In re: NIO, Inc., Securities Litigation

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

IN RE NIO, INC. SECURITIES LITIGATION MEMORANDUM & ORDER

19-CV-1424 (NGG) (JRC)

NICHOLAS G. GARAUFIS, United States District Judge.

Lead plaintiff Mark Mundy and named plaintiff Eva Huang

(“Plaintiffs”) bring this putative class action on behalf of them-

selves and all purchasers of NIO Inc.’s (“NIO”) American

Depositary Shares (“shares”) from its initial public offering

(“IPO”) on September 12, 2018 through March 5, 2019 (“the

Class Period”). (Am. Compl. (Dkt. 67) { 1.) Plaintiffs allege that

NIO filed a false and misleading Registration Statement in con-

nection with its IPO, for which Defendants are liable under

Sections 11 and 15 of the Securities Act of 1933 (the “Securities

Act”) and Sections 10(b) and 20(a) of the Securities Exchange

Act of 1934 (the “Exchange Act”), as well as Rule 10b-5 promul-

gated by the Securities and Exchange Commission (“SEC”)

pursuant to Section 10(b). Defendants are NIO, certain of its sen-

ior executives and board members (the “Individual Defendants”),

and the underwriters of NIO’s IPO.! Defendants moved to dismiss

! The Individual Defendants are Bin Li, NIO’s founder, Chief Executive Of-

ficer (“CEO”), and chairman of the company’s board of directors; Louis

Hsieh, NIO’s former Chief Financial Officer (“CFO”); Lihong Qin, NIO’s co-

founder, president, and a director; Padmasree Warrior, NIO’s former chief

development officer, CEO of NIO’s American subsidiary, NIO USA, and for-

mer director of the company; Tian Cheng, Xiang Li, Hai Wu, Yaqin Zhang,

Xiangping Zhong, and Zhaohui Li, all six of whom were directors of NIO.

(Id. {{ 24-33.) The underwriter defendants are Morgan Stanley & Co. LLC;

Goldman Sachs (Asia) L.L.C.; J.P. Morgan Securities LLC; Merrill Lynch,

Pierce, Fenner & Smith Incorporated; Deutsche Bank Securities Inc.;

the action pursuant to Federal Rule of Civil Procedure 12(b) (6)

for failure to state a claim. (See Defs.’ Mot. to Dismiss (Dkt. 68);

Defs.’ Mem. in Supp. of Mot. to Dismiss (“Mot.”) (Dkt. 69); Pls.’

Opp. to Mot. to Dismiss (“Opp.”) (Dkt. 71); Defs.’ Reply (Dkt.

72).)? For the following reasons, Defendants’ motion is DENIED.

I. BACKGROUND

On a motion to dismiss, the court accepts as true all factual alle-

gations in the complaint and draws all reasonable inferences in

Plaintiffs’ favor. See N.Y. Pet Welfare Ass'n v. City of New York, 850

F.3d 79, 86 (2d Cir. 2017).

A. Overview

NIO is a Chinese company founded in 2014 that develops electric

vehicles (“EVs”) and is often referred to as the “Tesla of China.”

(Id. § 47.) Headquartered in Shanghai, NIO pitched itself as a

“pioneer in China’s premium [EV] market” that was higher qual-

ity than other domestic manufacturers and less expensive than

foreign manufacturers. (Id. 23, 49.) Compared to American

and European EV makers, like Tesla, Audi, and Mercedes-Benz,

NIO sells its vehicles at lower prices because it manufactures

them in China. (Id. {{ 48, 50.) NIO’s domestic production lowers

manufacturing costs, allows it to capture EV subsidies from the

Chinese government, and lets it avoid the import duties levied on

foreign manufacturers. (Id. 14 3-4.)

But unlike its foreign competitors, NIO does not manufacture its

own EVs. (Id. { 5.) Instead, in May 2016, NIO partnered with

Jianghuai Automobile Group Co. Ltd. (“JAC Motors”), a state-

owned Chinese truck manufacturer. (Id. 4 5, 52.) Under their

Citigroup Global Markets Inc.; Credit Suisse Securities (USA) LLC; UBS

Securities LLC; and WR Securities, LLC. (Id. { 36-44.)

2 Individual Defendants’ Motion to Join the pending Motion to Dismiss

(Dkt. 74) is GRANTED.

five-year agreement, JAC Motors would manufacture NIO’s EVs

and NIO would pay JAC Motors a per-vehicle fee, as well as cover

any operating losses for the first 36 months of production. (Id. {

52.)

B. NIO’s September 2018 Initial Public Offering

On September 11, 2018, NIO filed its final Registration State-

ment with the SEC in advance of its IPO and, on the following

day, filed its Prospectus. (Id. § 54.) On September 12, NIO’s

shares began trading on the New York Stock Exchange. (Id. 455.)

NIO’s IPO raised approximately $1.095 billion in net proceeds

from the sale of 184 million shares at a price of $6.26 per share.

(Id.)

In its Registration Statement, NIO warned of risks related to its

current manufacturing agreement with JAC Motors, noting that

its brand could be “adversely affected by perceptions about the

quality of our partners’ vehicles.” (NIO Prospectus (Dkt. 70-1) at

16).° Equity research analysts also noted that risk, describing

JAC Motors as “third tier,” and described the “unusual business

model” as a “source of concern for investors.” (Am. Compl. 53,

57.)

NIO also announced in its Registration Statement that it was “de-

veloping [its] own manufacturing facility in Shanghai which [it]

expect[ed] to be ready by the end of 2020.” (NIO Prospectus at

32.) The Shanghai Facility site was approximately 15 miles from

NIO’s headquarters, an estimated 20-minute drive. (Am. Compl.

