Chen v. X Financial

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

--------------------------------------X

XIANGDONG CHEN, on behalf of herself

and all others similarly situated

Plaintiff,

MEMORANDUM AND ORDER

19-CV-6908 (KAM)(SJB)

-against-

X FINANCIAL, YUE TANG, JIE ZHANG,

SHAOYONG CHENG, DING GAO, SHENGWEN

RONG, ZHENG XUE, LONGGEN ZHANG, RICHARD

ARTHUR, COLLEEN A. DEVRIES, COGENCY

GLOBAL INC., MORGAN STANLEY & CO.

INTERNATIONAL PLC, MORGAN STANLEY & CO.

LLC, DEUTSCHE BANK SECURITIES INC.,

CHINA EVERBRIGHT SECURITIES (HK)

LIMITED, CHINA MERCHANTS SECURITIES

(HK) CO., LTD., AND AMTD GLOBAL MARKETS

LIMITED,

Defendants.

--------------------------------------X

MATSUMOTO, United States District Judge:

Plaintiffs Xiangdong Chen initiated the instant action

on December 9, 2019, by filing a complaint against all

defendants. (ECF No. 1, Compl.) On May 13, 2020, the Court

appointed as Lead Plaintiffs Xiangdong Chen and Ke Zheng

(“Plaintiffs”), the two members of X Financial Investor Group,

and Pomerantz LLP as Lead Class Counsel. See Xiangdong Chen v.

X Fin., No. 19-CV-6908, 2020 WL 2478643, at *1 (E.D.N.Y. May 13,

2020) On July 13, 2020, Plaintiffs filed an amended complaint.

(ECF No. 22, Am. Compl.) Defendants X Financial (“X Financial”

or “the Company”), Yue Tang, Shaoyong Cheng, Shengwen Rong,

Zheng Xue, and Longgen Zhang (collectively, the “Individual

Defendants”)1 moved to dismiss the complaint for failure to state

a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) on

March 8, 2021. (ECF No. 70, Mot. to Dismiss.) On March 9,

2021, the Court referred the motion to dismiss to the Honorable

Sanket J. Bulsara, United States Magistrate Judge, for a Report

and Recommendation (“R&R”). (Dkt. Order, Mar. 9, 2021.)

Presently before the Court is the R&R issued on

December 9, 2021, by Judge Bulsara, recommending that the Court

grant the defendants’ motion to dismiss in its entirety, with

leave to replead as to Plaintiffs’ Exchange Act Sections 10(b)

and 20(a) claims. (ECF No. 94, R&R). Judge Bulsara recommended

that Plaintiffs’ claims pursuant to Sections 11, 12(a)(2), and

15 of the Securities Act be dismissed with prejudice because

they are untimely. (See id.) Plaintiffs timely objected to the

entirety of Judge Bulsara’s R&R. (ECF No. 97, Pls. R&R

Objections). Defendants responded in opposition to Plaintiffs’

objections. (ECF No. 99, Defs. R&R Reply.) For the reasons set

forth below, on de novo review, the Court denies Plaintiffs’

objections, and affirms and adopts Judge Bulsara’s R&R in its

entirety.

1 Tang, Zhang, and Cheng are referred to as the “Management Defendants.” (Am.

Compl. ¶ 52.)

BACKGROUND

I. Factual Background

Upon de novo review, the Court incorporates by

reference in its entirety the factual background provided in the

R&R. (R&R, pp. 3-11.) By way of brief background, the R&R

appropriately accepted as true, in considering the Defendants’

motions, the following facts: X Financial is a financial

technology company based in Shenzhen, China, that provides peer-

to-peer online lending, which involves matching borrowers and

lenders and collecting fees for facilitating loans. (Am. Compl.

¶¶ 2, 66.) The instant case is a securities class action

brought by a group of investors who acquired American Depositary

Shares (“ADSs”) in XF’s September 19, 2018, Initial Public

Offering (“IPO”). In addition to X Financial and the Individual

and Management Defendants, Plaintiffs also named Defendants

Morgan Stanley & Co. LLC and Deutsche Bank Securities Inc.

(together, the “Domestic Underwriter Defendants”), and

Defendants Cogency Global Inc., Richard Arthur, and Colleen

DeVries (collectively, the “Cogency Defendants”). (See

generally, Am. Compl.)

As Plaintiffs describe in their Amended Complaint, in

2016, Chinese authorities began implementing rules and

regulations in the peer-to-peer lending industry in which X

Financial operated. (Id. at ¶ 4.) Though this period of

increased regulation by the Chinese authorities apparently

resulted in the closure of many other peer-to-peer lenders, X

Financial represented to potential investors that the Company

had a positive financial future, based on certain

representations regarding its specific business structure and

policies. (Id. ¶¶ 6, 71–76.)

According to the allegations in Plaintiffs’ Amended

Complaint, these representations regarding X Financial’s

anticipated success were deliberately misleading. These

misleading statements, according to Plaintiffs, were

memorialized in X Financials’ offering materials. Specifically,

on August 28, 2018, X Financial filed with the SEC a

registration statement on Form F-1 for the IPO, which, after

several amendments,2 was declared effective on September 18, 2018

(the Form F-1, together with all amendments, is the

“Registration Statement”). On September 19, 2018, the day after

the IPO, X Financial filed a prospectus for the IPO on Form

424B4, which incorporated and formed part of the Registration

Statement. (Id. ¶ 7.) The following day, on September 20, 2018,

X Financial filed a supplement to the Prospectus, which also

forms part of the Registration Statement. (See id. at ¶ 138.)

A. Securities Act and Exchange Act Allegations

2 The Company filed amendments to the Form F-1 on September 10, 2018,

September 12, 2018 and September 17, 2018. (Am. Compl. at ¶ 138.)

Plaintiffs allege that XF’s IPO prospectus and

Registration Statement contained false or misleading statements

or omissions in violation of Sections 11 and 15 the Securities

Act of 1933 (“Securities Act”). See 15 U.S.C. §§ 77k,

77l(a)(2), 77o(a). Plaintiffs specifically allege that X

Financial and other named defendants misrepresented three

aspects of X Financial’s business in the X Financial September

19, 2018, Registration Statement. (Id. ¶¶ 7, 20.) These false

statements involved alleged misrepresentations regarding: (1)

the elimination of XF’s preferred loan product line; (2) XF’s

ability to maintain low delinquency rates and attract prime

borrowers; and, (3) policy changes that decreased the size of

XF’s card loans and the total loans facilitated by the company.

Plaintiffs also allege that XF made false or

misleading statements or omissions on earnings calls and to the

press after XF’s IPO, in violation of sections 10(b) and 20(a)

of the Securities and Exchange Act of 1934 (“Exchange Act”) and

Rule 10b-5 under the Exchange Act. See 15 U.S.C. §§ 78j(b),

78t(a); 17 C.F.R. § 240.10b–5.

