HENRY v. FUTU HOLDINGS LIMITED

NOT FOR PUBLICATION

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

JENNIFER HENRY, Individually and on

Behalf of All Others Similarly Situated,

Case No. 2:23-cv-03222 (BRM) (CLW)

Plaintiff,

OPINION

v.

FUTU HOLDINGS LIMITED, et al.,

Defendants.

MARTINOTTI, DISTRICT JUDGE

Before the Court is a Motion to Dismiss pursuant to Federal Rules of Civil Procedure 8(a),

9(b), and 12(b)(6) filed by Defendant Futu Holdings Limited (“Futu”) (ECF No. 37) and joined by

Individual Defendants Arthur Yu Chen (“Chen”) and Leaf Hua Li (“Li”) (collectively,

“Defendants”) (ECF Nos. 41, 44). Lead Plaintiffs1 Treasurer of the State of North Carolina—on

behalf of the North Carolina Retirement Systems, the North Carolina Department of State

Treasurer, and the North Carolina Supplemental Retirement Board of Trustees, on behalf of the

North Carolina Supplemental Retirement Plans (“North Carolina Funds”)—and the Indiana Public

Retirement System (“Indiana PRS”), individually and on behalf of all other persons similarly

situated (collectively, “Plaintiffs”) filed an Opposition (ECF No. 39), and Defendants filed a Reply

(ECF No. 42). Having reviewed the submissions filed in connection with Defendants’ Motion and

having declined to hold oral argument pursuant to Federal Rule of Civil Procedure 78(b), for the

1 On November 16, 2023, the Court issued an Order appointing lead plaintiffs and approving lead

counsel and liaison counsel, pursuant to the Private Securities Litigation Reform Act of 1995

(“PSLRA”) and 15 U.S.C. §78u-4 (1997). (ECF No. 30.)

reasons set forth below and for good cause having been shown, Defendants’ Motions to Dismiss

(ECF Nos. 37, 41, and 44) are GRANTED.

I. BACKGROUND

A. Factual Background

For the purpose of this Motion to Dismiss, the Court accepts the factual allegations in the

Amended Complaint as true and draws all inferences in the light most favorable to Plaintiffs. See

Phillips v. Cnty. of Allegheny, 515 F.3d 224, 228 (3d Cir. 2008). The Court may also consider any

“document integral to or explicitly relied upon in the complaint.” In re Burlington Coat Factory

Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (quoting Shaw v. Digit. Equip. Corp., 82 F.3d 1194,

1220 (1st Cir. 1996)).2

This action is a putative class action arising out of alleged violations of the federal

securities laws—specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the

“Exchange Act”) and Rule 10b-5 promulgated thereunder. (See generally ECF No. 36 (Am.

Compl.).) Futu is a technology company that offers a fully digitalized securities brokerage platform

to investors, which is either called either Futubull or Moomoo, depending on the market. (Id.

2 The factual background is taken from the allegations in the Amended Complaint (ECF No. 36),

as well as the exhibits Defendants submitted in support of their Motion (see ECF Nos. 37-3 through

37-27). The Court considers these exhibits in deciding Defendants’ Motion because Plaintiffs’

claims rely on these documents (see ECF No. 36) and because Plaintiffs do not appear to object to

the Court considering these documents (see ECF No. 39). Courts can consider any “document

integral to or explicitly relied upon in the complaint.” In re Burlington, 114 F.3d at 1426 (citation

omitted). A district court may also consider any “undisputedly authentic document that a defendant

attaches as an exhibit to a motion to dismiss if the plaintiff’s claims are based on the document.”

Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)

(citations omitted). See also Aliano v. Twp. of Maplewood, Civ. A. No. 22-05598, 2023 WL

4398493, at *3 (D.N.J. July 7, 2023) (“Documents attached by a defendant to a motion to dismiss

are considered part of the pleadings if they are referred to in the plaintiff’s complaint and are

central to the claim.” (citing Cooper v. Samsung Elecs. Am., Inc., 374 F. App’x 250, 253 n.3 (3d

Cir. 2010))).

¶¶ 2, 16.) Futu’s American Depositary Shares (“ADS”) are listed on NASDAQ under ticker

symbol FUTU. (Id. ¶ 16.) Futu is incorporated in the Cayman Islands and has its principal place

of business in Hong Kong. (Id.) Li is the founder and Chief Executive Officer (“CEO”) of Futu

and served as Futu’s Board of Directors Chairman during the Class Period. (Id. ¶ 17.) Chen is

Futu’s Chief Financial Officer (“CFO”). (Id. ¶ 18.) Plaintiffs are putative class members consisting

of all persons, excluding Defendants and their families, directors, officers, and affiliates, who

purchased or otherwise acquired Futu ADS between April 27, 2020 and May 16, 2023 (the “Class

Period”) and who suffered damages as a result of Defendants’ alleged conduct. (Id. ¶¶ 1, 94.) The

North Carolina Funds and Indiana PRS are entities who purchased Futu ADS at allegedly

artificially inflated prices during the Class Period and suffered damages as a result. (Id. ¶¶ 16−17.)

“[T]hrough its proprietary digital platforms, Futubull and Moomoo, Futu provides a full

range of brokerage services, including ‘trade execution and margin financing which allow [its]

clients to trade securities, such as stocks, warrants, options and exchange-traded funds, or ETFs,

across different markets.’” (Id. ¶ 21 (second alteration in original).) Futu provided online

brokerage services in the Peoples Republic of China (“PRC” or “China”), and during the Class

Period, China and Hong Kong were the two primary markets for Futu’s brokerage services. (Id.

¶¶ 2, 4, 22.) Plaintiffs allege Defendants—through its SEC filings, press releases, and on earnings

calls—falsely assured investors that Futu’s securities brokerage operations in China complied with

applicable Chinese securities laws and regulations, when in fact Futu was illegally operating in

China without the required brokerage firm license. (See generally ECF No. 36.)

The Chinese government prohibits securities brokerage companies from operating in China

without a license. (Id. ¶ 23.) On December 29, 1998, the National People’s Congress (the “NPC”)

in China issued the first version of China’s Securities Law (the “PRC Securities Law”), “which

established comprehensive regulatory rules for the issuance and trading of securities” and became

effective July 1, 1999. (Id.) Among other things, the PRC Securities Law “required that brokerage

firms apply for and obtain licenses from the PRC State Council in order to operate in China[.]”

(Id. ¶ 3; see also id. ¶ 23.) For example, Article 117 of the PRC Securities Law3 provides: “The

establishment of a securities company must be examined and approved by the State Council’s

securities regulatory body. Without the approval of this institution, no one is allowed to engage in

securities business.” (Id.) Similarly, Article 118 similarly states in relevant part: “No entity or

individual shall conduct securities business in the name of a securities company without the

approval of the securities regulatory authority under the State Council.” (Id. ¶ 28.) Article 131

likewise provides: “Securities companies shall submit application for the scope of business

allowed to the State Council securities regulatory body for approval in accordance with the

provisions specified in the preceding two articles” and “shall not operate securities or other types

of business beyond the approved scope of business.” (Id. ¶ 23.) Additionally, Article 160 states in

relevant part: “Without examination and approval, no one shall provide services for securities

transactions and other related activities.” (Id. ¶ 29.)

Article 119 describes the process for how securities companies can obtain the required

license. (Id. ¶ 23.) Article 202 of the PRC Securities Law describes the consequences for

companies who violate this licensing requirement, stating in relevant part: “Where . . . an entity or

individual establishes a securities company without authorization, illegally engages in securities

businesses, or conducts securities business activities in the name of a securities company without

3 Plaintiffs provided the Court with a certified English translation of the PRC Securities Law from

its original form in Chinese, attached as an exhibit to the Amended Complaint. (See ECF No.

36-3.) Articles 117 and 131 were not included in the translation. (See id.) Nevertheless, for

purposes of this Motion, the Court uses Plaintiffs’ translation.

approval, the entity or individual shall be ordered to take corrective measures” and that “[a]

securities company established without authorization shall be banned by the securities regulatory

authority under the State Council.” (Id. ¶ 30). Subsequent revisions to these regulations in the PRC

Securities Law likewise describe this licensing requirement. (Id. ¶ 25.)

