Van Dongen ex rel. Situated v. Cninsure Inc.

• Decision Date: 24 June 2013
• Docket Number: No. 11 Civ. 7320(VM).,11 Civ. 7320(VM).
• Citation: 951 F.Supp.2d 457
• Parties: Pieter VAN DONGEN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. CNINSURE INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

951 F.Supp.2d 457

Pieter VAN DONGEN, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.CNINSURE INC., et al., Defendants.

No. 11 Civ. 7320(VM).

United States District Court, S.D. New York.

June 24, 2013.

Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, Jeffrey A. Berens, Dyer & Berens L.L.P., Denver, CO, Marshall Pierce Dees, Michael Ira Fistel, Jr., Holzer Holzer & Fistel, LLC, Atlanta, GA, for Plaintiff.

Brian Stryker Weinstein, David Brendan Toscano, Davis Polk & Wardwell L.L.P., New York, NY, for Defendants.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

Lead Plaintiffs Jeff Schram and Linda Schram (“Lead Plaintiffs”), individually and on behalf of all others similarly situated, filed an amended class action complaint (the “Amended Complaint”) against defendants CNinsure Inc. (“CNinsure”), Yinan Hu (“Hu”), Qiuping Lai (“Lai”), and Peng Ge (“Ge,” and collectively, “Defendants”), asserting two counts; (1) violation of Securities Exchange Act § 10(b) (“Section 10(b)”) as well as Securities and Exchange Commission (“SEC”) Rule 10b–5 (“Rule 10b–5”) promulgated thereunder, and (2) violation of Securities Exchange Act § 20(a) (“Section 20(a)”). ( See Dkt. No. 12.) CNinsure subsequently moved to dismiss the Amended Complaint ( see Dkt. No. 13), and the parties completed briefing on the motion ( see Dkt. Nos. 14, 17 & 19).¹For reasons stated below, CNinsure's motion to dismiss is DENIED.

I. BACKGROUND²

Plaintiff Pieter Van Dongen, individually and on behalf of all others similarly situated, initially filed this action on October 17, 2011. ( See Dkt. No. 1.) The Court subsequently granted the motion of Jeff and Linda Schram for appointment as lead plaintiffs, and for the approval of the law firm of Robbins Gellar Rudman & Dowd LLP as lead counsel, ( seeDkt. No. 10), and the Amended Complaint followed on August 1, 2012 ( see Dkt. No. 12).

Lead Plaintiffs represent a class of purchasers of American Depositary Shares (“ADSs”) of CNinsure issued between March 2, 2010 and November 21, 2011 (the “Class Period”). CNinsure's ADSs trade on the NASDAQ Global Select Market. CNinsure is a Cayman Islands corporation headquartered and operating in the People's Republic of China. CNinsure is an insurance intermediary. It distributes insurance products underwritten by others through its network of sales agents. CNinsure does not assume underwriting risk; it generates revenues by receiving commissions from insurance companies. All three individuals named as defendants served as executives of CNinsure during the Class Period: Hu served as Chief Executive Officer and Chairman of the Board of Directors, Lai served as President and Executive Director, and Ge served as Chief Financial Officer.

Briefly stated, Lead Plaintiffs allege that Defendants defrauded purchasers of CNinsure ADSs by disseminating misstatements and/or omitting material facts regarding the compensation of CNinsure's sales agents. As a result, class members purchased the ADSs at artificially inflated prices, and Defendants were able to raise capital in a secondary offering in July 2010 resulting in roughly $109.6 million in net proceeds.

A. INITIAL MISSTATEMENTS AND THE OPENING OF THE CLASS PERIOD

Lead Plaintiffs assert that the Class Period begins on March 2, 2010 with the issuance of CNinsure's press release announcing its financial results for the fourth quarter and full year ending December 31, 2009 (the “March 2, 2010 Press Release”). CNinsure reported an increase in net revenues, and primarily attributed this success to enhanced sales and marketing efforts, including a 33.9% year-over-year increase in the number of sales agents. Lead Plaintiffs allege that this statement identifying enhanced sales and marketing as the driver for increased revenues was materiallyfalse and misleading because; (1) Defendants failed to disclose that CNinsure was promoting equity incentive compensation to its sales agents; (2) this equity incentive compensation plan was the driver of CNinsure's increased revenues and sales force; (3) the plan also allowed CNinsure to withhold a portion of its sales agents' compensation, meaning that CNinsure recorded lower commission and fee expenses; (4) Defendants' positive statements about CNinsure and its future prospects had no reasonable basis and thus misled investors; and (5) Defendants were knowing or reckless in misleading investors about the compensation plan.

