Xu v. Gridsum Holding Inc.

Background

Peifa Xu, individually and on behalf of a proposed class of Gridsum shareholders, asserted claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The claims included allegations concerning Gridsum’s April 23, 2018 press release about the suspension of reliance on its auditor’s report for the year ended December 31, 2016.

The shareholders alleged that the press release was materially false or misleading because it omitted that PricewaterhouseCoopers Zhong Tian LLP had advised Gridsum that issues identified in its audit raised questions about whether the auditor could rely on management’s representations. The Individual Defendants—Guosheng Qi, Michael Peng Zhang, and Ravi Sarathy—moved to dismiss the remaining claims concerning the press release, arguing that they were not the people who legally made its statements.

Issue

The issue was whether the complaint sufficiently alleged that each Individual Defendant was a “maker” of the press release under Section 10(b) and Rule 10b-5. Under the Supreme Court’s rule, the maker is the person or entity with ultimate authority over a statement, including its content and whether and how it is communicated.

Court’s reasoning

The court held that the complaint plausibly alleged that Qi had ultimate authority over the press release. The allegations identified Qi as Gridsum’s co-founder, chief executive officer, and board chair; described his ownership and voting power; characterized him as Gridsum’s chief operating decision maker for resource allocation and performance assessment; and included a lengthy statement from him in the press release. The court concluded that these allegations, considered together, supported an inference that Qi had authority over the release as a whole, not merely over his quoted remarks.

The court reached a different conclusion for Zhang and Sarathy. Their positions as co-chief financial officers, without more, did not establish ultimate authority over the press release. The release’s reference to discussions involving the company’s “Co-Chief Financial Officer” did not identify either executive by name and, even if it had, merely referring to an officer or the officer’s conduct would not make that person the statement’s maker. Zhang’s signature on the Form 6-K attached to the press release also was insufficient because he signed only the filing cover page, not the press release itself.

The court also rejected the shareholders’ argument that the group-pleading doctrine could make the Individual Defendants collectively responsible. It relied on its earlier conclusion that, after the Supreme Court’s decision in Janus, the doctrine was no longer viable because plaintiffs must plead facts showing that each individual defendant had ultimate authority over the statement.

Disposition

The court denied the Individual Defendants’ motion to dismiss as to Qi and granted the motion to dismiss as to Zhang and Sarathy. The court granted the shareholders leave to replead the dismissed claims against Zhang and Sarathy, requiring any amended complaint to be filed within fourteen days after entry of the opinion. The Clerk of Court was directed to terminate the motion at Doc. 246.