Denny v. Canaan Inc.

Background

Jason Denny brought this proposed class action for purchasers of Canaan, Inc. American Depositary Receipts between February 10 and April 9, 2021. The complaint names Canaan, Inc., Nangeng Zhang, and Tong He as defendants and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

According to the complaint, Canaan made positive statements about its business metrics and financial prospects after the company’s then-chief financial officer resigned. The complaint alleges that those statements concealed supply-chain disruptions and the effect of newer machines on sales of older products. It further alleges that Canaan later disclosed a 93% year-over-year decrease in computing power sold and quarterly net revenue, after which the price of Canaan’s American Depositary Receipts declined.

Appointment of Lead Plaintiff

The Private Securities Litigation Reform Act requires the court to appoint the proposed class member or members most capable of adequately representing the class. The law generally presumes that the person or group with the largest financial interest should serve as lead plaintiff if that person or group timely moved for appointment and makes the required preliminary showing under Federal Rule of Civil Procedure 23. The relevant Rule 23 considerations here were whether the proposed lead plaintiffs’ claims were typical of the class’s claims and whether they could adequately represent the class.

Ten people or groups initially sought appointment as lead plaintiff and approval of lead counsel. Six later withdrew their motions or stated that they did not oppose alternatives. Paul Richards and Manu Gandhi did not respond and were treated as having abandoned their motions. The remaining candidates were Mahinderjit Singh and the group of Bill Lu and Liying Huang.

Lu and Huang moved within the required sixty-day period and claimed losses of $1,321,305.38. The court found that this was the largest financial interest among the candidates. Singh did not dispute either point. Those findings created a presumption that Lu and Huang were the most adequate lead plaintiffs, subject to their meeting the relevant Rule 23 requirements.

Singh argued that Lu and Huang had not provided enough information about their adequacy and typicality before the sixty-day deadline. Lu and Huang later submitted additional declarations describing their backgrounds, investment experience, choice of counsel, and understanding of their responsibilities. The court held that it could consider this later information. It found that Lu and Huang’s additional submissions supported their adequacy: Lu is a business executive, Huang works in insurance, both have investment experience and are college graduates, and both described their commitment to obtaining the maximum recovery for the class. The court also noted that Singh identified no reason to believe that Lu and Huang were atypical, had conflicts of interest, selected inadequate counsel, or lacked sufficient interest in prosecuting the case.

Singh also challenged the wording of Lu and Huang’s first supplemental declaration, which was signed abroad. The court concluded that the declaration substantially complied with the applicable federal statute and noted that Lu and Huang later filed a version using additional penalty-of-perjury language. The court did not find this issue sufficient to make them inadequate representatives.

Because Lu and Huang timely moved, had the largest financial interest, and made the required preliminary showing of typicality and adequacy, the court appointed them lead plaintiffs.

Approval of Lead Counsel

The lead plaintiffs selected Bragar Eagel & Squire P.C. as lead counsel. After reviewing the firm’s résumé and supporting materials, including its experience in securities class actions and the backgrounds of its attorneys, the court concluded that the firm was qualified. The court therefore approved Lu and Huang’s selection of lead counsel.

Disposition

The court granted Lu and Huang’s motion for appointment as lead plaintiff and granted their motion for approval of their selection of lead counsel. It directed the Clerk of Court to close the motions pending at Docket Numbers 13, 16, 19, 22, 23, 28, 30, 35, 41, and 45. The court also granted Lu and Huang leave to file a consolidated amended complaint by January 7, 2022, and ordered the defendants to answer or otherwise respond by January 28, 2022.