preparing a statement fail to raise any inference of scienter. See Commc'ns Workers of Am. Plan for Emps.' Pensions & Death Benefits v. CSK Auto Corp., 2007 WL 951968, at *4 (D. Ariz. Mar. 28, 2007) (rejecting allegations that defendant CEO "was responsible for the financial results and press releases issued by the Company"). Moreover, just because Defendants allegedly played some role in preparing the Form 20-F does not mean they believed that Yirendai's statement concerning offline business was misleading. See, e.g., Rigel, 697 F.3d at 883-84 (allegation that defendants were aware of the omitted information was "not sufficient to allege the [they] believed that they were making false or misleading statements"). Nor do Plaintiffs supply witness accounts demonstrating Individual Defendants' scienter. Plaintiffs rely on the assertions of CW1 that Yirendai restructured its marketing departments in part due to the "new regulation prohibiting offline business." (AC ¶ 60.) However, even assuming the Court credits CW1's statement despite Plaintiffs' failure to lay a proper foundation for it, see supra note 2, CW1's assertions say nothing about the knowledge of Individual Defendants concerning this endeavor. See, e.g., Intuitive, 759 F.3d at 1063 (rejecting allegations that failed to link witnesses with defendants); Zucco, 552 F.3d at 998 ("generalized Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 25 of 31 Page ID #:324 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 claims about corporate knowledge . . . fail to establish that the witness reporting them has reliable personal knowledge of the defendants' mental state"). This also is not the "'rare circumstance' in which it would be 'absurd' to suggest that management was without knowledge" that Yirendai's Form 20-F was allegedly misleading. Intuitive, 759 F.3d at 1063. Such circumstances arise only when "the information misrepresented is readily apparent" to Individual Defendants because it concerns "prominent facts" that are "obvious from the operations of the company." Zucco, 552 F.3d at 1001. Plaintiffs have made no attempt to identify such "prominent facts" or explain how such facts would necessarily demonstrate to Individual Defendants that Yirendai's Form 20-F was misleading, especially here where the Draft Measures apparently had little if any effect on Yirendai's business operations or financial results. 2. Lack Of Motive Negates An Inference Of Scienter Plaintiffs' failure to plead any motive to commit fraud also cuts against any inference of scienter. See Rigel, 697 F.3d at 884. Plaintiffs allege that Individual Defendants were motivated to commit fraud because they did not want to disclose news that could have negatively affected Yirendai's business following its IPO. (See AC ¶¶ 65-66.) However, "[a]llegations of routine corporate objectives . . . are not, without more, sufficient to allege scienter; to hold otherwise would support a finding of scienter for any company that seeks to enhance its business prospects." Rigel, 697 F.3d at 884 (holding the desire to obtain financing and expand were insufficient to allege scienter). Plaintiffs' allegation of Defendants' motive to "maintain momentum and price stability following its IPO" amounts to nothing more than a raw assertion of a routine corporate objective. (AC ¶ 66.) Plaintiffs make no other attempt to allege that Defendants had a motive to commit fraud, such as a motive to benefit from sales of Yirendai ADS at inflated prices. See Downey, 2009 WL 736802, at *14 ("[A]ny inference of scienter is negated by the lack of stock sales by the Individual Defendants during the class period"). Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 26 of 31 Page ID #:325 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 3. Viewed Holistically, Plaintiffs' Allegations Fail To Raise An Inference Of Scienter Viewed holistically, Plaintiffs' allegations do not establish an inference of scienter that is "cogent and at least as compelling as any opposing inference." See Tellabs, 551 U.S. at 314. The gist of Plaintiffs' scienter theory is that when Yirendai filed its Form 20-F, Individual Defendants must have known that draft regulations that included a vague limitation on business conducted at "physical locations" (AC ¶ 47), if eventually enacted, would prohibit offline customer sourcing and would "jeopardize half of [Yirendai's] revenue stream" (AC ¶ 65). The Individual Defendants allegedly "made a conscious decision to gloss over" this prospect (AC ¶ 56)-all while including extensive disclosures of substantial risks posed by the Draft Measures (AC ¶ 10)-believing for some reason that it would be better for Yirendai's "momentum and price stability" if its investors did not understand this particular risk at that particular time (AC ¶ 66). The Individual Defendants supposedly did this despite knowing that the Draft Measures had already been publicly available to investors for months (see AC ¶¶ 7, 65) and that they would eventually have to "reorient [Yirendai's] business" and disclose "up to a 20% drop in" business that never materialized (AC ¶ 61). This theory is neither cogent nor compelling; the far more plausible inference is that Defendants believed (correctly) Yirendai's disclosures were proper. For one thing, the notion that Individual Defendants went so far as to commit fraud rather than disclose that Article 16 would "jeopardize