Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.

20–3074

Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.

In the

United States Court of Appeals

FOR THE SECOND CIRCUIT

AUGUST TERM 2020

No. 20-3074

ALTIMEO ASSET MANAGEMENT AND ODS CAPITAL LLC,

INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,

Plaintiffs-Appellants,

v.

QIHOO 360 TECHNOLOGY CO. LTD., ERIC X. CHEN,

Defendants-Appellees,

HONYI ZHOU, XIANGDONG QI,

Defendants. *

On Appeal from the United States District Court

for the Southern District of New York

ARGUED: JUNE 3, 2021

DECIDED: NOVEMBER 24, 2021

Before: CALABRESI, POOLER, and MENASHI, Circuit Judges.

* The Clerk of Court is directed to amend the caption as set forth above.

Plaintiffs-Appellants Altimeo Asset Management and ODS

Capital LLC brought this putative class action on behalf of investors

who traded Qihoo 360 Technology securities between December 18,

2015, and July 15, 2016. The proxy materials given to the investors

explained that the company was being taken private, that there were

no “current plans, proposals or negotiations” for an “extraordinary

corporate transaction,” and that in the future, the company “may

propose or develop plans and proposals” to relist. The investors

agreed to sell their securities, and sixteen months after the company

was taken private, it was announced that it would be relisted in the

Chinese public market. The investors sued Qihoo 360 Technology Co.

Ltd. and its controlling officers, alleging that the defendants-appellees

violated the Exchange Act by, among other things, deceiving

investors about the plan to relist the company. The district court

dismissed the complaint, holding that the investors failed adequately

to allege a material misstatement or omission of fact. Because the

allegations in the complaint were sufficient to survive a motion to

dismiss on that ground, we vacate the dismissal and remand to the

district court for further proceedings.

JEREMY A. LIEBERMAN (Michael Grunfeld, on the brief),

Pomerantz LLP, New York, NY, for Plaintiffs-Appellants.

DAVID KISTENBROKER (Joni Jacobsen, Angela Liu, Brian

Raphel, on the brief), Dechert LLP, Chicago, IL, for

Defendants-Appellees.

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20–3074

Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd.

MENASHI, Circuit Judge:

In this case, we must decide whether the appellants,

representing a putative class of investors, plausibly alleged a

misstatement or omission of material fact sufficient to state a claim for

securities fraud and therefore to survive a motion to dismiss. The

appellants claim that the appellees represented to shareholders that

there were no plans to relist the company following a shareholder

buyout, when in fact the company had such a plan at the time of the

buyout. Usually, to survive a motion to dismiss a complaint need only

plead “enough facts to state a claim to relief that is plausible on its

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). However,

“[f]or complaints alleging securities fraud, we apply heightened

pleading requirements imposed by Federal Rule [of Civil Procedure]

9(b) and the [Private Securities Litigation Reform Act].” In re

Synchrony Fin. Sec. Litig., 988 F.3d 157, 166 (2d Cir. 2021). The district

court considered the sources and contents of the pleaded facts, and it

held that the appellants’ complaint did not meet those requirements.

We disagree. We hold that the appellants adequately alleged a

misstatement or omission of material fact. In the complaint, the

appellants included facts from which we can infer that, in order for

the company to have been relisted when it was, the appellees must

have been planning to relist at the time of the shareholder vote. The

appellants also included references to news articles indicating that,

before the shareholder vote, the appellees were already planning to

relist the company. We therefore vacate the district court’s dismissal

of the appellants’ claim and remand for further proceedings.

BACKGROUND

“We review a district court’s grant of a motion to dismiss de

novo, accepting as true all factual claims in the complaint and drawing

all reasonable inferences in the plaintiff’s favor.” Henry v. County of

Nassau, 6 F.4th 324, 328 (2d Cir. 2021) (internal quotation marks

omitted). We therefore rely on the facts as alleged in the complaint in

deciding this appeal.

I

Appellee Qihoo 360 Technology Co. Ltd. (“Qihoo”) is an

internet company, incorporated under the laws of the Cayman

Islands and headquartered in Beijing. It was founded by Hongyi

Zhou and Xiangdong Qi; Zhou served as the chairman and chief

executive officer of Qihoo, while Qi served as its president and a

director. 1 In 2011, Qihoo listed its American depository shares on the

New York Stock Exchange. Zhou and Qi owned Qihoo securities

through their holding vehicles Global Village Associates Limited and

Young Vision Group Limited, respectively.

