In re QUTOUTIAO, INC. SECURITIES LITIGATION

Background

Lead Plaintiff James Pappas brought a securities class action concerning Qutoutiao Inc.’s initial public offering in September 2018 and secondary public offering in April 2019. The complaint named Qutoutiao, its insider and director defendants, and nine underwriter defendants. Pappas alleged that the defendants violated the Securities Exchange Act of 1934 and the Securities Act of 1933 by making materially false or misleading statements and omitting important information.

The allegations concerned Qutoutiao’s advertising business, including claims that Qutoutiao intentionally placed illegal or noncompliant advertisements, knew that such advertising substantially contributed to revenue, misrepresented its advertising-screening practices, failed to disclose related-party transactions, overstated revenue in filings with the U.S. Securities and Exchange Commission compared with Chinese regulatory filings, and failed to disclose potential liabilities. The complaint also challenged statements in the IPO and secondary-offering documents.

Qutoutiao and Oliver Yucheng Chen moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. The underwriter defendants joined Qutoutiao’s arguments and asserted additional grounds.

Exchange Act Claims

Count I alleged securities fraud under Section 10(b) of the 1934 Exchange Act and Securities and Exchange Commission Rule 10b-5. The court explained that the complaint had to identify a material misstatement or omission, fraudulent intent or recklessness, a connection with the purchase or sale of securities, reliance, and injury caused by that reliance. Securities-fraud claims also had to satisfy heightened requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act.

The court addressed each theory of alleged misstatement or omission and found the allegations insufficient. It held that the complaint did not provide specific facts showing that Qutoutiao had a strategy of intentionally placing illegal advertisements to increase revenue. It also found that the complaint did not plausibly allege the scale of illicit advertising or Qutoutiao’s knowledge that illicit advertising made up a significant share of revenue.

The court concluded that Qutoutiao’s disclosures warned investors about risks involving advertising compliance and that the complaint did not adequately show that statements about advertising screening were misleading. It treated some general statements about advertising quality, compliance, and recovery as nonactionable “puffery,” meaning statements too general for a reasonable investor to rely on as concrete facts.

The court also rejected the related-party-transaction theory. It found that the alleged relationship between Qutoutiao co-founder Eric Tan and Dianguan’s founder did not sufficiently show that Dianguan could not pursue its own interests. As to Mengtui, Fangce, and Shihui Miao, the court noted that the transactions had been disclosed in Qutoutiao’s 2019 annual report and that the plaintiff identified no requirement for real-time disclosure.

The court rejected the theory based on differences between Qutoutiao’s revenue figures in U.S. Securities and Exchange Commission filings and filings with China’s State Administration for Market Regulation. The complaint did not allege facts showing that the U.S. figures, rather than the Chinese figures, were false or that the differences were not attributable to different accounting standards. The court likewise found no adequately alleged government investigation likely to result in a material fine that would have required disclosure of a contingent liability.

Because the complaint did not adequately allege any actionable material misstatement or omission, the court dismissed Count I in its entirety. Count II alleged control-person liability under Section 20(a) of the Exchange Act. Because there was no adequately pleaded primary Section 10(b) violation, the court dismissed Count II as well.

Securities Act Claims

The complaint alleged that Qutoutiao, the director defendants, and the underwriter defendants violated Section 11 of the 1933 Securities Act through misleading registration statements; that Qutoutiao and the underwriters violated Section 12(a)(2) through misleading prospectuses; and that the director defendants were liable as controlling persons under Section 15.

The court determined that these claims sounded in fraud because the complaint used fraud-based allegations and language throughout its Securities Act claims, despite disclaiming reliance on fraud for those counts. The court therefore applied Rule 9(b)’s heightened pleading standard. It found that the complaint did not plead the alleged fraudulent facts with sufficient particularity as to each defendant.

The court dismissed the Section 11 claims because they did not satisfy the heightened pleading standard. It dismissed the Section 12(a)(2) claims for the same reason. Because Sections 11 and 12(a)(2) claims were not adequately pleaded, the court also dismissed the Section 15 control-person claims, which depended on an underlying violation of those provisions.

Disposition

The court granted both motions to dismiss in full. The ruling dismissed all claims in the Consolidated Amended Class Action Complaint: Counts I and II under the 1934 Exchange Act and Counts III, IV, and V under the 1933 Securities Act.