Second Circuit – Securities fraud: In re Shanda Games Ltd. Sec. Litig.

United States Court of Appeals for the Second Circuit

Securities fraud — Scienter and transactions on domestic exchange

In re Shanda Games Ltd. Sec. Litig.

22-3076

Judges Livingston, Jacobs, and Lohier

Background: The plaintiff challenged the dismissal of his securities fraud case for failing to state a claim. He alleges that materially misleading proxy materials issued by Shanda Games Ltd. as part of a freeze-out merger caused him to accept the merger price instead of exercising his appraisal rights.

Ruling: The Second Circuit affirmed in part and vacated in part. The court held that it was in error to dismiss the claims as City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, 752 F3d 173 (2d Cir. 2014) created a limited exception to the general rule that transactions in securities listed on a domestic exchange fall within the scope of Section 10(b). The Second Circuit further held that the plaintiff adequately alleged material misstatements and the scienter of the conflicted directors, who had the motive and opportunity to deflate the merger price for their own financial gain, can be imputed to the company. Finally, the Second Circuit held that it agreed with the district court that the plaintiff may invoke the rebuttable presumption of fraud-on-the-market to satisfy transaction causation because he relied on the market price to decide not to exercise his appraisal rights.

Jake Bissell-Linsk, of Labaton Keller Sucharow, for the plaintiff-appellant; Abby F. Rudzin, of O’Melveny & Myers, for the defendants-appellees.

Oral argument audio