IN RE: ALIBABA GROUP HOLDING LTD. SECURITIES LITIGATION

Background

The plaintiffs—Salem Gharsalli, Laura Ciccarello, Dineshchandra Makadia, and Yan Tongbiao—brought federal securities-fraud claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Section 20(a). They sued Alibaba Group Holding Limited, Jack Ma, Maggie Wu, and Daniel Zhang on behalf of investors who purchased or acquired Alibaba American Depositary Shares during the stated class period.

The plaintiffs alleged that Alibaba continued requiring merchants to sell exclusively on Alibaba platforms even after signing a July 2020 agreement with China’s State Administration for Market Regulation promising not to force exclusive cooperation. They claimed Alibaba made misleading statements about its past use of exclusivity, the reasons for its revenue growth, the legality of its practices, and the risk of regulatory action. They also alleged that Alibaba and Ma made misleading statements about Ant Group’s planned initial public offering and that entities controlled by Ma sold Alibaba shares while possessing material nonpublic information.

Rulings on the Ant Claims and Ma

The court held that the plaintiffs lacked standing—the legal right to bring the claim—to challenge statements about Ant. Under the purchaser-seller rule, a person suing under Section 10(b) must have bought or sold the security about which the alleged misstatement was made. The plaintiffs purchased Alibaba securities, not Ant securities. The court therefore dismissed the Ant initial-public-offering claims against Ma and Alibaba for lack of standing, and also dismissed related scheme-liability claims based on the Ant statements.

The court also held that it lacked personal jurisdiction—the authority to exercise power over a defendant—over Ma for the plaintiffs’ Section 10(b) and Section 20(a) claims. The complaint did not concretely allege that Ma played a role in making, proposing, editing, or approving Alibaba’s United States public filings. His board membership, ownership interest, and alleged control over Alibaba were insufficient by themselves. The court also rejected the argument that the effects of conduct on United States investors established jurisdiction, because the alleged conduct was directed toward China. The Section 10(b) and Section 20(a) claims against Ma were dismissed for lack of personal jurisdiction.

The court separately concluded that the plaintiffs had not adequately alleged Ma’s insider-trading claims. Although the plaintiffs alleged that entities controlled by Ma sold Alibaba shares on September 30 and October 1, 2020, they did not plausibly allege that Ma knowingly possessed material, nonpublic information about Alibaba’s exclusivity practices when the sales occurred. The court dismissed Ma’s Rule 10b-5 and Rule 10b5-1 insider-trading claims.

Exclusivity-Practices Claims

The court held that the plaintiffs plausibly alleged that Alibaba’s description of its exclusivity practices as “prior” and narrowly deployed could have misled a reasonable investor into believing that Alibaba had stopped requiring merchant exclusivity. The court also found plausible the allegations that Alibaba’s statements attributing growth to its value offered merchants omitted the continuing role of exclusivity practices. Once Alibaba discussed the reasons for its success, the court concluded, it had to provide information necessary to keep those statements from being misleading.

The court further held that the plaintiffs plausibly alleged that Alibaba’s statement expressing the belief that its business practices complied with anti-monopoly and unfair-competition laws was misleading. Alibaba had disclosed regulatory warnings but allegedly failed to disclose that it continued practices contrary to its commitment to regulators and its statements to investors. The court reached the same conclusion about Alibaba’s antitrust-risk disclosures.

For loss causation—the requirement to connect the alleged fraud to the investors’ losses—the court rejected reliance on the November 10, 2020 stock-price decline because the new regulations announced then did not reveal that Alibaba’s specific statements were false. But the court found the December 23, 2020 announcement of an investigation into Alibaba’s exclusivity practices could plausibly be the first in a series of corrective disclosures revealing the alleged truth. The court therefore denied the motion to dismiss the Exclusivity Practices claims in Count One.

The court also held that the plaintiffs sufficiently alleged claims under Item 303 of Securities and Exchange Commission Regulation S-K. The plaintiffs plausibly alleged that Alibaba knew it continued requiring exclusivity and that this practice created a trend or uncertainty reasonably likely to materially affect Alibaba’s financial condition through regulatory penalties. The court denied the motion to dismiss those claims.

Control-Person Claims and Disposition

The court allowed the Section 20(a) control-person claims against Wu and Zhang to proceed. It found that the plaintiffs plausibly alleged a primary securities-law violation by Alibaba, that Wu and Zhang exercised control by speaking for Alibaba and signing relevant filings and disclosures, and that they acted with the required culpable participation. The court also found that their positions and alleged access to merchant agreements and other information supported a plausible inference of conscious misbehavior or recklessness.

Judge Daniels’s final disposition was as follows: the motion to dismiss the action as to Ma was granted; the motion to dismiss the Ant claims in Counts One and Two against all defendants was granted; and the motion to dismiss the Exclusivity Practices claims in Counts One and Two was denied. The order did not state that any dismissal was with or without prejudice.