Rudani v. Ideanomics, Inc.

Background

Jaysukh Rudani brought a proposed securities-fraud class action against Ideanomics, Inc., Bing Yang, Federico Tovar, Robert Benya, and Zheng Wu, also known as Bruno Wu. The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. It also asserted control-person liability under Section 20(a) against Wu, Yang, Tovar, and Benya.

The alleged misconduct concerned three areas of Ideanomics’s business. First, Rudani challenged statements about the company’s acquisitions of Sun Video Group HK Limited and Wide Angle Group Limited and the company’s 2017 revenue guidance. The complaint alleged that the acquired businesses had generated $30 million in revenue and suffered a $475,046 loss in the fourth quarter of 2016, facts that were not disclosed when Ideanomics issued revenue guidance of $280 million and later $300 million for 2017. Second, Rudani challenged a January 2018 statement that the company’s crude-oil supply-chain business had generated preliminary, unaudited fourth-quarter 2017 revenue of $170 million. Third, he challenged statements about integrating blockchain and artificial-intelligence technology into Ideanomics’s consumer-electronics and crude-oil businesses.

Ideanomics, Yang, Benya, and Wu moved to dismiss the amended complaint under Rules 12(b)(6) and 9(b), the latter requiring fraud to be pleaded with particular detail, and under the Private Securities Litigation Reform Act. Tovar separately moved to dismiss. Rudani moved to strike materials submitted with the dismissal motions.

Court’s analysis

The court denied the motions to strike. It explained that the challenged materials included Securities and Exchange Commission filings, earnings-call transcripts, and press releases that were cited in or incorporated into the complaint, and that courts may consider legally required public disclosures in deciding a motion to dismiss. The court also stated that Rule 12(f), the rule cited by Rudani, permits striking material from a pleading, not from a motion to dismiss.

For a securities-fraud claim, the complaint had to allege a material false statement or omission, an intent to deceive or recklessness, a connection to the purchase or sale of a security, reliance, economic loss, and a causal connection between the fraud and the loss. The court concluded that at least some of the statements about 2017 revenue guidance were actionable at the pleading stage. The alleged omissions about the acquired businesses’ revenue and losses could have influenced a reasonable investor’s assessment of the company’s guidance. The court rejected the defendants’ argument that the statements were protected by the statutory safe harbor for forward-looking statements because the allegations concerned material omissions, which the court held were not protected by that safe harbor at this stage.

The court also found a sufficiently strong inference of the required intent to deceive, known as scienter, as to Ideanomics, Wu, and Yang. According to the allegations, Wu had a controlling interest in the seller of the acquired businesses and therefore had access to their financial records. Yang signed the purchase agreement as Ideanomics’s chief executive officer, and Wu approved the acquisition as chairman of Ideanomics’s board. The court concluded that the financial information was important to the transaction and that the allegations supported an inference that Wu and Yang knew or should have known the businesses’ financial condition. The court did not decide whether the separate allegations about crude-oil revenue and blockchain integration were independently actionable because the revenue-guidance allegations were sufficient for the case to proceed as to Ideanomics, Wu, and Yang.

As to Benya, the court did not decide whether his blockchain-related statement was an actionable misrepresentation. Instead, it held that the complaint did not adequately plead scienter. The allegation that Benya had access to the company’s computer systems did not identify specific information showing that he knew blockchain had not been integrated. The court also found that the complaint did not establish that a Securities and Exchange Commission inquiry had occurred or that general allegations about the company’s motivation to increase its stock price supported a strong inference of fraud.

As to Tovar, the court held that his statement about the company’s intent to move its businesses onto blockchain was a forward-looking statement protected by the statutory safe harbor. The statement was accompanied by cautionary disclosures and risk factors. The court also held that the complaint failed to state a control-person claim against Tovar because it did not allege that he controlled Benya, and because the complaint failed to state a primary securities-fraud claim against Benya.

Disposition

Judge George B. Daniels denied Rudani’s motions to strike. The court granted Tovar’s motion to dismiss. It also granted Benya’s motion to dismiss Count I of the amended complaint against him. The opinion’s conclusion does not separately state a disposition for the dismissal motion filed by Ideanomics, Yang, and Wu, but the court held in its analysis that the complaint stated a securities-fraud claim against those defendants based on the 2017 revenue-guidance allegations.