# Chen v. X Financial

> District Court, E.D. New York · March 13, 2022

URL: https://www.frixlaw.com/law-library/cases/10307725

## Case

- **Court:** District Court, E.D. New York
- **Decided:** March 13, 2022
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10307725

## How later opinions describe it (automated extraction)

- noting continued application of “inquiry notice” to Securities Act is unresolved by Circuit
- 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

## Opinion text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10307725. Public record. Not legal advice.