In the latest sign that coronavirus-related securities class action lawsuit filings will continue into the New Year, on January 20, 2021, a plaintiff shareholder filed a COVID-19-related securities suit against the Chinese Internet social media company Lizhi, Inc. The lawsuit relates to the coronavirus outbreak now more than a year ago in China, and to the company’s January 2020 U.S. IPO. A copy of the plaintiff’s complaint can be found here.
Background and Lawsuit
Lizhi is a Chinese social audio platform for user-generated content in China. Lizhi completed a U.S. IPO in January 2020. Its shares tread on the NASDAQ stock exchange.
On January 20, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against, Lizhi; certain of its directors and officers; its two U.S-based designated U.S. representatives; and its offering underwriters. The complaint purports to be filed on behalf of investors who purchased the company’s American Depositary Shares (ADSs) in connection with the company’s January 17, 2020 IPO. The complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.
The gist of the plaintiff’s complaint is that the offering documents filed with the SEC in connection with the company’s IPO were “negligently prepared,” and that as a result, the documents “contained untrue statements of material facts or omitted to state other facts necessary to make the statements therein not misleading.”
Specifically, the complaint alleges that the offering documents “failed to disclose Lizhi’s direct and escalating exposure to the devastating coronavirus epidemic, then already raging in China and engulfing its business, customers, and employees at the time of the IPO.”
The complaint quotes various statements from the company’s IPO registration to the effect that the company faces risks from “natural disasters, health epidemics and other outbreaks,” which “could significantly disrupt our operations and negatively impact our business, financial conditions and development.” The complaint alleges that these statements were misleading in that they risks were express as if the “might” occur and “could” affect the company, while the risks “had already materialized at the time of the IPO.”
The complaint alleges that the company’s statement and omissions in the offering documents were misleading because the defendants failed to disclose that “(1) at the time of the IPO, the coronavirus was already ravaging China, the home base, principal market, and significant hub for Lizhi, its employees, and its customers; (2) the complications associated with the coronavirus were already negatively affecting Lizhi’s business, as employees contracted the virus, lost employment, or otherwise experienced difficulty in generating, publishing, and monetizing the content critical to Lizhi’s platform; (3) even prior to IPO, Lizhi employees and customers complained of, and to, Lizhi, which harmed the Company’s reputation and financial condition and prospects; and (4) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”
In a section captioned “The Truth Emerges,” the complaint quotes from the company’s post-IPO SEC filings. For example, the complaint quotes from the company’s March 12, 2020 filing on Form 6-K, in which the company stated that “The COVID-19 outbreak has caused, and may continue to cause, companies in China, including us, to implement temporary adjustment of work schemes allowing employees to work from home…. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 and the actions to contain or treat its impact, among others.” The complaint also quotes from the company April 20, 2020 filing on Form 20-F, in which the company acknowledges, among other things, that the COVID-19 virus was spreading worldwide “in late 2019.”
By my count, the new lawsuit against Lizhi is the 25th coronavirus-related securities class action lawsuit to be filed since March 2020. Lizhi is also the second Chinese company to be hit with a coronavirus-related securities suit. As discussed here, the other Chinese company hit with one of these suits was Phoenix Tree Holdings Limited. Coincidentally enough, Phoenix Tree also completed its U.S. IPO in January 2020, at almost the same time as Lizhi. The Phoenix Tree complaint, like the complaint against Lizhi, alleges that the defendant company failed to disclose in the offering documents filed in connection with the company’s IPO that the coronavirus outbreak supposedly was already affecting the company’s operations and finances.
Both the Lizhi complaint and the Phoenix Tree complaint beg the question about what was known about COVID-19 in China in mid-January 2020. In that respect it is worth repeating at length and in full the following text from my prior post about the Phoenix Tree action:
What was the situation on the ground in China [in January 2020]? To try and get a sense, I went to the online John Hopkins Coronavirus Resource Center, which has a page breaking down the progression of the coronavirus outbreak in Hubei. According to the website, the Wuhan City government did not begin tracking cases of a suspected pneumonia until December 30, 2019. A Shanghai lab first detected a coronavirus similar to SARS on January 5, 2020. Human to human spread of the coronavirus was first announced on January 20, 2020. Wuhan was first placed on quarantine on January 24, 2020. The website’s timeline is a little bit hard to decode on a daily basis, but my interpretation of the graphical data is that on January 23, 2020 (the first specific individual date identified on the graphic chart), there were a total of 444 confirmed cases of the coronavirus and 17 deaths.
While thinking about what the situation was in China at the time this company’s registration was declared effective, it is important to remember that in the early stages of the coronavirus outbreak in China, the Chinese government was actively suppressing the dissemination of information about the outbreak, as detailed in a detailed timeline posted on Axios (here). Among other things, the timeline shows that during a pre-scheduled Chinese Communist Party meeting in Wuhan during the period January 11 to January 17, 2020, the Wuhan Health Commission “insisted” that there were no new cases reported. In February 2020, the Washington Post reported that as of January 16, 2020, people in Wuhan were still being told by the government that the virus outbreak was not a problem and that there were no new cases. As people began to travel for the Lunar New Year celebration (which began on January 24, 2020) that a perception quickly began to grow that the virus was spreading rapidly; only then were Wuhan and then a larger region were locked down.
In other words, it looks like things were just emerging at the time of the company’s IPO and that things got very bad immediately after, but the extent of the looming disaster arguably was not apparent at the time the company’s Registration Statement was declared effective on January 16, 2020, in part because the Chinese government was actively suppressing information about the viral disease.
In that same regards it is probably worth noting here, as I also noted in my earlier post about the Phoenix Tree lawsuit, that “Whether this company made a material misrepresentation in its offering materials about the coronavirus outbreak in China is going to come down to a very narrow factual issue, and elusive questions about how a rapidly emerging situation was evolving — as well as what was being hidden at the time by the Chinese government. The one thing that is certain is that the company’s offering document statements cannot be judged based on what later happened.”
All of that said, the one thing this complaint does suggest for certain is that we are likely going to continue to see further coronavirus-related securities suits as 2021 progress – and not just cases, like this one, relating to the very early days of the outbreak, but also cases related to statements companies are making as the public health crisis phase of the pandemic continues far longer than any of us imagined a year ago.