The following e-filed documents, listed by NYSCEF document number (Motion 003) 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 88, 89, 90, 91, 92, 93 were read on this motion to/for DISMISS. DECISION ORDER ON MOTION This is a putative securities class action, brought on behalf of all persons and entities that purchased American Depository Shares (ADSs) of Uxin Limited (Uxin) pursuant or traceable to Uxin’s allegedly false and misleading registration statement and prospectus (the registration statement and prospectus, collectively, the Offering Documents) issued in connection with Uxin’s June 27, 2018 initial public offering (IPO) (Consolidated Amend. Compl., NYSCEF Doc. No. 83). The Consolidated Amended Complaint (the Complaint) asserts strict liability and negligence claims under Sections 11,12 and 15 of the Securities Act of 1933 (the 1933 Act) against Uxin, China’s largest used car e-commerce platform, certain of its senior executives and directors, and the investment banks that acted as its underwriters in connection with the IPO. The Complaint alleges that Uxin’s Offering Documents violated the 1933 Act in two ways: (1) they were materially incomplete and misleading as they touted Uxin’s existing business model and services without disclosing the fact that Uxin was about to discontinue providing some of those same services that it touted in its Offering Documents shortly after the IPO and (2) they contained incorrect financial information about Uxin’s sales, assets and liabilities. For the reasons set forth below, and as discussed at oral argument (3/3/2020), the defendants’ joint motion to dismiss is granted in part as set forth below. Uxin’s business is composed of two main segments: (i) Uxin Auction (the 2B Business), which primarily helps businesses such as car dealerships source vehicles, optimize turnover, and facilitate cross-regional transactions and (ii) Uxin Used Car (the 2C Business), which primarily provides consumers with customized car recommendations, financing, title transfer, delivery, insurance referral, warranty and other related services (NYSCEF Doc. No. 83,
2-4). The 2B Business can further be broken down into a “C2B” component, in which cars listed by consumers are purchased by dealers, and a “B2B” component, in which cars listed by dealers are purchased by other dealers (id., 7, 51). Uxin makes money from the fees it collects for its transaction and auto-loan facilitation services for all of these business segments (id., 5). According to the Complaint, in 2017, 48 percent of Uxin’s revenue came from facilitating loans as part of its 2C Business, and 38 percent of its revenue came from facilitating transactions as part of its 2B and 2C Businesses (id.). Uxin’s 2B transaction facilitation revenue was 26.6 percent of its total revenue (Prospectus, p. 90, NYSCEF Doc. No. 73). The Prospectus explained these revenue sources in detail: 2C business Our 2C business generates revenues from (i) transaction facilitation services, and (ii) loan facilitation services. Transaction facilitation revenue. For each used car sold through our 2C business, we charge a transaction facilitation service fee that equals the higher of a certain percentage of the price of the car and a minimum fee. The transaction facilitation service fee is for services provided through our platform in connecting consumers with used car sellers, facilitating car sales to consumers and providing after-sale warranty…. Loan facilitation revenue. We generate loan facilitation revenue primarily from the loan facilitation service fee we charge. For each consumer auto loan facilitated through our platform, we charge a loan facilitation service fee paid by the borrower at the beginning of the loan period. We charge service fees for loan facilitation services in connection with loans for both used cars and new cars…. 2B business Our 2B business generates revenues from transaction facilitation services. We primarily charge the buyers a transaction facilitation service fee for connecting business buyers with used car sellers and facilitating car sales through our auction service as well as for the title transfer service that we provide…. (id., p. 96). Under the heading “Risk Factors,” the Prospectus also explained that, “[a]n investment in the ADSs involves significant risks,” including “the following risks [which] could have a material and adverse effect on our business, financial condition and results of operations:” Risks Related to Our Business and Industry If we fail to provide a differentiated and superior customer experience, the size of our customer base and the number of transactions on our platform could decline, and our business would be materially and adversely affected (emphasis in original). Providing a differentiated and superior used car transaction experience for our customers, including both consumers and businesses, is critical to our business. Our ability to provide a high-quality customer experience depends on a number of factors, including: our ability to improve our existing service offerings and upgrade our platform; our ability to meet the diverse needs of our customers with ongoing innovation and new service offerings; our ability to maintain and improve operating efficiency and service quality of our offline networks and personnel; our ability to leverage technology and data to improve our services; our ability to adequately train and manage our employees; and our ability to effectively ensure the quality of services provided by our third-party service providers on our platform. We cannot guarantee that we can provide a differentiated and superior experience to our customers as our business continues to evolve. Our failure to do so would materially and adversely affect our business, financial condition and results of operations (emphasis added). * * * We provide and work with third parties to provide many services through our platform, such as car inspection services and warranty services, which are the key to earn customer trust. If we fail to maintain a high level of customer satisfaction or fail to properly manage our warranty and car inspection programs or other services, our business, financial condition and results of the operation would be adversely affected (emphasis added). (id., pp. 16-17). Pursuant to its IPO, Uxin sold 25,000,000 ADSs at a price of $9 each for a total of $205.1 million in net proceeds (Compl., 6, NYSCEF Doc. No. 83). Each ADS represents three shares of Uxin’s Class A common stock (id.). The 2B Business Change The Complaint alleges that less than two months after its IPO, on August 22, 2018, Uxin released its second quarter earnings (the Q2 Press Release) for the period ending June 30, 2019 (NYSCEF Doc. No. 75), together with