As I noted in a post last week discussing the derivative lawsuit and settlement involving 21st Century Fox, allegations of failure to prevent alleged misconduct within company operations or at company facilities can translate into potential liability exposure for the company and its senior management. Another example of this phenomenon has emerged. In the weeks just after RYB Education completed its late September 2017 IPO, news reports began circulating of alleged child abuse at company preschool education facilities in China. Now a shareholder has filed a securities class action lawsuit in the U.S. against the company and certain of its executives. As discussed below, this new lawsuit represents the latest example of several different securities class action lawsuit filing trends.
RYB is an early childhood educational service company registered in the Cayman Islands and based in Beijing. The company operates preschool educational facilities and child care centers under several brand names in China. According to Wikipedia, the company is the largest provider of early childhood educational services in China. The company completed an IPO on September 27, 2017. The company raised approximately $144 million in the offering. The company’s American Depositary Receipts (ADR) trade on the NYSE under the ticker symbol “RYB.”
Within weeks of the company’s completion of its IPO, media reports began circulating of abuses at the company’s preschool facilities. As discussed in a November 10, 2017 BBC News report (here), video footage reportedly surfaced allegedly showing abusive behavior toward children at one of the company’s facilities in Shanghai. The videos quickly went viral and were viewed by millions online. Additional stories followed days later, including disturbing reports that children at one of the company’s Beijing facilities were given injections and fed drugs. The reports also included alarming suggestions that children at the Beijing facility had been forced to strip naked and possibly had been subjected to sexual abuse. Later reports followed that teachers at the facility had been arrested and that the head of the Beijing facility had been fired. The price of company’s ADR’s declined as much as 40% on the news of these revelations, although they have recovered slightly since.
On November 27, 2017, an RYB Education ADR holder filed a securities class action lawsuit in the Southern District of New York against the company, its co-founder and CEO, and its CFO. The complaint purports to be filed on behalf of a class of persons who purchased ADRs in the company’s IPO, as well as on behalf of persons who purchased the company’s ADRs in the open market between September 27, 2017 and November 22, 2017.
According to the plaintiff’s counsel’s November 27, 2017 press release (here), the plaintiff’s complaint (a copy of which can be found here) alleges that the defendants made false and misleading statements or omissions that: “(i) RYB failed to establish safety policies to prevent sexual abuse from occurring at its schools; (ii) RYB’s failure to remedy problems within its system exposed children to harm and unreasonable risk of harm while in the Company’s care; and (iii) as a result of the foregoing, RYB securities traded at artificially inflated prices during the Class Period, and class members suffered significant losses and damages.”
In a post late last week about the shareholder derivative lawsuit and settlement involving 21st Century Fox, I discussed how that case and settlement showed how the current wave of revelations of sexual misconduct in the U.S. could lead to claims against company management for failing to allowing or failing to prevent the misconduct. Although the allegations against RYB are very different from the kinds of misconduct allegations that beset 21st Century Fox, the new securities lawsuit against RYB represents another kind of example of the way in which allegations of misconduct at company facilities or involving company personnel can translate into D&O exposure and potential liability.
The new lawsuit against RYB also represents an example of another phenomenon on which I have commented during recent months – that is, the phenomenon of event-driven securities litigation. As I discussed in an earlier post (here), there have been a number of event-driven suits filed this year, including, for example, the lawsuit filed against Arconic in wake of the Grenfell Tower fire, or the lawsuit filed against USANA Health Services after the company self-reported possible FCPA violations involving its Chinese facilities.
These cases (and the many other examples cited in the linked blog post) do not necessarily include the more traditional types of alleged securities law violations involving allegations of supposed financial misrepresentations or omissions.
Rather, these cases tend to involve situations in which the company supposedly failed to disclose an operational vulnerability or internal control weakness that subsequently resulted in an adverse development at the company causing a resulting decline in the company’s share price. These kinds of cases are one of the many causes of the increase in securities class action lawsuit filings during 2017. It is also worth noting that all of the cases I cited in my prior blog post involve the same plaintiffs’ law firm – as does the new lawsuit filed against RYB Education.
The RYB Education lawsuit also represents an example of a couple of other securities litigation filing trends. First, it is most obviously an example of the increased susceptibility to securities litigation that IPO companies face compared to companies whose shares have long been traded on the securities exchanges.
Second, it is an example of the heightened vulnerability of non-U.S. companies whose securities are listed on the U.S. exchanges to U.S. securities class action litigation. Only about 16% of the companies listed on the U.S. exchanges are non-U.S. companies. Of the 208 traditional securities class action lawsuits filed so far this year (that is, disregarding the federal court merger objection lawsuits), 48 (or about 23%) involve non-U.S. companies, suggesting that non-U.S. companies face a greater securities litigation risk than do domestic U.S. companies listed on the U.S. exchanges.