GOLDSMITH v. WEIBO CORPORATION et al
Filing
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OPINION. Signed by Judge Stanley R. Chesler on 6/6/2018. (JB, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
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ANDREW GOLDSMITH,
Plaintiff,
v.
WEIBO CORPORATION, GAOFEI
WANG, and HERMAN YU,
Defendants.
Civil Action No. 17-4728 (SRC)
OPINION
CHESLER, District Judge
This is a securities fraud class action filed on behalf of individuals and entities who
bought NASDAQ-traded shares in the Chinese social media company known as Weibo. It comes
before the Court on the motion brought by Defendants Weibo Corporation (“Weibo”), Gaofei
Wang and Herman Yu (collectively, “Defendants”) to dismiss the Consolidated Class Action
Complaint (hereinafter, the “Complaint”) pursuant to Federal Rule of Civil Procedure 12(b)(6).
Lead Plaintiff Chen Qiwei (“Plaintiff”) has opposed the motion. The Court has considered the
papers filed by the parties and, pursuant to Federal Rule of Civil Procedure 78, will rule on the
motion without oral argument. For the reasons expressed below, Defendants’ motion will be
granted.
I.
BACKGROUND
Plaintiff brings this putative class action for securities fraud on behalf of investors who
purchased Weibo American Depository Shares (“ADS”) between April 17, 2014 and June 21,
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2017 (the “Class Period”). Plaintiff and the putative class members purchased Weibo securities
during the Class Period at prices they claim were artificially inflated as a result of allegedly
misleading statements and omissions made by Weibo, Wang and Yu in public filings with the
Securities and Exchange Commission (“SEC”). Plaintiff claims that Defendants knowingly
misled investors to believe that Weibo was operating in compliance with Chinese laws and
regulations concerning a licensing requirement for companies engaged in internet transmissions.
Plaintiff further claims that when the public became aware that Weibo was not in compliance
with the law, Weibo’s stock price dropped, causing Weibo investors to sustain a loss. The
Complaint seeks relief pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. § 78a, et seq. (the “Exchange Act”).
The factual summary below is based on the Complaint’s allegations and on documents
attached to or referenced in the Complaint. The facts are taken as true for purposes of this motion
to dismiss only.
A. The Parties
Defendant Weibo is a company engaged in the internet transmission of written and
multimedia content in the People’s Republic of China (“PRC” or “China”). According to the
Complaint, Weibo “operates as a social media platform for people to create, distribute, and
discover Chinese-language content.” (Compl., ¶ 2.) In this regard, Weibo has been described as
the “Chinese Twitter.” (Id.) The various content disseminated by Weibo is contributed, or
posted, to Weibo by users of the platform and by platform partners. (Id.) Weibo’s business is
comprised of three segments: user; advertising and marketing; and platform partners. The user
segment consists of, among others, self-expression products, social products, and games. Weibo
users include individuals, celebrities, media outlets, businesses, charities and government
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agencies. The advertising and marketing segment, through which Weibo generates the majority
of its revenue, allows customers to purchase ad space on Weibo pages. In the platform partners
segment, third-party developers of mobile applications, games, and other products share their
content on Weibo’s platform.
Weibo was incorporated in 2010 in the Cayman Islands, and it maintains its principal
place of business in Beijing. Though it was once a fully-owned subsidiary of SINA, a leading
Chinese internet media company, Weibo has been a stand-alone company since 2014, the year it
completed its initial public offering in the American securities market. On April 17, 2014, Weibo
began selling and trading its ADS in the United States on the NASDAQ Global Select Market.
Weibo itself is structured as a “variable interest entity,” or “VIE”, comprised of a chain
of fully-owned entities it uses to conduct various aspects of its business. One of these entities is
Weibo Internet Technology (China), the entity Weibo uses to conduct its business in the PRC.
Weibo operates its online platform in China through Beijing Weimeng Technology Co., Ltd.
(“Weimeng”). Weimeng is the entity which may hold and obtain the various permits and licenses
needed for Weibo’s PRC operations.
In addition to Weibo, this lawsuit names as defendants Gaofei Wang and Herman Yu,
two individuals who held official positions in Weibo during the relevant time period. Individual
Defendant Wang is and was at all relevant times Weibo’s Chief Executive Officer. Individual
Defendant Yu served as the company’s Chief Financial Officer from March 2015 to September
2017.
Lead Plaintiff Qiwei is an individual who invested in Weibo during the relevant time
period. According to his Certification of August 5, 2017, he made several purchases of Weibo
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ADS during the Class Period. He claims he bought the shares at artificially inflated prices due to
Defendants’ misrepresentations and omissions.
B. PRC Regulations Requiring a License for Internet Transmission
Weibo’s core business operations within the PRC subject the company to extensive
regulations on various matters, including foreign ownership, licensing, and internet-broadcast
content. The essence of the fraud alleged in this case concerns certain regulations that require a
company to obtain a government-issued license before it may engage in the internet transmission
of audio-visual programs in the PRC. The Court reviews the relevant regulations briefly.
To begin, in 2004, China’s State Administration of Radio, Film and Television
promulgated a set of rules which require all persons and/or entities engaging in internet
broadcasting activities to obtain an audio-video program transmission license (hereinafter
“AVPT License”). Then, on December 20, 2007, the State Administration of Radio, Film and
Television and the Ministry of Industry and Information Technology jointly issued a set of rules
known as “Circular 56.” Circular 56 reiterated and strengthened the licensing requirement set
forth in the 2004 regulations. As quoted in the Complaint, Circular 56 provides, in relevant part,
as follows:
Article 2: These Provisions shall apply to the provision of audio-visual
program service via internet (including mobile internet, hereinafter
referred to as internet) within the borders of the People’s Republic of
China. The term “internet audio-video program service” as mentioned in
these Provisions refers to activities of making, redacting and integrating
audio-visual programs, providing them to the general public via internet,
and providing services for other people to upload and spread audio-visual
programs.