145.) Pursuant to an agreement with Shanghai municipal au-

thorities, the government would construct the facility and NIO

3 Items 303 and 503 of SEC Rule S-K require that registration statements

“focus specifically on material events and uncertainties known to manage-

ment that are reasonably likely to cause reported financial information not

to be necessarily indicative of future operating results or of future financial

condition.” 17 C.F.R. §§ 229.303; 229.503. (Am. Compl. 4" 94-99.)

would lease it from them and outfit it into its own factory. (Id. 4

64 n.5.) NIO planned to pay $650 million to complete the facility,

at least $276 million of which would come from the proceeds of

the IPO. (Id. §§ 63-64.)

NIO made several statements related to the Shanghai Facility in

its Registration Statement, including:

e “The construction and operation of our own manufac-

turing plant in Shanghai or other manufacturing

facilities are subject to regulatory approvals and may

be subject to delays, cost overruns or may not produce

expected benefits. We are developing our own manufac-

turing facility in Shanghai which we expect to be ready

by the end of 2020. Such manufacturing facility is cur-

rently being constructed by relevant Shanghai

authorities. As a result, such construction is largely out-

side of our control and could experience delays or other

difficulties. We are also building phase two of our manu-

facturing facilities in Nanjing. Construction projects of

this scale are subject to risks and will require significant

capital. Any failure to complete these projects on sched-

ule and within budget could adversely impact our

financial condition, production capacity and results of

operations. Under PRC law, construction projects are

subject to broad and strict government supervision and

approval procedures, including but not limited to project

approvals and filings, construction land and project plan-

ning approvals, environment protection approvals, the

pollution discharge permits, work safety approvals, fire

protection approvals, and the completion of inspection

and acceptance by relevant authorities. Some of the con-

struction projects being carried out by us are undergoing

necessary approval procedures as required by law. As a

result, the relevant entities operating such construction

projects may be subject to administrative uncertainty

construction projects in question within a specified time

frame, fines or the suspension of use of such projects. Any

of the foregoing could have a material adverse impact on

our operations.” (NIO Prospectus at 32.) (emphasis in

original).)

e “Construction has started on our own manufacturing

facility in Shanghai.” (Id. at 122.)

e “Our own manufacturing facility in Shanghai is

currently under construction by certain Shanghai

government entities.” (Id. at 137.)

C. The March 2019 Announcement

Before markets opened on March 6, 2019, NIO released its finan-

cial results for the fourth quarter, as well as for the entirety of

Fiscal Year 2018 on Form 6-K. (Am. Compl. { 65.) NIO reported

net losses of $1.4 billion, and a significant slowdown in EV deliv-

eries. (See Mot. at 7.) NIO also announced that it was

abandoning its plans for the Shanghai Facility and instead would

continue to partner with JAC Motors to produce EVs. (Am.

Compl. { 65.) On a conference call with investors, NIO’s CEO,

Defendant Bin Li, cited a November 2018 Chinese government

policy encouraging “cooperation between the car R&D compa-

nies like NIO with the existing manufacturing companies . . . that

means the cooperative mode between NIO and JAC is endorsed

by the Chinese government.” (Id. 4 67.)

Following the announcement, NIO’s stock fell from its closing

price of $10.16 on March 5, 2019 to $7.09 on March 7, 2019—a

30 percent drop. (Id. { 146.) The South China Morning Post pub-

lished an article on March 6, 2019 headlined “Chinese Electric

Vehicle Make NIO Scraps Shanghai Factory Plan After Losses

Double to US$1.4 Billion.” (Id. { 72.) A Deutsche Bank report

published on March 19, 2019 also noted the news and stated that

investors believed NIO abandoned the Shanghai Facility because

it lacked sufficient cash due to dwindling car sales since January

2019. (Id. { 71.) An industry website, insideevs.com, posted an

article titled “NIO Terminates Plan for Shanghai Manufacturing

Plant.” (Id. § 73.)

D. Plaintiffs’ Allegations

Plaintiffs allege that Defendants misrepresented the progress of

construction on the Shanghai Facility and failed to warn inves-

tors about risks to construction related to future cash flow and

sales performance. (Id. { 10.) Plaintiffs rely primarily on NIO’s

failure to obtain the necessary regulatory approvals, without

which NIO could not have started construction, and accounts

from three former employees who stated that construction had

never begun on the Shanghai Facility, despite what NIO pub-

lished in its Registration Statement. (Id. {| 10, 85-86.)

All construction projects in Shanghai, including government pro-

jects, require a construction planning permit from the municipal

government, which posts all permits on its website within five

days of issuance. (Id. { 77-78.) Permits for projects issued after

2010 remain on the government website even if the projects are

later suspended or terminated. (Id. { 81.) According to Plaintiffs,

construction on the Shanghai Facility could never have begun

because the Shanghai Municipal Planning and Natural Resources

Bureau website shows no construction planning permit was ever

issued for NIO’s Shanghai Facility. (Id. { 80.) Because the website

catalogs all permits, and no permit is available for NIO’s project,

Plaintiffs aver that NIO misrepresented the status of the Shanghai

Facility by telling investors that it was “currently under construc-

tion” when it was not and could not have been under the

applicable laws. (Id. § 85.)

Plaintiffs also base their allegations on NIO’s failure to obtain an

environmental approval. ([d.) Chinese law requires a construc-

tion project to conduct and pass a multi-step environmental

impact assessment before construction can begin. (Id. { 82.) That

process involves the preparation of an environmental impact as-

sessment and report, a period of public comment and review and,

ultimately, approval by the relevant authorities. (Id.) The Shang-

hai Environmental Impact Assessment for Construction Projects

Publication Platform website lists projects in Shanghai which

have successfully completed the environmental review process.

(Id. { 83.) NIO satisfied the first step of the process with an envi-

ronmental impact assessment completed by Shanghai Huanke

Environmental Assessment Consulting Co., Ltd. in May 2018, but

the project was never listed as approved on the website. (Id. {

84.) Plaintiffs cite the lack of environmental approval to support

their allegation that construction never began on the Shanghai

Facility. (Id. { 85.)