B. Relevant Factual Background

Plaintiffs allege that on November 19, 2018, the

Company released its earnings for the period ending September

30, 2018 (the “Q3 2018 Earnings”), a period that ended eleven

days after the September 19, 2018, IPO. (Id. ¶ 23.) The Q3 2018

Earnings reflected reduced results for the Company, including a

21% decrease in the numbers of loans facilitated quarter-to-

quarter, and a decrease of 32% in the value of those loans

quarter-to-quarter. (Id. ¶179.) But, on an earnings call that

day (the “November 19 Call”), Defendants primarily blamed market

conditions for the decreases in the number and value of loans.

(Id. ¶ 26.) During the November 19 Call, X Financial stated

that in response to the increasing delinquency rates, the

Company would be altering its credit policy, including approving

fewer borrowers and decreasing the size of the average loan.

(Id. ¶¶ 109, 185-186.) Defendants also misleadingly assured

investors that the market turmoil was no longer “at peak” and

the “lack of funding that hampered loan facilitation was

‘already over.’” (Id. ¶ 182-183, 201.) Despite the Company’s

poor Q3 2018 Earnings and financial results, the stock price

increased because of these reassurances from Defendants. (Id. ¶

201.)

In financial reports and other public-facing

disclosures, X Financial “shed further light” on the problems

that began before the IPO. (Id. ¶¶ 176-194.) Plaintiffs allege

that “X Financial Defendants dribbled out the truth about the

reality of their business in a series of partial disclosures,

which painted an overly optimistic portrait of the Company’s

future.” (Id. ¶ 176.) On the March 19, 2019, earnings call

(“March 19 Call”) discussing the earnings report for the fourth

quarter of 2018 (“Q4 2018 Earnings”), X Financial revealed that,

like the Q3 2018 Earnings, the Q4 earnings report noted that

delinquencies remained on the rise. (Id. ¶¶ 110-114.) As the

Q4 2018 Earnings reflected, “[t]he delinquency rates for all

outstanding loans that were past due for 31-90 days and 91–180

days as of December 31, 2018 were 3.54% and 5.28%, respectively,

compared with 3.51% and 3.36%, respectively, as of September 30,

2018, and 1.47% and 1.35%, respectively, as of December 31,

2017.” (Id. ¶ 110.) Also on the March 19 Call, Defendant Zhang

explained that the rise in delinquencies was the result of June

and July 2018 loans issued shortly before the IPO. (Id. ¶ 114.)

Defendant Cheng separately admitted on the March 19 Call that

contrary to what had been stated on the November 19, 2018, Call,

the Company had reduced loan approval rates since before the

IPO, Plaintiffs allege, which effectively amounted to altering

the Company’s business practices in a manner not reflected in

the Registration Statement. (Id. ¶ 112.) Defendants had

previously stated that the reduction in approval rates was a

measure that would be implemented from Q3 2018 on. (Id. ¶¶ 109-

110.)

On May 20, 2019, X Financial announced its Q1 2019

Earnings, reflecting that the loan facilitation amount was down,

and reflecting lower average loan amounts. (Id. ¶¶ 131-132.)

On the corresponding May 21, 2019, investor call, Defendants

allegedly admitted for the first time that the financial

downturn was due to the Company discontinuing preferred loans—a

decision that was made prior to the September 19, 2018, IPO.

(Id. ¶¶ 131-134.) Following a year of categorically poor

overall performance by X Financial, the initial complaint in

this action was filed on December 9, 2019. (Id. ¶¶ 134-137; ECF

No. 1.)

II. Procedural Background

As referenced supra, on July 13, 2020, Plaintiffs

filed an Amended Complaint. (ECF No. 22, Am. Compl.) On March

8, 2021, the X Financial Defendants moved to dismiss the

complaint for failure to state a claim pursuant to Federal Rule

of Civil Procedure 12(b)(6). (ECF No. 70, Mot. to Dismiss.)

Plaintiffs opposed this motion. (ECF No. 71, Pls. Opp.) On

March 8, 2021, the Domestic Underwriter Defendants filed a

notice of joinder, through which they joined, adopted, and

incorporated by reference all the arguments and authorities in

the X Financial Defendants’ Memorandum of Law in Support of

their Motion to Dismiss the Amended Complaint, to the extent

that the motion set forth grounds for the dismissal of Count I

of the Amended Complaint.3 (ECF No. 72, Not. by Domestic

3 Count I of the Amended Complaint alleges violations of Section 11 of the

Securities Act of 1933 (“Securities Act”) against all Defendants, and is the

Underwriter Defendants.) Additionally on March 8, 2021, the

Cogency Defendants filed a notice of joinder, by which they

joined in, adopted, and incorporated by reference all arguments

and authorities in the X Financial Defendants’ Motion to Dismiss

the Amended Complaint. (ECF No. 73, Not. by Cogency

Defendants.) The Court referred the motions to dismiss to Judge

Bulsara for a report and recommendation on March 9, 2021. (Dkt.

Order, Mar. 9, 2021.)

On December 9, 2021, Judge Bulsara issued an R&R,

recommending that the Court grant the defendants’ motion to

dismiss in its entirety, with leave to replead granted in part

and denied in part. (ECF No. 94, R&R). Plaintiffs timely

objected to the entirety of Judge Bulsara’s R&R. (ECF No. 97,

Pls. R&R Objections (“R&R Objections”)). On January 6, 2022,

the X Financial Defendants responded in opposition to all of

Plaintiffs’ objections. (ECF No. 99, Defs. R&R Opp. Reply.) On

January 6, 2022, the Domestic Underwriter Defendants filed a

motion for joinder, joining in full the X Financial Defendants’

opposition to Plaintiffs’ objections to the R&R. (ECF No. 100.)

Additionally on January 6, 2022, the Cogency Defendants filed a

notice of joinder, joining in full the X Financial Defendants’

opposition to Plaintiffs’ objections to the R&R. (ECF No. 101.)

sole remaining cause of action alleged against the Domestic Underwriter

Defendants.

LEGAL STANDARDS

I. Review of R&R

A district court may refer a dispositive motion to a

magistrate judge for a report and recommendation. See 28 U.S.C.

§ 636(b)(1). When a magistrate judge issues a report and

recommendation, “any party may serve and file written

objections.” Id.; accord Fed. R. Civ. P. 72(b) (“[A] party may

serve and file specific written objections to the proposed

findings and recommendations.”). The district court shall then

review the portions of the report and recommendation to which a

party has timely objected, as here, under a de novo review

standard, and “may accept, reject, or modify, in whole or in

part, the findings or recommendations made by the magistrate

judge.” Id. However, “[g]eneral or conclusory objections, or

objections which merely recite the same arguments presented to

the magistrate judge, are reviewed for clear error.” New York

City Dist. Council of Carpenters v. Allied Design & Constr.,

LLC, 335 F. Supp. 3d 349, 351 (E.D.N.Y. 2018) (citations

omitted); see also Mario v. P & C Food Markets, Inc., 313 F.3d

758, 766 (2d Cir. 2002) (“[M]erely referring the court to

previously filed papers or arguments does not constitute an

adequate objection under . . . Fed. R. Civ. P. 72(b) . . . .”).

II. 12(b)(6) Motion to Dismiss Standard

A complaint must be dismissed if it fails to state a

claim upon which relief may be granted. Fed. R. Civ. P.