Article 7: To engage in internet audio-visual program service, one shall, in
accordance with these Provisions, obtain the Permit for Spreading AudioVisual Programs via Information Network (hereinafter referred to as
Permit) issued by the competent department of radio, film and television,
or handle the archive-filing formalities. No entity or individual may
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engage in internet audio-video program service without obtaining the
Permit issued by the competent department of radio, film and
television, or handling the archive-filing formalities.
(Compl., ¶ 47 and Ex. A) (emphasis added).
Importantly, Circular 56 restricts eligibility for the AVPT License. Under Circular 56, the
AVPT License may be obtained only by companies that are exclusively state-owned or state
controlled. As to this criterion for qualification, it states:
Article 8: An applicant for engaging in internet audio-visual program
service shall simultaneously satisfy the following requirements:
1. It has the corporate capacity, is an exclusive state-owned entity or a
state-controlled entity, and has not committed any violation within
three years prior to the date of application . . .
(Compl., Ex. A). The PRC government thereafter clarified that a limited exception to this
restriction would be made for entities that were already operating an internet broadcasting
business prior to the issuance of the Circular 56 regulation. Such companies could also apply for
an AVPT License, even if not exclusively state-owned or state-controlled.
Further tightening the licensing requirements for internet broadcasting activities, Circular
56 prohibits a licensed company from providing services on behalf of an unlicensed entity. It
provides:
Article 14: . . . No licensed entity may provide fee collection services,
signal transmission, server hosting and other related financial and
technical services in connection with internet audio-visual program
services to any entity on behalf of or for the benefits of any unlicensed or
unregistered third party.
(Compl., ¶ 48 and Ex. A.)
The third set of rules relevant to Plaintiff’s claims is known as Circular 196. On
December 16, 2016, the PRC’s newly established State Administration of Press, Publication,
Radio, Film and Television (“SAPPRFT”) promulgated Circular 196. Circular 196 is expressly
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directed to “strengthening [the] management of audio-visual program disseminating on Weibo,
WeChat and other online social platforms.” (Compl., Ex. C.) Circular 196 states in relevant part
that entities that disseminate audio-video programs through the Weibo platform must themselves
obtain an AVPT License. It further states that if such broadcasters do not have their own license,
the “network platform” – that is, Weibo – “shall be the responsible entity” of the program service
and “act as a gatekeeper for program content and other management responsibilities.” (Id.)
C. Weibo’s Public Statements About the Regulations
According to the Complaint, Weibo stated throughout the Class Period that it “was not
required to have a license” and “gave investors the false impression that Weibo was in full
compliance with Chinese laws and regulations by operating through third-party websites.”
(Compl., ¶¶ 52-53.) Weibo first made such statements, the Complaint alleges, on April 17, 2014,
the first day of the Class Period. On that date, Weibo filed its prospectus in connection with the
company’s initial public offering (hereinafter, the “2014 Prospectus”). The same allegedly
misleading statements also appear in Weibo’s three Form 20-F annual reports filed with the SEC
during the Class Period (the annual reports for 2014, 2015 and 2016). The Complaint quotes the
pertinent sections from all four SEC filings at issue. To paraphrase, in each filing Weibo conveys
three key pieces of information about the AVPT License: (1) Following a thorough synopsis of
the licensing regulations in effect at the time (the 2004 rules and Circular 56 in all four abovementioned filings, plus Circular 196 in the 2016 Form 20-F report), Weibo expressly draws
attention to the PRC’s AVPT License requirement; (2) Weibo discloses that it does not hold and
is not qualified to obtain the required AVPT License; and (3) Weibo states that the programs
posted to Weibo are delivered through third-party websites, each of which does hold the AVPT
License. While the relevant portions of Weibo’s SEC filings are lengthy, the language bears
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quoting in full because the statement, as a whole, constitutes the alleged fraud on investors on
which Plaintiff’s entire case is based.
The 2014 Prospectus as well as the Form 20-F reports for 2014, 2015 and 2016 each
contain a section entitled “Regulations on Broadcasting Audio/Video Programs through the
Internet.” (Compl., ¶ 53; Musoff Cert. Ex. B at 146) (emphasis in original). In the 2014
Prospectus, that section reads as follows:
The Rules for the Administration of Broadcasting of Audio/Video
Programs through the Internet and Other Information Networks,
promulgated by the State Administration for Radio, Film and Television in
2004, apply to the launch, broadcasting, aggregation, transmission or
download of audio/video programs via televisions, mobile phones and the
internet and other information networks. Anyone who wishes to engage
in internet broadcasting activities must first obtain an audio/video
program transmission license issued by the State Administration for
Radio, Film and Television and must operate pursuant to the scope as
provided in such license. Foreign invested enterprises are not allowed to
engage in these activities.
On December 20, 2007, the State Administration for Radio, Film
and Television and MIIT jointly issued the Rules for the Administration of
Internet Audio and Video Program Services, commonly known as Circular
56, which came into effect as of January 31, 2008. Circular 56 reiterates
the requirement set forth in the earlier rules that online audio/video
service providers must obtain an internet audio/video program
transmission license from the State Administration for Radio, Film
and Television. Furthermore, Circular 56 requires all online
audio/video service providers to be either wholly state-owned or statecontrolled companies. According to relevant official answers to press
questions published on the website of State Administration for Radio,
Film and Television on February 3, 2008, officials from the State
Administration for Radio, Film and Television and the MIIT clarified that
online audio/video service providers that already had been operating
lawfully prior to the issuance of Circular 56 may re-register and continue
to operate without becoming state-owned or controlled, provided that such
providers have not engaged in any unlawful activities. This exemption will
not be granted to online audio/video service providers established after
Circular 56 was issued. These policies have been reflected in the
Application Procedure for Audio/Video Program Transmission License.