Plaintiffs also rely on accounts from three former NIO employees,

(“FE1”, “FE2”, and “FE3”,) to allege that construction on the

Shanghai Facility never began. (Id. {{ 86-91.)

FE1 was a Purchasing Manager at NIO from May 2018 until Au-

gust 2020. (Id. { 87.) As a Purchasing Manager, FE1 was

responsible for overseeing site selection, design, and installation

of new factories, as well as negotiating contracts with factory

suppliers. (Id. {{ 87- 88.) FE1 was directly involved with the

Shanghai Facility and stated that construction had not begun

when the project was terminated in the latter half of 2018. (Id. 4

89.)

FE2 worked in a senior sales position for NIO in Shanghai from

March 2018 until October 2019. (Id. { 74.) According to FE2,

construction never started on the factory, which was still in the

initial planning stages when it was abandoned. (Id. 4 90.) FE2

also told Plaintiffs that the “main reason” for scrapping the pro-

ject was “cash shortage difficulties.” (Id. § 74.)

FE3 was a car design engineer for NIO in Shanghai from April

2018 until May 2020 and also reported that NIO performed an

environmental impact assessment but canceled the Shanghai Fa-

cility before construction could begin. (Id. { 91.)

E. Procedural History

Between March and May 2019, multiple plaintiffs filed putative

class actions against NIO in the Eastern District of New York and

in the Northern District of California. (See Mar. 3, 2020 Mem. &

Order (Dkt. 44) at 4-5.) The cases were transferred to this district

where the court consolidated them, appointing Mark Mundy as

lead plaintiff and The Rosen Law Firm as class counsel. (Id. at

11-12.)

II. LEGAL STANDARD

A. Rule 12(b)(6)

To survive a motion to dismiss under Rule 12(b) (6), a complaint

“must contain sufficient factual matter, accepted as true, to ‘state

a claim to relief that is plausible on its face.” Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly,

550 U.S. 544, 570 (2007)).4 In considering the sufficiency of the

operative complaint, the court “accept[s] all factual allegations

in the complaint as true, and draw[s] all reasonable inferences

in the plaintiff's favor.” Chambers v. Time Warner, Inc., 282 F.3d

147, 152 (2d Cir. 2002). However, the court need not credit

“It]hreadbare recitals of the elements of a cause of action, sup-

ported by mere conclusory statements.” Iqbal, 556 U.S. at 678.

B. Pleading Standard

Plaintiffs’ claims under the Exchange Act must satisfy the height-

ened pleading requirements of Federal Rule of Civil Procedure

9(b) and the Private Securities Litigation Reform Act of 1995

(“PSLRA”), 15 U.S.C. § 78u-4(b). See Anschutz Corp. v. Merrill

4 When quoting cases, unless otherwise noted, all citations and quotation

marks are omitted, and all alterations are adopted.

Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012). For those claims,

Plaintiffs “must state with particularity the circumstances consti-

tuting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy Rule 9(b),

the plaintiff must “(1) specify the statements that the plaintiff

contends were fraudulent, (2) identify the speaker, (3) state

where and when the statements were made, and (4) explain why

the statements were fraudulent.” Anschutz, 690 F.3d at 108. Fur-

ther, to satisfy the PSLRA, Plaintiffs must “specify each

misleading statement; . . . set forth the facts on which a belief

that a statement is misleading was formed; and .. . state with

particularity facts giving rise to a strong inference that the de-

fendant acted with the required state of mind.” Id.

Defendants contend that Plaintiffs’ Securities Act claims are also

subject to the heightened pleading standards of Rule 9(b) be-

cause they “are based on the same securities fraud allegations

pled under the Exchange Act.” (Mot. at 10.) “Fraud is not an el-

ement or a requisite to a [Securities Act] claim” and “a plaintiff

need allege no more than negligence to proceed under” that pro-

vision. Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004).

However, where a Section 11 claim is “premised on allegations

of fraud,” plaintiffs must adhere to the heightened pleading

standards under Rule 9(b) and plead their allegations with par-

ticularity. See id. (“We hold that the heightened pleading

standard of Rule 9(b) applies to Section 11 and Section 12(a) (2)

claims insofar as the claims are premised on allegations of

fraud.”).

In practice, courts rely on four factors to determine whether Sec-

tion 11 claims sound in fraud: whether “(1) the complaint

contains merely a blanket disclaimer that the plaintiffs do not al-

lege fraud for the purposes of the Securities Act claims; (2) the

allegations themselves include classic fraud language; (3) the

complaint does not show any basis for the claims that is non-

fraudulent; and (4) the plaintiffs do not separate the factual

allegations supporting the fraud claims and negligence claims,

but rather require the courts to parse the complaints.” In re Gen-

tiva Sec. Litig., 932 F. Supp. 2d 352, 392 (E.D.N.Y. 2013) (citing

Rombach, 355 F.3d at 171-72). The court will also consider

whether the “gravamen of the complaint is plainly fraud,” or

whether alternative bases of liability exist. Rombach, 355 F.3d at

172.

Here, the court finds that Plaintiffs’ Securities Act claims are not

subject to the heightened pleading standards under Rule 9(b) be-

cause they sound in negligence, not in fraud. Plaintiffs’ claims

under Section 11 of the Securities Act and under Section 10(b)

of the Exchange Act are analytically distinct, even if overlapping

conduct forms the basis for both. Plaintiffs do not simply rely on

a blanket disclaimer to cordon off their claims into fraud and neg-

ligence; they plead each allegation separately. With respect to the

Section 11 claim, Plaintiffs base their allegations on Defendants’

failure to make “a reasonable investigation” or possess reasona-

ble grounds for the facts presented to investors in the

Registration Statement. (Am. Compl. { 128.) In contrast, Plain-

tiffs’ Exchange Act claims rest on alternative grounds—alleged in

a separate, Exchange Act-specific portion of the Amended Com-

plaint—that “[t]he Individual Defendants were, at the very least,

reckless in telling investors that construction of the Shanghai Fa-

cility was underway if they did not verify that construction had

actually commenced.” (Id. { 143.) The court finds that Plaintiffs’

Section 11 and Section 10(b) claims are separate because alter-

native grounds of liability, requiring different proof, are distinctly

asserted. See, e.g. In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611,

631-32 (S.D.N.Y. 2007) (“[T]he mere fact that a statement is

misleading (as are all false statements, whether intentionally,

negligently or innocently made) does not make it fraudulent. . .

