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Glaser v. The9, Ltd.

United States District Court for the Southern District of New York

March 28, 2011, Decided; March 28, 2011, Filed

09 Civ. 08904 (RJH)

Opinion

 [*576]  MEMORANDUM OPINION AND ORDER

Richard J. Holwell, District Judge:

Lead Plaintiffs Lawrence F. Glaser and Chen Kuang bring this putative class action against defendants  [**2] The9 Ltd. ("The9"), Xiaowei Chen, George Lai, Hannah Lee, Tony Tse, and Jun Zhu, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Exchange Act Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Exchange Act Section 20(a), 15 U.S.C. § 78t(a). Plaintiffs allege that between November 15, 2006, and July 15, 2009 (the "Class Period"), defendants fraudulently misrepresented facts relating to the likelihood of their renewal of a certain extremely profitable exclusive license granted them by a third company. Defendants now move to dismiss. For the reasons set forth below, and specifically because plaintiffs fail to adequately plead scienter, defendants' motion is GRANTED in its entirety; and plaintiffs are granted leave to replead their complaint.

I. FACTUAL SETTING

For the purposes of the present motion, the following facts—drawn from the complaint, documents incorporated by reference therein, Securities Exchange Commission ("SEC") public disclosure documents, and documents known to the plaintiffs and upon which they relied in bringing this action 1—are taken as true.

A.  [**3] Background

Lead Plaintiffs Lawrence F. Glaser and Chen Kuang seek to represent the class of persons who purchased The9's American Depositary Shares ("ADS") and options during the Class Period, November 15, 2006, through July 15, 2009. (Compl. ¶¶ 15, 23.) Defendant The9, incorporated in the Cayman Islands with its principal place of operations in China, operates multiplayer online video games 2 in China. (Id. ¶ 16; Def.'s Mem. at 3.) The9's stock trades as ADS on NASDAQ. (Compl. ¶ 16.) As relevant to this action The9 contracts with video game developers, such as non-parties Blizzard Entertainment Inc. ("Blizzard") and Electronic Arts, Inc. ("EA"), to provide and run the networks and servers on which those developers'  [*577]  multiplayer online video games are played. (See id. ¶¶ 29, 34, 52.) Defendant Jun Zhu is a co-founder of The9, and was the company's Chief Executive Officer ("CEO") during the Class Period. (Id. ¶ 17(a).) Defendant Hannah Lee was The9's Chief Financial Officer ("CFO") and Vice President ("VP") from January 2004 through February 2008. (Id. ¶ 17(b).) Defendant Tony Tse followed as The9's CFO through June 2008. (Id. ¶ 17(c).) Defendant George Lai was The9's CFO from July 2008  [**4] through the end of the Class Period. (Id. ¶¶ 1, 17(d).) Defendant Xiaowei Chen was The9's President from May 2008 through the end of the Class Period. (Id. ¶ 17(e).) 3

On February 3, 2004, The9 entered into a contract (the "WoW Contract") with Blizzard's parent company, Vivendi Universal Games ("Vivendi"), to be the exclusive operator of Vivendi's game World of Warcraft 4 ("WoW") in China. (Id. ¶ 29.) The WoW Contract, which was amended in January 2007 to replace Vivendi with Blizzard, was to expire on June 7, 2009. (Id. ¶¶ 29-30.) The9 launched WoW in China on June 5, 2005; and in the third quarter of 2005, The9's revenues rose 2,096% to $22.8 million. (Id. ¶¶ 29, 32.) Of that amount, The9 attributed $22.3 million to WoW. (Id. ¶ 32.) WoW would go on to account for over 90% of The9's revenues in 2006, 2007, and 2008. (Id. ¶ 16.)

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772 F. Supp. 2d 573 *; 2011 U.S. Dist. LEXIS 31989 **; Fed. Sec. L. Rep. (CCH) P96,267

LAWRENCE F. GLASER, on Behalf of Himself and All Others Similarly Situated, Plaintiff, -against- THE9, LTD., XIAOWEI CHEN, GEORGE LAI, HANNAH LEE, TONY TSE, and JUN ZHU, Defendants.

CORE TERMS

scienter, renewal, license, stock, confidential, Fiscal, resignations, online, circumstantial, negotiations, Harbor, launch, Safe, fraudulent, misleading, insider, falsity, misstatements, discounting, announced, talks, contradictory, contradicted, conclusory, analyst's, rumors, video, suspicious, quotation, expire

Securities Law, Securities Exchange Act of 1934 Actions, Insider Trading, Classical Theory, Civil Procedure, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Pleadings, Complaints, Requirements for Complaint, Heightened Pleading Requirements, Fraud Claims, Implied Private Rights of Action, Elements of Proof, General Overview, Postoffering & Secondary Distributions, Heightened Pleading Requirements, Evidence, Inferences & Presumptions, Inferences, Scienter, Civil Liability Considerations, Securities Litigation Reform & Standards, Motive & Opportunity, Recklessness, Admissibility, Circumstantial & Direct Evidence, Secondary Liability, Controlling Persons, Elements of Proof