United States District Court, S.D. New York
Jiehua Huang, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
AirMedia Group Inc., Harman Man Guo and Richard Peidong Wu, Defendants.
L. CARTER, JR., District Judge
are purchasers of American Depository Receipts
("ADRs") belonging to Defendant AirMedia Group Inc.
("AirMedia"). Lead Plaintiff Jiehua Huang
("Plaintiff), individually and on behalf of all others
similarly situated, alleges that Defendants AirMedia, Herman
Man Guo, and Richard Peidong Wu (collectively
"Defendants"), misrepresented the value of
AirMedia's ADRs and the finality of a publicized
agreement with Shenzhen Liantronics Co., Ltd.
("Liantronics") between April 7, 2015, and June 15,
2015 (the "Class Period"). Plaintiff asserts claims
under Section 10(b), Rule 10b-5, and Section 20(a) of the
Securities Exchange Act of 1934 (the "SEA").
March 10, 2016, Defendants moved to dismiss the amended
complaint (the "Amended Complaint") in its entirety
for failure to plead fraud with particularity, failure to
state a claim, and for lack of personal jurisdiction over
Defendant Richard Peidong Wu. On May 27, 2016, Plaintiff
moved to strike a public securities filing appended as
Exhibit J submitted in support of Defendants' motion to
dismiss on the grounds that the filing is neither alleged in
nor integral to the Amended Complaint.
reasons set forth below, Plaintiffs motion to strike Exhibit
J is denied. Defendants' motion to dismiss the Amended
Complaint is GRANTED in its entirety. II. FACTUAL ALLEGATIONS
Plaintiffs allegations in the Amended Complaint as to the
facts underlying this action are taken as true for the
purposes of this motion. Defendant AirMedia provides
advertising platforms and services to businesses that
primarily advertise their products in the Republic of China.
Amd. Compl. ¶ 2. AirMedia trades its ADRs on the U.S.
NASDAQ stock exchange. Amd. Comp. ¶ 20. During the class
period, Defendant Herman Man Guo ("Guo") was, and
still is, a Board of Director, Chief Executive Officer, and
substantial owner of AirMedia, as well as the "actual
controller" of AirMedia's advertising affiliate,
AirMedia Group Co., Ltd. ("AM Advertising"). Amd.
Compl. ¶ 21. During the same time frame, Defendant
Richard Peidong Wu ("Wu") was, and still is,
AirMedia's Chief Financial Officer. Defendant Wu
allegedly maintains a residence in Carmel, IN and continues
to have extensive ties to the U.S. - assertions Defendant Wu
disputes. Amd. Compl. ¶ 22; Defs.' Brief at 24;
March 8, 2016 Declaration of Richard Peidong Wu ("Wu
Decl, " Dkt. No. 47) ¶¶ 5-9.
the Class Period, Plaintiff and other Class members purchased
AirMedia's ADRs. During that time period, Defendants
allegedly engaged in a scheme to artificially inflate the
value of AM Advertising and the trading price of the ADRs.
Defendants did so by announcing the existence of a sham
contract with the intended effect of precipitating a
perception in the market that AM Advertising and AirMedia
were more valuable than they were; as a result,
AirMedia's market capitalization artificially inflated by
more than $500 million in a matter of days. Amd. Compl.
Plaintiff alleges that in early 2015, AirMedia began
implementing strategies to transform its advertising business
into a "leading in-flight and on-train Wi-Fi operator in
China." Id. ¶ 52. In 2015, AirMedia began
discussions of an agreement for Shenzhen Liantronics Co.,
Ltd. ("Liantronics") to purchase 5% equity interest
of AM Advertising. Id. ¶ 4. Thereafter,
AirMedia issued a press release about the Liantronics
agreement, dated April 7, 2015. In the press release,
AirMedia announced that it had sold 5% of the equity in AM
Advertising to Liantronics. Under the purported agreement,
Liantronics would pay RMB 150 million in cash, which implied
a value for AM Advertising of RMB 3 billion ($484 million).
This valuation caused the price of AirMedia's ADRs to
increase by 150% over the following three weeks. ]xL
However, the press release concealed the underlying contract
and failed to fully disclose the "unrealistic"
contract terms. Id. ¶ 5. Chief among the
contract provisions was a requirement that AM Advertising
achieve an improbable $31 million profit target for fiscal
year ("FY") 2015; Liantronics was given the right
to terminate the transaction for any reason - an option that
essentially rendered the agreement illusory. Amd. Compl.
one day before the announcement, on April 6, 2015,
AirMedia's ADRs traded below $2 - implying a valuation of
approximately $100 million for the entire company.
Id. ¶ 55. On April 8, 2015, AirMedia's ADRs
closed at $2.84 - an increase of 38.54%. IcL¶59. By
April 17, 2015, AirMedia's ADRs closed at $4.62 - an
increase of 90.1% from April 8, 2015. AirMedia's failure
to disclose the unrealistic profit target and
Liantronics' right to walk away accounted for the ADRs
reaching a closing price of $5.00 by April 23, 2015. IcL
April 28, 2015, investor and Forbes contributor Richard
Pearson published an English translation of the terms of the
contract, which he found written in Chinese on
Liantronics' website. He also issued a detailed report
concluding that the Liantronics deal was a sham because of
its unrealistic contract terms. The deal between AM
Advertising and Liantronics was more accurately characterized
as a short-term loan to AirMedia than a 5% sale of AM
Advertising, as AirMedia had previously claimed.
Pearson's investigation also disclosed that Liantronics
had failed to conduct any due diligence before entering into
the transaction - a fact which further supported his
assertion that the deal was non-binding and illusory. Amd.
Compl. ¶¶ 5, 6.
following day, April 29, 2015, AirMedia attacked
Pearson's report in a press release. The press release
did not dispute Pearson's interpretation of the contract
terms; rather, it appended a letter from Defendant Guo to the
shareholders, in which he characterized the Liantronics
transaction as "arms-length and serious" and
dismissed the assertion that Liantronics had not conducted
due diligence as "erroneous". Amd. Compl. ¶ 7.
Plaintiffs assert that Defendants' representations had
the intended (and actual) effect of concealing the truth
regarding the value of AM Advertising and AirMedia, thereby
boosting the trading price of the ADRs.
May 18, 2015 press release and earnings call, Defendants Guo
and Wu again emphasized AM Advertising's strong valuation
and asserted that the Liantronics transaction would proceed.
Amd. Compl. ¶¶ 87, 89, 91-94. The price of the ADRs
continued to climb. Amd. Compl. ¶¶ 95-96.
weeks later, on June 13, 2015, AirMedia announced that it
would terminate the Liantronics contract in favor of a new
agreement to sell 75% of AM Advertising to another buyer,
Beijing Longde Wenchuang Fund Management Co., Ltd.
("Longde Wenchuang"), for RMB2.1 billion ($338
million). The new deal required AM Advertising to meet even
higher profit targets; AM Advertising was obligated to earn
aggregate net profit equal to or exceeding RMB 1.0592 billion
($170.6 million) for combined fiscal years 2015 to 2018. If
AM Advertising did not meet the targets, Longde Wenchuang
would be entitled to the remaining 25% interest for no
additional consideration. Under the new deal, Am
Advertising's valuation was approximately 30% below the
total value implied in the Liantronics deal. Additionally, AM
Advertising's failure to achieve the profit targets could
result in the conveyance of the entire business for the
initial price of just RMB2.1 billion. Amd. Compl. ¶ 9.
alleges that as a result of the announcement, investors
learned that the valuation ascribed to AM Advertising in the
earlier Liantronics transaction was artificially inflated.
Furthermore, investors learned that because it was even more
improbable for AM Advertising to meet the profit targets
associated with the new transaction, it was a virtual
certainty that AirMedia would have to transfer the remaining
interest in AM Advertising to Longde Wenchuang for no
consideration. Therefore, investors learned that, in the new
deal, Defendants accurately valued AM Advertising, and
therefore, AirMedia itself, at 30% less than implied by the
purported deal with Liantronics. Amd. Compl. ¶ 11.
price of AirMedia's ADRS dropped from $7.26 per ADR on
June 12, 2015 (the day before the announcement) to $3.52 per
ADR on June 18, 2015 - representing a 52% decline in value.
Amd. Compl. ¶ 12. Plaintiff asserts that as a result, he
and other members of the Class suffered substantial harm.
Id. By contrast, Defendants Guo and Wu personally
benefitted from the fraud. Id. ¶ 3. Plaintiff
contends that Defendant Guo, who owns approximately 76.11% of
AM Advertising, personally benefitted "by the cash
infusion associated with the new transaction[s]" prior
to the ADRs' decline in value. Id. ¶ 14.
For his part, Defendant Wu intended to, and did, capitalize
on the artificially inflated SDR price by selling large
swaths of holding in AirMedia before the truth was exposed.
Id. ¶ 3.
move to dismiss on several grounds. First, Defendants move to
dismiss Plaintiffs claims that Defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5
pursuant to Rules 9(b), 12(b)(6), and the Private Securities
Litigation Reform Act ("PSLRA"). Specifically,
Defendants assert that Plaintiff failed to: (1) allege any
misstatements or omissions by any of the Defendants; (2)
plead any scienter; and (3) plead loss causation. Second,
Defendants move to dismiss for lack of personal jurisdiction
as to Defendant Wu based on deficient service of process.
Plaintiff moves to strike Exhibit J from the record and the
addressing Defendants' Rule 9(b) and Rule 12(b)(6)
motions to dismiss or Plaintiffs motion to strike Exhibit J,
the Court must first address the preliminary question of
service. Arrowsmith v. United Press Int'l, 320
F.2d 219 (2d Cir. 1963) ("logic compel[s] initial
consideration of the issue of jurisdiction over the
defendant-a court without such jurisdiction lacks power to
dismiss a complaint for failure to state a claim.").
Amended Complaint asserts that Defendant Wu, AirMedia's
CFO, "maintains a residence in Carmel, Indiana, and
continues to have extensive ties to the U.S." Amend.
Compl. ¶ 22. On that basis, Plaintiffs hired an
independent process server who attempted to serve Defendant
Wu at his alleged residence in Indiana in January 2016.
Affidavit of Service, ECF No. 41. According to the Affidavit
of Service, service of process on Defendant Wu was attempted
by affixing copies of the summons and complaint at a
residence located at 358 Pintail Court, Carmel, IN 46032 and
subsequently mailing copies to that address. Id. The
Affidavit of Service does not contain facts establishing that
personal service ...