MEMORANDUM OPINION & ORDER KE Holdings Inc. (the “Company”) is the largest real estate brokerage company in China. It operates a network of physical brokerages, as well as an online platform. In late 2021, Muddy Waters Capital LLC — a short seller — reported its conclusion that the Company had substantially overstated the number of agents and stores that used its platform, as well as the Company’s revenues. The market reacted to the issuance of the report. The Company’s stock slumped briefly after the report was issued. Saskatchewan Healthcare Employees’ Pension Plan (the “Lead Plaintiff”) also reacted to the issuance of the Muddy Waters Report and the resulting dip in the Company’s stock price. The Lead Plaintiff filed this case alleging that the Company, its officers and directors, as well as the underwriters of its secondary offering, are responsible for misleading statements in the Company’s public disclosures. The Lead Plaintiff claims that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Because the Lead Plaintiff has not adequately pleaded scienter, the Lead Plaintiff’s claims under the Securities Exchange Act are dismissed, but because the Lead Plaintiff has adequately pleaded that the Company’s secondary offering documents contained misleading statements, its Securities Act claims survive this motion to dismiss. Therefore, Defendants’ motion to dismiss the amended complaint is GRANTED in part and DENIED in part. I. BACKGROUND A. Facts1 1. KE Holdings and Its Business KE Holdings Inc. (“KE Holdings” or the “Company”) is a Cayman Islands corporation headquartered in Beijing, China. Am. Compl., Dkt. No. 51 (“FAC”), 20. The Company “operates an integrated online and offline platform for housing transactions and services in China, under the brand name Beike.” Id. 34. The Company “traces its origins to the real estate brokerage brand Lianjia, founded in 2001.” Id. KE Holdings launched the “Beike” platform in 2018. Id. The Beike platform facilitates housing transactions in China “across the residential real estate ecosystem, including existing and new home sales, home rentals, home renovation, and financial solutions.” Id. A variety of real estate brokerages use the Beike platform. Company-owned “Lianjia” branded stores use the platform. So too do third-party brokerages that are not owned by the Company: those include “franchise stores, which pay fees to KE Holdings for the use of its ‘Deyou’ franchise brand, and ‘connected’ stores, which pay fees to KE Holdings to utilize the platform while maintaining their status as independent brokerage brands.” Id. 35. KE Holdings generates revenues from three sources: “existing home transactions, new home transactions, and emerging and other services.” Id. 38. The Company receives several income streams from transactions involving existing homes: the Company receives commissions for transactions facilitated by Lianjia-branded brokerages; franchise fees charges to brokerage firms that operate under one of the Company’s franchise brands; and service fees for independent brokerages that use the platform. Id. The Company also receives commissions from the sale of newly developed properties. Because the Company primarily generates revenues from commissions, “KE Holdings’ profitability is driven, in large part, by the number of brokerage stores and agents on its platform — since more brokerage stores and agents using the platform generally leads to more housing transactions” on the platform. Id.
3, 41. “For this reason, the Company considers ‘the number of real estate brokerage stores and agents on [its] platform’ to be a ‘key operating metric.’” Id. 3. There is a close correlation between the number of agents and stores on the Company’s platform and its revenues. Id. 43. “Another ‘key operating metric’ is gross transaction value (‘GTV’), which represents the total value of all transactions the Company facilitated on its platform.” Id. 3. GTV is a significant metric in part because the Company’s “value proposition” is “built on its claim to have the leading market share” in China; the Company’s market share is determined by reference to its GTV. Id. 40. Increased GTV also correlates with increased revenues. Id. 43. 2. The Individual Defendants A number of individuals associated with the Company are named as defendants in the case. Defendant Peng Yongdong, one of the Company’s founders, served as its Executive Director and Chief Executive Officer. Id. 21. He was also the Chair of the Company’s Board of Directors. Id. As the Company’s CEO, he was responsible for the “[o]verall strategy, business development and management of the Company.” Id. He signed the offering documents for the Company’s public offerings in the United States, including the secondary offering that is the subject of this lawsuit. Id. Defendant Xu Tao was the Company’s Chief Financial Officer. Id. 22. Since August 2021, he has also served as its Executive Director. Id. As the Company’s CFO, he was responsible for the Company’s “[o]verall strategy, business development, accounting…[and] internal control….” Id. Mr. Tao also signed the offering documents for the Company’s secondary offering. Defendant Shan Yigang, a co-founder of the Company, was its Executive Director. Id. He is described as a “key member” of the Company’s management team. Id. Defendants Yongdong, Tao, and Yigang are collectively defined in the complaint as the “Executive Defendants.” The complaint names four additional individual defendants. Bao Fan, Li Zhaohui, and Chen Xiaohong served as directors of the Company at the time of its secondary offering. Id. 24. They too are alleged to have signed the offering documents for the Company’s secondary offering. And Colleen A. DeVries is named because she was the Company’s “Authorized U.S. Representative” in connection with the Company’s secondary offering and signed the offering documents in that capacity. Id. 25. The complaint pleads no additional information about her role at the company. 3. The Company’s Public Offerings in the United States Seeking to raise new capital by listing its shares in the United States, KE Holdings conducted an initial public offering (the “IPO”) on the New York Stock Exchange on August 13, 2020. Id. 45. The Company’s shares priced at $20.00 per ADS. Id. The offering was very successful, raising more than $2.3 billion in net proceeds. Id. 46. Just three months later, the Company conducted a secondary offering (the “SPO”). The Company filed a registration statement on Form F-1 on November 16, 2020 (the “Registration Statement”). Id. 48. The Registration Statement became effective two days later. The Company filed a secondary offering prospectus (the “Secondary Offering Prospectus,” and, together with the Registration Statement, the “Secondary Offering Documents”) on November 19, 2020. Id. 49. The Company’s secondary offering was also very successful, netting more than $2.3 billion at a valuation of $58.00 per ADA — nearly triple the price at which shares were sold at the IPO just three months before. Id. 50. Four of the named defendants acted as underwriters for the secondary offering: Goldman Sachs (Asia) L.L.C., Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC, and China Renaissance Securities (Hong Kong) Limited (collectively, the “Underwriter Defendants”). Id.
