Court Dismisses Securities Fraud Case Against Chinese Internet Company
We’ve blogged before about legal translation services for international disputes involving foreign investments and the Securities Exchange Act of 1934 and the on-going need for certified Chinese to English legal document translation services. The case below involves a federal securities class action matter against a Chinese internet company related to the company’s cryptocurrency program filed by investors who alleged they lost money due to the company’s fraudulent statements and misrepresentations.
Lawsuit against Chinese Internet Company
Lead plaintiffs, American investors, filed a class action matter on behalf of themselves and all similarly situated individuals who purchased or acquired shares of the defendant company in 2017 and 2018 and who suffered financial losses stemming from the defendants’ wrongful actions. The defendants consisted of a Chinese internet company and its CEO. The defendant company operated primarily in China and provided services such as content delivery network (“CDN”), download acceleration, video and gaming acceleration, and distributed cloud storage.
The lead plaintiffs alleged in their complaint that the defendants made a series of materially false and misleading statements following the launch of the defendant’s “OneCoin Rewards Program,” an internet-based program further explained below. Plaintiffs also alleged that the defendants’ “OneCoin Rewards Program,” a cryptocurrency, was illegal and was banned in China, but that Defendants failed to disclose its illegality to American investors in violation of Sections 10(b) and 20(a) of the Securities Exchange Act.
Explanation of Defendants’ “OneThing Cloud” & Rewards Program
In 2017, the defendant company launched “OneThing Cloud,” a network linked storage device that utilizes blockchain technology and enables multiple users to share online storage remotely instead of from a centralized server. Shortly thereafter, the defendant company issued a “Rewards Program” whereby users could leverage their excess bandwith, storage and computing power to “mine” a new cryptocurrency called “OneCoin.” Users were further able to receive and send OneCoin through a “Wallet App.”
The defendant’s program allowed users to exchange products and services that would normally cost tangible currency. However, speculators created trading markets which enabled users to exchange their OneCoin for actual currency (such as the Chinese yuan) on a third-party trading platform. The defendant company did not sponsor the third-party platforms and was not otherwise affiliated with them. However, the defendant company did enable users to extract OneCoin to third-party websites and trading platforms through its “Wallet App.” In addition, the defendant promoted OneCoin as a way for its users to make money, even going so far as to incorporate the Chinese symbol for currency into its name.
China’s Ban on Token Fundraising.
The same month that the Defendant issued its “OneThing Cloud,” the People’s Bank of China and other Chinese regulatory agencies issued a ban on “Fundraising through Coin Offering” or an “ICO” notice. The ban prohibited the issuance of any type of tokens that provided trading and exchange services from exchanging legal tender or “virtual currency.” Several days later, the defendant published a statement in Simplified Chinese on its OneThing Cloud Chinese domain about the use of OneCoin. The statement acknowledged that OneCoin was being traded on third party platforms and also warned its users about the risks of trading.
Plaintiffs’ Section 10(b) Claim.
Section 10(b) of the Exchange Act makes it illegal “[t]o use or employ, in connection with the purchase or sale of any security … any manipulative or deceptive device or contrivance…” 15 U.S.C. § 78j(b). Rule 10b-5 implements the statute and prohibits the making of “any untrue statement of a material fact or [omitting] to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).
Plaintiffs alleged that the defendants violated Section 10(b) of the Exchange Act and were liable to them for damages due to three categories of misstatements: (1) the defendants’ statement the Rewards Program was not a “disguised” Initial Coin Offering (ICO) and that OneCoins could only be used for the defendants’ products; (2) the CEO’s statement in a press release that the defendant did not “monetize” OneCoin, and (3) the CEO’s statement that the defendant company followed all the local regulations and laws.
Certified Translations of Chinese Documents to English
Chinese defendants filed a motion to dismiss in response to the plaintiffs’ complaint, alleging that the plaintiffs had failed to state a claim for relief. The defendants argued that the plaintiffs’ complaint was insufficient because the plaintiffs had not pled a material misstatement or omission, scienter or loss causation.
In evaluating the arguments, the court reviewed, among other things, certified English translations of documents which were originally written in Chinese consisting of the defendants’ statement on its Chinese domain. The court noted that the translated documents were “admissible because they [were] accompanied by executed translation certifications.” See Contrera v. Langer, 290 F. Supp. 3d 269, 278 (S.D.N.Y. 2018), report and recommendation adopted, No. 16 CV 3851-LTS-GWG, 2018 WL 3918179 (S.D.N.Y. Aug. 16, 2018) (considering a certified translated document on a motion to dismiss).
In addressing the defendant’s motion to dismiss, the court noted that the plaintiffs had claimed that the defendants’ offering of OneCoin through its Rewards Program violated Chinese regulations, operated like a disguised Initial Coin Offering, and/or violated China’s ban on token-based financing The court found that in order to state a claim, the plaintiffs had to allege that the defendants’ conduct violated Chinese law during the class period.
The court found that, even accepting the plaintiffs’ allegations as true, the plaintiffs had not demonstrated that the defendants’ “Rewards Program” violated Chinese law. The court found that the plaintiffs had not alleged that the defendant fundraised or raised money through the Rewards Program, nor had the plaintiffs alleged that the defendants’ “OneThing Cloud” was a sham, an inoperable device, or that the defendant had ever offered OneCoin in exchange for legal or virtual tender.
The court found that the plaintiffs’ allegations essentially amounted to an “aiding and abetting” theory or “willful blindness” allegations for which there was no liability under Chinese law.
No Inference of Scienter
The court also found that even if the plaintiffs had pled a claim for relief, that the plaintiffs’ claim would still fail because the complaint did not allege scienter. In order to plead scienter under the Private Securities Litigation Reform Act (“PSLRA”), a plaintiff must plead with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009).
In finding the scienter requirement to be absent, the court held that the plaintiffs did not allege that the defendants had a motive and opportunity to defraud, only inferences of scienter based on the defendants’ knowledge of the ICO notice and the defendants’ statements. Specifically, the court held that plaintiffs “cannot manufacture a scienter allegation with speculation that regulators must have informed [defendant] that the Rewards Program is illegal, particularly given their failure to plead that it was.”
Based on the above, the court granted the defendants’ motion to dismiss for failure to state a claim for relief. The court also dismissed the plaintiffs’ claims against the defendant’s CEO individually, finding that since the plaintiffs failed to plead a primary violation of the securities law against the defendant company, their claim against the individual defendant failed as well.
The case is In Re Xulei Limited Securities Litigation, Court No. 18 Civ 467 decided on September 10, 2019 in the United States District Court for the Southern District of New York.
All Language Alliance, Inc. provides certified legal translation services from Chinese to English for use in U.S. courts. Get in touch with our legal translations company to discuss your need for Mandarin deposition interpreters for virtual depositions via Zoom and inquire about hiring an in-person Mandarin deposition interpreter for an on-site deposition.
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