. Rombach necessarily requires a case-by-case analysis of particu-

lar pleadings to determine whether the gravamen of the

complaint is plainly fraud.”).

10

Accordingly, Plaintiffs’ Securities Act claims are not subject to

Rule 9(b)’s heightened pleadings standards for fraud.

III. DISCUSSION

A. Overview

Plaintiffs assert claims against all Defendants under Section 11

of the Securities Act and against NIO and the Individual Defend-

ants under Section 10(b) of the Exchange Act and Rule 10b-5.

(Am. Compl. 94 123-132; 153-162.) In addition, Plaintiffs allege

“control person” liability against the Individual Defendants under

Section 15 of the Securities Act and Section 20(a) of the Ex-

change Act. (Id. §{ 133-138; 163-168.) Defendants move to

dismiss all of Plaintiffs’ claims.

B. Primary Liability

1. Section 11 of the Securities Act

Plaintiffs assert Section 11 claims against all Defendants. (Am.

Compl. { 124.) Section 11 imposes liability for material misstate-

ments or omissions in registration statements. See 15 U.S.C. §

77k(a). “To state a claim under section 11, a plaintiff must allege

that: (1) she purchased a registered security, either directly from

the issuer or in the aftermarket following the offering; (2) the

defendant participated in the offering in a manner sufficient to

give rise to liability under section 11; and (3) the registration

statement ‘contained an untrue statement of a material fact or

omitted to state a material fact required to be stated therein or

necessary to make the statements therein not misleading.” In re

Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358-59 (2d

Cir. 2010) (quoting 15 U.S.C. § 77k(a)).

Plaintiffs allege, and Defendants do not dispute, that they pur-

chased NIO’s shares in satisfaction of the first element, and that

the named Defendants consist of the company itself, its officers

and directors, and its underwriters, in satisfaction of the second

11

element. (Am. Compl. 99 2, 23-46.) The crux of Defendants’ mo-

tion lies in the third prong: whether the registration statement

“contained an untrue statement of a material fact or omitted to

state a material fact” that rendered it misleading to investors. 15

U.S.C. § 77k(a).

A Section 11 claim requires (1) a misrepresentation or omission

concerning (2) a material fact. A misrepresentation is an “untrue

statement,” and an omission is a missing statement “required to

be stated . . . or necessary to make the statements [in the regis-

trationstatement] not misleading.” 15 U.S.C. § 77k(a). “The test

for whether a statement is materially misleading . . . is whether

the defendants’ representations, taken together and in context,

would have misled a reasonable investor.” Rombach, 355 F.3d at

172 n.7. Plaintiffs assert two theories of liability under Section

11: (1) that Defendants misrepresented the progress of construc-

tion on the Shanghai Facility; and (2) that Defendants omitted

warnings that the construction depended on sufficient cash flow

and meeting sales expectations. (Am. Compl. { 10.)

Defendants move to dismiss Plaintiffs’ Section 11 claims on the

grounds that Plaintiffs “fail to allege any material misrepresenta-

tion about the status of construction of the Shanghai Facility.”

(Mot. at 2.) Defendants argue (1) that construction permits and

environmental approvals were not necessary for construction to

have begun, (2) that the anonymous employees’ testimony

should not be credited because Plaintiffs have not alleged suffi-

cient facts to establish the foundation for the former employees’

knowledge, and, (3) that even if there were a misrepresentation,

Plaintiffs have failed to show that it was material to investors.

12

(Mot. at 11-17.) For the following reasons, the court finds that

Plaintiffs have adequately pleaded a Section 11 claim.°

a. Lack of Permits and Approvals

First, Defendants argue that the absence of construction permits

and environmental approvals on which Plaintiffs rely is meaning-

less because such authorizations were “neither [] sufficient nor

[] necessary” for construction to begin. (Mot. at 13.) The court

disagrees. On a motion to dismiss the court accepts all factual

allegations in the complaint as true. See N.Y. Pet Welfare Ass'n,

850 F.3d at 86. Plaintiffs allege that certain regulatory approvals

were required for construction to begin, that NIO failed to obtain

those approvals, and that, therefore, construction on the Shang-

hai Facility never began and NIO misled investors when it stated

that the Shanghai Facility was “currently under construction.”

(Am. Compl. 62, 85.) To support those factual allegations,

Plaintiffs point to various other construction projects, including

government projects, that obtained permits and note that the

government websites cataloging those approvals maintain a rec-

ord for all permits, including for projects that are suspended or

canceled. (Id. {{ 81, 83.) Defendants do not controvert Plaintiffs’

clear assertion that “[i]t is illegal to begin construction work in

Shanghai without the necessary construction planning permit

from the Shanghai Municipal Planning and Natural Resources

Bureau.” (Id. § 77.) Instead, Defendants aver that NIO was en-

gaged in a long permitting process with multiple steps, that it had

yet to obtain final approval, and that nothing in the Registration

Statement stated otherwise. (Mot. at 14.) At bottom, the two

> Because the court finds that Plaintiffs’ Section 11 claims may proceed be-

cause they have adequately pleaded material misrepresentations with

respect to the Shanghai Facility, the court need not consider whether Plain-

tiffs’ allegations that Defendants omitted warnings about specific risks

could independently form the basis of such a claim.

13

sides present competing theories to be developed as the case con-

tinues, but at this stage, Plaintiffs have met their initial pleading

burden.

b. Anonymous Employee Accounts

Next, Defendants argue that the anonymous former NIO employ-

ees on whom Plaintiffs rely lack the requisite knowledge for their

claims that construction on the Shanghai Facility had never

started. (Id. at 12.) The court disagrees and finds that Plaintiffs

have alleged sufficient facts from which the court may infer that

the former employees would have knowledge of the status of

construction on the Shanghai Facility.