On March 1, 2020, prior to the beginning of the Class Period, the NPC enacted an

amendment to the PRC Securities Law, Article 2, which “clarified that the reach of the law

extended to ‘securities issuance and trading activities outside the territory of [China]’ that ‘disrupt

the order of the market within the territory of [China].’” (Id. ¶ 4.) Specifically, Article 2 states in

relevant part:

This Law shall apply to the issuance and transaction of stocks,

corporate bonds, depository receipts and other securities lawfully

recognized by the State Council within the territory of the People’s

Republic of China. Where there are no such provisions in this Law,

the provisions of the Company Law of the People’s Republic of

China and other laws and administrative regulations shall apply. . . .

Where the issuance and transactions of securities outside the

territory of the People’s Republic China have disrupted the market

order within the territory of the People’s Republic of China and

damaged the legitimate rights and interests of investors within the

territory, such activities shall be handled and investigated for legal

responsibility in accordance with the relevant provisions of this

Law.

(ECF No. 36-3 at 4.)

Plaintiffs allege that despite the PRC Securities Laws’ “clear language,” Defendants falsely

and misleadingly reassured investors that it “was operating in China legally.” (ECF No. 36 ¶ 37.)

Plaintiffs further allege Defendants did not take any steps to obtain the required brokerage license

despite a series of four “clear warnings” that Futu was illegally operating in China. (Id. ¶ 5.) First,

in October 2021, Chinese regulators began focusing on securities brokerages operating illegally in

China without the required license. (Id. ¶ 5.) On October 14, 2021, People’s Daily4 reported, in an

article entitled, “Financial Observer: The Personal Information Protection Law is About to be

Implemented. Where Will Cross-border Internet Securities Companies Go From Here?”,5 that “it

had learned from the China Securities Regulatory Commission (‘CSRC’)—which is the Chinese

equivalent to the SEC in the United States—that ‘no domestic or foreign institutions have been

approved to provide services for domestic investors to participate in overseas securities

transactions.’” (Id. ¶¶ 5, 33 & n.4.) The article stated that “according to the CSRC, ‘except for the

Qualified Domestic Institutional Investors (QDII) and the “Shanghai-Hong Kong Stock Connect”

mechanism, no domestic or foreign institutions have been approved to provide services for

domestic investors to participate in overseas securities transactions.’” (Id. ¶ 33.) Investors and

analysts understood this to mean “Futu faced impending regulatory action due to its failure to

obtain a securities business license in China.” (Id.) Upon this news, the price of Futu’s ADS closed

down 12.4% on October 14, 2021 and “continued to fall on October 15, 2021, closing down

another $10.08 per share, or 13.7%.” (Id. ¶ 74.) Both October 14, 2021 and October 15, 2021 “had

abnormally high trading volumes of over seven times the median volume during the Class Period.”

(Id.)

Second, on October 24, 2021, ten days after the People’s Daily article came out, China’s

head of the financial stability department of the People’s Bank of China (“PBOC”) Tianqi Sun

4 According to Plaintiffs, People’s Daily is “the official newspaper of the Central Committee of

the Chinese Communist Party,” “has a circulation of over 3 million,” and “is widely considered

the official voice of the central government of China.” (ECF No. 36 ¶ 5 & n.2.)

5 The Court was not provided with a certified translated copy of this article. To the extent Plaintiff

quotes from it, the Court accepts it as accurate unless otherwise stated.

(“Sun”) spoke6 in Shanghai at the Bund Summit where he stated in part: “Cross-border online

brokerages are driving in China without a driver’s license. They’re conducting illegal financial

activities,” and that “[o]verseas institutions with only overseas licenses conducting business in

mainland China is illegal financial activity.” (Id. ¶ 34.) Sun did not mention Futu by name in his

speech but did specifically reference Futu’s recent share price drops. (Id.) On October 28, 2021,

various news media outlets reported on Sun’s speech and indicated Futu was one of the companies

operating illegally in China and who were implicated in Sun’s speech. (Id. ¶¶ 5, 34.) On that same

day, a Jeffries analyst noted, “‘Futu’s share price has dropped by more than 20% premarket,’ and

identified Sun’s statements as the cause for the drop” but also echoed Defendants’ statements

regarding “‘uncertainties’ in the law, saying ‘we still need to wait for more guidelines from the

regulators to address these concerns’ about Futu’s business model.” (Id. ¶ 79.)

Third, on December 17, 2021, Reuters published an article reporting that Futu would be

banned from operating in China in “the coming months.” (Id. ¶ 35.) The article stated “Futu [is]

registered with the Securities and Futures Commission in Hong Kong but that permit does not

extend to the mainland. No mainland licence [sic] exists for online brokerages specializing in

cross-border trades, the sources said.” (Id. ¶ 35 (alterations in original).) The article also stated

Futu “had been communicating with Chinese authorities but had not received any formal orders

along the lines of those suggested by Reuters reporting” and that Futu “was operating normally.”7

(Id.)

Fourth, approximately one year later, on December 30, 2022, both Reuters and The Wall

6 The Court was not provided with a copy of this speech. To the extent Plaintiff quotes from it, the

Court accepts it as accurate unless otherwise stated.

7 The Amended Complaint does not explicitly allege a specific share price drop of Futu ADS

following the publication of this article on December 17, 2021.

Street Journal reported that the CSRC had found Futu’s securities operations in China to be

unlawful, stating Futu’s business in China “doesn’t comply with the country’s laws and

regulations,” and had banned Futu from opening any new investor accounts in China. (Id. ¶ 36.)

Upon this news, the price of Futu’s ADS closed down 31% on December 30, 2022, “with a trading

volume of over eight times the median volume” and “continued to fall on the next trading day,

January 3, 2023, falling $2.81, or 6.9%, on a trading volume over three times the median volume.”

(Id. ¶ 81.)

“Through [these] four increasingly targeted revelations, investors eventually came to learn

that Futu was, in fact, violating Chinese law, and would ultimately suffer the severest of

consequences—the complete removal of Futu’s app in . . . China, and a complete ban from

acquiring any new users in that market.” (Id. ¶ 9.) With each of these four revelations, Futu’s ADS

price “fell dramatically, inflicting substantial harm on Plaintiffs and other investors in Futu ADS.”

(Id.) On May 16, 2023, news media outlets reported “the Chinese government would be removing

Futu’s app from stores in China because Futu had been illegally operating a securities brokerage

business in China without a license.” (Id. ¶ 43.) On this news, Futu’s ADS declined 4.4%. (Id.

¶ 85.)

B. Defendants’ Alleged Misrepresentations and Omissions

Plaintiffs allege Defendants made a series of false and misleading statements and omitted

material facts necessary to make the statements made not false or misleading, which can effectively

be grouped into three categories: (1) statements regarding Futu’s purported compliance with the

PRC Securities Law (the “Purported Compliance Statements”); (2) statements regarding Futu’s

self-proclaimed focus on regulatory compliance (the “Regulatory Focus Statements”); and (3)

statements downplaying the impact of the PRC Securities Law on Futu’s business in China (the

“Downplayed Legal Impact Statements”) (collectively, the “Challenged Statements”). (See

generally ECF No. 36.)

i. The Purported Compliance Statements

Plaintiffs allege “Defendants falsely and misleadingly told investors that Futu was in

compliance with the applicable regulations in the PRC Securities Law . . . while simultaneously

asserting, also falsely or misleadingly, that those regulations were uncertain and that they did not

believe Futu even engaged in securities brokerage business in China.” (Id. ¶ 45.) Defendants stated

Futu was in compliance with the applicable regulations, even though the PRC Securities Law

contained “uncertainties” related to securities brokerage businesses, and also represented in Futu’s

public filings that certain law firms Futu had retained determined “Futu was ‘in compliance with

the applicable PRC laws and regulations related to securities brokerage business in China.’” (Id.

¶ 7.)

Futu’s public SEC filings during the Class Period disclosed the risk regarding

“uncertainties” regarding the PRC Securities Law and related regulations but stated Futu was in

compliance with those laws and further stated Futu’s counsel had determined Futu was in

compliance with the relevant Chinese laws and regulations. (Id. ¶ 38.) For example, on April 27,

2020, Futu filed with the SEC its Annual Report on SEC Form 20-F for fiscal year ending

December 31, 2019 (the “2019 Annual Report”), which stated in relevant part:

We do not hold any license or permit for providing securities

brokerage business in China. Although we do not believe we

engage in securities brokerage business in China, there remain

uncertainties to the interpretation and implementation of relevant

PRC laws and regulations.

