Nowakowski v. AXT, Inc.

Background

Plaintiffs Craig Nowakowski and Charles Grubb alleged that they purchased stock in AXT, Inc. and brought claims for themselves and a proposed class. The defendants were AXT, Morris Young, and Gary L. Fischer.

According to the amended complaint, AXT obtained almost all of its revenue from Tongmei, a subsidiary based in China. Plaintiffs alleged that AXT announced plans for Tongmei to list on China’s STAR Market, raised $49.6 million from private-equity firms in China in exchange for a 7.28% non-controlling interest in Tongmei, and gave those investors redemption rights if Tongmei’s initial public offering was rejected or withdrawn.

Plaintiffs alleged that AXT’s reports filed with the Securities and Exchange Commission between March 2021 and March 2024 contained materially false or misleading statements. They claimed AXT failed to disclose known risks that Tongmei’s offering could fail, requiring repayment of the investment and harming AXT’s finances and operations. Plaintiffs also alleged that Tongmei had used trade secrets allegedly brought by a former competitor’s employee, that Chinese authorities investigated the alleged intellectual-property violation, and that a 2024 report by J Capital Research discussed the investigation.

Defendants’ Motion

Defendants moved to dismiss under the heightened pleading requirements of the Private Securities Litigation Reform Act. They argued that plaintiffs had not alleged enough facts to establish falsity—the requirement that a challenged statement or omission was materially false or misleading.

To plead falsity under that law, a complaint must identify each allegedly misleading statement, explain why it was misleading, and provide the facts supporting allegations based on information and belief. The plaintiff must also identify the sources of the information.

The court separately denied defendants’ request for judicial notice of fifteen documents because it did not need those documents to decide the motion.

Court’s Analysis

The court found that plaintiffs did not expressly identify the sources of their information about the alleged trade-secret misuse, investigation, and related events. To the extent plaintiffs relied on the J Capital Research report, the amended complaint did not identify the sources on which that report relied. The court therefore concluded that the report did not adequately support the alleged falsity of AXT’s statements at the pleading stage.

Because the court found the allegations of falsity insufficient, it did not address defendants’ additional arguments that the amended complaint failed to adequately plead other elements of the securities claims.

Ruling

The court granted defendants’ motion to dismiss. It dismissed the amended complaint, with leave to amend, because plaintiffs might be able to correct the identified deficiency. The court stated that any second amended complaint had to be filed by June 27, 2025. Plaintiffs were not limited to amending only their falsity allegations and could amend other allegations as well.