12(b)(6). In deciding a motion to dismiss under Rule 12(b)(6),

a court evaluates the sufficiency of a complaint under a “two-

pronged approach.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).

First, courts are not bound to accept legal conclusions when

examining the sufficiency of a complaint. See id. at 678

(citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555

(2007)). Second, the court must assume all well-pleaded facts

are true, and then “determine whether they plausibly give rise

to an entitlement to relief.” Iqbal, 556 U.S. at 679. A claim

is plausible “when the plaintiff pleads factual content that

allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Id. at 678.

DISCUSSION

Judge Bulsara recommended that the Court dismiss the

Amended Complaint for failure to state a claim. (ECF No. 94,

R&R at 2.) The comprehensive R&R specifically recommended that

Plaintiffs’ Securities Act claims under Sections 11, 12(a)(2),

and 15 should be dismissed with prejudice, because they were

untimely, as Plaintiffs failed to bring their claims within the

one-year statute of limitations. (Id.) The R&R further

recommended that Plaintiffs’ Exchange Act claims under Sections

10(b) and 20(a) be dismissed with leave to replead, as

Plaintiffs had failed to adequately plead claims under the

Exchange Act. (Id.) On de novo review, the Court finds that

the claims in the Amended Complaint should be dismissed, with

leave to replead the Sections 10(b) and 20(a) Exchange Act

claims as provided herein. As set forth below, the Court denies

Plaintiffs’ objections, and affirms and adopts Judge Bulsara’s

R&R in its entirety.

I. Plaintiffs’ Objections

A. Securities Act Section 12(a)(2) Claim

As a preliminary matter, as Plaintiffs note in their

R&R Objections, Plaintiffs previously dismissed their Count II

claim, without prejudice, by stipulation of dismissal against

Defendants Morgan Stanley & Co. LLC, Deutsche Bank Securities

Inc., Morgan Stanley & Co. International plc, China Everbright

Securities (HK) Limited, China Merchants Securities (HK) Co.,

Ltd., and AMTD Global Markets Limited (collectively, the

“Underwriter Defendants”). (ECF No. 63, Stipulation and

Proposed Order; ECF No. 64, Stipulation and Order.) Count II

alleged a claim under Section 12(a)(2) of the Securities Act

against the Underwriter Defendants. (ECF No. 63, Stipulation of

Dismissal; ECF No. 64, Sept. 9, 2020, Stipulation and Order.)

As Plaintiffs further note in their R&R Objections, despite the

stipulation of dismissal (see Fed. R. Civ. P. 41(a)(1)(B)), the

R&R still adjudicated the dismissed Section 12(a)(2) claim.

(R&R at pp. 25-26, 32.) To the extent that the stipulation of

dismissal was without prejudice, the Court denies Plaintiff’s

objection and, on de novo review, affirms and adopts the portion

of the R&R recommending that Plaintiff’s already dismissed

Section 12(a)(2) claim be dismissed, with prejudice, because it

is untimely. (See R&R at p. 25 (“[the Section 12(a)(2)] claim

against the Underwriter Defendants is untimely for the same

reasons the section 11 claim is untimely.”).)

B. Remaining Securities Act Claims

1. Section 11 Claim

Plaintiffs allege Section 11 violations against all

Defendants. (ECF No. 22, Am. Compl., ¶209.) Section 11 of the

Securities Act imposes liability on issuers and other

signatories of a registration statement that, upon becoming

effective, “contain [s] an untrue statement of a material fact

or omit[s] to state a material fact required to be stated

therein or necessary to make the statements therein not

misleading.” Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 715

(2d Cir. 2011) (citing 15 U.S.C. § 77k(a)). In order to state a

claim under Section 11,

the 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).

Plaintiffs object to the R&R’s recommendation that

their Section 11 claims against all defendants be dismissed as

untimely. Importantly, pursuant to the applicable statute of

limitations articulated in Section 13 of the Securities Act of

1933, any claim under Section 11 must be timely brought “within

one year after the discovery of the untrue statement or the

omission, or after such discovery should have been made by the

exercise of reasonable diligence[.]” 15 U.S.C. § 77m. The

statute of limitations for a Section 11 claim begins either (a)

upon the actual discovery of an untrue statement or (b) when

“reasonable diligence” would have discovered the statement or

omission. Id. Phrased differently, Section 11 claims “are

barred if brought more than one year after actual or

constructive notice of the claim.” Amorosa v. AOL Time Warner

Inc., 409 F. App’x 412, 416 (2d Cir. 2011) (citing 15 U.S.C. §

77m) (emphasis added).

Plaintiffs object to the R&R’s conclusion that their

claims for violations of the Securities Act are untimely, and

argue that their Section 11 claims were brought within the

requisite one year deadline. Plaintiffs filed the Complaint in

this action on December 9, 2019. (ECF No. 1, Compl.)

Accordingly, in order for Plaintiffs’ Securities Act claims to

be considered timely, Plaintiffs must have either (1) discovered

Defendants’ misrepresentations or omissions, or (2) have been

able to discover the misrepresentations or omissions with

“reasonable diligence,” on or after December 9, 2018. See 15

U.S.C. § 77m.

As the R&R notes, courts in this Circuit have split as

to whether the so-called “inquiry notice” standard for

reasonable diligence continues to apply to Securities Act claims

after the Supreme Court’s decision in Merck & Co. v. Reynolds,

559 U.S. 633, 130 S. Ct. 1784 (2010), and the Second Circuit’s

decision in City of Pontiac Gen. Employees’ Ret. Sys. v. MBIA,

Inc., 637 F.3d 169 (2d Cir. 2011).4 For decades, the law of the

Second Circuit for all securities fraud claims provided that a

plaintiff was on “inquiry notice” when “public information would

lead a reasonable investor to investigate the possibility of

fraud[,]” and if a plaintiff failed to investigate at that

4 Both cases interpreted “reasonable diligence” specifically in the context of

claims relating to Section 10 of the Exchange Act, and not in the context of

Securities Act claims.

point, the “Circuit deemed the statute of limitations to start

running on the day the plaintiff should have begun

investigating.” Shah v. Meeker, 435 F.3d 244, 249 (2d Cir.2006)

(internal citations omitted). In Merck, the Supreme Court

rejected the “inquiry notice” standard which tied the

limitations period to the commencement of an investigation, and

held that “the limitations period does not begin to run until

the plaintiff thereafter discovers or a reasonably diligent

plaintiff would have discovered the facts constituting the

violation [...] irrespective of whether the actual plaintiff

undertook a reasonably diligent investigation.” 559 U.S. at 653

(quotations omitted). In City of Pontiac, the Second Circuit

relied on Merck and further elaborated that “the reasonably

diligent plaintiff has not ‘discovered’ one of the facts

constituting a securities fraud violation until he can plead

that fact with sufficient detail and particularity to survive a

12(b)(6) motion to dismiss.” Id. at 175.

