Marcu v. Cheetah Mobile Inc.

Background

Plaintiffs brought a proposed securities-fraud class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. They alleged that Cheetah Mobile Inc. and certain corporate officers made false or misleading statements while concealing an advertising-fraud scheme known as “click injection.”

According to the complaint, certain Cheetah Mobile apps detected newly downloaded apps, inserted fake clicks, and launched the downloaded apps so that Cheetah Mobile appeared to have referred the downloads. Cheetah Mobile allegedly received referral payments, usually between 50 cents and three dollars, even when the downloads occurred without a Cheetah Mobile referral. The alleged conduct was publicly reported in a November 26, 2018 BuzzFeed News article. Plaintiffs alleged that Cheetah Mobile’s American depositary receipt price fell nearly 37 percent over the next two trading sessions.

Plaintiffs challenged statements in three general categories: statements about Cheetah Mobile’s revenue and revenue sources; statements about the functionality and popularity of its utility apps; and statements about the importance of Google Play to its business. Defendants moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legally plausible claim.

Court’s analysis

The court held that the challenged statements were not false or misleading. Statements describing app functions, popularity, rankings, and downloads did not address how Cheetah Mobile generated revenue and therefore did not imply that the company had not used click injection. Statements reporting revenue, profit, and cash flow generally described accurate historical data.

The court also rejected plaintiffs’ argument that Cheetah Mobile’s descriptions of the factors driving revenue were misleading. The company had said that it generated online marketing revenue “primarily” through referrals and identified the “most significant” revenue factors. The court reasoned that those words acknowledged that other factors could play a role. Plaintiffs did not allege facts showing that click injection had a significant enough effect on overall revenue to make the disclosures misleading.

The court separately rejected challenges to Cheetah Mobile’s risk disclosures. The possibility that Google Play might terminate its relationship with Cheetah Mobile had not yet occurred when the statements were made, and the regulatory-risk statements did not assure investors that the company was complying with all regulations.

The court also held, independently, that plaintiffs failed to plead scienter. Scienter means the intent to deceive or recklessness required for a securities-fraud claim. Plaintiffs relied on the officers’ positions, their alleged knowledge of the apps and revenue, Cheetah Mobile’s ownership of the relevant software development kit, confidential witnesses, the importance of the apps, and an earlier lawsuit accusing Cheetah Mobile of advertising fraud. The court concluded that these allegations did not create a sufficiently strong inference that the defendants knew about or recklessly disregarded the alleged false attributions. The allegations also did not adequately establish scienter for Cheetah Mobile itself.

Disposition

Judge Jesse M. Furman granted defendants’ motions to dismiss and dismissed plaintiffs’ complaint in its entirety. Because the claims failed both for lack of adequately pleaded false or misleading statements and for failure to adequately plead scienter, the court dismissed the claims under Sections 10(b) and 20(a) and Rule 10b-5.

The court declined to grant leave to amend. It reasoned that amendment appeared unlikely to cure the problems concerning falsity, that plaintiffs had already received an opportunity to amend and had been warned that they would not receive another opportunity to address the motion’s issues, and that plaintiffs had not requested permission to file another amended complaint. The court directed the Clerk of Court to terminate the dismissal motions and close the case.