Failure to obtain the internet audio/video program transmission
license may subject an online audio/video service provider to various
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penalties, including fines of up to RMB30,000 ($4,956), seizure of
related equipment and servers used primarily for such activities and
even suspension of its online audio/video services.
Weimeng is not qualified to obtain an internet audio/video
program transmission license under the current legal regime as it is
not a wholly state-owned or state-controlled company, nor did it begin
operation prior to the issuance of Circular 56. Weimeng plans to
apply for an internet audio/video program transmission license when
it is feasible to do so. Currently, all the audio/video programs posted
on our platform are delivered through third-party websites, each of
which has an internet audio/video program transmission license.
(Compl., ¶ 53; Musoff Cert. Ex. B at 146-47) (emphasis added).
The Form 20-F annual reports filed by Weibo with the SEC for fiscal years 2014, 2015,
and 2016 contain almost identical language to the above-quoted summary of Circular 56.
(Compl., ¶¶ 57, 63, 69; see also Musoff Cert. Ex. A at 64, Ex. E at 66, Ex. F at 61.) With respect
to regulations governing internet broadcasting activities, Weibo’s Form 20-F for 2016 adds the
following statement concerning Circular 196:
On December 16, 2016, the State Administration of Press,
Publication, Radio, Film and Television of the PRC (SAPPRFT) issued
the Rules for the Administration of Video and Audio Programs on Weibo,
WeChat and other Social Media Platforms, or Circular 196. Circular 196
requires that any organizations that provide online streaming through
social media platforms such as Weibo or WeChat should obtain an internet
audio/video program transmission license. For organizations and
individuals that do not hold [the] license, the hosting social networking
platform shall be responsible for supervising the content of the posted
programs, and the scope of the programs must not exceed the scope stated
on the platform’s audio/video program transmission license. Similarly,
film and TV dramas broadcasted through social media are required to
obtain a license for public airing, and social medial platforms are not
allowed to repost user-generated video or audio programs featuring
political news.
(Compl., ¶ 69; Musoff Cert. Ex. A at 65.)
The 2014 Prospectus and the Form 20-F annual reports for 2014, 2015, and 2016 also
disclosed various “Risks Relating to Doing Business in China” – again, emphasizing the
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heading in bold print. (Musoff Cert. Ex. A at 27, Ex. B at 38, Ex. E at 29, Ex. F at 26) (emphasis
in original). Among the disclosures, Weibo expressly warns of the risk of operating without the
AVPT License in the PRC. In the 2014 Prospectus and in each of the annual reports filed with
the SEC during the Class Period, Weibo repeats that it does not hold the AVPT License. Weibo’s
disclosures also specify that the PRC government could impose penalties for a failure by Weibo
to obtain the necessary permits and licenses, including, in particular, the AVPT License. As to
the risk and consequences of operating without the required licenses, Weibo’s SEC filings state
as follows:
We may be adversely affected by the complexity, uncertainties and
changes in PRC licensing and regulation of internet businesses.
The PRC government extensively regulates the internet industry,
including the licensing and permit requirements pertaining to companies
in this industry. Internet-related laws and regulations in China are
relatively new and evolving, and their interpretation and enforcement
involve significant uncertainty. As a result, it may be difficult to determine
what actions or omissions may be deemed to be violations of applicable
laws and regulations in certain circumstances.
Our VIE [Weimeng] holds the Internet Content Provision License
and the Online Culture Operating Permit that are necessary for operating
our current business in China. However, we cannot assure you that we
have obtained all the permits or licenses required for conducting our
business in China or will be able to maintain our existing licenses or
obtain any new licenses if required by any new laws or regulations. . . . In
addition, companies engaging in internet broadcasting activities must
first obtain an audio/video program transmission license. See “PRC
Regulation—Regulations on Broadcasting Audio/Video Programs
through the Internet” for more details. Currently, all the audio/video
programs posted on our website are delivered through third-party
websites. Weimeng is not qualified to obtain the internet audio/video
program transmission license under the current legal regime as it is
not a wholly state-owned or state-controlled company and it was not
operating prior to the issuance of the Rules for the Administration of
Internet Audio and Video Program Services, commonly known as Circular
56. Weimeng plans to apply for an internet audio/video program
transmission license when feasible to do so. Further we many need to
apply for an internet news publication license. See “Item 4. B. Information
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on the Company—Business Overview—Regulation—Regulations on
Internet News Dissemination.” If we fail to obtain such licenses or any
additional licenses required by new laws and regulations in a timely
manner or at all, we could be subject to liabilities, penalties and
operational disruption.
(Compl., ¶¶ 52, 56, 62, 68; Musoff Cert. Ex. A at 31, Ex. B at 41, Ex. E at 32, Ex. F at 29)
(emphasis added).
D. The Individual Defendants’ Statements
Weibo’s Form 20-F annual reports were accompanied by certifications signed by
Individual Defendants Wang and Yu, pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”). In
each of the SOX certifications, Wang and Yu attested that the respective annual report of the
corporation “does not contain any untrue statement of material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report.”
(Compl., ¶¶ 59, 65, 71.)
