Banerjee v. Zhangmen Education Inc.

Background

Saurav Banerjee brought the case individually and on behalf of shareholders who purchased Zhangmen’s American Depositary Shares in connection with its initial public offering. The defendants were Zhangmen Education Inc.; executives Yi Zhang, Ricky Kwok Yin Ng, and Teng Yu; the offering signatories Cogency Global, Inc. and Collen A. De Vries; and underwriters Morgan Stanley & Co., LLC and Credit Suisse Securities (USA) LLC.

The amended complaint asserted claims under Sections 11, 12(a), and 15 of the Securities Act of 1933. Plaintiffs alleged that Zhangmen’s registration statement and prospectus were misleading because they presented the Chinese online tutoring market and Zhangmen’s growth too positively, did not adequately disclose regulatory risks and alleged misconduct, minimized a recent regulatory fine, and failed to disclose a known trend under Securities and Exchange Commission Item 303. Plaintiffs also challenged Zhangmen’s statement that it did not perceive material obstacles to obtaining a private-school operating permit.

All defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally actionable claim.

Court’s Analysis

The court treated the claims as based primarily on alleged omissions and misleading statements in the offering materials. It explained that an omission claim requires a duty to disclose and that the omitted information must be material—that is, sufficiently important that it would significantly change the total information available to a reasonable investor.

The court held that Zhangmen’s registration statement contained specific and prominent warnings about the regulatory risks that later occurred. The warnings stated that the regulatory framework was uncertain, that Zhangmen might not obtain a required permit, and that Chinese authorities could impose fines, suspend operations, or substantially limit the company’s business, including its advertising, fees, and course schedule. Because the later regulatory crackdown was the type of risk these warnings identified, the court applied the “bespeaks caution” doctrine, under which adequate warnings can make an allegedly misleading statement immaterial as a matter of law.

The court also rejected the claims based on Zhangmen’s disclosures about the recent regulatory fine. Zhangmen had disclosed that it had received fines for misleading advertising and promotions. The court found that the fine’s alleged maximum value—$390,170—was negligible compared with Zhangmen’s value as alleged in the complaint, and that plaintiffs did not adequately plead facts showing qualitative materiality. The court further found that the complaint did not plausibly show that the fine had a significant effect on Zhangmen’s operations or that management expected a significant market reaction.

The court rejected the claim concerning Zhangmen’s opinion that it did not perceive material obstacles to obtaining an operating permit. The offering materials disclosed the basis for that view, including consultations with lawyers and relevant Chinese authorities, and plaintiffs did not allege that those consultations failed to occur or that Zhangmen falsely described its belief. The court also held that the general regulatory warnings independently defeated this claim.

Finally, the court dismissed the Item 303 claims. It found that those claims duplicated the failed Securities Act claims, did not identify a separate misleading statement or omission, and did not plausibly allege that an undisclosed trend was known to defendants and reasonably likely to materially affect Zhangmen’s financial condition or results. The court also found that the offering documents disclosed the adverse regulatory developments that plaintiffs identified.

Disposition

The court granted Defendant Zhangmen Education Inc.’s motion to dismiss. Because the Section 11 claims against Zhangmen failed, the court also dismissed the claims against the officer defendants, the signatory defendants, and the underwriter defendants. The court stated that all claims against all defendants were dismissed with prejudice, entered judgment for defendants, directed the clerk to close the motions, and closed the case.

Judge J. Paul Oetken entered the order on March 30, 2023.