As a general matter, “if personal sources must be identified, there

is no requirement that they be named, provided they are de-

scribed in the complaint with sufficient particularity to support

the probability that a person in the position occupied by the

source would possess the information alleged.” Novak v. Kasaks,

216 F.3d 300, 314 (2d Cir. 2000). Following Novak, district

courts in the Second Circuit generally credit anonymous wit-

nesses in two situations. See, e.g., Glaser v. The9, Ltd., 772 F.

Supp. 2d 573, 590 (S.D.N.Y. 2011). In one situation, courts will

credit confidential sources whose “positions and/or job responsi-

bilities are described sufficiently to indicate a high likelihood that

they actually knew facts underlying their allegations.” Id. Alter-

natively, where “independent adequately pled factual allegations

corroborate a confidential source’s statements, the requirement

of a description of the source’s job is loosened.” Id.

Plaintiffs rely on three anonymous former employees: FE1, FE2,

and FE3. FE1, who told Plaintiffs that construction on the Shang-

hai Facility never began, was a Purchasing Manager whose job

duties included selecting factory sites and negotiating with fac-

tory suppliers. (Am. Compl. {4 87-89.) As a Purchasing Manager

in charge of factory development, FE1 would have been a posi-

tion to know the status of construction on the Shanghai Facility.

14

The court, therefore, finds that Plaintiffs have alleged sufficient

facts “to indicate a high likelihood” that FE1 had knowledge of

the status of construction.

The two other anonymous sources—FE2 and FE3—are described

as employees in a “senior sales position” and a “car design engi-

neer” respectively. (Am. Compl. {{ 74, 91.) FE2 told Plaintiffs

that construction had never started on the Shanghai Facility. (Id.

90.) FE3 confirmed, also noting that NIO had completed the

first step in the environmental impact approval process by pre-

paring a report. (Id. { 91.) Both employees were based in

Shanghai. (Id. {4 74, 91.) FE2’s and FE3’s positions may not be

described with enough detail to suggest how each would have

known particular details about construction on the Shanghai Fa-

cility. However, their accounts are supported by FE1’s accounts,

by the absence of regulatory approvals necessary for construction

to begin, and, in FE3’s case, by Defendants’ admission that an

environmental impact assessment was conducted. As a result, the

court disagrees with Defendants’ contention that Plaintiffs failed

to plead sufficient facts on which the anonymous witnesses’ alle-

gations were based, and finds that those accounts, along with the

lack of permits and approvals, form an adequate basis for a claim

under Section 11.

c. Materiality

Finally, Defendants argue that Plaintiffs have failed to “allege

facts showing the status of construction was material infor-

mation.” (Mot. at 15.) Materiality is satisfied when a plaintiff

alleges “a statement or omission that a reasonable investor would

have considered significant in making investment decisions.” Ga-

nino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). A

district court may not dismiss a complaint “on the ground that

the alleged misstatements or omissions are not material unless

they are so obviously unimportant to a reasonable investor that

15

reasonable minds could not differ on the question of their im-

portance.” Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 717 (2d

Cir. 2011).

The court finds that Plaintiffs have satisfactorily alleged materi-

ality. According to Plaintiffs, the Shanghai Facility would require

upwards of 25 percent of IPO proceeds and reduce NIO’s reliance

on JAC Motors, an allegedly “third tier’ manufacturer. (Am.

Compl. {{ 5, 63.) The new facility was intended to shift NIO out

of a partnership that analysts viewed as a “source of concern for

investors” and eliminate certain production risks that the com-

pany had identified. (Id. {{ 57-58.) The news about the facility

was featured prominently in industry press, along with NIO’s

other announcements about weak financials and lagging de-

mand for EVs. (Id. §{ 71-73.) Those details are sufficient for

Plaintiffs to show that a “reasonable investor would have consid-

ered” details about the Shanghai Facility important when making

investment decisions. Ganino, 228 F.3d at 161. Therefore, the

court disagrees with Defendants and finds that Plaintiffs have ad-

equately alleged materiality.

2. Section 10(b) of the Exchange Act and Rule 10b-5

Plaintiffs also bring claims under Section 10(b) of the Exchange

Act and Rule 10b-5 against NIO and the Individual Defendants.

(Am. Compl. { 154.) Section 10(b) makes it unlawful “to use or

employ, in connection with the purchase or sale of any security

registered on a national securities exchange or any security not

so registered, . . . any manipulative or deceptive device or con-

trivance in contravention of such rules and regulations as the

[SEC] may prescribe as necessary or appropriate in the public

interest or for the protection of investors.” 15 U.S.C. § 78j(b).

Rule 10b-5 “more specifically delineates what constitutes a ma-

nipulative or deceptive device or contrivance,” Press v. Chem. Inv.

Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999), and prohibits

“mak[ing] any untrue statement of a material fact or ...

16

omit[ting] to state a material fact necessary in order to make the

states made ... not misleading.” 17 C.F.R. § 240.10b-5(b).

Section 10(b) of the Exchange Act resembles Section 11 of the

Securities Act in that they both provide causes of action for ma-

terial misstatements and omissions, but plaintiffs proceeding

under Section 10(b) bear a heavier burden. To survive a motion

to dismiss for claims under Section 10(b), plaintiffs must “plau-

sibly allege: (1) a material misrepresentation (or omission); (2)

scienter, i.e., a wrongful state of mind; (3) a connection with the

purchase or sale of a security; (4) reliance; (5) economic loss;

and (6) loss causation.” Singh v. Cigna Corp., 918 F.3d 57, 62 (2d

Cir. 2019). Defendants contend that Plaintiffs have (1) failed to

allege a material misrepresentation or omission, (2) failed to

plead scienter, and (3) failed to plead loss causation. (Mot. at 2-

4.) The court considers each of those arguments in turn.

a. Material Misrepresentations and Omissions

Plaintiffs base their Section 10(b) and Rule 10b-5 claims on the

same alleged misrepresentations and omissions as their Section

11 claims. “The test for whether a statement is materially mis-

leading” is the same under Section 10(b) and Section 11.

