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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 1 of 42
UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
AHMED AREA, Individually And }On Behalf of All Others Similarly Situated, }
Plaintiff, ) CIVIL ACTION NO. 10-cv-9053JUDGE ROBERT W. SWEET
VS. }
MECOX LANE LIMITED, NEIL NANPENG ) CONSOLIDATED AMENDED
SHEN, JOHN J. YING, PAUL BANG ZHANG, } CLASS ACTION COMPLAINT
ALFRED BEICHUN GU, KELVIN KENLING ) FOR VIOLATIONS OF
YU, ANTHONY KAI YIU LO, DAVID RAN ) FEDERAL SECURITIES LAWS
SUN, UBS AG, and CREDIT SUISSESECURITIES (USA) LLC, ) JURY TRIAL DEMANDED
Defendants. )
NATURE OF THE ACTION
1. This is a class action brought on behalf of purchasers of Mecox Lane Limited
("Mecox" or the "Company") common stock pursuant to its October 26, 2010, initial public
offering ("IPO" or the "Offering") of 11,742,857 American depositary shares ("ADSs"), each
representing seven ordinary shares of the Company, priced at $11.00 per ADS. In connection
with this IPO, 9,714,286 ADSs were offered by the Company and 2,028,571 ADSs were offered
by certain selling shareholders. The total price to the public in connection with this offering was
over $128.97 million, with underwriters' discounts and commissions totaling over $9,041
million, shares sold by the selling shareholders totaling over $22.314 million, and shares sold by
the Company totaling $106.857 million.
2. The Company's Registration Statement, including the Prospectus (collectively,
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 2 of 42
the "Prospectus"), issued in connection with the IPO, included a number of materially untrue and
misleading statements and omissions. For example, the Prospectus, inter alia:
• Touted increasing growth in net revenues in all segments;
• Showed a significant year-over-year increase in the number of physical stores andclaimed that Mecox planned to open additional franchise and directly-operated stores;
• Claimed that Mecox intended to "promote higher margin sales," noting that its highestmargin sales carne from its directly operated stores, and its lowest margin sales camefrom the online segment;
• Showed tremendous growth in the online platform, and forecasted continuing "rapidgrowth" in online platforms sales;
• Stated that the expansion of directly-operated stores increased compensation and benefitexpenses;
• Touted Defendants' ability to "effectively and continuously" monitor the Company'ssales and financial metrics; and
• Failed to disclose that its results for the third quarter of 2010, which had ended weeksprior to the IPO, were alarmingly out of line with the positive trends reported in theProspectus, casting serious doubt as to the Company's ability to maintain high revenuesand "high margin" sales.
3. It was only on November 29, 2010, after the close of trading — and after the
Company and certain of its insiders liquidated over $128.97 million of Mecox shares in
connection with the IPO — that Mecox began to reveal the previously-undisclosed truth about the
Company, including:
• The Company had experienced poor results for the third quarter in 2010 — the periodwhich had ended weeks prior to the IPO — including a decline in gross margin (by 400basis points), a dramatic increase in expenses (including a 19.8% increase in operatingexpenses and a 40.2% increase in compensation and benefits expenses), and a 22.3%fall in net revenues from its directly-operated stores segment;
• Growth in the Company's online segment was -unsustainable, and would cease followingthe third quarter, such that online revenues for the fourth quarter (which was alreadyunderway at the time of the IPO) would be flat;
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® The Company's purported revenues and net income growth were unsustainable as theCompany's reported revenues in the Prospectus were directly contradicted by informationprovided to the People's Republic of China's Administration for Industry andCommerce, a fact that the Underwriter Defendants should have checked as part of theirdue diligence;
® The Company was not supporting the growth of its directly-operated stores or the successof its franchise stores: the average number of directly-operated stores had fallen in thethird quarter due to closures and conversions to franchised stores; although the number offranchise stores increased by over 300%, net revenues from those stores increased only35.9%;
e Contrary to statements in the Prospectus that the Company would "promote highermargin sales," it had closed higher-margin directly-operated stores in the third quarter2010 in favor of expansion of its lower-margin franchise stores; the Company focusedmost heavily on its online platform, which had the smallest gross margin of all threesegments;
• Prior to the IPO, profit was falling in the Company's physical stores, but rather thanfocus on increasing revenue or marketing the stores, the Company did not market thestores and simply used those physical stores as mere "fitting rooms" for its lowest-marginonline segment, i.e., where customers could try on and see clothing in person, but makepurchases later online; and
O Despite touting the decline in the Company's dependence on the low margin onlineplatform for revenue over a number of years (falling from 92.2% in 2007, to 86% in2008, to 72.8% in 2009 as a percentage of total revenue), Mecox was closing high-margin directly-operated stores, revenues in franchise stores were not keeping pace withthe expansion in the number of franchises, and for the third quarter 2010, online platformrevenues crept back up, contributing over 79.3% of the Company's total net revenues-revealing a discouraging trend for the prospects of the Company.
