The Second Circuit recently revived a putative securities class action against Alibaba Group Holding Ltd. and four of its top executives for alleged material misrepresentations in connection with the company’s $25 billion initial public offering in September 2014 – the largest in U.S. history. Chief Judge Colleen McMahon of the U.S. District Court for the Southern District of New York had dismissed the suit in June 2016, holding that the plaintiffs failed to state a claim under the Securities Exchange Act of 1934. In a summary order last week, the Second Circuit vacated and remanded, concluding that Judge McMahon misapplied Rule 12(b)(6) standards in dismissing the investors’ claims.

According to the complaint, high-level Chinese regulators summoned Alibaba executives to a secret meeting two months before the IPO in which they threatened to levy hefty daily fines if the e-commerce giant continued to host a marketplace for third parties to sell counterfeit goods. This information was not revealed until four months after the IPO, when China’s State Administration for Industry and Commerce (“SAIC”) published on its website a white paper about the “guidance” it had provided to Alibaba.  Within two days of the publication of this information, Alibaba’s stock dropped 13 percent, erasing $33 billion in market capitalization.

The complaint alleged that the facts underlying the white paper were highly material to prospective investors and that they should have been, but were not, disclosed in Alibaba’s stock registration statements. The Second Circuit, in apparent agreement, noted that the information’s revelation likely would have had a multi-billion dollar negative effect on Alibaba’s IPO. Thus, “[a]ccepting Plaintiffs’ allegations as true,” the Second Circuit concluded that Alibaba “had a duty to disclose these facts, in a manner that accurately conveyed the seriousness of the problems Alibaba faced, so as not to render Defendants’ public disclosures ‘inaccurate, incomplete, or misleading.’”

The Second Circuit criticized the district court for reaching a contrary result, reasoning that Judge McMahon improperly discredited “significant allegations” upon which the plaintiffs’ claims relied, such as news reports about the secret meeting. According to the Second Circuit, Judge McMahon failed to construe the complaint’s allegations in the light most favorable to the plaintiffs and to draw all reasonable inferences in the plaintiffs’ favor, as Rule 12(b)(6) requires. Judge McMahon, for example, gave too much weight to Alibaba’s assertion that the white paper must have been “unauthorized” and untrustworthy because SAIC withdrew the paper within 12 hours; rather, under Rule 12(b)(6), the judge should have credited the plaintiffs’ “reasonable inference” that the withdrawal resulted from “Alibaba’s influence over Chinese regulators.”

The Second Circuit also concluded that the plaintiffs alleged “strong circumstantial evidence” that Alibaba acted with scienter in withholding information about its secret meeting with SAIC. The Court reasoned: “Considering the high-level nature of the meeting, the seniority of the attendees, its conduct in secret, and the huge potential impact of the SAIC’s threat made at the meeting on Alibaba and its imminent IPO, it is virtually inconceivable that this threat was not communicated to the senior level of Alibaba’s management.” Consequently, according to the Second Circuit, Alibaba’s failure to disclose the meeting concealed “true facts” about SAIC’s threat to the company.

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Photo of Shiloh Rainwater Shiloh Rainwater

Shiloh Rainwater is an associate in the Litigation Department and a member of the Firm’s Appellate Practice Group, which was named to the National Law Journal’s 2020 Appellate Hot List.  He litigates appeals spanning a wide array of subject areas, including bankruptcy, constitutional…

Shiloh Rainwater is an associate in the Litigation Department and a member of the Firm’s Appellate Practice Group, which was named to the National Law Journal’s 2020 Appellate Hot List.  He litigates appeals spanning a wide array of subject areas, including bankruptcy, constitutional law, securities, employment, and contracts.  Shiloh has successfully represented clients in high-stakes appeals in state and federal appellate courts across the country, including the U.S. Supreme Court.  Among his notable representations, Shiloh has obtained victories at the First Circuit on behalf of the Financial Oversight and Management Board for Puerto Rico in numerous appeals stemming from Puerto Rico’s $135 billion bankruptcy—the largest in American history.

In addition, Shiloh litigates a range of commercial disputes at the trial level involving, among other things, products liability, real estate, contracts, securities regulation, shareholder actions, and restructurings.  His experience spans the entire litigation lifecycle, from commencing litigation through discovery, motion practice, and trial.  Most recently, Shiloh was a member of a trial team litigating a protracted contract dispute between former co-owners of nursing facilities in California.  Among other matters, Shiloh secured dismissal of claims for intentional interference with contract against a major French logistics company; obtained summary judgment on behalf of a debt fund seeking to enforce guarantees executed in connection with financing a condominium project in Brooklyn; and contributed to a favorable outcome in expedited arbitration proceedings concerning violations of a commercial non-compete.

Shiloh maintains a robust pro bono practice, representing clients in a variety of matters.  For several years, he has provided pro bono representation to a veteran seeking vocational rehabilitation & employment benefits from the Department of Veterans Affairs.  He has also represented a prisoner asserting claims against prison officials for violations of his Eighth Amendment rights.  And, he has represented a class of tenants in public housing seeking to compel New York to address persistent mold issues.

Before joining Proskauer, Shiloh served as a law clerk to the Honorable James O. Browning of the U.S. District Court for the District of New Mexico, one of the nation’s most prolific federal judges.  Shiloh also clerked for the Honorable Gregory A. Phillips of the U.S. Court of Appeals for the Tenth Circuit.