298772 - 10/29/2020 - appx - melissa pickett

20-3074-cv

United States Court of Appeals for the

Second Circuit

ALTIMEO ASSET MANAGEMENT, individually and on behalf of all others similarly situated, ODS CAPITAL LLC,

Plaintiffs-Appellants,

– V. –

QIHOO 360 TECHNOLOGY CO. LTD., HONGYI ZHOU, XIANGDONG QI, and ERIC X. CHEN,

Defendants-Appellees.

–––––––––––––––––––––––––––––– ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

BRIEF AND SPECIAL APPENDIX FOR PLAINTIFFS-APPELLANTS

JEREMY A. LIEBERMAN

MICHAEL GRUNFELD POMERANTZ LLP Attorneys for Plaintiffs-Appellants 600 Third Avenue New York, New York 10016 (212) 661-1100

Case 20-3074, Document 44, 11/23/2020, 2980439, Page1 of 115

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, Plaintiff-Appellant Altimeo Asset Management states that it does not have any parent corporation and that no publicly held corporation owns 10% or more of its stock.

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, Plaintiff-Appellant ODS Capital LLC states that it does not have any parent corporation and that no publicly held corporation owns 10% or more of its stock.


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TABLE OF CONTENTS

I. JURISDICTIONAL STATEMENT ............................................................... 1 II. ISSUES PRESENTED FOR REVIEW .......................................................... 1 III. STATEMENT OF THE CASE ...................................................................... 2 IV. STATEMENT OF FACTS ............................................................................. 5

A. The Buyer Group Planned All Along to Relist Qihoo in China After the Merger ............................................................................................ 6 1. News Articles Revealed the Relisting Plan .................................. 6 2. A Well-Placed Confidential Witness Attested to Defendant Qi’s

Knowledge of the Relisting Plan .................................................. 8 3. The Timeline of Qihoo’s Relisting is Consistent With the

Backdoor Listing Process ............................................................. 9 B. The Merger Price Was Unfair to Qihoo’s Shareholders .................... 10

1. Secret Marketing Materials Contained Better Financial Projections .................................................................................. 10

2. Qihoo’s Undisclosed Business Opportunities After the Merger 11 3. The Cayman Islands Appraisal Action Confirms the Unfairness

of the Merger Price ..................................................................... 12 C. Defendants’ False and Misleading Statements About the Merger ..... 13

1. Defendants Misrepresented the Buyer Group’s Plans for Qihoo After the Merger ......................................................................... 14

2. Defendants Falsely Described the Merger Price as “Fair” ......... 14 3. Defendants Misrepresented the Reasons Why They Described the

Merger as “Fair” ......................................................................... 15 D. Zhou and Qi Reaped Enormous Profits From the Merger ................. 16

V. SUMMARY OF THE ARGUMENT ........................................................... 17 VI. STANDARD OF REVIEW .......................................................................... 23 VII. ARGUMENT ................................................................................................ 23

A. THE DISTRICT COURT ERRED IN HOLDING THAT THE COMPLAINT FAILS TO PLEAD MATERIALLY FALSE AND


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MISLEADING STATEMENTS CONCERNING THE BUYER GROUP’S RELISTING PLAN .......................................................... 24 1. The District Court Incorrectly Held That Plaintiffs Were

Required to Plead a “Concrete and Definite” Relisting Plan ..... 26 a) Defendants’ Risk Language Does Not Protect Them From

Liability ............................................................................... 30 b) Defendants’ Risk Disclosure Itself Was False ................... 35 c) How to Interpret Defendants’ Statements is a Factual Issue

That Cannot be Decided at This Stage ............................... 35 2. The District Court Improperly Discounted Evidence of the Buyer

Group’s Relisting Plan................................................................ 39 a) The District Court Improperly Discounted Evidence in News

Articles ................................................................................ 40 b) The District Court Improperly Discounted CW1 ............... 43

B. THE DISTRICT COURT ERRED IN DISMISSING THE FAC’s CLAIMS CONCERNING DEFENDANTS’ OTHER MISSTATEMENTS FOR THE “SAME REASON” ........................ 47 1. Statements About the Fairness of the Merger Price ................... 48 2. Statements About the Reasons for the Merger ........................... 51

C. THE COMPLAINT ADEQUATELY PLEADS SCIENTER, RELIANCE, AND LOSS CAUSATION .......................................... 53 1. The Complaint Adequately Pleads Scienter ............................... 53

a) The Complaint Adequately Pleads Motive and Opportunity ............................................................................................. 54

b) The Complaint Adequately Pleads Defendants’ Conscious Misbehavior and Recklessness ........................................... 55

c) The Individual Defendants’ Roles Strongly Support Their Scienter ............................................................................... 56

2. The Complaint Adequately Pleads Reliance .............................. 57 3. The Complaint Adequately Pleads Loss Causation ................... 60

D. THE DISTRICT COURT ERRED IN DISMISSING PLAINTIFFS’ CLAIMS UNDER SECTIONS 20A AND 20(a) ............................... 61


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VIII. CONCLUSION ............................................................................................. 61


TABLE OF AUTHORITIES

Page(s)

Cases

Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) ................................................................................. 53

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) ............................................................................................ 59

Ark. Teacher Ret. Sys. v. Goldman Sachs Grp., Inc., 955 F.3d 254 (2d Cir. 2020) ......................................................................... 58, 59

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ............................................................................................ 23

Azar v. Blount Int’l, Inc., No. 16-cv-483-SI, 2017 WL 1055966 (D. Or. Mar. 20, 2017) ................................................... 49, 50

Basic Inc. v. Levinson, 485 U.S. 224 (1988) .....................................................................................passim

Baum v. Harman Int’l Indus., Inc., 408 F. Supp. 3d 70 (D. Conn. 2019) ................................................................... 49

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ............................................................................................ 23

Black v. Finantra Capital, 418 F.3d 203 (2d Cir. 2005) ............................................................................... 59

Bricklayers & Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd., 866 F. Supp. 2d 223 (S.D.N.Y. 2012) ................................................................ 48

Buxbaum v. Deutsche Bank, A.G., No. 98-cv-8460-JGK, 2000 WL 33912712 (S.D.N.Y. Mar. 6, 2000) ........................................ 24, 25, 26

Capital Real Estate Inv’rs Tax Exempt Fund Ltd. P’ship v. Schwartzberg, 929 F. Supp. 105 (S.D.N.Y. 1996) ..................................................................... 52

Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2d Cir. 2014) ............................................................................... 23


vi

Castellano v. Young & Rubicam, Inc., 257 F.3d 171 (2d Cir. 2001) ......................................................................... 33, 37

City of Providence v. Aeropostale, Inc., No. 11-cv-7132-CM-THK, 2013 WL 1197755 (S.D.N.Y. Mar. 25, 2013) .............................................. 34, 44

City of Warren Police & Fire Ret. Sys. v. World Wrestling Entm’t Inc., No. 20-cv-2031-JSR, 2020 WL 4547217 (S.D.N.Y. Aug. 6, 2020) ............ 37, 44

Constr. Laborers Pension Tr. for S. Cal. v. CBS Corp., 433 F. Supp. 3d 515 (S.D.N.Y. 2020) ................................................................ 55

Credit Suisse First Bos. Corp. v. ARM Fin. Grp., Inc., No. 99-cv-12046-WHP, 2001 WL 300733 (S.D.N.Y. Mar. 28, 2001) ................................................ 38, 57

DoubleLine Capital LP v. Construtora Norberto Odebrecht, S.A., 413 F. Supp. 3d 187 (S.D.N.Y. 2019) ................................................................ 37

DoubleLine Capital LP v. Odebrecht Fin., Ltd., 323 F. Supp. 3d 393 (S.D.N.Y. 2018) .......................................................... 40, 41

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ............................................................................................ 60

Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171 (S.D.N.Y. 2010) .......................................................... 31, 44

Galestan v. OneMain Holdings, Inc., 348 F. Supp. 3d 282 (S.D.N.Y. 2018) ................................................................ 43

GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A., 838 F.3d 214 (2d Cir. 2016) ............................................................................... 23

Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) ......................................................................... 27, 54

Glaser v. The9, Ltd., 772 F. Supp. 2d 573 (S.D.N.Y. 2011) ................................................................ 45

Grace v. Rosenstock, 228 F.3d 40 (2d Cir. 2000) ................................................................................. 58


vii

Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) ...................................................................................... 58, 59

Harley-Davidson Motor Co. v. PowerSports, Inc., 319 F.3d 973 (7th Cir. 2003) .............................................................................. 27

Haw. Structural Ironworkers Pension Tr. Fund v. AMC Entm’t Holdings, Inc., 422 F. Supp. 3d 821 (S.D.N.Y. 2019) ................................................................ 32

In re Avon Sec. Litig., No. 19-cv-1420-CM, 2019 WL 6115349 (S.D.N.Y. Nov. 18, 2019) .................................................... 50

In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487 (S.D.N.Y. 2013) ................................................................ 35

In re Fairway Grp. Holding Corp. Sec. Litig., No. 14-cv-0950-LAK-AJP, 2015 WL 249508 (S.D.N.Y. Jan. 20, 2015) ....................................................... 60

In re Forcefield Energy Inc. Sec. Litig., No. 15-cv-3020-NRB, 2015 WL 4476345 (S.D.N.Y. July 22, 2015) ..................................................... 59

In re Goldman Sachs Grp., Inc. Sec. Litig., No. 10-cv-3461-PAC, 2018 WL 3854757 (S.D.N.Y. Aug. 14, 2018) ................................................................................................................... 58

In re Hi-Crush Partners L.P. Sec. Litig., No. 12-cv-8557-CM, 2013 WL 6233561 (S.D.N.Y. Dec. 2, 2013) ...................................................... 56

In re Hot Topic, Inc. Sec. Litig., No. 13-cv-2939-SJO-JCx, 2014 WL 7499375 (C.D. Cal. May 2, 2014) ...................................................... 49

In re Inv. Tech. Grp., Inc. Sec. Litig., 251 F. Supp. 3d 596 (S.D.N.Y. 2017) ................................................................ 36

In re KeySpan Corp. Sec. Litig., 383 F. Supp. 2d 358 (E.D.N.Y. 2003) ................................................................ 31

In re Lehman Bros. Sec. & ERISA Litig., 131 F. Supp. 3d 241 (S.D.N.Y. 2015) ................................................................ 50

In re Lihua Int’l, Inc. Securities Litigation, No. 14-cv-5037-RA, 2016 WL 1312104 (S.D.N.Y. Mar. 31, 2016) .................................................... 41


viii

In re Merrill Lynch Auction Rate Sec. Litig., No. 09-md-2030-LAP, 2011 WL 1330847 (S.D.N.Y. Mar. 29, 2011) .................................................... 27

In re Mylan N.V. Sec. Litig., No. 16-CV-7926 (JPO), 2018 WL 1595985 (S.D.N.Y. Mar. 28, 2018) .................................................... 36

In re Optionable Sec. Litig., 577 F. Supp. 2d 681 (S.D.N.Y. 2008) ................................................................ 40

In re Par Pharm., Inc. Sec. Litig., 733 F. Supp. 668 (S.D.N.Y. 1990) ..................................................................... 36

In re Refco Inc. Sec. Litig., No. 07-md-1902-JSR, 2010 WL 11500542 (S.D.N.Y. Oct. 22, 2010) ................................................... 37

In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001) ................................................................................. 24

In re Shanda Games Ltd. Sec. Litig., No. 18-cv-2463-ALC, 2019 WL 11027710 (S.D.N.Y. Sep. 30, 2019) .................................................. 54

In re Sturm, Ruger & Co. Sec. Litig., No. 09-cv-1293-CFD, 2011 WL 494753 (D. Conn. Feb. 7, 2011) ......................................................... 44

In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993) ................................................................................... 27

In re Van Der Moolen Holding N.V. Sec. Litig., 405 F. Supp. 2d 388 (S.D.N.Y. 2005) ................................................................ 34

In re Vivendi, S.A. Sec. Litig., 838 F.3d 223 (2d Cir. 2016) ................................................................... 23, 30, 37

Iowa Pub. Emps.’ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137 (2d Cir. 2010) ................................................................... 30, 31, 33

Joseph v. Mobileye, N.V., 225 F. Supp. 3d 210 (S.D.N.Y. 2016) ................................................................ 27

Koppel v. 4987 Corp., 167 F.3d 125 (2d Cir. 1999) ............................................................................... 48


ix

Lewis v. Termeer, 445 F. Supp. 2d 366 (S.D.N.Y. 2006) ................................................................ 60

Lickteig v. Cerberus Capital Management, L.P., No. 19-cv-5263-GHW, 2020 WL 1989424 (S.D.N.Y. Apr. 26, 2020) ........................................ 48, 49, 54

Long Miao v. Fanhua, Inc., 442 F. Supp. 3d 774 (S.D.N.Y. 2020) ................................................................ 46

Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160 (2d Cir. 2015) ............................................................................... 54

Lydon v. Estate of Winston, 715 F. Supp. 600 (S.D.N.Y. 1989) ............................................................... 38, 39

Martinek v. AmTrust Fin. Servs., Inc., No. 19-cv-8030-KPF, 2020 WL 4735189 (S.D.N.Y. Aug. 14, 2020) .............................................. 25, 36

McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d 105 (S.D.N.Y. 2013) .......................................................... 40, 41

Meyer v. JinkoSolar Holdings Co., 761 F.3d 245 (2d Cir. 2014) ........................................................................passim

Mills v. Elec. Auto-Lite Co., 396 U.S. 375 (1970) ............................................................................................ 58

Muller-Paisner v. TIAA, 289 F. App’x 461 (2d Cir. 2008) ........................................................................ 24

Nakkhumpun v. Taylor, 782 F.3d 1142 (10th Cir. 2015) .......................................................................... 52

Newman v. Warnaco Grp., Inc., 335 F.3d 187 (2d Cir. 2003) ............................................................................... 53

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) ................................................................... 43, 45, 53

Omnicare, Inc. v. Laborers Distr. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015) ............................................................................................ 49


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P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92 (2d Cir. 2004) ................................................................................. 33

Panther Partners Inc. v. Jianpu Tech. Inc., No. 18-cv-9848-PGG, 2020 WL 5757628 (S.D.N.Y. Sept. 27, 2020) ................................................... 34

Plumbers & Pipefitters Nat’l Pension Fund v. Davis, No. 16-cv-3591-GHW, 2020 WL 1877821 (S.D.N.Y. Apr. 14, 2020) .................................................... 35

Plumbers & Pipefitters Nat’l Pension Fund v. Orthofix Int’l N.V., 89 F. Supp. 3d 602 (S.D.N.Y. 2015) .................................................................. 44

Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) ............................................................................... 31

Schiro v. Cemex, S.A.B. de C.V., 396 F. Supp. 3d 283 (S.D.N.Y. 2019) ................................................................ 46

Shemian v. Research In Motion Ltd., No. 11-cv-4068-RJS, 2013 WL 1285779 (S.D.N.Y. Mar. 29, 2013), aff’d, 570 F. App’x 32 (2d Cir. 2014)................................................................. 31

Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167 (9th Cir. 2009), aff’d, 563 U.S. 27 (2011) .................................................................................... 34

Speakes v. Taro Pharm. Indus., Ltd., No. 16-cv-8318-ALC, 2018 WL 4572987 (S.D.N.Y. Sept. 24, 2018) ................................................... 60

State of N.J. & its Div. of Inv. v. Sprint Corp., No. 03-cv-2071-JWL, 2004 WL 1960130 (D. Kan. Sept. 3, 2004) ........................................................ 28

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ...................................................................................... 53, 57

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) ............................................................................................ 36

Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991) .......................................................................................... 52

Wallace v. Intralinks, No. 11-cv-8861-TPG, WL 1907685 (S.D.N.Y. May 8, 2013) ............................................................... 44


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Wilson v. Great Am. Indus., Inc., 855 F.2d 987 (2d Cir. 1988) ............................................................................... 60

Statutes

15 U.S.C. § 78aa ........................................................................................................ 1

15 U.S.C. §78j(b) ..............................................................................................passim

15 U.S.C. § 78t(a) ............................................................................................ 1, 2, 61

15 U.S.C. § 78t–1 ....................................................................................... 1, 2, 59, 61

15 U.S.C. §78u-4 .................................................................................................. 1, 24

28 U.S.C. § 1291 ........................................................................................................ 1

28 U.S.C. § 1331 ........................................................................................................ 1

Rules

Fed. R. Civ. P. 8(a) ................................................................................................... 60

Fed. R. Civ. P. 9(b) ........................................................................................ 1, 24, 60

Fed. R. Civ. P. 12(b)(6) ............................................................................................ 23

17 C.F.R. §240.10b-5 ........................................................................................... 2, 23


I. JURISDICTIONAL STATEMENT

The United States District Court for the Southern District of New York had

jurisdiction over this action under 28 U.S.C. § 1331 and Section 27 of the Securities

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78aa. On August 14, 2020,

the District Court issued its Opinion and Order, and entered its final Judgment on

August 17, 2020, dismissing all claims with prejudice. Plaintiffs filed a timely

Notice of Appeal on September 10, 2020. This Court has jurisdiction under 28

U.S.C. § 1291.1

II. ISSUES PRESENTED FOR REVIEW

1. Whether the District Court erred in holding that the First Amended

Class Action Complaint (“FAC”) failed to sufficiently plead materially false or

misleading statements or omissions under § 10(b) of the Exchange Act, Rule 9(b) of

the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform

Act of 1995 (“PSLRA”).

2. Whether the District Court erred in dismissing the FAC’s claims under

§§ 20(a) and 20A of the Exchange Act based on the District Court’s holding that the

FAC failed to sufficiently plead a predicate violation of § 10(b).

1 Documents in the Joint Appendix are designated as “A-__” and documents in the Special Appendix are designated as “SA-__”. All internal citations are omitted and emphases are added unless otherwise noted. All “¶__” references are to Plaintiffs’ First Amended Class Action Complaint (A-382-507; District Court Dkt. No. 53).


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III. STATEMENT OF THE CASE

This is a securities fraud class action on behalf of a class of investors who sold

Qihoo 360 Technology Co. Ltd. (“Qihoo” or the “Company”) securities during the

period from December 18, 2015 through July 15, 2016, inclusive, and investors who

tendered their shares in the Merger at issue in this action. (A-493-94¶¶298-99). The

FAC brings claims against Defendants pursuant to §10(b) of the Exchange Act, 15

U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5;

Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); and Section 20A of the

Exchange Act, 15 U.S.C. § 78t–1. Defendants are (i) Qihoo; its two founders and

most senior executives, (ii) Hongyi Zhou and (iii) Xiangdong Qi; and (iv) Eric X.

Chen, the Chairman of the Special Committee that advised Qihoo to approve the

Merger. Service has not yet been completed on Zhou and Qi, who are believed to be

located in China. (A-790).

The FAC alleges that Defendants Zhou and Qi—Qihoo’s top executives,

Directors, largest shareholders, and co-founders—led a group of investors that paid

$9.3 billion to take the Company private in the Merger. They then turned around and

relisted the Company in the Chinese public market for over $60 billion through a

process known as a “backdoor listing.” (A-418-20¶¶95-100). The FAC further

alleges that Defendants misrepresented several key facts related to the Merger in

order to convince Qihoo’s shareholders to sell their shares for tens of billions of


3

dollars less than their fair value. In particular, Defendants misrepresented (1) the

Buyer Group’s plans for Qihoo after the Merger; (2) that the Merger price was fair

to Qihoo’s shareholders; and (3) the reasons supporting the Merger.

(A-447-50¶159).

On March 5, 2019, Appellant Altimeo Asset Management filed this action in

the United States District Court for the Central District of California. (District Court

Dkt. No. 1). Appellant ODS Capital LLC had previously filed a substantively

identical action in the United States District Court for the Southern District of New

York on January 17, 2019 (the “New York Action”), but then decided to join

Altimeo’s efforts in these actions. (A-195). On May 20, 2019, Appellants voluntarily

dismissed the New York Action so that their claims could proceed in this action

(then in California). (A-197). On July 1, 2019, the District Court appointed Altimeo

Asset Management and ODS Capital LLC as Lead Plaintiffs to represent the putative

class. (District Court Dkt. No. 42). Lead Plaintiffs filed the FAC on August 30, 2019.

(A-382-507). On October 24, 2019, the District Court granted Defendants Qihoo and

Chen’s motion to transfer this action to the Southern District of New York. (District

Court Dkt. No. 60).

On December 23, 2019, Qihoo and Chen moved to dismiss the FAC

(A-656-58). Lead Plaintiffs opposed that motion on January 31, 2020. (A-779-814).

Qihoo and Chen filed a reply in support of their motion on February 21, 2020


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(A-821-37). Both sides requested that the District Court hold oral argument on the

motion, but the District Court declined to do so. (District Court Dkt. Nos. 80, 82).

The District Court held in its dismissal order (the “Order”) that while the FAC

raised evidence “suggest[ing] that a separate, and more rosy, set of projections

(based on the secret relisting plan) had been provided to the Buyer Group, but not to

Qihoo Securityholders, prior to the Merger,” this did not suffice to allege material

misrepresentations and omissions because the FAC did not adequately allege a

“concrete and definite” relisting plan. (SA-31, SA-35-36; see also SA-20-21). This

ruling applied the wrong legal standard to assess the falsity of Defendants’

statements. The District Court also improperly discounted the FAC’s allegations

regarding the Buyer Group’s relisting plan, regardless of what standard applies.

