X Financial securities litigation victory

On March 13, 2022, Davis Polk secured dismissal of a federal securities class action arising out of the initial public offering of X Financial. The case is captioned Xiangdong Chen et al. v. X Financial et al., 1:19-CV-06908-KAM-SJB (E.D.N.Y.).

Founded in 2015, X Financial is a leading technology-driven personal finance company in China. Among other things, it facilitates loan transactions by operating an online platform that matches prospective borrowers with individual or institutional lenders. X Financial completed its initial public offering of American depositary shares in the United States in September 2018. The complaint, originally filed on December 9, 2019, and amended on July 13, 2020, alleged that the IPO offering materials, as well as post-offering statements by several X Financial executives, included misstatements and omissions pertaining to the health and outlook of the company’s “preferred loan” and “card loan” product lines, rising delinquency rates across the company’s borrower base, and the company’s ability to successfully identify and target “prime” borrowers. The putative lead plaintiff named as defendants X Financial itself, several individual directors/executives, the IPO underwriters, and the company’s U.S. representative for the IPO. It asserted claims under sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and sections 10(b) and 20(a) of the Securities and Exchange Act of 1934.

Davis Polk filed a motion to dismiss. It contended, among other things, that the Securities Act claims were barred by the applicable one-year statute of limitations, that the amended complaint failed to identify an actionable misstatement or omission in either the IPO offering materials or the company’s post-offering earnings disclosures and press interviews, and that the Exchange Act allegations failed to support a plausible inference of fraudulent scienter.

On December 9, 2021, Magistrate Judge Sanket J. Bulsara issued a report and recommendation recommending that the motion to dismiss be granted in its entirety. Following further briefing, Judge Matsumoto issued a memorandum and order on March 13, 2022, adopting the Magistrate Judge’s conclusions and dismissing plaintiff’s claims in full. As to the Securities Act claims, Judge Matsumoto held that X Financial’s earnings disclosures on November 19, 2018, provided the “critical information” underlying each category of supposed misstatements or omissions such that “reasonably diligent investors” should have discovered the alleged securities violations at issue more than one year before the plaintiff brought suit. In so holding, the Court rejected plaintiff’s contentions that the November 2018 disclosures could not have placed them on notice of their claims because they did not precipitate a stock price drop, were accompanied by purportedly reassuring words of comfort from company management, and failed to provide certain additional information about plaintiff’s claims supposedly revealed on subsequent earnings calls conducted months later. Regarding 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 timeframes showing how or when any company executives received information supposedly contradicting their public statements. Among other things in this regard, the Court rejected multiple sets of confidential-witness allegations as lacking “any degree of specificity” that might have connected the CWs’ reports to the purportedly conscious misbehavior or recklessness of any management-level defendants. It also declined to infer access to contradictory information from such defendants’ high-level corporate jobs, disagreeing with plaintiff’s argument that it was “virtually inconceivable” that these defendants did not receive later-revealed information inconsistent with the company’s prior public positions. The Court denied leave to replead the Securities Act claims but granted an opportunity to file a further amended complaint with respect to the Exchange Act claims within 30 days.

A substantially identical parallel class action, captioned In re X Financial Securities Litigation, Index No. 657033/2019, remains pending before Justice Andrew Borrok of the New York Supreme Court Commercial Division, with Davis Polk’s motion to dismiss yet to be adjudicated.

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.