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From Securities Regulation Daily, January 11, 2017

Exit from marketplace not in the cards at time of IPO

By Rodney F. Tonkovic, J.D.

A complaint alleging that a Chinese online retailer failed to disclose that it planned to exit a marketplace has been dismissed by the district court sitting in Manhattan. The complaint claimed that the company's IPO registration statement contained false statements because of the failure to disclose. The court found that the complaint failed to plead any actionable misrepresentation or any facts beyond mere speculation as to knowledge or intent regarding the exit plans (In re Jumei International Holding Limited Securities Litigation, January 10, 2017, Pauley, W.).

Online beauty marketplace. Jumei International Holding Ltd., a Chinese online retailer specializing in beauty products and apparel, had an IPO of American Depositary Shares in May 2014. The company generates revenue through direct sales of Jumei brands and through fees for sales made by third-party merchants on Jumei's online marketplace. Prior to the IPO, revenue attributable to the marketplace sales was 16 percent of Jumei's net revenue and generated more than half of its gross merchandise volume.

In the IPO registration statement, Jumei noted, among other risk factors, the possibility that its financial results could be adversely affected if counterfeit products were sold on the online marketplace. In August, Jumei reported positive financial results and strong growth. In late 2014, Jumei exited the online marketplace to focus on its private-label merchandise. The stock price dropped and the company reported a 4 percent decline in gross profit margins linked to the shift to merchandise sales. Jumei explained that its sudden exit from the marketplace channel would ensure greater control over its supply chain and strengthen its quality control.

Securities Act. The complaint claimed under Securities Act Section 11 that Jumei's registration statement was misleading because Jumei knew, but failed to disclose, that it would exit the third-party marketplace and that this would have a material impact on its profits. Due to the scope and impact of leaving the third-party marketplace, the complaint asserted, it was inconceivable that the exit plan "was hatched overnight." The court found, however, that the complaint set forth no facts showing that any defendant knew about the exit plan and its likely impact at the time of the IPO. While the counterfeit products issue was itself a "trend" or "uncertainty" that ultimately forced Jumei out of the marketplace, that risk was disclosed in the registration statement, the court said.

Scienter. Next, the complaint argued that Jumei's knowledge could be inferred because implementation of its exit strategy affected many facets of its business and required advance planning. This, the court said, was classic fraud-by-hindsight pleading. In the absence of any other allegations, there was no strong circumstantial evidence of conscious misbehavior.

The court noted in conclusion that Jumei consistently disclosed the risk of counterfeit products on its marketplace platform, but it was not obligated to disclose every possible response it may have been contemplating to address the problem. Other than the temporal proximity between the positive financial forecasts and Jumei's exit from the marketplace business, the complaint pointed to no evidence sufficient to meet any pleading standard.

The case is No. 14cv9826.

Attorneys: Jeremy Alan Lieberman (Pomerantz LLP) for Bellport Overseas Ltd. and Goldenrain Assets Ltd. Robert Alexander Fumerton (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) for Jumei International Holding Ltd. Edmund Polubinski, III (Davis Polk & Wardwell LLP) for Goldman Sachs [Asia] LLC, Credit Suisse Securities [USA] LLC and J.P. Morgan Securities LLC.

Companies: Bellport Overseas Ltd.; Goldenrain Assets Ltd.; Jumei International Holding Ltd.; Goldman Sachs [Asia] LLC; Credit Suisse Securities [USA] LLC; J.P. Morgan Securities LLC

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