Pursuant to the relevant PRC laws and regulations, no entity or

individual shall engage in securities business without the approval

of the securities regulatory authority of the State Council. . . . We do

not hold any license or permit in relation to providing securities

brokerage business in China. . . . However, we do not believe the

business we are conducting now through our subsidiaries or

consolidated affiliated entities in China is securities brokerage

business in China. In the past, we received inquiries relating to our

business from certain regulatory authorities in China. We have since

then taken measures to modify and enhance our business and

platform to be in compliance with the applicable PRC laws and

regulations related to securities brokerage business in China.

However, we cannot assure you that the measures we have taken or

will take in the future will be effective or fully satisfy the relevant

regulatory authorities’ requirements. Based on the opinion of our

PRC counsel, CM Law Firm, we are in compliance with the

applicable PRC laws and regulations related to securities

brokerage business in China after such modifications in all

material aspects. However, there remain some uncertainties as to

how the current and any future PRC laws and regulations will be

interpreted or implemented in the context of operating securities

related business in China.

We cannot assure you that our current operation model, such as

redirecting users and clients to open accounts and make transactions

outside China, will not be deemed as operating securities brokerage

business in China, which may subject us to further inquiries or

rectifications. If certain of our activities in China were deemed by

relevant regulators as provision of securities brokerage services,

investment consulting services and stock options brokerage business

in China, we will be required to obtain relevant licenses or permits

from relevant regulatory bodies, including the CSRC, and failure of

obtaining such licenses or permits may subject us to regulatory

actions and penalties, including fines, suspension of parts or all of

our operations in the PRC, and temporary suspension or removal of

our websites and mobile application in China. In such cases, our

business, financial condition, results of operations and prospects

may be materially and adversely affected.

PRC laws and regulations are evolving, and there are

uncertainties relating to the regulation of different aspects of the

services we provide through our platforms in China. We cannot

assure you that we will not be found in violation of any future laws

and regulations or any of the laws and regulations currently in effect

due to changes in or discrepancies with respect to the relevant

authorities’ interpretation of these laws and regulations. In addition,

we may be required to obtain additional license or approvals, and

we cannot assure you that we will be able to timely obtain or

maintain all the required licenses or approvals or make all the

necessary filings in the future.

(Id. ¶ 46; see also ECF No. 37-3.) Chen and Li each signed Futu’s 2019 Annual Report and

affirmed “based on my knowledge, this report does not contain an untrue statement of a material

fact or omit to state a material fact necessary to make the statements made, in light of the

circumstances under which such statements were made, not misleading[.]” (ECF No. 36 ¶ 47.)

Futu’s 2020 Annual Report (for fiscal year ending December 31, 2020) and 2021 Annual Report

(for fiscal year ending December 31, 2021) contained nearly identical language, and Chen and Li

provided substantially similar certifications and statements in those reports. (Id. ¶ 48; see also ECF

Nos. 37-14, 37-15.)

Then, Futu’s 2022 Annual Report (for fiscal year ending December 31, 2022) stated in

relevant part:

As announced by the CSRC on December 30, 2022, the CSRC has

initiated inquiries on us regarding our cross-border operations in

Mainland China, including the provision of cross-border securities

services for domestic investors. As of the date of this annual report,

we have limited information to accurately predict if any

disciplinary action or punishment will be taken against us and/or

our responsible officers after the conclusion of such inquiries, and

if so, the nature and extent of any such action. Although we have

been and continue to take rectification measures on our business

to be in compliance with laws and regulations and to meet the

requirements from the CSRC during the inquiries, we cannot

assure or predict whether the CSRC is satisfied with our rectification

measures and whether the CSRC would impose further regulatory

actions and penalties on us, including fines, suspension of parts or

all of our operations or activities in Mainland China, or suspension

or removal of our websites, desktop devices and mobile applications

in China[.] . . .

We do not hold any license or permit for providing securities

brokerage services in Mainland China. . . . We have taken and may

continue to take rectification measures based on our

communication with or the requirements from the CSRC. If the

CSRC is not satisfied with our rectification measures or the CSRC

imposes other further regulatory actions or penalties on us, our

business and results of operations may be materially and adversely

affected. . . .

PRC laws and regulations are evolving, and there are

uncertainties relating to the regulation of different aspects of the

services we provide through our platforms in China. We cannot

assure you that we will not be found in violation of any future laws

and regulations or any of the laws and regulations currently in effect

due to changes in or discrepancies with respect to the relevant

authorities’ interpretation of these laws and regulations. In addition,

we may be required to obtain additional license or approvals, and

we cannot assure you that we will be able to timely obtain or

maintain all the required licenses or approvals or make all the

necessary filings in the future.

(ECF No. 36 ¶ 50; see also ECF No. 37-4.) Chen and Li likewise signed this report and affirmed

it did not contain untrue statements of material facts or omit any material facts necessary to make

the statements contained therein not misleading. (ECF No. 36 ¶ 51.)

Defendants also reassured investors that Futu was in compliance with the PRC Securities

Law on Futu’s earnings calls. (Id. ¶ 39.) For example, on the November 24, 2021 earnings call,

one analyst asked Chen about the impact on Futu of China’s regulations regarding online brokers’

offshore trading, and Chen responded, “In terms of the China regulations, I think we are not in the

best position to prejudge what the regulator will do. I think so far, the impact to our client

acquisitions in the Great China areas is manageable,” and “I think the worst is already behind us.

. . . But we think the overall speaking, the situation is still within our control.” (Id. ¶ 39; ECF No.

37-9 at 7.) Similarly, in response to an analyst’s question during an earnings call on March 28,

2023, Chen stated Futu had “full cooperation with the regulators.” (ECF No. 36 ¶¶ 40, 56.)

ii. The Regulatory Focus Statements

Plaintiffs allege Defendants falsely and misleadingly told investors “that Futu

‘monitor[ed]’ and ‘embrac[ed]’ the relevant regulations in the PRC Securities Law, was ‘actively

and transparently’ communicating with Chinese regulators about those regulations, and would

‘timely disclos[e]’ to investors any developments regarding the regulations that ‘may have a

material adverse impact on the Company’s business operation.’” (Id. ¶ 53 (alterations in original).)

For example, in an earnings call on November 24, 2021, Defendants stated Futu was focused on

complying with the relevant provisions of the PRC Securities Law, and, in particular, “when an

analyst expressed that there were ‘some concerns about legality of offshore trading by online

brokers,’ and asked whether ‘management can shed some light on the impact of the government

regulation,’” Li (through translation) responded in relevant part:

Yes. We are business as usual here at Futu, and our business model

is nothing new. . . . And we have always been embracing the

regulations and have a very high set of standards for operational

compliance, and we are actively and transparently communicating

with the regulators, and we anticipate and welcome more guidance

from the regulators to both us and the industry as a whole. And if

there are new regulatory guidance is coming out, I think we’ll abide

by these regulations as soon as possible. And as a listed company,

we’ll timely update any new information available to us.

(Id. ¶ 54.) A few weeks later, on December 17, 2021, Futu issued a press release titled “Futu

Responds to Media Report,” which stated in relevant part:

[Futu], a leading tech-driven online brokerage and wealth

management platform, today responds to the media speculations

regarding potential PRC regulatory policies that may have a material

adverse impact on the Company’s business operation. As a Nasdaq-

listed company, Futu is committed to timely disclosing recent

developments that may have a material adverse impact on the

Company’s business operation, including regulatory

developments.

Futu always maintains active communication with different

competent PRC regulatory authorities in its ordinary course of

business. To date, the Company has not received (nor is it aware

of) any notice, guidance or order from any PRC regulatory

authorities which is expected to have a material adverse impact on

its business operation or financial conditions. In terms of serving

the PRC clients, Futu has been abiding by the same rules and

regulations and adopting the similar industry practices and business

models as other brokers who hold the same type of licenses in Hong

Kong. No further innovations or breakthroughs have been made by

Futu with respect to the business model. There is no such “internet

broker-dealer” category or definition under relevant legal

framework and nowadays almost all broker-dealers are using

internet (through App and/or website) to serve their clients. Futu

will keep monitoring regulatory developments and continue to

fully cooperate with relevant regulatory authorities.

During the recent period, the Company noticed that some

individuals and institutions have been spreading false or fake

information about Futu on social media with the purpose of

profiting from short-selling. We have gathered relevant

information and further reported to relevant regulators. We also

reserve our right to take legal action. . . .

(Id. ¶ 55.)

