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In re Idreamsky Technology Limited Securities Litigation

United States District Court, S.D. New York

February 22, 2017



          J. PAUL OETKEN United States District Judge.

         The Consolidated Amended Class Action Complaint (“Complaint”) in this action was filed on March 25, 2016, by Plaintiffs[1] against iDreamSky Technology Limited (“IDS”), its officers and directors, and four underwriters (collectively, “Defendants”). (Dkt. No. 38 (“Compl.”).) The Complaint alleges violations of Sections 11, 12 and 15 of the Securities Act, Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5. Before the Court are two motions to dismiss, filed by IDS and by the four underwriter Defendants. (Dkt. No. 40; Dkt. No. 42.) For the reasons that follow, these motions are granted in part and denied in part.

         I. Background

         The allegations in the Complaint relate to American Depository Shares (“ADSs”) issued by IDS in an initial public offering (“IPO”) on August 7, 2014. (Compl. ¶¶ 35-37.) In particular, Plaintiffs allege that IDS failed to disclose the adverse financial impact of delays in its release of the game Cookie Run in China and its lack of an adequate third-party billing platform.

         IDS is a mobile game-publishing platform in China. (Id. ¶ 27.) Game developers grant IDS access to the source code of their games and IDS distributes the games through both proprietary and third-party distribution channels, and also offers “games as a service.” (Id.)

         Cookie Run is a mobile game in which a gingerbread man must run, run, run as fast as he can in order to escape an oven's flames. (Id. ¶ 29.) Cookie Run is enormously popular in South Korea-the Complaint reports that it was downloaded on about half of all South Korean smartphones. (Id.)

         IDS sought to localize and distribute Cookie Run in China, with an expected release date in 2014. (Id. ¶¶ 31, 38.) In order to do so, IDS needed to acquire the necessary licenses and source code. (Id. ¶ 32.) However, the Complaint alleges that this process was rife with delay, due to disagreements with the Korean game developer. (Id. ¶¶ 32-34.)

         On August 7, 2014, IDS filed a Registration Statement and Prospectus with the Securities and Exchange Commission (“SEC”) in connection with its initial public offering of 7, 700, 000 ADSs. (Id. ¶¶ 34-35.) Plaintiffs allege that the Registration Statement and Prospectus failed to disclose the risks resulting from delay in the Cookie Run launch and failed to include a general risk disclosure. (Id. ¶¶ 45-46.) Plaintiffs claim that IDS also failed to disclose risks relating to its third-party billing platform, which experienced frequent technical issues leading to IDS's inability to fully monetize its mobile games. (Id. ¶¶ 42, 49.) Plaintiffs also claim that statements made by a company officer in connection with the IPO and a press release issued on November 25, 2014, were misleading because the revenue guidance in the release incorporated projected revenues from Cookie Run even though IDS and its officers knew that the release of Cookie Run would be delayed. (Id. ¶¶ 50-52.)

         On March 13, 2015, IDS issued a press release revising its revenue guidance because “in the fourth quarter of 2014, the launch of a popular casual game was delayed.” (Id. ¶ 54.) And on March 23, 2015, IDS issued another press release announcing its 2014 earnings, which also confirmed that “revenue for the fourth quarter of 2014 was also negatively impacted as a result of a delay in the launch of Cookie Run due to that [sic] the Company received the source code of the game later than scheduled.” (Id. ¶ 56.) On an earnings conference call the same day, IDS confirmed that the Cookie Run launch delay was one of the reasons for the “shortfall on guidance” (id. ¶ 57), and also noted ongoing problems “due to the third party telecom carrier billing code issue” (id. ¶ 59).

         Plaintiffs filed four putative class actions in this Court, naming as Defendants IDS, its officers and directors (the “Individual Defendants”), and four underwriters of IDS's IPO (the “Underwriter Defendants”). (Dkt. No. 1.) The Court then consolidated these actions on January 25, 2016, designating Hoong as Lead Plaintiff, and the operative Consolidated Amended Class Action Complaint was filed on March 25, 2016. (Dkt. No. 35; Dkt. No. 38.) IDS and the Underwriter Defendants separately move to dismiss the claims against them.[2] (See Dkt. No. 40; Dkt. No. 42.)

         II. Legal Standard

         “To survive a motion to dismiss, a complaint must plead enough facts to state a claim to relief that is plausible on its face.” Litwin v. Blackstone Group, L.P., 634 F.3d 706, 715 (2d Cir. 2011) (quoting ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged.” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662 (2009)). For claims sounding in fraud, a plaintiff must satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires that “the circumstances constituting fraud . . . be stated with particularity.” Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000). In considering a motion to dismiss, the court must “accept[] all factual allegations as true and draw[] all reasonable inferences in the plaintiff's favor.” Litwin, 634 F.3d at 715.

         Defendants move to dismiss Plaintiffs' claims under Sections 11, 12(a)(1), and 12(a)(2) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Section 11 imposes strict liability on certain participants in a registered securities offering if “any part of the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a). Section 12(a)(2) imposes similar liability for misstatements or omissions in a prospectus. Id. § 77l(a)(2). And Section 12(a)(1) imposes similar liability on sellers of unregistered securities. Id. § 77l(a)(1). Section 10(b) of the Exchange Act and Rule 10b-5 impose liability where a defendant made omissions or misstatements of material fact, with scienter, in connection with the sale of securities. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir. 2007).

         III. Discussion

         The Court first considers Plaintiffs' Securities Act claims and next considers Plaintiffs' Exchange Act claims.[3]

         A. Securities Act Claims

         As a threshold matter, Defendants argue that Plaintiffs' Securities Act claims are subject to the heightened pleading standard of Rule 9(b), rather than the more liberal requirements of Rule 8(a), because they “sound in fraud.” (Dkt. No. 41 at 9.) However, the Court need not decide which ...

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