Boluka Garment Co., Limited v. Canaan, Inc.

Background

Boluka Garment Co., Limited and Hongkuo Tang sued Canaan Inc., five senior executives, and companies involved in Canaan’s initial public offering. They asserted claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 on behalf of people who bought or otherwise acquired Canaan securities between November 20, 2019, and February 20, 2020.

The complaint alleged that Canaan’s registration statement omitted three categories of information: Yongjie Yao’s position as a Canaan senior executive while holding 8.8 percent of Canaan’s shares; an announced agreement between Canaan and Grandshores Technology Group Limited, a company controlled by Yao, involving up to $150 million in equipment; and purchases from Canaan by Zhejiang Suanli Network Science and Technology Company Ltd., which was partly controlled by two Canaan directors.

The alleged corrective disclosure was an online report published by a short seller using the pseudonym Marcus Aurelius. The report accused Canaan of deceptive business practices, and Canaan’s stock price fell roughly 6.8 percent that day. Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim.

Claims concerning Yao and Zhejiang Suanli

For the Exchange Act claims under Section 10(b) and Rule 10b-5, the court focused on loss causation—the required connection between the alleged misconduct and the plaintiffs’ economic loss. The court held that the Aurelius report did not mention Yao’s alleged role as a senior executive or Zhejiang Suanli’s alleged purchase of Canaan products. Its general accusations about related-party transactions did not reveal any part of the specific alleged omissions. The court therefore dismissed those Section 10(b) and Rule 10b-5 claims for failure to plead loss causation.

The court also dismissed the related Section 11 claims under the Securities Act. Although Section 11 claims generally do not require plaintiffs to plead loss causation, the court concluded that the complaint itself showed that the alleged losses could not be tied to the omissions about Yao and Zhejiang Suanli.

Grandshores claim

The court dismissed the claims concerning the Grandshores agreement under both Section 10(b) and Section 11 because Plaintiffs did not adequately plead materiality. Materiality asks whether a reasonable investor would likely have considered the omitted information important to the overall information available.

The court found that the agreement was a nonbinding “strategic cooperation framework.” It did not create enforceable rights or obligations, required a later definitive agreement, and did not establish how much Grandshores would actually spend. Because the agreement’s probability and financial impact were too speculative, the court concluded that no reasonable investor would have considered it important in deciding how to invest. The court did not resolve whether Canaan had a duty to disclose the agreement because it found the agreement immaterial even if such a duty existed.

Control-person claims

Plaintiffs also asserted claims under Section 20(a) of the Exchange Act and Section 15 of the Securities Act. Those claims required an underlying primary violation. Because the court dismissed the Section 10(b) and Section 11 claims, it also dismissed the Section 20(a) and Section 15 claims.

Disposition

The court granted Defendants’ motion to dismiss. It also granted Plaintiffs’ request for leave to seek permission to file a second amended complaint by letter motion, with a proposed complaint showing the changes. The order stated that if Plaintiffs did not seek amendment, or did not file the required letter by August 6, 2021, the court would enter final judgment and close the case. Plaintiffs had also filed a motion to strike certain defense exhibits or convert the dismissal motion into a summary-judgment motion; because the opinion did not rely on those exhibits, the court denied that motion as moot.