As New York commercial practitioners will recall, the U.S. Supreme Court in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund held that state and federal courts have concurrent jurisdiction over class actions alleging violations of only the Securities Act of 1933 (the “1933 Act”) and, further, that defendants in such suits filed in state court cannot remove those actions to federal court to avoid state-court jurisdiction.[1]  Not surprisingly, this development has led to an increase in the filing of securities claims in state courts.

In the nearly two-and-a-half years since Cyan, New York courts—and the Commercial Division in particular—have asserted their role in securities litigation under the 1933 Act.  For example, as this blog previously covered here and here, Commercial Division justices have denied motions filed by defendants seeking to stay state-court actions pending resolution of later-filed federal securities actions.  Those decisions reasoned, inter alia, that after Cyan state courts are deemed fully capable of resolving securities matters on their own,[2] and that as a result, a plaintiff’s choice of a state forum should be honored.[3]

With these sorts of securities cases now winding their way through New York courts, the Appellate Division, First Department recently joined the chorus and issued its first post-Cyan ruling in Lyu v. Ruhnn Holdings Ltd.[4]  There, the appellate court reversed a decision by Commercial Division Justice Jennifer G. Schecter denying defendants’ motion to dismiss and dismissed the securities complaint in its entirety against the company, its underwriters, and the individual defendants.

Lyu involved a putative class action against Ruhnn Holdings Ltd., a company that facilitates brand marketing and promotional efforts within China’s e-commerce industry through social media influencers (also called “key opinion leaders” or “KOLs”).  Ruhnn provides facilitation services both for brands and stores that it owns—under its “full service model”—and for brands and stores owned by third-party customers—under its “platform model.” 

Plaintiff asserted claims under Sections 11 and 12(a)(2) of the 1933 Act based on a purported omission in offering materials used in connection with Ruhnn’s initial public offering (“IPO”).  Plaintiff, who had purchased shares traceable to the IPO, alleged that those offering materials failed to disclose certain changes to Ruhnn’s “full service” business model—specifically, that the company had in fact closed nearly 40% of its own stores before the IPO and that, on the date of the IPO, only 56 of its 91 stores remained open.  When Ruhnn made these disclosures months later, shares traded at 73% below the IPO price. 

Defendants moved to dismiss the 1933 Act claims, arguing inter alia that the alleged omission about store closures was immaterial because other disclosures in the offering materials described a strategic shift away from the full service model to the platform model as the company’s primary generator of revenue.  The lower court disagreed and denied the motion in part, reasoning that plaintiff had “plausibly alleged that a reasonable investor would care about Ruhnn’s significant store closures in deciding whether to invest.”[5] 

The First Department reversed and dismissed the complaint.  The court reasoned that, “[g]iven defendants’ disclosure that . . . Ruhnn was shifting to a ‘platform’ model for its online sales and away from the self-owned, ‘full service’ model,” the omission of data showing that there “had already been a reduction in the full service segment of the company did not ‘significantly alter[] the total mix of information made available’ to a reasonable investor.”[6]  The First Department was not persuaded that disclosure of the store closures would have provided a more accurate picture of the business, because “the full service sector’s revenue was not closely related to either the number of stores or the number of online influencers serving the segment.”[7]  Because the securities claims against the company were dismissed, the claims against the individuals under Section 15 of the 1933 Act also needed to be dismissed.

The First Department’s Lyu decision represents an important example of New York state courts asserting their serious and important role in securities cases filed in the post-Cyan era and dismissing claims that do not withstand close scrutiny.  It remains to be seen whether other New York decisions in this area result in similar pre-discovery dismissals or prove to be more favorable toward allowing these types of securities cases to proceed past the pleading phase.