In addition, the District Court determined that all of the misstatements

described in the FAC were alleged to be false and misleading for the “same

reason”—that “the Buyer Group already planned to relist Qihoo at a far-higher

valuation.” (SA-17-19). The court did not address the FAC’s other explanations for

the falsity of Defendants’ descriptions of the fairness of, or the reasons for, the

Merger. These statements were false and misleading for the independent reasons that

(1) Defendants’ attestations of fairness were based on artificially deflated financial

projections and (2) the Buyer Group bought Qihoo so that it could capitalize on


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increased business opportunities that the Company would have in China after the

Merger.

Plaintiffs timely filed a notice of appeal. (A-838-39).

IV. STATEMENT OF FACTS

Qihoo describes itself as one of the leading internet companies in China, with

a focus on internet security. (A-397-98¶¶34-38). In 2016, Defendants Zhou and Qi,

Qihoo’s co-founders, its CEO and President (respectively), and its two largest

shareholders, led a group of investors (the “Buyer Group”) that paid approximately

$9.3 billion to take the Company private (the “Merger”). (A-387¶3 , 394¶¶22-23,

A-406-07¶¶62-64). Defendant Chen was a Qihoo Director since 2014 and the

Chairman of the Special Committee that advised Qihoo to approve the Merger.

(A-394¶¶24-26, A-400-01¶44, A-482¶¶269-70).

Zhou initiated the Merger in May 2015 at a price that was over 36% below

the Company’s share price just 14 months earlier. (A-399-400¶¶41-42; A-819).

Qihoo signed the Merger Agreement with the Buyer Group on December 18, 2015,

and issued the Proxy Materials for the Merger between January 11, 2016 and March

3, 2016. (A-405¶60, A-407-08¶66). On March 30, 2016, Qihoo’s shareholders voted

to approve the Merger based on Defendants’ recommendation that the Merger was

fair. (A-414¶83).

After the Merger closed on July 15, 2016, the Buyer Group, led by Zhou and


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Qi, proceeded with a “backdoor listing” by merging Qihoo’s main businesses into

SJEC, an elevator company that was already listed on the Shanghai Stock Exchange,

so that Qihoo would be relisted in the Chinese public market. (A-417-20¶¶93-100).

SJEC announced the relisting on November 2, 2017. (A-419¶96). Immediately upon

its relisting on February 28, 2018, just the portion of Qihoo that was relisted had a

market capitalization of over $60 billion, as compared to $9.3 billion in the Merger.

(A-420¶100).

A. The Buyer Group Planned All Along to Relist Qihoo in China After the Merger

The FAC’s detailed allegations demonstrate that the Buyer Group—led by

Zhou and Qi—had a specific plan all along to conduct a backdoor listing to relist

Qihoo in the Chinese public market after the Merger.

1. News Articles Revealed the Relisting Plan

Several news articles described the details of the Buyer Group’s relisting plan

based on specific documents and information that these publications obtained. A

Financial Times article reported on February 28, 2017 that the article’s author saw

“[m]arketing materials from the fundraising” that solicited investors to participate

in the Buyer Group that would buy Qihoo in the Merger. (A-427¶115). These

documents told investors in the Buyer Group that they would multiply their

investment “as high as 5 [times]” when they are able to “exit” from their investments

after Qihoo is relisted through a “return [to the] A shares” stock market in China.


7

(Id.).

Similarly, on December 29, 2015, Tencent Technology reported that it

obtained Qihoo’s privatization plan from Huatai United Securities (“Huatai”), which

was the main underwriter for the Merger. This article reported that Qihoo planned

to return to the Chinese A-shares market through a backdoor listing. (A-424¶110).

In addition, a November 12, 2015, article from the publication CN Stock

reported that the author had obtained a copy of Qihoo’s privatization plan, which

confidentially told investors in the Buyer Group that Qihoo planned to return to the

Chinese stock market following the Merger through a relisting that would take up to

one-and-a-half years to complete. (A-422¶106). This timeline is consistent with

when Qihoo’s relisting occurred. It was announced on November 2, 2017 and

completed in February 2018, following the Merger’s closing on July 15, 2016.

(A-418-20¶¶ 95-100).

Then, on August 3, 2016, less than three weeks after the Merger closed, the

newspaper Caixin described a documented plan to relist “as of last year”—showing

that the Buyer Group had already planned to relist the Company in 2015, well before

Defendants first issued the Proxy Materials in January 2016. This article described

Qihoo’s plan to split its main businesses from its other businesses so that its core

security and search businesses would be taken public in the relisting while its other

businesses would be excluded. (A-426¶113).


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2. A Well-Placed Confidential Witness Attested to Defendant Qi’s Knowledge of the Relisting Plan

A confidential witness that worked in Qihoo’s Public Relations department at

its Beijing headquarters from 2014 through 2017 (“CW1”) recalled a meeting that

took place in mid-2015 at which Defendant Qi explicitly warned attendees not to

disclose any information about the Company’s planned relisting.

(A-435-36¶¶134-35). CW1 reported to a senior editor in the department, who

reported to Qu Bing. Qu was in charge of Qihoo’s Public Relations department and

reported to Qi. (A-435¶134).

CW1 described many specific details concerning this meeting. In particular,

Qi directed employees at the meeting that they needed to keep a low profile

concerning the relisting plan and that they should “not release this information

outside the company.” (A-436¶135). Qi also instructed employees to not even

discuss the relisting plan internally, in order to avoid leaks outside the company.

Moreover, CW1 stated specifically that he or she had a clear memory of this

meeting. The reason that Qi gave this direction was that by April 2015, everyone in

Qihoo’s Public Relations department was aware of the plan to relist Qihoo in China

following the Merger. It was particularly important for Qi to raise this so that the

Public Relations department would know what information could and could not be

publicly reported. (A-436-37¶¶135-36). CW1 also noted that employees knew since

at least late 2015 that Qihoo would be relisted through a backdoor listing rather than


9

through an IPO. (Id.).

CW1 also explained that Qihoo sought to complete its privatization as quickly

as possible because that needed to be done before the relisting. Qihoo therefore

pledged its headquarters in Beijing and the Company’s trademarks as collateral to

overcome funding constraints and secure loans from China Merchants Bank (as

media reports confirm). (A-430-31¶124, A-437¶136).

3. The Timeline of Qihoo’s Relisting is Consistent With the Backdoor Listing Process

The FAC explains, based on consultation with an expert in Chinese and

United States M&A and capital market transactions, that it usually takes companies

over one year to reach agreement with a shell company to conduct a backdoor listing.

These steps include hiring financial and legal advisors, identifying and negotiating

with potential shell companies, conducting auditing, compliance, due diligence, and

regulatory reviews, and conducting corporate restructurings. In addition, the

restructuring that Qihoo needed to do to separate its businesses that would be

included in the relisting from those that would not, added significant time to this

process. The announcement of Qihoo’s backdoor listing on November 2, 2017—less

than 16 months after the Merger closed on July 15, 2016—is therefore entirely

consistent with the Buyer Group having been planning the relisting while the Merger

was pending, as well as the one-and-a-half year relisting timeline noted in the CN

Stock article discussed above. (A-422-24¶¶106-09).


10

All of these specific allegations show that, contrary to the Order’s conclusory

holding, the FAC clearly alleges the existence of the Buyer Group’s relisting plan

based upon multiple independent sources.

B. The Merger Price Was Unfair to Qihoo’s Shareholders

The FAC alleges with ample detail that in addition to misrepresenting Qihoo’s

relisting plan, Defendants misrepresented Qihoo’s value based on Zhou’s business

plans for Qihoo after the Merger.

1. Secret Marketing Materials Contained Better Financial Projections

The February 2017 Financial Times article described above revealed that the

private “marketing materials” that were used to solicit members of the Buyer Group

contained secret financial projections, including “ambitious estimates of future net

income and other performance metrics going out to 2019.” (A-427¶115). This article

explained that these undisclosed projections were far better than the information that

Qihoo disclosed publicly in connection with the Merger because Qihoo told minority

shareholders before the Merger “that the company’s prospects were not nearly that

bright.” Id.

The public projections in the Proxy Materials were prepared by Qihoo’s

management and forecasted the Company’s performance from 2015 through 2025.

(A-401¶47). These deflated public projections were the key input that formed the

basis for J.P. Morgan’s valuation of the Company and fairness opinion in the Merger.


11

(A-403-05¶¶54-57, A-445¶154). That unfounded determination, in turn, formed the

basis for Qihoo’s false and misleading determination that the Merger was fair to the

Company’s shareholders. (A-405¶¶58-59).

2. Qihoo’s Undisclosed Business Opportunities After the Merger

The secret, more favorable projections identified in news articles comport

with Zhou’s undisclosed business plans for Qihoo after the Merger. Zhou finally

admitted in media interviews after the Merger closed that the Merger was part of his

long-term plan to remove Qihoo from the U.S. market so that it could pursue

increased business opportunities in China. This included providing internet security

“solutions for many sensitive [Chinese] organizations including the government.”

(A-430-31¶124). Zhou also admitted that high-ranking Chinese government officials

explained to him several years prior that Qihoo played a key role in the increasing

importance of network security in China’s national security efforts. (A-428-29¶118,

A-430-31¶124.). But, Zhou explained, “[i]f Qihoo 360 were a foreign company, it

couldn’t receive the necessary qualifications. So we returned to China to play a more

important role in network security,” including for the Chinese military.

(A-431-32¶¶125-28).

Zhou also explained that the Merger enabled his “big security” vision for

Qihoo, comparing his idea to Jack Ma’s (the founder of Alibaba) vision of “new

retail.” (A-432¶128). He stated that “Qihoo 360 can play an important role in


12

industrial security, social security, national security, cyber-attack and defense.” (Id.).

These increased business opportunities were not reflected in the artificially

deflated financial projections that Defendants disclosed to shareholders in the Proxy

Materials for the Merger. Even after being specifically asked by the SEC to disclose

all projections and to set out the assumptions underlying them, Defendants did not

mention these business opportunities and instead stated the projections in the Proxy

Materials were based on more conservative assumptions, such as that “the popularity

of the Company’s products would remain stable.” (A-433-34¶131; see also infra

Sections IV.C.2-3).

3. The Cayman Islands Appraisal Action Confirms the Unfairness of the Merger Price

Because Defendants misrepresented the true nature of the Merger, only a

small portion of shareholders exercised their appraisal rights under Cayman Islands

law (the “Appraisal Action”). (A-414¶83, A-437-38¶138). Qihoo agreed to give $92

million—over five times the value of the dissenters’ shares in the Merger—as a

security deposit at the outset of the action. (A-438-39¶¶140-41). The Cayman

Islands determined that the dissenters “will receive . . . a substantial sum as fair

value.” (Id.).

Qihoo has repeatedly impeded the dissenters’ efforts in the Appraisal Action

to obtain the Company’s internal data that would reveal its fair value. For example,

Qihoo made the patently absurd claim that because of purported “eye issues,”


13

Zhou—the CEO of the one of the leading internet companies in China—had not used

a computer since he founded the Company in 2006. (A-442-43¶150). Multiple

sources directly contradicted this claim. (Id.).

Qihoo also tried to conceal the basis for the financial projections in the Proxy

Materials that were the key input into the Company’s valuation in the Merger.

(A-439-40¶143). The Company tried to distance itself from the creation of those

projections by ascribing them to J.P. Morgan, until that explanation was contradicted

by documents that Qihoo was forced to produce showing the involvement of

multiple Company employees. (Id.). Qihoo also claimed that due diligence materials

and financial reports related to these projections did not exist, even though the

Company had those exact documents. (A-436-41¶¶142-47). In addition, a senior

member of Qihoo’s finance group instructed employees to delete information during

the document collection process. (A-443-44¶151).

The Cayman Islands court found Qihoo’s obstructionist positions to be

“unfortunate, (even peculiar),” “odd,” “quite incredible,” and “strange.”

(A-439¶142, A-441-44¶¶146-51). The court ordered the “intrusive and exceptional”

remedy that a forensic expert oversee discovery and awarded the dissenters 80% of

their costs seeking to compel production of these materials. (A-441-42¶¶148-49).

C. Defendants’ False and Misleading Statements About the Merger

Defendants made several types of false and misleading statements in the


14

Proxy Materials for the Merger to convince Qihoo’s ADS holders to vote for the

Merger at a price that was far below the Company’s fair value. (A-447-50¶159).

1. Defendants Misrepresented the Buyer Group’s Plans for Qihoo After the Merger

Defendants made many misrepresentations concerning the Buyer Group’s

plans for Qihoo following the Merger that were false because they planned to relist

Qihoo in China through a backdoor listing at multiple times the Merger price.

Defendants explicitly warranted in every set of the Proxy Materials that they issued

during the Merger process that “the Buyer Group does not have any current plans,

proposals or negotiations that relate to or would result in an extraordinary corporate

transaction involving the Company’s corporate structure, business, or management,

such as a merger, reorganization, liquidation, relocation of any material operations,

or sale or transfer of a material amount of the Company’s assets.” (A-409¶72,

A-452-53¶170, A-454¶¶174-76). Defendants also assured investors that there were

no “undisclosed agreements or arrangements” among the Buyer Group and that

Qihoo “will continue its operations as a privately held company.” (A-452¶168,

A-453-54¶172, A-455¶178). And they falsely stated that there was “no viable

alternative” to the Merger. (A-409¶73, A-455-57¶¶181-85, A-470-71¶¶235-36).

2. Defendants Falsely Described the Merger Price as “Fair”

Defendants also falsely told Qihoo’s ADS holders that the Merger price was

“fair” to them. These assurances were based on J.P. Morgan’s fairness opinion,


15

which, in turn, was based on the deflated financial projections that Qihoo’s

management provided. (A-413¶82, A-433-35¶¶130-33, A-445-47¶¶154-58,

A-457-463¶¶187-212, A-472-74¶¶239-41). These statements about the fairness of

the Merger to Qihoo’s shareholders were particularly misleading because the SEC

directed Qihoo to revise the original Proxy Materials to disclose “all preliminary and

final projections,” as well as to identify management’s “numerous assumptions and

estimates as to future events made by the Company’s management.”

(A-472-73¶239). In response, Defendants provided several assumptions underlying

the financial projections, such as that “the popularity of the Company’s products

would remain stable,” that did not mention the Buyer Group’s secret set of much

better projections, or that that Zhou planned to greatly expand Qihoo’s business in

China following the Merger. (A-411-12¶77, A-433-34¶131, A-473-74¶¶240-41).

3. Defendants Misrepresented the Reasons Why They Described the Merger as “Fair”

In addition, Defendants falsely stated in the Proxy Materials that Qihoo

determined that the Merger was “fair” to Qihoo’s shareholders because it would fare

better as a private company in light of difficulties that the Qihoo faced in China.

(A-433¶130, A-447-50¶159, A-469-72¶¶234-38; see also A-410-13¶¶75-82). In

particular, Defendants stated—after being forced by the SEC to provide more

information justifying the fairness of the Merger—that “the Company faces


16

increased competition in the Company’s industry from internet security product and

service providers and PRC-based internet companies” and that “the recent economic

slowdown in China and expected sustained macroeconomic challenges place

pressure on the Company’s revenue growth and other key financial and operating

metrics.” (A-469-72¶¶234-38). Similarly, the Proxy Materials stated that the

“primary detriments of the Merger to the Buyer Group” included “[t]he business

risks facing the Company, including increased competition and government

regulation.” (A-433-467¶¶130, 225).

These purported reasons for the fairness of the Merger to Qihoo’s

shareholders, and its detriments to the Buyer Group, were false and misleading

because they highlighted business difficulties that Qihoo faced in China and omitted

that the Buyer Group conducted the Merger so that it could realize far greater value

from the increased business opportunities that Qihoo would have after no longer

being listed in the U.S. (A-433-35¶¶130-33, A-449-50¶159(d)).

D. Zhou and Qi Reaped Enormous Profits From the Merger

Qihoo was worth far more than what Defendants represented in the Merger

for several reasons, including the Buyer Group’s plan to relist Qihoo in China and

Qihoo’s true business opportunities in China after the Merger. (A-434-35¶¶132-33,

A-444-47¶¶152-58, A-483-84¶273). Defendants’ misrepresentations allowed the

Buyer Group—including Zhou and Qi—to reap tens of billions of dollars in ill-


17

gotten gains by paying only $9.3 billion for Qihoo and then relisting its main

businesses for over $60 billion. (A-407¶¶64-65, A-420¶¶100-01,

A-478-79¶¶260-61). Zhou alone increased the value of his stake in the Company by

$12 billion.

V. SUMMARY OF THE ARGUMENT

The Proxy Materials for the Merger misrepresented to Qihoo’s shareholders

that the Buyer Group—led by Defendants Zhou and Qi—did not have any “current

plans” to relist Qihoo in China and that the Merger price was “fair” to Qihoo’s

shareholders. Defendants made these misstatements so that Zhou and Qi would be

able to underpay Qihoo’s shareholders by over $50 billion for the Company. These

statements were false and misleading because the Buyer Group planned all along to

relist Qihoo in China for five times the Merger price and the Proxy Materials failed

to account for a secret, more favorable set of financial projections that were used to

solicit members of the Buyer Group.

Multiple sources of evidence demonstrate the falsity of Defendants’

statements. This evidence is particularly strong because several news articles

consistently reference a specific confidential document from the Merger process that

the journalists saw firsthand and that discussed the Buyer Group’s relisting plan. For

example, the Financial Times reported on confidential “marketing materials” that

were used to solicit investors in the Buyer Group by promoting that they could


18

quintuple their investment through Qihoo’s “return” to the Chinese stock market.

(A-427¶115). Other publications revealed that this secret document corroborated

other aspects of the Merger, including that Qihoo’s relisting would take

one-and-a-half years (A-422¶106); that Huatai, the main underwriter for the Merger,

provided this document, which states that the relisting would take place through a

backdoor listing (A-424¶110); and that a documented relisting plan existed as of

2015—before Qihoo issued the Proxy Materials—including the plan to split Qihoo’s

main businesses from its other businesses before relisting (A-426¶113). In addition,

a confidential witness from Qihoo’s Public Relations department recalled a specific

meeting in mid-2015 where Defendant Qi exhorted the Public Relations department

not to disclose any details about the relisting plan. (A-435-37¶¶134-36).

The District Court acknowledged that the FAC describes news articles “whose

authors purportedly saw Buyer Group materials,” and that “[e]ach suggests that a

separate, and more rosy, set of projections (based on the secret relisting plan) had

been provided to the Buyer Group, but not to Qihoo Securityholders, prior to the

Merger.” (SA-35-36). The court even agreed that this “secretiveness . . . hint[s] at”

wrongdoing. (SA-36). But the court determined that these allegations were not

sufficient because Plaintiffs are required to plead a “concrete and definite” relisting

plan, including its “terms, participants, profitability, or mechanics.” (SA-35-36; see

also id. at SA-20-21, SA-31).


19

This is the wrong legal standard. The Supreme Court held in Basic Inc. v.

Levinson that “[w]hether merger discussions in any particular case are material . . .

depends on the facts.” 485 U.S. 224, 239 (1988). Courts therefore clearly hold that

when defendants deny the existence of plans for a corporate transaction, as

Defendants did here, those statements are actionable when such plans existed,

regardless of their stage of development. The FAC’s allegations of the Buyer

Group’s relisting plan easily meet this standard.

The District Court applied its incorrect “concrete and definite” standard

because it determined that Defendants “explicitly disclosed the possibility of a future

relisting.” (SA-19). The court based this ruling on Defendants’ statement that after

the Merger, Qihoo “may propose or develop plans and proposals, . . . including the

possibility of relisting” the Company. (SA-19-21). This analysis goes against the

plain meaning of Defendants’ statement that no “current plans, proposals or

negotiations” for a relisting existed at the time of the Merger, regardless of what

plans or proposals the Company might start to develop after the Merger closed.

Moreover, the law is clear that Defendants’ disclosure of possible future

relisting plans does not absolve them of liability for falsely stating that no such plans

currently existed. First, the court’s reasoning goes against the well-established rule

that risk disclosures cannot insulate defendants from liability for false statements of

current fact. This is because a warning that something might occur in the future


20

cannot disclose that it has already happened. Second, Defendants’ risk language not

only fails to protect them from liability—it is itself an additional false statement that

misrepresented the fact that the Buyer Group already had a relisting plan. Third,

Defendants’ risk disclosure does not alter the basic rule that the meaning of

Defendants’ planning statements in light of the Buyer Group’s relisting plan is, at

the very least, itself a factual issue that cannot be resolved on a motion to dismiss.

For all of these independent reasons, Defendants’ statement that Qihoo might in the

future develop relisting plans and proposals does not change the ordinary meaning

that statements of current plans include not just “concrete and definite” plans, but

also preliminary plans.