an announcement of an “abrupt change to its business model,” as the company would “drastically shrink the scope of its much-touted 2B Business services” by ceasing to provide inspections and ancillary services to consumers,” which the plaintiffs claim was a competitive advantage which differentiated Uxin in the marketplace and which allegedly conflicted with statements made by Uxin in its Offering Documents (id., 7). Specifically, per the Q2 Press Release, Uxin stated: [W]e historically provided inspection and other complementary services that enabled consumers to sell used cars through our 2B business. Starting in the second half of 2018, we will take an alternative approach that connects these consumers with quality dealers on our platform without us providing inspection and other services directly. Due to this change to our service approach, we will no longer record the corresponding GMV, which has historically made an immaterial contribution to our overall business. Our B2B auction business remains unchanged. The e-commerce market for used cars is still in its infancy in China. We are excited about the tremendous opportunities ahead, and we will continue to optimize our model and provide more value-added services to our users. (NYSCEF Doc. No. 75, p. 1 [emphasis added]). In the two months since the IPO, Uxin’s ADS price had already decreased by approximately half (NYSCEF Doc. No. 76 [Stock Price List June 27, 2018-September 9, 2019]). On August 22, 2018, the day of Uxin’s Q2 Press Release, however, its stock price actually went up by approximately 6 percent (id.). Thereafter, on November 20, 2018, Uxin issued a press release following its third quarter earnings for the period ending September 30, 2018 (the Q3 Press Release) (NYSCEF Doc. No. 77). The third quarter was the first quarter reflecting the new exclusion of C2B sales from the 2B Business (id.). According to the Q3 Press Release, Uxin’s transaction volume associated with its 2B Business declined 8.5 percent year-over-year and the associated gross merchandise value (GMV) declined 14.8 percent year-over year following the company’s decision to stop providing those services (Compl., 8, NYSCEF Doc. No. 83). The Complaint alleges that Uxin’s “cash and cash equivalent position also materially declined during the first three quarters of 2018,” to wit, Uxin reported $194 in cash and cash equivalents, but by September 30, 2018, Uxin’s cash and cash equivalents fell to approximately $98.4 million (id., 9). However, as the defendants point out, because C2B sales were excluded from the 2B business, the year-over-year numbers were no longer “an apples-to-apples” comparison, and comparing the B2B Business alone — which now accounted for all of the 2B Business — Uxin actually achieved an 18 percent year-on-year growth in transaction volume and a 13.3 percent year-on-year growth in GMV (NYSCEF Doc. No. 77, p. 3). Accordingly, despite the exclusion of C2B sales, overall transaction facilitation revenue for Uxin’s 2B Business was up 20.8 percent year-on-year to $27.8 million (id.). On the day of the Q3 Press Release, Uxin’s ADS price closed at $4.50, which was a $0.60 drop from the day before (NYSCEF Doc. No. 76; Compl., 10, NYSCEF Doc. No. 83). In December of 2018, Uxin’s ADS price dropped even further, then spiked dramatically (going from $2.86 on December 4, 2018 to $9.35 on December 24, 2018) and then fell again by more than half to $3.88 by January 2, 2019 (NYSCEF Doc. No. 76). The Plaintiffs do not claim that the sharp decline at the end of December of 2018 was caused by any revelation of any prior misstatement or omission in Unix’s Registration Statement. The instant complaint was initially filed on January 22, 2019, based solely on the post-IPO change to Unix’s 2B Business that was announced pursuant to the Q2 Press Release on August 22, 2018. On March 14, 2019, Uxin announced its fourth quarter 2018 and year-end financial results (the Q4 Press Release) (NYSCEF Doc. No. 79). Uxin stated that, “[t]he transaction volume for the 2B business decreased to 72,081 units in the fourth quarter of 2018 due to the Company’s change of approach in serving consumers with car-selling needs as disclosed in the earnings release for the second quarter of 2018 as well as dealers’ growing appetite for retail transactions through the Company’s 2C platform” (id., p. 4). On the accompanying earnings call, Uxin’s CEO explained that the shift was part of the company’s plan and claimed that it actually created value for its business buyers, to wit: …the 2B revenue and the transaction has declined. But I want to mention that it’s on our plan. It’s our strategy, because we found that the 2C business is very, very big and very potential the golden mine. So we — just to move all our resource and — into the 2C business. And that’s also we’re showing the result. We have very significant achievement in our 2C. And for the 2B business, I wanted to explain for the short term, medium term and the long term. For the short-term decline, especially in the Q4 and the last Q3, they are mainly due to we change our C2B business model. (NYSCEF Doc. No. 80). The plaintiffs assert that the full year 2018 results reflected bad news for Uxin investors: Transaction volume for the 2B business decreased to 319,672 units in the full year 2018, representing year-on-year decline of 8.8 percent, due to the Company’s change of approach in serving consumers with car-selling needs, as well as dealers’ growing appetite for retail transactions through Uxin’s 2C platform. * * * GMV for the 2B business decreased to RMB15,253 million in the full year 2018, representing year-on-year decline of 12.2 percent. (Compl., 13, NYSCEF Doc. No. 83). The plaintiffs complain that, in fact, “the Registration Statement did not disclose any information concerning the risk associated with and the effect on the Company (post-IPO) of no longer providing the ancillary services that differentiated it from competitors,” i.e., the complimentary inspections, and that, “the Registration Statement did not disclose that the risk that dropping these services would result in a corresponding decrease in transactions on its 2B platform as well as a decrease in GMV and take rate for the 2B business,” nor “explicate the magnitude that such a change would have on the Company’s business, especially how business customers would react” (id., 16). As such, the plaintiffs allege that the defendants are strictly liable for the purported misstatements and omissions contained in the Registration Statements and that the defendants have also violated their independent, affirmative duty to provide adequate disclosures about known adverse conditions, trends, risk, and uncertainties about Uxin’s business (id.,