4. Revelation of this news had a devastating impact on Mecox's share price. On
November 30, 2010, the first day of trading after the disclosure, as shares of Mecox plummeted
almost 40%, from $13.38 per share on November 29, 2010, to close at $8.15 per share the
following day, November 30, 2010. The next day, shares of the Company continued to decline as
investors digested this news, reaching a low of $6.45 before closing the day at $6.65. The two
day decline of almost 50% occurred on exceptionally heavy trading volume with over 14.759
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million shares traded during the two trading days, which was more than ten times the Company's
recent average daily trading volume.
5. The Company's pre-IPO decision to abandon support for its physical stores
continued to impact its financial health and growth. On May 23, 2011, after the close of trading,
the Company filed a press release announcing first quarter 2011 results. In that press release, the
Company revealed year-over-year declines in net revenues (of 2.4%), gross profit (of 16.7 0/o), net
revenues from directly operated stores (of 31.9%), the number of directly operated stores (down
from an average of 175 to 119), and gross margin (down to 36.1% from 42.3%). The Company
also reported a 153% increase in net loss, 8% increase in cost of good sold (which the Company
attributed to its online platform), and 180.2% increase in loss from operations.
6. These poor results were attributed, in large part, to "a decline in the number of
directly operated stores," "the increase in weighting of the Interpret business in total net revenues,
which generated a lower margin than the other segments," and "the increase in the number of
franchised stores."
7. The following trading day, on the publication of this news, Mecox stock price
declined precipitously. As evidence of this, as shares of the Company resumed trading, shares of
Mecox fell almost 28%, plummeting from $4.96 per share on May 23; 2011, to close at $3.59 per
share the following day, May 24, 2011. On May 25, 2011, shares of the Company continued to
decline as investors digested this news, trading to a low of $3.33 before closing the trading day at
$3.52. The two day decline of almost 29% occurred on exceptionally heavy trading volume with
over 2.0086 million shares traded during the two trading days. Furthermore, shares of Mecox
continued their drastic descent throughout the week finally closing at $3.40 on May 27, 2011--- a
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 5 of 42
four day decline of approximately 32%.
S. Mccox, its entire board of directors, and the lead underwriters involved in the
Offering, are each charged with including or allowing the inclusion of materially untrue and
misleading statements in the Prospectus issued in connection with the IPO, in direct violation of
the Securities Act of 1933. Specifically, defendants each failed to conduct an adequate due
diligence investigation into the Company prior to the IPO, and they also each failed to reveal, at
the time the IPO closed -- well after the end of the third quarter of 2010, the period ended
September 30, 2010 —that the Company was not proceeding according to plan and that Mecox's
gross margins had been adversely impacted by increased costs and expenses which would make
it impossible for Mccox to achieve its projected results sponsored and/or endorsed by defendants
prior to and at the time of the IPO.
JURISDICTION AND VENUE
9. The claims asserted herein arise under § § 11 and 15 of the Securities Act of 1933
(the "Securities Act"). Jurisdiction is conferred by §22 of the Securities Act.