The R&R acknowledges that the Second Circuit has not

specifically determined, post-Merck and post-City of Pontiac,

whether the “inquiry notice” standard for reasonable diligence

continues to apply to Securities Act claims. (See R&R at p. 17

(citing in relevant part Magnum Hunter Res. Corp. Sec. Litig.,

26 F. Supp. 3d 278, 302 (S.D.N.Y. 2014), aff’d, 616 F. App’x

442, 447 (2d Cir. 2015) (“We have never considered whether Merck

abrogates this circuit’s existing ‘inquiry notice’ rule in favor

of the discovery rule in Securities Act claims, an issue that

divides the district courts in this circuit.”); Freidus v.

Barclays Bank PLC, 734 F.3d 132, 138 n.2 (2d Cir. 2013) (noting

continued application of “inquiry notice” to Securities Act is

unresolved by Circuit)). Both this Court and Judge Bulsara in

the R&R note that, while the Second Circuit has not resolved

whether inquiry notice continues to apply to Securities Act

claims, other courts in this Circuit have applied the standards

articulated in Merck and City of Pontiac to Securities Act

claims, such as those alleged by Plaintiffs, under Sections 11,

12(a)(2), and 15. (See R&R, p. 17); see Horowitz v. Sunlands

Tech. Grp., No. 19-cv-3744 (FB), 2021 WL 1224517, at *2

(E.D.N.Y. Mar. 31, 2021) (applying City of Pontiac reasonable

diligence standard in evaluating statute of limitations for

Securities Act Section 11 and Section 15 claims); Emerson v.

Mut. Fund Series Tr., 393 F. Supp. 3d 220, 240 (E.D.N.Y. 2019)

(applying standard articulated in City of Pontiac to statute of

limitations analysis for Section 11 claim, though also invoking

inquiry notice); Rudman v. CHC Grp. LTD., 217 F. Supp. 3d 718,

724 (S.D.N.Y. 2016) (holding that the court did not need to

decide whether Merck applied to Section 11 claims, and noting

that district courts in this Circuit have split on whether Merck

applies to the statute of limitations for claims under Sections

11, 12(a)(2), and 15, with a majority concluding that it does);

In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851

F. Supp. 2d 746, 762 (S.D.N.Y. 2012) (holding that the Supreme

Court’s invalidation of the inquiry notice standard for Exchange

Act claims extends to claims brought under Sections 11 and

12(a)(2) of the Securities Act, collecting cases, and noting

majority of courts in this Circuits have decided Merck applies

in Securities Act cases)).

Importantly, on de novo review, the Court notes the

Second Circuit decision in Fed. Hous. Fin. Agency for Fed. Nat’l

Mortg. Ass’n v. Nomura Holding Am., Inc., 873 F.3d 85 (2d Cir.

2017), which provided that post-Merck, “we still assume a

reasonable plaintiff on inquiry notice would conduct further

investigation, but the limitations period begins to run only

when [...] the reasonable plaintiff would have discovered

sufficient information to plead a securities-law violation

adequately.” Id. at 119. Accordingly, in the Second Circuit,

regardless of whether inquiry notice continues to apply to

Securities Act claims, even once inquiry notice is triggered,

the limitations period will begin only when a plaintiff would

have discovered sufficient information to plead a securities-law

violation adequately.5 Id.

5 Notably, the Court in Nomura assumed only “arguendo that Merck, which

involved the statute of limitations for claims under Section 10(b) of the

Exchange Act, 15 U.S.C. § 78j(b), applies with equal force to the statute of

Whether applying inquiry notice (as amended by Nomura)

or only the discovery by a reasonably diligent Plaintiff rule

articulated in City of Pontiac, as explained below, the Court

finds on de novo review that Plaintiffs’ Section 11 claims are

untimely. Here, Plaintiffs allege as the basis of their Section

11 claim three categories of material misstatements and

omissions within the September 18, 2018, Registration Statement:

(i) material misstatements and omissions regarding XF’s ability

to target investors able to repay loans and the Company’s

increasing delinquency rates; (ii) material misstatements and

omissions regarding Preferred Loans; and (iii) material

misstatements and omissions regarding Card Loans. (See ECF No.

97, Pls. R&R Objections, citing Am. Compl., ¶¶ 138-172.)

First, as to Plaintiffs’ allegations of material

misstatements and omissions regarding X Financial’s ability to

target prime investors and the company’s increasing delinquency

rates, the Court finds on de novo review that any associated

Section 11 claim is untimely. As alleged in the Amended

Complaint, the September 2018 Registration Statement contained a

series of statements regarding the strength of X Financial’s

loans programs, the Company’s controls and procedures for

limitations in Section 13 of the Securities Act.” Id. at 119, n. 37

(internal citations omitted). Given this caveat in Nomura, the Court will,

for the purposes of this Order, analyze Plaintiffs’ claims under both an

inquiry notice standard (as articulated by Nomura) and under the discovery

rule described in Merck and City of Pontiac.

approving loans, proprietary credit assessment abilities, and

even a chart capturing “a consistently low delinquency rate for

its preferred loans” through the second quarter of 2018. (Id.

¶¶ 143-153.) Plaintiffs, in their Amended Complaint, allege

that the Registration Statement did not reveal the company’s

pre-IPO rise in delinquency rates. (Am. Compl. ¶ 106 (“The

Registration Statement admitted delinquency rates were on the

rise . . . [b]ut [...] did not explain to investors that this

increase was a growing trend that was continuing at the time of

the IPO[.]”)). As Plaintiffs allege in their Amended Complaint,

though the September 2018 Registration Statement admitted

delinquency rates were on the rise “[i]n 2016, 2017 and for the

six months ended June 30, 2018[....] the Registration Statement

did not explain to investors that this increase in delinquency

was a growing trend that was continuing at the time of the IPO,

nor did it disclose that X Financial was making policy changes

because of the delinquency increases[.]” (Id. at ¶ 106.)

The Amended Complaint, however, further alleges, in

relevant part, that X Financial disclosed the rising delinquency

rates in excess of expectations during the November 19, 2018,

Call. (Id. ¶ 108 (“[...] X Financial would admit on the November

19 Call that delinquency rates were greatly exceeding the

Company’s internal expectations.”)).6 The R&R states that the

Complaint does not allege any further disclosure of information

regarding the increasing delinquencies subsequent to the

November 19 Call, and thus, logically, all that was necessary

for Plaintiffs to allege that the Registration Statement

contained misstatements regarding delinquency rates was

disclosed during the November 19 Call. (R&R at 20, “And there

is nothing in the Complaint alleging there was additional

information about delinquencies disclosed after the November 19

Call.”). Plaintiffs objected specifically to this conclusion in

the R&R, and asserted that the Amended Complaint did include

additional allegations as to disclosures about delinquency rates

after the November 19, 2018 Call. Plaintiffs are correct: the

Amended Complaint specifically alleges that the earnings report

on March 19, 2019, for the fourth quarter of 2018 (“Q4 2018

Earnings”), noted that delinquencies were still on the rise,

with loans issued just prior to the IPO in June and July 2018

now surfacing as particularly problematic for investors. (Id. at

¶¶ 110, 114, “On the March 19 Call, Defendant Zhang explained

that this rise in delinquencies was the result of loans

facilitated in June and July 2018, shortly before the IPO[....]

