IN RE: EHANG HOLDINGS LTD. SECURITIES LITIGATION

Background

Lead Plaintiff Sergiu Rata brought a federal securities class action against EHang Holdings Limited, Huazhi Hu, Richard Jian Liu, Edward Huaxiang Xu, and Derrick Yifang Xiong. The proposed class consisted of investors who purchased or otherwise acquired EHang American Depositary Shares between December 12, 2019, and February 16, 2021.

The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5(b), which prohibit material false statements or omissions connected to securities transactions, and under Section 20(a), which concerns control-person liability. The investors alleged that defendants made misleading statements about EHang’s aerial vehicles, regulatory approvals, manufacturing facilities, customer contracts, research and development, and revenue. They relied substantially on a February 2021 report by Wolfpack Research, a short-selling analyst firm that accused EHang of, among other things, using sham sales contracts and overstating its manufacturing and regulatory progress.

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the amended complaint did not state a legally sufficient claim. They also moved under Rule 12(b)(2), arguing that the court lacked personal jurisdiction—the legal authority to exercise power over a defendant—over Xiong.

Personal Jurisdiction Over Xiong

The court held that the complaint did not establish general or specific personal jurisdiction over Xiong. Although the complaint alleged that Xiong had signed EHang’s Form F-1, served on EHang’s board, and made social-media posts mentioning the Federal Aviation Administration and test flights in North Carolina, it did not allege that Xiong helped make, propose, edit, or approve the securities filings or press releases challenged as false or misleading.

The court also found that the one Securities and Exchange Commission filing Xiong signed during the class period was not alleged to contain false or misleading statements. His social-media posts were not among the statements challenged in the complaint. The court therefore concluded that exercising jurisdiction over Xiong would exceed constitutional limits and dismissed the amended complaint as to Xiong for lack of personal jurisdiction.

Alleged Misstatements

The court concluded that the complaint did not plausibly allege that the challenged statements were materially false or misleading. Regarding regulatory approvals, the court found that the Wolfpack Report and the investors’ investigation did not show that EHang lacked approvals for passenger-grade aerial-vehicle trial flights. The challenged press releases described the approvals as involving trial permits, unmanned flights, trial air-logistics service, or non-passenger flights. EHang also disclosed in Securities and Exchange Commission filings that it was not aware of any operator having received all approvals required for commercial passenger-grade aerial-vehicle operations in China or the United States.

The court found that the allegations about EHang’s proprietary technology rested mainly on an expert’s concern about the EH216’s use of “hobby-grade motors.” The complaint did not establish when the expert examined the vehicle or plausibly show that EHang lacked proprietary autonomous technology.

The court also rejected the challenge to statements about the planned Yunfu manufacturing facility. It determined that the statements that EHang had begun to increase production capacity did not say that the facility was already operational or meaningfully producing vehicles. Other materials stated that production was expected to begin in the first half of 2021.

The court characterized some statements as forward-looking statements—statements about future events that may receive protection under the Private Securities Litigation Reform Act’s safe harbor—and others as non-actionable corporate optimism, sometimes called “puffery.” Statements describing EHang’s vehicles or regulatory approvals as industry-leading or first in the world, and statements that the vehicles had achieved commercialization, were too vague or nonspecific to support liability.

The court stated that the Wolfpack Report met the standard for reliability, although only slightly. It noted that the report included photographs, government records, credit reports, and translations, and that the investors’ investigation corroborated some allegations. But the court found that the complaint still did not plausibly establish the required elements of securities fraud.

Scienter

Scienter means the required fraudulent intent or extreme recklessness. The court held that the complaint failed to plead scienter as to all defendants.

The investors alleged that Hu and Xiong sold EHang shares during the class period and sold interests in an EHang subsidiary while EHang’s share price was allegedly inflated. The court found those allegations insufficient. It stated that Xiong’s alleged share sales were not supported by the stock chart in the complaint, and that Hu’s sale of 559,850 shares—1.21 percent of his total shares—was not plausibly unusual. The court also found no sufficient connection between the subsidiary transaction and any challenged statement.

The court further held that the allegations did not show conscious misbehavior or recklessness. The complaint did not provide concrete facts about each individual defendant’s knowledge of EHang’s regulatory approvals, vehicles, manufacturing capacity, or revenue. The alleged omission of the word “trial” from some press-release titles did not create a strong inference of fraudulent intent, particularly because the releases otherwise described the approvals as conditional trial runs. The court also rejected reliance on the company’s “core operations” without independent facts supporting a strong inference of scienter.

Loss Causation

Loss causation is the required link between the alleged misconduct and the plaintiff’s financial loss. The investors argued that the Wolfpack Report was a corrective disclosure that caused a 62.7 percent decline in EHang’s American Depositary Share value.

The court held that the Wolfpack Report was not a corrective disclosure because it did not reveal previously undisclosed facts sufficiently connected to the specific alleged misstatements. EHang had already disclosed that it lacked full operational approvals, that existing approvals concerned trial or non-passenger flights, and that the Yunfu facility had not begun production in December 2020. The complaint also did not plausibly show that the report revealed that EHang lacked proprietary technology. The court therefore found that loss causation was not adequately pleaded.

Section 20(a) Claim and Disposition

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

The court granted defendants’ motion to dismiss. The order did not use a “with prejudice” or “without prejudice” qualifier. It stated that the plaintiffs may seek leave to amend by letter application with a proposed amended complaint within 30 days if they can show that amendment would not be futile. The Clerk of Court was directed to close ECF No. 90 accordingly.