In May 2015, Zhou discussed with two investment funds the

possibility of taking Qihoo private. He also discussed the possibility

with Qi. On June 17, Zhou—along with four investment funds, Global

Village, Young Vision, and other investors (the “Buyer Group”)—

provided Qihoo’s board with a proposal to acquire all outstanding

shares not owned by the board (the “Merger”). The proposal

prompted the board to form a Special Committee chaired by director

Eric Chen, who is also an appellee in this case. The Special Committee

retained J.P. Morgan Securities (Asia Pacific) Limited to evaluate the

1The complaint named Zhou and Qi as defendants, but they were never

successfully served.

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proposal. Ultimately, J.P. Morgan gave the Special Committee its

opinion that the proposal was fair, and in December 2015 the Special

Committee “expressly adopted” J.P. Morgan’s “analyses and

opinion.” J. App’x 403, 405. The Special Committee and the board

approved the Merger, and the board recommended that the

shareholders approve it as well. On December 18, 2015, Qihoo

executed the Merger with the Buyer Group.

The shareholders still had to vote on the Merger for it to be

consummated. In anticipation of the shareholder vote on the Merger,

Qihoo published proxy statements, amended three times

(collectively, the “Proxy Materials”). The Proxy Materials stated that

“[u]pon the completion of the Merger, the Surviving Company will

become a private company beneficially owned solely by the Buyer

Group.” Id. at 754. The documents also stated that, “except as set forth

in this proxy statement, the Buyer Group does not have any current

plans, proposals or negotiations that relate to or would result in an

extraordinary corporate transaction involving the Company’s

corporate structure, business, or management, such as a merger,

reorganization, liquidation, relocation of any material operations, or

sale or transfer of a material amount of the Company’s assets.” Id. at

758. The Proxy Materials further stated that, “subsequent to the

consummation of the Merger, the Surviving Company’s management

and Board … may propose or develop plans and proposals, …

including the possibility of relisting the Surviving Company or a

substantial part of its business on another internationally recognized

stock exchange.” Id. The Merger was approved with 99.8 percent of

the votes cast at the shareholder meeting, and it was closed on July

15, 2016. The outstanding shares were purchased for $9.4 billion.

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After the Merger, Qihoo spun off its main businesses into 360

Technology Co. Ltd. On November 2, 2017, SJEC—an elevator-

manufacturing company listed on the Shanghai Stock Exchange—

“announced that it would be conducting a backdoor listing,” that is,

a reverse merger, with 360 Technology Co. Ltd. Id. at 419. About four

months later, on February 28, 2018, the necessary asset restructuring

was completed and Qihoo shares effectively began trading on the

Shanghai Stock Exchange. By the end of the first trading day, Qihoo

had a market capitalization of $62 billion.

II

Altimeo Asset Management (“Altimeo”) is a portfolio

management company based in France. ODS Capital LLC (“ODS”) is

a Florida limited liability company with its primary office in Jupiter,

Florida. Both Altimeo and ODS, the appellants in this case, traded

Qihoo securities during the period from December 2015 to June 2016.

In August 2019, Altimeo and ODS, on behalf of themselves and

similarly situated plaintiffs, filed a putative class action complaint in

the U.S. District Court for the Central District of California. The

complaint alleged that Qihoo, Zhou, Qi, and Chen violated § 10(b),

§ 20(a), and § 20A of the Exchange Act, as well as SEC Rule 10b-5. The

complaint alleged that the Buyer Group had a plan to relist Qihoo in

the Chinese capital market at the time of the Merger and that the

financial projections the appellees provided to the Buyer Group

differed from the projections provided in the Proxy Materials.

Because the appellants did not know of the plan to relist or these more

optimistic projections, they sold their securities at “artificially

deflated prices.” J. App’x 500.

