Huang ex rel. Situated v. Airmedia Grp. Inc.
| Decision Date | 25 March 2017 |
| Docket Number | 1:15-cv-04966 |
| Parties | Jiehua Huang, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. AirMedia Group Inc., Harman Man Guo and Richard Peidong Wu, Defendants. |
| Court | U.S. District Court — Southern District of New York |
I. INTRODUCTION
Plaintiffs 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").
On 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.
For the reasons set forth below, Plaintiff's motion to strike Exhibit J is denied. Defendants' motion to dismiss the Amended Complaint is GRANTED in its entirety.
II. FACTUAL ALLEGATIONS
Plaintiff's 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.
During 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. ¶ 3.
Specifically, 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. Id.
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. ¶ 5.
Just 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%. Id. ¶ 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. Id. ¶¶ 61-62.
On 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.
The 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.
In a 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.
Six 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 meetthe 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.
Plaintiff 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.
The 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.
III. DISCUSSION
Defendants move to dismiss on several grounds. First, Defendants move to dismiss Plaintiff's 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 Court's consideration.
Before addressing Defendants' Rule 9(b) and Rule 12(b)(6) motions...
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