Rombach, 355 F.3d at 172 n.7. Because the court finds that Plain-

tiffs adequately pled that Defendants made materially misleading

statements with respect to the Section 11 claims, the same anal-

ysis holds for the Section 10(b) claims.

As discussed above, actions under the Exchange Act are subject

to additional requirements at the pleading stage under Federal

Rule of Civil Procedure 9(b) and the PSLRA. See Fed. R. Civ. P.

9(b); 15 U.S.C. § 78u-4(b) (1). Under Rule 9(b), plaintiffs must

plead fraud with particularity. The complaint must “(1) specify

the statements that the plaintiff contends were fraudulent, (2)

identify the speaker, (3) state where and when the statements

were made, and (4) explain why the statements were fraudu-

lent.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99

17

(2d Cir. 2007). Plaintiffs have met each of those requirements.

They identified several specific statements, named NIO and those

who signed its offering documents as speaker, pinpointed the

source of these statements as NIO’s September 2018 Registration

Statement, and explained that these statements were fraudulent

because they misrepresented the status of the Shanghai Facility.

(Am. Compl. {| 60-62.)

In addition to Rule 9(b), the PSLRA imposes an additional plead-

ing requirement: “whenever plaintiffs allege, on information and

belief, that defendants made material misstatements or omis-

sions, the complaint must ‘state with particularity all facts on

which that belief is formed.” Novak, 216 F.3d at 312 (2d Cir.

2000) (quoting 15 U.S.C. § 78u-4(b) (1)). The Second Circuit has

held that plaintiffs who rely on anonymous sources, as Plaintiffs

do here, do not necessarily need to identify these sources by

name, especially when plaintiffs rely on separate additional facts.

Novak, 216 F.3d at 314. As discussed above, Plaintiffs rely on

three anonymous sources whose testimony is corroborated inde-

pendently and by each other. Therefore, Plaintiffs have pleaded

the factual basis with particularity.

b. Scienter

Defendants argue that Plaintiffs’ Exchange Act claims should be

dismissed because they failed to sufficiently plead scienter. (Mot.

at 21-22.) Scienter “refers to a mental state embracing intent to

deceive, manipulate, or defraud” and is necessary to assert a vi-

olation of section 10(b) of the Exchange Act and Rule 10b-5.

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Under

the PSLRA, plaintiffs bringing such actions are required to “state

with particularity facts giving rise to a strong inference that the

defendant acted with” scienter. 15 U.S.C. § 78u-4(b) (2). Alt-

hough the PSLRA is silent on what amounts to a “strong

inference,” the Supreme Court has clarified that it is an inference

which is “more than merely plausible or reasonable—it must be

18

cogent and at least as compelling as any opposing inference of

nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rts., Ltd.,

551 U.S. 308, 314 (2007). Defendants contend that Plaintiffs

failed to articulate a strong inference of scienter under the

PSLRA. (Mot. at 21-22.)

The court must determine “(1) whether the Complaint alleged

facts sufficient to create a strong inference of scienter, and (2)

whether an inference of scienter is at least as compelling as any

opposing inference of nonfraudulent and nonreckless intent.” S.

Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 111 (2d Cir.

2009). On the first prong, plaintiffs can show scienter either by

alleging facts “(1) showing that the defendants had both motive

and opportunity to commit the fraud or (2) constituting strong

circumstantial evidence of conscious misbehavior or reckless-

ness.” ATSI Commc'ns, 493 F.3d at 99.

Plaintiffs plead scienter based on alleged conscious misbehavior

or recklessness, claiming that Defendants “knew facts or had ac-

cess to information suggesting that their public statements were

not accurate” or “failed to check information they had a duty to

monitor.” (Opp. at 17.) Plaintiffs note that the Shanghai Facility

was NIO’s first and only manufacturing facility; it was approxi-

mately a 20-minute drive from NIO headquarters; its

construction was a business imperative that would have allowed

the company to shift away from its partnership with JAC Motors;

and the company planned to dedicate 25 percent of the IPO pro-

ceeds to its construction. (Opp. at 18; Am. Compl. { 139-45.) In

addition, Plaintiffs assert that the Registration Statement shows

that Defendants were aware of the regulatory approvals required

to begin construction. (Am. Compl. { 144.) Given those facts,

Plaintiffs argue that “[i]t is not credible that NIO’s senior execu-

tives were unaware of the status of the Shanghai Facility’s

construction” and that “[i]f the Individual Defendants failed to

19

verify the construction status before telling investors that con-

struction was underway, then they were reckless.” (Opp. at 18.)

Defendants contend that Plaintiffs have inadequately alleged sci-

enter through recklessness because they did not “specifically

identify the reports or statements that are contradictory to the

statements made.” (Mot. at 22 (quoting Glaser, 772 F. Supp. 2d

at 578) (emphasis in original).) That language originates from

the Second Circuit’s decision in Novak, 216 F.3d at 309, and re-

fers to situations where “the public statements [of corporate

officials] are consistent with reasonably available data” at the

time they were made. For that proposition, the Novak court cited

to San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip

Morris Cos., Inc., 75 F.3d 801 (2d Cir. 1996). In San Leandro,

plaintiffs argued that Philip Morris concealed the true rate at

which sales of Marlboro cigarettes were declining because the

company later revealed that sales were falling at 8.3 percent,

“significantly higher than the previously announced rate of 2.5

percent.” Id. at 812. The court held that plaintiffs’ “unsupported

general claim of the existence of confidential company sales re-

ports that revealed the larger sales decline” was insufficient to

adequately allege that Philip Morris’s public statements were

false or misleading. Id. The circumstances in this case are sub-

stantially different. The San Leandro plaintiffs argued that poor

sales figures implied that Philip Morris must have known that

sales were declining more than three weeks before those figures

were announced. In contrast, the question here is whether a sig-

nificant construction project had begun at all. Put simply,

whether a factory is “currently under construction” is far clearer

cut than sales data which is prone to fluctuation and differing

interpretations. A company’s representations about the strength

of demand for a product might fairly be construed as “consistent

with reasonably available data,” but a company’s representations

about whether a factory is currently under construction cannot

be. Therefore, Plaintiffs’ allegations that Defendants represented

20

that the Shanghai Facility was under construction when it was

not are enough to plead recklessness.

