Complete victory for X Financial in IPO-related litigation

On November 1, 2022, Justice Andrew Borrok of the Commercial Division of the New York County Supreme Court granted in full Davis Polk’s motion to dismiss a putative securities class action complaint filed against Davis Polk’s client X Financial, Inc., a leading online personal finance company in China. This dismissal – along with a March 13, 2022, dismissal of a substantially similar case filed in the Eastern District of New York (EDNY) – marks a complete victory for X Financial in all of the securities litigation that followed its September 2018 IPO.

Both the state and federal court cases were brought on behalf of a putative class of purchasers of X Financial’s American depositary shares (ADSs) and asserted claims under sections 11, 12, and 15 of the Securities Act. The federal action also included claims under sections 10 and 20 of the Exchange Act. Both cases alleged that X Financial’s IPO registration statement included misstatements and omissions pertaining to the health and outlook of several of the company’s business lines, and that the truth of those matters was disclosed in X Financial’s subsequent earnings releases and investor calls.

Based on arguments advanced by Davis Polk, both courts held that disclosures made by the company more than one year before either lawsuit was filed placed the plaintiffs on notice of their claims and therefore their Securities Act claims were barred by the one-year statute of limitations. As Judge Kiyo Mastumoto of the EDNY put it, those disclosures provided the “critical information” underlying each category of supposed misstatements or omissions such that “reasonably diligent investors” should have discovered the alleged securities violations. Both courts rejected the plaintiffs’ arguments that the disclosures in question were only partial and that a reasonable investor would not have been on notice of its claims until a subsequent earnings call months later.

With respect to the Exchange Act claims, Judge Matsumoto concluded that the complaint lacked adequate allegations of scienter because it failed to “specifically identify” any reports, statements, dates or time frames showing how or when any company executives received information supposedly contradicting their public statements. Among other things in this regard, the EDNY rejected multiple sets of confidential-witness allegations as lacking “any degree of specificity” that might have connected the witnesses’ reports to the purportedly conscious misbehavior or recklessness of any management-level defendants.

The Davis Polk team includes partner Brian S. Weinstein (who argued the motion in federal court) and counsel Jonathan K. Chang and Craig J. Bergman. Members of the team are based in the New York and Hong Kong offices.