10. Venue is proper pursuant to §22 of the Securities Act, as defendant Mccox, the
Individual Defendants and/or Underwriter Defendants conduct business in, and the wrongful
conduct took place in, this District.
11. In addition to the foregoing, venue is also proper in this District pursuant to
Section 27 of the Exchange Act, and 28 U.S.C. § 1391(d). Defendant Mecox is a foreign or
"alien" corporation doing significant business in this District, and may properly be sued in any
District of the United States, including the Southern District of New York.
THE PARTIES
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Lead Plaintiff
12. Court-appointed Lead Plaintiff WESTEND (comprised of Westend Partners, L.P.
and the Cooper Family Trust) purchased shares of Mecox common stock pursuant and/or
traceable to the Company's materially untrue and misleading Prospectus issued by Defendants in
connection with the October 2010 IPO, including those shares detailed in the previously-filed
Certification [Dkt. No. 4-11, incorporated herein by reference, and was damaged thereby.
Conhnanv Defendant
13. Defendant MECOX LANE LIMITED is a Chinese corporation, with its chief
executive offices and principal place of business located at 22nd Floor Gems Tower Building 20,
Number 487 Tianlin Road, Shanghai, 200233, China. According to the Company's profile,
Mccox operates China's leading online platform for apparel and accessories as measured by
revenues in 2009, offering a wide selection of fashion products through its www.ml8.com e-
commerce website and physical store network. The Company's product offerings include apparel
and accessories, home products, beauty and healthcare products, and other products, under the
Company's own proprietary brands, such as Euromoda and Rampage, as well as under selected
third-party brands, including established international and Chinese brands in addition to
independent and emerging brands.
Individual Defendants
14. Defendant NEIL NANPENG SHEN is, and at the time of the October 2010 IPO
was, Chairman of the Board of Directors of Mecox. Defendant Shen signed the materially untrue
and misleading Registration Statement and filed with the SEC the materially untrue and
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 7 of 42
misleading Prospectus issued in connection with the October 2010 IPO. In connection with the
IPO, defendant Shen or entities associated and/or controlled by him sold at Ieast 2.230 million
shares of the Company, or 318,573 ADSs valued at over $3.504 million at the IPO Offering
price.
15. Defendant JOHN J. YING is, and at the time of the October 2010 IPO was, Vice
Chairman of the Board of Directors of Mecox. Defendant Ying signed the materially untrue and
misleading Registration Statement and filed with the SEC the materially untrue and misleading
Prospectus issued in connection with the October 2010 IPO.
16. Defendant ALFRED BEICHUN GU is, and at the time of the October 2010 IPO
was, Chief Executive Officer and a member of the Board of Directors of the Company.
Defendant Gu signed the materially untrue and misleading Registration Statement and filed with
the SEC the materially untrue and misleading Prospectus issued in connection with the October
20101PO. In connection with the IPO, defendant Gu or entities associated and/or controlled by
him sold at least 3.5 million shares of the Company, or 500,000 ADSs valued at over $5.5
million at the IPO Offering price.
17. Defendant KELVIN KENLING YU is, and at the time of the October 2010 IPO
was, a member of the Board of Directors of Mecox. Defendant Yu signed the materially untrue
and misleading Registration Statement and filed with the SEC the materially untrue and
misleading Prospectus issued in connection with the October IPO.
18, Defendant ANTHONY KAI YIU LO is, and at the time of the October 2010 IPO
was, a member of the Board of Directors of Mecox. Defendant Lo signed the materially untrue
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and misleading Registration Statement and filed with the SEC the materially untrue and
misleading Prospectus issued in connection with the October IPO.
19. Defendant DAVID JIAN SUN is, and at the time of the October 2010 IPO was, a
member of the Board of Directors of Mecox. Defendant Sun signed the materially untrue and
misleading Registration Statement and filed with the SEC the materially untrue and misleading
Prospectus issued in connection with the October IPO.
