IN RE SHANDA GAMES LIMITED SECURITIES LITIGATION

Background

Lead Plaintiff David Monk brought a proposed class action under the Securities Exchange Act of 1934 on behalf of former Shanda Games Limited stockholders and former owners of its American Depository Shares. The defendants involved in the motions were Shanda; Capitalcorp Limited and Capitalhold Limited, referred to together as the Capital Defendants; Yingfeng Zhang; and other individual defendants.

Shanda announced a proposed merger in 2015 that would allow it to go private. Unaffiliated holders effectively received $3.55 per share or $7.10 per American Depository Share. In separate appraisal proceedings, the Grand Court of the Cayman Islands valued the shares at $16.68 per American Depository Share, and the Cayman Islands Court of Appeal later determined the value to be $12.84 per American Depository Share.

The second amended complaint alleged that Shanda’s proxy statements contained material misstatements or omissions concerning financial projections and that Zhang traded using nonpublic information about the performance of Shanda’s mobile game, Mir II Mobile. The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim.

Court’s Analysis

The court applied the law-of-the-case doctrine to issues previously decided in the same litigation. It therefore did not revisit the prior determination that the case involved transactions in securities listed on domestic exchanges under the territorial test from Morrison v. National Australia Bank, Ltd. It also treated the prior rulings as controlling the allegations that Shanda and Zhang made material misrepresentations and acted with the required state of mind.

Securities-Fraud Claims

For the securities-fraud claims under Section 10(b) and Rule 10b-5, the court considered reliance and loss causation. The plaintiff did not allege direct reliance, but instead relied on the fraud-on-the-market doctrine, which can create a rebuttable presumption that investors relied on material public misstatements when trading in an efficient market.

The court declined to consider expert slides and expert legal conclusions offered to support market efficiency, but it considered the complaint’s well-pleaded factual allegations. Those allegations stated that weekly trading volume exceeded 2% for most of the proposed class period and that 46 market makers traded in the American Depository Shares. The court held that these allegations minimally satisfied the pleading requirement for an efficient market. It emphasized that the ultimate question of market efficiency was a factual issue not decided by the ruling on the dismissal motions and not binding for class certification.

The complaint nevertheless failed to plead loss causation. Loss causation requires a plaintiff to connect the alleged misrepresentation to a subsequent economic loss. The court found no sufficient allegations explaining how the alleged omissions or accounting-method changes affected the market price or caused the plaintiff to sell his shares rather than exercise appraisal rights. Because loss causation was inadequately pleaded, the court dismissed Count I, the Section 10(b) fraud claim against Shanda and Zhang. The court did not reach the economic-loss element.

Because there was no adequately pleaded primary fraud violation, the court also dismissed Count IV, the Section 20(a) control-person claim against Zhang.

Insider-Trading Claims

The court held that the complaint still did not adequately allege that Shanda was a purchaser of the American Depository Shares. Shanda was the surviving entity after the merger, and the relevant commitment to accept or appraise the shares occurred before the surviving entity came into existence. The insider-trading claims against Shanda were therefore dismissed.

The court held that the complaint adequately alleged that Capitalhold purchased the shares and that the plaintiff’s sale and Capitalhold’s payment occurred contemporaneously at the November 18, 2015 closing. The court also found it plausible at the pleading stage that Zhang was a purchaser because he directed Capitalhold’s purchase, indirectly owned part of Capitalhold, and signed the merger documents for it.

The court nevertheless dismissed the insider-trading claims against Capitalhold. Although Capitalhold could be treated as a purchaser, the complaint did not adequately allege that Capitalhold itself owed shareholders a duty to disclose material nonpublic information. The court also rejected the theory that Capitalhold was liable as a temporary insider or tippee.

The court held that the allegations were sufficient to state an insider-trading claim against Zhang. Zhang was alleged to be a Shanda executive who possessed material nonpublic information about Mir II Mobile and failed to disclose it before purchasing the plaintiff’s shares. The court also found that the complaint did not adequately show that Capitalcorp was itself a purchaser, so it dismissed the insider-trading claims against Capitalcorp as well.

Disposition

Judge Andrew L. Carter, Jr. ordered that the defendants’ motions to dismiss were denied in part and granted in part. Count I was dismissed under Rule 12(b)(6) for failure to plead loss causation. Count IV was dismissed because it depended on a primary fraud violation. Counts II and III were dismissed against Shanda, Capitalcorp, and Capitalhold. The clerk was directed to terminate Shanda, Capitalhold, and Capitalcorp from the case, and the lead plaintiff and remaining defendants were directed to file a joint status report within 14 days. The court stated that it did not need to reach the Capital Defendants’ argument that Count II was untimely.