Kain v. ACM Research, Inc.

Background

Jeffrey Kain brought securities-fraud allegations against ACM Research, Inc., and other defendants. The complaint relied on J Capital Reports and challenged aspects of ACM’s financial reporting. The defendants moved to dismiss under the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA).

The court said the complaint did not clearly identify a material misstatement or omission. It noted that the possible securities-fraud theories had to be identified from the parties’ motion papers and opposition rather than from the complaint itself.

The Five Theories

1. Revenue and advances: The complaint alleged that ACM’s revenue doubled while its advances remained flat. The court found that this did not contradict or make misleading any identified statement and that the complaint did not explain a connection between current revenue and cash advances.

2. Related-party transactions: The complaint did not explain how failing to disclose the transactions financially affected ACM’s stock price. The court found that the allegation that the transactions caused revenue and profits to be materially overstated was conclusory and inadequate.

3. Cash-balance comparison: The complaint compared cash balances in ACM’s STAR initial-public-offering filings with balances in its Securities and Exchange Commission filings. The court found the comparison improper because the STAR filings covered only ACM’s Chinese subsidiary, while the SEC filings covered ACM and all its subsidiaries. The court also said the complaint did not explain why any difference could not result from different reporting rules or accounting standards in China and the United States.

4. Overstated cash balances: The complaint gave specific amounts for alleged cash overstatements in one or two places but did not explain how those amounts were calculated. The court found that the theory that ACM’s debt and credit lines made a large cash reserve unlikely was speculation unsupported by facts. It also noted that at least some credit lines had been disclosed publicly and that drawing different conclusions from public information did not satisfy the PSLRA’s pleading standard.

5. Access to subsidiary funds: The complaint alleged that U.S. shareholders were misled into believing they could access funds held by ACM’s Chinese subsidiary. The court found that ACM’s Form 10-K for the fiscal year ending December 31, 2019, disclosed that funds raised or generated by ACM Shanghai were unlikely to be readily distributable to shareholders. The filing also stated that ACM had never paid cash dividends and did not intend to do so in the foreseeable future.

Scienter and Loss Causation

Scienter means the required state of mind for securities fraud. The court said Kain had likely not adequately alleged it. The court noted that the core-operations doctrine might apply to some theories, but Kain raised that theory only in his opposition to the motion and had not adequately pleaded it in the complaint. The scienter allegations actually included in the complaint were insufficient.

Loss causation means a connection between the alleged misconduct and the investor’s loss. The court questioned whether Kain adequately alleged loss causation because the stock-price changes after the alleged disclosures were relatively small. It did not resolve that issue because the complaint had more obvious deficiencies.

Disposition

The court granted the defendants’ motion to dismiss. Because the complaint could theoretically be amended, the court granted leave to amend. Kain’s amended complaint was due 21 days from the order, and the defendants were required to respond within 21 days after its filing.

The court’s footnote also addressed the related request for judicial notice. It granted that request in part and denied it as moot in part. The J Capital Reports and specified public Securities and Exchange Commission filings were considered, while other exhibits were not needed to resolve the motion.