Plaintiffs must also show that the “strong inference of scienter’” is

“cogent and at least as compelling as any opposing inference of

nonfraudulent intent.” Tellabs, 551 U.S. at 314. Defendants sug-

gest that the more “cogent” and “compelling” explanation is that

“Defendants sincerely believed construction was underway” be-

cause the project was primarily in the hands of the Shanghai

government. (Mot. at 24.) But considering the totality of the facts

Plaintiffs have asserted—namely the importance and cost of the

factory to NIO’s business, the close proximity of the project to

NIO’s offices, Defendants’ awareness of the required regulatory

approvals, and their substantial role in preparing the factory

along with the Shanghai government—the court finds that Plain-

tiffs have pleaded recklessness as the foundation of a strong

inference of scienter which is sufficiently compelling.

c. Loss Causation

Finally, Defendants argue that Plaintiffs have failed to adequately

plead loss causation. (Mot. at 24.) Loss causation requires a

plaintiff to show that an alleged misstatement, “when disclosed,

negatively affected the value of the security.” Lentell v. Merrill

Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005). Pleading loss cau-

sation “is not meant to impose a great burden on plaintiffs.” IBEW

Loc. 90 Pension Fund v. Deutsche Bank AG, No. 11-cv-4209 (KBF),

2013 WL 1223844, at *12 (S.D.N.Y. Mar. 27, 2013) (citing Dura

Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005)). The Supreme

Court has held that an artificially inflated stock price at the time

of purchase is insufficient to show loss causation. Dura Pharms.,

544 U.S. at 346. Instead, plaintiffs must establish that the stock

price fell following later corrective disclosures. Id. at 345-47. Alt-

hough plaintiffs “need not demonstrate on a motion to dismiss

that the corrective disclosure” was the singular cause of the loss,

Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d

21

227, 233 (2d Cir. 2014), the complaint must still “allege facts

that support an inference that defendants’ misstatements and

omissions concealed the circumstances that bear upon the loss

suffered such that plaintiffs would have been spared all or an as-

certainable portion of that loss absent the fraud,” In re Citigroup

Inc. Sec. Litig., 753 F. Supp. 2d 206, 234 (S.D.N.Y. 2010) (quot-

ing Lentell, 396 F.3d at 175).

Plaintiffs allege that “NIO’s announcement on March 6, 2019 that

it had terminated construction of the Shanghai Facility shocked

the market” and caused the price of its shares to drop by 30 per-

cent from $10.16 per share on March 5 to $7.09 on March 7.

(Am. Compl. { 146.) Plaintiffs have also alleged that the Shang-

hai Facility would have eliminated a partnership which some

analysts viewed as a “source of concern for investors,” and have

pointed to various media and equity research commentary to es-

tablish that the Facility was a development of significance to

industry professionals. (Id. {{ 57, 70-72.) Pleading loss causation

“does not place on Plaintiffs a further pleading obligation to rule

out other contributing factors or alternative casual explanations.”

Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Secs., LLC, 797 F.3d

160, 189 (2d Cir. 2015). If that were the case, defendants could

escape liability for fraud merely through clever timing of infor-

mation disclosures. Even though NIO released financial results

that could have impacted the stock price at the same time as the

news about the Shanghai Facility, Plaintiffs’ allegations are suffi-

cient here. See Gould v. Winstar Commece'ns, Inc., 692 F.3d 148,

161-62 (2d Cir. 2012) (holding that even where non-fraudulent

developments may be responsible “for a portion of the collapse”

in a company’s stock price, “these facts, if established, hardly

foreclose the reasonable inference that some part of the decline

was substantially caused by the disclosures about the fraud it-

self.”). Accordingly, Plaintiffs have satisfactorily pleaded loss

causation.

22

C. Control Person Liability

In addition to their claims under Section 11 and Section 10(b),

Plaintiffs allege violations of Section 15 of the Securities Act and

Section 20(a) of the Exchange Act against the Individual Defend-

ants in their capacities as “control persons” of NIO. (Am. Compl.

{{ 134, 166.) For both claims, Plaintiffs must show (1) a primary

violation of the relevant statute, and (2) control of the primary

violator by the defendants. See In re Lehman Bros. Mortgage-

Backed Secs. Litig., 650 F.3d 167, 185 (2d Cir. 2011). “Control

over a primary violator may be established by showing that the

defendant possessed ‘the power to direct or cause the direction

of the management and policies of a person, whether through

the ownership of voting securities, by contract, or otherwise.”

SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1472-73 (2d Cir.

1996) (quoting 17 C.F.R. § 240.12b-2). Defendants move to dis-

miss the control person claims on three separate grounds. (Mot.

at 25.)

First, Defendants argue that the control person claims should be

dismissed because Plaintiffs have failed to plead a primary viola-

tion under either the Securities Act or the Exchange Act, which

is necessary to sustain a control person liability claim. (Id.) For

the reasons stated above, Plaintiffs have sufficiently pleaded

both.

Second, Defendants argue that it is improper for Plaintiffs to

plead both primary and control person liability for the same un-

derlying conduct by the same defendants and therefore the

claims are redundant. (Id.) Although some case law from district

courts in this circuit arguably supports that theory, at this stage

the court declines to dismiss the claims for that reason, especially

given that the Federal Rules of Civil Procedure permit parties to

plead claims in the alternative. Compare Kalnit v. Eichler, 85 F.