6 Additionally, though referenced but not specifically alleged in the Amended

Complaint, during the November 19 Call, X Financial stated that it “saw [an]

increase in delinquency,” and that preferred loans had “a higher delinquency

in Q3 than before[.]” (ECF No. 70-1, Decl. of Brian S. Weinstein, ECF No.

70-8, Ex. F, Nov. 19 Call Tr. at 5).

Defendant Zhang admitted: ‘And we noted that the delinquency

rate for the loan facilitated in June, July of 2018 actually

increased a lot in Q4[.]’.”)

Plaintiffs’ allegations that X Financial made

disclosures regarding delinquencies subsequent to the IPO and

November 19, 2018 Call does not alter the Court’s finding that

Plaintiffs’ Section 11 claim is untimely. The November 19 Call

and its associated disclosures regarding increasing

delinquencies plainly put investors on notice “that

delinquencies were on the rise[,]” ... “‘greatly exceeding the

Company’s internal expectations.’” (Am. Compl. ¶ 108.) Thus,

reasonably diligent investors were provided information by the

November 19 earnings statement and call on which they could

bring timely claims.

Even assuming that inquiry notice remains applicable,

courts have held that inquiry notice is triggered when “storm

warnings” would alert an investor and prompt an investigation.

See In re Bear Stearns, 851 F. Supp. 2d as 762 (S.D.N.Y. 2012)

(Storm warnings are circumstances that arise and “‘suggest to an

investor of ordinary intelligence the probability’ that she has

a cause of action[,]” triggering the potential plaintiff’s duty

to investigate) (internal citations omitted). When a potential

plaintiff fails to investigate following storm warnings, the

statute of limitations begins to run on the date the storm

warnings triggered the duty to inquire. See Lentell v. Merrill

Lynch & Co., Inc., 396 F.3d 161, 168 (2d Cir.2005), accord In re

IndyMac Mortgage–Backed Securities Litigation, 718 F.Supp.2d

495, 502–03 (S.D.N.Y. 2010). Here, the November 19, 2018, Call

provided storm warnings that triggered Plaintiffs’ inquiry

notice, which could be negated if “the warning signs [were]

accompanied by reliable words of comfort from management.” LC

Capital Partners LP v. Frontier Ins. Group, Inc., 318 F.3d 148,

155 (2d Cir.2003). Plaintiffs argue that such was the case

here, and Plaintiffs object to the R&R’s characterization of the

assurances they received during the November 19 Call as

“generic.” (R&R Objections, p. 12.) Plaintiffs cite the

reassurances of Defendant Tang on the November 19 Call as

sufficient to dissipate any storm warnings. The Amended

Complaint alleges that Defendant Tang stated the following to

downplay concerns:

For the existing loan book, because our risks are

fully provisioned and fully being sell[sic] to the

customers covered by the insurance company, so you

actually don’t need to worry about the existing loan

book that much. That’s the reason I think we feel this

is a better way to present our business, just on the

combined basis.

(Am. Compl. ¶ 188.) The meaning of this statement is not clear,

and the statement cannot plausibly constitute “reliable words of

comfort.” Apart from these statements, Plaintiffs cite only to

what the R&R aptly terms “general puffery” made during the

November 19 Call. (See e.g., id. ¶ 28 (“growth was on the

horizon”); ¶ 182 (“executives . . . sought to reassure investors

by stressing supposed growth.”)).7 The Court agrees that these

forward-looking alleged assurances do not mitigate inquiry

notice, as an “investor of ordinary intelligence” would not

“reasonably rely” on such a statement to allay his or her

concerns about continually rising delinquencies at X Financial.

See In re Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236, 247

(S.D.N.Y. 2007) (citing LC Capital Partners LP v. Frontier Ins.

Group, Inc., 318 F.3d 148, 155 (2d Cir. 2003)). On de novo

review, the Court agrees with the R&R, as is applicable to all

three categories of Plaintiffs’ Section 11 allegations, that

“Plaintiffs do not identify anything that directly addresses the

three categories of false statements they base their claim

upon.” See LC Cap. Partners, 318 F.3d at 156 (Alleged

reassurances were unavailing where “‘reassuring’ statements by

7 Plaintiffs appear to concede that their allegations in the Amended Complaint

further illustrate that the statements made during the November 19 Call

reflected misstatements and omissions about circumstances impacting the

Company prior to the IPO. (See Am. Compl. ¶ 26 (“As executives explained on

the call, the negative operational and financial results reported in the

day’s press release had been caused by market and other problems that had

long preceded the IPO.”); ¶ 91 (“X Financial reported earnings[. . .] on

November 19, 2018, [and] noted for the first time: ‘Xiaoying Preferred Loan

was adversely impacted[.]’”); ¶ 93 (“At the time of the IPO – which was only

11 days prior to the end of [the Q3 2018 Earnings quarter] – Defendants were

undoubtedly aware that X Financial’s numbers were going to continue to

plummet.”)). Thus, based on Plaintiffs’ allegations, as of the earnings

report and investor call on November 19, 2018, inquiry notice was triggered,

and reasonably diligent investors discovered facts and/or could have

discovered facts sufficient to bring timely claims.

management were mere expressions of hope, devoid of any specific

steps taken to avoid under-reserving in the future.”).

Finally, Plaintiffs argue that any revelations on the

November 19 Call were downplayed by the subsequent stock price

increase. (Am. Compl. ¶ 201.) The stock price movement that

Plaintiffs rely on, however, is not sufficient to negate the

storm warnings or the resulting inquiry notice. See Freidus v.

ING Groep N.V., 736 F. Supp. 2d 816, 829 (S.D.N.Y. 2010), aff’d

in pertinent part, 601 F. App’x 59 (2d Cir. 2015) (noting that

though stock price movements may be a “storm warning” sufficient

to put plaintiffs on inquiry notice, they are not necessary, and

lack of movement in stock price does not eliminate inquiry

notice); see also Yi Xiang v. Inovalon Holdings, Inc., 268 F.

Supp. 3d 515, 524 (S.D.N.Y. 2017) (“decline in stock price is

not necessarily required to put a plaintiff on notice” of a

Securities Act claim).

The Court finds that the defendants’ disclosures

regarding the rising delinquencies discussed on the

November 19 Call were sufficiently “company-specific” to

“trigger a duty to investigate.” Lentell, 396 F.3d at 169.

Even pivoting from an inquiry notice analysis to the

standards in Merck and City of Pontiac, at the time of the

November 19, 2018, Call, a “reasonable plaintiff would have

discovered sufficient information to plead a securities-law

violation adequately[.]” City of Pontiac, 637 F.3d at 174.

Second, as to Plaintiffs’ allegations of material

misstatements and omissions regarding the Preferred Loans, the

Court finds that any associated Section 11 claims are also

untimely. The September 2018 Registration Statement, as alleged

in the Amended Complaint, emphasized the importance of Preferred

Loans, described the Preferred Loans as one of the Company’s

major products that would drive “continued” growth, and

projected a customer base that would continue to grow. (Am.