20. Because of the Individual Defendants' positions with the Company, they each had
access to the adverse undisclosed information about Mecox's business, operations, product,
operational trends, financial statements, markets, and present and fiiture business prospects Wa
access to internal corporate documents (including the Company's operating plans, budgets and
forecasts, and reports of actual operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management and Board of Directors
meetings and committees thereof, and Wa reports and other information provided to them in
connection therewith.
21. It is appropriate to treat the Individuals Defendants as a group for pleading
purposes and to presume that the untrue, misleading and incomplete information conveyed in the
Company's public filings, press releases, and other publications as alleged herein are the
collective actions of the narrowly defined group of defendants identified above. Each of the
Individual Defendants, by virtue of their high-level positions with the Company, directly
participated in the management of the Company, was directly involved in the day-to-day
operations of the Company at the highest levels, and was privy to confidential proprietary
information concerning the Company and its business, operations, products, growth, financial
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 9 of 42
statements, and financial condition, as alleged herein. Accordingly, the Individual Defendants
were also involved in drafting, producing, reviewing, and/or disseminating the untrue and
in statements and information alleged herein, and approved or ratified these statements,
in violation of the federal securities laws.
22. As officers and controlling persons of a publicly-held company whose common
stock was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the
NASDAQ stock market exchange (the "NASDAQ"), and governed by the provisions of the
federal securities laws, the Individual Defendants each had a duty promptly to disseminate
accurate and truthful information with respect to the Company's financial condition and
performance, growth, operations, financial statements, business, products, markets, management,
earnings, and present and future business prospects, and to correct any previously-issued
statements that had become materially misleading or untrue, so that the market price of the
Company's publicly-traded common stock would be based upon truthful and accurate
information. The Individual Defendants' misrepresentations and ozuissions made in connection
with the issuance of common stock in October 2010 violated these specific requirements and
obligations.
Underwriter Defendants
23. In connection with the October 2010 Initial Public Offering, CREDIT SUISSE
SECURITIES (USA) LLC and UBS AG, acted as Lead or Representative Underwriters of the
Offering, facilitating the distribution of over 11.742 million shares of Mecox stock to investors
and initiating the first public market for Mecox shares. Excluding the oversubscription allotment
of an additional 1.761 million shares, the distribution of the Mecox shares awarded Underwriters
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 10 of 42
in the IPO occurred, as follows:
Name Number of Shares
Credit Suisse Securities (USA) LLC 5,049,429
UBS AG 4,932,000
Oppenheimer.& Co, Inc. 1056 857, >
Roth Capital Partners, LLC 704,571
Total 11,742,857
24. In connection with the October 2010 IPO, the Underwriter Defendants were paid
at least $9.041 million — not including any additional fees paid in connection with the sale of
shares sold in connection with the Underwriters oversubscription agreement — paid indirectly by
purchasers of the Company's shares. The Underwriter Defendants were paid at least $0.77 per
share in connection with the 11.742 million ADSs sold in the October 2010 Offering.
25. Shareholders paid over $9.041 million in combined fees and an additional $4.814
million in expenses to compensate the Underwriter Defendants for conducting a purported
significant "due diligence" investigation into Mecox in connection with the IPO. The
Underwriter Defendants' due diligence investigation was a critical component of the Initial
Public Offering, and this was expected to provide investors with important safeguards and
protections.
26. The due diligence investigation that was required from the Underwriter
Defendants included a detailed investigation into Mecox gross margins, costs, expenses, sales,
accounting, controls, and procedures, and it also required that defendants test the assumptions
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and verify the projections adopted or ratified by defendants, to the extent a reasonable investor
with access to such confidential corporate information would. A reasonable due diligence
investigation world have extended well beyond a mere casual view of Mecox books, records,
financial controls, or disclosure controls. The failure of the Underwriter Defendants to conduct
an adequate due diligence investigation was a substantial contributing factor leading to the harm
complained of herein.
