Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.

20–3074
Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.
In the
United States Court of Appeals
FOR THE SECOND CIRCUIT
AUGUST TERM 2020
No. 20-3074
ALTIMEO ASSET MANAGEMENT AND ODS CAPITAL LLC,
INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,
Plaintiffs-Appellants,
v.
QIHOO 360 TECHNOLOGY CO. LTD., ERIC X. CHEN,
Defendants-Appellees,
HONYI ZHOU, XIANGDONG QI,
Defendants. *
On Appeal from the United States District Court
for the Southern District of New York
ARGUED: JUNE 3, 2021
DECIDED: NOVEMBER 24, 2021
Before: CALABRESI, POOLER, and MENASHI, Circuit Judges.
* The Clerk of Court is directed to amend the caption as set forth above.
Plaintiffs-Appellants Altimeo Asset Management and ODS
Capital LLC brought this putative class action on behalf of investors
who traded Qihoo 360 Technology securities between December 18,
2015, and July 15, 2016. The proxy materials given to the investors
explained that the company was being taken private, that there were
no “current plans, proposals or negotiations” for an “extraordinary
corporate transaction,” and that in the future, the company “may
propose or develop plans and proposals” to relist. The investors
agreed to sell their securities, and sixteen months after the company
was taken private, it was announced that it would be relisted in the
Chinese public market. The investors sued Qihoo 360 Technology Co.
Ltd. and its controlling officers, alleging that the defendants-appellees
violated the Exchange Act by, among other things, deceiving
investors about the plan to relist the company. The district court
dismissed the complaint, holding that the investors failed adequately
to allege a material misstatement or omission of fact. Because the
allegations in the complaint were sufficient to survive a motion to
dismiss on that ground, we vacate the dismissal and remand to the
district court for further proceedings.
JEREMY A. LIEBERMAN (Michael Grunfeld, on the brief),
Pomerantz LLP, New York, NY, for Plaintiffs-Appellants.
DAVID KISTENBROKER (Joni Jacobsen, Angela Liu, Brian
Raphel, on the brief), Dechert LLP, Chicago, IL, for
Defendants-Appellees.
2
20–3074
Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.
MENASHI, Circuit Judge:
In this case, we must decide whether the appellants,
representing a putative class of investors, plausibly alleged a
misstatement or omission of material fact sufficient to state a claim for
securities fraud and therefore to survive a motion to dismiss. The
appellants claim that the appellees represented to shareholders that
there were no plans to relist the company following a shareholder
buyout, when in fact the company had such a plan at the time of the
buyout. Usually, to survive a motion to dismiss a complaint need only
plead “enough facts to state a claim to relief that is plausible on its
face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). However,
“[f]or complaints alleging securities fraud, we apply heightened
pleading requirements imposed by Federal Rule [of Civil Procedure]
9(b) and the [Private Securities Litigation Reform Act].” In re
Synchrony Fin. Sec. Litig., 988 F.3d 157, 166 (2d Cir. 2021). The district
court considered the sources and contents of the pleaded facts, and it
held that the appellants’ complaint did not meet those requirements.
We disagree. We hold that the appellants adequately alleged a
misstatement or omission of material fact. In the complaint, the
appellants included facts from which we can infer that, in order for
the company to have been relisted when it was, the appellees must
have been planning to relist at the time of the shareholder vote. The
appellants also included references to news articles indicating that,
before the shareholder vote, the appellees were already planning to
relist the company. We therefore vacate the district court’s dismissal
of the appellants’ claim and remand for further proceedings.
BACKGROUND
“We review a district court’s grant of a motion to dismiss de
novo, accepting as true all factual claims in the complaint and drawing
all reasonable inferences in the plaintiff’s favor.” Henry v. County of
Nassau, 6 F.4th 324, 328 (2d Cir. 2021) (internal quotation marks
omitted). We therefore rely on the facts as alleged in the complaint in
deciding this appeal.
I
Appellee Qihoo 360 Technology Co. Ltd. (“Qihoo”) is an
internet company, incorporated under the laws of the Cayman
Islands and headquartered in Beijing. It was founded by Hongyi
Zhou and Xiangdong Qi; Zhou served as the chairman and chief
executive officer of Qihoo, while Qi served as its president and a
director. 1 In 2011, Qihoo listed its American depository shares on the
New York Stock Exchange. Zhou and Qi owned Qihoo securities
through their holding vehicles Global Village Associates Limited and
Young Vision Group Limited, respectively.