In addition to applying the wrong legal standard, the District Court improperly

discounted the substantial evidence in the FAC even under the court’s “concrete and

definite” standard. The fact that multiple journalists saw Defendants’ secret

marketing materials firsthand leaves no doubt—and certainly raises the plausible

inference—as to their authenticity. The District Court also incorrectly determined

that these materials did not disclose details of the relisting plan and that they were

inconsistent with how the relisting played out. These assessments are belied by the

details that these sources disclosed, including the amount that Qihoo would be worth

to the Buyer Group after relisting, the timeline for relisting, that the transaction

would take place through a backdoor listing, and that just Qihoo’s core businesses


21

would be included in the relisting. (See supra at 17-18). The FAC therefore pleads

precisely the type of evidence about the relisting plan that the District Court required,

such as the plan’s “terms, participants, profitability, or mechanics.” (SA-36). The

District Court also improperly discredited CW1 even though the witness described

a specific meeting where Defendant Qi discussed the relisting plan. That is exactly

the type of evidence that courts regularly credit from confidential witnesses in

securities class actions. In sum, even under the District Court’s erroneous “concrete

and definite” standard, the FAC easily meets the burden of pleading a plausible

inference that the Buyer Group planned to relist Qihoo at multiple times what it paid

the Company’s shareholders in the Merger. By discrediting the FAC’s well-pleaded

allegations at every turn, the District Court violated its duty to draw all reasonable

inferences in Plaintiffs’ favor.

The District Court also improperly failed to consider the FAC’s allegations of

other types of misstatements. The court ruled that the FAC alleges all of Defendants’

statements were false for the “same reason” relating to the Buyer Group’s relisting

plan. (SA-17-18). But the FAC alleges expressly that Defendants’ assurances that

the Merger price was “fair,” and the reasons supporting that determination, were also

false and misleading for the independent reasons that they were based on artificially

deflated financial projections and overly pessimistic assumptions about Qihoo’s

business. The FAC describes substantial evidence showing why these statements


22

were false and misleading. This includes the secret financial projections that were

provided to the Buyer Group, Zhou’s admission that he was planning for years to

take Qihoo private so that the Company could capitalize on increased business

opportunities in China, and Qihoo’s egregious efforts in the Appraisal Action to

cover up the Company’s true value. (See supra Section IV.B.3). The District Court

even acknowledged that the FAC adequately alleges “a separate, and more rosy, set

of projections” that was provided to the Buyer Group to support “a potentially

lucrative course.” (SA-35). But the court failed entirely to consider the false and

misleading nature of Defendants’ statements promoting the Merger to Qihoo’s

shareholders while they had a contrary set of internal projections that valued Qihoo

at multiple times the Merger price.

For all of these reasons, and those described below, this Court should reverse

the District Court’s ruling and hold that the FAC adequately pleads false and

misleading statements under Section 10(b) of the Exchange Act. Defendants should

not be permitted to get away with duping shareholders into selling their Qihoo

securities for tens of billions of dollars less than they were worth so that the Buyer

Group could turnaround and relist the Company for over five times what they paid

for it based on their secret knowledge of the Company’s true value.


23

VI. STANDARD OF REVIEW

This Court reviews a district court’s dismissal for failure to state a claim under

Rule 12(b)(6) de novo, “accepting the complaint’s factual allegations as true and

drawing all reasonable inferences in the plaintiff’s favor.” Carpenters Pension Tr.

Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 232 (2d Cir. 2014).

VII. ARGUMENT

On a Rule 12(b)(6) motion to dismiss, the court must “accept all factual

allegations as true and draw all reasonable inferences in favor of the plaintiff.” Meyer

v. JinkoSolar Holdings Co., 761 F.3d 245, 249 (2d Cir. 2014). To survive the motion,

a complaint must allege “enough facts to state a claim … that is plausible on its

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Ashcroft v. Iqbal, 556

U.S. 662, 678 (2009).

The elements of a claim brought under Section 10(b) and Rule 10b-5 include

a material misrepresentation or omission by the defendant in connection with the

purchase or sale of a security, scienter, reliance, economic loss, and loss causation.

GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A., 838 F.3d 214, 217 (2d Cir. 2016).

In addition to prohibiting statements that are outright false, Section 10(b) prohibits

“half-truths, or statements that are misleading by omission.” In re Vivendi, S.A. Sec.

Litig., 838 F.3d 223, 239-40 (2d Cir. 2016). Once defendants choose to speak about


24

a topic, they therefore have “a duty to tell the whole truth,” including “to be both

accurate and complete.” JinkoSolar, 761 F.3d at 250.

Even under the heightened pleading standard of Rule 9(b) and the PSLRA,

“we do not require the pleading of detailed evidentiary matter in securities

litigation.” In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001). Instead,

a plaintiff must specify the fraudulent statements or omissions, “identify the speaker,

state where and when the statements were made, and explain why the statements

were fraudulent.” Muller-Paisner v. TIAA, 289 F. App’x 461, 463 (2d Cir. 2008).

A. THE DISTRICT COURT ERRED IN HOLDING THAT THE COMPLAINT FAILS TO PLEAD MATERIALLY FALSE AND MISLEADING STATEMENTS CONCERNING THE BUYER GROUP’S RELISTING PLAN

The law is clear that a defendant’s statement that it is not planning a course of

action is false when the defendant is already planning to do just that. The Supreme

Court in Basic addressed this exact situation, holding the defendant was not

permitted to falsely deny the existence of merger negotiations. 485 U.S. at 235-39.

Similarly, in Buxbaum v. Deutsche Bank, A.G., No. 98-cv-8460-JGK, 2000 WL

33912712 (S.D.N.Y. Mar. 6, 2000), the court denied defendants’ motion to dismiss

because “takeover talks were well under way by October 25, 1998,” when Deutsche

Bank’s CEO “falsely and knowingly denied [their] existence.” Id. at *19.

Defendants here falsely told investors that the Buyer Group did “not have any

current plans, proposals or negotiations” to engage in any transaction after the


25

Merger that would materially change the Company’s structure. (See supra Section

IV.C.1). They also misrepresented that there were no “undisclosed agreements or

arrangements” among the Buyer Group; that Qihoo would remain a private

company; and that there were “no viable alternative[s]” to the Merger. (Id.).

The FAC alleges ample facts showing that these statements were false because

the Buyer Group, led by Defendants Zhou and Qi, had a plan from before the Merger

to relist Qihoo in China for multiple times the transaction price. This evidence

includes multiple news articles discussing specific documents that were used to

solicit investors to participate in the Buyer Group. (A-422¶106, A-424¶110, A-

426¶113, A-427¶115). In addition, CW1 described a specific meeting that took place

in mid-2015, at which Qi told Qihoo’s Public Relations department to keep the

relisting plan secret. (A-435-37¶¶134-36). And these allegations are even stronger

because they corroborate each other and how Qihoo’s backdoor listing actually

occurred. (See supra Section IV.A).

All of this evidence confirms—and does far more than plausibly allege—that

the Buyer Group planned to relist Qihoo in China through a backdoor listing while

the Merger was pending. See Basic, 485 U.S. at 235-39; Buxbaum, 2000 WL

33912712, at *19; Martinek v. AmTrust Fin. Servs., Inc., No. 19-cv-8030-KPF, 2020

WL 4735189, at *12-14 (S.D.N.Y. Aug. 14, 2020) (holding statements that

defendants “‘will’ maintain the preferred stock’s listing” after a merger, and that


26

they “‘expected” the stock “would continue to be listed on the NYSE,” were

actionable when the company delisted the stock following the merger).

1. The District Court Incorrectly Held That Plaintiffs Were Required to Plead a “Concrete and Definite” Relisting Plan

The District Court incorrectly held that the Complaint does not adequately

plead the Buyer Group’s relisting plan because Plaintiffs were required to plead “the

existence pre-Merger of a specific and definite plan” or “concrete and definite plan

to relist.” (SA-20-21, SA-31, SA-35-37). The court also went even further, holding

that Plaintiffs are required to plead the plan’s “terms, participants, profitability, or

mechanics.” (SA-36). While the Complaint does in fact plead that this type of

information was secretly told to the Buyer Group before the Merger (see infra

Section VII.A.2), these details go above and beyond the level of specificity that

Plaintiffs are required to plead.

The law is clear that when a defendant states there is no plan for a corporate

transaction, that statement is false when such a plan exists, regardless of the plan’s

stage of development. Any questions concerning the plan’s significance or stage of

development are issues of fact related to materiality that cannot be decided at the

motion to dismiss stage. See Basic, 485 U.S. at 239 (holding that “[w]hether merger

discussions in any particular case are material . . . depends on the facts”); Buxbaum,

2000 WL 33912712, at *18 (same). This principle applies when defendants deny

plans for all types of corporate transactions because “[f]ollowing Basic, we have


27

consistently rejected a formulaic approach to assessing the materiality of an alleged

misrepresentation.” Ganino v. Citizens Utils. Co., 228 F.3d 154, 162-63 (2d Cir.

2000) (explaining that “materiality of merger negotiations depends on the specific

facts”); see also Joseph v. Mobileye, N.V., 225 F. Supp. 3d 210, 214, 219-20

(S.D.N.Y. 2016) (holding whether complaint adequately alleged that defendants

misrepresented “that there was no then-existing plans for an IPO” was an issue for

the trier of fact, where the company brought in “stakeholders who can help the

company move toward an IPO” that was “expected . . . in perhaps a year and a half”);

In re Merrill Lynch Auction Rate Sec. Litig., No. 09-md-2030-LAP, 2011 WL

1330847, at *2, 8 (S.D.N.Y. Mar. 29, 2011) (holding statements touting ARS market

were false in light of the fact that defendants “contemplated ending their [market]

intervention”).

Similarly, it is misleading for defendants to omit plans that are under “active

and serious consideration” when doing so renders other statements misleading. In re

Time Warner Inc. Sec. Litig., 9 F.3d 259, 268 (2d Cir. 1993). This rule applies

“whenever secret information renders prior public statements materially misleading,

not merely when that information completely negates the public statements.” Id.; see

also Harley-Davidson Motor Co. v. PowerSports, Inc., 319 F.3d 973, 976, 992 (7th

Cir. 2003) (holding that “draft slides to use for an upcoming investor roadshow”—

the type of evidence that exists here—created “at least a material question of fact as


28

to whether PowerSports had a present intent of not going public”); State of N.J. &

its Div. of Inv. v. Sprint Corp., No. 03-cv-2071-JWL, 2004 WL 1960130, at *7 (D.

Kan. Sept. 3, 2004) (holding “question of what defendants were considering”

concerning executives’ employment, “and to what extent . . . , is not one that can be

resolved on a motion to dismiss”). The falsity of Defendants’ statements is even

stronger here because the Buyer Group’s relisting plan not only rendered

Defendants’ statements misleading—it directly contradicted their affirmative

assurance that no such plan existed.

The District Court based its “concrete and definite” standard on Defendants’

statement in the Proxy Materials that “subsequent to the consummation of the

Merger, the Surviving Company’s management and Board will continuously

evaluate and review the Surviving Company’s entire business and operations from

time to time, and may propose or develop plans and proposals, . . . including the

possibility of relisting the Surviving Company or a substantial part of its business on

another internationally recognized stock exchange.” (SA-19-21, SA-35-36;

A-452-53¶¶170-71). According to the District Court, Plaintiffs are required to plead

a “concrete and definite” relisting plan (SA-31) because this warning “explicitly

disclosed the possibility of a future relisting.” (SA-19). The District Court, however,

misinterpreted Defendants’ statements and misapplied the well-established law

concerning falsity.


29

A plain reading of Defendants’ statements shows that the language that the

District Court relied on did not disclose the existence of the Buyer Group’s relisting

plan. Defendants told shareholders that “the Buyer Group does not have any current

plans, proposals or negotiations” for an extraordinary corporate transaction.

(A-452-53¶170). Defendants did not qualify this statement by stating just that there

were no “concrete and definite” current plans or, similarly, that there were no

binding agreements in place. They went further by assuring that there were no

“current plans”—or even any more tentative “proposals” or “negotiations”—at all.

They also disavowed any relisting plan in other ways, including by assuring

investors that there were no “undisclosed agreements or arrangements” among the

Buyer Group and that there was “no viable alternative” to the Merger. (Supra Section

IV.C.1).

The risk language that the District Court highlighted, in contrast, refers to the

possibility that “subsequent to the consummation of the Merger,” the Company “may

propose or develop plans and proposals” for a possible relisting. Even the District

Court’s reading highlights the inadequacy of this disclosure because, according to

the court, Defendants disclosed only “the possibility of a future relisting,” not that

they had current plans for one. (SA-19). But a careful reading of Defendants’

statement shows that they disclosed even less than what the District Court ascribed

to them. Defendants did not warn that Qihoo may conduct a relisting in the future,


30

but that the “plans and proposals” themselves would first be “propose[d] or

develope[d]” at some unspecified time after the Merger. (A-452-53¶170). Even

without Defendants’ affirmative denial of any “current plans,” reasonable investors

would be misled by this statement about the future into thinking that no such plans

or proposals existed when Defendants issued the Proxy Materials.

The law is clear, based on the plain meaning of Defendants’ statements, that

their disclosure of potential future plans and proposals does not convert Defendants’

disavowal of “current plans, proposals or negotiations” into a more-limited

renunciation of just “concrete and definite” plans.

a) Defendants’ Risk Language Does Not Protect Them From Liability

A warning about potential future actions cannot, as a matter of law, protect a

statement of current fact from liability. See In re Vivendi, 838 F.3d at 246 (holding

“safe-harbor provision does not protect this and other present representations”);

Iowa Pub. Emps.’ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137, 142 (2d Cir. 2010) (“It

is settled that the bespeaks-caution doctrine applies only to statements that are

forward-looking.”). Defendants’ statement that the Buyer Group did not have any

“current plans” is, literally, a statement of “current” fact (as are their other statements

disavowing current “proposals,” “negotiations,” “agreements,” or “arrangements”).

Their warning of possible plans or proposals that might be first developed in the


31

future cannot, as a matter of black-letter law, protect their statements of current fact

from liability.

This is not just a technical rule. Risk disclosures cannot protect statements of

current fact because such warnings do not aid defendants when the scenario being

warned about has already occurred. See MF Global, 620 F.3d at 144 (holding

safe-harbor does not apply when risk disclosures “fail[] to disclose that the risk has

[already] transpired” (quoting Rombach v. Chang, 355 F.3d 164, 173 (2d Cir.

2004)); Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 193-94 (S.D.N.Y.

2010) (holding “risk disclosures will not insulate Defendants from liability where

the risk allegedly disclosed has already occurred”). The plain meaning of

Defendants’ specific statements here shows that the risk that they warned about had

already transpired. (See supra at 29-30).

The District Court erred in two ways when it determined that Defendants’

warning of the possible future development of relisting plans or proposals

sufficiently disclosed the Buyer Group’s current plan. (SA-19-21). First, the cases

that the District Court cited dealt with situations where defendants disclosed the

exact information at issue. (See SA-20 (citing Shemian v. Research In Motion Ltd.,

No. 11-cv-4068-RJS, 2013 WL 1285779, at *20 (S.D.N.Y. Mar. 29, 2013)

(defendants disclosed that product was “Wi-Fi only”), aff’d, 570 F. App’x 32 (2d

Cir. 2014); and In re KeySpan Corp. Sec. Litig., 383 F. Supp. 2d 358, 376 (E.D.N.Y.


32

2003) (company disclosed regulatory effect of merger))). Here, in contrast,

Defendants’ plainly did not disclose the Buyer Group’s “current” plans. See Haw.

Structural Ironworkers Pension Tr. Fund v. AMC Entm’t Holdings, Inc., 422 F.

Supp. 3d 821, 837 (S.D.N.Y. 2019) (rejecting argument that allegedly omitted

information was disclosed, because “a plan to renovate some Carmike theaters in the

future is not the same thing as Carmike’s significant underinvestment in

improvements”).

Second, the cases that the District Court cited did not deal with information

that was disclosed through a warning about potential future events. The District

Court thus erroneously allowed Defendants’ risk disclosure to protect their

statements of current fact without applying the rule that risk disclosures cannot

insulate those statements from liability. The law is clear that planning statements

include even preliminary plans. (See supra at 24-28). Defendants’ risk disclosure

cannot transform the accepted meaning of their planning statements into more-

limited references to “concrete and definite” plans, as the District Court incorrectly

ruled, because doing so would insulate Defendants from liability for making

statements that are plainly false based on their ordinary meaning.

Indeed, this Court has held that statements about the existence of plans for

corporate transactions are false when contradicted by defendants’ plans at the time,

regardless of whether defendants warned that the plans might be different in the


33

future. For example, in P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92 (2d

Cir. 2004), a statement about “the existence of an agreement to try to plan an IPO”

was a statement about current plans that was not protected from liability by the

warning (among others) that “it is unlikely that a public market for the Units will

develop in the future.” Id. at 97-98 (emphasis in original) (cited by MF Global, 620

F.3d at 142). Just as the statement in Stolz that there was an agreement to try to plan

an IPO was not protected by the warning that a public market was “unlikely,”

Defendants’ statements that the Buyer Group had no “current plans” for a relisting

is not protected by the warning that it may develop such plans in the future. See also

Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 175-78 (2d Cir. 2001) (holding

statement to resigning CEO that “the company was not going to go public . . . in the

near future” was adequately alleged to be false where the company was “exploring

various options” for restructuring, including a “potential financial investor” and “a

possible leveraged recapitalization,” even though “Castellano was obviously aware

of some possibility that Y & R might go public” (emphasis in original)).

Defendants’ warning about possible future relisting plans also does not protect

them from liability because risk disclosures are unavailing when the thing being

warned about has become just more likely than the defendants represented, even if

it has not yet taken place. See JinkoSolar, 761 F.3d at 251 (holding risk disclosure

does not suffice when omitted information would “substantially affect a reasonable


34

investor’s calculations of probability” and “cause a reasonable investor to make an

overly optimistic assessment of the risk”). For example, the risk at issue in

Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167 (9th Cir. 2009), was the

“significant costs [that may] result[] from product liability claims,” not the existence

of the claims themselves. Id. at 1172, aff’d, 563 U.S. 27, 34 (2011). Even so,

defendants’ statement about that risk was adequately alleged to be misleading

because the existence of product liability claims made those risks far more likely

than defendants had represented. See Panther Partners Inc. v. Jianpu Tech. Inc., No.

18-cv-9848-PGG, 2020 WL 5757628, at *11-13 (S.D.N.Y. Sept. 27, 2020) (holding

disclosures about potential future regulation did not disclose “presently-existing

risk” based on non-compliance); City of Providence v. Aeropostale, Inc., No.

11-cv-7132-CM-THK, 2013 WL 1197755, at *11 (S.D.N.Y. Mar. 25, 2013)

(holding defendants failed to disclose “that the company anticipated that the

[inventory] problem might well extend into succeeding quarters”); In re Van Der

Moolen Holding N.V. Sec. Litig., 405 F. Supp. 2d 388, 400 (S.D.N.Y. 2005) (holding

warnings about regulatory risk were actionable because “employees were violating

NYSE rules”). Defendants’ warning of potential future plans for a relisting did not

disclose the likelihood that a relisting would occur given the Buyer Group’s current

relisting plan.


35

Furthermore, the case here is even starker than in cases where the thing being

warned about has become only more likely, even if it did not yet occur. The Buyer

Group’s relisting plan meant that the thing that they warned might occur in the

future—“propos[ing] or develop[ing] plans and proposals” for a “possible”

relisting—was not only more likely, but had already occurred and directly

contradicted Defendants’ affirmative statements denying the existence of such plans.

b) Defendants’ Risk Disclosure Itself Was False

Not only does Defendants’ statement about potential future plans not protect

them from liability—it is itself an additional false statement. Courts regularly hold

that “purported risk disclosures are misleading where the company warns only that

a risk may impact its business when that risk has already materialized.” In re

Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487, 516 (S.D.N.Y.

2013); Plumbers & Pipefitters Nat’l Pension Fund v. Davis, No. 16-cv-3591-GHW,

2020 WL 1877821, at *12 (S.D.N.Y. Apr. 14, 2020) (holding “statements that PSG

might experience these problems in the future” were misleading). Defendants’

warning that the Company might develop or propose a relisting plan in the future

was itself misleading because such a plan or proposal already existed.

c) How to Interpret Defendants’ Statements is a Factual Issue That Cannot be Decided at This Stage

The District Court also improperly held that Plaintiffs are required to show a

“concrete and definite” plan, because the question of whether “a reasonable investor


36

would have received a false impression from the [defendant’s] statement . . . is

generally a question reserved for the trier of fact.” In re Inv. Tech. Grp., Inc. Sec.

Litig., 251 F. Supp. 3d 596, 609 (S.D.N.Y. 2017). This is part of the inquiry into

whether the Buyer Group’s relisting plan was material, because it involves

determining “whether the statements alleged in the complaint were misleading in

light of the circumstances under which they were made.” Id. (quoting In re Par

Pharm., Inc. Sec. Litig., 733 F. Supp. 668, 677 (S.D.N.Y. 1990) (citing TSC Indus.,

Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976)); see also Martinek, 2020 WL

4735189, at *12 (assessing statements from the reasonable investor’s perspective in

light of defendant’s actions). Defendants’ risk disclosure does not alter this basic

rule. See In re Mylan N.V. Sec. Litig., No. 16-CV-7926 (JPO), 2018 WL 1595985,

at *9 (S.D.N.Y. Mar. 28, 2018) (holding “the test is whether a reasonable investor

could have been misled about the nature of the risk”).

