b'statement on its website stating that Pinduoduo shouldexpress warning about the potential ineffectiveness react properly to media reports and consumerof the [c]ompanys anti-counterfeiting policies, noting complaints, and should not tolerate and supportthe registration statement explained that [a]lthough infringement. The price of the companys ADSsPinduoduo had adopted strict measures against dropped the same day from $19.66 to $19.07.counterfeiting, these measures may not always Investors filed putative securities class actions againstbe successful. Thus, the court determined that, Pinduoduo and its executives and directors allegingafter reading the challenged statement in context, violations of the 1933 Act. On August 30, 2018, newsa reasonable investor would have understood that leaked that the companys sales and marketingcounterfeiting remained an ongoing problem for the expenses had increased in the second quarter of 2018.company, and that the high volume of merchants and That day, the value of the companys ADSs droppedsales on the platform were an obstacle to enforcement. from $21.15 to $17.99. On January 19, 2019, the courtSecond, the court held that plaintiffs did not allege an consolidated the cases and appointed a lead plaintiff.actionable misstatement or omission concerning the On February 22, 2019 plaintiffs filed a consolidatedcompanys marketing expenses because Pinduoduo amended complaint alleging defendants violatedprovided purchasers with ample warnings and Sections 11 and 15 of the 1933 Act and adding claimsdisclosures about the growth of marketing expenses. under Sections 10(b) and 20(a) of the 1934 Act andPinduoduos prospectus disclosed that its operating Rule 10b-5 promulgated thereunder. Plaintiffs claimedexpenses had increased substantially based defendants materially misrepresented the companysprimarily on its sales and marketing expenses. anti-counterfeiting efforts in its offering documentsIt stated that, over the course of a year, quarterly because Pinduoduo actually did little to addressmarketing expenses rose from RMB 73.9 million to RMB counterfeiting, ignored complaints from brands like1,217.5 million. In short, the court reasoned that the Skyworth, performed desultory offline investigations,doubling of marketing expenses in the second quarter and sold large volumes of counterfeit goods in certainof 2018 was consistent with the trend disclosed by product categories. Plaintiffs also alleged that thePinduoduo, and plaintiffs failed to allege how further offering documents omitted material information aboutdisclosure would have significantly altered the total the companys marketing expenses from the secondmix of information available to a reasonable investor quarter of 2018, claiming Pinduoduos interim financialor disclosed a trend not otherwise explained in the results for the second quarter of 2018 sharply differedoffering documents. from the existing trends as Pinduoduo engaged inFinally, the court held that plaintiffs 1934 Act claims a massive but fruitless marketing campaign, withseparately failed because plaintiffs failed to adequately marketing expenses jumping from RMB 1,217,458 toallege scienter. The court determined that plaintiffs RMB 2,970,734, while the number of new users onlyallegations [fell] far short of strong circumstantial increased from 25.2 million to 28.8 million, with theevidence of a reckless state of mind approximating per-user acquisition costs going from RMB 24 to RMBactual intent because the companys description of its 64. Plaintiffs alleged that the increased customer- strict anti-counterfeiting measures was accompanied acquisition costs were a trend known to the defendantsby the qualification that its efforts might not always that should have been disclosed under Item 303 ofbe successful, a recitation of the companys potential Regulation S-K. Plaintiffs relied on allegations from anliabilities, and descriptions of claims and actions accountant who purportedly previously worked for onepreviously asserted against it. The court also reasoned of Pinduoduos subsidiaries and stated that Pinduoduothat plaintiffs did not allege a cogent and compelling would have had access to data on its quarterly andinference that defendants acted with a reckless intent monthly marketing expenses in advance of the IPO.by omitting the marketing expenses incurred in the Defendants moved to dismiss, and the court grantedsecond quarter of 2018 because plaintiffs did not assert the motion in full. First, the court held that the companythat management or any specific defendant should adequately disclosed its issues with, and efforts to limit,reasonably have been aware of those expenses, counterfeits, noting the companys disclosures depictedexplain the basis for the knowledge of confidential its anti-counterfeiting efforts as an ongoing battle,informants, or assert that the confidential informant involving continuing litigation and claims over third- had any knowledge or connection to the marketing party infringement, warned that its anti-counterfeitingexpenses in the second quarter of 2018. measures may not always be successful, andPlaintiffs appealed the district courts dismissal to explained that its 1.7 million merchants had ultimatethe U.S. Court of Appeals for the Second Circuit on responsibility for the sourcing of products. The courtApril 29, 2020 (Case No. 20-1423). The appeal is further stated that the challenged statement in thefully briefed.registration statement was in fact phrased as an 66'