In May 2015, Zhou discussed with two investment funds the
possibility of taking Qihoo private. He also discussed the possibility
with Qi. On June 17, Zhou—along with four investment funds, Global
Village, Young Vision, and other investors (the “Buyer Group”)—
provided Qihoo’s board with a proposal to acquire all outstanding
shares not owned by the board (the “Merger”). The proposal
prompted the board to form a Special Committee chaired by director
Eric Chen, who is also an appellee in this case. The Special Committee
retained J.P. Morgan Securities (Asia Pacific) Limited to evaluate the
1The complaint named Zhou and Qi as defendants, but they were never
successfully served.
4
proposal. Ultimately, J.P. Morgan gave the Special Committee its
opinion that the proposal was fair, and in December 2015 the Special
Committee “expressly adopted” J.P. Morgan’s “analyses and
opinion.” J. App’x 403, 405. The Special Committee and the board
approved the Merger, and the board recommended that the
shareholders approve it as well. On December 18, 2015, Qihoo
executed the Merger with the Buyer Group.
The shareholders still had to vote on the Merger for it to be
consummated. In anticipation of the shareholder vote on the Merger,
Qihoo published proxy statements, amended three times
(collectively, the “Proxy Materials”). The Proxy Materials stated that
“[u]pon the completion of the Merger, the Surviving Company will
become a private company beneficially owned solely by the Buyer
Group.” Id. at 754. The documents also stated that, “except as set forth
in this proxy statement, the Buyer Group does not have any current
plans, proposals or negotiations that relate to or would result in an
extraordinary corporate transaction involving the Company’s
corporate structure, business, or management, such as a merger,
reorganization, liquidation, relocation of any material operations, or
sale or transfer of a material amount of the Company’s assets.” Id. at
758. The Proxy Materials further stated that, “subsequent to the
consummation of the Merger, the Surviving Company’s management
and Board … may propose or develop plans and proposals, …
including the possibility of relisting the Surviving Company or a
substantial part of its business on another internationally recognized
stock exchange.” Id. The Merger was approved with 99.8 percent of
the votes cast at the shareholder meeting, and it was closed on July
15, 2016. The outstanding shares were purchased for $9.4 billion.
5
After the Merger, Qihoo spun off its main businesses into 360
Technology Co. Ltd. On November 2, 2017, SJEC—an elevator-
manufacturing company listed on the Shanghai Stock Exchange—
“announced that it would be conducting a backdoor listing,” that is,
a reverse merger, with 360 Technology Co. Ltd. Id. at 419. About four
months later, on February 28, 2018, the necessary asset restructuring
was completed and Qihoo shares effectively began trading on the
Shanghai Stock Exchange. By the end of the first trading day, Qihoo
had a market capitalization of $62 billion.
II
Altimeo Asset Management (“Altimeo”) is a portfolio
management company based in France. ODS Capital LLC (“ODS”) is
a Florida limited liability company with its primary office in Jupiter,
Florida. Both Altimeo and ODS, the appellants in this case, traded
Qihoo securities during the period from December 2015 to June 2016.
In August 2019, Altimeo and ODS, on behalf of themselves and
similarly situated plaintiffs, filed a putative class action complaint in
the U.S. District Court for the Central District of California. The
complaint alleged that Qihoo, Zhou, Qi, and Chen violated § 10(b),
§ 20(a), and § 20A of the Exchange Act, as well as SEC Rule 10b-5. The
complaint alleged that the Buyer Group had a plan to relist Qihoo in
the Chinese capital market at the time of the Merger and that the
financial projections the appellees provided to the Buyer Group
differed from the projections provided in the Proxy Materials.
Because the appellants did not know of the plan to relist or these more
optimistic projections, they sold their securities at “artificially
deflated prices.” J. App’x 500.