More than a year later, during an earnings call on March 28, 2023, Chen responded to an

analyst’s question regarding the impact on Futu of the CSRC’s December 2022 announcement

regarding tightening offshore brokers and stated in relevant part:

[R]egarding the CSRC’s news at the end of last year, I think we –

number one, we fully accept the regulator’s point of view, and we

have a full cooperation with the regulators. On a net-to-net basis,

we do think it will be healthy for the industry’s long-term growth.

And also, if you follow you, there are some clarities from the CSRC

spokesperson in the middle of February, mentioning how to deal

with the existing clients. They ask for orderly deal with the existing

clients. It will be an industry-wide situation. So we will take a very

constructive manners to cooperate with the regulators in this regard.

(Id. ¶ 56.)

iii. The Downplayed Legal Impact Statements

Plaintiffs also allege “Defendants misleadingly downplayed the adverse impact that the

applicable PRC Securities Law had on Futu’s ability to do business in China . . . falsely assuring

investors that Futu’s growth prospects in that market remained ‘very strong.’” (Id. ¶ 58.) For

example, during an earnings call on November 19, 2020, an analyst asked “[s]o what will be our

strategy in the future to acquire the mainland China users, which seems to be – have a larger user

base that we could explore into?” (Id. ¶ 59.) Chen responded: “And with regards to our mainland

[China] client acquisition, I think we use different client acquisition strategies because of the

number of constraints. . . . So we have different client acquisition strategies for mainland, and we

think the growth prospects in mainland [China] are very strong.” (Id.) Similarly, during an earnings

call on November 24, 2021, in response to an analyst’s question regarding “concerns about legality

of offshore trading by online brokers” and whether “management can shed some light on the

impact of the government regulation[,]” Chen responded in relevant part:

In terms of the China regulations, I think we are not in the best

position to prejudge what the regulator will do. I think so far, the

impact to our client acquisitions in the Great China areas is

manageable. I can share a little bit more color, which I think may be

helpful for analysts and also the investors to gauge how the negative

impact on the recent headline use because of that, what's the

implication to our client acquisitions across board. Definitely, we

see certain asset outflows among clients in the Great China areas,

amid the concerns over media report.

Overall speaking, we think the impact is still very short term and

manageable from mid – from the mid-October to mid-November,

the net asset outflows accounts for less than 2% of our total client

assets. . . . In my personal thought, I think the worst is already behind

us. Of course, the market volatility alongside with seasonality effect

in Q4, together with this headline news, definitely enhanced attrition

rate for existing paying clients and also create some challenges for

new client acquisition across the board in the near term. But we think

the overall speaking, the situation is still within our control.

(Id. ¶ 60; ECF No. 37-9 at 7.) Likewise, during an earnings call on March 28, 2023, in response to

an analyst’s question regarding the impact on Futu’s business operations following the “CSRC

announcement on tightening of the offshore brokers” in December 2022, Chen responded in

relevant part:

Let me answer your question. First of all, I’ll give you some general

color about our client’s movement following the end of last year’s

news flow. We do witness some our Hong Kong clients because of

the – there are some sentiment concerns, there are some client

outflows in – particularly in the first half of January. But I think the

overall amount is quite manageable. Roughly, I think the net

outflow at the time accounts for roughly 1% to 2% of our total client

assets, which, compared with the situation we faced and at the end

of 2021, we think the situation was manageable. . . . Secondly,

regarding the CSRC’s news at the end of last year, I think we --

number one, we fully accept the regulator’s point of view, and we

have a full cooperation with the regulators. On a net-to-net basis, we

do think it will be healthy for the industry’s long-term growth. And

also, if you follow you, there are some clarities from the CSRC

spokesperson in the middle of February, mentioning how to deal

with the existing clients. They ask for orderly deal with the existing

clients. It will be an industry-wide situation. So we will take a very

constructive manners to cooperate with the regulators in this regard.

(ECF No. 36 ¶ 61; ECF No. 37-12 at 10.)

C. Procedural History

On June 12, 2023, Plaintiffs filed a Class Action Complaint against Defendants for alleged

violations of the federal securities laws. (ECF No. 1.) On January 16, 2024, Plaintiffs filed an

Amended Class Action Complaint (“Amended Complaint”) asserting the following two causes of

action: (1) “Violations of Section 10(b) of the Exchange Act and Rule 10b-5(a)-(c) Promulgated

Thereunder Against All Defendants” (Count I), and (2) “Violations of Section 20(a) of the

Exchange Act Against All Defendants” (Count II). (ECF No. 36.) On February 29, 2024,

Defendants filed a Motion to Dismiss the Amended Complaint pursuant to Federal Rules of Civil

Procedure 8(a), 9(b), and 12(b)(6). (ECF No. 37.) On April 15, 2024, Plaintiffs filed an Opposition

(ECF No. 39), and on May 15, 2024, Defendants filed a Reply (ECF No. 42). Also on May 15,

2024, Chen filed a Notice of Joinder to Futu’s pending Motion to Dismiss.8 (ECF No. 41.) On

August 28, 2024, Li filed a Notice of Joinder to Futu and Li’s pending Motion to Dismiss.9 (ECF

8 Chen notes he “had not been properly served in this action” at the time the Motion to Dismiss

was filed. (ECF No. 41 at 2 n.1.) Chen further states that although Plaintiffs filed a proof of service

on April 9, 2024, he “maintains that this service attempt was invalid because it did not comply

with the requirements of the Hague Convention.” (Id.) However, he “agreed to voluntarily appear”

but asserts he “reserves all rights and defense[s], other than with respect to service of process.”

(Id.)

9 Li notes he “had not been properly served in this action” at the time the Motion to Dismiss was

filed. (ECF No. 44 at 2 n.1.) Li further states he “notified counsel that attempted service in this

matter was made[,]” and “[w]ithout conceding whether the service attempt complied with the

No. 44.)

II. LEGAL STANDARD

A. Rule 12(b)(6)

In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a

district court is “required to accept as true all factual allegations in the complaint and draw all

inferences from the facts alleged in the light most favorable to [the non-moving party].” Phillips,

515 F.3d at 228. “[A] complaint attacked by a Rule 12(b)(6) motion to dismiss does not need

detailed factual allegations.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations

omitted). However, “a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’

requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of

action will not do.” Id. at 555 (alteration in original) (quoting Papasan v. Allain, 478 U.S. 265,

286 (1986)). A court is “not bound to accept as true a legal conclusion couched as a factual

allegation.” Papasan, 478 U.S. at 286. Instead, assuming the factual allegations in the complaint

are true, those “[f]actual allegations must be enough to raise a right to relief above the speculative

level[.]” Twombly, 550 U.S. at 555 (citations omitted).

“To survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S.

662, 678 (2009) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility 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 (citing Twombly, 550 U.S. at 556). This

“plausibility standard” requires the complaint to allege “more than a sheer possibility that a

requirements of the Hague Convention, [he] has agreed to voluntarily appear.” (Id.) However, he

“reserves all rights and defenses, other than with respect to service of process.” (Id.)

defendant has acted unlawfully,” but it “is not akin to a ‘probability requirement.’” Id. (citing

Twombly, 550 U.S. at 556). “[D]etailed factual allegations” are not required, but “more than an

unadorned, the-defendant-unlawfully-harmed-me accusation” must be pleaded; it must include

“factual enhancement” and not just conclusory statements or a recitation of the elements of a cause

of action. See id. (citations omitted). In assessing plausibility, the court may not consider any

“[f]actual claims and assertions raised by a defendant[.]” Doe v. Princeton Univ., 30 F.4th 335,

345 (3d Cir. 2022).

“Determining whether a complaint states a plausible claim for relief [is] . . . a context-

specific task that requires the reviewing court to draw on its judicial experience and common

sense.” Iqbal, 556 U.S. at 679. “[W]here the well-pleaded facts do not permit the court to infer

more than the mere possibility of misconduct, the complaint has alleged—but it has not

‘show[n]’—‘that the pleader is entitled to relief.’” Id. (second alteration in original) (quoting Fed.

R. Civ. P. 8(a)(2)). Indeed, after Iqbal, conclusory or “bare-bones” allegations will no longer

survive a motion to dismiss: “[t]hreadbare recitals of the elements of a cause of action, supported

by mere conclusory statements, do not suffice.” Id. at 678 (citing Twombly, 550 U.S. at 555). To

prevent dismissal, all civil complaints must set out “sufficient factual matter” to show that the

claim is facially plausible, “allow[ing] the court to draw the reasonable inference that the defendant

is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556, 570). The Supreme

Court’s ruling in Iqbal emphasizes that plaintiffs must show that the allegations of their complaints

are plausible. See id. at 670.

