Pure Market Manipulation Claims Remain Out of Reach For Some Shareholders Victimized By Mysterious Stock Price Reversals

Emergent LLP partner Chi-Ru Jou, who leads the firm's securities litigation practice, provides representation and advice on complex, cutting-edge matters affecting investors and businesses in the financial services industry.  Below, she discusses recent unexplained spikes in the stock price of Chinese lender Wins, and the challenges facing wronged shareholders seeking compensation.  You can reach Chi-Ru by emailing her (chiru@emergent.law) or contacting us.

Wins Finance Holdings Inc. (“Wins”), a company that guarantees loans and leases equipment for small businesses in China, has been the target of multiple securities class action lawsuits ever since the news broke in March of this year that it was under investigation by the SEC for market manipulation of its stock.  Incredibly, the stock price of Wins soared over 4,000% since the inception of trading near the end of 2015, with no company news headlines to explain this market bubble.  On March 30, 2017, the investment analytics site Seeking Alpha reported the SEC investigation and the fact that Wins had mislead the Russell Index into including the company based upon a false report of the location of its headquarters.  On this news, the stock price plunged back to levels below $50 per share, only to be followed by another mysterious spike up to the $200 level in the early summer of this year.  On June 7, 2017, NASDAQ announced that it was halting trade in Wins stock pending the receipt of further information from the company.  On August 4, 2017, NASDAQ sent Wins a delisting determination letter, but withdrew this letter on October 19, 2017.  The stock remains halted while NASDAQ awaits further information from Wins.

For securities practitioners, the most interesting and perplexing part of this scenario was the nature of the class action complaints that were filed during the months following the Seeking Alpha article, asserting claims under Rule 10b-5 of the Securities Exchange Act.  Several plaintiff-side securities firms issued press releases stating that they had filed complaints, but only two firms engaged in a battle for lead counsel status in the Southern District of New York and the Central District of California, leading to the voluntary dismissal of the SDNY lawsuit.  Although the subject of the SEC investigation was believed to be the company’s market manipulation, the class action complaints relied for the most part on theories of misrepresentation, drawing upon news headlines such as Wins’ misrepresentations to the Russell Index.  The currently pending putative class action in California features an amended complaint pleading both misrepresentation and scheme liability as separate causes of action, yet the substantive allegations focus upon the misrepresentation regarding the company headquarters.

This fact was obviously due to the lack of information available about what manipulative acts the insiders at Wins could have perpetrated to drive these mysterious spikes in its stock price.  Securities class action lawsuits are frequently brought in the New York federal courts, where the Second Circuit case ATSI Communications v. Shaar Fund, 493 F.3d 87 (2d Cir. 2007) imposes a stringent pleading standard for market manipulation cases.  In ATSI, the Second Circuit held that a plaintiff had to allege “something more” than open-market trading activity that was otherwise perfectly legal in order to support claims of market manipulation.  Although the court clarified that for market manipulation claims, the pleading standard was slightly lower than the standard for misrepresentation claims, due to the fact that the information was mostly in the hands of the defendant, it still spelled out that the plaintiff had to plead with particularity “what manipulative acts were performed, which defendants performed them, when the manipulative acts were performed, and what effect the scheme had on the market for the securities at issue.”  Id. at 102. 

In the wake of these events involving Wins, it may be time for the Second Circuit to take another look at the pleading standard for market manipulation.  Otherwise, shareholder plaintiffs may need to resort to other devices such as derivative litigation rather than the securities class action lawsuit to address such mysterious instances of apparent market manipulation.