6
To support its allegations, the complaint refers to several
sources. It refers to a confidential witness who “worked in Qihoo’s
Public Relations department” from 2014 to 2017 and “reported to a
senior editor in the department.” Id. at 435. Among other things, the
witness claims that, in mid-2015, the witness “attended a department
meeting where Defendant Qi directed the attendees that they needed
to keep a low profile concerning the relisting plan and should ‘not
release this information outside the company.’” Id. at 436. The
complaint also incorporates news articles in Chinese publications
from November and December 2015 in which the authors report that
the privatization plan Qihoo distributed to the Buyer Group included
plans to relist the company. And the complaint further alleges that
“[i]t typically takes companies at least a full year on the quickest
possible timeline, and usually longer, from the time they first start to
consider a backdoor listing until they reach agreement with a shell
company to conduct a reverse merger.” Id. at 422-23. 2 Moreover, the
complaint states that “Qihoo’s fundamental restructuring of its
businesses was particularly complex and would have required a
significant amount of time to complete following the Merger.”
J. App’x 424.
The case was transferred to the U.S. District Court for the
Southern District of New York on October 30, 2019. The appellees
2 The complaint lists eight distinct steps: “[h]iring a financial advisor (or
investment bank) and a legal advisor”; “[i]dentifying potential shell
companies”; “[r]eaching a preliminary agreement with a shell company”;
“[c]onducting auditing and compliance work”; “[b]oth sides to the
transaction performing due diligence on each other”; “[c]onducting
regulatory assessments”; “[n]egotiating the transaction terms”; and
“[c]onducting corporate restructurings.” J. App’x 423.
7
filed a motion to dismiss for failure to state a claim under Federal Rule
of Civil Procedure 12(b)(6). The district court granted the motion,
holding that the complaint “does not adequately allege any material
misrepresentations or omissions by defendants.” Altimeo Asset Mgmt.
v. Qihoo 360 Tech. Co. Ltd., No. 19-CV-10067, 2020 WL 4734989, at *8
(S.D.N.Y. Aug. 14, 2020). In particular, the district court held that the
complaint did not adequately plead “that defendants, as of the
Merger, had in place a concrete plan to relist Qihoo” as opposed
merely “to envisioning a possible future relisting.” Id. at 17.
Altimeo and ODS now appeal.
DISCUSSION
We review the district court’s dismissal of a complaint de novo.
Synchrony Fin. Sec. Litig., 988 F.3d at 166. The appellants’ complaint
contains three counts. Count I alleges that the appellees are liable for
false or misleading statements in violation of § 10(b) of the Exchange
Act and SEC Rule 10b-5. Count II claims that Qihoo, Zhou, and Qi
traded Qihoo securities while in possession of insider information in
violation of § 20A of the Exchange Act. Finally, Count III asserts that
Zhou, Qi, and Chen violated § 20(a) of the Exchange Act as
controlling persons of Qihoo during the time Qihoo violated § 10(b).
The district court dismissed the complaint in its entirety. We address
each count in turn.
I
First, we consider the appellants’ claim under § 10(b) and Rule
10b-5. Section 10(b) provides that it is unlawful “[t]o use or employ,
in connection with the purchase or sale of any security registered on
a national securities exchange or any security not so registered, … any
manipulative or deceptive device.” 15 U.S.C. § 78j(b). Rule 10b-5
8
implements that statute by prohibiting “mak[ing] any untrue
statement of a material fact or [omitting] to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, … in
connection with the purchase or sale of any security.” 17 C.F.R.
§ 240.10b-5. The appellants allege that four groups of statements
violate those provisions: (1) “statements throughout the Proxy
Materials stating clearly that there were no plans in place for …
relisting Qihoo on a Chinese stock exchange”; (2) “statements
throughout the Proxy Materials stating clearly that there were no
alternatives to the Merger that would be more beneficial” to
shareholders; (3) “statements concerning the fairness of the Merger”;
and (4) statements “[c]oncerning the [r]easons for the Merger.”
J. App’x 448-49.
To state a claim for relief under § 10(b) and Rule 10b-5, “a
plaintiff must allege that the defendant (1) made misstatements or
omissions of material fact, (2) with scienter, (3) in connection with the
purchase or sale of securities, (4) upon which the plaintiff relied, and
(5) that the plaintiff’s reliance was the proximate cause of its injury.”