How investors would interpret Defendants’ statements that “the Buyer Group

does not have any current plans, proposals or negotiations” for an extraordinary

transaction such as a relisting—and that they may in the future “propose or develop

plans and proposals”—in light of the Buyer Group’s relisting plan is therefore a

factual issue that the court cannot decide on a motion to dismiss. Defendants’

statements of current fact, or the materiality of Defendants’ actions to those

statements, are particularly appropriate for a broad interpretation because they


37

referenced not just “plans,” but also “proposals,” “negotiations,” and “undisclosed

agreements or arrangements” among the Buyer Group, as well as “viable

alternatives” to the Merger. (Supra at 29-30).

Courts consistently hold that the reasonable interpretation of the defendant’s

statements cannot be resolved on a motion to dismiss. See In re Vivendi, 838 F.3d at

249 (affirming district court’s upholding of jury’s finding based on plaintiffs’

interpretation of the term “liquidity risk”); Castellano, 257 F.3d at 178 (holding there

was “a jury question as to” the proper interpretation of defendant’s statement); City

of Warren Police & Fire Ret. Sys. v. World Wrestling Entm’t Inc., No.

20-cv-2031-JSR, 2020 WL 4547217, at *4 (S.D.N.Y. Aug. 6, 2020) (holding

definition of the “renewal” of a contract creates a factual issue); DoubleLine Capital

LP v. Construtora Norberto Odebrecht, S.A., 413 F. Supp. 3d 187, 210 (S.D.N.Y.

2019) (same as to the term “political risk”); In re Refco Inc. Sec. Litig., No.

07-md-1902-JSR, 2010 WL 11500542, at *8 (S.D.N.Y. Oct. 22, 2010) (same as to

“prime broker”).

The District Court’s imposing its “concrete and definite” interpretation on

Defendants’ planning statements based on their warning of possible future relisting

plans was particularly improper because the issue of whether risk disclosures “were

substantial enough to render the risk unimportant to reasonable investors” are for


38

“discovery [to] reveal.” Credit Suisse First Bos. Corp. v. ARM Fin. Grp., Inc., No.

99-cv-12046-WHP, 2001 WL 300733, at *9 (S.D.N.Y. Mar. 28, 2001).

Furthermore, Defendants’ statements here are not even open to interpretation

because a plain reading demonstrates that Defendants represented that the Buyer

Group did not have any “current” plans, agreements, negotiations, or arrangements

to relist, while they warned only that the Company might first develop such plans or

proposals in the future. These statements are adequately alleged to be false because

the FAC makes specific allegations showing that the Buyer Group had its relisting

plan while the Merger was pending.

In addition to improperly crediting Defendants’ inadequate risk disclosure, the

District Court incorrectly relied on Lydon v. Estate of Winston, 715 F. Supp. 600

(S.D.N.Y. 1989), to hold that Plaintiffs must plead “the existence pre-Merger of a

specific and definite plan for Qihoo to relist.” (SA-21). That is not what Lydon held.

The plaintiff in Lydon “baldly assert[ed] that the simple fact that the [company]

turned a profit” 17 months after the merger was sufficient to support its claims. Id.

715 F. Supp. at 601. The court in Lydon did not hold that allegations of a “specific

and definite plan” were required, but that the plaintiff did not allege any evidence at

all of a plan prior to the merger to resell the company at higher price. Here, in

contrast, there is overwhelming evidence that the Buyer Group had a plan before the

Merger to relist the Company in China at multiple times the Merger price. Moreover,


39

the plaintiff in Lydon alleged only that the defendant failed to “advise that it planned

to resell” stock at a higher price, but did not allege any affirmative statement denying

the plan’s existence. Id. at 601.

In sum, Defendants’ risk disclosure cannot protect their false statements of

then-existing fact because (1) the plain meaning of these statements shows that the

thing that Defendants warned about had already transpired; (2) the risk disclosure

was itself misleading; and (3) how investors would interpret Defendants’ statements

is itself a factual issue that the District Court improperly resolved in Defendants’

favor. The District Court’s misguided analysis does not exempt Defendants from the

well-established rule that the denial of plans for a corporate transaction is false when

such plans currently exist, regardless of their stage of development. The FAC’s

specific allegations of the Buyer Group’s relisting plan leave no doubt—and easily

plead a plausible inference—that the Buyer Group planned while the Merger was

pending to relist Qihoo in China for multiple times the Merger price.

2. The District Court Improperly Discounted Evidence of the Buyer Group’s Relisting Plan

In addition to applying the wrong legal standard concerning the Buyer

Group’s relisting plan, the District Court improperly discounted the overwhelming

evidence of a relisting plan alleged in the FAC. These allegations satisfy even the

District Court’s erroneous “concrete and definite” standard. At the motion to dismiss


40

stage, the court is required to “accept all factual allegations as true and draw all

reasonable inferences in favor of the plaintiff.” JinkoSolar, 761 F.3d at 249. The

District Court did just the opposite.

a) The District Court Improperly Discounted Evidence in News Articles

Courts regularly find that allegations in news articles reveal falsity in

securities class actions. See DoubleLine Capital LP v. Odebrecht Fin., Ltd., 323 F.

Supp. 3d 393, 422-25, 444, 457-58 (S.D.N.Y. 2018) (holding New York Times article

revealed that senior executives participated in bribery scheme); McIntire v. China

MediaExpress Holdings, Inc., 927 F. Supp. 2d 105, 125 (S.D.N.Y. 2013) (holding

allegations “viewed holistically,” including based on multiple news articles, support

inference of falsity).

While the District Court acknowledged that news articles are credited to the

same “extent that other factual allegations would be,” it did not apply that standard

to the allegations here. (SA-26 (citing In re Optionable Sec. Litig., 577 F. Supp. 2d

681, 690 (S.D.N.Y. 2008)). Unlike in Optionable, where “the articles provide no

basis for believing that the unidentified source is likely to have known the relevant

facts about the Deloitte report,” multiple reporters here independently saw firsthand

the secret planning materials that were used to solicit members of the Buyer Group.

One reporter even obtained these planning materials from Huatai, the main

underwriter for the Merger. (A-424¶110). These corroborative sources leave no


41

doubt—and plead much more than a plausible inference—as to the authenticity of

these secret planning materials.

The allegations here include the same type of evidence that courts regularly

hold suffices to show falsity. For example, in In re Lihua Int’l, Inc. Securities

Litigation, No. 14-cv-5037-RA, 2016 WL 1312104 (S.D.N.Y. Mar. 31, 2016), the

court rejected the defendants’ arguments that news articles were inadequate because

they relied on anonymous sources and referred to an “unspecified time.” Id. at *11-

12. The complaint adequately alleged falsity based on “People’s Daily and Danyang

Daily articles describe[ing] specific ways in which Lihua’s production allegedly

decreased . . . in the first quarter of 2013.” Id.; see also DoubleLine, 323 F. Supp. 3d

at 457-58; McIntire, 927 F. Supp. 2d at 125.

According to the District Court, the articles here did not plead the relisting

plan’s “terms, participants, profitability, or mechanics,” and did not “factually mesh”

with the timing of the relisting that ended up taking place. (SA-36). But the FAC did

plead these types of details. The articles here disclosed that the relisting plan was

presented to private investors as part of the process for soliciting them to participate

in the Buyer Group (A-422¶106, A-424¶110, A-426¶113, A-427¶115); the

Company’s value upon relisting (five times the Merger price) based on better

financial projections that what Defendants disclosed in the Proxy Materials

(A-427¶115); the timing for the relisting (A-422¶106); that the relisting would be


42

conducted through a backdoor listing (A-424¶110); that the relisting had been

planned since 2015, and that Qihoo would be split up so that just its core businesses

would be included in the relisting (A-426¶113).

The District Court’s contrary interpretation improperly accepted Defendants’

competing version of events rather than drawing all reasonable inferences in

Plaintiffs’ favor, as the court was required to do. For example, the District Court

noted that the Financial Times article discussed in the FAC was labeled an “opinion

piece.” (SA-34n.11). But that does not change the factual nature of the information

that was reported in the article based on specific firsthand evidence that the author

described in detail. (A-427¶115). Moreover, contrary to the District Court’s

interpretation, while the need to undertake a restructuring as part of the relisting plan

added time to the process, it does not diminish the firmness of the plan. (SA-37).

This plan to split up Qihoo’s main business from its other businesses was part of the

documented relisting plan from before the Merger. (A-426¶113). The FAC also

explains why the relisting plan here must have already been in process while the

Merger was pending based on the general process for backdoor listings in China.

(A-422-24¶¶108-09). The news articles here go far beyond the “generalized

forecasting or factually unsourced speculation” that the District Court described.

(SA-27).


43

b) The District Court Improperly Discounted CW1

The District Court also improperly discounted allegations from CW1.

Statements from confidential witnesses in securities fraud class actions should be

credited when (1) the witness’s account is corroborated by “other facts” or (2) “they

are described in the complaint with sufficient particularity to support the probability

that a person in the position occupied by the source would possess the information

alleged.” Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000). The FAC satisfies both

of these independent criteria.

CW1 attested to a specific meeting in mid-2015—well before Defendants

issued the Proxy Materials in 2016—at which Defendant Qi told Qihoo’s Public

Relations department not to disclose any information about the Company’s relisting.

CW1 had a specific memory of this meeting. Moreover, CW1 explained that Qi was

giving this direction because knowledge of the relisting was widespread in the

Company by April 2015, the Public Relations department was responsible for

external communications, and Qi wanted to ensure that the information be kept

secret. (A-435-36¶¶134-35).

These allegations easily satisfy the Novak standard. First, courts regularly

credit confidential witnesses that describe events with this level of detail, particularly

when they point to a specific meeting that the defendant attended. See Galestan v.

OneMain Holdings, Inc., 348 F. Supp. 3d 282, 289, 300, 302 (S.D.N.Y. 2018)


44

(crediting former employees because they identified specific meetings that

defendants attended, including “a meeting in the early fall of 2016”); Plumbers &

Pipefitters Nat’l Pension Fund v. Orthofix Int’l N.V., 89 F. Supp. 3d 602, 617,

610-11 (S.D.N.Y. 2015) (crediting a confidential witness because he attended a

meeting in Germany with the defendant); Aeropostale, Inc., 2013 WL 1197755, at

*3, *19 (same); In re Sturm, Ruger & Co. Sec. Litig., No. 09-cv-1293-CFD, 2011

WL 494753, at *8 (D. Conn. Feb. 7, 2011) (same).

Second, courts determine whether a person in the witness’s position would

have the knowledge that they describe based on the context of how they learned the

information at issue, not based on their title or level of seniority. See World

Wrestling Entm’t, 2020 WL 4547217, at *5 (holding testimony “based on hearsay

and indirect knowledge” should be credited when it is “probable” the witness “would

have had access to” the information based on their description of events); Wallace

v. Intralinks, No. 11-cv-8861-TPG, WL 1907685, at *1 (S.D.N.Y. May 8, 2013);

Freudenberg, 712 F. Supp. 2d at 196-97 (holding witnesses occupied

“knowledgeable positions” based on firsthand interactions with the defendants).

CW1 easily meets this standard based on the witness’s role in the Public Relations

department and his or her description of a particular meeting that the witness

attended, recalled specifically, and explained in detail.


45

Third, while corroboration of CW1’s testimony is not necessary given the

level of specificity that the witness described, the relisting plan that CW1 described

is corroborated by the FAC’s other allegations, including the many news articles

described above. CW1 also confirmed that by late 2015, the relisting was planned to

take place through a backdoor listing rather than an IPO. (A-436¶135). Moreover,

CW1 explained that the meeting with Qi took place in mid-2015 because employees

started to learn of the relisting plan in April 2015, which is contemporaneous with

when Zhou started the Merger process. (A-436¶135n.25). This corroboration is an

independent basis for crediting CW1’s allegations. Novak, 216 F.3d at 314.

The District Court ruled that the Complaint “does not contain any independent

well-pled factual allegations to corroborate the confidential source’s statements.”

(SA-30). But the District Court paradoxically held that the news reports discussed

in the FAC also lacked any corroborative evidence. (SA-36-37). The court thus

improperly found the news articles and CW1 were both lacking while ignoring that

they corroborate each other, as well as the FAC’s other detailed allegations of how

the relisting actually occurred.

The cases that the District Court cites to challenge the level of specificity of

CW1’s allegations dealt with far-more attenuated circumstances, where the

witnesses did not describe information with the same level of detail that CW1 does

here. (See SA-30-31 (citing Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 594-95


46

(S.D.N.Y. 2011) (noting that three CWs were not alleged to have “ever had any

contact with anyone” at the company, and the complaint failed to allege “what kind

of access CW4 had to Zhu, in what form and context Zhu made his alleged statement,

or how CW4 was privy to that statement”), and Schiro v. Cemex, S.A.B. de C.V., 396

F. Supp. 3d 283, 304-05 (S.D.N.Y. 2019) (plaintiffs did not allege how the CWs’

allegations “made their way . . . to the Individual Defendants” or “any other facts”

showing the basis for the CW’s knowledge))). CW1, in contrast, described a specific

meeting—including the timing, content, and reason for the meeting—where Qi told

Qihoo’s Public Relations department to keep the relisting plan secret, as well as other

information widely known inside the Company corroborating that a relisting was

planned via a backdoor listing rather than an IPO. (A-435-37¶¶134-36).

Lastly, the District Court claimed that “plaintiffs’ counsel appear to have done

nothing whatsoever to confirm the veracity of CW1.” (SA-31-32). But the court

acknowledged that “the complaint implies but does not clearly state [that the

interview of CW1] was conducted by plaintiff’s counsel.” (SA-28). This is therefore

not a case where the Complaint merely repeats a third-party’s “characterization of

purported interviews with anonymous sources.” Long Miao v. Fanhua, Inc., 442 F.

Supp. 3d 774, 802 (S.D.N.Y. 2020). The District Court once again improperly

construed the FAC against Plaintiffs rather than draw all reasonable inferences in

their favor.


47

In sum, the FAC alleges the Buyer Group’s relisting plan based on many

sources that describe the plan in detail, which are buttressed by the fact that they

corroborate one another. Rather than accepting these allegations “as true and

draw[ing] all reasonable inferences in favor of the plaintiff[s],” as the District Court

was required to do, the court did just the opposite, interpreting the FAC’s substantial

allegations against Plaintiffs at every turn. JinkoSolar, 761 F.3d at 249.

B. THE DISTRICT COURT ERRED IN DISMISSING THE FAC’s CLAIMS CONCERNING DEFENDANTS’ OTHER MISSTATEMENTS FOR THE “SAME REASON”

The District Court held that the FAC contends that all of Defendants’ alleged

misstatements “were false for the same reason: when these statements were made,

the Buyer group already planned to relist Qihoo at a far-higher valuation in China

post-transaction.” (SA-17-18). This plainly misreads the FAC, which specifically

alleges that Defendants’ statements concerning the fairness of the Merger and the

reasons for the Merger were false and misleading for separate reasons, independent

of the Buyer Group’s relisting plan. (A-448-50¶159(c)-(d)).

The District Court did not address the falsity of these statements separate from

the Buyer Group’s relisting plan at all. The FAC adequately alleges that these

statements were false and misleading for the following reasons.


48

1. Statements About the Fairness of the Merger Price

The FAC explained specifically that Defendants’ statements about the fairness

of the Merger price were false and misleading because “Defendants disclosed more

positive financial projections privately to members of the Buyer Group when

Defendant Zhou solicited investors to participate in the Merger than what

Defendants disclosed publicly in the Proxy Materials.” (A-448-49¶159(c),

A-433-34¶131). Moreover, when the SEC directed Defendants to clarify the basis

for the projections in the Proxy Materials, Defendants provided assumptions that

failed to account for the increased business opportunities that Qihoo would have in

China after the Merger. (A-472-74¶¶ 239-41; see supra Section IV.C.2).

The law is clear that when proxy materials misrepresent the basis for the

fairness of a merger, they support a claim under the Exchange Act. Koppel v. 4987

Corp., 167 F.3d 125, 133 (2d Cir. 1999) (holding a merger recommendation is

actionable when based on analysis that fails to account for known financial

situation); Bricklayers & Masons Local Union No. 5 Ohio Pension Fund v.

Transocean Ltd., 866 F. Supp. 2d 223, 244 (S.D.N.Y. 2012) (fairness statement

relied on false and misleading information). For example, in Lickteig v. Cerberus

Capital Management, L.P., No. 19-cv-5263-GHW, 2020 WL 1989424 (S.D.N.Y.

Apr. 26, 2020), the court held that “use of 7.5 as the TEV/EBITDA multiple in the

Valuation can serve as the basis for a securities fraud claim” where the defendant


49

told a colleague that a higher figure was a “reasonable multiple” and a slide deck

showed that defendants knew the figure was “grossly understated.” Id. at *4, *10-11.

Courts also regularly find fairness opinions to be misleading where, as here,

they are based on a worse set of projections than what the defendants disclosed to

the buyer of the company. See Baum v. Harman Int’l Indus., Inc., 408 F. Supp. 3d

70, 88 (D. Conn. 2019) (defendant provided only the better projections to the buyer

and used the worse set “solely for the fairness opinion”); Azar v. Blount Int’l, Inc.,

No. 16-cv-483-SI, 2017 WL 1055966, at *8 (D. Or. Mar. 20, 2017) (plaintiffs

alleged that “more pessimistic financial projections [were presented] to shareholders

to justify a merger”); In re Hot Topic, Inc. Sec. Litig., No. 13-cv-2939-SJO-JCx,

2014 WL 7499375, at *2, *6 (C.D. Cal. May 2, 2014) (worse projections relied “on

many flawed and inaccurate assumptions”). Furthermore, Plaintiffs’ allegations are

“comparatively more compelling” because the defendants in Baum and Hot Topic at

least included the better projections in the proxy statement—and the Blount

defendants “generally refer[red] to” the undisclosed projections—but Defendants

here never revealed the existence of the secret projections at all. Blount, 2017 WL

1055966, at *8.2

2 Even if defendants’ fairness statements are considered statements of opinion, they are false for the independent reasons that 1 – Defendants did not honestly believe the financial projections that formed the basis for these statements, since Zhou and Qi used a different set of financial projections when soliciting investors to participate in the Buyer Group and 2 – they conflicted with Qihoo’s true undisclosed financial projections. See Omnicare, Inc. v. Laborers Distr. Council Constr. Indus. Pension Fund, 575 U.S. 175, 183-85, 188-92 (2015); Lickteig, 2020


50

The FAC plausibly alleges that Defendants misrepresented the fairness of the

Merger price by concealing these more favorable projections and the increased

business opportunities that Qihoo would have once it was no longer listed in the U.S.

(A-427-30¶¶114-22, A433-34¶131, A-444-46¶¶153-56, A-483-84¶273). These

confidential projections that were disclosed only to the Buyer Group, but not

Qihoo’s shareholders, supported the Company being valued at five times the Merger

price because they “contain[ed] ambitious estimates of future net income and other

performance metrics going out to 2019.” (A-427¶115). In contrast, the projections

that Defendants disclosed in the Proxy Materials, and that formed the basis for their

fairness opinion, “suggested that the company’s prospects were not nearly that

bright.” (Id.).

The importance of these hidden projections is highlighted even further by their

central role in the Appraisal Action. (Supra Section IV.B.3). The key documents that

Qihoo sought to conceal there contained information related to Qihoo’s projections

that formed the basis for J.P. Morgan’s valuation and fairness opinion. (A-

439-41¶¶143-44). Qihoo also tried to conceal the existence of basic financial

documents that are crucial to understanding the Company’s true value, including due

WL 1989424, at *10; In re Avon Sec. Litig., No. 19-cv-1420-CM, 2019 WL 6115349, at *17 (S.D.N.Y. Nov. 18, 2019) (holding beliefs are irrelevant when statements conflict with omitted information); In re Lehman Bros. Sec. & ERISA Litig., 131 F. Supp. 3d 241, 254, 258-59 (S.D.N.Y. 2015) (a valuation is misleading if it is not supported by “relevant data”).


51

diligence materials from the Merger, the Special Committee’s documents, and

regular financial reports. (A-441¶¶145-47). The Cayman Islands court described

Qihoo’s obstructionist behavior as “strange” and “unfortunate, (even peculiar),” and

ordered the “intrusive and exceptional” remedy of appointing a forensic expert to

oversee discovery. (A-441-42¶¶146-49, A-443-44¶151). Qihoo’s egregious tactics

in the Appraisal Action support the inference that Defendants were trying to hide

information related to the Company’s undisclosed financial projections that confirm

the unfairness of the Merger price.

2. Statements About the Reasons for the Merger

Defendants also provided false reasons for the Merger. (A-449-50¶159(d)).

