Ed Hershewe v. Joyy, Inc.

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS MAY 9 2023
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
ED J. HERSHEWE, Individually and on No. 22-55377
behalf of all others similarly situated,
D.C. No.
Plaintiff, 2:20-cv-10611-SB-AFM
and
MEMORANDUM*
GEDION DEMMISSIE; SURESH GOYAL,
Co-Lead Plaintiffs,
Plaintiffs-Appellants,
v.
JOYY, INC., FKA YY, Inc.; et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Stanley Blumenfeld, Jr., District Judge, Presiding
Argued and Submitted April 21, 2023
San Francisco, California
Before: SCHROEDER, CALLAHAN, and BUMATAY, Circuit Judges.
Gedion Demmissie and Suresh Goyal (“Appellants”) represent a proposed
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
class of investors asserting securities fraud claims against JOYY, Inc. (“JOYY”)—
a Chinese video streaming platform—for violations of the Securities Exchange Act
of 1934 (the “Exchange Act”). The claims are brought under two causes of action:
(1) Section 10(b) and Rule 10b-5 promulgated thereunder, 15 U.S.C. § 78j(b); 17
C.F.R. § 240.10b-5; and (2) Section 20(a), 15 U.S.C. § 78t(a) (establishing liability
for controlling persons). The district court granted Defendants’ motion to dismiss
Appellants’ Second Amended Complaint (“SAC”) with prejudice, and Appellants
seek review. We have jurisdiction under 28 U.S.C. § 1291 and review the district
court’s order de novo. See Curry v. Yelp Inc., 875 F.3d 1219, 1224 (9th Cir. 2017).
We affirm.
To state a securities-fraud claim, a plaintiff must first plead “a material
misrepresentation or omission” (i.e., “falsity”). City of Dearborn Heights Act 345
Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 613 (9th Cir. 2017). To
plead falsity, Appellants must specify with particularity “each statement alleged to
have been misleading [and] the reason or reasons why the statement is misleading.”
In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 877 (9th Cir. 2012); Fed. R. Civ.
P. 9(b) (requiring plaintiffs “state with particularity the circumstances constituting
fraud”); Private Securities Litigation Reform Act (PSLRA) of 1995, 15 U.S.C.
§§ 78u–4(b)(1)(B) (same). “The court need not . . . accept as true allegations that
contradict matters properly subject to judicial notice or by exhibit.” In re Gilead
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Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).
Appellants argue in their SAC that JOYY failed to disclose that “a material
portion of [its] users” were bots used to manufacture and inflate revenues through
fake gifting transactions. Appellants fault the district court for not crediting
evidence from a Report by short seller Muddy Waters Capital LLC, as well as
Appellants’ expert Dr. Knoblock. We agree with the district court that these sources
lacked “indicia of reliability” and failed to substantiate Appellants’ allegations of
falsity.
First, the Muddy Waters Report disclaims all liability and presents its contents
“without warranty of any kind.” It “makes no representation, express or implied, as
to the accuracy, timeliness, or completeness” of its claims. In addition, Muddy
Waters had a significant financial interest in seeing JOYY’s stock decline. That
might all be okay—if the SAC sufficiently pleaded falsity. But the Muddy Waters
Report fails to detail how it determined that various IP addresses of alleged fake
users or bots are associated with JOYY. And Appellants failed to allege additional
facts supporting this central claim of fraud. Moreover, the other allegations in the
Muddy Waters Report don’t show that Defendants’ disclosures were materially false
or misleading. For example, the Report describes a promotion in which JOYY
openly created “Platform Angels” to award gifts, encouraging user activity.
Appellants do not explain why this promotional activity is evidence of securities
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fraud. Thus, Appellants’ securities fraud claims are “merely conclusory,
unwarranted deductions of fact, or unreasonable inferences,” which this court need
not accept. Sprewell, 266 F.3d at 988.
Appellants’ arguments relating to their expert Dr. Knoblock fare no better.
The SAC states that after conducting an “independent review” of the Muddy Waters
Report, Dr. Knoblock found its “data analysis and collection methodology to be
sound and agree[d] with the report’s conclusions.” But this provides little insight
into what conclusory statements in the Report were determined to be true by Dr.
Knoblock when forming his overall assessment. And we agree with the district court
that Dr. Knoblock’s statistical evidence “failed to validate the Report’s conclusions
or establish that any of Defendants’ statements were false when made.” More is
required to show falsity. See In re Nektar Therapeutics Sec. Litig., 34 F.4th 828,
837 (9th Cir. 2022) (“Plaintiffs cannot evade the PSLRA’s exacting pleading
standards by merely citing an expert who makes assertions about falsity based on
questionable assumptions and unexplained reasoning.”).
Because Appellants have failed to sufficiently allege falsity, we need not
address scienter or the Section 20(a) controlling persons claim. See Zucco Partners,
LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009). The district court did
not err in granting Defendants’ motion to dismiss.
AFFIRMED.
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