27. In addition to the foregoing, because of the Underwriter Defendants' roles during
the IPO, they each had access to the adverse undisclosed information about Mecox's business,
operations, products, operational trends, financial statements, markets, and present and future
business prospects Wa access to internal corporate documents (including the Company's
operating plans, budgets and forecasts, and reports of actual operations compared thereto),
conversations and connections with other corporate officers and employees, attendance at
management and Board of Directors meetings and committees thereof, and Wa reports and other
information provided to there in connection therewith.
MATERIALLY UNTRUE & MISLEADINGSTATEMENTS AND OMISSIONS IN THE PROSPECTUS
Materially Untrue & Misleading Statements and Omissions Regarding the Company's Revenue Growth
28. On October 26, 2010, Mecox conducted its IPO of 11,742,857 ADSs
(representing 82,199,999 ordinary shares) a price of $11.00 per share.
29. In connection with the Company's IPO, on or about October 26, 2010, a
registration statement was declared effective by the Securities and Exchange Cominission, and a
final prospectus for the Offering was filed with SEC. In the Overview section of the Prospectus,
Defendants conditioned investors to believe that the Company was experiencing continued
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strong demand for its products and that the Company was operating in accordance with the
guidance sponsored and/or endorsed by Defendants during its investor presentations and "road
show" presentations hosted at or before the time of the IPO.
30. In the Prospectus, Defendants cited increasing growth in net revenues in all
segments:
Net revenues (in thousands of $)
2007 2008 2009
Online platform 56,568 92,438 129,362
Directly 4,786 13,915 37,388operated stores
Franchised 5 1,174 10,939stores
31. Despite this dramatic year-over-year increase in net revenue growth from directly-
operated stores, undisclosed to investors, third quarter 2010 net revenues from the directly-
operated store segment had fallen 22.3% from the same quarter of the previous year — from $ 8.4
million in the third quarter of 2009 to just $6.5 million in the third quarter 2010. In addition, for
the fourth quarter — the period which was already underway at the time of the IPO — growth in
the Company's key "Online platform" segment had ceased, and was performing flat as compared
to the third quarter.
Materially Untrue & Misleading Statements and Omissions Reizardina the Company's Network of Physical Stores
32. The Prospectus informed investors that the Company "had [as of June 30, 20101
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 13 of 42
478 stores in 182 cities in China" and "plan[ned] to open an additional approximately 20
franchised stores and five directly operated stores in 2010."
33. As examples of the Company's "competitive strengths," the Prospectus included,
in part, the following:
• Leading online platform for apparel and accessories;
• Flexible "plug and play" platform business model;
• Compelling value, selection and convenience for customers;
• Superior operational capabilities (including order fulfillment, customer service, andpayment processing);
• Complementary physical retail channel broadening our customer reach(including a "national network of over 400 stores in 182 cities across China,""Leveraging customer loyalty and brand awareness developed through ourphysical store network, we are well-positioned to increase online sales tocustomers in second- and third-tier cities as they become more accustomed toonline shopping." and
• Strong management team with extensive relevant experience.
(Emphasis added).
34. With regard to the Company's "Growth Strategies," the Prospectus stated that
Defendants intended to:
• Expand product offerings through introducing additional brands;
• Further grow customer base ("by promoting and selling affordable fashion productsthrough our online platform and stores" and "broaden[ing] our store networkcoverage to additional second- and third-tier cities where consumer spending isexpected to increase.")
• Promote higher margin sales, larger ticket sizes and more frequent repeat purchases;
• Further enhance customer experience to increase customer loyalty; and
• Further improve infrastructure to support our anticipated growth.
(Emphasis added).
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35. Regarding its physical (directly operated and franchised) stores, the Prospectus
stated:
Expansion of Physical Store Network
Our physical store network has also grown substantially since we began selling ourbranded apparel and accessories in stores in 2006. The number of our stores increasedfrom 27 as of December 31, 2007 to 402 as of December 31, 2009 and further to 478 asof June 30, 2010, which contributed to the increase in our net revenues. The expansionof our directly operated stores also increased our compensation and benefitexpenses and rental expenses.