E. The PRC Cites Weibo for Operating Without the Required License
On June 22, 2017, Weibo issued a press release entitled “Weibo Announces Receipt of a
SAPPRFT Notice.” (Compl., ¶ 73; Musoff Cert. Ex. G.) The press release announced that the
PRC government authority on broadcasting activities, SAPPRFT, had taken action against
Weibo to enforce the AVPT License regulations. The press release disclosed that the SAPPRFT
had issued a public notice requesting local authorities in the PRC to take measures to suspend the
internet broadcasting services of various companies, including, specifically, Weibo, for failure to
hold the required AVPT License. The press release stated that the SAPPRFT had
requested the local competent authorities to take measures to suspend
several companies’ video and audio services due to their lacking of an
internet audio/video program transmission license and posting of certain
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commentary programs with content in violation of government regulations
on their sites, and Weibo is named as one of these companies.
The Company [Weibo] is communicating with the relevant government
authorities to understand the scope of the notice. It intends to fully
cooperate with the relevant authorities. The Company will also evaluate
the impact of this notice on its operations and its administrative options.
(Compl., ¶ 73; Musoff Cert. Ex. G.)
According to the Complaint, the public first became aware of Weibo’s non-compliance
with the AVPT License regulations upon the disclosures made in Weibo’s June 22, 2017 press
release. It avers that, on this news, Weibo’s share price fell $4.71 per share, from its closing price
of $76.96 on June 21, 2017 to $72.25 per share at the close of trading on June 22, 2017. This
drop represented a loss of over 6% in the value of Weibo, “severely damaging investors,”
according to the Complaint. (Compl., ¶ 74.)
F. Investors File Suit Against Weibo
The securities fraud lawsuit was filed in this Court on June 27, 2017. In the original
Complaint, named Plaintiff Andrew Goldsmith claimed that he and a putative class of other
investors purchased Weibo securities at an artificially inflated price as a result Defendants’
misrepresentations and omissions concerning two matters: Weibo’s non-compliance with the
AVPT License requirement and information in Weibo’s 2016 Form 20-F regarding platform
postings containing material or commentary in violation of the PRC’s content restrictions. A
second class action lawsuit arising from substantially similar allegations was filed on August 3,
2017 by Plaintiff Feng Chen. Thereafter, the Court consolidated the Goldsmith and Chen actions
and appointed Chen Qiwei as Lead Plaintiff in this consolidated action, pursuant to the Exchange
Act and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u4(a)(3)(B).
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G. The Complaint Before the Court
On November 27, 2107, Lead Plaintiff Qiwei filed the Consolidated Class Action
Complaint, which is the subject of the motion to dismiss currently before the Court. The
Complaint alleges that throughout the Class Period, in the various SEC filings made by Weibo
and reviewed in the foregoing synopsis by the Court, Defendants “gave investors the false
impression that Weibo was in compliance with Chinese laws and regulations by operating
through third-party websites[.]” (Compl., ¶¶ 52, 56, 62, 68.) According to Plaintiff, these public
statements were materially false and misleading for their “failure to disclose a true and accurate
picture of Weibo’s compliance with PRC regulations” as it related to Weibo’s operation without
possessing the required AVPT License. (Id., ¶ 99.) Plaintiff further alleges that “Defendants’
materially misleading statements and omissions concealed a risk concerning Weibo’s noncompliance with PRC regulation[s] . . . [which] materialized in the form of PRC violations and
fines.” (Id.; ¶ 103.) According to the Complaint, Defendants’ misleading statements and
omissions artificially inflated the price of Weibo shares and caused Plaintiff other purchasers of
Weibo securities to sustain a loss when the share price dropped upon Weibo’s announcement of
the SAPPRFT action against Weibo. Unlike the original complaints, the Consolidated Complaint
no longer alleges that Defendants violated securities fraud laws based on statements concerning
the posting of PRC-prohibited content to the Weibo platform.
The Complaint before the Court asserts two claims for relief. Count I asserts a securities
fraud claim against all Defendants for violation of § 10(b) of Exchange Act, 15 U.S.C. § 78j(b),
and SEC Rule 10b-5. Count II asserts a claim against Individual Defendants Wang and Yu for
control person liability, pursuant to Exchange Act § 20(a), 15 U.S.C. § 78t(a).
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II.
DISCUSSION
A.
Standard of Review
Defendants seek dismissal of the Complaint in its entirety pursuant to Rule 12(b)(6). The
issue before the Court on a Rule 12(b)(6) motion to dismiss “is not whether plaintiff will
ultimately prevail but whether the claimant is entitled to offer evidence in support of the claims.”
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997) (quoting Scheuer
v. Rhodes, 416 U.S. 232, 236 (1974)). To make that determination, the Court must employ the
standard of review articulated by the Supreme Court in Bell Atlantic Corp. v. Twombly and
Ashcroft v. Iqbal. A complaint will survive a motion under Rule 12(b)(6) only if it states
“sufficient factual allegations, accepted as true, to ‘state a claim for relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S.
544, 570 (2007)). The plausibility standard will be met if the complaint “pleads factual content
that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556.) While the complaint need not
demonstrate that a defendant is probably liable for the wrongdoing to meet the pleading standard
of Federal Rule of Civil Procedure 8(a), allegations that give rise to the mere possibility of
unlawful conduct will not do. Iqbal, 556 U.S. at 678; Twombly, 550 U.S. at 557.