Setzer v. Omega Healthcare Invs., Inc., 968 F.3d 204, 212 (2d Cir. 2020)
(quoting ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d
Cir. 2007)). In addition, because such a claim sounds in fraud, the
plaintiff “must state with particularity the circumstances constituting
fraud.” Fed. R. Civ. P. 9(b); see also 15 U.S.C. § 78u-4(b)(1) (“[I]f an
allegation regarding the [misleading] statement or omission is made
on information and belief, the complaint shall state with particularity
all facts on which that belief is formed.”).
The district court held that the appellants failed adequately to
allege the first element of a Rule 10b-5 claim—specifically, the
9
complaint “[did] not adequately allege any material
misrepresentations or omissions by defendants.” Altimeo Asset Mgmt.,
2020 WL 4734989, at *8. The district court considered the appellants’
allegation that, at the time the Proxy Materials were sent to
shareholders, “the Buyer Group already planned to relist Qihoo at a
far-higher valuation in China post-transaction.” Id. (internal
quotation marks omitted). But the district court disregarded the
confidential witness’s allegations as unreliable, and it found that the
news articles did not describe “a concrete plan to relist”—that is, the
articles did not provide the “terms, participants, profitability, or
mechanics” of the alleged plan. Id. at *16. The district court therefore
dismissed the appellants’ claim under § 10(b) and Rule 10b-5.
We disagree that the appellants failed adequately to allege any
material misrepresentations or omissions. Although pleading
standards are heightened for securities fraud claims, “we must be
careful not to mistake heightened pleading standards for impossible
ones.” Synchrony Fin. Sec. Litig., 988 F.3d at 161. “In considering a
motion to dismiss a [§] 10(b) action, we must accept all factual
allegations in the complaint as true and must consider the complaint
in its entirety.” Slayton v. Am. Express Co., 604 F.3d 758, 766 (2d Cir.
2010). We “draw all reasonable inferences in favor of the plaintiff,”
and “dismissal is appropriate only where appellants can prove no set
of facts consistent with the complaint that would entitle them to
relief.” Meyer v. JinkoSolar Holdings Co., 761 F.3d 245, 249 (2d Cir. 2014)
(alteration omitted).
The appellants adequately alleged misstatements and
omissions on the part of the appellees. The appellants allege in the
complaint that, according to “[a]n expert in Chinese and United States
M&A and capitals market transactions,” it “typically takes companies
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at least a full year on the quickest possible timeline, and usually
longer, from the time they first start to consider a backdoor listing
until they reach agreement with a shell company to conduct a reverse
merger.” J. App’x 422-23. The complaint goes on to list the multiple
steps required to perform a backdoor listing. See supra note 2.
Additionally, the appellants provide two news articles from 2015
which report that a privatization plan was provided to the Buyer
Group that involved relisting the company on the Chinese stock
market. J. App’x 422, 424. We can infer from these allegations, taken
together, that the statement in the Proxy Materials that “the Buyer
Group does not have any current plans” to relist Qihoo—as well as
its omission of any such plan—was misleading. Id. at 758; see also Fecht
v. Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995) (“A plaintiff may …
satisfy Rule 9(b) with allegations of circumstantial evidence if the
circumstantial evidence alleged explains how and why the statement
was misleading when made.”). 3 The allegations create a plausible
inference that a concrete plan was in place at the time Qihoo issued
the Proxy Materials.
The alleged misstatements and omissions were also material. A
3The district court disregarded the statements attributed to the confidential
witness, finding that those statements bore “none of the indicia of reliability
that have led courts … to sustain [confidential witness] allegations as
worthy of crediting.” Altimeo Asset Mgmt., 2020 WL 4734989, at *14. Because
the other facts alleged in the complaint sufficiently plead material
misstatements and omissions, we need not consider whether the district
court’s treatment of the confidential witness’s statements was correct. See
Novaks v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) (“[W]here plaintiffs rely on
confidential personal sources but also on other facts, they need not name
their sources as long as the latter facts provide an adequate basis for
believing that the defendants’ statements were false.”).
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statement is materially misleading when “the defendants’
representations, taken together and in context, would have misled a
reasonable investor.” Rombach v. Chang, 355 F.3d 164, 172 n.7 (2d Cir.
2004) (quoting I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936
F.2d 759, 761 (2d Cir. 1991)). Omissions are material when “there is a
substantial likelihood that the disclosure of the omitted fact would
have been viewed by the reasonable investor as having significantly
altered the total mix of information made available.” Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (internal quotation
marks omitted). In Basic Inc. v. Levinson, the Supreme Court
concluded that “materiality will depend at any given time upon a
balancing of both the indicated probability that the event will occur
and the anticipated magnitude of the event in light of the totality of
the company activity.” 485 U.S. 224, 238 (1998) (internal quotation
marks omitted).
