New York Appellate Division Decides First Securities Act Case Since Cyan

On December 3, 2020, the New York State Appellate Division for the First Judicial Department dismissed an action alleging claims under the Securities Act of 1933 (the “Securities Act”) in Lyu v. Ruhnn Holdings Limited.[1]  This dismissal is the first occasion on which the New York Appellate Division has considered the merits of Securities Act claims after the Supreme Court’s landmark decision in Cyan v. Beaver County Employees Retirement Fund in 2018.[2]  Ruhnn, and its implications, are discussed further below.

Background

In Cyan, the Supreme Court held state courts have jurisdiction over claims brought under the Securities Act, prohibiting removal of these claims to federal court.  After Cyan, Securities Act defendants have had to endure duplicative litigation via parallel proceedings in state and federal court.[3]  Plaintiffs increasingly filed Securities Act lawsuits in state courts, which are generally considered to be more plaintiff-friendly because (1) published statistics suggest that in Securities Act cases, federal courts dismiss a higher percentage of cases than do state courts, [4] and (2) various state courts, including those within New York, have taken conflicting positions as to whether the Private Securities Litigation Reform Act’s automatic stay of discovery applies.[5]  New York, in particular, has experienced a high volume of Securities Act filings in its state courts.[6]

Lyu v. Ruhnn Holdings Limited

Ruhnn Holdings Limited (“Ruhnn”) is a Chinese company that provides e-commerce marketing services to social media influencers, often referred to as “key opinion leaders” or KOLs.  Ruhnn has two principal business models – a “full-service model” where Ruhnn sells products through online stores that Ruhnn owns and operates for KOLs, and a “platform model” through which Ruhnn provides services to KOLs in support of their sales on third-party online stores. 

On September 18, 2019, an investor who purchased Ruhnn’s American Depository Shares in connection with Ruhnn’s April 3, 2019 IPO filed a putative class action complaint against Ruhnn, certain individuals and underwriters in New York State Supreme Court alleging claims under Sections 11 and 12 of the Securities Act.  Specifically, the plaintiff claimed Ruhnn’s offering materials contained material misstatements or omissions regarding its intended shift from the full-service model to the platform model.  Ruhnn and the underwriter defendants moved to dismiss the complaint.   

In an April 22, 2020 decision,[7] the New York State Supreme Court denied the motion to dismiss, concluding that, notwithstanding its disclosed shift in business model to the platform model, reasonable investors “would care about Ruhnn’s significant store closures in deciding whether to invest.”  Ruhnn and the underwriter defendants appealed.

On December 3, 2020, the New York Appellate Division reversed the Supreme Court’s decision and dismissed the complaint in its entirety.  The Appellate Division held that the offering documents fully disclosed the shift from the “full-service” model to the “platform model” and as a result the “omission of data from the period immediately preceding the issuance of the final prospectus showing that there had already been a reduction in the full service segment of the company” did not alter the “total mix” of information available to reasonable investors. 

Implications

Ruhnn is the first New York Appellate court decision to weigh in on the substance of Securities Act claims since Cyan.  Notably, the Ruhnn court addressed the merits of the Section 11 suit before it and determined that the alleged omission did not alter the totality of the information available to investors in a material way.  While state courts are generally considered more favorable forums for plaintiffs seeking to bring Securities Act lawsuits, Ruhnn demonstrates that not all such claims will survive motions to dismiss.     

[1] No. 2020-02555, 2020 WL 7062118 (N.Y. App. Div. Dec. 3, 2020).

[2] 138 S. Ct. 1061 (2018).

[3] To avoid duplicative state and federal litigation, we advise corporations to adopt federal forum selection provisions in their bylaws.  See Seyfarth Shaw LLP, California Superior Courts Enforce Delaware Corporations’ Federal Forum Provision for Securities Act Lawsuits (Nov. 23, 2020), https://www.seyfarth.com/news-insights/california-superior-courts-enforce-delaware-corporations-federal-forum-provision-for-securities-act-lawsuits.html.

[4] See Cornerstone Research, Securities Class Action Filings 2019 Year in Review (2020), https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Year-in-Review; Cornerstone Research, Securities Class Action Filings 2020 Midyear Assessment (2020),  https://www.cornerstone.com/Publications/Reports/2020-Securities-Class-Action-Filings-2020-Midyear-Assessment.

[5] See Seyfarth Shaw LLP, California Superior Courts Enforce Delaware Corporations’ Federal Forum Provision for Securities Act Lawsuits (Nov. 23, 2020), https://www.seyfarth.com/news-insights/california-superior-courts-enforce-delaware-corporations-federal-forum-provision-for-securities-act-lawsuits.html.

[6] See Cornerstone Research, Securities Class Action Filings 2019 Year in Review (2020), https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Year-in-Review; Cornerstone Research, Securities Class Action Filings 2020 Midyear Assessment (2020),  https://www.cornerstone.com/Publications/Reports/2020-Securities-Class-Action-Filings-2020-Midyear-Assessment.

[7] Lyu v. RUHNN Holdings Ltd., No. 655420/2019, 2020 WL 1939668 (N.Y. Sup. Ct. Apr. 22, 2020).  The court granted the motion to dismiss as to the Section 12(a)(2) claim against Ruhnn, but otherwise denied it.