They stated that the Special Committee and the Board determined that the Merger

was in the best interests of Qihoo’s shareholders because (1) “the Company faces

increased competition in the Company’s industry from internet security product and

service providers and PRC-based internet companies” and (2) “the recent economic

slowdown in China and expected sustained macroeconomic challenges place

pressure on the Company’s revenue growth and other key financial and operating

metrics.” (A-469-72¶¶234-38). Similarly, the Proxy Materials stated that the

“primary detriments of the Merger to the Buyer Group” included “[t]he business

risks facing the Company, including increased competition and government

regulation.” (A-433-467¶¶130, 225). These reasons were false and misleading


52

because the Buyer Group actually conducted the Merger so that it could realize far

greater value from the Company’s increased business in China. (A-433-35¶¶130-33,

A-449-50¶159(d); supra Section IV.C.3).

The Supreme Court explained in Virginia Bankshares, Inc. v. Sandberg, 501

U.S. 1083 (1991), that defendants’ “explanation of their reasons for recommending”

a merger are actionable because investors “will think it important to know the

directors’ beliefs about the course they recommend and their specific reasons for

urging the stockholders to embrace it.” Id. at 1090-91. Courts therefore regularly

uphold claims based on false reasons for a course of action. See Nakkhumpun v.

Taylor, 782 F.3d 1142, 1148-49 (10th Cir. 2015) (holding defendant’s incomplete

explanation for why a real estate deal failed adequately pled falsity); Capital Real

Estate Inv’rs Tax Exempt Fund Ltd. P’ship v. Schwartzberg, 929 F. Supp. 105, 115

(S.D.N.Y. 1996) (holding that “[w]here an issuer recommends a course of action for

a stated reason and the evidence then establishes that it did not act for that reason, it

may be held liable”); (see also supra at 48-49).

Defendants’ recommendation of the Merger based on the business and

regulatory difficulties that Qihoo faced in China was misleading in light of the Buyer

Group’s conducting the Merger in order to capitalize on the undisclosed increased

business opportunities that Qihoo would have in China.


53

C. THE COMPLAINT ADEQUATELY PLEADS SCIENTER, RELIANCE, AND LOSS CAUSATION

The District Court did not address Defendants’ arguments that the Complaint

does not adequately plead scienter, reliance, and loss causation. Plaintiffs

respectfully submit that this Court should remand these issues for the District Court

to consider in the first instance. See Absolute Activist Value Master Fund Ltd. v.

Ficeto, 677 F.3d 60, 71 (2d Cir. 2012) (remanding arguments that “the district court

did not consider . . . in the first instance”); Newman v. Warnaco Grp., Inc., 335 F.3d

187, 195 (2d Cir. 2003) (same as to argument that plaintiffs “did not plead fraud with

particularity”). The District Court should find that the Complaint adequately pleads

these elements for the following reasons that Plaintiffs explained in more detail in

their Opposition to Defendants’ Motion to Dismiss the FAC. (A-779-814).

1. The Complaint Adequately Pleads Scienter

Scienter may be pled either by alleging facts (a) showing “defendants had both

motive and opportunity to commit fraud” or (b) “that constitute strong circumstantial

evidence of conscious misbehavior or recklessness.” Novak, 216 F.3d at 307. The

test is “whether all of the facts alleged, taken collectively” support a strong inference

of scienter. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-24

(2007). These allegations must be only “cogent and at least as compelling as any

opposing inference.” Id.


54

The FAC adequately alleges both that (1) Defendants Zhou and Qi had the

motive and opportunity to defraud Qihoo’s shareholders and (2) Defendants engaged

in conscious misbehavior and recklessness. Each of these reasons is an independent

basis for scienter. See Ganino, 228 F.3d at 170 (“Complaint need only plead scienter

by alleging either motive and opportunity, or conscious or reckless misbehavior”);

In re Shanda Games Ltd. Sec. Litig., No. 18-cv-2463-ALC, 2019 WL 11027710, at

*7 (S.D.N.Y. Sep. 30, 2019) (finding scienter based on motive alone). Moreover,

each of the Individual Defendants’ scienter is attributable to Qihoo. See Loreley Fin.

(Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 177-78 (2d Cir. 2015).

a) The Complaint Adequately Pleads Motive and Opportunity

The law is clear that when defendants buy a company based on false

information that allows them to pay significantly less than its true value—precisely

the situation here—they have a motive to commit fraud. Lickteig, 2020 WL

1989424, at *13 (holding motive adequately pled because “[a] lower EBITDA

multiple meant that Defendants were required to pay Lickteig less”); Shanda, 2019

2019 WL 11027710, at *7 (holding CEO and Director, “as members of Buyer Group,

had the motive and opportunity to secure a low transaction price”). Zhou and Qi had

an exceedingly strong motive to mislead Qihoo’s ADS holders so that they could

obtain billions of dollars in ill-gotten gains by substantially underpaying for the


55

Company and relisting it in China for over five times the Merger price. (A-406¶62,

A-419¶¶96-98, A-478-80¶¶258-63); (see also A-801-02).

b) The Complaint Adequately Pleads Defendants’ Conscious Misbehavior and Recklessness

The Complaint also pleads an independent basis for scienter based on the

abundant evidence showing that Zhou, Qi, and Chen each knew of or were reckless

as to the Buyer Group’s relisting plan and the Company’s true financial condition.

Among other allegations described in the FAC, news articles discuss specific

“marketing materials” showing a documented plan for the Buyer Group to relist

Qihoo in China at multiple times the Merger price. (Supra Section IV.A.1). Zhou

was aware of these documents because he led the Merger and decided personally

which investors could participate in the Buyer Group. (A-399-400¶¶41-42,

A-430¶123, A-431-32¶126). He also admitted that he had a years’-long plan to

return Qihoo to China so that it could capitalize on increased opportunities in the

internet security business. (A-428-32¶¶118-28; supra Section IV.B.2). In addition,

CW1 establishes a strong inference of Qi’s scienter. (Supra Section IV.A.2).

Qihoo’s obstructionist efforts in the Appraisal Action trying to hide evidence

of Qihoo’s true value also show Defendants’ scienter. (Supra Section IV.B.3); see

Constr. Laborers Pension Tr. for S. Cal. v. CBS Corp., 433 F. Supp. 3d 515, 548

(S.D.N.Y. 2020) (holding that “effort to obstruct the internal investigation is


56

circumstantial evidence of scienter”).

The Complaint also pleads a strong inference of Defendant Chen’s scienter

because he was given free reign as Chairman of the Special Committee to consider

all evidence necessary to assess the Merger and participated in specific meetings

where Qihoo’s financial projections were discussed. (A-482¶270). These allegations

support a strong inference that Chen knew or ignored the falsity of the Proxy

Materials. The FAC similarly alleges Qihoo’s scienter though Alex Zuoli Xu, the

Company’s CFO. He led the Company’s due diligence for the Merger and advanced

Qihoo’s evasive strategy in the Appraisal Action. (A-401¶47, A-439-40¶143,

A-450¶161, A-482¶270, A-485-86¶278); (see also A-801-05).

c) The Individual Defendants’ Roles Strongly Support Their Scienter

A plaintiff may base scienter allegations “on the ‘core operations doctrine,’

which permits an inference that a company and its senior executives have knowledge

of information concerning the ‘core operations’ of a business.” In re Hi-Crush

Partners L.P. Sec. Litig., No. 12-cv-8557-CM, 2013 WL 6233561, at *26 (S.D.N.Y.

Dec. 2, 2013). As Qihoo’s top executives, largest shareholders, and the leaders of

the Buyer Group, Zhou and Qi, by definition, had to know about the relisting plan.

(A-394-95¶¶22-27, A-399-400¶¶41-42, A-406-07¶¶62-64, A-419¶98, A-475-

77¶¶247-54, A-478-79¶¶258-60, A-481¶266, A-482¶270); Similarly, Chen—as the


57

Director that was tasked with representing Qihoo’s shareholders in the Merger—

either knew about this plan or failed to see the obvious by ignoring the Buyer

Group’s documented plan and valuation of the Company. (See A-805-06),

In sum, a common-sense review of the FAC as a whole creates an inference

of scienter that is “at least as compelling” as any inference that Defendants did not

know about or ignore the relisting plan, Qihoo’s fair value, or the Buyer Group’s

true reasons for the Merger. Tellabs, 551 U.S. at 324-26. The FAC pleads a strong

inference of Defendants’ conscious misbehavior and recklessness based on these

allegations, as well as others set out in the FAC. (See A-801-07).

2. The Complaint Adequately Pleads Reliance

Defendants argued below only that “claims with respect to putative class

members who received payments through the Merger” do not adequately allege

reliance. (A-552; A-393¶¶19-20, A-497-99¶¶308-11). They therefore conceded that

Plaintiffs’ claims based on their sale of Qihoo securities on the New York Stock

Exchange during the Class Period and before the Merger are entitled to the

presumption of reliance under Basic. (See A-807).

Plaintiffs’ additional sales of their Qihoo securities in the Merger are also

entitled to a presumption of reliance for the following four independent reasons.

First, the reliance requirement is satisfied under Section 10(b) when shareholders’

“vote, sale of shares, or other action[,] was required” for a merger that the buyer


58

obtained through deceptive conduct. Grace v. Rosenstock, 228 F.3d 40, 48-49 (2d

Cir. 2000). This rule is rooted in the Supreme Court’s holding that reliance is

presumed where the votes of minority shareholders are needed for a merger. See

Basic, 485 U.S. at 243 (citing Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 382 n.5,

384-85 (1970)). That is precisely the case here, where approval of minority

shareholders at the March 30, 2016 shareholder vote was required for the Merger to

proceed. (A-414-15¶85); (see also A-808-09).

Second, the Supreme Court has explained that “[t]he ‘fundamental premise’

underlying the” fraud-on-the-market presumption under Basic “is that an investor

presumptively relies on a misrepresentation so long as it was reflected in the market

price at the time of his transaction.” Halliburton Co. v. Erica P. John Fund, Inc.,

573 U.S. 258, 278 (2014) (“Halliburton II”). Market efficiency is only an “indirect

proxy for price impact,” which is the basis for the presumption. Id. at 281.

The fraud-on-the-market presumption applies here because Plaintiffs can

show directly that Defendants’ misrepresentations impacted the price at which they

sold their Qihoo securities in the Merger. “Thus, ‘defendant[s]’ statements had price

impact—that is, an effect on its share price.” Ark. Teacher Ret. Sys. v. Goldman

Sachs Grp., Inc., 955 F.3d 254, 261 (2d Cir. 2020). Moreover, at a minimum, the

question of price impact raises factual issues that require expert evidence and a

hearing. See In re Goldman Sachs Grp., Inc. Sec. Litig., No. 10-cv-3461-PAC, 2018


59

WL 3854757, at *1 (S.D.N.Y. Aug. 14, 2018), aff’d sub nom. Ark. Teacher Ret. Sys.,

955 F.3d 254; Halliburton II, 573 U.S. at 272 (“market efficiency is a matter of

degree,” and thus “a matter of proof” of the extent of price impact); (see also A-807-

08).

Third, the fraud-on-the-market presumption applies because what matters

under Basic is that the plaintiff’s transactions are tied to securities that trade in an

efficient market, not that the securities at issue themselves trade in an efficient

market. See In re Forcefield Energy Inc. Sec. Litig., No. 15-cv-3020-NRB, 2015

WL 4476345, at *4 (S.D.N.Y. July 22, 2015) (plaintiff “plausibly relied on the

market[]” price in an off-market exchange). Courts apply this principle in many

different contexts. See Black v. Finantra Capital, 418 F.3d 203, 205-06, 209-10 (2d

Cir. 2005) (holding Basic presumption applies to privately negotiated transactions

even if the price of the publicly traded stock was just “one of several factors taken

into account” in the private transaction). Plaintiffs are entitled to the Basic

presumption because they sold their securities in the Merger based on the market

price of Qihoo ADS on the NYSE during the Class Period. (See-A-809).

Fourth, the presumption applies under Affiliated Ute Citizens of Utah v.

United States, 406 U.S. 128, 131 (1972), because the FAC alleges that Defendants

had independent duties under Cayman Islands law (and Section 20A) to disclose

information about the relisting and Qihoo’s financial condition. (A-491-92¶¶293-94,


60

A-499-500¶315, A-502¶327); (see also A-809-10).

3. The Complaint Adequately Pleads Loss Causation

“Allegations of loss causation are evaluated under [Rule 8(a)’s] notice

pleading standard.” In re Fairway Grp. Holding Corp. Sec. Litig., No. 14-cv-0950-

LAK-AJP, 2015 WL 249508, at *16 (S.D.N.Y. Jan. 20, 2015). Moreover, regardless

of whether Rule 9(b) or Rule 8(a) applies, “the securities fraud plaintiff’s burden is

not a heavy one” and requires only “some indication of the loss and the causal

connection.” Speakes v. Taro Pharm. Indus., Ltd., No. 16-cv-8318-ALC, 2018 WL

4572987, at *10 (S.D.N.Y. Sept. 24, 2018) (quoting Dura Pharm., Inc. v. Broudo,

544 U.S. 336, 347 (2005)). This Court has held that plaintiffs may recover damages

based on a claim that “at the time of the merger, [the] stock was worth considerably

more than” what the proxy disclosed. Wilson v. Great Am. Indus., Inc., 855 F.2d

987, 996-97 (2d Cir. 1988); see also Basic, 485 U.S. at 228, 245; Lewis v. Termeer,

445 F. Supp. 2d 366, 371 (S.D.N.Y. 2006); (see also supra Section VII.B.1). The

FAC easily satisfies this standard by alleging that Defendants misrepresented

Qihoo’s value at the time of the Merger based on (1) the Buyer Group’s plan to relist

Qihoo at five times the Merger price and (2) Qihoo’s true business opportunities and

financial projections. (A-444-47¶¶152-58, A-486¶279); (see also A-810-11).


61

D. THE DISTRICT COURT ERRED IN DISMISSING PLAINTIFFS’ CLAIMS UNDER SECTIONS 20A AND 20(a)

The District Court dismissed Plaintiffs’ claims under Sections 20A and 20(a)

of the Exchange Act based on its holding that the Complaint fails to plead a predicate

violation of Section 10(b). (SA-37-38). That ruling should be reversed for the

reasons described above.

VIII. CONCLUSION

For the reasons described above, the District Court’s dismissal should be

reversed and this Court should rule that the FAC adequately pleads false and

misleading statements under Section 10(b).

Dated: November 23, 2020 Respectfully submitted, POMERANTZ LLP By: /s/ Jeremy A. Lieberman Jeremy A. Lieberman Michael Grunfeld 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 E-mail: [email protected] E-mail: [email protected] Counsel for Plaintiffs-Appellants Altimeo Asset Management and ODS Capital LLC


62

CERTIFICATE OF COMPLIANCE

This brief complies with the type-volume limitation of Fed. R. App. P.

32(a)(7)(B) and Local Rule 32.1(a)(4)(A) because the brief contains 13,999 words,

excluding the parts of the brief exempted by Fed. R. App. P. 32(f). This brief

complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type

style requirements of Fed. R. Ap. P. 32(a)(6) because the brief has been prepared in

a proportionally spaced typeface in 14-point Times New Roman font.

Dated: November 23, 2020 New York, New York

By: /s/ Michael Grunfeld

Michael Grunfeld


SPECIAL APPENDIX


i

SPECIAL APPENDIX TABLE OF CONTENTS

Page

Opinion and Order, dated August 14, 2020, Appealed From ...................................................... SPA-1

Judgment, dated August 17, 2020, Appealed From ... SPA-39


UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

ALTIMEO ASSET MANAGEMENT and ODS CAPITAL LLC, individually and on behalf of all others similarly situated,

Plaintiff, -v-

QIHOO 360 TECHNOLOGY CO. LTD., HONGYI ZHOU, XIANGDONG QI, and ERIC X. CHEN,

Defendants.

19 Civ. 10067 (PAE)

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

In this putative class action under the federal securities laws, lead plaintiffs Altimeo

Asset Management (“Altimeo”) and ODS Capital LLC (“ODS”) (collectively, “plaintiffs”) claim

that internet company Qihoo 360 Technology Co. Ltd. (“Qihoo”), its Co-Founder and CEO

Hongyi Zhou (“Zhou”), Co-Founder and President Xiangdong Qi (“Qi”), and Director and

Special Committee Chair Eric Chen (“Chen”) (together, “Qihoo” or “defendants”) devised and

executed a scheme to depress the price of Qihoo American depository shares (“ADS”) and stock

(together, “Qihoo Securities”) in order to avoid paying a fair price to Qihoo Securityholders

during a transaction to take the company private in 2016 (the “Merger”). Specifically, plaintiffs

allege that at the time the Merger was announced, defendants already planned to relist Qihoo on

a Chinese stock exchange but deliberately withheld this information from Qihoo Securityholders.

Based on this allegation, plaintiffs allege several false and misleading statements made by Qihoo

in connection with the Merger between December 18, 2015, the day the Merger was announced

via press release, and July 15, 2016, the effective date of the Merger (the “Class Period”).

Case 1:19-cv-10067-PAE Document 84 Filed 08/14/20 Page 1 of 38

SPA-1Case 20-3074, Document 44, 11/23/2020, 2980439, Page77 of 115

2

Plaintiffs seek to bring this suit on behalf of all owners and former owners of Qihoo

Securities who sold shares, and were damaged thereby, during the Class Period, and all owners

and former owners who owned shares as of the effective date of the Merger and have tendered

those shares for the Merger consideration.1 They allege violations of §§ 10(b), 20(a), and 20A of

the Securities Exchange Act of 1934 (the “Exchange Act”) and the corresponding rule of the

Securities and Exchange Commission (“SEC” or “Commission”), 17 C.F.R. § 240.10b-5

(“Rule 10b-5”).

Pending now is Qihoo’s motion to dismiss Plaintiffs’ First Amended Complaint, Dkt. 53

(“FAC”), for failure to state a claim under Federal Rules of Civil Procedure 12(b)(6) and 9(b).

For the following reasons, the Court grants the motion and dismisses the FAC in its entirety.

1 Excluded from the Class are: (1) defendants; (2) members of the immediate family of individual defendants and the directors and officers of Qihoo; (3) any entity in which defendants have a controlling interest; (4) any person who was an officer or director of Qihoo during the Class Period; (5) any firm, trust, corporation, or other entity in which any defendant has or had a controlling interest; and (6) the legal representatives, affiliates, heirs, successors-in-interest, or assigns of any such excluded person previously described. Dkt. 53 (“FAC”) ¶ 300.



3

I. Background2

A. The Parties

Lead Plaintiffs are Altimeo, an independent portfolio management company based in

France and approved by the French Financial Authority, FAC ¶ 18, and ODS, a Florida limited

liability company, id. ¶ 20. Both entities owned Qihoo Securities, including ADS purchased on

the New York Stock Exchange (“NYSE”), during the putative class period and represent a class

of similarly situated investors. Id. ¶¶ 19–20. Altimeo purchased 140,261 Qihoo Securities

during the class period and sold 79,613 Qihoo Securities during that time. Id. ¶ 19. It retained

61,500 Qihoo Securities, including some acquired prior to the start of the class period, through

the Merger; those securities have now been paid in exchange for the Merger consideration. Id.

ODS purchased 86,300 ADS during the class period and sold at least 11,800 ADS during that

time. Id. ¶ 20. It retained 74,500 ADS through the Merger; those securities have now been paid

in exchange for the Merger consideration. Id.

2 These facts are drawn primarily from the FAC. Dkt. 53. For the purpose of resolving the motion to dismiss, the Court assumes all well-pled facts to be true and draws all reasonable inferences in favor of plaintiffs. See Koch v. Christie’s Int’l PLC, 699 F.3d 141, 145 (2d Cir. 2012). The Court has also considered the documents attached to the declaration of Brian C. Raphel, Esq. in support of Qihoo’s motion to dismiss, Dkt. 79 (“Raphel Decl.”), and the document attached to the declaration of Michael Grunfeld, Esq. in opposition to the motion to dismiss, Dkt. 81-1 (“Grunfeld Decl.”). Because these documents were incorporated into the FAC by reference, or are matters of public record, they are properly considered on a motion to dismiss. See City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173, 179 (2d Cir. 2014) (in resolving a motion to dismiss, the court may consider, inter alia, “any statements or documents incorporated in it by reference, as well as public disclosure documents required by law to be, and that have been, filed with the SEC, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit” (citation omitted)). The Court has considered these documents “not for the truth of the matters asserted therein,” but only “for the fact that the statements were made.” Clark v. Kitt, No. 12 Civ. 8061 (CS), 2014 WL 4054284, at *7 (S.D.N.Y. Aug. 15, 2014); see Staehr v. Hartford Fin. Servs. Grp., 547 F.3d 406, 425 (2d Cir. 2008) (“[I]t is proper to take judicial notice of the fact that press coverage, prior lawsuits, or regulatory filings contained certain information, without regard to the truth of their contents . . . .” (emphasis omitted)).



4

Defendant Qihoo is a Cayman Islands corporation headquartered in Beijing. Id. ¶ 21.

Qihoo offers a variety of internet and cloud-based products—including internet and mobile

security tools, an internet browser, a search engine, and a mobile app store—to hundreds of

millions of customers. Id. ¶¶ 34–36. Qihoo’s “core business at the time of the Merger was its

internet security business.” Id. ¶ 38. Before the Merger, Qihoo registered ADS were listed and

traded on the NYSE under the ticker symbol “QIHU.” Id. ¶ 21. Each ADS was redeemable for

1.5 of Qihoo’s Class A ordinary shares. Id. Qihoo’s common stock was not registered on the

SEC or publicly traded prior to the Merger. Id.