For the purpose of surviving a motion to dismiss, the alleged
misstatements and omissions meet our standard for materiality.
“[B]ecause the materiality element presents a mixed question of law
and fact, it will rarely be dispositive in a motion to dismiss.” In re
Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir. 2010)
(internal quotation marks omitted); Ganino v. Citizens Utils. Co., 228
F.3d 154, 163 (2d Cir. 2000) (“We held that the materiality of merger
negotiations depends on the specific facts of each case.”). “[A]
complaint may not properly be dismissed … on the ground that the
alleged misstatements or omissions are not material unless they are
so obviously unimportant to a reasonable investor that reasonable
minds could not differ on the question of their importance.” Goldman
v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). In SEC v. Shapiro,
information concerning merger negotiations was material even when
12
“negotiations had not jelled to the point where a merger was
probable.” 494 F.2d 1301, 1306-07 (2d Cir. 1974). Here, the appellants
allege that the relisting process would have similarly required
negotiations and “[r]eaching a preliminary agreement with a shell
company.” J. App’x 423. Because the relisting was announced a mere
sixteen months after the Merger, the appellants allege that these
negotiations were ongoing—or had already happened—at the time of
the shareholder vote. We do not find those alleged negotiations “so
obviously unimportant to a reasonable investor” as to allow the
dismissal of the appellants’ claims. Goldman, 754 F.2d at 1067.
In sum, “even securities plaintiffs need not prove their entire
case within the confines of the complaint.” Synchrony Fin. Sec. Litig.,
988 F.3d at 161. Regardless of whether the appellants ultimately prove
that there are material misstatements or omissions of fact, they have
alleged enough to survive a motion to dismiss on those grounds. 4
II
The appellants also allege violations of § 20(a) and § 20A of the
Exchange Act. The district court dismissed the appellants’ claims
under § 20(a) and § 20A because it held that the appellants did not
adequately allege an independent Exchange Act violation—here, the
§ 10(b) claim. Altimeo Asset Mgmt., 2020 WL 4734989, at *17.
4 The appellants also allege that the district court erred when it held that the
complaint’s “claims of material misrepresentations and omissions all turn
on” whether the “defendants, as of the Merger, had in place a concrete plan
to relist Qihoo.” Altimeo Asset Mgmt., 2020 WL 4734989, at *17. In the
appellants’ view, the appellees made material misstatements or omissions
regarding the fairness of the merger price or the reasons for the merger
independent of whether there was a plan to relist Qihoo. Appellants’ Br. 47-
52. Because we conclude the appellants plausibly alleged that there was a
relisting plan, we need not rely on this argument in this appeal.
13
Section 20(a) “provides that individual executives, as
‘controlling person[s]’ of a company, are secondarily liable for their
company’s violations of the Exchange Act.” Employees’ Ret. Sys. v.
Blanford, 794 F.3d 297, 305 (2d Cir. 2015) (alteration in original)
(quoting 15 U.S.C. § 78t(a)). Section 20A “provides an express private
right of action for those who trade contemporaneously with an inside
trader.” Steginsky v. Xcelera Inc., 741 F.3d 365, 372 (2d Cir. 2014).
Actions under either section require an independent violation of the
Exchange Act. See Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.
1998) (“In order to establish a prima facie case of liability under § 20(a),
a plaintiff must show … a primary violation by a controlled person.”);
Jackson Nat’l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 704 (2d
Cir. 1994) (holding that a plaintiff, “in order to state a claim under
§ 20A, must plead as a predicate an independent violation of the”
Exchange Act).
As we have explained, the district court erred when it held that
the appellants failed adequately to allege a material misstatement or
omission. We therefore vacate the district court’s dismissal of the
§ 20(a) and § 20A claims as well.
CONCLUSION
Because the district court reached only the question of whether
the appellants adequately alleged a material misstatement or
omission, we leave all other aspects of the case to the district court to
consider in the first instance. We VACATE the district court’s
dismissal of the complaint and REMAND for further proceedings
consistent with this opinion.
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