Claims brought pursuant to Exchange Act § 10(b) and the statute’s implementing
regulation, SEC Rule 10b-5, are subject to certain heightened pleading requirements under the
PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320-21 (2007) (noting that
prior to the enactment of the PSLRA, the pleading standard of Rule 9(b) governed the
sufficiency of a complaint for securities fraud). The PSLRA mandates that, to survive a motion
to dismiss, a complaint must (1) “specify each statement alleged to have been misleading, the
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reason or reasons why the statement is misleading, and, if an allegation regarding the statement
or omission is made on information and belief, the complaint shall state with particularity all
facts on which that belief is formed” and (2) “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” 15 U.S.C. §§ 78u-4(b)(1) &
(2); 15 U.S.C. § 78u-4(b)(3)(2) (“In any private action arising under this chapter, the court shall,
on the motion of any defendant, dismiss the complaint if the requirements of [15 U.S.C. §§ 78u4(b)(1) & (2)] are not met.”).
In evaluating a Rule 12(b)(6) motion to dismiss for failure to state a claim, a court “must
consider the complaint in its entirety, as well as . . . documents incorporated into the complaint
by reference, and matters of which the court may take judicial notice.” Tellabs, 551 U.S. at 322.
In that regard, the Third Circuit has held that a district court may take judicial notice of
documents “integral to or explicitly relied upon in the complaint,” SEC filings, and stock price
data. In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir. 2002) (quoting Burlington Coat
Factory, 114 F.3 at 1426).
B.
Securities Fraud Claim Under § 10(b) of the Exchange Act
Under § 10(b) of the Exchange Act, a person or entity may not “use or employ, in
connection with the purchase or sale of any security, . . . any manipulative or deceptive device or
contrivance in contravention of [SEC] rules and regulations.” 15 U.S.C. § 78j(b). SEC Rule
10b-5(b), in turn, makes it unlawful to “make any untrue statement of material fact or to omit to
state a material fact in order to make the statements made, in light of the circumstances under
which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b)(2). The Supreme Court has
recognized a private cause of action for damages sustained as the result of a violation of Section
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10(b) and Rule 10b-5 and held that such claim requires a plaintiff to establish the following six
elements:
(1) a material misrepresentation or omission;
(2) scienter, i.e., a wrongful state of mind;
(3) a connection with the purchase or sale of a security;
(4) reliance, also known as “transaction causation” in cases involving public
securities markets;
(5) economic loss; and
(6) loss causation, i.e., a causal connection between the material misrepresentation
and the loss.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); see also In re Aetna Inc. Sec. Litig.,
617 F.3d 272, 277 (3d Cir. 2010).
Defendants challenge three elements of Plaintiff’s Rule 10b-5 claim: material
misrepresentation or omission; scienter; and loss causation. The Court agrees that the Complaint
fails to allege a false statement or misleading omission of material fact, as required by the
PSLRA. As the failure of this element by itself warrants dismissal of the Rule 10b-5 claim, the
Court does not reach the sufficiency of the other elements challenged by Defendants in this
motion.
The gravamen of the instant action is that Weibo misled investors regarding its
compliance with Chinese regulations which required a license to engage in the transmission of
online audio-video material. The alleged fraud, however, does not arise from any false
representations to the public that Weibo in fact possessed the required license or that Defendants
concealed Weibo’s lack thereof. Indeed, the Complaint acknowledges that “Weibo consistently
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stated throughout the Class Period that it did not hold an audio/video program transmission
license.” (Compl., ¶ 7) (emphasis in original). Rather, Plaintiff alleges that Weibo deceived
investors by telling them that it used the websites of license-holding third parties to deliver
content posted to the Weibo platform, which had the effect of falsely assuring the public that
Weibo’s internet transmission operations were lawful under PRC regulations. Weibo, the
Complaint avers, opted to circumvent the license requirement of Circular 56 knowing that is
third-party delivery “solution” was not permissible under Chinese Law.
Before examining the sufficiency of the pleading under Rule 12(b)(6) and the PSLRA,
the Court must clarify the subject of its analysis, that is, the exact public communication
identified by the Complaint as constituting Defendants’ alleged false assurance that Weibo was
complying with PRC law. This is important because the securities fraud claim pled in the
Complaint is not grounded in any affirmative statement made by Defendants in which they assert
that Weibo was exempt from Circular 56 and/or the AVPT License requirement. Nor is it
grounded in an affirmative statement in which Defendants assert that the third-party delivery of
content brings Weibo into compliance with the AVPT License regulations. Instead, the basis for
the alleged fraud, according to the Complaint, consists of an allegedly false impression created
by Weibo’s juxtaposition of two statements: the disclosure that Chinese law requires an AVPT
License to transmit programs followed by the disclosure that Weibo, while not qualified to
obtain a license itself, routes programs through license-holding third-party websites. Taken
together, Plaintiff alleges in the Complaint, these statements
were materially misleading because they created the false impression that
Weibo was complying with PRC regulations concerning the audio/video
program transmission license. By representing that the content on Weibo
originated through third-party websites, Defendants indicated to investors
that Weibo was not at risk of violating Circular 56. In reality, Weibo was
violating Circular 56 by routing content through third-parties instead of
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holding the license itself. Defendants’ statements omitted material
information about Circular 56, namely that it applied to Weibo and that
Weibo was operating in violation of the regulation.
(Compl., ¶ 54.) Articulating the alleged wrongdoing in a slightly different manner, Plaintiff
alleges elsewhere in the Complaint that Defendants’ statements were materially misleading for
their “failure to disclose a true and accurate picture of Weibo’s compliance with PRC
regulations.” (Id., ¶ 99.)