While courts generally may not consider anything beyond the four corners of the complaint

on a motion to dismiss pursuant to Rule 12(b)(6), the Third Circuit has held that “a court may

consider certain narrowly defined types of material without converting the motion to dismiss [to

one for summary judgment pursuant to Rule 56].” See In re Rockefeller Ctr. Props. Sec. Litig., 184

F.3d 280, 287 (3d Cir. 1999). Specifically, courts may consider any “document integral to or

explicitly relied upon in the complaint.” In re Burlington, 114 F.3d at 1426 (quoting Shaw, 82 F.3d

at 1220). However, “[w]hen the truth of facts in an ‘integral’ document are contested by the well-

pleaded facts of a complaint, the facts in the complaint must prevail.” Princeton Univ., 30 F.4th at

342.

B. Heightened Pleading Standard

“[F]aced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any

motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual

allegations in the complaint as true.” Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d

Cir. 2009) (alteration in original) (quoting Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308,

322 (2007)). Courts must also “consider the complaint in its entirety, as well as . . . documents

incorporated into the complaint by reference, and matters of which a court may take judicial

notice.” Id. (quoting Tellabs, 551 U.S. at 322). However, because this is a securities fraud case,

plaintiffs must satisfy the heightened pleading rules codified in the Private Securities Litigation

Reform Act of 1995 (“PSLRA”). Id. The PSLRA replaced Federal Rule of Civil Procedure 9(b)

(“Rule 9(b)”) “as the applicable pleading standard in private securities class actions.” Rahman v.

Kid Brands, Inc., 736 F.3d 237, 242 n.3 (3d Cir. 2013) (citing Avaya, 564 F.3d at 253).

“Nonetheless, ‘Rule 9(b)’s particularity requirement is comparable to and effectively subsumed

by the requirements of [15 U.S.C. § 78u–4(b)(1) of] the PSLRA.’” Id. (alteration in original)

(quoting Avaya, 564 F.3d at 253).

Pursuant to Rule 9(b), when alleging fraud, “a party must state with particularity the

circumstances constituting fraud or mistake, although ‘intent, knowledge, and other conditions of

a person's mind may be alleged generally.’” In re Lipitor Antitrust Litig., 868 F.3d 231, 249 (3d

Cir. 2017) (quoting Fed. R. Civ. P. 9(b)); see also United States ex rel. Moore & Co., P.A. v.

Majestic Blue Fisheries, LLC, 812 F.3d 294, 307 (3d Cir. 2016) (holding that a “plaintiff alleging

fraud must . . . support its allegations with all of the essential factual background that would

accompany the first paragraph of any newspaper story—that is, the who, what, when, where and

how of the events at issue” (citation omitted)). Accordingly, “a party must plead [its] claim with

enough particularity to place defendants on notice of the ‘precise misconduct with which they are

charged.’” United States ex rel. Petras v. Simparel, Inc., 857 F.3d 497, 502 (3d Cir. 2017) (citation

omitted).

Likewise, “[u]nder the PSLRA’s heightened pleading instructions, any private securities

complaint alleging that the defendant made a false or misleading statement must: (1) ‘specify each

statement alleged to have been misleading [and] the reason or reasons why the statement is

misleading’”; and (2) “state with particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.” Tellabs, 551 U.S. at 321 (alteration in original)

(quoting 15 U.S.C. §§ 78u-4(b)(1), (b)(2)). Therefore, the PSLRA “requires that a complaint ‘state

with particularity both the facts constituting the alleged violation, and the facts evidencing scienter,

i.e., the defendant’s intention “to deceive, manipulate, or defraud.”’” Rahman, 736 F.3d at 241–

42 (quoting Tellabs, 551 U.S. at 313).

“To plead falsity, Rule 9(b) and the PSLRA each demand specificity.” Warren Police &

Fire Ret. Sys. v. Prudential Fin., Inc., 70 F.4th 668, 680 (3d Cir. 2023). “Rule 9(b) requires that a

fraud plaintiff “state with particularity the circumstances constituting fraud[,]” i.e., “the time,

place, and contents of the false representations or omissions, as well as the identity of the person

making the statement and the basis for the statement’s falsity.” Id. “Like Rule 9(b), the PSLRA

requires the pleadings to identify ‘each statement alleged to have been misleading’ and to specify

‘the reason or reasons why the statement is misleading.’” Id. (quoting 15 U.S.C. § 78u-4(b)(1)).

“And if allegations of falsity are based on information and belief, instead of on ‘evidentiary

support,’ the PSLRA requires the complaint to plead, with particularity, facts ‘sufficient to support

a reasonable belief as to the misleading nature of the statement or omission’ before the allegations

can be accepted as true.” Id. (citations omitted). To satisfy this particularity requirement, the

plaintiff must plead “facts giving rise to a strong inference that the defendant acted with the

required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A). “A complaint will survive . . . only if a

reasonable person would deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324. “Upon a

motion by any defendant, a claim for securities fraud under § 10(b) and Rule 10b-5 that lacks

particularized allegations of falsity must be dismissed.” Warren Police, 70 F.4th at 681.

“Although the pleading standards in Rule 9(b) and the PSLRA can be generally reconciled

harmoniously for allegations of falsity, the PSLRA’s requirements for allegations of scienter

control over the more lenient standard in Rule 9(b) for mental-state allegations.” Id. at 681 n.1

(citing Avaya, 564 F.3d at 253 (“The PSLRA’s requirement for pleading scienter . . . marks a sharp

break with Rule 9(b).”)); Tellabs, 551 U.S. at 323–24); compare Fed. R. Civ. P. 9(b) (permitting

“[m]alice, intent, knowledge, and other conditions of a person’s mind [to] be alleged generally”),

with 15 U.S.C. § 78u-4(b)(2)(A) (requiring a particularized statement of the “facts giving rise to a

strong inference that the defendant acted with the required state of mind”).

C. PSLRA Safe Harbor

The PSLRA’s safe harbor provision “immunizes from liability any forward-looking

statement, provided that: the statement is identified as such and accompanied by meaningful

cautionary language; or is immaterial; or the plaintiff fails to show the statement was made with

actual knowledge of its falsehood.” Avaya, 564 F.3d at 254 (citing 15 U.S.C. § 78u-5(c)).

The term “forward-looking statement” is broadly defined in the

statute to include statements “containing a projection of revenues,

income (including income loss), earnings (including earnings loss)

per share, capital expenditures, dividends, capital structure, or other

financial items”; statements of “the plans and objectives of

management for future operations, including plans or objectives

relating to the products or services of the issuer”; or statements of

“future economic performance, including any such statement

contained in a discussion and analysis of financial condition by the

management or in the results of operations included pursuant to the

rules and regulations of the Commission.” 15 U.S.C. § 78u-5

(i)(1)(A)-(C). Further, forward-looking statements include “any

statement of the assumptions underlying or relating to any statement

described” in the definition. § 78u-5(i)(1)(D).

Id. at 255. Mixed present and future statements are entitled to the safe harbor only as to the portion

of the statement that refers to the future. Id. (citations omitted). Additionally, to be protected under

the PSLRA safe harbor, the forward-looking statements must be accompanied by “extensive and

specific” cautionary language. Id. at 256 (quoting GSC Partners CDO Fund v. Washington, 368

F.3d 228, 243 n.3 (3d Cir. 2004)). “[A] vague or blanket (boilerplate) disclaimer which merely

warns the reader that the investment has risks will ordinarily be inadequate to prevent

misinformation. To suffice, the cautionary statements must be substantive and tailored to the

specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge.”

Id. (quoting Semerenko v. Cendant Corp., 223 F.3d 165, 182 (3d Cir. 2000)).

III. DECISION

The Court first addresses whether Plaintiffs have sufficiently alleged Section 10(b) and

Rule 10b-5 violations against the Defendants and then addresses whether Plaintiffs have

sufficiently alleged a Section 20(a) violation against the Individual Defendants.

