Xu v. Gridsum Holding Inc.

Background

This putative shareholder class action concerns Gridsum’s September 2016 initial public offering and later financial disclosures. The plaintiffs alleged violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The defendants included Gridsum, officers and directors, PricewaterhouseCoopers Zhong Tian LLP (PwC), and the underwriters for the initial public offering.

The court’s March 30, 2020 opinion had dismissed the Securities Act claims against Gridsum, the underwriters, and Thomas Melcher, while allowing the plaintiffs to replead. It had also dismissed the claims against PwC because PwC had not been properly served. The court had denied dismissal of certain Exchange Act claims involving Gridsum’s 2016 Form 20-F and April 2018 press release. The plaintiffs then filed a third amended complaint. The motions addressed in this opinion were filed by Gridsum and Melcher, PwC, and Perry Chui; the underwriters joined the motion filed by Gridsum and Melcher.

Securities Act claims

The plaintiffs added claims concerning Gridsum’s interim financial statement for the first half of 2016. They alleged that the statement understated tax liability, failed to disclose an offshore-capital restructuring plan, and failed to disclose plans to launch a sentiment-tracking product whose revenue-recognition practices later became significant. They also re-alleged that Gridsum failed to disclose additional weaknesses in its internal controls.

The court held that the new claims were barred by the Securities Act’s three-year statute of repose because they were asserted after the relevant deadline and did not relate back to earlier allegations. The court separately held that the claims would fail even if timely. It found that the alleged tax understatement was not adequately pleaded as material, that the plaintiffs did not show a duty to disclose the business plans or why those plans were materially misleading when the offering documents were issued, and that the internal-control allegations were too conclusory.

Because the Section 11 claims failed, the court also dismissed the Section 15 control-person claim against Melcher. The court dismissed the claims against Chui because they arose from the registration statement and failed for the same reasons.

Exchange Act claims

To the extent the third amended complaint added Exchange Act claims based on the new allegations about the 2016 interim financial statement, the court dismissed those claims for the same reasons. The court stated that this ruling did not change its earlier decision denying dismissal of the Section 10(b) claims against Gridsum and Melcher concerning Gridsum’s 2016 financial statement and April 2018 press release, or the related Section 20(a) claim against Melcher. Those earlier claims survived.

Claims against PwC

PwC had accepted service of the third amended complaint, so the court addressed the claims against it. The court dismissed the Section 11 claims because the plaintiffs had not adequately alleged material misstatements connected to the registration statement. It also dismissed the Section 10(b) claims based on PwC’s 2015 audit opinion because that opinion could not support a fraud claim after the Section 11 allegations failed.

As to PwC’s 2016 audit opinion, the court assumed for purposes of its analysis that the alleged statements could be actionable but held that the plaintiffs had not adequately pleaded scienter, meaning an intent to deceive or sufficiently reckless conduct. The allegations suggested that PwC’s audit may have been deficient or negligent, but they did not create a strong inference that PwC acted fraudulently.

Disposition

The court granted the defendants’ motions to dismiss. It dismissed all Section 11 claims against Gridsum, Melcher, the underwriters, PwC, and Chui; all Section 15 claims against Chui and Melcher; all Section 10(b) claims against Chui and PwC; the newly alleged Section 10(b) claims against Gridsum and Melcher concerning the registration statement; the newly alleged Section 20(a) claim against Melcher concerning the registration statement; and the Section 20(a) claims against Chui. The court did not dismiss the previously surviving Exchange Act claims concerning Gridsum’s 2016 financial statement and 2018 press release. It directed Gridsum, Melcher, Sarathy, Qi, and Zhang to respond to the third amended complaint and terminated Chui, the underwriters, and PwC as defendants.