Kevin LaCroix has all the information on the first securities fraud lawsuit to be filed against Alibaba regarding its sale of ADS on the NYSE in September. For securities regulation professors, there are a few nice issues here.
Materiality. The complaint cites two separate "revelations" that appeared in the U.S. in the WSJ on the same day (January 29). One article reports that the company announced that it had come to an agreement with China's State Administration for Industry and Commerce to strengthen its websites ability to monitor unlawful activity. In addition, the article noted that the SAIC had met with Alibaba for the first time in July, two months prior to the IPO. This meeting was not mentioned in the registration materials. The other article reported disappointing revenue numbers and a decline in profits. That day, the share price drops about 7%. Which revelation caused the drop if we believe that a "market test" determines materiality? What about the "total mix" test? Would investors have wanted to know about the sit-down meeting? Aren't the disappointing numbers most likely non-actionable under a forward-looking safe harbor for any contrary statements in the registration materials?
The Difference Between Section 11 and 12 of the Securities Act and Section 10 of the Securities Exchange Act. The plaintiffs have only brought suit under Section 10, even though the false statements would be in the registration statement. Kevin hypothesizes that the plaintiffs can't meet the tracing requirements of the Securities Act, but a commenter also points out that those who purchased at the IPO or shortly thereafter bought at a purchase price lower than the market price now, even with the January 29 price drop, so no damages.
Fee-Shifting Provision. Alibaba has a fee-shifting provision in its (Grand Caymans) charter. Will the fee-shifting provision hold up in federal court under the Securities Exchange Act? Does federal securities law (specifically the PSLRA) pre-empt this provision? We shall see.
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