A. Defendants’ Motion to Dismiss Plaintiffs’ Section 10(b) and 10b-5 Claims

(Count I of the Amended Complaint)

Defendants argue Plaintiffs’ Amended Complaint should be dismissed for failure to state

a claim under Section 10(b) of the Exchange Act. (See generally ECF Nos. 37-1, 42.) Specifically,

Defendants contend: (1) Plaintiffs fail to plead any material misrepresentation or omission; (2)

Plaintiffs fail to plead any facts supporting the requisite inference of scienter; (3) Plaintiffs fail to

plead loss causation; and (4) Plaintiffs fail to plead scheme liability. (ECF No. 37-1 at 17−40; ECF

No. 42 at 4−15.) Defendants also submit that because Plaintiffs have not sufficiently pled a Section

10(b) claim, their Section 20(a) claim against the Individual Defendants also fails. (Id. at 15 n.13.)

In opposition, Plaintiffs argue Defendants’ Motion should be denied because: (1) they

adequately alleged actionable misstatements and omissions—namely, that Defendants made false

and misleading statements about (a) Futu’s purported compliance with the PRC Securities Law,

(b) Futu’s purported focus on regulatory compliance, and (c) downplaying the impact of the PRC

Securities Law on Futu’s business; (2) they allege a strong inference of scienter; (3) they

adequately allege loss causation; (4) they plead a scheme claim; and (5) they plead a Section 20(a)

claim. (ECF No. 39.)

i. Alleged Material Misrepresentations or Omissions

Defendants argue Plaintiffs have failed to plead any material misrepresentation or omission

because Plaintiffs “fail to plead any illegal conduct with particularity”; Futu disclosed the relevant

risks and information; “Futu had no duty to disclose uncharged, unadjudicated wrongdoing;” and

certain challenged statements are not false or misleading and/or are nonactionable opinions. (ECF

No. 37-1 at 18−31.) Defendants also contend the disclosures in their annual reports “cited to the

relevant parts of the [PRC] Securities Law, explained their implications, and reiterated that

securities businesses operating in China are ‘subject to the approval of the securities regulatory

authority of the State Council.’” (Id. at 19.) Defendants also assert that each of Futu’s annual

reports during the Class Period explicitly disclosed in bold italicized text: “We [referring to Futu]

do not hold any license or permit for providing securities brokerage business in China.” (Id.;

see also ECF No. 33-3 (Futu’s 2019 Annual Report); ECF No. 33-4 (Futu’s 2022 Annual Report);

ECF No. 33-14 (Futu’s 2020 Annual Report); ECF No. 33-15 (Futu’s 2021 Annual Report).)

Defendants state the disclosed risk of the possibility that Futu’s business model could be deemed

as unlawfully operating a brokerage business in China given the then-uncertainties surrounding

the PRC Securities Law and regulations and how they would be applied to Futu “is precisely what

slowly materialized.” (ECF No. 37-1 at 3.) Additionally, Defendants submit that “Futu’s

disclosures did not become false or misleading in hindsight just because PRC authorities’ view of

Futu’s business model later changed” and, in any event, “Futu expressly warned of that risk and

provided investors with all material facts to assess the risk themselves.” (Id. at 4.) Defendants also

argue Futu “had no duty to preemptively accuse itself of violating PRC law” and Plaintiffs do not

allege, let alone with the requisite particularity, any other facts showing Futu had a duty to disclose

or which rendered its disclosures misleading. (Id.) Further, Defendants state to the extent Plaintiffs

are challenging Futu’s opinion regarding its legal compliance or forward-looking growth

expectations, those statements are legally inactionable. (Id. at 4, 29−31.) Therefore, Defendants

submit the Amended Complaint “should be dismissed because none of the four purported

corrective disclosures revealed any prior misrepresentation or the materialization of a concealed

risk.” (Id. at 39.)

In opposition, Plaintiffs argue they have sufficiently alleged material misrepresentations or

omissions because “[t]hroughout the Class Period, Defendants falsely reassured investors that Futu

complied with the PRC Securities Law, and that the applicable regulations were ‘uncertain’” when

in fact the PRC Securities Law required foreign securities companies to obtain brokerage licenses,

which requisite license Futu did not have and never obtained. (ECF No. 39 at 10−12.) Specifically,

Plaintiffs contend Defendants falsely claimed in Futu’s 2019, 2020, and 2021 Annual Reports that

“Futu did not ‘engage[] in securities brokerage business in China,’ and therefore did not need a

Chinese brokerage license” and also “that Futu was ‘in compliance with the applicable PRC laws

and regulations related to securities brokerage business in China.’” (Id. (citing ECF No. 36 ¶¶

46−48).) Plaintiffs assert that despite public declarations (including the October 14, 2021 People’s

Daily article, Sun’s October 28, 2021 speech, and the December 17, 2021 Reuters article)

indicating Futu’s operations in China were illegal, Defendants continued to maintain Futu was

compliant with the applicable Chinese securities laws. (Id. at 12.) Plaintiffs also state Defendants’

statement in its 2022 Annual Report that Futu was taking “rectification measures” to comply with

the Chinese securities laws was false “because the only possible ‘rectification measure’ was to

apply for the required Chinese brokerage license, which Defendants still did not do.” (Id. at 12.)

Additionally, Plaintiffs argue Defendants never disclosed the PRC Securities Law explicitly

required a license to operate in China but rather falsely stated in its disclosures that the license was

not required. (Id. at 15.)

In reply, Defendants argue, among other things: (1) Plaintiffs’ opposition hinges on their

mischaracterization of Article 2 of the 2020 amendment to the PRC Securities Law, which

Plaintiffs assert made clear that Futu was “explicitly required” to obtain a license, but Defendants

state this amendment as “Article 2 has nothing to do with the licensing requirement[,]” nor does it

state the PRC Securities Law applies to online brokerage companies like Futu; (2) Plaintiffs have

not identified any “unequivocal official pronouncement prohibiting” Futu’s alleged misconduct,

and at no point did regulators claim Futu violated the 2020 amendment to the PRC Securities Law;

(3) Plaintiffs’ reliance on unnamed sources in Wall Street Journal and Reuters articles can only be

used to satisfy the PSLRA’s pleading requirements where “the complaint otherwise fully describes

the foundation or basis of the confidential witness’s knowledge, including the position(s) held, the

proximity to the offending conduct, and the relevant time frame,” which the articles here do not

satisfy; (4) “Futu had no duty to disclose uncharged, unadjudicated wrongdoing” and (5)

Defendants’ statements about Futu’s growth prospects in China and the impact of market rumors

regarding increased regulation “are nonactionable opinions and puffery” and “[c]ritically,

Plaintiffs have still not pointed to a single report or other information to support the suggestion

that Futu ‘subjectively disbelieved’ its opinion or otherwise ‘lacked a reasonable basis for their

expressed belief’ in 2020 that growth prospects in [] China were ‘very strong.’” (ECF No. 42 at

6−12 (citations omitted).)

“The private right of action under Section 10(b) and Rule 10b–5 . . . creates liability for

false or misleading statements or omissions of material fact that affect trading on the secondary

market.” In re Burlington, 114 F.3d at 1417. To state a claim for securities fraud pursuant to

Section 10(b) of the Exchange Act, “plaintiffs must allege (1) a material misrepresentation or

omission, (2) scienter, (3) a connection between the misrepresentation or omission and the

purchase or sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic

loss, and (6) loss causation.” Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014)

(citations omitted). “To prevail on a § 10(b) claim, a plaintiff must show that the defendant made

a misleading statement or omission as to a material fact.” Howard v. Arconic Inc., 395 F. Supp. 3d

516, 537 (W.D. Pa. 2019) (citing Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011)).

“[A] fact or omission is material only if ‘there is a substantial likelihood that it would have been

viewed by the reasonable investor as having significantly altered the “total mix” of information’

available to the investor.” In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir. 2002) (quoting

Levinson, 485 U.S. at 231–32). “[W]hen a stock is traded in an efficient market, the materiality of

disclosed information may be measured post hoc by looking to the movement, in the period

immediately following disclosure, of the price of the firm’s stock.” Oran v. Stafford, 226 F.3d 275,

282 (3d Cir. 2000). “Because in an efficient market ‘the concept of materiality translates into

information that alters the price of the firm’s stock,’ if a company’s disclosure of information has

no effect on stock prices, ‘it follows that the information disclosed . . . was immaterial as a matter

of law.’” Id. (quoting Burlington, 114 F.3d at 1425). However, “vague and general statements of

optimism ‘constitute no more than “puffery” and are understood by reasonable investors as such.’”