The Court notes that, at a number of points in the Complaint, Plaintiff appears to
paraphrase or make conclusory statements about the contents of the SEC filings at issue. For
example, the Complaint avers that “Defendants engaged in a reckless gamble with investors by
assuring the public that a permit was not required, even though they knew the opposite was more
than likely true . . . .” (Id., ¶ 8.) Additionally, the Complaint alleges that Weibo’s SEC filings
“falsely stated that Weibo was not required to have a license.” (Id., ¶¶ 53, 57, 63, 69.) The
problem with these allegations is that Plaintiff never identifies where in the SEC filings such
assertions were made. Nor does the Complaint quote, cite, or reference some other public
communication by Weibo, besides the SEC filings, that contain statements which would provide
factual support for these allegations. In its own review of the pertinent sections of the SEC
filings referenced in the Complaint and submitted by the parties, the Court has not discovered
any statements even remotely similar to the language used in the allegations charging that Weibo
told the public that it “was not required to have a license.” The Complaint’s various allegations
of this nature lack a factual basis and, indeed, seem to be no more than mere hyperbole used to
bolster Plaintiff’s “false impression” theory of fraud.
In short, neither the Complaint nor Plaintiff’s brief in opposition to the motion to dismiss,
directs the Court’s attention to any part of the SEC filings which make any affirmative
17
representations as to the legality or propriety of Weibo’s regulatory compliance concerning the
AVPT License. Allegations that charge a defendant spoke in an untrue or misleading manner but
do not allege that the defendant actually made those statements or omissions fail to “show” that
the plaintiff is entitled to relief and therefore do not satisfy Rule 8(a)’s pleading standard, much
less the heightened requirement of the PSLRA. Iqbal, 556 U.S. at 679; 15 U.S.C. §§ 78u-4(b)(1)
(directing that a Rule 10b-5 claim must “specify each statement alleged to have been
misleading”). A securities fraud claim based on purported statements that a defendant did not
actually make fails, necessarily, to state a claim upon which relief can be granted. City of
Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 172 (3d Cir. 2014) (affirming dismissal of a
Rule 10b-5 claim based on statements that were not made by defendants because “[d]efendants
cannot be held responsible for statements they did not make.”) To the extent Plaintiff’s Rule 10b5 claim is based on alleged statements that Defendants did not make, it is clearly deficient under
the pleading standards of both the Federal Rules of Civil Procedure and the PSLRA.
Having clarified the contours of Plaintiff’s securities fraud claim, the Court turns to the
contention that Defendants violated Rule 10b-5 by creating a false impression regarding Weibo’s
compliance with PRC regulations imposing the AVPT License requirement. Rule 10b-5
“presents two bases for liability: (1) ‘[t]o make any untrue statement’ or (2) ‘to omit to state a
material fact necessary in order to make the statements made . . . not misleading.’” United States
v. Schiff, 602 F.3d 152, 167-168 (3d Cir. 2010) (quoting 17 C.F.R. § 240.10b-5(b)). In essence,
Plaintiff’s claim posits that, in juxtaposing two literally true statements—Weibo did not hold an
AVPT License but transmitted its programs through third-party websites that did—Defendants
implicitly made an untrue statement that Weibo’s conduct was lawful. Plaintiff’s theory fails
because the implication at the core of the securities fraud claim is not based on a plausible
18
reading of Weibo’s public statements and disclosures. This is so because the statement on which
Plaintiff focuses, regarding third-party delivery of programs, cannot be viewed in isolation from
the rest of the respective document in which it is set forth. It is axiomatic that, when analyzing
whether a complaint sets forth misleading statement or omission actionable under Section 10(b)
and Rule 10b-5, a court must “examine statements in the full context of the documents of which
they are part.” Edinburgh, 754 F.3d at 169 (citing Burlington Coat Factory, 114 F.3d at 1426).
The SEC filings at issue in this lawsuit contain extensive and unambiguous information which
renders implausible and even contradicts the misrepresentation Plaintiff maintains can be
inferred from the juxtaposed statements concerning Weibo’s lack of the AVPT License and
delivery of programs through licensed third parties. From the very start of the Class Period,
beginning with the 2014 Prospectus, Weibo’s SEC filings expressly state the following:
•
PRC rules, promulgated in 2004, mandate that a government-issued AVPT License must
be obtained by “anyone” wishing “to engage in internet broadcasting activities”
•
Circular 56, a PRC regulation issued in 2007, restricts eligibility for the AVPT License to
companies that are wholly state-owned or state controlled: “Circular 56 reiterates the
requirement . . . that online audio/video service providers must obtain an internet [AVPT]
license from [the government]” . . . and “requires all online audio/video service providers
to be either wholly state-owned or state-controlled companies”
•
An exemption to Circular 56’s eligibility restriction will not be granted to online
providers established after the rule was issued
•
Weibo is “not qualified” under Circular 56 to obtain the AVPT License because it is not
wholly state-owned or state-controlled
19
•
Weibo cannot avail itself of the exemption carved out of the AVPT License requirement
because it did not begin operation prior to the issuance of Circular 56
•
Although the current legal regime bars Weibo from obtaining the AVPT License, Weibo
“plans to apply for an [AVPT License] when feasible”
•
Failure to obtain the AVPT License exposes an online provider to various penalties,
including the imposition of fines, seizure of equipment, and suspension of online
audio/video services
Significantly, these disclosures are not scattered throughout the filings, leaving it to an
investor to cobble together the information. The statements appear all together in the relevant
documents, set forth under the heading “Regulations on Broadcasting Audio/Video Programs
through the Internet.” It is in this same section, immediately following all of the above-listed
disclosures, that Weibo states that it currently delivers programs posted to the Weibo platform
through license-holding third party websites. Read in context, Weibo’s disclosure that it delivers
content through license-holding third-parties cannot plausibly imply that Weibo’s method of
operating complies with the governing regulations concerning the AVPT License requirement or,
to put it differently, obviates Weibo’s need to obtain its own license.
