A federal district court dismissed a class action complaint brought by investors against China’s largest insurance company and its officers and directors for violations of Section 10(b) of the Securities and Exchange Act. The lawsuit was brought on behalf of all investors who purchased the company’s shares on the New York Stock Exchange and the Hong Kong Stock Exchange (HKSE) during the class period. Plaintiffs alleged that the company failed to disclose in its prospectus either an ongoing Chinese government audit or the Securities and Exchange Commission’s investigation of the company’s predecessor for alleged accounting irregularities. Plaintiffs claimed that these non-disclosures artificially inflated the company’s stock and caused plaintiffs to suffer loss when the stock price dropped after the press released reports about the audit and investigation.
Defendants successfully moved to dismiss the complaint for failure to state a claim. The court ruled that in order to establish the loss causation element of their claim, plaintiffs were required to allege that the subject of the fraudulent statement caused the alleged loss “in the sense that the misstatement or omission concealed something from the market that, when disclosed or corrected, negatively affected the value of the security.” The court found that plaintiffs had not met this standard because the disclosure of the government audit and SEC investigation did not result in the losses that plaintiffs sought to recover. To the contrary, the court found that the defendant company’s stock price rose following disclosure of the Chinese government audit and dropped insignificantly after disclosure of the SEC investigation (and that plaintiffs had not claimed that this “minor price reduction” constituted their loss).
The court also granted defendants’ motion to dismiss for lack of subject matter jurisdiction the claims of foreign purchasers who acquired stock on the HKSE. The court ruled that subject matter jurisdiction did not exist because plaintiffs failed to show either that the defendants’ alleged activities in the United States directly caused losses to foreign purchasers or that defendants’ conduct outside the United States had a “substantial” impact within the United States. (In re China Life Securities Litig., No. 04-2112, 2008 WL 4066919 (S.D.N.Y. Sept. 3, 2008))