Supp. 2d 232, 246 (S.D.N.Y. 1999) (stating, in dicta, that direc-

tors alleged to have made misrepresentations “would be primary

23

violators rather than control persons”) with In re Van der Moolen

Holding N.V. Secs. Litig., 405 F. Supp. 2d 388, 412-13 (S.D.N.Y.

2005) (permitting claims under Sections 10(b) and 20(a) to pro-

ceed, despite Kalnit, because “it is conceivable that one

defendant ultimately might be found to be a primary violator

while another defendant might be found to be a control person”

and because the Federal Rules of Civil Procedure permit claims

in the alternative); see also In re Alstom SA, 406 F. Supp. 2d 433,

486, 506 (S.D.N.Y. 2005) (sustaining both Sections 10(b) and

20(a) allegations against some defendants as alternative theories

of liability).

Third, Defendants argue that Plaintiffs have failed to plead the

requisite elements for either of the control person liability claims,

which the court now considers. (Mot. at 25.)

1. Section 15 of the Securities Act

Plaintiffs allege that the Individual Defendants are liable under

Section 15 of the Securities Act for the misstatements in NIO’s

Registration Statement. (Am. Compl. 134-136.) Section 15 at-

taches liability to “[e]very person who, by or through stock

ownership, agency, or otherwise . . . controls any person liable

under sections [11 or 12 of the Securities Act].” 15 U.S.C. §

770(a). As discussed, Plaintiffs have sufficiently pleaded a pri-

mary violation of Section 11. The remaining question is whether

they have also established in their pleadings that the Individuals

Defendants exercised “control over the primary violator.” Id.

Plaintiffs have adequately alleged that the Individual Defendants

had control over NIO because all of them signed NIO’s Registra-

tion Statement. (Am. Compl. § 35.) See Plumbers’ & Pipefitters’

Loc. No. 562 Supplemental Plan & Tr. v. J.P. Morgan Acceptance

Corp. I, No. 08-cv- 1713 (ERK) (WDW), 2012 WL 601448, at *20

(E.D.N.Y. Feb. 23, 2012) (collecting cases) (“It is well settled law

that officers and directors of the primary violator who signed the

registration statements containing alleged violations fulfill the

24

control prong [of Section 15].”). The Individual Defendants were

all either officers or directors of NIO, and each reviewed and

signed NIO’s Registration Statement. (Am. Compl. {| 24-35.)

Therefore, Plaintiffs have sufficiently pleaded a Section 15 viola-

tion.

Defendants argue that Plaintiffs have failed to plead a third ele-

ment of Section 15 liability altogether because the Amended

Complaint fails to establish that Defendants “culpably partici-

pated in the alleged violations.” (Mot. at 25.) It is an open

question whether Section 15 claims also require “culpable partic-

ipation” in addition to the “control” element. See In re Lehman

Bros., 650 F.3d at 186; Plumbers' & Pipefitters’ Loc. No. 562, 2012

WL 601448, at *20. District courts in this circuit are divided on

that question, with many of them holding that culpable partici-

pation is not required for Section 15 claims. See, e.g., In re Bear

Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d

746, 773 (S.D.N.Y. 2012) (“While the Second Circuit has yet to

address the question of whether a plaintiff bringing a Section 15

claim must allege ‘culpable participation,’ a majority of judges in

this District . . . have held such an allegation is not required.”’);

see also City of Omaha Police & Fire Ret. Sys. v. Evoqua Water

Techs. Corp., 450 F. Supp. 3d 379, 427 n.4 (S.D.N.Y. 2020). This

court agrees and holds that Plaintiffs need not allege culpable

participation for a Section 15 claim.

2. Section 20 of the Exchange Act

Plaintiffs also assert control personal liability against the Individ-

ual Defendants pursuant to Section 20(a) of the Exchange Act.

(Am. Compl. { 164.) Section 20(a) of the Exchange Act is sub-

stantively similar to Section 15 of the Securities Act in that it

provides “[e]very person who, directly or indirectly, controls any

person liable under any provision of this chapter” shall be liable

to the same extent as the controlled person for the underlying

25

violation. 15 U.S.C. § 78t(a). But unlike Section 15 of the Secu-

rities Act, Section 20(a) of the Exchange Act provides a defense

for parties who “acted in good faith and did not directly or indi-

rectly induce the act or acts constituting” the primary violation.

Id.

Section 20(a) of the Exchange Act shares its first two elements—

a primary violation and control over the primary violator— with

Section 15 of the Securities Act. See In re Lehman Bros., 650 F.3d

at 185. Section 20 plaintiffs must also plead culpable participa-

tion. See id. at 186. Courts have described culpable participation

as “similar to the scienter requirement of Section 10(b)” in that

“plaintiffs must ‘plead with particularity facts giving rise to a

strong inference that the controlling person knew or should have

known that the primary violator, over whom that person had

control, was engaging in fraudulent conduct.” See In re Refco, Inc.

Sec. Litig., 503 F. Supp. 2d 611, 661 (S.D.N.Y. 2007). At the very

least, culpable participation “requires ‘something more than neg-

ligence.” In re Alstom SA, 406 F. Supp. 2d at 490. As discussed in

the section on scienter, viewing the evidence in the most favora-

ble light for Plaintiffs, they have adequately alleged that NIO and

its senior executives and directors—the Individual Defendants—

knew or should have known of the status of the Shanghai Facility

when they signed the Registration Statement. Accordingly, Plain-

tiffs have met their burden to plead liability under Section 20(a).

26

IV. CONCLUSION

For the reasons stated above, Defendants’ motion to dismiss (Dkt.

68) is DENIED.

SO ORDERED.

Dated: — Brooklyn, New York

August 12, 2021

/s/ Nicholas G. Garaufis

NICHOLAS G. GARAUFIS

United States District Judge

27