The individual defendants are Zhou, Qi, and Chen. Id. ¶¶ 22–24.

Zhou is Qihoo’s Co-Founder and served as Chairman and CEO during the putative class

period. Id. ¶ 22. He also owned shares in some of the equity investors that participated in taking

the company private. Id. ¶¶ 29–30. Before the Merger, Zhou owned 17.3% of Qihoo. Id. ¶ 62.

According to the Final Proxy Statement, he personally owned 22.8% of the Company post-

Merger. Id. ¶ 64.

Qi is Qihoo’s Co-Founder and served as President and Director during the putative class

period. Id. ¶ 23. Like Zhou, he also owned shares in some of the entities that participated in

taking the company private. Id. ¶¶ 29–30. Before the Merger, Qi owned 8.1% of Qihoo. Id.

¶ 62. According to the Final Proxy Statement, he personally owned 2.2% of the Company post-

Merger, as well as an additional 11.5% via Tianjin Xinxinsheng Investment Limited Partnership

(“Xinxinsheng”), in which he was the general partner. Id. ¶ 64.

Chen served as a Qihoo Director from 2014 through the Merger, and acted as Chairman

of the Special Committee of independent directors that the Company appointed to evaluate the

Merger. Id. ¶¶ 24, 26.



5

B. Qihoo’s Merger

1. Origins of the Merger

In early May 2015, Zhou discussed the possibility of an acquisition of Qihoo with Golden

Brick Capital Private Equity Fund and China Renaissance Holdings Limited. Id. ¶ 41. Later that

month, he shared the idea of such a transaction with Qi, as well as representatives of CITIC

Securities Co. Ltd. and Sequoia Capital China, whose founding managing partner is a Qihoo

Director. Id. These discussions sparked the transaction at the center of this dispute. Id. On

June 17, 2015, the four investment companies and Zhou (collectively, the “Buyer Group”)

approached Qihoo’s Board with a preliminary non-binding proposal to acquire all of Qihoo’s

outstanding shares for $77.00 in cash per ADS and $51.33 in cash per Class A or Class B

ordinary share. Id. ¶ 42.

Two days later, on June 19, Qihoo’s Board formed a Special Committee to evaluate the

transaction, and appointed Defendant Chen as Chairman. Id. ¶ 44. The Special Committee was

charged with, inter alia, evaluating the terms of the Buyer Group’s proposal, negotiating with the

Buyer Group or their representatives, exploring strategic alternatives, negotiating definitive

agreements, and reporting to the Board recommendations and conclusions as to the fairness of

the transaction to Qihoo’s stakeholders. Id. The Special Committee retained J.P. Morgan

Securities to act as financial advisor in connection with its review of the Merger proposal, id.

¶ 45, and on December 16, 2015, J.P. Morgan gave the Special Committee its opinion that the

Buyer Group’s preliminary offer ($77.00 per ADS and $51.33 per share Merger consideration)

was fair to Qihoo Securityholders, id. ¶ 48. The valuation range and pricing conclusions in the

fairness opinion were based on a set of management projections provided to J.P. Morgan by Alex



6

Xu, Qihoo’s Co-CFO. 3 Id. ¶ 47. The Special Committee and the Board approved the Merger

the same day, id. 49, and on December 18, 2015, executed the Merger Agreement and issued a

press release announcing the transaction, id. ¶ 60. The total funds necessary to complete the

Merger were $9.4 billion, assuming no shareholder exercised appraisal rights in the Cayman

Islands. Id. ¶ 61.

2. Issuance of Proxy Materials

After the execution of the Merger Agreement, Defendants published a series of Proxy

Materials between January 11, 2016, and March 3, 2016, which attempted to persuade Qihoo

Securityholders to vote for the Merger. Id. ¶ 66. Defendants published the initial transaction

statement for the Merger on Schedule 13E-3, which attached the Company’s Preliminary Proxy

Statement and other supporting documents for the Merger (collectively, the “Preliminary Proxy

Materials”).4 Id. ¶ 67. Plaintiffs allege that the Proxy Materials contained several materially

false and misleading statements about the fairness of and reasons for the Merger, as well as

assurances that no other strategic alternatives were contemplated or imminent. Id. ¶¶ 71–82.

Plaintiffs allege that the statements were misleading because the Proxy Materials did not mention

a possibility, let alone a plan, of relisting the company in China. Id. ¶ 74. The alleged

misleading statements are discussed in detail infra.

3 J.P. Morgan’s conclusions also derived from its review of the Merger Agreement, publicly available business and financial information about the company and broader industry, precedent transactions, the financial and operating performance of comparable companies, and other information that J.P. Morgan deemed appropriate. Id. ¶ 52. 4 The Proxy materials were amended three times: the “Amended Proxy Statement” was published on February 8, 2016; the “Second Amended Proxy Statement” on February 26, 2016; and the “Third Amended Proxy Statement” or “Final Proxy Statement” on March 3, 2016. The third version included the final materials provided to the Qihoo Securityholders at the March 30, 2016, shareholder vote on the Merger. Id. ¶¶ 67–69.



7

3. Shareholder Vote and Completion of the Merger

On March 30, 2016, the shareholders voted on the Merger based on the information in the

Final Proxy Statement. Id. ¶ 83. An affirmative vote of shareholders representing at least two-

thirds of the voting rights of the shares present and voting in person or by proxy was required for

the Merger to pass. Id. ¶ 84. Approximately 41% of the Company’s outstanding ordinary shares

were represented at the meeting, and approximately 99.8% of the total votes cast at the meeting

were in favor of the Merger. Id. ¶ 86. The transaction therefore passed, and closed on July 15,

2016 (“Effective Time”). Id. ¶¶ 86, 93.

4. Qihoo’s Backdoor Listing in China

After the Merger, Qihoo “conducted a complicated restructuring of its business” to

separate its main internet business from non-core operations. Id. ¶ 95. On November 2, 2017,

more than 15 months after the Merger, an elevator manufacturing company listed on the

Shanghai Stock Exchange called SJEC announced that it would merge with Qihoo in order to

conduct a backdoor listing, or reverse merger. Id. ¶ 96. This allowed Qihoo to list its main

internet business on the Chinese stock market without the regulatory hurdles associated with an

initial public offering. Id. ¶ 97. On February 28, 2018, Qihoo began trading on the Shanghai

stock exchange. Id. ¶ 100. At the close of trading on that day, it had a market capitalization of

385 billion RMB, or approximately $62 billion. Id. According to a Bloomberg news article, the

value of the former SJEC, the company that Qihoo merged with, “soared as much as 550%” in

the time between the announcement of the backdoor listing in November 2017 and Qihoo’s

relisting on February 28, 2018. Id. ¶ 101. The relisting allegedly increased Defendant Zhou’s

net worth from approximately $2 billion to $13.6 billion. Id.



8

C. Procedural History

On March 5, 2019, plaintiffs filed their initial complaint in the Central District of

California. Dkt. 1. On March 18, 2019, plaintiffs moved for appointment as lead plaintiffs and

lead counsel. Dkts. 10–13.

On June 4, 2019, defendants moved to transfer the case to the Southern District of New

York. Dkts. 33–35. Plaintiffs opposed. Dkt. 40. On July 1, 2019, the Honorable John A.

Kronstadt, United States District Judge, appointed plaintiffs as lead plaintiffs. See Dkt. 42. On

August 30, 2019, plaintiffs filed the FAC. FAC. On October 11, 2019, defendants moved to

dismiss the FAC. Dkts. 57–59. On October 24, 2019, Judge Kronstadt granted defendants’

motion to transfer venue to this District and denied the motion to dismiss as moot. Dkt. 60. On

October 30, 2019, the case was transferred to the Southern District of New York and assigned to

this Court. Dkt. 61. On November 15, 2019, the parties filed a joint letter outlining the status of

the case and their proposed next steps. Dkt. 75. Defendants sought leave “to file an amended

motion to dismiss under Second Circuit law.” Id. On November 18, 2019, the Court granted the

request and set a briefing schedule. Dkt. 76.

On December 23, 2019, defendants5 filed their amended motion to dismiss, Dkt. 77, a

memorandum of law, Dkt. 78 (“Def. Mem.”), and the declaration of Brian Raphel, Esq., Raphel

Decl., with attached exhibits. On January 31, 2020, plaintiffs filed a memorandum of law in

opposition, Dkt. 81 (“Pl. Opp’n”), and the declaration of Michael Grunfeld, Esq., Grunfeld Decl.,

with attached exhibit. On February 21, 2020, defendants filed a reply. Dkt. 83 (“Reply”).

5 The instant motion is brought by defendants Chen and Qihoo only, because defendants Zhou and Qi have yet to be successfully served.



9

II. Applicable Legal Standards

A. Standards for Resolving a Motion to Dismiss

To survive a motion to dismiss under Rule 12(b)(6), a complaint must plead “enough

facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570 (2007). A claim will only have “facial plausibility when the plaintiff pleads

factual content that allows the court to draw the reasonable inference that the defendant is liable

for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint is

properly dismissed where, as a matter of law, “the allegations in a complaint, however true,

could not raise a claim of entitlement to relief.” Twombly, 550 U.S. at 558. Although the Court

must accept as true all well-pled factual allegations in the complaint and draw all reasonable

inferences in the plaintiff’s favor, Steginsky v. Xcelera Inc., 741 F.3d 365, 368 (2d Cir. 2014),

that tenet “is inapplicable to legal conclusions,” Iqbal, 556 U.S. at 678.

“Securities fraud claims are subject to heightened pleading requirements that the plaintiff

must meet to survive a motion to dismiss.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,

493 F.3d 87, 99 (2d Cir. 2007); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd.,

551 U.S. 308, 321–23 (2007).

First, a complaint alleging securities fraud must meet the requirements of Federal Rule of

Civil Procedure 9(b). See ECA & Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan

Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (“ECA”). Rule 9(b) states that “[i]n alleging fraud

or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”

Fed. R. Civ. P. 9(b). “Allegations that are conclusory or unsupported by factual assertions are

insufficient.” ATSI Commc’ns, 493 F.3d at 99.



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Second, such a complaint must comply with the pleading requirements of the Private

Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b). See ECA, 553 F.3d at 196.

In particular, where a plaintiff’s claims depend upon allegations that the defendant has made an

untrue statement of material fact or that the defendant omitted a material fact necessary to make

a statement not misleading, the plaintiff “shall specify each statement alleged to have been

misleading [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1).

Thus, to plead a claim of securities fraud, plaintiffs “must do more than say that the statements

. . . were false and misleading; they must demonstrate with specificity why and how that is so.”

Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004). In addition, the plaintiff “shall, with

respect to each act or omission . . . state with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2).

B. Elements of Plaintiffs’ Claims

Plaintiffs assert claims under §§ 10(b), 20A, and 20(a) of the Exchange Act, and Rule

10b-5. FAC ¶¶ 312–339.

Section 10(b) of the Exchange Act makes it unlawful to “use or employ, in connection

with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance

in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C.

§ 78j(b). The SEC’s implementing rule, Rule 10b-5, provides that it is unlawful “[t]o make any

untrue statement of a material fact or to omit to state a material fact necessary in order to make

the statements made, in light of the circumstances under which they were made, not

misleading[.]” 17 C.F.R. § 240.10b-5(b).

To state a claim under § 10(b) of the Exchange Act, a plaintiff must adequately plead

“(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection



11

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.” Matrixx

Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37–38 (2011) (citation omitted). A complaint must

ultimately allege conduct involving manipulation or deception; § 10(b) does not cover “instances

of corporate mismanagement . . . in which the essence of the complaint is that shareholders were

treated unfairly by a fiduciary.” Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977).

To state a claim under § 20(a) of the Exchange Act, “a plaintiff must show (1) a primary

violation by the controlled person, (2) control of the primary violator by the defendant, and

(3) that the defendant was, in some meaningful sense, a culpable participant in the controlled

person’s fraud.” Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 236

(2d Cir. 2014) (citation omitted) (quoting ATSI Commc’ns, 493 F.3d at 108). If a plaintiff has

not adequately alleged a primary violation, i.e., a viable claim under another provision of the

Exchange Act, then the § 20(a) claims must be dismissed. See id.

To state a claim for insider trading under § 20A of the Exchange Act, a plaintiff must

plead (1) a predicate violation of the Exchange Act; (2) contemporaneous trading by defendant

and plaintiff; and (3) that the defendant possessed “material, nonpublic information” at the time

of the trading activity. See City of Taylor Gen. Emps. Ret. Sys. v. Magna Int’l, Inc.,

967 F. Supp. 2d 771, 800 (S.D.N.Y. 2013).

Thus, for their claims under either § 20(a) or § 20A of the Exchange Act to survive the

motion to dismiss, plaintiffs must successfully plead a prima facie violation of § 10(b).

Defendants argue that plaintiffs have failed to allege four of the six elements of a § 10(b) claim:

material misrepresentations, reliance, scienter, and loss causation. See Def. Mem. at 1–2, 7–25.



12

For the reasons that follow, to find for defendants on the motion to dismiss, the Court

need only address the first of these alleged deficiencies: that plaintiffs have failed to adequately

plead material misrepresentations or omissions by defendants.

1. Pleading a Material Misrepresentation or Omission

a. False or Misleading Statements

To survive a motion to dismiss, the complaint must adequately plead “that the defendant

made a statement that was ‘misleading as to a material fact.’” Matrixx Initiatives, 563 U.S. at 38

(emphasis omitted) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)). Section 10(b)

and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.”

Id. at 44; see also Basic, 485 U.S. at 239 n.17. The materiality requirement “is satisfied when

there is ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed

by the reasonable investor as having significantly altered the total mix of information made

available.’” Matrixx Initiatives, 563 U.S. at 38 (quoting Basic, 485 U.S. at 231–32). As the

Supreme Court has explained, a lower standard—such as defining a “material fact” as any “fact

which a reasonable shareholder might consider important”—would lead corporations to “bury

the shareholders in an avalanche of trivial information[,] a result that is hardly conducive to

informed decisionmaking.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448–49 (1976)

(emphasis omitted). The “materiality hurdle” is, therefore, “a meaningful pleading obstacle.” In

re ProShares Tr. Sec. Litig., 728 F.3d 96, 102 (2d Cir. 2013). However, because of the fact-

intensive nature of the materiality inquiry, the Court may not dismiss a complaint “on the ground

that the alleged misstatements or omissions are not material unless they are so obviously

unimportant to a reasonable investor that reasonable minds could not differ on the question of

their importance.” ECA, 553 F.3d at 197 (citation omitted).



13

As to alleged omissions, “[d]isclosure of . . . information is not required . . . simply

because it may be relevant or of interest to a reasonable investor.” Resnik v. Swartz,

303 F.3d 147, 154 (2d Cir. 2002); see also Kleinman v. Elan Corp., 706 F.3d 145, 152 (2013)

(noting that Section 10(b) and Rule 10b-5(b) do not create “an affirmative duty to disclose any

and all material information”). An omission of information not affirmatively required to be

disclosed is, instead, actionable only when disclosure of such information is “necessary ‘to make

. . . statements made, in the light of the circumstances under which they were made, not

misleading.’” Matrixx Initiatives, 563 U.S. at 44 (quoting 17 C.F.R. § 240.10b-5(b)); see also In

re Vivendi, S.A. Sec. Litig., 838 F.3d 223, 239–40 (2d Cir. 2016) (explaining that “pure

omissions” of information, absent a duty to disclose, are not actionable; however, “half-truths”—

“statements that are misleading . . . by virtue of what they omit to disclose”—are).

b. Statements of Opinion

Like objective statements of material fact, subjective statements of opinion can be

actionable as fraud. Such statements of opinion can give rise to liability in two distinct ways.

First, “liability for making a false statement of opinion may lie if either ‘the speaker did

not hold the belief she professed’ or ‘the supporting fact[s] she supplied were untrue.’” See

Tongue v. Sanofi (“Sanofi II”), 816 F.3d 199, 210 (2d Cir. 2016) (quoting Omnicare, Inc. v.

Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175, 185–86 (2015)). “It is not

sufficient for these purposes to allege that an opinion was unreasonable, irrational, excessively

optimistic, [or] not borne out by subsequent events . . . .” In re Salomon Analyst Level 3 Litig.,

350 F. Supp. 2d 477, 489 (S.D.N.Y. 2004). “The Second Circuit has firmly rejected this ‘fraud

by hindsight’ approach.” Podany v. Robertson Stephens, Inc., 318 F. Supp. 2d 146, 156

(S.D.N.Y. 2004) (citing Stevelman v. Alias Research, Inc., 174 F.3d 79, 85 (2d Cir. 1999)).



14

Second, “opinions, though sincerely held and otherwise true as a matter of fact, may

nonetheless be actionable if the speaker omits information whose omission makes the statement

misleading to a reasonable investor.” Sanofi II, 816 F.3d at 210 (citing Omnicare, 575 U.S.

at 194). To adequately allege that a statement of opinion was misleading through the omission

of material information, “[t]he investor must identify particular (and material) facts going to the

basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the

knowledge it did or did not have—whose omission makes the opinion statement at issue

misleading to a reasonable person reading the statement fairly and in context.” Omnicare,

575 U.S. at 194. As the Supreme Court has explained, “a reasonable investor, upon hearing a

statement of opinion from an issuer, ‘expects not just that the issuer believes the opinion

(however irrationally), but that it fairly aligns with the information in the issuer’s possession at a

time.’” Sanofi II, 816 F.3d at 210 (quoting Omnicare, 575 U.S. at 188–89). “The core inquiry,”

then, “is whether the omitted facts would ‘conflict with what a reasonable investor would take

from the statement itself.’” Id. (quoting Omnicare, 575 U.S. at 189); see also Abramson v.

NewLink Genetics Corp., 965 F.3d 165, 177 (2d Cir. 2020) (“When omitted contrary facts

substantially undermine the conclusion a reasonable investor would reach from a statement of

opinion, that statement is misleading and actionable.”).

The Supreme Court has instructed that this second theory of liability for opinions, based

on the omission of material facts that may render a statement of opinion actionable, should not

be given “an overly expansive reading.” See Sanofi II, 816 F.3d at 210. Rather, establishing

liability on such a theory “is no small task for an investor.” Omnicare, 575 U.S. at 194.

“Reasonable investors understand that opinions sometimes rest on a weighing of competing

facts, . . . [and do] not expect that every fact known to an issuer supports its opinion statement.”



15

Omnicare, 575 U.S. at 189–90 (emphasis in original). A statement of opinion “is not necessarily

misleading when an issuer knows, but fails to disclose, some fact cutting the other way.” Id.

at 189.

Further, the Supreme Court has emphasized, statements of opinion must be considered in

the context in which they arise. An “investor takes into account the customs and practices of the

relevant industry,” and “an omission that renders misleading a statement of opinion when viewed

in a vacuum may not do so once that statement is considered, as is appropriate, in a broader

frame.” Id. at 190.

c. The PSLRA Safe Harbor for Forward-Looking Statements and the Bespeaks-Caution Doctrine

The PSLRA amended the Exchange Act to provide a safe harbor for forward-looking

statements. See 15 U.S.C. § 78u-5(c). Forward-looking statements are defined as those that

contain, among other things, “a projection of revenues, income, [or] earnings,” “plans and

objectives of management for future operations,” or “a statement of future economic

performance.” Id. § 78u-5(i)(1). A forward-looking statement is not actionable if it “is

[(i)] identified and accompanied by meaningful cautionary language or [(ii)] is immaterial or

[(iii)] the plaintiff fails to prove that it was made with actual knowledge that it was false or

misleading.” Slayton v. Am. Express Co., 604 F.3d 758, 766 (2d Cir. 2010) (emphasis omitted).

Because the statute is written in the disjunctive, statements are protected by the safe harbor if

they satisfy any one of these three categories. Id. Materiality is defined as above; the first and

third categories are defined as follows:

i. Meaningful Cautionary Language

To qualify as “meaningful,” cautionary language “must convey substantive information

about factors that realistically could cause results to differ materially from those projected in the



16

forward-looking statement[.]” Id. at 771 (quoting H.R. Rep. No. 104-369, at 43 (1995)).

Language that is “vague” or “mere boilerplate” does not suffice. Id. at 772. “To determine

whether cautionary language is meaningful, courts must first ‘identify the allegedly undisclosed

risk’ and then ‘read the allegedly fraudulent materials—including the cautionary language—to

determine if a reasonable investor could have been misled into thinking that the risk that

materialized and resulted in his loss did not actually exist.’” In re Delcath Sys., Inc. Sec. Litig.,

36 F. Supp. 3d 320, 333 (S.D.N.Y. 2014) (quoting Halperin v. eBanker USA.com, Inc.,

295 F.3d 352, 359 (2d Cir. 2002)). Plaintiffs may establish that cautionary language is not

meaningful “by showing, for example, that the cautionary language did not expressly warn of or

did not directly relate to the risk that brought about plaintiffs’ loss.” Halperin, 295 F.3d at 359.

ii. Actual Knowledge

The scienter requirement for forward-looking statements—actual knowledge—is “stricter

than for statements of current fact. Whereas liability for the latter requires a showing of either

knowing falsity or recklessness, liability for [forward-looking statements] attaches only upon

proof of knowing falsity,” pled with the requisite particularity. Slayton, 604 F.3d at 773 (quoting

Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 274 (3d Cir. 2009)); 15 U.S.C. § 78u-4(b)(2).

iii. The Bespeaks-Caution Doctrine

The safe harbor for forward-looking statements does not apply to statements made in

connection with an IPO, such as an IPO prospectus. See 15 U.S.C. §§ 77z-2(b)(2)(D),

78u-5(b)(2)(D); City of Omaha Police & Fire Ret. Sys. v. Evoqua Water Techs. Corp.,

No. 18 Civ. 10320 (AJN), 2020 WL 1529371, at *6 (S.D.N.Y. Mar. 30, 2020); Gregory v.