Moreover, the pertinent information appears not once but twice in each and every one of
the Class Period SEC filings. The statements are also grouped together under the bold-print
heading “Risks Related to Doing Business in China” and the subheading “We may be adversely
affected by the complexity, uncertainties and changes in PRC licensing and regulation of internet
businesses.” Broadly, Weibo warns “we cannot assure you that we have obtained all the permits
or licenses required for conducing our business in China . . . .” Specifically, as to the AVPT
License requirement, the SEC filings pointedly state that “companies engaging in internet
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broadcasting activities must first obtain an [AVPT License],” and that Weibo does not have the
license but plans to apply for it when feasible. Again, Weibo discloses its risk exposure for
operating without the AVPT License: “If we fail to obtain such licenses . . . in a timely manner
or at all, we could be subject to liabilities, penalties and operational disruption.” It is in this
context that, under the “Risks” section of the SEC filings at issue, Weibo states that “[c]urrently,
all the audio/video programs posted on our website are delivered through third-party websites.”
Moreover, this section of the SEC filings expressly cross-references the section related to the
internet broadcasting regulations, discussed at length above. Taking the relevant disclosures
made in the SEC filings as a whole, no reasonable investor could interpret Defendants’ statement
as creating a “false impression” that Weibo could operate legally in the PRC without the AVPT
License.
The PSLRA places the burden on a securities fraud plaintiff “to specify . . . . the reason or
reasons why the statement is misleading.” 15 U.S.C. §§ 78u-4(b)(1). Plaintiff’s Complaint,
which itself quotes the pertinent sections from each of the SEC filings, fails to allege facts that
provide a plausible basis for connecting Defendants’ disclosures with the misleading message
Plaintiff maintains was communicated to investors. Defendants’ repeated, clear and
comprehensive communication on the subject of the government-mandated AVPT License belies
any assertion by Plaintiff that Defendants’ statements conveyed false assurances that its online
transmission of programs through third parties complied with PRC regulations.
As set forth earlier in the Opinion, the Third Circuit has held that a Rule 10b-5 claim can
be misrepresentation-based or omission-based. Plaintiff’s argument in support of the viability of
the claim also invokes the latter basis. In the brief in opposition to the motion to dismiss,
Plaintiff argues that the SEC filings misled investors by omitting material information about “the
21
risks associated with Weibo’s attempt to circumvent PRC laws by posting content through thirdparty websites.” (Opp’n Br. at 14.) Plaintiff maintains that Defendants’ disclosures at best
amounted to a “half-truth” because, having chosen to tell the public that it routed content through
third-parties holding the necessary AVPT License, Weibo should have stated “that the thirdparty solution was also illegal.” (Id. at 15.) To the extent the securities fraud alleged in the
Complaint is omissions-based, the claim is unavailing for the same reasons that Plaintiff’s
disclosures fail to create a false impression.
It is well-established that “[a]bsent a duty to disclose, silence is not fraudulent or
‘misleading under Rule 10b-5.’” Schiff, 602 F.3d at 162 (quoting Basic Inc. v. Levinson, 485
U.S. 224, 239 n.17 (1988)); see also Burlington Coat Factory, 114 F.3d at 1432 (“Except for
specific periodic reporting requirements[,] . . . there is no general duty on the part of a company
to provide the public with all material information.”). A duty to disclose under Rule 10b-5 may
arise in three circumstances: “when there is insider trading, a statute requiring disclosure, or an
inaccurate, incomplete or misleading prior disclosure.” Oran v. Stafford, 226 F.3d 275, 285-286,
(2000). An omission may constitute a violation of Rule 10b-5 only where 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) (quoting Basic, 485 U.S. at 231-232); see
also Oran, 226 F.3d at 282 (holding same). Here, Plaintiff argues that Defendants misled
investors by failing to disclose that the “sub-contracting arrangement” with third parties for
delivery of Weibo content was illegal. (Opp’n Br. at 8.) However, in light of the abundant
disclosures made by Weibo in the Class Period SEC filings, no reasonable investor could have
viewed this omission as significantly altering total mix of information concerning Weibo’s status
22
vis-à-vis the AVPT licensing regulations and the potential consequences for remaining
unlicensed.
Indeed, the potential consequences became a reality upon the issuance of the SAPPRFT
notice in the PRC. In the notice, the SAPPRFT, the PRC government agency with authority over
internet broadcasting activities, called for local authorities to suspend Weibo’s operations for
failure by Weibo to hold the AVPT License. The risk that materialized when the SAPPRFT
notice was issued on or about June 22, 2017 – suspension of Weibo’s operations for lack of the
AVPT License – was precisely the risk disclosed in Defendants’ various SEC filings.
Finally, Defendants also attack the first element of the securities fraud claim based on the
assumption, which they do not concede, that the challenged statements might be construed as
expressing Weibo’s opinion that it was acting in compliance with PRC law. Plaintiff rejects such
an interpretation as the basis for the alleged securities fraud. The opposition brief states that
“Defendants statements cannot be identified as opinions because they involve statements of
present fact – that Weibo operates legally under the PRC law via transmission through thirdparty websites.” (Opp’n Br. at 20.) Nevertheless, the Court addresses the opinion-based theory of
wrongdoing because the parties have in fact engaged in substantial argument concerning this
alleged basis for the claim.