half of [Yirendai's] revenue stream" ignores that Plaintiffs fail to allege that Article 16 has had such an effect. (AC ¶ 65.) Yirendai's revenues grew 19% from the second to the third quarter of 2016 and 22% from the third to fourth quarter of 2016. (See Ex. 2, Ex. 99.1 at 1; Ex. 3, 99.1 at 9.) Given this reality, the more plausible inference is not that Defendants concealed Article 16, but that they reasonably did not believe it would limit Yirendai's offline customer sourcing or harm its revenues. See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F. 3d 751, Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 27 of 31 Page ID #:326 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 22 758-59 (1st Cir. 2011) ("[V]iewed objectively, the inferences are stronger that defendants did not knowingly or recklessly risk misleading the reasonable investor, as defendants reasonably did not expect that the change in [new] regulations would itself have a significant impact on Waters' overall worldwide sales."). Moreover, courts have concluded that any inference of scienter is undercut when defendants have disclosed information connected to the alleged misstatements or omissions. See, e.g., Rigel, 697 F.3d 869 at 885 (the fact that defendant voluntarily disclosed all data and methodology for a clinical trial undermined any inference that it deliberately concealed the "true" results of that trial); In re Wet Seal, Inc. Sec. Litig., 518 F. Supp. 2d 1148, 1172 (C.D. Cal. 2007) (no inference of scienter when allegedly misleading practice was disclosed). If, as Plaintiffs allege, Individual Defendants wished to conceal Article 16, they would have omitted any reference to limitations on offline business entirely, not voluntarily disclosed an outline of the Draft Measures, including a reference to the limitation of offline business. The more plausible inference is that Defendants reasonably believed no further disclosure was necessary. See In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564, 586 (S.D.N.Y. 2013) (concluding that in light of the public availability of information, the most "compelling inference" was that "defendants reasonably believed that no further disclosure was required"). C. Plaintiffs Fail To Allege Loss Causation Plaintiffs' claim fails for a final separate reason: Plaintiffs do not properly allege "loss causation"-a "causal connection between the deceptive acts that form the basis for the claim of securities fraud and the injury suffered by the plaintiff." Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 608 (9th Cir. 2014). To establish this causal connection, a plaintiff must "allege that the decline in the defendant's stock price was proximately caused by a revelation of fraudulent activity rather than by changing market conditions, changing investor expectations, or other unrelated factors." Loos v. Immersion Corp., 762 F.3d 880, 887 (9th Cir. 2014); see Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 28 of 31 Page ID #:327 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 23 also Metzler, 540 F.3d at 1063 (plaintiff must allege that "the practices that the plaintiff contends are fraudulent were revealed to the market and caused the resulting losses"). In particular, "a plaintiff must allege (1) that the fraudulent statement artificially inflated the share price; (2) the disclosure that revealed that statement was fraudulent; and (3) a decline in the price of the stock after the truth became known." Melot v. JAKKS Pac., Inc., 2016 WL 6902093, at *25 (C.D. Cal. Nov. 18, 2016). Plaintiff must plead loss causation with particularity. See Apollo, 774 F.3d at 605. Plaintiffs' only attempt to allege loss causation is to allege that the price of Yirendai ADS declined when the Draft Measures became final and the enactment received non-descript coverage from the "American media." (AC ¶¶ 13, 62.) However, in identifying the "disclosure that revealed the statement was fraudulent," Melot, 2016 WL 6902093, at *25, or the so-called "corrective disclosure," the plaintiff must allege how the disclosure "[makes] untrue or call[s] into question" the defendant's previous statements. Apollo, 774 F.3d at 608; see also Bonanno v. Cellular Biomedicine Grp., Inc., 2016 WL 4585753, at *3 (N.D. Cal. Sept. 2, 2016) ("To be corrective, the disclosure must 'relate back to the misrepresentation and not to some other negative information about the company.'"). Plaintiffs do not explain how the enactment of the Draft Measures or any media coverage made untrue or called into question Yirendai's previous statements. Plaintiffs identify nothing about the fact the Measures became final or the media coverage that contradicted Yirendai's undisputed risk disclosures about the Draft Measures in general or the limitation on offline business in particular. See Karam v. Corinthian Colls., Inc., 2012 WL 8499135, at *15 (C.D. Cal. Aug. 20, 2012) ("[p]laintiffs have 'not explained (or even attempted to explain) how a future risk . . . based upon newly proposed regulations undermines any of Defendants' previous statements'"). Moreover, a plaintiff cannot plead loss causation by pointing to "corrective disclosures" that merely repeat information that is already public, as such disclosures do not "reveal" any new information to the market. See, e.g., In re Blue Earth, Inc. Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 29 of 31 Page ID #:328 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 24 Sec. Litig., 2015 WL 12001274, at *2 (C.D. Cal. Nov. 3, 2015) ("[T]o establish loss causation, the purported corrective disclosure must reveal new information concerning the alleged misrepresentation."); Bonanno v. Cellular Biomedicine Group, Inc., 2016 WL 2937483, at *5 (N.D. Cal. May 20, 2016) ("New information is critical to demonstrating loss causation."); In re Herbalife, Ltd. Sec. Litig., 2015 WL 1245191, at *4 (C.D. Cal. Mar. 16, 2015) ("Since any information released to the public [in an efficient market] is immediately digested and incorporated into the price of a security . . . [the] disclosure of confirmatory information-or information already known to the market-will not cause a change in stock price."). Plaintiffs do not allege that the "coverage from the American media" revealed anything new about the Draft Measures that was not already disclosed in Yirendai's Form 20-F or publicly known by virtue of the fact that the Draft Measures had been previously published. (AC ¶¶ 7, 45.) In particular, Plaintiffs do not allege that the media revealed any new details about the offline limitations, let alone details that revealed that Yirendai's offline customer sourcing or revenues would be adversely affected. In fact, the media outlets referenced in the Complaint did not even mention Yirendai or the limitations on offline business. (See Exs. 4-7.) Similarly, the text of the final version of Article 16 does not reveal any new details about offline limitations that would adversely affect Yirendai. (AC ¶ 63.) On the contrary, Plaintiffs allege that the Measures were "identical to the Draft Measures" and that the final Article 16 was "in substantially the same form" as the draft, which had been public since December 28, 2015. (AC ¶¶ 13, 63.) Thus, while alleging that American investors "with no understanding of the Chinese language and no knowledge of how to interpret Chinese law" could not have appreciated Yirendai's disclosures when they were made, Plaintiff do not explain what about the final text of Article 16 (or the media coverage of the Measures) caused the scales to fall from investors' eyes. (AC ¶ 56.) Instead, the only new information allegedly revealed was the fact that the Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 30 of 31 Page ID #:329 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 25 Draft Measures became final. Acknowledging as much, Plaintiffs admit that it was the "promulgation of the Draft Measures," as opposed to any revelation connected with Article 16 or Yirendai's business, that caused Yirendai's ADS price decline. (AC ¶ 64.) Thus, according to Plaintiffs' own Complaint, the price of Yirendai ADS declined because a previously disclosed industry-wide risk came to fruition, not because of concealed limitations on offline business or their alleged effects on Yirendai. The final enactment of a previously disclosed draft regulation is the archetypical "new industry-specific . . . fact[]" that does not support an allegation of loss causation. Dura Pharm., 544 U.S. at 343; see also Karam, 2012 WL 8499135, at *15 (concluding "that the new DOE regulations are the type of 'new industry specific event' on which plaintiffs may not rely to show loss causation"). IV. PLAINTIFFS FAIL TO STATE A CLAIM UNDER SECTION 20(a) To state a claim for control person liability under section 20(a) of the Exchange Act, a plaintiff must first allege an underlying violation of section 10(b). See Zucco, 552 F.3d at 990, 1008 (affirming dismissal of section 20(a) claims where plaintiffs failed to allege violation of section 10(b)). Because Plaintiffs have failed to state a claim under section 10(b), their section 20(a) claim also fails. See id. V. CONCLUSION For the reasons stated herein, the Court should dismiss the Complaint with prejudice. DATED: March 28, 2017 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP By: /s/Peter B. Morrison Peter B. Morrison Attorneys for Defendants Yirendai Ltd., Yihan Fung, Yu Cong, and Ning Tang Case 2:16-cv-06437-MWF-AGR Document 37 Filed 03/28/17 Page 31 of 31 Page ID #:330 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION ALEXANDRU LEFTER, individually and on behalf of all others similarly situated, Plaintiff, v. YIRENDAI LTD., et al., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CASE NO.: 2:16-CV-06437 MWF-AGR(x) [PROPOSED] ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS Judge: Hon. Michael W. Fitzgerald Courtroom: 5A Date: June 19, 2017 Time: 10:00 a.m. Case 2:16-cv-06437-MWF-AGR Document 37-1 Filed 03/28/17 Page 1 of 2 Page ID #:331 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 [PROPOSED] ORDER The Court, having considered the Motion to Dismiss Amended Class Action Complaint brought by Defendants Yirendai Ltd., Yihan Fung, Yu Cong and Ning Tang ("Motion to Dismiss"), the accompanying memorandum of points and authorities, supporting request for judicial notice and declaration, any papers filed in opposition or reply thereto, as well as the files in the case and any oral argument presented, and for good cause shown therein, hereby GRANTS the Motion to Dismiss. The case is hereby DISMISSED with prejudice. IT IS SO ORDERED. Dated:__________________ ______________________________ Hon. Michael W. Fitzgerald United States District Judge Case 2:16-cv-06437-MWF-AGR Document 37-1 Filed 03/28/17 Page 2 of 2 Page ID #:332
