In re Montage Technology Group Limited Securities Litigation: Motion to Dismiss Denied In Case Alleging Undisclosed Related Party Dealings
In In re Montage Technology Group Limited Securities Litigation, 2015 BL 22394 (N.D. Cal. Jan. 29, 2015), Martin Graham, individually and on behalf of the class (collectively, “Plaintiffs”) filed suit against Montage Technology Group Limited (“Montage”) and individual defendants Yang, Tai, and Voll (collectively, “Defendants”) for securities purchased between September 25, 2013 and February 6, 2014. The United States District Court for the Northern District of California denied Defendants’ motion to dismiss Plaintiffs’ consolidated amended complaint (“Complaint”), holding Plaintiffs properly stated claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
According to the allegations in the Complaint, Plaintiffs asserted that Defendants committed fraud by failing to disclose in their SEC filings that dealings with LQW were related party transactions. Dealings with LQW accounted for between 50 and 71 percent of Montage’s revenue. LQW was owned and controlled by Shanghai Montage Microelectronics Co. Ltd. (“SMMT”), an undisclosed affiliate of Montage.
The court concluded that the Defendants “essentially concede that LQW was a related party prior to July of 2012, when Lei Wu - an officer of Montage - was a majority owner of SMMT.” Thereafter, while the connection was “somewhat more attenuated” the alleged facts nonetheless gave rise “to the plausibility of a continued close relationship.”
For a plaintiff to adequately assert a claim under § 10(b) and Rule 10b-5, the plaintiff must allege facts that show (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.
The court considered whether the complaint sufficiently alleged a misleading statement or omission, causation and scienter. With respect to the misleading statement, the court reasoned that without knowledge of the relationship between Montage and LQW, investors were unaware that most of Montage’s revenue was generated through related party transactions. This created a substantial likelihood that a reasonable investor would find the omission significantly altered the “total mix of information.”
Scienter may be shown with particularized facts indicating motive and opportunity to commit fraud. The court found that the complaint sufficiently alleged a strong inference that Defendants knew, or were deliberately reckless in not knowing, that the SEC filings were false or misleading. Montage and SMMT had a close relationship, the companies shared an office and phone number, and employees had knowledge that a relationship existed between the companies. As a result, the court concluded that “[t]hese facts, taken together, raise a ‘strong inference’ that the defendants were aware of facts that made their SEC filings false or misleading."
The court also found Plaintiffs properly alleged loss causation through allegations that (1) Montage’s omission of related party transactions led to inflated stock prices, (2) the market became aware of fraud after release of the Gravity Report, and (3) the price of Montage’s stock fell more than 25% in the two days following the report’s release.
Finally, Plaintiffs alleged that the individual defendants named were officers of Montage and those officers signed the allegedly fraudulent SEC filings at issue. The court held this was sufficient to state a claim for control person liability in violation of § 20(a).
Accordingly, the court denied Defendants’ motion to dismiss.
The primary materials for the post are available on the DU Corporate Governance Website.