In re Advanta Corp. Sec. Litig., 180 F.3d 525, 538 (3d Cir. 1999) (quoting Burlington Coat

Factory, 114 F.3d at 1428 n.14)). “A statement is considered puffery only when it is immaterial.”

Enzymotec, 2015 WL 8784065, at *14. An opinion “is misleading if it: (i) was not sincerely

believed when made; (ii) contains an expressly embedded, untrue factual assertion; or (iii)

reasonably implies untrue facts and omits appropriate qualifying language.” City of Warren Police

& Fire Ret. Sys. v. Prudential Fin., Inc., 70 F.4th 668, 686 (3d Cir. 2023).

Likewise, to state a claim for securities fraud under Rule 10b–5, a plaintiff “must ‘allege

defendants made a misstatement or an omission of material fact with scienter in connection with

the purchase or the sale of a security upon which plaintiffs reasonably relied and plaintiff’s [sic]

reliance was the proximate cause of their injury.’” Avaya, 564 F.3d at 251 (quoting Winer Family

Tr. v. Queen, 503 F.3d 319, 326 (3d Cir. 2007)). However, “Section 10(b) and Rule 10b–5 ‘do not

create an affirmative duty to disclose any and all material information.’” Edinburgh Council, 754

F.3d at 174 (quoting Matrixx Initiatives, 563 U.S. at 44). “Disclosure is required . . . only when

necessary ‘to make . . . statements made, in the light of the circumstances under which they were

made, not misleading.’” Id. (alterations in original) (quoting Matrixx Initiatives, 563 U.S. at 44).

“Silence, absent a duty to disclose, is not misleading under Rule 10b–5.” Id. (quoting Basic Inc. v.

Levinson, 485 U.S. 224, 239 n.17 (1988)).

To satisfy the heightened pleading standard in a securities-fraud case, “media sources must

be sufficiently detailed to indicate [] their reliability and be based on an independent investigative

effort.” In re Mylan N.V. Sec. Litig., Civ. A. No. 20-00955, 2023 WL 3539371, at *6 (W.D. Pa.

May 18, 2023) (alteration in original) (quoting In re Loewen Grp. Inc. Sec. Litig., Civ. A. No.

98-06740, 2004 WL 1853137, at *6 (E.D. Pa. Aug. 18, 2004)); see In re Optionable Sec. Litig.,

577 F. Supp. 2d 681, 690 (S.D.N.Y. 2008) (“[N]ewspaper articles should be credited only to the

extent that other factual allegations would be—if they are sufficiently particular and detailed to

indicate their reliability. Conclusory allegations of wrongdoing are no more sufficient if they come

from a newspaper article than from plaintiff's counsel.” (citation and internal quotation marks

omitted)). Generally, when considering confidential witness allegations, it is proper to “evaluat[e]

the ‘detail provided by the confidential sources, the sources’ basis of knowledge, the reliability of

the sources, the corroborative nature of other facts alleged, including from other sources, the

coherence and plausibility of the allegations, and similar indicia.’” Avaya, 564 F.3d at 263 (quoting

Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 147 (3d Cir. 2004)).

1. The Alleged False and Misleading Purported Compliance

Statements

Here, with respect to the Purported Compliance Statements, the Court finds Plaintiffs have

not adequately alleged that the Purported Compliance Statements were material misstatements or

omissions because Plaintiffs have not alleged with sufficient particularity how Defendants’

statements—regarding their then-current beliefs that they were in compliance with the PRC

Securities Law and related regulations and that they did not need a brokerage license in China—

were false or otherwise misleading at the time they were made. Plaintiffs do not allege any internal

and/or contradictory information undercutting Futu’s belief that it was compliant with the PRC

Securities law or did not need a license at the time the Purported Compliance Statements were

made, which belief was supported by advice of Futu’s legal counsel. Plaintiffs also have not

adequately alleged facts showing this opinion “(i) was not sincerely believed when made; (ii)

contains an expressly embedded, untrue factual assertion; or (iii) reasonably implies untrue facts

and omits appropriate qualifying language.” City of Warren Police, 70 F.4th at 686.

Plaintiffs argue Defendants “never disclosed that [the] PRC Securities Law explicitly

required the license to operate in China” (ECF No. 39 at 15), but do not point to anything showing

Defendant had the duty to disclose this. Additionally, as Defendants note, Article 2 of the 2020

amendment to the PRC Securities Law does not explicitly state a license is required; indeed, it

does not relate to licensing more generally but rather states in relevant part, “Where the issuance

and transactions of securities outside the territory of [China] have disrupted the market order. . .

and damaged the legitimate rights and interests of investors within the territory, such activities

shall be handled and investigated for legal responsibility in accordance with the relevant provisions

of this Law.” (ECF No. 37-3 at 4.) Plaintiffs have not alleged any facts supporting that Futu

disrupted the market order or damaged the rights and interests of investors in China, nor do they

allege that the CSRC (or anyone else) ever even stated Futu violated this amendment. Indeed, the

Amended Complaint itself notes Futu stated in its December 17, 2021 press release that “[t]o date,

[Futu] has not received (nor is it aware of) any notice, guidance or order from any PRC

regulatory authorities which is expected to have a material adverse impact on its business

operation or financial conditions.” (ECF No. 36 ¶ 55.) Plaintiffs also do not allege non-

conclusory facts showing the PRC Securities Law “explicitly required” Futu to obtain a license.

In other words, Plaintiffs have not sufficiently alleged facts showing Futu gave investors

unqualified false assurances that it was in compliance with the PRC Securities Law or that a license

was not required for Futu (as compared to any other similar businesses). Rather, the allegations

support that Defendants (1) disclosed the pertinent regulations, i.e., the PRC Securities Law and

related Chinese regulations; (2) explicitly disclosed the fact that Futu did not hold a brokerage

license for providing securities brokerage business in China; (3) disclosed Futu’s belief that it did

not need such a license, which belief was supported by legal advice from its counsel stating it did

not need such a license; (4) despite this belief, disclosed the uncertainties surrounding the PRC

Securities Law and related regulations; and (5) disclosed the risks that the Chinese regulatory

authorities could find Futu non-compliant with the Chinese securities laws and the potential

consequences if that were to happen. Indeed, as the Amended Complaint alleges, Defendants

explicitly disclosed in its 2019, 2020, and 2021 Annual Reports: “We do not hold any license or

permit for providing securities brokerage business in China” and “Although we do not believe

we engage in securities brokerage business in China, there remain uncertainties to the

interpretation and implementation of relevant PRC laws and regulations.” (See ECF No. 37-3

at 13; ECF No. 37-14 at 17; ECF No. 37-15 at 22.) Defendants likewise disclosed in its 2022

Annual Report: “We do not hold any license or permit for providing securities brokerage

business in China” and “We have taken and may continue to take rectification measures based on

our communication with or the requirements from the CSRC[,]” but “[i]f the CSRC is not satisfied

with our rectification measures or the CSRC imposes other further regulatory actions or

penalties on us, our business and results of operations may be materially and adversely

affected.” (ECF No. 37-4 at 29.) Defendants also repeatedly cautioned: “We cannot assure you

that our current operational model . . . will not be deemed as operating securities brokerage

business in China” and disclosed the potential consequences “including fines, suspension of parts

or all of our operations in the PRC, and temporary suspension or removal of our websites and

mobile application in China” if the relevant regulators deemed Futu’s activities as the “provision

of securities brokerage services, investment consulting services and stock options brokerage

business in China[.]” (ECF No. 37-3 at 13; ECF No. 37-14 at 17; ECF No. 37-15 at 22.)

Additionally, while Plaintiff alleges Futu’s statement in its 2022 Annual Report that it was taking

“rectification measures” to comply with the Chinese securities laws was false, this allegation relies

on an assumption that the only rectification measure for Futu was to apply for and obtain the

required Chinese brokerage license, which may not necessarily have been the case, depending on

additional facts not pled in the FAC.

2. The Alleged False and Misleading Regulatory Focus

Statements

With respect to the Regulatory Focus Statements, the Court likewise finds Plaintiffs have

not adequately alleged that these were material misstatements or omissions because they have not

alleged with sufficient particularity how Defendants’ statements about monitoring regulatory

developments and cooperating with, and maintaining active communications with, PRC regulatory

authorities were false. For example, Plaintiffs have not alleged that Defendants did not cooperate

or regularly communicate with PRC regulatory authorities or that Defendants did not monitor

regulatory developments. Plaintiffs have not otherwise alleged with particularity how these

statements were false or misleading.

