In the News Law360

China Mobile Games Dodges Investors' Bribery Allegations

 A Manhattan federal judge tossed a proposed securities class action against China's largest mobile game publisher, its executives and investment bank underwriters on Monday, saying the investors had not pled concrete evidence of insider transactions and corporate bribery.

U.S. District Judge Kimba M. Wood dismissed the suit against China Mobile Games & Entertainment Group Ltd. The investors claimed the company lied in 2013 and 2014 financial disclosures about supposed bribes to game distributors, but the bribery allegations only surfaced after the filings, the judge said. And the judge said investors didn't have enough facts to claim the company's Chief Operating Officer Shuling “Dino” Ying was secretly controlling a CMGE business partner.

In the consolidated suit filed in February 2015, Miran Segregated Portfolio Co., Edward McCaffery and Charlie Chun pointed to a report in June 2014 that claimed the company had told analysts it was axing nine senior managers, including Ying, for handing out bribes. The report allegedly caused a 24 percent stock drop.

Judge Wood dismissed those allegations because the report came after the company allegedly falsified U.S. Securities and Exchange Commission filings, and since a confidential witness for the investors had worked at a subsidiary and not CMGE itself.

“Plaintiffs’ inability to allege that any bribery occurred during the class period is fatal to their required showing of contemporaneous falsity,” Judge Wood said. “Without a showing of contemporaneous falsity, plaintiffs cannot allege actionable misstatements or omissions with regard to bribery.”

The judge also nixed claims that Ying had continued to secretly control Zhongzheng Ruanyin Science & Technology Co. Ltd. — a company the investors say he founded and which now “does substantial business” with CMGE — after he divested his interest in the company and joined CMGE.

Judge Wood said that although the investors “are correct that CMGE is under a duty to disclose related-party transactions and that their alleged omission would likely be material,” they had failed to cite specific facts that would suggest Ying still controlled Zhongzheng or had sold his shares to a crony.

And the investors' claim that CEO Ken Jian Xiao, Chief Financial Officer Ken Fei Fu Chang and Ying desired to keep the bribery a secret did not give rise to a strong inference of scienter, the judge said.

Judge Wood gave the investors a month to amend their suit.

The suit was initially filed in June 2014 and consolidated with another in November 2014.

The consolidated complaint additionally names Credit Suisse Securities (USA) LLC, Jefferies LLC, Barclay’s Capital Inc., Brean Capital LLC and Nomura Securities International Inc. — investment banks that underwrote CMGE's $82 million secondary public offering.

The investors claim the executive reshuffle over the supposed bribery and Ying's continued control of Zhongzheng were part of “an internal civil war” at the company. They seek to represent investors who bought CMGE stock between April 26, 2013, and Jan. 14, 2015.

Counsel for CMGE declined to comment. Attorneys for the other parties did not immediately reply to requests for comment.

Miran is represented by Richard W. Gonnello, Megan M. Sullivan and Katherine M. Lenahan of Faruqi & Faruqi LLP.

Chun and McCaffery are represented by Laurence M. Rosen and Jonathan Stern of The Rosen Law Firm PA.

CMGE and the three executives are represented by Andrew B. Clubok and Adam T. Humann of Kirkland & Ellis LLP.

The underwriters are represented by Adam S. Hakki, Daniel C. Lewis and Jeffrey D. Hoschander of Shearman & Sterling LLP.

The case is In re China Mobile Games & Entertainment Group Ltd. Securities Litigation, case number 1:14-cv-04471, in U.S. District Court for the Southern District of New York.

--Editing by Kelly Duncan.