The plaintiffs, shareholders who bought Baosheng stock in March 2021, allege the company failed to disclose in its registration statement and prospectus that it was under investigation by Chinese authorities. The plaintiffs claim the investigation involved the detention of multiple executives, the loss of Baosheng’s largest client, and significant operational disruptions.
Judge Rochon held that the requested materials are relevant to the plaintiffs’ claims that Baosheng violated Sections 11 and 12(a)(2) of the Securities Act of 1933 by omitting the investigation. The court previously ruled that while Item 103 of Regulation S-K did not require disclosure of the investigation as a formal legal proceeding, Item 303 did require disclosure because the investigation was reasonably likely to have a material effect on Baosheng’s financial condition.
The plaintiffs seek records from the Yixing Public Security Bureau, including documents establishing that Baosheng director Sheng Gong was detained in July 2020 on suspicion of assisting cyber criminal activities. The plaintiffs had previously examined certain criminal case files in a parallel civil action in the People’s Republic of China, which they argue supports their allegations.
Defendants argued the materials were irrelevant and disproportionate, but the court rejected these arguments. Judge Rochon found that the investigation into Baosheng’s largest client created a reasonably likely risk that the client would sever its relationship with Baosheng, a fact central to the plaintiffs’ disclosure claims.
The court also addressed comity concerns, noting that a letter rogatory requests rather than compels production. Judge Rochon held that any determination regarding whether Chinese law prohibits the production of these records is a matter for Chinese courts, not the Southern District of New York.
The motion was granted, and the court will issue the letter of request to the Ministry of Justice of China. The decision resolves a key discovery hurdle for the plaintiffs, who can now seek the records through the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters.