Baliga v. Link Motion Inc.
| Decision Date | 10 August 2022 |
| Docket Number | 18-cv-11642 (VM) (VF) |
| Parties | WAYNE BALIGA, Plaintiff, v. LINK MOTION INC. F/K/A NQ MOBILE INC., VINCENT WENYONG SHI, ROLAND WU, and ZEMIN XU, Defendants. |
| Court | U.S. District Court — Southern District of New York |
REPORT AND RECOMMENDATION
Plaintiff Wayne Baliga (“Plaintiff”) commenced this action against Defendants Link Motion Inc. (“LKM” or the “Company”), Vincent Wenyong Shi (“Shi”), Roland Wu (“Wu”), and Zemin Xu (“Xu”) to recover damages and equitable relief for Defendants' alleged violation of the federal securities laws and state common law. Plaintiff's suit arises from his purchase and ownership of American Depository Shares (“ADS”) of LKM. More specifically Plaintiff seeks to recover losses resulting from an alleged “multi-year fraud” where Defendants failed to disclose the self-dealing nature of a transaction undertaken by LKM. Plaintiff alleges: (1) violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as against all Defendants; (2) violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as against the individual Defendants; (3) common-law fraud as against all Defendants (4) negligent misrepresentation as against all Defendants and (5) unjust enrichment as against only Shi. On December 1, 2021, LKM and Shi moved to dismiss Plaintiff's Second Amended Complaint (“SAC”) (ECF No. 166), pursuant to Federal Rule of Civil Procedure 12(b)(6). See ECF Nos. 261-62.
For the reasons set forth below, I respectfully recommend that LKM and Shi's Motion to Dismiss be DENIED in part and GRANTED in part.
LKM, formerly known as NQ Mobile Inc., is incorporated in the Cayman Islands with its principle executive offices located in Beijing, People's Republic of China (the “PRC”). SAC ¶ 17. Founded by Defendant Shi and Henry Lin (“Lin”), LKM is a multinational technology company that develops, licenses, supports, and sells mobile-software platforms, including mobile games and social-media platforms, as well as services that focus on the smart car and smart-ride business. Id. ¶¶ 17, 25. Prior to the Company renaming itself in 2018, the Company's securities traded on the New York Stock Exchange (“NYSE”) under the ticker “NQ.” Id. ¶ 17. Thereafter, LKM securities traded on the NYSE under the ticker “LKM.” Id.
In 2014, Shi became LKM's Chairman of the Board-a position he held until his removal by the Court-appointed Receiver, Robert W. Seiden (hereinafter, the “Receiver”), in March 2019. Id. ¶ 18. Defendant Wu was LKM's Chief Financial Officer from June 2015 until his resignation in September 2018. Id. ¶ 19. Defendant Xu was LKM's President since December 2010, and became the Chief Executive Officer in December 2014, until his resignation in September 2018. Id. ¶ 20. Between January 21, 2014, and January 18, 2019 (the “Relevant Period”), Plaintiff purchased and owned LKM securities in the form of ADS. Id. ¶¶ 16, 126.
In late 2014, in connection with a purported “anti-corruption” campaign led by the Chinese government, Henry Lin, one of LKM's founders, was “disappeared” for four months. Id. ¶ 32. Seeking to seize control of LKM, in December 2014, Shi “engineered Lin's formal resignation as LKM's CEO.” Id. ¶ 33. LKM issued a press release stating that Lin resigned due to “personal reasons unrelated to the company.” Id. Shi subsequently became Chairman of the Board of LKM-a position previously held by Lin-and he exercised “total control” over LKM. Id. ¶¶ 34, 70.
In early 2015, Lin “reappeared,” but remained uninvolved in LKM's management and operations. Id. ¶ 35. In 2016, Shi “forged or forced the forgery of Lin's signature on a letter purportedly by Lin announcing his resignation” from RPL Holdings Ltd. (“RPL”), one of LKM's larger shareholders. Id. In response to his removal from RPL, Lin complained to LKM's Board of Directors that his removal by Shi had been improper. Id. ¶ 36. Lin's complaint led to an internal investigation conducted by LKM's Independent Special Committee of its Board of Directors and carried out by LKM's independent counsel, Loeb & Loeb LLP (the “Internal Investigation”). Id. As LKM's Chairman, Shi knew of the Internal Investigation but concealed its existence from LKM shareholders. Id. ¶ 37.
In September 2016, Zhongzhi Hi-Tech Overseas Investment Ltd. (“Zhongzhi”), an international investment fund and institutional investor in China, entered into a Note Purchase Agreement (the “Purchase Agreement”) with LKM, pursuant to which Zhongzhi agreed to purchase a $220 million convertible note (the “Convertible Note”) from LKM. Id. ¶¶ 3, 38. That same month, Zhongzhi, RPL, and Shi “entered into a cooperation agreement, by which Shi personally guaranteed to pay to the interest owed to Zhongzhi on the Convertible Note at 10% per annum on the principal balance of the note prior to its maturity date, and an additional 2.5% of the balance after the maturity date.” Id.
By the end of 2016, LKM was generating hundreds of millions of dollars a year in revenue, stemming largely from the success of two of its corporate assets, FL Mobile Jiutian Technology Co., Ltd. (“FL Mobile”), a developer, publisher, and operator of games for mobile phones, and Beijing Showself Technology Co., Ltd. (“Showself”), a mobile-video platform for social media. Id. ¶ 2. Revenues from FL Mobile and Showself accounted for 83% of LKM's total revenue in 2016. Id. ¶ 28. Between 2015 and 2017, LKM tried “no less than three times to sell FL Mobile on both the Hong Kong and mainland China exchanges,” but the deals “failed to come to fruition.” Id. ¶ 30. In its 2016 annual report, LKM stated that FL Mobile and Showself represented “a significant portion of [LKM's] operations,” and that if LKM divested itself of FL Mobile and Showself, “revenues and operating results might be greatly reduced.” Id. ¶ 28. At that time, LKM ADS were trading at around $4.00 per share, and LKM had a market capitalization in the billions of dollars. Id. ¶ 2.
Meanwhile, by late 2016, Shi was under significant financial pressure. Id. ¶ 38. The Internal Investigation concerning Lin was “looming over” Shi, and Shi “was also personally liable for millions of dollars” in connection with corporate debt (the Convertible Note) owed to Zhongzhi. Id. ¶¶ 3, 37, 39. Both Shi and Zhongzhi have a financial interest in an entity known as Tongfang Investment Fund Series SPC (“Tongfang SPC”). Id. ¶ 39. Prior to March 2017, Shi was a significant shareholder of FL Mobile, owning a 22% equity interest, which LKM had disclosed to its shareholders. Id. ¶ 29. Plaintiff alleges that to “generate the cash to pay off the Convertible Note, Shi used Tongfang SPC” and “engineer[ed]” the sale of LKM's most valuable assets, FL Mobile and Showself, to himself in a “secretly self-dealing transaction.” Id. ¶ 39.
On March 30, 2017, LKM announced that it had entered into an agreement with Tongfang SPC (the “Tongfang Transaction”). Id. ¶ 40. Tongfang SPC agreed to acquire 63% of LKM's equity interest in FL Mobile for RMB 2.52 billion and 65% of LKM's equity interest in Showself for RMB 800 million. Id. The total consideration to be paid to LKM was RMB 3.32 billion-approximately $516 million. Id. Under the agreement, Tongfang SPC would make a nominal upfront payment of RMB 150 million (approximately $23 million), after which LKM would transfer FL Mobile and Showself to Tongfang SPC, with Tongfang SPC obligated to pay the remaining balance of RMB 3.17 billion by May 31, 2017. Id. If Tongfang SPC failed to pay the remaining balance by May 31, 2017, FL Mobile and Showself would be transferred back to LKM. Id.
Plaintiff contends that the “Tongfang Transaction was a fraud perpetrated by Shi to loot the Company of its most valuable assets, effectively handing them over to Shi without fair consideration to shareholders.” Id. ¶ 41. To perpetrate this fraud and make the Tongfang Transaction appear free from self-dealing and conflicts of interest, Defendants made at least three types of materially false and misleading statements. Id. First, Defendants “falsely and repeatedly represented” that Tongfang SPC, the buyer in the Tongfang Transaction, “was a corporate affiliate of Tsinghua Tongfang, a bona fide Chinese state-owned computer manufacturing giant based in Beijing.” Id. ¶ 42. These misleading statements gave the Tongfang Transaction the “imprimatur of legitimacy” by “representing to investors that the transaction was a fair, arms-length negotiation between two aboveboard entities conducted for a legitimate business purpose.” Id. ¶¶ 42, 59. Tongfang SPC, however, was not an affiliate of Tsinghua Tongfang but, instead, was an entity owned and controlled by Shi. Id. ¶¶ 46, 77, 83. The allegedly false statements include:
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