Monday, March 05, 2018

Class action alleging company falsified its address in SEC filings proceeds

By Joanne Cursinella, J.D.

A shareholder class action alleging that the defendants falsely stated that a financial company maintained its principal executive offices in the United States in order to satisfy the criteria for inclusion in the Russell 2000 Index, a small cap stock market index, so as to allow the firm to maintain its listing on the Nasdaq moves on (Desta v. Wins Finance Holdings, Inc., February 28, 2018, Snyder, C.).

Wins Finance Holdings, Inc. According to the complaint, Wins Finance Holdings, Inc. (Wins) is a Cayman Islands company with operations located primarily in Jinzhong City, Shanxi Province, and Beijing, China. The company principally provides financial guarantee, financial leasing, and financial advisory services to Chinese small and medium enterprises to which commercial banks in China have been reluctant to lend due to higher credit risks and lack of credit support. On October 28, 2015, Wins went public on the Nasdaq stock exchange via a reverse merger with Sino Mercury Acquisition Corp. Wins struggled to keep its Nasdaq listing due to lack of investor interest, the court noted, evidenced by the stock’s low trading volume and a scarcity of shareholders.

Allegedly in order to counter the risk of Nasdaq delisting for lack of shareholders, the defendants sought inclusion in The Russell 2000 Index (Index). Inclusion in the Index would guarantee Wins sufficient beneficial holders to comply with Nasdaq’s initial listing requirements of having 300 round lot holders and the continued listing requirement of having 300 public holders, the court noted.

U.S. address. From the date the company went public to February 22, 2016, the court noted, Wins reported in its SEC filings that its principal executive offices were located in China. But an address outside the U.S. would prohibit inclusion in the Index. On February 23, 2016, Wins represented in an SEC filing that its principal executive offices were located in New York City. Wins was subsequently included in the Index the stock’s trading volume “spiked,” the court said.

On December 12, 2016, Seeking Alpha published an article titled “Wins Finance and the Case of the Missing Headquarters,” which, the court said, called into question whether Wins actually had its principal executive offices located in the United States. On January 9, 2017, in a Form 6-K filed with the SEC, Wins changed the location of its principal executive offices back to an address in Beijing, but it remained on the Index and, allegedly, continued to benefit from artificial investor demand and continued trading at an inflated price this allowed.

On April 3, 2017, revisions to the criteria for inclusion in the Index prohibited Chinese companies from joining. The price of Wins stock declined. Later, Nasdaq delisted Wins’ stock for, among other things, potential misrepresentations and failure to satisfy the initial 300 round-lot holder requirement.

Class action continues. April 20, 2017, plaintiff Michael Desta commenced this putative class action alleging the Exchange Act violations against the company and its principals. The court examined the defendants’ motion to dismiss at issue here and, even under the heightened pleading standards of the PSLRA, determined that the pleadings were sufficient to be sustained on a preliminary motion.

The plaintiffs alleged that Wins filed 19 forms with the SEC from February 23, 2016 to January 6, 2017––each of them fraudulently designating the New York address as its principal executive offices––and that defendants Hao, Mu, and Zhao attested to the accuracy of these filings knowing they were false.

The plaintiffs based this claim on, among other things, statements disclosed in the Seeking Alpha article and independently verified information, the court said. Considering the specifics included in the complaint, the court concluded that the plaintiffs adequately alleged that the relevant SEC filings contained false statements regarding the location of Wins’ principal executive offices.

The court also found that the plaintiffs satisfied their pleading burden with respect to scienter. The facts alleged in the complaint support a strong inference that the defendants falsified the address of Wins’ principal executive offices in order to pave the way for the company’s inclusion in the Index.

The court also held that the plaintiffs’ allegations were sufficient to plead loss causation since the stock price declined soon after the Seeking Alpha article appeared. As for reliance, the court determined that the issue of whether the alleged fraud had an impact on Wins’ stock price is a factual question more appropriately decided on a motion for summary judgment.

The case is No. 2:17-cv-02983-CAS-AGR.

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