In re QUTOUTIAO, INC. SECURITIES LITIGATION

Background

These two proposed securities class actions arose from alleged misrepresentations by Qutoutiao, Inc., a news-aggregation app, in filings connected to its September 2018 initial public offering and in public statements while its securities traded on NASDAQ. Stephen Burnham alleged violations of Sections 11 and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5. The allegations centered on Qutoutiao's alleged replacement of an independent third-party advertising agent with a related party, which allegedly allowed fraudulent advertisements to be placed widely on its mobile application and contributed to a decline in the value of Qutoutiao's American Depositary Shares.

Howard Brown filed a related proposed class action. Four proposed class members then moved to consolidate the cases, to be appointed lead plaintiff, and to have their chosen lead counsel approved under the Private Securities Litigation Reform Act of 1995 (PSLRA).

Consolidation

The court granted consolidation under Federal Rule of Civil Procedure 42(a), which allows related actions involving common legal or factual questions to be combined. The court found that the complaints challenged the same public statements and reports, raised nearly identical legal and factual issues, and identified the same class period. Although Burnham's complaint also named the underwriters of Qutoutiao's initial public offering as defendants, the court concluded that this difference did not outweigh the efficiency benefits of consolidation or prejudice the defendants.

Lead Plaintiff

The PSLRA requires the court to appoint the “most adequate plaintiff” in a securities class action. The court applied a two-step process. It first considered whether a proposed lead plaintiff timely sought appointment, had the largest financial interest in the class's potential recovery, and made a preliminary showing of typicality and adequacy under Rule 23. Another movant could rebut that presumption by showing that the presumptive plaintiff could not fairly and adequately represent the class or faced unique defenses.

All four movants timely filed their motions. The court found that James Pappas had the largest financial interest by a substantial margin: he represented that he had purchased more than $1 million in Qutoutiao American Depositary Shares and still held roughly 90,000 of them. Each of the other three movants claimed losses of less than $42,000.

The court also found that Pappas met the preliminary Rule 23 requirements. His claims arose from the same alleged statements and conduct as the other class members' claims, making them typical. The court found no conflict with the class, no unique defense interfering with his representation, and sufficient experience and qualifications in his proposed counsel. No other movant attempted to rebut Pappas's presumed suitability.

Lead Counsel

The PSLRA allows the lead plaintiff to select class counsel, subject to court approval. The court approved Pappas's selection of Roche Cyrulnik Freedman LLP and appointed the firm as class counsel.

Disposition

The court granted the motions to consolidate the related actions. It granted James Pappas's motion for appointment as lead plaintiff and for approval of his selection of Roche Cyrulnik Freedman LLP as class counsel. It denied the lead-plaintiff motions filed by Robert Arredondo, Susan Nguyen, and Steven Burnham. The court directed Pappas to file and serve an amended consolidated class-action complaint within 30 days. The opinion resolved case-management and representation issues; it did not decide whether Qutoutiao or the other defendants actually violated the securities laws.