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To support its allegations, the complaint refers to several

sources. It refers to a confidential witness who “worked in Qihoo’s

Public Relations department” from 2014 to 2017 and “reported to a

senior editor in the department.” Id. at 435. Among other things, the

witness claims that, in mid-2015, the witness “attended a department

meeting where Defendant Qi directed the attendees that they needed

to keep a low profile concerning the relisting plan and should ‘not

release this information outside the company.’” Id. at 436. The

complaint also incorporates news articles in Chinese publications

from November and December 2015 in which the authors report that

the privatization plan Qihoo distributed to the Buyer Group included

plans to relist the company. And the complaint further alleges that

“[i]t typically takes companies at least a full year on the quickest

possible timeline, and usually longer, from the time they first start to

consider a backdoor listing until they reach agreement with a shell

company to conduct a reverse merger.” Id. at 422-23. 2 Moreover, the

complaint states that “Qihoo’s fundamental restructuring of its

businesses was particularly complex and would have required a

significant amount of time to complete following the Merger.”

J. App’x 424.

The case was transferred to the U.S. District Court for the

Southern District of New York on October 30, 2019. The appellees

2 The complaint lists eight distinct steps: “[h]iring a financial advisor (or

investment bank) and a legal advisor”; “[i]dentifying potential shell

companies”; “[r]eaching a preliminary agreement with a shell company”;

“[c]onducting auditing and compliance work”; “[b]oth sides to the

transaction performing due diligence on each other”; “[c]onducting

regulatory assessments”; “[n]egotiating the transaction terms”; and

“[c]onducting corporate restructurings.” J. App’x 423.

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filed a motion to dismiss for failure to state a claim under Federal Rule

of Civil Procedure 12(b)(6). The district court granted the motion,

holding that the complaint “does not adequately allege any material

misrepresentations or omissions by defendants.” Altimeo Asset Mgmt.

v. Qihoo 360 Tech. Co. Ltd., No. 19-CV-10067, 2020 WL 4734989, at *8

(S.D.N.Y. Aug. 14, 2020). In particular, the district court held that the

complaint did not adequately plead “that defendants, as of the

Merger, had in place a concrete plan to relist Qihoo” as opposed

merely “to envisioning a possible future relisting.” Id. at 17.

Altimeo and ODS now appeal.

DISCUSSION

We review the district court’s dismissal of a complaint de novo.

Synchrony Fin. Sec. Litig., 988 F.3d at 166. The appellants’ complaint

contains three counts. Count I alleges that the appellees are liable for

false or misleading statements in violation of § 10(b) of the Exchange

Act and SEC Rule 10b-5. Count II claims that Qihoo, Zhou, and Qi

traded Qihoo securities while in possession of insider information in

violation of § 20A of the Exchange Act. Finally, Count III asserts that

Zhou, Qi, and Chen violated § 20(a) of the Exchange Act as

controlling persons of Qihoo during the time Qihoo violated § 10(b).

The district court dismissed the complaint in its entirety. We address

each count in turn.

I

First, we consider the appellants’ claim under § 10(b) and Rule

10b-5. Section 10(b) provides that it is unlawful “[t]o use or employ,

in connection with the purchase or sale of any security registered on

a national securities exchange or any security not so registered, … any

manipulative or deceptive device.” 15 U.S.C. § 78j(b). Rule 10b-5

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implements that statute by prohibiting “mak[ing] any untrue

statement of a material fact or [omitting] to state a material fact

necessary in order to make the statements made, in the light of the

circumstances under which they were made, not misleading, … in

connection with the purchase or sale of any security.” 17 C.F.R.

§ 240.10b-5. The appellants allege that four groups of statements

violate those provisions: (1) “statements throughout the Proxy

Materials stating clearly that there were no plans in place for …

relisting Qihoo on a Chinese stock exchange”; (2) “statements

throughout the Proxy Materials stating clearly that there were no

alternatives to the Merger that would be more beneficial” to

shareholders; (3) “statements concerning the fairness of the Merger”;

and (4) statements “[c]oncerning the [r]easons for the Merger.”

J. App’x 448-49.

To state a claim for relief under § 10(b) and Rule 10b-5, “a

plaintiff must allege that the defendant (1) made misstatements or

omissions of material fact, (2) with scienter, (3) in connection with the

purchase or sale of securities, (4) upon which the plaintiff relied, and

(5) that the plaintiff’s reliance was the proximate cause of its injury.”

Setzer v. Omega Healthcare Invs., Inc., 968 F.3d 204, 212 (2d Cir. 2020)

(quoting ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d

Cir. 2007)). In addition, because such a claim sounds in fraud, the

plaintiff “must state with particularity the circumstances constituting

fraud.” Fed. R. Civ. P. 9(b); see also 15 U.S.C. § 78u-4(b)(1) (“[I]f an

allegation regarding the [misleading] statement or omission is made

on information and belief, the complaint shall state with particularity

all facts on which that belief is formed.”).