ProNAi Therapeutics Inc., 297 F. Supp. 3d 372, 398 (S.D.N.Y. 2018), aff’d, 757 F. App’x 35

(2d Cir. 2018). However, the bespeaks-caution doctrine, a “corollary of the well-established

principle that a statement or omission must be considered in context,” does. Johnson v. Sequans



17

Commc’ns S.A., No. 11 Civ. 6341 (PAC), 2013 WL 214297, at *9 (S.D.N.Y. Jan. 17, 2013)

(quoting Iowa Pub. Emps.’ Ret. Sys. v. MF Glob., Ltd., 620 F.3d 137, 141 (2d Cir. 2010)).

Under this doctrine, “[a] forward-looking statement accompanied by sufficient cautionary

language is not actionable because no reasonable investor could have found the statement

materially misleading.” MF Glob., Ltd., 620 F.3d at 141.6 To apply, however, the cautionary

language must pertain to the specific risk that was realized. “[C]autionary language [that] did

not expressly warn of or did not directly relate to the risk that brought about plaintiffs’ loss” is

insufficient. Halperin, 295 F.3d at 359.

III. The FAC’s § 10(b) Claim

The Court begins by considering whether plaintiffs’ FAC has adequately alleged material

misrepresentations or omissions by defendants, a necessary element of a § 10(b) claim. The

Court concludes that it has not.

A. The FAC’s Core Allegation: Misrepresentations and Omissions Regarding Qihoo’s Plan Post-Merger to Relist at a Higher Valuation

The misstatements and omissions that the FAC alleges in the Proxy materials and other

transaction-related filings can be grouped into four categories: (1) statements concerning Qihoo’s

intention not to relist; (2) statements regarding the lack of strategic alternatives that would be

more beneficial to Qihoo Securityholders; (3) statements that presented the transaction as “fair”

or in an otherwise positive light; and (4) statements concerning the reasons for the Merger. See

FAC ¶ 159(a), (b), (c), (d).

Critically for this motion, the FAC contends that each set of statements— none of which

mentioned the possibility, let alone the financial benefits, of Qihoo’s later relisting in China— 6 The cautionary-language prong of the PSLRA is based, in part, on the bespeaks-caution doctrine. See Slayton, 604 F.3d at 770 n.5.



18

were false for the same reason: “when these statements were made, the Buyer group already

planned to relist Qihoo at a far-higher valuation” in China post-transaction. FAC ¶ 159(a).7 The

7 See also, e.g., id. ¶ 2 (“Defendants told the market that Qihoo had no plans at the time of the Merger to relist the Company on any other stock exchange after the Merger . . . . That was demonstrably false because the group of investors that bought Qihoo in the Merger—led by Defendant Zhou—planned all along to relist Qihoo on the Chinese stock market following the Merger at a much higher value than what they paid to Qihoo Securityholders in the Merger.” (emphasis added)), ¶ 5 (“Contrary to the Defendants’ repeated reassurances about no substantial changes to Qihoo’s structure following the Merger, several news reports have revealed that the Buyer Group that took Qihoo private in the Merger planned all along to relist the Company in China after the Merger for multiple times what they paid to Qihoo Securityholders . . . .” (emphasis added)), ¶ 71 (“Defendants’ most fundamental misleading action was hiding the Buyer Group’s plan to relist Qihoo’s core business in China following the Merger.”), p. 36 ¶ G (“The Buyer Group [p]lanned to [r]elist Qihoo [a]ll [a]long[.]”), ¶ 105 (“Several news articles have reported on a secret plan that Defendant Zhou had with the investors that bought Qihoo in the Merger. A key term for their participation in the Merger was that Qihoo would relist in the public markets in China shortly after the Company’s privatization in the United States . . . . [Defendants’] secret promise to relist Qihoo in the Chinese stock market at a higher value after its privatization is what incentivized those investors to participate in the Merger.”), ¶ 110 (“Other news reports confirm that the members of the Buyer Group planned to relist Qihoo in China as part of their agreement to participate in the Merger.”), ¶ 134 (“A confidential witness that worked in Qihoo’s Public Relations department at its Beijing headquarters from 2014 through 2017 (“CW1”) has explained that Defendants planned all along to relist the Company in China following the Merger.” (emphasis added)), ¶ 152 (“Defendants, however, failed to disclose to Qihoo Securityholders, the Buyer Group’s plan to relist Qihoo in the Chinese stock market.”), ¶ 159(a) (“These assurances provided to Qihoo Securityholders were false and misleading because when these statements were made, the Buyer Group already planned to relist Qihoo at a far-higher valuation.” (emphasis added)), ¶ 159(b) (“These statements were false and misleading because they did not mention the alternative of relisting Qihoo on a Chinese stock exchange or paying Qihoo Securityholders fair value in light of that alternative plan.”), ¶ 159(c) (“These statements were also false and misleading because the fairness assessment of the Merger price . . . failed to consider . . . how Qihoo’s post-Merger businesses would be valued on the Chinese stock market, where the Buyer Group already planned during the Merger process to relist Qihoo following the Merger.” (emphasis added)); ¶ 159(d) (“These statements were false because the Buyer Group did not intend for Qihoo to remain a private Company. Rather, they planned all along to relist the Company at a higher valuation in China.” (emphasis added)), ¶ 171 (“[T]hese statements were false and misleading because such a relisting was not just a possibility that the Buyer Group might consider in the future, but rather, was the Buyer Group’s pre-established plan and its whole reason for the Merger.” (emphasis added)), ¶ 199 (“These statements . . . were false and misleading . . . because J.P. Morgan’s [fairness] analysis was based on Qihoo’s financial projections that did not account for Qihoo’s true business prospects in China following the Merger[.]”).



19

Court therefore begins by examining whether the FAC has adequately pled this factual premise

underlying all its claims. For the reasons that follow, the Court finds that it has not. The FAC

therefore does not adequately allege any material misrepresentations or omissions by defendants.

B. Discussion

1. The FAC’s Two Key Sources (CW-1 and Newspaper Articles) and the Requirement of an Actual but Undisclosed Relisting Plan

The FAC relies on two key sources to support its repeated claim that the Buyer Group

had undisclosed plans to relist Qihoo on a Chinese stock exchange at the time it marketed the

Merger to Qihoo Securityholders as a pure take-private: (1) statements made by a confidential

witness within Qihoo’s Public Relations department (“CW1”); and (2) newspaper articles that

ostensibly reveal that the plan to relist preceded the Merger and had been secretly marketed to

Buyer Group investors.

In evaluating whether the information attributed to these sources adequately alleges a

material misstatement or omission, it is important to focus on the precise nature of what the FAC

claims was undisclosed. Defendants’ proxy materials explicitly disclosed the possibility of a

future relisting. For example, these materials stated:

[S]ubsequent to the consummation of the Merger, the Surviving Company’s management and Board will continuously evaluate and review the Surviving Company’s entire business and operations from time to time, and may propose or develop plans and proposals, including any of the foregoing actions, including the possibility of relisting the Surviving Company or a substantial part of its business on another internationally recognized stock exchange.

FAC ¶ 170 (emphasis added) (quoting January 11, 2016 Proxy Statement at 66); see also Raphel

Decl., Ex. 1 at 33 (same). Defendants repeatedly made similar disclosures throughout the proxy

process. See Raphel Decl., Ex. 4 at 6 (Feb. 8, 2016 Proxy Statement at 66) (same); id., Ex. 5 at 6

(Feb. 26, 2016 Proxy Statement at 66) (same); id., Ex. 6 at 6 (March 3, 2016 Proxy Statement

at 68) (same).



20

These disclosures preclude any viable theory of an actionable misstatement or omission

to the extent the FAC asserts a failure to alert shareholders to the possibility of a future relisting.

That is because the above materials reported this very scenario. See, e.g., Shemian v. Research

In Motion Ltd., No. 11 Civ. 408 (RJS), 2013 WL 1285779, at *20 (S.D.N.Y. Mar. 29, 2013)

(dismissing § 10(b) claims when defendants made the disclosures that were purportedly omitted,

rendering “the factual premise” of the misrepresentation claims unsound), aff’d 570 F. App’x 32

(2d Cir. 2014); In re Keyspan Corp. Sec. Litig., 383 F. Supp. 2d 358, 377 (E.D.N.Y. 2003)

(“[D]ismissal is appropriate where the complaint is premised on the nondisclosure of information

that was actually disclosed.”); Debora v. WPP Grp., P.L.C., No. 91 Civ. 1775 (KTD),

1994 WL 177291, at *5 (S.D.N.Y. May 5, 1994) (“A complaint fails to state a § 10(b) claim

when the alleged omission has actually been disclosed.” (citing Decker v. Massey-Ferguson,

Ltd., 681 F.2d 111, 116–17 (2d Cir. 1982))); Sable v. Southmark/Envicon Capital Corp.,

819 F. Supp. 324, 333 (S.D.N.Y. 1993) (“The naked assertion of concealment of material facts[,]

which is contradicted by published documents which expressly set forth the very facts allegedly

concealed[,] is insufficient to constitute actionable fraud.” (citation omitted)); White v. Melton,

757 F. Supp. 267, 272 (S.D.N.Y. 1991) (“The Court must dismiss a complaint founded on

allegations of securities fraud if the allegedly omitted or misrepresented information was in fact

appropriately disclosed.”).

Plaintiffs are therefore left with the theory that defendants, at the time of the Merger, had

already adopted—but did not disclose to the public—an actual, concrete plan to relist in China.

The factual hurdles presented to a plaintiff pursuing such a theory are underscored by Lyndon v.

Estate of Winston, 715 F. Supp. 600 (S.D.N.Y. 1989), a pre-PSLRA case in which § 10(b) claims

based on a similar theory of liability were found inadequately pled even under the more lenient



21

pleading standard of Federal Rule of Civil Procedure 9(b). Plaintiffs in Lyndon were former

shareholders of the public company Winston Network. They claimed that Winston, when

notifying stockholders of an impending merger and the stock’s purchase price, had actionably

misrepresented the true nature of the transaction because it “failed to also advise that it planned

to resell WNI stock at a higher price” later on. Id. at 601. The district court, however, found this

claim inadequately pled under Rule 9(b) because, inter alia, “there are no factual allegations that

support an inference that the alleged plan to find a buyer in the future had been formulated prior

to the merger[.]” Id. at 602 (emphasis added). Defendants argue that the same is so here, and

that the express disclosure of the possibility of such a transaction therefore disclosed all that was

necessary. Plaintiffs attempt to distinguish Lyndon on the grounds that the plaintiffs there

alleged only that defendant failed to “advise that it planned to resell” stock at higher price post-

merger, id. at 601, but did not allege that, before the merger, defendants had affirmatively denied

the existence of a concrete such plan, as plaintiffs contend occurred here, see Pl. Opp’n at 10 n.7.

But plaintiffs’ distinction of Lyndon, valid or not, itself underscores the minimum factual

allegation necessary for the FAC here to survive: the existence pre-Merger of a specific and

definite plan for Qihoo to relist.8

The Court accordingly considers whether the FAC’s factual attributions to a confidential

witness and/or to newspaper articles adequately plead the existence, pre-Merger, of a specific

and definite plan for Qihoo to relist in China. The Court first assesses the legal standards under

8 Plaintiffs implicitly acknowledge this. See id. at 10 (“[O]nce [d]efendants chose to speak about the plans for Qihoo after the Merger, they had an obligation under Section 10(b) to tell the whole truth, even if they had no independent duty to disclose such information.” (internal quotation marks, citations, and alterations omitted)); id. (“[E]ven if there is no independent duty to disclose [M]erger negotiations, a defendant is not permitted to falsely deny their existence.”)



22

the PSLRA governing such sources. The Court then measures the FAC’s allegations against

these standards.

2. Applicable Legal Standards

a. Attributions to Confidential Witnesses

To satisfy the PSLRA, a complaint must “specify each statement alleged to have been

misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding

the statement or omission is made on information and belief, the complaint shall state with

particularity all facts on which that belief is formed.” ATSI Commc’ns, 493 F.3d at 99 (quoting

15 U.S.C. § 78u-4(b)(1)). To satisfy the heightened pleading standards of the PSLRA and Rule

9(b), plaintiffs often rely, at least in part, “on information attributed to ‘confidential witnesses[.]’”

City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 952 F. Supp. 2d 633, 635

(S.D.N.Y. 2013).

“The case law examining facts attributed to unidentified witnesses, however, reflects the

need to view such attributions with caution and care.” Long Miao v. Fanhua, Inc.,

42 F. Supp. 3d 774, 797 (S.D.N.Y. 2020). The Second Circuit first addressed attributions to

confidential sources in a securities fraud complaint in Novak v. Kasaks, 216 F.3d 300 (2d Cir.

2000). The Circuit there rejected a district court’s holding that such sources must be identified

by name for the factual allegations attributed them to be used to satisfy the particularity

requirement. Information attributed to confidential sources may be considered, the Circuit

explained, in proper circumstances:

[W]here plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants’ statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged. In both of these situations, the plaintiffs will



23

have pleaded enough facts to support their belief, even though some arguably relevant facts have been left out.

Novak, 216 F.3d at 314.

Where a securities fraud complaint relies on uncorroborated confidential witnesses

(“CW”s), courts presented with challenges to particularity have, on occasion, used procedural

devices to test whether such CWs in fact had made the statements attributed to them. See Campo

v. Sears Holdings Corp., 371 F. App’x 212, 216 & n.4 (2d Cir. 2010); see also In re Millennial

Media, Inc. Sec. Litig., No. 14 Civ. 7923 (PAE), 2015 WL 3443918, at *12 (S.D.N.Y. May 29,

2015). More commonly, however, following Novak, courts in this District resolve the adequacy

of such complaints as facially pled, and “will credit confidential source allegations, generally, in

two situations.” Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 590 (S.D.N.Y. 2011). First, “when

‘independent [adequately pled] factual allegations’ corroborate a confidential source’s

statements, the requirement of a description of the source’s job is loosened.” Id. (quoting In re

Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 493 n.10 (S.D.N.Y. 2004)).

Second, in the absence of such well-pled corroborative facts, courts will credit confidential

sources when “those sources’ positions and/or job responsibilities are described sufficiently to

indicate a high likelihood that they actually knew facts underlying their allegations.” Id. (citation

omitted).

At the same time, the assembled case law reflects at least four contexts in which courts

have been loathe, under Novak, to sustain as sufficiently particular securities fraud complaints

based on uncorroborated statements by CWs. First, courts generally have not credited the

statements of CWs who are insufficiently described or whose descriptions do not suggest that

they were in a position to know the facts attributed to them. See, e.g., Frankfurt-Tr. Inv.

Luxemburg AG v. United Techs. Corp., 336 F. Supp. 3d 196, 223 (S.D.N.Y. 2018); In re Lehman



24

Bros. Sec. & Erisa Litig., No. 10 Civ. 6637 (LAK), 2013 WL 3989066, at *4 (S.D.N.Y.

July 31, 2013) (disregarding CWs who “were loan level underwriters, not managers or corporate

officers who could have spoken to the company’s practices broadly”); see also Local No. 38 Int’l

Bhd. of Elec. Workers Pension Fund v. Am. Express Co., 724 F. Supp. 2d 447, 460

(S.D.N.Y. 2010) (discounting allegations of “low-level, rank-and-file employees or outside

contractors” who the complaint did not indicate had any “access to aggregated data regarding

[the company’s] credit risk” or contact with the individual defendants), aff’d, 430 F. App’x 63

(2d Cir. 2011).

Second, statements of CWs that cannot situate relevant occurrences in time are

sometimes disregarded because they cannot establish that the challenged statements were

knowingly false when made. See, e.g., Gregory, 297 F. Supp. 3d at 409 (disregarding CW

allegations regarding failed clinical studies that were “unmoored in time”); In re Lululemon Sec.

Litig., 14 F. Supp. 3d 553, 579 (S.D.N.Y. 2014) (“No CW sets forth facts that suggest that any of

the alleged statements were false when they were made.” (emphasis in original)), aff’d,

604 F. App’x 62 (2d Cir. 2015).

Third, allegations by CWs that are insufficiently particular are apt to be discounted or

disregarded. See, e.g., Schiro v. Cemex, S.A.B. de C.V., 396 F. Supp. 3d 283, 305–06 (S.D.N.Y.

2019) (rejecting “[g]eneric and conclusory allegations” from plaintiffs’ CWs relating to bribery,

mismanagement, and other alleged “strange dealings” as “so vague as to be meaningless”); In re

Lululemon, 14 F. Supp. 3d at 580 (“general allegations” regarding quality control issues “do not

render the [defendants’] statements described herein, considered in context, false or misleading,”

where the complaint does not also “contain the . . . required specific factual allegations (by CWs

or otherwise)”); In re Sierra Wireless, Inc. Sec. Litig., 482 F. Supp. 2d 365, 376 (S.D.N.Y. 2007)



25

(“[P]laintiffs have not satisfied the heightened pleading requirements for their channel-stuffing

claim . . . [because the CW on whom they rely] merely parrots the conclusory allegations

contained in the complaint.”).

Fourth, courts have tended not to credit uncorroborated statements of CWs who are

sourced secondhand—with whom plaintiffs’ counsel have not themselves interacted. For

example, in In re Lehman Brothers, one set of allegations was based entirely “on confidential

witness statements originally recounted in a separate complaint filed by separate counsel in a

separate action.” In re Lehman Bros., 2013 WL 3989066, at *3. The court explained that,

without independent corroboration:

it would be inappropriate to give any weight to these alleged confidential witness statements. There is no suggestion that counsel in this action has spoken with these confidential witnesses or even knows who they are . . . . When citing alleged confidential witnesses in a complaint, the [Federal Rule of Civil Procedure 11] certification means that counsel has spoken with these confidential witnesses and knows who they are. Allowing counsel to rely on confidential witness statements recounted in a separate complaint would provide the Court little assurance that the factual contentions have any evidentiary support.

Id. at *4. Differentiating between confidential statements extracted from a complaint in a lawsuit

filed by different counsel and facts recounted in newspaper articles and government reports, the

court noted that “the probative value of an independent news article or government report is

much greater than that of confidential witness statements recounted in another complaint

[because there] is significant motive and opportunity for counsel in any case to misuse or

mischaracterize confidential witness statements in a pleading.” Id.; see also id. (“The unfairness

of permitting a plaintiff in a separate action to rely blindly at the pleading stage primarily on

confidential witness statements from another case to meet its pleading burden is patent.”); accord

In re Millennial Media, 2015 WL 3443918, at *11.



26

As this Court has recently observed, “[t]he cases in which securities complaints based on

statements attributed to CWs have been sustained as alleging fraud with sufficient particularity

supply an illuminating contrast” to the above scenarios. Long Miao, 442 F. Supp. 3d at 800. For

example, in Employees’ Retirement System of Government of the Virgin Islands v. Blanford,

the complaint alleged that a coffee manufacturer had made knowingly false misstatements about its production and inventory levels. Although relying on CWs, the complaint “specifie[d] each [CW’s] position, length of employment, and job responsibilities.” It recited that plaintiffs’ counsel had had personal contact with these witnesses, and quoted the CWs in detail as giving specific descriptions, for example, as to “the buildup of inventory ‘up to the rafters’ . . . and even stored in operators’ work spaces” and the “need to throw away ‘pallet after pallet after pallet’ as the coffee products expired.” Witnesses recalled a specific order during the relevant time period “where 500,000 brewers were loaded onto trucks right before an audit, and put back in stock immediately after the auditors left the facility.” These allegations were further corroborated by other witnesses’ accounts and a thorough short-seller report containing independent factual allegations.

