Ikeda v. Baidu Inc. et al.

Securities Fraud

Northern District

U.S. District Judge Lucy H. Koh

Defense Attorneys: Skadden, Arps, Slate, Meagher & Flom Llp And Affiliates, Peter B. Morrison, Virginia F. Milstead, Raza Rasheed, Steve Kwok, Beatriz Paterno

Plaintiffs Attorneys: Kahn Swick & Foti Llc, Ramzi Abadou, Alexander L. Burns, Alayne K. Gobeille, Morgan M. Embleton; Pomerantz Llp, Jennifer Pafiti, J. Alexander Hood Ii, Jeremy A. Lieberman; Levi & Korsinsky Llp, Adam M. Apton

Peter B. Morrison

Baidu Inc. is a Chinese internet technology firm with the second-largest search engine in the world. When the company suspended some of its channels due to "lowbrow content," investor Roger Ikeda cried foul and filed a securities fraud class action lawsuit, accusing Baidu of misleading and defrauding shareholders about China's regulatory oversight.

He claimed that the company had neglected to warn investors about potential Chinese regulations governing internet content on Baidu's platforms.

In April, U.S. District Judge Lucy H. Koh of San Jose dismissed the lawsuit, ruling that Baidu's statements were not misleading, particularly due to the company's previous and detailed disclosures about regulatory risk. Ikeda v. Baidu et al., 20-CV-02768 (N.D. Cal., filed April 21, 2020).

She also ruled the company was not required to repeat past regulations that had been publicly announced in China. Baidu's disclosures that regulatory risk in China posed a perpetual challenge for the company were sufficient to satisfy the standards of the Securities Exchange Act.

"When there is a drop in the stock price," said defense attorney Peter B. Morrison, a partner with Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, "plaintiffs scour the company's public disclosures and say, essentially, notwithstanding what you told us, you should have been able to predict with a crystal ball that this regulatory risk would come to fruition and occur."

"And the court rightfully rejected that, based on the robust public disclosures that Baidu and other companies like Baidu make concerning the well-known regulatory risks that exist in China," he added.

Skadden partner Virginia F. Milstead said that Koh "noted that those regulatory actions had been made public by the regulatory authorities themselves, and so Baidu did not have an obligation to repeat that public information."

"That's also noteworthy because the public disclosures of those prior regulatory actions were in China, and not, for instance, published in The Wall Street Journal," she added. "But the court still found that Baidu didn't need to repeat public information."

Even though the penalties were announced in Chinese, Koh agreed that this information was in the public domain, likely making this the first case to hold that public statements made in a foreign language are presumably known by U.S. investors.

The Baidu decision's definitive rejection of a misrepresentation of regulatory risks in China may prove influential for similar cases in the future.

Koh dismissed the lawsuit with leave to amend, but the lead plaintiff and his counsel at Kahn Swick & Foti LLP voluntarily dismissed the complaint in May. Plaintiff's attorney Lewis S. Kahn could not be reached for comment.

- Kathryn Stelmach Artuso

Virginia F. Milstead