Lead Plaintiffs allege that Defendants' misstatements and/or omissions regarding the equity incentive compensation plan continued with CNinsure's filing of its annual report with the SEC on May 7, 2010 (the “May 7, 2010 Annual Report”). The report, signed by defendant Hu, stated in relevant part that sales agents were compensated only by commissions, and further detailed how the commissions were calculated ( e.g., based on a percentage of the sale and fees generated by the sale), depending on the type of insurance policy at issue. Roughly two months later, on July 9, 2010, CNinsure announced that it priced a secondary offering, which closed on July 15, 2010 and resulted in $109.6 million in net proceeds for the company. The registration statement filed with the SEC in connection with the secondary offering likewise did not mention the equity incentive compensation plan that forms the basis of Lead Plaintiffs' claims (the “July 15, 2010 Registration Statement”).

B. OLP REPORTS AND CNINSURE'S RESPONSE

On November 22, 2010, OLP Global LLP (“OLP”), a self-described alternative research and consulting firm focused on publicly listed Chinese companies, issued an analyst report (the “November 22 Report”) focusing on then-recent regulations promulgated by the China Insurance Regulatory Commission (“CIRC”) that restricted the use of equity incentive compensation plans by insurance intermediaries. The November 22 Report detailed some relevant points from the CIRC regulations and noted that, based on OLP's knowledge, CNinsure had been offering equity incentives to its sales agents since 2007. The November 22 Report further predicted that the regulatory changes would slow CNinsure's aggressive hiring of sales agents and result in curtailed revenue growth, and that CNinsure may be forced to raise commission payments to its sales agents which would result in increased overall compensation expenses for the company.

That same day, CNinsure held a conference call with analysts and investors during which company representatives were asked about equity incentive compensation. CNinsure representatives characterized the plan as a scorecard akin to airline mileage programs, and explicitly denied that it was an equity compensation program. Lead Plaintiffs allege that the price of CNinsure's ADSs dropped roughly 13% by the close of market on November 23, 2010 as a result of the November 22 Report—and that CNinsure's misleading representations on the ensuing conference call prevented further decline.

On December 2, 2010, OLP issued another analyst report (the “December 2 Report”) offering more details as to how CNinsure compensated its sales agents. OLP concluded in the December 2 Report that CNinsure's plan was no different from an equity-based plan, was a growth-driver for CNinsure, and that the equity incentive compensation earned by CNinsure's sales agents was not properly reflected in the company's financial statements. OLP expressly disagreed with CNinsure's characterization of the plan as a scorecard system, and offered some details about the plan's mechanics, including specifics related to agent eligibility and equity incentive share conversion. Further, OLP opined that sales agents were being recruited with equity incentive shares in an entity that did not legally exist; the sales agents were offered shares in Finestart Holdings Limited (“Finestart”), but OLP was unable to verify the registration of that company in either Hong Kong or China. Lead Plaintiffs allege that the price of CNinsure's ADSs dropped nearly 17% by the close of market on December 2, 2010 as a result of the December 2 Report.

On December 3, 2010, CNinsure held a conference call with analysts and investors during which Hu addressed the December 2 Report. In particular, he reiterated that the company's equity incentive compensation plan was a scorecard system that allowed sales agents to accumulate points and participate in rewards programs. Hu noted that, under certain situations, sales agents could use these points to acquire stock options in CNinsure or CNinsure's affiliated subsidiaries, and that sales agents may become eligible to become full-time employees under the points program. He also stated that the program should not be recognized as costs under accounting principles and that it was misleading to characterize the program as no different from an equity incentive compensation plan. In addition, Hu stated that CIRC was aware of and approved CNinsure's scorecard program.

On the subject of Finestart, Hu stated that it was registered in the British Virgin Islands, and that it provided CNinsure and its employees and sales agents with stock trading services; but he repeatedly emphasized that it was independent from CNinsure. When faced with an analyst question requesting details about Finestart, Hu responded that Finestart had its origins in a company called Chengdu Jingshi, with which CNinsure also collaborated, and that Chengdu Jingshi actually had an incentive plan whereby CNinsure sales agents could earn stock.

On the same day, OLP issued a follow-up analyst report (the “December 3 Report”) and also published documents supporting its research on CNinsure. The December 3 Report characterized these supporting documents as CNinsure's presentations to existing and prospective sales agents touting the company's compensation plans, and reiterated OLP's belief that CNinsure's financial statements should account for the equity incentive compensation plan described...