The district court held that the appellants failed adequately to

allege the first element of a Rule 10b-5 claim—specifically, the

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complaint “[did] not adequately allege any material

misrepresentations or omissions by defendants.” Altimeo Asset Mgmt.,

2020 WL 4734989, at *8. The district court considered the appellants’

allegation that, at the time the Proxy Materials were sent to

shareholders, “the Buyer Group already planned to relist Qihoo at a

far-higher valuation in China post-transaction.” Id. (internal

quotation marks omitted). But the district court disregarded the

confidential witness’s allegations as unreliable, and it found that the

news articles did not describe “a concrete plan to relist”—that is, the

articles did not provide the “terms, participants, profitability, or

mechanics” of the alleged plan. Id. at *16. The district court therefore

dismissed the appellants’ claim under § 10(b) and Rule 10b-5.

We disagree that the appellants failed adequately to allege any

material misrepresentations or omissions. Although pleading

standards are heightened for securities fraud claims, “we must be

careful not to mistake heightened pleading standards for impossible

ones.” Synchrony Fin. Sec. Litig., 988 F.3d at 161. “In considering a

motion to dismiss a [§] 10(b) action, we must accept all factual

allegations in the complaint as true and must consider the complaint

in its entirety.” Slayton v. Am. Express Co., 604 F.3d 758, 766 (2d Cir.

2010). We “draw all reasonable inferences in favor of the plaintiff,”

and “dismissal is appropriate only where appellants can prove no set

of facts consistent with the complaint that would entitle them to

relief.” Meyer v. JinkoSolar Holdings Co., 761 F.3d 245, 249 (2d Cir. 2014)

(alteration omitted).

The appellants adequately alleged misstatements and

omissions on the part of the appellees. The appellants allege in the

complaint that, according to “[a]n expert in Chinese and United States

M&A and capitals market transactions,” it “typically takes companies

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at least a full year on the quickest possible timeline, and usually

longer, from the time they first start to consider a backdoor listing

until they reach agreement with a shell company to conduct a reverse

merger.” J. App’x 422-23. The complaint goes on to list the multiple

steps required to perform a backdoor listing. See supra note 2.

Additionally, the appellants provide two news articles from 2015

which report that a privatization plan was provided to the Buyer

Group that involved relisting the company on the Chinese stock

market. J. App’x 422, 424. We can infer from these allegations, taken

together, that the statement in the Proxy Materials that “the Buyer

Group does not have any current plans” to relist Qihoo—as well as

its omission of any such plan—was misleading. Id. at 758; see also Fecht

v. Price Co., 70 F.3d 1078, 1083 (9th Cir. 1995) (“A plaintiff may …

satisfy Rule 9(b) with allegations of circumstantial evidence if the

circumstantial evidence alleged explains how and why the statement

was misleading when made.”). 3 The allegations create a plausible

inference that a concrete plan was in place at the time Qihoo issued

the Proxy Materials.

The alleged misstatements and omissions were also material. A

3The district court disregarded the statements attributed to the confidential

witness, finding that those statements bore “none of the indicia of reliability

that have led courts … to sustain [confidential witness] allegations as

worthy of crediting.” Altimeo Asset Mgmt., 2020 WL 4734989, at *14. Because

the other facts alleged in the complaint sufficiently plead material

misstatements and omissions, we need not consider whether the district

court’s treatment of the confidential witness’s statements was correct. See

Novaks v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000) (“[W]here plaintiffs rely on

confidential personal sources but also on other facts, they need not name

their sources as long as the latter facts provide an adequate basis for

believing that the defendants’ statements were false.”).

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statement is materially misleading when “the defendants’

representations, taken together and in context, would have misled a

reasonable investor.” Rombach v. Chang, 355 F.3d 164, 172 n.7 (2d Cir.