Compl. ¶¶ 155-160.) Plaintiffs argue that the defendants’

statements during the November 19 Call only foreshadowed the

misstatements and omissions related to the Preferred Loans in

the Registration Statement; but this argument is not borne out

by the Amended Complaint. As reflected in Plaintiffs’ Amended

Complaint, the November 19 Call disclosed that the Preferred

Loan product had been consistently reduced over the last three

quarters, and, as Plaintiffs themselves specifically allege, as

of at least November 19, 2018, they were notified that

“preferred loans were being intentionally phased out.” (Id. ¶

94.) As the R&R correctly identified, the Complaint itself

alleges that the elimination of the Preferred Loans occurred

through X Financial’s decision to “phase out” the program. (Id.

¶ 20 (“For example, at the time of the IPO, [X Financial] had

already decided to[. . . .] phase out the preferred loan

business.”). Accordingly, on November 19, 2018, X Financial

informed investors on the call that Preferred Loans were being

phased out. Further, on the November 19 Call, Defendant Tang

stated that as the Card Loans now dominated X Financial’s

business and dwarfed the Preferred Loans, “to understand our

business going forward,” the investors “should just focus on

card loan[s],” a statement that reasonably could only be

interpreted as meaning that the Preferred Loans had been phased

out and eliminated. (ECF No. 70-1, Decl. of Brian S. Weinstein,

ECF No. 70-8, Ex. F, Nov. 19 Call Tr. at 5) (emphasis added).)

Critically, as the R&R notes,8 and as this Court finds on de novo

review, the terms “phasing out” and “eliminating” or

“discontinuing” as related to the preferred loans are used

interchangeably by Plaintiffs in the Amended Complaint. (Am.

Compl. ¶ 88 (X Financial was “prior to the IPO, taking the first

steps in eliminating the product line, because Defendants

already knew it would be gone soon”); ¶ 93 (“At the time of the

IPO[....][X Financial was] indeed aware that they had already

chosen to discontinue the preferred loan product.”); ¶ 94

(“[P]referred loans were being intentionally phased out.”)

8 Though the R&R also notes that Plaintiffs use these terms interchangeably in

their briefs, Defendants’ motion to dismiss, and this Court’s decision

whether or not to affirm and adopt the R&R, must be decided strictly on the

face of Plaintiff’s Amended Complaint and any materials incorporated by

reference.

(emphases added).) Here, Plaintiffs plainly had inquiry notice

as to the phasing out, discontinuation, and elimination of the

preferred loans at least as of the call on November 19, 2018.

See Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 427

(2d Cir. 2008) (“Inquiry notice is a type of constructive notice

that exists when uncontroverted evidence clearly demonstrates

that the plaintiff should have discovered the violation.”)

Alternatively, whether or not inquiry notice continues to apply,

Plaintiffs, as reasonable investors, would have “uncovered the

facts constituting a violation[,]” as of at least November 19,

2018. City of Pontiac, 637 F.3d at 174.

Third and finally, as to Plaintiffs’ allegations of

material misstatements and omissions regarding Card Loans, the

Court finds that any associated Section 11 claim is also

untimely. As alleged in the Amended Complaint, the September

2018 Registration Statement emphasized the importance of Card

Loans to X Financial’s revenue, as there were more Card Loans

with higher interest rates than Preferred Loans. (Am. Compl. ¶

162.) The Registration Statement also stated:

Xiaoying Card Loan is the most profitable product

facilitated on our platform due to its higher service

fee rate compared to our other products. As we plan to

expand the business scale of Xiaoying Card Loan, we

expect revenue contribution from Xiaoying Card Loan

will continue to increase in the future and enhance

our profitability.

(Id. ¶ 163.) During the November 19 Call, Defendant Tang

disclosed that during the third quarter of 2018, X Financial

“consciously reduced [its] average loan size because of [its]

concern of external economic environment and credit environment.

. . . by about 20%[.]”9 (Weinstein Decl., Ex. F, ECF No. 70-8,

Nov. 19 Call Tr. at 2–3; Am. Compl. ¶ 125.). The Amended

Complaint states that the Q3 2018 Earnings, reported on November

19, 2018, indicated a “tremendous reduction in loan size[.]”

(Id. ¶ 124.) The reduction in average loan size “was news to

investors, as, while this decision was obviously made before the

IPO, it could not be found in the Registration Statement.” (Id.

¶ 125.) On the November 19 Call, X Financial also stated that,

as the delinquency rates on card loans were high, it would

“tighten [the] credit policy” and “reject more applications” as

preventative measures. (Id. ¶ 109.) As the Amended Complaint

also alleges, as of the November 19, 2018 Call, the change to

the credit policy and application rate had already occurred,

though unbeknownst to investors. (Id.)

9 Though the transcript of the November 19, 2018, Call does not make clear

whether “consciously reduc[ing] []average loan size” refers to all loans or

Card Loans specifically, the language in the transcript does indicate that,

at minimum, the reduction in average loan size included Card Loans. (ECF No.

70-8, Nov. 19 Call Tr. at 2-3 (“[W]e consciously reduced our average loan

size because of our concern of external economic environment and credit

environment. So you could look at the average loan size that we have on our

credit card loan during the Q3. We cut it down by about 20% from our normal

period.”).)

The allegations in the Amended Complaint belie

Plaintiffs’ arguments that they did not have at least

constructive notice of misstatements and omissions related to

the Card Loans by November 19, 2018, the date of the Q3 2018

earnings report and investor call. As of November 19, 2018,

Plaintiffs were provided sufficient information to plead a

Section 11 claim alleging that the Registration Statement’s plan

for the expansion of the Card Loan program contained untrue

statements or omissions of material facts.

The November 19, 2018, statements during the call

provided an adequate basis upon which a reasonably diligent

Plaintiff could have brought a sufficient Section 11 claim, as

currently alleged in the Amended Complaint. See In re Magnum

Hunter, 26 F. Supp. 3d at 302 (Disclosures do not have to

“perfectly match the allegations that a plaintiff chooses to

include in its complaint[,]” in order to trigger the statute of

limitations under Section 13 of the Securities Act.).

Plaintiffs’ Objections arguing that they had “little reason to

not believe X Financial[,]” because “[t]here was a well-

publicized market problem in China in the summer of 2018[,]” are

unavailing. (Pls. R&R Objections, p. 15.) Plaintiffs’

subjective beliefs are not availing. Plaintiffs discovered, or

could have and should have “discovered[,]” the alleged

misstatements and omissions in the Registration Statement as of

November 19, 2018, well before the filing of the complaint in

this action; indeed, they were directly provided with critical

information during the November 19 Call. “The filing period

commences when the plaintiff discovers (or should have

discovered) the securities-law violation[;]” a “securities-law

violation is discovered when the plaintiff learns sufficient

information about [the violation] to ... plead it in a complaint

with enough detail and particularity to survive a [Federal Rule

of Civil Procedure] 12(b)(6) motion to dismiss.” See Fed.

Deposit Ins. Corp. v. Credit Suisse First Bos. Mortg. Sec.

Corp., 414 F. Supp. 3d 407, 411 (S.D.N.Y. 2019) (citing Nomura

Holding Am., Inc., 873 F.3d at 119).

The Court recognizes that “[w]hether sufficient facts

existed at [a particular] time is, by definition, a fact-

intensive inquiry and, thus, generally ill-suited for resolution

at the motion to dismiss stage.” In re Bear Stearns, 851 F.

