Africa v. Jianpu Technology Inc.

Background

Enrique Africa brought a proposed class action against Jianpu Technology Inc. and Jianpu executives David Ye and Yilü (Oscar) Chen. He asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. Africa alleged that, from May 29, 2018, through February 16, 2021, Defendants inflated Jianpu’s stock price and made material misstatements or omissions about the company’s performance and risks.

The second amended complaint focused on Jianpu’s Credit Card Segment and Advertising Segment. For the Credit Card Segment, Africa alleged that sham transactions and undisclosed related-party transactions inflated revenue and helped Jianpu meet revenue targets. For the Advertising Segment, he alleged that Jianpu failed to timely disclose a Chinese criminal investigation involving Hangzhou Scorpion Technology Co., Ltd., a subsidiary of Databook, which Jianpu had acquired.

In a prior related proceeding, the court dismissed Africa’s first amended complaint without prejudice because it did not adequately allege material misstatements or omissions and did not adequately plead scienter. Scienter means an intent to deceive, manipulate, or defraud, or conduct sufficiently close to intentional wrongdoing. The court allowed Africa to amend and had described that opportunity as his final chance.

The Court’s Analysis

The court reviewed the second amended complaint under Rule 12(b)(6), which allows dismissal when a complaint does not allege enough facts to state a legally plausible claim. Because the claims alleged securities fraud, Africa also had to satisfy heightened pleading requirements requiring particularized facts supporting a strong inference of scienter for each defendant.

The court rejected Africa’s theory that Ye had a personal motive because his wife owned 40% of Beijing Rongdiandian Information Technology Co., Ltd. The court found that Africa had not adequately connected that company to the questionable Credit Card Segment transactions. It also found that his argument depended on a series of weak inferences, including that a related party identified in Jianpu’s filings was involved in the sham transactions and was the company partially owned by Ye’s wife.

The court also rejected Africa’s argument that the timing of the alleged revenue inflation showed that Defendants acted to offset declining Loan Segment revenue. The court said that the desire to maintain the appearance of profitability was a motive shared by many corporate insiders and did not establish a concrete, personal benefit or a strong inference of scienter.

The court found that the later expense reclassifications and executive or board-member resignations did not support scienter. The reclassifications did not clearly represent errors, and Africa did not connect the resignations to the alleged fraud. The court likewise found that Jianpu’s internal-control weaknesses did not show that Defendants knew about, or recklessly disregarded, contradictory information.

Regarding the Advertising Segment, the court assumed for purposes of analysis that Jianpu might have violated a disclosure requirement concerning the investigation. Even so, the court found that Africa had not alleged facts showing that Jianpu or the individual defendants acted consciously recklessly. The court noted that Jianpu recorded a substantial impairment after learning of the investigation and was not required to accuse itself of wrongdoing or predict the investigation’s outcome.

Because Africa failed to adequately plead scienter for the primary securities-fraud claim, the court also dismissed his scheme-liability claim under Rule 10b-5(a) and (c) and his Section 20(a) control-person claim. The court rejected Africa’s argument that the scheme claim could not be dismissed because Defendants had not sufficiently addressed it in their opening memorandum, finding that Africa had notice of the scienter issue and an opportunity to respond.

Disposition

Judge Jesse M. Furman granted Defendants’ motion to dismiss. The court dismissed the second amended complaint, denied Africa leave to amend again because further amendment would be futile, directed the Clerk to enter judgment in Defendants’ favor and close the case, and found that no sanctions under Federal Rule of Civil Procedure 11 were warranted.

Classification

This is a procedural order because the court dismissed the complaint under Rule 12(b)(6) for failure to adequately plead the required elements of the claims, rather than deciding whether the alleged securities fraud actually occurred.