We have expanded and plan to continue to expand our store network in second- and third-tier cities by opening franchised stores in order to achieve high growth with minimumcapital investment. As of June 30, 2010, we had 320 franchised stores and 158 directlyoperated stores. We plan to open an additional approximately 20 franchised storesand an additional approximately 5 directly operated stores in 2010.
(Emphasis added).
36. The Prospectus also presented a picture of dramatic growth in the number of
Mecox physical stores, stating, in part:
The following table presents selected operating data of our physical stores as of the datesindicated:
As of December 31, As of June 30, 2007 2008 2009 2009 2010
Number of stores
Directly operatedstores 25 128 177 154 158
Franchised stores 2 39 225 66 320
All stores 27 167 402 220 478
37. In truth, but undisclosed to investors, Mccox had approximately 19 fewer directly
operated stores in the third quarter of 2010 (as compared to the third quarter of 2009), leading to
a more than 20% decline in revenue (from the same quarter of the previous year) in the Directly
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Operated Stores segment — for the period that ended three weeks prior to the IPO.
38. While the Company claimed that "[t]he expansion of our directly operated stores
also increased our compensation and benefit expenses and rental expenses," those expenses
climbed dramatically in the third quarter of 2010, even as the Company completely halted the
expansion of its directly-operated stores. Undisclosed to investors, third quarter 2010
compensation and benefit expenses had increased 40.2% from the same quarter of the previous
year.
39. The Prospectus also showed a decline in the Company's dependence on its
"Online platform," noting that, as a percentage of total net revenue, "Online platform" had
decreased from 92.2% in 2007, to 86% in 2008, to 72.8% in 2009.
40. In truth, however, for the third quarter of 2010, online platform revenues made up
over 79.3% of the Company's total net revenues.
41. While the Prospectus noted that "our franchised stores' expansion at a faster pace
compared to our directly operated stores may affect our gross margin," Defendants tempered any
potential decrease in gross margin by stating: "On the other hand, opening franchised stores
allows us to minimize capital investment and rental and staffing expenses." In truth, however,
costs and expenses rose dramatically during the third quarter, even though Mecox decreased the
number of directly-operated stores and increased the number of lower-margin franchise stores.
42. However, despite the Company's increased focus on franchise stores, which cut
into the Company's gross margins and caused Directly-Operated Stores revenue to plummet, the
Company faced a dramatic, undisclosed increase in expenses prior to the IPO.
43. In addition, the Prospectus noted a "relatively high gross margin of sales through
our franchised and directly operated stores compared to our online platform." In truth, and in
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contrast to the Prospectus's stated "strategy" to "Promote higher margin sales," an inelvased
percentage of 3Q:10 revenues had been achieved through the lower-margin online platform.
Indeed, undisclosed to investors, gross margins for the third quarter 2010 had fallen from 43.7%
in the same quarter of the previous year to 39.7%
44. In truth, Mecox did not expect to derive profit from its physical store operations,
let alone "promote higher margin sales." Instead, Mecox's physical stores were used as little
more than fitting rooms, where customers intending to make online purchases could try on the
clothes from a limited selection of inventory to check for proper sizing, rather than actually make
purchases in the stores.
45. Just two days after the IPO, in an October 28, 2010, article that appeared in
Chinese in the Economic Hef ald ("Economic Herald article") and is not available in Englishl,
author Hao Feng Lin discussed material, ahheady-existing problems faced by the Company with
regard to its highly-touted IPO plan to expand its network of physical stores.