Supp. 2d at 763. Here, however, the record, including

Plaintiffs’ own allegations, reflects “uncontroverted evidence

irrefutably demonstrat[ing] [that the Plaintiffs] discovered or

should have discovered facts sufficient to adequately plead a

claim” prior to the expiration of the one-year statute of

limitations. In re Bear Stearns, 851 F. Supp. 2d at 763

(internal quotation marks omitted) (citing Fed. Deposit Ins.

Corp., 414 F. Supp. 3d at 412). After conducting a de novo

review, the Court affirms and adopts the portion of the R&R

dismissing Plaintiffs’ Section 11 claims, with prejudice, as

Plaintiffs’ Section 11 claims are untimely.

2. Section 15 Claim

Plaintiffs also bring a claim under Section 15 of the

Securities Act against X Financial, the Individual Defendants,

and Cogency Global. (Am. Compl. ¶¶ 228-233.) Section 15

provides a cause of action against “[e]very person who ...

controls any person liable under [Sections 11 or 12(a)(2)] of

this title.” 15 U.S.C. § 77o. A claim under Section 15,

therefore, is derivative and can only succeed if a plaintiff can

first demonstrate liability under Section 11 or Section 12. See

In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851

F. Supp. 2d 746, 760 (S.D.N.Y. 2012) (citing In re Morgan

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

Cir.2010)).

Because Section 15 claims are derivative, the one-year

statute of limitations under Section 13, applicable to Section

11 claims, also applies to Section 15 claims. See In re Lehman

Bros. Sec. & ERISA Litig., 903 F. Supp. 2d 152, 183 (S.D.N.Y.

2012) (“Section 15 liability is derivative of liability under

Sections 11 and 12[.]”). Accordingly, as the Court has found

Plaintiffs’ Section 11 claim to be untimely, Plaintiffs’ Section

15 claim is likewise untimely. See, e.g., Cross v. 21st Century

Holding Co., 00-CV-4333, 2001 WL 34808272, at *6 (S.D.N.Y. Aug.

6, 2001) (“A necessary element of a cause of action under

section 15 is a primary violation of the Securities Act of 1933,

such as a violation of section 11. [....] Because the Court has

dismissed plaintiffs’ section 11 claim as untimely, plaintiffs’

section 15 claim necessarily fails.”). Upon a de novo review,

the Court affirms and adopts the portion of the R&R dismissing

Plaintiffs’ Section 15 Claim, with prejudice, as untimely.

C. Exchange Act Claims

1. Section 10(b)10

Plaintiffs allege violations of Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder, 15 U.S.C. §

78j(b), 17 C.F.R. § 240.10b-5, against X Financial and the

Management Defendants. (ECF No. 22, Am. Compl. ¶¶ 173-175.) To

state a claim under Section 10(b) and the corresponding Rule

10b–5, a plaintiff must plead that a defendant, “in connection

with the purchase or sale of securities, made a materially false

statement or omitted a material fact, with scienter, and that

the plaintiff’s reliance on the defendant’s action caused injury

to the plaintiff.” See Ganino v. Citizens Utilities Co., 228

10 Though timeliness has not been raised as an issue with regard to

Plaintiffs’ Exchange Act claims, the Court notes for the avoidance of doubt

that the statute of limitations for a Section 10(b) claim (and a derivative

Section 20(a) claim) is two years. See Securities Exchange Act of 1934, §§

10(b); 28 U.S.C.A. § 1658(b). Consequently, Plaintiffs’ Exchange Act claims

are timely.

F.3d 154, 161 (2d Cir. 2000) (citing In re Carter–Wallace, Inc.

Sec. Litig., 150 F.3d 153, 155–56 (2d Cir. 1998); San Leandro

Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos.,

75 F.3d 801, 808 (2d Cir. 1996); Acito v. IMCERA Group, Inc., 47

F.3d 47, 52 (2d Cir. 1995)). The requisite state of mind for

purposes of a Rule 10b–5 claim is “an intent to deceive,

manipulate or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S.

185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). The

required intent can be demonstrated “either (a) by alleging

facts to show that defendants had both motive and opportunity to

commit fraud, or (b) by alleging facts that constitute strong

circumstantial evidence of conscious misbehavior or

recklessness.” Ganino, 228 F.3d at 168–69 (internal citations

omitted). A failure to plead scienter, by whichever means, is

fatal to Plaintiffs’ Section 10(b) claim.

Plaintiffs allege that the Management Defendants’

failure to disclose the decisions to decrease loan sizes, phase

out preferred loans, and implement policy changes before X

Financial’s IPO demonstrates the requisite scienter, given that

these were decisions that involved executives at the highest

level of the company. (Am. Compl. ¶ 195(b), (d), (f); ¶ 198

(Defendants Tang and Cheng “were responsible for decisions that

led to the tightening of credit requirements for loans and the

cessation of the preferred loan business.”)).

Plaintiffs further allege in the Amended Complaint

that the conduct of the Management Defendants indicates that

they “either deliberately, recklessly or intentionally made the

most significant misrepresentations and omissions contained in

the Registration Statement and later statements[.]” (Id. at ¶

195.) Apparently, Plaintiffs do not base their scienter

allegations on Management Defendants’ motive and opportunity to

commit fraud, but rather, on a theory that the Management

Defendants demonstrated conscious misbehavior or recklessness.

(See ECF No. 71, Pls. Opp., pp. 25-27.) Accordingly, Plaintiffs

must allege sufficient circumstantial indicia of fraud. Kalnit

v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001) (“[w]here motive is

not apparent [. . . .] it is still possible to plead scienter by

identifying circumstances indicating conscious behavior by the

defendant, though the strength of the circumstantial allegations

must be correspondingly greater.”).

Even assuming, as the Court must, that all well-

pleaded facts in the Amended Complaint are true, Iqbal, 556 U.S.

at 679, the Court finds on de novo review that the R&R

appropriately concluded that Plaintiffs have failed to

adequately plead scienter as to any of the Management

Defendants. Plaintiffs’ allegations of scienter with regard to

its Exchange Act claims are contained at paragraphs 195-199 of

their Amended Complaint. After de novo review, the Court agrees

with the well-reasoned R&R that Plaintiffs’ allegations of

scienter are vague and conclusory. At most, Plaintiffs appear

to allege that, given the Management Defendants’ access to

Company information, they should have known their public

statements were false, and had a responsibility to correct those

public statements. (See, e.g., Am. Comp. ¶ 195(a) (“Management

Defendants had access to adverse information pertaining to the

Q3 of 2018 that they did not disclose to investors in the

Registration Statement[.]”); ¶ 196 (“The Management Defendants

had access to and were provided with copies of the documents and

statements alleged herein to be materially false and misleading

prior to or shortly after their issuance and/or had the ability

and opportunity to prevent their issuance or cause them to be

corrected.”).) Plaintiffs have not “‘specifically identified

any reports or statements’ or any dates or time frame in which

Defendants were put on notice of contradictory information.”