2004) (quoting I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936

F.2d 759, 761 (2d Cir. 1991)). Omissions are material when “there is a

substantial likelihood that the disclosure of the omitted fact would

have been viewed by the reasonable investor as having significantly

altered the total mix of information made available.” Matrixx

Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38 (2011) (internal quotation

marks omitted). In Basic Inc. v. Levinson, the Supreme Court

concluded that “materiality will depend at any given time upon a

balancing of both the indicated probability that the event will occur

and the anticipated magnitude of the event in light of the totality of

the company activity.” 485 U.S. 224, 238 (1998) (internal quotation

marks omitted).

For the purpose of surviving a motion to dismiss, the alleged

misstatements and omissions meet our standard for materiality.

“[B]ecause the materiality element presents a mixed question of law

and fact, it will rarely be dispositive in a motion to dismiss.” In re

Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir. 2010)

(internal quotation marks omitted); Ganino v. Citizens Utils. Co., 228

F.3d 154, 163 (2d Cir. 2000) (“We held that the materiality of merger

negotiations depends on the specific facts of each case.”). “[A]

complaint may not properly be dismissed … on the ground that the

alleged misstatements or omissions are not material unless they are

so obviously unimportant to a reasonable investor that reasonable

minds could not differ on the question of their importance.” Goldman

v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). In SEC v. Shapiro,

information concerning merger negotiations was material even when

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“negotiations had not jelled to the point where a merger was

probable.” 494 F.2d 1301, 1306-07 (2d Cir. 1974). Here, the appellants

allege that the relisting process would have similarly required

negotiations and “[r]eaching a preliminary agreement with a shell

company.” J. App’x 423. Because the relisting was announced a mere

sixteen months after the Merger, the appellants allege that these

negotiations were ongoing—or had already happened—at the time of

the shareholder vote. We do not find those alleged negotiations “so

obviously unimportant to a reasonable investor” as to allow the

dismissal of the appellants’ claims. Goldman, 754 F.2d at 1067.

In sum, “even securities plaintiffs need not prove their entire

case within the confines of the complaint.” Synchrony Fin. Sec. Litig.,

988 F.3d at 161. Regardless of whether the appellants ultimately prove

that there are material misstatements or omissions of fact, they have

alleged enough to survive a motion to dismiss on those grounds. 4

II

The appellants also allege violations of § 20(a) and § 20A of the

Exchange Act. The district court dismissed the appellants’ claims

under § 20(a) and § 20A because it held that the appellants did not

adequately allege an independent Exchange Act violation—here, the

§ 10(b) claim. Altimeo Asset Mgmt., 2020 WL 4734989, at *17.

4 The appellants also allege that the district court erred when it held that the

complaint’s “claims of material misrepresentations and omissions all turn

on” whether the “defendants, as of the Merger, had in place a concrete plan

to relist Qihoo.” Altimeo Asset Mgmt., 2020 WL 4734989, at *17. In the

appellants’ view, the appellees made material misstatements or omissions

regarding the fairness of the merger price or the reasons for the merger

independent of whether there was a plan to relist Qihoo. Appellants’ Br. 47-

52. Because we conclude the appellants plausibly alleged that there was a

relisting plan, we need not rely on this argument in this appeal.

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Section 20(a) “provides that individual executives, as

‘controlling person[s]’ of a company, are secondarily liable for their

company’s violations of the Exchange Act.” Employees’ Ret. Sys. v.

Blanford, 794 F.3d 297, 305 (2d Cir. 2015) (alteration in original)

(quoting 15 U.S.C. § 78t(a)). Section 20A “provides an express private

right of action for those who trade contemporaneously with an inside

trader.” Steginsky v. Xcelera Inc., 741 F.3d 365, 372 (2d Cir. 2014).

Actions under either section require an independent violation of the

Exchange Act. See Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.

1998) (“In order to establish a prima facie case of liability under § 20(a),

a plaintiff must show … a primary violation by a controlled person.”);

Jackson Nat’l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 704 (2d

Cir. 1994) (holding that a plaintiff, “in order to state a claim under

§ 20A, must plead as a predicate an independent violation of the”

Exchange Act).

As we have explained, the district court erred when it held that

the appellants failed adequately to allege a material misstatement or

omission. We therefore vacate the district court’s dismissal of the

§ 20(a) and § 20A claims as well.

CONCLUSION

Because the district court reached only the question of whether

the appellants adequately alleged a material misstatement or

omission, we leave all other aspects of the case to the district court to

consider in the first instance. We VACATE the district court’s

dismissal of the complaint and REMAND for further proceedings

consistent with this opinion.

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