46. The Economic Herald article addresses the pre-IPO departure of Wang Hong
Zheng, a key member of the Company's management team who joined the Company in May
2009 as the retail general manager and was critical to its touted IPO plan to increase physical
stores. Wang Hong Zheng had previously been general manager of competitor Metersbonwe
and brand manager of ME & CITY. The article notes "Wang planned to open nearly 2,000
stores within three years. In fact, MecoxLane already developed a small number of the retail
outlets at that time. Wang Hong Zheng's joining shows the great ambition of MecoxLane on
retail outlets expansion. This strategy was regarded by industry experts as quickly increase the
revenue and store scale for its planned IPO. Others even suggested that the company is `walking
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on a tightrope."' In August of 2010, however, just over two months before the Company's IPO,
Wang Hong Zheng resigned from the Company. The article notes, "this has led some to further
doubts on the model of retail outlets expansion in MecoxLane." [Defendant Alfred] Gu said that
Wang's leave does not affect the retail business."
47. The Economic Herald article compares Mecox to competitor, Metersbonwe,
where Wang had previously achieved significant store expansions for that company. `By March
31, 2008, Metersbonwe, a newly listed fashion enterprise, has a total of 2211 retail stores, of
which 1927 are the franchise ones. It took Metersbonwe 10 years to achieve these store
expansions."
48. The Econonic Herald article then questions: `But how can the stores make profits
given high costs of rental, labor, and electricity fee, etc.? Some people even contribute Wang's
resignation to the fact that many physical stores are carrying a lot of inventory difficult to sell and
the stores are difficult to achieve profits. This was denied by [Defendant] Gu. He pointed out
that more than 80% of the shops are making money."
49. The Economic Herald article notes, with respect to the potential problems of
simultaneously running online and physical stores, Defendant Gu "believes that Mecox Lane can
deal with online sales and retail stores operation simultaneously. However, Liu Qiang Dong,
CEO of 360buy, chooses to do the online sales only, though the fact that 360buy did both online
and offline sales in 2004. Liu believes that a company only has the ability to make one core
competence, just as a person cannot do two things well at the same time. As far as is known,
another major competitor Vancl has no plan to develop retail stores within 3 years. Some VC
investors have different views on the model of `online sale + retail outlets.' `I do not recommend
I This article, as well as all other cited articles that irate they are not available in English, were translated for use in
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the model of retail outlets to an e-commerce company,' said Zhu Xiaohu, a GSR Ventures
Partner." Finally, the article notes that "In the view of Tong Shihao from Qiming Venture
Partner, it's a big challenge to do the website-based and store-based retail simultaneously."
50. While it was not disclosed in the Prospectus that the Company had lost the key
executive with the experience and capability of expanding the Company's physical stores as
touted in the IPO, a July 29, 2010, article translated from the Chinese, entitled "MecoxLane's
Executive Wang Hong Zheng Resigns Multi-channel Expansion of E-Conunerce Gets In
Trouble" ("July 29, 2010 article") further conf rmed the resignation occurred shortly before the
IPO. The article further notes (before the IPO, but not aw ilcrble in English), "Nowadays,
MecoxLane's physical store has very little customers."
51. The July 29, 2010, article notes that during Wang's tenure, "Metersbonwe
expanded rapidly, which made Metersbonwe's IPO possible. At the beginning of his tenure at
MecoxLane, Wang Hongzheng announced that he was going to set up 2,000 MecoxLane chain
stores within 3 years... One year later, MecoxLane actually only owned more than 470 physical
stores." Significantly, the article notes, "MccoxLane's store team from Metersbonwe doubted
whether the online-offline multi-channel marketing could work, and they believed that the
physical stores and e-comme[r]ce are competing [with] each other."
52. The July 29, 2010, article also quoted an insider who wrote (also in Chinese,
translated here) "in an open email `among the online shopping and mail-order and physical
stores, whichever has the quickest return on investment, it will attract more investment.
Traditional clothing retail must need big investment, big scale, and large number of personnel
and have slow returns, but venture capital investor is not willing to spend capital to support it.
the Complaint.
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Most stores could not make profit in the short term. Wang Hongzheng, former vice president of
Metersbonwe, together with his team members, gradually reached a dead end."
53. The July 29, 2010, article further explained, "It's quite an eye-catching point that
MecoxLanc would soon do its IPO in the United States market in fourth quarter 2010. Wang
Hongzheng also indicated frankly that he would leverage his experiences and resources in the
store operations. Despite the model being questioned and top management change, the
development of physical stores will not slow down... Executives said they will adjust the
strategy to help more fiancisce[s] to gain more profits. The adjustment itself seems a part
abandonment of previous strategy."
