Case of the Day: Maresca v. Soufun Holdings Ltd., 2016 U.S. Dist. LEXIS 145006 (C.D. Cal. Oct. 18, 2016)

Summary:

Investors sued a Chinese company that sold ADS in the New York Stock Exchange. The defendant company is China's leading real estate internet portal, connecting real estate brokers with customers. Plaintiffs alleged securities fraud, based on the reports that brokers working for the defendant fabricated non-existent rental contracts.

The court dismissed for failure to state a claim. The court found that the plaintiffs failed to allege enough facts to show that the defendant's statement of its finances were materially false, and also that there was no sufficient allegation of scienter.

Takeaway:

This is the correct result under the law, but consider this. The jurisprudence of securities regulation has consistently moved toward giving greater protection to the issuing companies, on the basis of the idea that the investors were unduly harassing companies with baseless litigation. In doing so, the courts have essentially required plaintiffs to allege fairly specific facts about the issuing company.

This requirement may have worked with U.S. issuers, for which investors may have informal avenues of gathering information about the company. But what if the company is Chinese? What if the U.S. investors cannot even read the mainstream newspaper in China to gather generally available information about the company? Should the court continue to operate under the same standard?