Defendants contend that if Weibo’s disclosures somehow communicated their belief that
Weibo was exempt from the AVPT license requirement, such a belief would be a non-actionable
pure statement of opinion given Defendants’ ample disclosures and the publicly-available
regulations. Plaintiff counters that assuming Defendants’ statements are understood to express an
opinion, the opinion is “actionable because Defendants omitted then-existing facts contradicting
the basis for their public statements.” (Id. at 20.) The Court finds that, if the disclosures amount
23
to an opinion statement concerning Weibo’s compliance with Circular 56, the statement neither
mispresents nor omits facts underlying the opinion and is therefore not actionable under the
Omnicare standard.
In Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, the Supreme
Court held that a sincere statement of pure opinion does not constitute an actionable
misrepresentation or omission of fact, even if the belief is later proved to be wrong. 135 S. Ct.
1318, 1325-28 (2015) (reaching this holding in the context of Securities Act § 11, which, using
language similar to § 10(b), forbids material misstatements and omissions by an issuer of
securities in its registration statements). As a corollary to this holding, the Omnicare Court also
recognized that certain opinion statements may be actionable. Id. at 1326. The Court held that an
opinion could constitute a misrepresentation of fact or misleading omission if (1) statement
expresses an opinion not actually held by the speaker (subjectively false) and contains an
embedded assertion of incorrect facts (objectively false) or (2) the speaker omits facts
concerning the basis for the opinion and “those facts conflict with what a reasonable investor
would take from the statement itself.” Id. at 1326, 1329; see also City of Edinburgh, 754 F.3d at
170 (“Opinions are only actionable under the securities laws if they are not honestly believed and
lack a reasonable basis.”) (citing In re Merck & Co., Inc. Sec., Derivative & "ERISA" Litig., 543
F.3d 150, 166 (3d Cir. 2008)); In re Hertz Global Holdings, Inc. Sec. Litig., 2017 U.S. Dist.
LEXIS 65156 at *37 (D.N.J. Apr. 27, 2017) (summarizing Omnicare’s holding regarding
circumstances in which an opinion may be actionable under securities laws).
Plaintiff sets forth no factual allegations that satisfy any of the Omnicare conditions. As
discussed, given the extensive information provided in Weibo’s SEC filings about the AVPT
License regulations—including the breadth of their applicability (“anyone who wishes to engage
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in internet broadcasting activities”); Weibo’s current lack of license (“Weimeng is not qualified
to obtain an internet [AVPT] license under the current legal regime”); Weibo’s intention to
obtain one when eligible (“Weimeng plans to apply for an internet [AVPT] license when feasible
to do so”); and the consequences for failing to obtain an AVPT License (“if we fail to obtain
such licenses . . . in a timely manner or at all, we could be subject to liabilities and penalties”)—
no plausible reading of the Complaint and its incorporated documents could support an
embedded factual statement in the opinion concerning the lawfulness of third-party transmission
and/or Weibo’s exemption from the license requirement. Nor is there any basis in the Complaint
for concluding that Weibo failed to disclose facts regarding Weibo’s knowledge of what the
regulatory scheme permits and that an investor would understand those facts as conflicting with
the opinion.
For the reasons set forth above, the Court finds that Plaintiff’s claim for violation of Rule
10b-5 does not sufficiently plead the first element of that claim. Moreover, it does not appear that
Plaintiff could amend the Complaint to add allegations that would cure this deficiency. The
parties have supplied the Court with the pertinent sections of the SEC filings on which the
securities fraud claim is based, and Plaintiff does not identify other documents or sources that
give rise to alleged misrepresentations and omissions by Weibo. For the reasons discussed, the
Court has already found that, when read in context, the SEC filings containing the purportedly
false and misleading statements identified by the Complaint fail to plausibly support Plaintiff’s
claim. Accordingly, the securities fraud claim under Section 10(b) of the Exchange Act will be
dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) and leave to amend will not be
granted, as it appears that amendment would be futile. See Grayson v. Mayview State Hosp., 293
F.3d 103, 108 (3d Cir. 2002) (holding that upon granting a defendant's motion to dismiss a
25
deficient complaint, a district court should grant the plaintiff leave to amend within a set period
of time, unless amendment of the complaint would be inequitable or futile).
C.
Section 20(a) Control Person Claim
Section 20(a) of the Exchange Act “creates a cause of action against individuals who
exercise control over a ‘controlled person,’ including a corporation, that has committed a
violation of § 10(b).” Institutional Investors Group v. Avaya, 564 F.3d 242, 252 (3d Cir. 2009);
see also 15 U.S.C. § 78t(a). A Section 20(a) claim thus imposes secondary liability on the
controlling person for the wrong committed by the one who is controlled. In re Suprema
Specialties, Inc. Sec. Litig., 438 F.3d 256, 284–85 (3d Cir. 2006). Plaintiff’s control person
claim against Wang and Yu is predicated upon the primary liability of Defendant Weibo under
Exchange Act § 10(b). Defendants argue that because the Complaint fails to state an actionable
§ 10(b) violation, the control person claim necessarily fails to state a claim upon which relief
may be granted. Defendants are correct. Id. at 285; Shapiro v. UJB Financial Corp., 964 F.2d
272, 279 (3d Cir.1992) (holding that “once all predicate § 10(b) claims are dismissed, there are
no allegations upon which § 20(a) liability can be based.”). Accordingly, the control person
claim will also be dismissed for failure to state a claim upon which relief may be granted.
III.
CONCLUSION
For the foregoing reasons, the Court will grant Defendants’ motion to dismiss. The
Complaint will be dismissed in its entirety pursuant to Federal Rule of Civil Procedure 12(b)(6).
An appropriate Order will be filed.
s/ Stanley R. Chesler
STANLEY R. CHESLER
United States District Judge
Dated: June 6, 2018
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