3. The Alleged Downplayed Legal Impact Statements

With respect to the Downplayed Legal Impact Statements, the Court similarly finds

Plaintiffs have not adequately alleged that these were material misstatements or omissions because

they have not alleged with sufficient particularity how Defendants’ statements about the potential

legal impact of the PRC Securities Law and related regulations on Futu’s business operations in

China were false or otherwise misleading at the time they were made. While Plaintiffs highlight

certain statements Defendants made including “we think the growth prospects in mainland [China]

are very strong,” and the situation is “manageable” and “within our control,” these selected

statements, when read in context and absent other facts not currently present in the FAC, do not

appear to be false or misleading at the time they were made. For example, Plaintiffs do not allege

that Defendants’ growth prospects in China were not strong at the time that statement was made;

rather, they appear to be relying on the assumption that this statement must not have been true

because Futu was allegedly operating illegally as a securities brokerage in China without the

required license. However, this is not sufficient to meet the particularity standard for securities

fraud as it relates to these statements.

Accordingly, the Court finds the Amended Complaint fails to satisfy the heightened

pleading requirements of Rule 9(b) and the PSLRA because, even accepting the Amended

Complaint’s factual allegations as true, it does not sufficiently allege with the requisite

particularity a material misrepresentation or omission by Defendants. The Amended Complaint

does not allege sufficient facts showing how Defendants’ Purported Compliance Statements,

Regulatory Focus Statements, and Downplayed Legal Impact Statements were false at the time

they were made, as opposed to in hindsight or otherwise. “To be actionable, a statement or

omission must have been misleading at the time it was made; liability cannot be imposed on the

basis of subsequent events.” Keystone Assocs. LLC v. Barclays Bank PLC, Civ. A. No. 19-00796,

2020 WL 109008, at *3 (D. Del. Jan. 9, 2020) (quoting In re NAHC, Inc. Sec. Litig, 306 F.3d 1314,

1330 (3d Cir. 2002)). Further, Plaintiffs’ claim is essentially that Defendants misled investors to

believe Futu was in compliance with the applicable PRC Securities Law and related regulations in

when in fact it was allegedly illegally operating a securities business in China without a license,

and Defendants simultaneously stated they did not believe Futu was engaged in securities

brokerage business in China and therefore did not need a license, based on advice from Futu’s

legal counsel. But despite Futu’s beliefs, the Amended Complaint also alleges Futu explicitly

disclosed that uncertainties remained regarding how the Chinese securities laws and regulations

would be interpreted or applied as to Futu and disclosed the associated risks that Futu could be

deemed to be in non-compliance with those laws and the consequences that would result if that

occurred. See In re Amarin Corp. PLC Sec. Litig., Civ. A. No. 21-02071, 2022 WL 2128560, at

*3 (3d Cir. June 14, 2022) (affirming dismissal of a securities litigation complaint, agreeing with

the district court that the complaint failed to adequately allege a materially false or misleading

statement where the alleged statements were statements of opinion and did not lack a reasonable

basis; and further finding plaintiffs’ theory of omission liability unpersuasive given the defendants’

contemporaneous disclosures, noting “the defendants ‘warned of the exact risk [the] [p]laintiffs

argue they failed to disclose’” in their annual SEC filings (alterations in original)); cf. Rubinstein

v. Credit Suisse Grp. AG, 457 F. Supp. 3d 289, 296 (S.D.N.Y. 2020) (“A Section 11 [of the

Securities Act of 1933] claim fails as a matter of law when a registration statement ‘warns of the

exact risk that later materialized.’” (quoting In re ProShares Tr. Sec. Litig., 728 F.3d 96, 102 (2d

Cir. 2013))).

Additionally, Plaintiffs have not adequately alleged that Defendants had any duty to

disclose uncharged, unadjudicated wrongdoing or any duty to generally disclose the PRC

Securities Law’s license requirement. See Menaldi v. Och-Ziff Cap. Mgmt. Grp. LLC, 164 F. Supp.

3d 568, 580 (S.D.N.Y. 2016) (“Corporations do not, as a general matter, have a duty ‘to disclose

uncharged, unadjudicated wrongdoing.’” (quoting Pontiac Policemen’s & Firemen’s Ret. Sys. v.

UBS AG, 752 F.3d 173, 184 (2d Cir. 2014))).

Therefore, Defendants’ Motion to Dismiss Count I of the Amended Complaint is

GRANTED. Because the Court finds the Amended Complaint does not sufficiently allege with

particularity a material misrepresentation or omission made by Defendants, it concludes that

further analysis of the Amended Complaint is unnecessary at this time. See Osio v. DeMane, Civ.

A. No. 05-02283, 2006 WL 2129460, at *12 (D.N.J. June 20, 2006) (noting “the Court need not

address the remaining elements of a claim under § 10(b) or Rule 10b-5” because plaintiffs did not

sufficiently plead an omission of material fact).

B. Defendants’ Motion to Dismiss Plaintiffs’ Section 20(a) Claim Against the

Individual Defendants (Count II of the FAC)

Section 20(a) provides:

Every person who, directly or indirectly, controls any person liable

under any provision of this chapter or of any rule or regulation

thereunder shall also be liable jointly and severally with and to the

same extent as such controlled person to any person to whom such

controlled person is liable . . . unless the controlling person acted in

good faith and did not directly or indirectly induce the act or acts

constituting the violation or cause of action.

15 U.S.C. § 78t(a). Liability under Section 20(a) “is derivative of an underlying violation of

Section 10(b) by the controlled person.” Rahman, 736 F.3d at 247 (quoting Avaya, 564 F.3d at

252). “Thus, for a controlling person to be liable, the person over whom control was exercised

must have committed a primary violation of the securities laws.” In re Intelligroup Sec. Litig., 527

F. Supp. 2d 262, 280 (D.N.J. 2007) (citations omitted).

Here, because the Court found the Amended Complaint fails to state a claim under Section

10(b), and liability under Section 20(a) is derivative of an underlying Section 10(b) violation, the

Court finds the Amended Complaint also fails to state a claim under Section 20(a) against the

Individual Defendants. See Biondolillo v. Roche Holding AG, Civ. A. No. 17-04056, 2019 WL

1468140, at *4 (D.N.J. Apr. 3, 2019) (“Because the Second Amended Complaint fails to state a

claim under Section 10(b), it also fails to state a claim under Sections 20(a) and 20A.”).

Therefore, Defendants’ Motion to Dismiss Count II of the Amended Complaint is

GRANTED.

C. Leave to Amend

Defendants request Plaintiffs’ Amended Complaint be dismissed with prejudice. (ECF No.

37-1 at 5, 40.) However, the Federal Rules of Civil Procedure generally require the Court to “freely

give leave [to amend] when justice so requires.” Fed. R. Civ. P. 15. “In the Third Circuit, plaintiffs

whose complaints fail to state a cause of action are entitled to amend their complaint unless doing

so would be inequitable or futile.” Lovallo, 2015 WL 7300492, at *14 (citing Fletcher-Harlee

Corp. v. Pote Concrete Contractors, Inc., 482 F.3d 247, 252 (3d Cir. 2007)).

Here, allowing Plaintiffs to amend would not be futile as they could provide additional

factual content to attempt to cure the deficiencies in the FAC. See Munenzon v. Peter Advisors,

LLC, 553 F. Supp. 3d 187, 210 (D.N.J. 2021); see also United States ex rel. Petratos v. Genentech,

Inc., Civ. A. No. 11-03691, 2014 WL 7331945, at *2 (D.N.J. Dec. 18, 2014) (stating that “within

the Third Circuit, even when a complaint is vulnerable to Rule 12(b)(6) dismissal, the district court

should allow the party a curative amendment, unless the amendment would be futile or

inequitable”).

Therefore, the Court denies Defendants’ request to dismiss the Amended Complaint with

prejudice and grants Plaintiffs leave to file a second amended complaint.

IV. CONCLUSION

For the reasons set forth above, Defendants’ Motions to Dismiss (ECF Nos. 37, 41, and

44) are GRANTED, and Plaintiffs’ Amended Complaint is DISMISSED WITHOUT

PREJUDICE. An appropriate Order follows.

Dated: September 25, 2024 /s/ Brian R. Martinotti

HON. BRIAN R. MARTINOTTI

UNITED STATES DISTRICT JUDGE