Yaroni v. Pintec Technology Holdings Limited

Background

This putative class action concerns Pintec Technology Holdings Limited’s October 25, 2018 initial public offering. Although Allon Yaroni filed the action, Eric Dahm was later appointed lead plaintiff and filed the operative complaint. The complaint named Pintec, certain Pintec employees and board members, and the banks that underwrote the offering.

The plaintiffs brought claims under Sections 11 and 15 of the Securities Act of 1933. Section 11 addresses materially false or misleading statements or omissions in a registration statement. Section 15 imposes liability on a person or entity that controls someone liable under Section 11. The claims concerned five subjects: Pintec’s internal controls, audit committee, and auditor; cash advances to its former parent company, Jimu; a loan to Plutux Labs Limited; revenue recognition; and financial-statement line items.

Certain defendants moved to dismiss under Rules 8(a) and 12(b)(6). The court considered the allegations in the amended complaint as true for purposes of the motion and also considered documents incorporated into the complaint, including Pintec’s registration statement, prospectus, annual reports, and other Securities and Exchange Commission filings.

Internal Controls, Auditor, and Audit Committee

The court held that the claims concerning internal controls and the auditor failed because Pintec had given specific warnings about the risks later alleged. The offering materials disclosed that Pintec had limited accounting personnel, had not completed a comprehensive assessment of its internal controls, and had not had its auditor examine those controls. They also disclosed an existing material weakness involving personnel who lacked appropriate knowledge of U.S. generally accepted accounting principles and Securities and Exchange Commission reporting requirements.

The offering materials further warned that Pintec might identify additional weaknesses, might need to restate earlier financial statements, and faced risks from using an auditor that the Public Company Accounting Oversight Board could not inspect. The court found that the plaintiffs did not plausibly allege that Pintec knew or should have known at the time of the initial public offering that the warned-of problems had already occurred. The court also rejected the claim that the audit committee’s description was materially deficient merely because the complaint later alleged that the committee could not perform its responsibilities effectively.

Jimu Advances and Plutux Loan

The court held that the claims concerning cash advances to Jimu and the Plutux loan were barred by the one-year limitation period applicable to Section 11 claims. Pintec’s 2018 annual report, released on July 30, 2019, disclosed the material weaknesses and related problems involving the Jimu advances and the Plutux transaction. The court concluded that these disclosures gave a reasonably diligent plaintiff the facts needed to bring the claims. Because the action was filed on September 29, 2020, these claims were too late.

Revenue Recognition

The court rejected the claims that Pintec’s offering materials misleadingly failed to explain whether technical service-fee revenue was recorded on a gross or net basis. The plaintiffs did not plausibly allege that the difference was material because correcting the accounting treatment increased both revenue and cost of revenue while leaving gross profit unchanged. The court also found that the offering materials appeared to disclose service fees paid to Jimu and that the plaintiffs had not identified a duty requiring Pintec to present those costs in the particular financial-statement section they preferred.

Financial Statements

The court rejected the alleged financial-statement misstatements for several reasons. It found that one claimed change in Pintec’s cash position was factually incorrect; the relevant cash-position figure had not changed. It found that certain other changes were small and that the plaintiffs had not explained why they would significantly alter the information available to investors. Although one operating-cash-flow change was larger, the court concluded that the plaintiffs still had not explained why that particular line item was important in the context of Pintec’s operations. Other alleged discrepancies reflected year-over-year comparisons, not restatements, or resulted from confusing Chinese yuan and U.S. dollar figures. Finally, one alleged restatement concerned financial statements issued after the registration statement and therefore could not have made that earlier registration statement misleading.

Disposition

The court concluded that the plaintiffs had not plausibly alleged a material misstatement or omission that was not time barred. Because the Section 15 claims depended on a primary Section 11 violation, those claims failed as well. The court granted the motion to dismiss. It did not consider the defendants’ other arguments for dismissal.

The court denied leave to amend because it found the problems with the claims substantive, the plaintiffs had not requested another amendment or identified facts that would cure the defects, and the court had previously warned that there would be no further opportunity to amend. The Clerk of Court was directed to enter judgment for defendants, terminate the motion, and close the case.