Case 1:18-cv-02463-ALC Document 25 Filed 08/13/18 Page 1 of 107 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK Case No. 18-CV-02463 (ALC) CLASS ACTION IN RE SHANDA GAMES LIMITED LEAD PLAINTIFF’S CLASS ACTION SECURITIES LITIGATION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Jury Trial Demanded Case 1:18-cv-02463-ALC Document 25 Filed 08/13/18 Page 2 of 107 TABLE OF CONTENTS I. NATURE OF THE ACTION ............................................................................................. 1 II. JURISDICTION AND VENUE ......................................................................................... 9 III. PARTIES AND OTHER KEY ACTORS ........................................................................ 10 A. Lead Plaintiff ........................................................................................................ 10 B. Defendants ............................................................................................................ 10 C. Shanda Interactive ................................................................................................. 13 D. Special Committee ................................................................................................ 13 E. Buyer Group.......................................................................................................... 13 IV. SUBSTANTIVE ALLEGATIONS .................................................................................. 15 A. Overview of Shanda’s Business............................................................................ 15 B. Shanda’s IPO and Listing on the NASDAQ ......................................................... 18 C. Shanda’s Focus Shifts to the Lucrative Mobile Game Market ............................. 20 D. Shanda Develops Mir II Mobile ........................................................................... 22 E. Shanda Explores a Going Private Transaction ...................................................... 29 F. Shanda Accepts the Going Private Offer .............................................................. 33 G. Shanda Publishes the Initial Proxy ....................................................................... 35 1. Financial Projections ................................................................................. 36 (a) The Purpose of the Projections ..................................................... 36 (b) Representations Regarding the Scope of the Projections ............. 37 (c) Representations Regarding the Preparation of the Projections..................................................................................... 40 2. Fairness of the Transaction ....................................................................... 43 H. The Composition of the Buyer Group Changes Again ......................................... 44 I. Shanda Publishes the Final Proxy ......................................................................... 47 i Case 1:18-cv-02463-ALC Document 25 Filed 08/13/18 Page 3 of 107 J. Defendants Had Access to and Reviewed Information Concerning MIR II Mobile’s Success at the Time of the Final Proxy ................................................. 49 K. The Transaction Closes ......................................................................................... 52 L. The Appraisal Suit ................................................................................................ 53 1. Admissions and Findings that the Merger Consideration Was Unfair and that the Projections Were Erroneous ...................................... 54 2. Unreasonable Revenue Intensity Estimates .............................................. 56 3. Unreasonable Amortization and Depreciation .......................................... 58 4. Mir II Mobile’s Revenue .......................................................................... 59 V. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD ..................................................... 61 A. The Deal Announcement ...................................................................................... 65 B. Initial Proxy .......................................................................................................... 66 1. Promotion of the Transaction Price .......................................................... 67 2. The False Projections ................................................................................ 67 3. False Representations About the Preparation of the Projections .............. 67 4. False Representations About the Scope of the Projections ....................... 68 5. False Representations that the Transaction Was Fair ............................... 69 C. The Final Proxy..................................................................................................... 73 1. Promotion of the Transaction Price .......................................................... 73 2. The False Projections ................................................................................ 73 3. False Representations About the Preparation of the Projections .............. 74 4. False Representations About the Scope of the Projections ....................... 74 5. False Representations that the Transaction Was Fair ............................... 74 D. The October 19, 2015, Press Release .................................................................... 77 VI. CONTROL PERSON ALLEGATIONS........................................................................... 78 ii Case 1:18-cv-02463-ALC Document 25 Filed 08/13/18 Page 4 of 107 VII. ADDITIONAL ALLEGATIONS SUPPORTING DEFENDANTS’ SCIENTER ........... 80 A. Motive and Opportunity ........................................................................................ 80 1. Defendant Zhang Had the Motive and Opportunity to Defraud the Class Members .......................................................................................... 80 2. Defendant Liang Had the Motive and Opportunity to Defraud the Class Members .......................................................................................... 81 B. The Content of the Projections was Known to the Individual Defendants ........... 82 C. MIR II Mobile Was a Core Component of Shanda’s Success and It Was Closely Watched by Defendants ........................................................................... 83 D. Shanda’s Own Admissions and the Appraisal Action Support Scienter .............. 85 E. The Individual Defendants Knew or Were Reckless in Not Knowing that the Proxies Omitted the Projections of Shanda’s 2020 Performance ................... 88 F. Additional Allegation Regarding Shanda’s Knowledge ....................................... 88 VIII. LOSS CAUSATION ......................................................................................................... 89 IX. APPLICATION OF THE PRESUMPTION OF RELIANCE .......................................... 90 X. NO SAFE HARBOR ........................................................................................................ 92 XI. ALLEGATIONS OF INSIDER TRADING ..................................................................... 93 XII. CLASS ACTION ALLEGATIONS ................................................................................. 94 COUNT I Violation of § 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants ..............................................................................................97 COUNT II Violation of § 20A of the Exchange Act Against Defendant Shanda .........................99 COUNT III Violation of § 20(a) of the Exchange Act Against the Individual Defendants ........100 XIII. PRAYER FOR RELIEF ................................................................................................. 102 XIV. JURY DEMAND ............................................................................................................ 102 iii Case 1:18-cv-02463-ALC Document 25 Filed 08/13/18 Page 5 of 107 By and through its undersigned counsel, David Monk (“Lead Plaintiff”) brings this complaint individually and on behalf of a class of former stockholders and former owners of American Depository Shares (“ADS”) of Shanda Games Limited (“Shanda” or the “Company”). Lead Plaintiff alleges the following upon personal knowledge as to those allegations concerning Lead Plaintiff and, to all other matters, upon the investigation of counsel, which included, without limitation: (a) review and analysis of public filings made by Shanda with the U.S. Securities and Exchange Commission (“SEC”); (b) review and analysis of press releases and other publications disseminated by certain of the Defendants and other related non-parties; (c) review of news articles, including news articles translated from Chinese into English through a certified translation service; (d) interviews with former employees of Shanda, its affiliates, and other third parties; (e) review of the publicly available documents from prior litigation involving Shanda; and (f) consultation with individuals with expertise in accounting, damages, and Cayman Islands law. Lead Plaintiff believes that substantial additional evidentiary support exists for the allegations herein and will be revealed after Lead Plaintiff has a reasonable opportunity to conduct discovery. Lead Plaintiff alleges the following against Defendants Yingfeng Zhang, Li Yao, Lijun Lin, Heng Wing Chan, Yong Gui, Shaolin Liang, and Danian Chen (collectively the “Individual