Plumbers & Steamfitters Loc. 773 Pension Fund v. Canadian

Imperial Bank of Com., 694 F. Supp. 2d 287, 300 (S.D.N.Y. 2010)

(citing Teamsters Local 445 Freight Div. Pension Fund v. Dynex

Capital Inc., 531 F.3d at 196, In re PXRE Group Ltd. Sec.

Litig., 600 F.Supp.2d 510, 539 (S.D.N.Y.2009)).

To the extent that Plaintiffs argue that it would be

“virtually inconceivable” for the Management Defendants, in

their high-level position, not to have had access to relevant

information (Pls. Opp. at pp. 16-17), “[c]ourts in this Circuit

have long held that accusations founded on nothing more than a

defendant’s corporate position are entitled to no weight.”

Plumbers & Steamfitters Loc. 773 Pension Fund, 694 F. Supp. 2d

287, 300 (S.D.N.Y. 2010) (citing In re Sotheby’s Holdings, Inc.,

No. 00-cv-1041(DLC), 2000 WL 1234601, at *7 (S.D.N.Y. Aug. 31,

2000) (“It is well established that boilerplate allegations that

defendants knew or should have known of fraudulent conduct based

solely on their board membership or executive positions are

insufficient to plead scienter.”) (citations omitted)).

Plaintiffs’ most specific allegations regarding the Management

Defendants still assert nothing more than broadly invoking the

Management Defendants’ high-level positions. (See e.g., Am.

Compl. ¶ 198 (“According to the Registration Materials, Tang had

‘the ability to control or exert significant influence over

important corporate matters[....] Defendant Cheng was the

President of X Financial and a director of its Board at the time

of the IPO and [....]thereafter. Both of them were responsible

for steering the company.”) It is also unclear when the

Management Defendants “later admitted,” as the Amended Complaint

alleges, that “they were responsible for decisions that led to

the tightening of credit requirements for loans and the

cessation of the preferred loan business[.]” (Id.)

Moreover, Plaintiffs’ allegations regarding

Confidential Witnesses 1 and 2 (“CW1” and “CW2” respectively),

without more, are insufficient to create a strong inference of

conscious misbehavior or recklessness on the part of the

Management Defendants. (See e.g., Am. Compl. ¶ 77 (“[CW1], who

worked in credit risk control at X Financial, from June 2017

through October 2018, said the screening process for applicants

became less rigorous if the Company wanted to distribute more

loans[....] [CW1] was told by his manager to not be as detailed

in his review and research[.]”).) Though this Court does not

diminish the importance of confidential witnesses participating

in the litigation process, the Court finds that the information

attributed to Confidential Witnesses 1 and 2 in the Amended

Complaint does not provide with any degree of specificity a

connection between the Confidential Witnesses and the conscious

misbehavior or recklessness of the Management Defendants. (See

id. ¶¶ 77, 86–88, 99-100.)

Taking “collectively” all the relevant allegations in

the Amended Complaint regarding scienter for purposes of a

Section 10(b) claim, the Court finds that a “strong inference”

of scienter has not been alleged. See Tellabs, Inc. v. Makor

Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). “Great

specificity” is not required in alleging scienter, provided that

a plaintiff alleges enough facts to support “a strong inference

of fraudulent intent.” Ganino, 228 F.3d at 169 (citing

Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d

Cir.1999)). Even so, “speculation and conclusory allegations

will not suffice[.]” Id. As noted by the Second Circuit in

Novak, a strong inference of fraudulent intent may be adequately

pleaded based on factual allegations that defendants,

(1) benefitted in a concrete and personal way from the

purported fraud; (2) engaged in deliberately illegal

behavior; (3) knew facts or had access to information

suggesting that their public statements were not

accurate; or (4) failed to check information they had

a duty to monitor[.]

Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000). Here,

Plaintiffs appear to rely on factor (3) which, as explained

above, is insufficient to plead scienter. Plaintiffs have

alleged only a series of fundamentally conclusory, generalized

facts regarding the Management Defendants’ intent and/or

recklessness. The Court finds, on de novo review, that the R&R

appropriately recommended that the Section 10(b) claim should be

dismissed against all defendants for failure to allege scienter

as required. Plaintiffs’ Section 10(b) claims are hereby

dismissed.

Though the Court dismisses Plaintiffs’ Section 10(b)

claim against all defendants, the Court finds that amending

Plaintiffs’ complaint would not be futile in this instance. See

Fed. R. Civ. P. 15(a) (A party may amend its pleading once as a

matter of right prior to the service of a responsive pleading,

and otherwise by leave of the court). The “court should freely

give leave when justice so requires,” and generally, upon

granting a motion to dismiss, a court will allow leave to

replead. See id; Cruz v. TD Bank, N.A., 742 F.3d 520, 523 (2d

Cir. 2013) (citing Cortec Indus., Inc. v. Sum Holding, L.P., 949

F.2d 42, 50 (2d Cir. 1991)). Plaintiffs are granted leave to

replead their Section 10(b) claim.

2. Section 20(a)

Finally, Plaintiffs bring a claim under Section 20(a)

of the Exchange Act, alleging control person liability against

the Management Defendants. See 15 U.S.C. § 78t(a); (ECF No. 22,

Am. Compl. ¶ 239.) To state a claim under Section 20(a), a

claimant must plead “(1) a primary violation by the controlled

person, (2) control of the primary violator by the defendant,

and (3) that the defendant was, in some meaningful sense, a

culpable participant in the controlled person's fraud.” Enzo

Biochem, Inc. v. Harbert Discovery Fund, LP, No. 20-cv-9992

(PAC), 2021 WL 5854075, at *8 (S.D.N.Y. Dec. 9, 2021) (citing

ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d

Cir. 2007)).

As explained supra, Plaintiffs have not pled any

viable primary violation of the Exchange Act under Section

10(b). See Asay v. Pinduoduo Inc., No. 20-1423, 2021 WL

3871269, at *5 (2d Cir. Aug. 31, 2021) (a claim under Section

20(a) of the Exchange Act is properly dismissed where a

complaint has failed to allege a primary violation of the

securities laws under Section 10(b).). The Court thus agrees

with the R&R’s recommendation that Plaintiffs’ Section 20(a)

claim should be dismissed. As with Plaintiffs’ Section 10(b)

claim, Plaintiffs are granted leave to replead their Section

20(a) claim.

CONCLUSION

For the foregoing reasons, upon de novo review, the

Court respectfully denies Plaintiffs’ objections, and affirms

and adopts Judge Bulsara’s thorough and well-reasoned R&R in its

entirety. Plaintiffs’ Securities Act Sections 11, 12, and 15

claims are dismissed with prejudice, as the claims are untimely.

Plaintiffs’ Exchange Act Section 10(b) and Section 20(a) claims

are dismissed, with leave to replead. Plaintiffs shall file a

Second Amended Complaint within (30) thirty days. If Plaintiffs

fail to file a Second Amended Complaint within thirty days,

judgment will be entered in favor of Defendants, and this case

will be closed.

SO ORDERED.

Dated: March 13, 2022

Brooklyn, New York

_________/s/ _ ____________

HON. KIYO A. MATSUMOTO

United States District Judge

Eastern District of New York