The Second Circuit recently revived a putative securities class action against Alibaba Group Holding Ltd. and four of its top executives for alleged material misrepresentations in connection with the company’s $25 billion initial public offering in September 2014 – the largest in U.S. history. Chief Judge Colleen McMahon of the U.S. District Court for the Southern District of New York had dismissed the suit in June 2016, holding that the plaintiffs failed to state a claim under the Securities Exchange Act of 1934. In a summary order last week, the Second Circuit vacated and remanded, concluding that Judge McMahon misapplied Rule 12(b)(6) standards in dismissing the investors’ claims.

According to the complaint, high-level Chinese regulators summoned Alibaba executives to a secret meeting two months before the IPO in which they threatened to levy hefty daily fines if the e-commerce giant continued to host a marketplace for third parties to sell counterfeit goods. This information was not revealed until four months after the IPO, when China’s State Administration for Industry and Commerce (“SAIC”) published on its website a white paper about the “guidance” it had provided to Alibaba. Within two days of the publication of this information, Alibaba’s stock dropped 13 percent, erasing $33 billion in market capitalization.

The complaint alleged that the facts underlying the white paper were highly material to prospective investors and that they should have been, but were not, disclosed in Alibaba’s stock registration statements. The Second Circuit, in apparent agreement, noted that the information’s revelation likely would have had a multi-billion dollar negative effect on Alibaba’s IPO. Thus, “[a]ccepting Plaintiffs’ allegations as true,” the Second Circuit concluded that Alibaba “had a duty to disclose these facts, in a manner that accurately conveyed the seriousness of the problems Alibaba faced, so as not to render Defendants’ public disclosures ‘inaccurate, incomplete, or misleading.’”

The Second Circuit criticized the district court for reaching a contrary result, reasoning that Judge McMahon improperly discredited “significant allegations” upon which the plaintiffs’ claims relied, such as news reports about the secret meeting. According to the Second Circuit, Judge McMahon failed to construe the complaint’s allegations in the light most favorable to the plaintiffs and to draw all reasonable inferences in the plaintiffs’ favor, as Rule 12(b)(6) requires. Judge McMahon, for example, gave too much weight to Alibaba’s assertion that the white paper must have been “unauthorized” and untrustworthy because SAIC withdrew the paper within 12 hours; rather, under Rule 12(b)(6), the judge should have credited the plaintiffs’ “reasonable inference” that the withdrawal resulted from “Alibaba’s influence over Chinese regulators.”

The Second Circuit also concluded that the plaintiffs alleged “strong circumstantial evidence” that Alibaba acted with scienter in withholding information about its secret meeting with SAIC. The Court reasoned: “Considering the high-level nature of the meeting, the seniority of the attendees, its conduct in secret, and the huge potential impact of the SAIC’s threat made at the meeting on Alibaba and its imminent IPO, it is virtually inconceivable that this threat was not communicated to the senior level of Alibaba’s management.” Consequently, according to the Second Circuit, Alibaba’s failure to disclose the meeting concealed “true facts” about SAIC’s threat to the company.