Baliga v. Link Motion Inc.

Background

Wayne Baliga, a holder of American Depositary Shares in Link Motion, Inc. (formerly NQ Mobile Inc.), sued Link Motion, Vincent Wenyong Shi, Roland Wu, and Zemin Xu. The second amended complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, control-person claims under Section 20(a), and New York claims for unjust enrichment, common-law fraud, and negligent misrepresentation.

Shi moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which concerns whether a complaint adequately states a legal claim. Magistrate Judge Valerie Figueredo recommended denying the motion as to the Section 10(b) and Rule 10b-5 claims, including claims involving the non-appearing defendants Wu and Xu; the Section 20(a) claims; the common-law fraud claim; and the negligent-misrepresentation claims. She recommended granting the motion as to the unjust-enrichment claim.

District Court Review

Judge Victor Marrero reviewed Shi’s objections under the standards governing objections to a magistrate judge’s report and recommendation. The court found no clear error in the magistrate judge’s conclusions that Baliga adequately pleaded securities-fraud elements including a purchase or sale of securities, material misstatements or omissions, a strong inference that Shi acted with the required state of mind, reliance, and loss causation.

The court agreed that the complaint adequately alleged that Shi’s financial interest in the Tongfang Transaction and the transaction’s related-party nature were material information that Link Motion failed to disclose. The court also held that statements concerning Tongfang SPC’s expected payment under the transaction were not protected forward-looking statements under the securities-law safe-harbor provision. The court upheld the recommendation that the Section 20(a) and negligent-misrepresentation claims could proceed, and adopted the recommendation concerning the claims against Wu and Xu.

Actionable Purchases

The court rejected the recommendation to the extent it treated all of Baliga’s purchases as actionable. Baliga alleged 32 purchases of Link Motion securities. The court ruled that the company’s duty to disclose the transaction’s related-party nature arose when the transaction was announced on March 30, 2017. Purchases before that date occurred before the alleged deception began and could not support a Section 10(b) or Rule 10b-5 claim. Those purchases were therefore dismissed with prejudice.

Unjust Enrichment and Common-Law Fraud

The court adopted the recommendation to dismiss the unjust-enrichment claim against Shi and granted the motion to dismiss that claim with prejudice. The court did not finally resolve the common-law fraud issue. Because the parties had not fully addressed whether the reliance presumption associated with failures to disclose applies to New York common-law fraud claims, the court remanded that issue to Magistrate Judge Figueredo for supplemental briefing and an amended recommendation.

Disposition

The court adopted the report and recommendation in part, rejected it in part, and modified it in part. Shi’s objections were denied as to the recommendations the court adopted. The court dismissed with prejudice purchases occurring before March 30, 2017; granted with prejudice the motion to dismiss the unjust-enrichment claim; left the adequately pleaded securities, control-person, and negligent-misrepresentation claims in place; and remanded the common-law fraud claims for further consideration.