IN RE IDEANOMICS, INC. SECURITIES LITIGATION

Background

Lead Plaintiff Rene Aghajanian brought a federal securities class action against Ideanomics, Inc., Alfred Poor, Conor McCarthy, Anthony Sklar, and Bruno Wu. The asserted claims arose under Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5(b), and Section 20(a), which addresses control-person liability. The proposed class consisted of people who purchased or otherwise acquired Ideanomics common stock from March 16, 2020 through June 25, 2020.

The complaint alleged that the defendants made misleading statements about Ideanomics’ Mobile Energy Global, or MEG, division and its planned or operating electric-vehicle center in Qingdao. The alleged statements concerned the center’s size, renovation, launch, vehicle sales, partners, customer traffic, and expected contribution to company revenue. The complaint relied in part on reports and posts by J Capital Research Limited and Hindenburg Research, as well as an investigation conducted by the plaintiff’s investigators in January 2021.

Motions and Legal Standards

Defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim, and under the heightened pleading requirements of the Private Securities Litigation Reform Act. For securities fraud, the complaint had to identify each allegedly misleading statement, explain why it was misleading, and plead particular facts supporting a strong inference that each defendant acted with the required fraudulent state of mind, known as scienter.

To state a Section 10(b) and Rule 10b-5 claim, the plaintiff had to allege a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Loss causation requires a sufficient connection between the alleged fraud and the actual loss. A Section 20(a) claim also required an adequately pleaded primary securities-law violation.

Court’s Analysis

The court held that the complaint plausibly alleged that some statements made on May 26, May 28, June 9, and June 11, 2020 could mislead a reasonable investor. In context, statements that the MEG Center had officially launched, was operating, had substantial vehicle capacity, had high activity and customer traffic, and had achieved a successful official launch could have conveyed that the center was operating at a greater scale than it actually was. The court also treated the use of photographs allegedly taken in 2018, with “MEG” superimposed, as supporting the alleged misleading nature of some statements.

The court did not find every alleged statement actionable. It characterized several statements about what the center would become, including statements about future vehicles, manufacturers, partners, and revenue expectations, as forward-looking statements that could not support the claim on the allegations presented. The court also found that the J Capital report, Hindenburg posts, and the plaintiff’s investigation met the pleading standard for reliability, although only narrowly.

The court nevertheless found the scienter allegations insufficient as to all defendants. The complaint alleged a specific motive for Wu based on his ownership interest and conversion of debt into equity, but it did not allege that he sold stock before the reports and made a profit. The court found that Ideanomics’ desire to avoid delisting or maintain its stock price was not enough to establish a personal motive. As to the other individual defendants, the complaint did not identify concrete facts showing their particular knowledge of the MEG Center’s status. The court also concluded that the photographs, the center’s importance to Ideanomics’ operations, and the defendants’ positions as company officers did not create the required strong inference of fraudulent intent.

The court separately found the loss-causation allegations insufficient. It held that the J Capital and Hindenburg materials did not reveal a previously undisclosed fact corresponding to the alleged misstatements; rather, they reported investigators’ inability to confirm the center’s existence or activity. The court considered the photograph’s alleged 2018 date potentially relevant but found that the complaint did not adequately connect the photograph to the stock-price decline. The court also noted that the stock price later rose above $2, and the complaint did not explain that rebound.

Because the complaint did not adequately allege a primary violation of the securities laws, the Section 20(a) control-person claim also failed.

Disposition

Judge George B. Daniels granted defendants’ motions to dismiss, identified as ECF Nos. 85 and 87. The court directed the Clerk of Court to close the motions accordingly. The opinion states that the plaintiff may seek leave to amend by letter application with a proposed amended complaint within 30 days of the decision.