Id. at 800–01 (internal citations omitted) (citing 794 F.3d 297, 307 (2d Cir. 2015)); see also, e.g.,

City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359, 362 n.1

(S.D.N.Y. 2012) (securities fraud claim adequately pled where complaint “sufficiently detail[ed]

the precise title and job duties of each of the CWs”—who were employed in the relevant division

of the company during the class period—“as well as their respective contacts with” the

individual defendant, and facts alleged from other “public and proprietary sources of

information” provided at least some corroboration).

b. Attributions to News Reports

A complaint’s reliance on newspaper articles may also be problematic. “[N]ewspaper

articles should be credited only to the extent that other factual allegations would be—if they are

sufficiently particular and detailed to indicate their reliability. Conclusory allegations of

wrongdoing are no more sufficient if they come from a newspaper article than from plaintiff’s

counsel[.]’” In re Optionable Sec. Litig., 577 F. Supp. 2d 681, 690 (S.D.N.Y. 2008) (quoting In



27

re Wet Seal, Inc. Sec. Litig., 518 F. Supp. 2d 1148, 1172 (C.D. Cal. 2007)); In re McKesson

HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1272 (N.D. Cal. 2000); see also In re Rockwell

Med., Inc. Sec. Litig., No. 16 Civ. 1691 (RJS), 2018 WL 1725553, at *8 (S.D.N.Y. Mar. 30,

2018) (same). “While use of [media reports] is permissible in pleadings, Plaintiffs are not

otherwise relieved of their burden to adequately identify and link the sources with the allegations

of misconduct derived from those sources. In other words, the news articles cited still must

indicate particularized facts about Defendants’ conduct in order to support the Plaintiffs’

claims.” Miller v. Lazard, Ltd., 473 F. Supp. 2d 571, 586 (S.D.N.Y. 2007) (internal quotation

marks, citation, and alterations omitted); see also Lopez v. CTPartners Exec. Search Inc.,

173 F. Supp. 3d 12, 31 (S.D.N.Y. 2016) (“[A] plaintiff is permitted to rely on newspaper articles,

provided that the reports themselves indicate particularized facts in order to support Plaintiffs’

claims.” (internal quotation marks and alterations omitted)).

Accordingly, where a complaint’s allegations of a false or misleading statement rely on a

news article, the relevant statements in the article must be properly attributed to meet Rule 9(b)’s

particularity requirement. See, e.g., In re Vale S.A. Sec. Litig., No. 15 Civ. 9539 (GHW),

2017 WL 1102666, at *27–28 (S.D.N.Y. Mar. 23, 2017) (two Wall Street Journal articles did not

satisfy Rule 9(b) where “[t]he statements in th[e] article[s] . . . are attributed to ‘Vale,’ but no

further information as to the source of the statements is provided in the article, and no further

information about the source is alleged in the complaint”). Similarly, media reports that consist

of generalized forecasting or factually unsourced speculation do not, without more, satisfy the

PSLRA. See Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of

Com., 694 F. Supp. 2d 287, 300–01 (S.D.N.Y. 2010).



28

Significant too, a public company does not have an obligation to “respond to every

potentially disparaging news story or to rebut the musings of the financial press.” Id. (citing In

re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501, 514 (2d Cir. 2010) (“Firms are not required

by the securities laws to speculate about distant, ambiguous, and perhaps idiosyncratic reactions

by the press or even by directors.”)). A company’s silence in the face of allegations in the press

cannot be treated by a complaint as tacit confirmation of them. Nor may a plaintiff succeed “by

alleging fraud by hindsight.” Hershfang v. Citicorp., 767 F. Supp. 1251, 1259 (S.D.N.Y. 1991)

(quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978)); see also id. (“Plaintiffs have

stitched together a patchwork of newspaper clippings and proclaimed the result a tale of

securities fraud . . . . Read as a whole, the complaint creates the strong impression that when

[defendant] announced a cut in dividends, plaintiff’s counsel simply stepped to the nearest

computer console, conducted a global Nexis search, [and] pressed the ‘Print’ button[.]”).

3. Discussion

The Court first assesses the adequacy of the FAC’s factual allegations attributed to CW1

and then those attributed to news sources. Considered separately or together, neither source

supplies sufficiently particularized allegations to satisfy the PLSRA.

a. Attributions to CW1

The FAC’s allegations relating to Qihoo’s intent to relist post-Merger do no more than

recapitulate an interview with CW1 (which the complaint implies but does not clearly state was

conducted by plaintiff’s counsel). The FAC does not allege any corroborative facts or any

independent investigation by counsel substantiating CW1’s factual allegations.

According to the FAC, CW1 worked in Qihoo’s Public Relations (“PR”) department in

the Beijing headquarters from 2014 to 2017. FAC ¶ 134. CW1 reported to a senior editor who

reported to Qu Bing, Qihoo’s vice president in charge of PR, who in turn reported to defendant



29

Qi. Id. According to an article published on an “established Chinese online media platform,”

Qu Bing “played an instrumental role in Qihoo’s privatization and relisting.” Id. at 50 n.24.

CW1 reported that informal discussions of relisting in China began as early as April

2015, and that by mid-2015, the entire PR department knew of the alleged secret plan. Id. ¶ 135.

CW1 described a mid-2015 department meeting in which Qi directed attendees not to disclose

the plan to relist outside of the company via Qihoo’s media platform or even in internal

discussions with members of other departments, lest this information be leaked to a competitor in

the industry. Id. The FAC also attributes the following to CW1:

• Qihoo’s employees knew that the relisting would be executed via a backdoor listing,

rather than via a traditional IPO, as early as late-2015, id. ¶ 135;

• Defendant Zhou was in charge of the privatization and relisting plan due to his large

ownership stake in Qihoo, id. ¶ 136;

• CW1 had conversations with “a senior employee in the Public Relations department who

confirmed that, after privatization, Qihoo would return to China and get relisted,” id.;

• Defendants attempted to execute the privatization quickly in an effort to push forward

with the relisting process and “pledged its headquarters in Beijing and the [c]ompany’s

trademarks as collateral to overcome funding constraints and secure loans from China

Merchants Bank” to lock down financing, id. ¶ 136;

• Qihoo’s leaders sought to prevent public disclosure of the relisting and told employees to

leverage their media connections to try to remove evidence from the internet of the shell

company used to execute the relisting, id. ¶ 137;

• Qihoo’s “employees were confident that the value of the Chinese shell company that

Qihoo would merge into would increase dramatically as a result of backdoor listing,” id.



30

These allegations attributed to a single CW, however, bear none of the indicia of

reliability that have led courts applying Novak to sustain CW allegations as worthy of crediting.

First, the FAC does not contain any “independent [well-pled] factual allegations” to “corroborate

[the] confidential source’s statements.” Glaser, 772 F. Supp. 2d at 590.

Second, CW1’s position and job responsibilities are not described at a sufficient level of

particularity to “indicate a high likelihood that [CW1] actually knew facts underlying [his or her]

allegations.” Id. Quite the contrary, the little disclosed about CW1 makes it dubious that he or

she would be entrusted by corporate management with an explosive secret capable, if revealed,

of derailing Qihoo’s plan to go private: a definite plan for the company to be relisted following

the Merger. The FAC describes CW1 as relatively senior within the PR team. But it describes

CW1 as working at least two degrees of separation from defendant Qi within the corporate

structure. And it provides no detail on CW1’s concrete job responsibilities. Absent substantially

more detail, the FAC leaves it implausible that Qihoo would entrust a non-executive PR

employee with secrets about high-level corporate strategy—more than 15 months before the

actual relisting. That CW1 purportedly participated in “informal[]” discussions to this effect, see

FAC ¶ 135, does not cure this problem. The FAC’s failure to substantiate this improbable

allegation or to offer surrounding context that would make this bombshell disclosure to CW1

more plausible badly undermines this pillar of its claim of false and misleading statements. See,

e.g., Glaser, 772 F. Supp. 2d at 595; In re Sierra Wireless, 482 F. Supp. 2d at 376; In re China

Mobile Games & Entm’t Grp., Ltd. Sec. Litig., No. 14 Civ. 4471 (KMW), 2016 WL 922711,

at *4 (S.D.N.Y. Mar. 7, 2016).

Third, the content of CW1’s allegations, far from being particular, is uncommonly hazy.

The FAC alleges conclusorily that the “[d]efendants planned all along to relist the [c]ompany in



31

China following the Merger” based on “informal discussions” among employees in the PR

department to which CW1 was privy and a single meeting in “mid[-]2015” in which Qi revealed

the top-secret relisting plan. See FAC ¶ 134–35. But the FAC, strikingly, “does not supply any

detail as to the who, what, when, where, and how of the” relisting plan itself. Long Miao,

442 F. Supp. 3d at 803–04. CW1’s statements are so devoid of detail about the future relisting as

to call into question whether, if CW1 indeed heard something about a potential relisting, what

was heard involved a concrete and definite plan to relist, as opposed merely to the possibility

(which was amply publicly disclosed) that Qihoo might later relist. Notably, when Qihoo

relisted some 15 months after the Merger vote, it did not do so alone, but instead with a shell

company, SJEC, to expedite the relisting process. CW1’s allegations do not align with any detail

of the relisting that eventually occurred. The information reported by CW1 about a future

relisting is instead entirely generic.9 The FAC’s general allegations from an anonymous source

therefore fall very short. See, e.g., Schiro, 396 F. Supp. 3d at 305–06; In re Lululemon,

14 F. Supp. 3d at 579–81; In re Sierra Wireless, 482 F. Supp. 2d at 376; Lopez, 173 F. Supp. 3d

at 31–32 & n.8.

Fourth, based on the FAC, plaintiffs’ counsel appear to have done nothing whatsoever to

confirm the veracity of CW1. Long Miao, 442 F. Supp. 3d at 804. Counsel do not explicitly

9 CW1’s allegation is so unmoored in time as to call into question whether whatever CW1 heard about a relisting occurred before the Merger. The FAC alleges only that CW1 has “explained that as the relisting approached, Qihoo’s leaders wanted to avoid public disclosure of the relisting and instructed employees to try to use their media connections to get articles with the identity of the shell company (SJEC) deleted from the internet.” FAC ¶ 137 (emphasis added). The FAC, however, offers no basis to credit that these events occurred prior to the Merger, and CW1’s statement that these discussions occurred “as the relisting approached” more naturally describe a point a time closer to the end of the 15-month period between the Merger and the relisting announcement than before the start of that period.



32

state that they have personally interviewed CW1 or even tried to locate this source on which the

FAC so heavily relies. The manner by which counsel came to learn of CW1’s purported

allegations instead is left opaque. And the FAC does not recount any meaningful effort to

substantiate CW1’s claims. As in prior cases involving similarly problematic allegations,

“[a]llowing counsel to rely on confidential witness statements recounted” at best second-hand

“provide[s] the Court little assurance that the factual contentions have any evidentiary support.”

In re Lehman Bros., 2013 WL 3989066, at *4.

The Court accordingly disregards CW1’s allegations. Examined with even minimal

rigor, they do nothing to substantiate the FAC’s claims of a § 10-b violation.

b. Attributions to News Articles

The news articles cited by the FAC do not fill this void. The articles cited there fall

generally into two groups: (1) reports suggesting that there were two sets of marketing materials

and projections prepared at the time of the Merger—one for Qihoo Securityholders and another

for the Buyer Group that showed substantially more upside as a result of a future relisting; and

(2) reports suggesting a different investment thesis than what was disclosed to investors pre-

Merger.10 For the reasons below, none describe with sufficient particularity the existence of an

actual concrete relisting plan at the time of the Merger.

10 The Final Proxy Statement provided to Qihoo Securityholders recited standard rationales for taking a business private. These included increased flexibility to maximize long-term financial performance (instead of the short-term thinking promoted by public equity markets), the ability to adapt to a changing operating environment with increasing regulatory hurdles, the ability to increase capital expenditures and invest in other technological advancements to bolster the Company’s market position, greater time to improve emerging businesses without the scrutiny of public markets, and the avoidance of regulatory costs that come with a public listing. See FAC ¶ 75.



33

The following are the allegations that the FAC attributes to news outlets:

• A November 12, 2015 article from CN Stock (published in Chinese) which reported that

the author had obtained an undisclosed copy of the privatization plan that had been

provided to Buyer Group investors and conveyed the plan to list in China post-Merger.

FAC ¶ 106. The materials approximated a one-and-a-half-year timeline for the relisting,

which proved similar to the actual amount of time that Qihoo took to become private in

the United States and execute the relisting in China. Id. ¶ 107.

• A December 29, 2015 article in Tencent Technology (published in Chinese) indicating

that it had obtained Qihoo’s privatization plan from the main underwriter, Huatai United

Securities. The article “also reported that Qihoo planned to return to the Chinese [stock]

market through a backdoor listing.” Id. ¶ 110.

• A June 23, 2016 article in Netease (published in Chinese) explaining that Qihoo had

indicated to the media that it “had reached an agreement on the currency exchange plan

with the State Administration of Foreign Exchange.” Id. ¶ 112. “The article commented

that these developments paved the way for [Qihoo’s] relisting in China.” Id.

• An August 3, 2016 article in the Chinese newspaper Caixin (published in Chinese),

published after the Merger, reporting that the Company had planned to relist “as of last

year”—that is, while the Merger process was still underway, and before defendants

issued the Preliminary Proxy materials. The Company declined to comment for this

article on its plans to relist following the Merger, but according to the FAC, “the article

confirms the other similar reports that the private promotional materials that Qihoo used

to solicit investors in the Buyer Group secretly advertised that there would be a relisting

after the Merger.” Id. ¶ 113.



34

• An August 16, 2016 article in Netease (published in Chinese), published post-Merger,

stating that Qihoo would soon become a “pure domestic company” at the urging of

Chinese government officials who had reached out to Zhou pre-Merger. Because many

Chinese government agencies used Qihoo’s products, these officials preferred that the

company be listed in China. Id. ¶ 118.

• An August 22, 2016 article in The Paper (published in Chinese), published post-Merger,

reporting an interview with Zhou in which he acknowledged that he had decided to split

up Qihoo’s businesses. He denied that this was part of a relisting plan, rejected the idea

that the company had plans for a backdoor relisting, and reiterated China’s national

security concerns as a reason for privatization. Id. ¶¶ 119–22.

• A February 28, 2017 opinion piece11 in the Financial Times (published in English)

discussing the trend of “take-privates” of Chinese companies, and attendant litigation,

giving the example, inter alia, of Qihoo and stating that “[m]arketing materials from the

fundraising ‘for the privatisation of Qihoo 360 and return of A shares’ seen by the FT

state that the return to investors assuming an exit in 2019 ‘may be as high as 5 [times]’

and contain ambitious estimates of future net income and other performance metrics

going out to 2019.” The opinion piece then cites unnamed “[m]inority shareholders,”

who “say that conversations with Qihoo 360 and its advisers before privatisation [sic]

suggested that the company’s prospects were not nearly that bright.” Id. ¶ 115.

11 Although the FAC does not identify this article as an opinion piece, see id. ¶ 115, the article itself—which is incorporated by reference into the FAC, see id. & n.16—is clearly labeled as such. See City of Pontiac Policemen’s & Firemen’s Ret. Sys., 752 F.3d at 179; Staehr, 547 F.3d at 425.



35

• A November 6, 2017 article in Pandaily (translating to English an article published in a

Chinese source three days earlier) reporting that “[i]n spite of his straightforward

reputation,” Zhou had been “tight-lipped about which company he bought” as the vehicle

for Qihoo’s backdoor listing up until the relisting announcement. FAC ¶ 116. The article

reiterated Qihoo’s desire to be a domestic company in China and the national security

strategy as the rationale for the privatization. It included a discussion of Zhou’s vision

for the company’s core security business, and the fact that “Qihoo [could] play an

important role in industrial security, social security, national security, cyber-attack and

defense.” Id. ¶ 128. Finally, it noted the disparity between technology stock valuations

in China vs. the United States, and explained that, “once Qihoo 360 returned to the

[Chinese stock market], its market value would grow many times over.” Id. ¶ 152.

• A February 28, 2018 Bloomberg article (published in English) noting that technology

companies generally command higher valuations in China than they do in the United

States. Id.

Of the media reports cited in the FAC, the most significant are the November 12, 2015

article from CN Stock, the December 29, 2015 article from Tencent Technology, and the

August 3, 2016 article in Caixin. Each suggests that a separate, and more rosy, set of projections

(based on the secret relisting plan) had been provided to the Buyer Group, but not to Qihoo

Securityholders, prior to the Merger. Id. ¶¶ 106, 110, 113. But these articles ultimately cannot

sustain the FAC’s allegations. None of these articles describes a concrete plan to relist, as

opposed to Qihoo executives’ identification of a post-Merger relisting as a potentially lucrative

course. And Qihoo’s proxy materials repeatedly disclosed that possibility. Even crediting the

allegations in these articles, they thus fall short of establishing the fact necessary to make the



36

proxy materials misleading: that at the time of the Merger, Qihoo had a concrete and definite

relisting plan in place (presumably the one that took effect 15 months later). And the allegations

in these articles, like the factual attributions to CW1, are far too conclusory, insufficiently

particular, and devoid of details confirming their reliability to allow them to be taken to establish

more than that the possibility of a future relisting was presented to Buyers. See In re Optionable,

577 F. Supp. 2d at 690; In re Rockwell Med., 2018 WL 1725553, at *8; Miller, 473 F. Supp. 2d

at 586. Vitally, the articles, as described in the FAC, do not supply any details of the purported

secret plan. The CN Stock and Tencent Technology articles, whose authors purportedly saw

Buyer Group materials addressing a possible relisting, tellingly do not disclose its terms,

participants, profitability, or mechanics. Like the statements attributed to the CW1, they do not

factually mesh, at all, with the relisting operation that ultimately transpired 15 months after the

Merger. The lack of these details, and the lack of corroboration in the FAC of the existence of a

concrete plan as opposed to an inchoate hope to relist in the future, makes these articles

ultimately unequal to the task required of plaintiffs to establish that defendants made false or

misleading statements. See, e.g., In re Optionable, 577 F. Supp. 2d at 690 (“newspaper articles

should be credited only to the extent that other factual allegations would be.” (citation omitted)).

The remainder of the articles cited by the FAC contain factual allegations that are only

indirectly relevant to the § 10b claim. They do not implicate a specific alleged misstatement or

omission. Rather, they describe secretiveness and similar dynamics among Qihoo leaders that

hint at, but do not concretely allege, wrongdoing. But any inferences drawn from these general

accounts to the effect that defendants were engaged in fraud in general—let alone the specific

fraud theorized by the FAC—would be rank speculation. See Plumbers, 694 F. Supp. 2d

at 300–01 (media reports relying on speculation are not sufficiently particularized to support a



37

§ 10b claim at the motion to dismiss stage). That various statements in these articles are not

attributed to any individual further undermines them as a basis for a § 10-b claim. See In re

Vale, 2017 WL 1102666, at *27–28.

Finally, the FAC’s attempt to minimize the absence of corroborative details in the media

reports on which it relies reveals its inadequacy. To explain why details of the secret plan were

not known to the media, the FAC notes that “Qihoo’s fundamental restructuring of its businesses

was particularly complex and would have required a significant amount of time to complete

following the Merger.” FAC ¶ 109. But that statement is inconsistent with plaintiffs’ necessary

theory that a relisting plan—as opposed to an aspiration—was in place prior to the Merger. The

FAC’s admission that any such a plan would require complex restructuring post-Merger all but

admits that no specific and definite plan (let alone the one eventually adopted) was in place prior

to the Merger. Similarly damning is the FAC’s acknowledgment that the cited media articles

chronicle “rumored reports” rather than “definitive” plans to relist. FAC ¶ 111.

c. Conclusion

For the foregoing reasons, the FAC fails to plead adequately its necessary factual

allegation: that defendants, as of the Merger, had in place a concrete plan to relist Qihoo. The

FAC’s repeated declarations that defendants had arranged such a plan, as opposed to envisioning

a possible future relisting, are ultimately an ipse dixit. Because the FAC’s claims of material

misrepresentations and omissions all turn on this factual premise, it fails to adequately allege this

element of the § 10(b) claim. The Court therefore dismisses plaintiffs’ § 10(b) claim, with

prejudice.

IV. The FAC’s § 20(a) and § 20A Claims

Because plaintiffs have failed to adequately allege their § 10(b) claim, their claims under

§§ 20(a) and 20A fail as a matter of law. Both require a predicate violation of the Exchange Act,



38

which the FAC does not adequately plead. See Carpenters Pension Tr. Fund of St. Louis,

750 F.3d at 236; City of Taylor Gen. Emps. Ret. Sys., 967 F. Supp. 2d at 800. These claims, too,

are therefore dismissed with prejudice.

CONCLUSION

For the foregoing reasons, plaintiffs’ First Amended Complaint is dismissed with

prejudice. The Clerk of Court is respectfully directed to terminate the motions pending at

dockets 77, 80, and 82, and to close this case.

SO ORDERED.

____________________________ Paul A. Engelmayer United States District Judge

Dated: August 14, 2020 New York, New York


PaJA.�



SPA-39

UNITED STATES DISTRICT COURT SOUTH ERN DISTRICT O F NEW YORK ...................................................... ······x A LTlMEO ASSET MANAGEM ENT and ODS CA PITAL LLC, individually and on bchalf ofall others similarly !<i ituatcd.

Plaintiff,

.against-

Q llioo 360 T ECHNO LOG Y CO. LTD., HONGYI ZHOU, XIANGDONG QI, and ERIC X. CHEN,

Defendants . ...•........••.....•. .......•..•..•......•............ ·····X

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19 C IVIL 10067 (r AE)

JUDGM ENT

It is hereby ORDERED, ADJUDGED AND DECREED: That for the reasons

slated in the Court's Opinion & Order dated August 14,2020, the motion is granted and the FAC

is dismissed in its entirelY. Plaintiffs' First Amended Complaint is d ismissed with prejudice;

accordingly, lhis case is closed.

Da ted : New York, New York

August! 7,2020

RUBY J . KRAJI CK

Clerk of Court BY:

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