54. The July 29, 2010, article also quotes Liu Hongwei, partner of PKU Management
Consulting regarding the issue of developing both online and physical store models
simultaneously. Liu Hongwei is quoted as stating, "'The stores have to provide cornplementarily
to online shop. If the total inventory and the price is the same between online and physical
stores, online shop will certainly affect the physical one". The article concludes, "In fact, the
physical shop have high cost and expensive rental expenses, slow expansion and slow
distribution, while the women's fashion is highly seasonal, requiring quick reaction towards
fashion, the overstock goods must be at a discount, and the shop needs constantly update[d]
style."
55. Prior to the Class Period, Mecox's per-store monthly income had decreased
substantially from 2007 to 2010.
56. Information provided by CW 1, a franchisee of Mecox physical stores, further
demonstrates a lack of support for or promotion of physical stores. CW I reported that the
opportunity to purchase franchises in Shanghai was first made available in December 2009. CW
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1 explained that there were approximately seven or eight districts in Shanghai, and s/he was
granted franchise rights in one district that did not yet have any Mecox-owned or franchise
stores. CW I's franchise agreement required CW 1 to open two stores within two years, or
Mecox could give the right to another franchisee to open a store in CW 1's district. In
compliance with the agreement, CW 1 opened two stores in spring 2010. Despite the terms of the
agreement, Mecox granted the right to another franchisee to open a store. CW 1 reported that
s/he has heard of another Shangai district where this occurred.
57. CW 1 said that every three months, franchisees are invited to attend ordering
conferences and they can view the new clothing styles on models. However, s/he said the
clothing does not arrive until six months later and the quality of the clothes received in the stores
is not as good as what the models wear during the order conference, In addition, once the
clothing is in the store and s/he is better able to determine what is popular, s/he is told by Mecox
that additional quantities are not available, even though those styles continue to be available in
the Mecox-owned stores.
58. CW 1 also reported that s/he loses customers to the Mecox website because the
Company offers large online discounts on the same products s/he carries in CW 1's stores. CW
1 has become acquainted with the other franchisees in Shanghai —there are approximately seven
owners — and learned that they were all experiencing the same issues. S/he said four franchise
stores have closed in Shanghai. CW 1 reported that s/he was experiencing losses each month.
59. CW 1 tried to take his/her complaints to the sales rep s/he originally dealt with but
said that person left the Company and has already been replaced several times. CW 1 reported
that s/he and other Shanghai franchisees were finally allowed to have a meeting with CEO
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Defendant Gu in November 2010 to discuss their extensive grievances, shortly after the IPO.
They were given two choices: 1) give their stores back to Mecox; or 2) close their stores.
Materially Untrue and Misleadin g Statements and Omissions Reizardin g Key Personnel
60. The Prospectus described the Company's management strengths and strategies, in
part, as follows: "strong management team with extensive relevant experience."
61. Despite touting the extensive experience of the Company's management team and
issuing a boilerplate warning that the Company's "future success heavily depends upon the
continued services of our management and other key personnel," Defendants omitted to disclose
the abrupt departure in August of 2010 of a key member of the management team, executive
Wang Hongzheng (`Executive Wang"), which occurred a mere two months prior to the IPO.
62. Wang, whose experience was crucial to the expansion of the physical store
network, was brought in to be the Company's senior vice-president and general manager in
charge of physical store operations.
63. Accordingly, Defendants failed to disclose this material fact that they lost a key
member of the management team, who had the necessary background and experience to expand
the Company's physical store network as touted in the Prospectus as a central piece of the
Company's business strategy.
64. Thus, prior to the IPO, the Company already lacked the management experience
and skills necessary to expand its physical store network. Without Executive Wang at the helm
of the Company's physical store operations, there was little chance the Company could attain its
stated goals contained in the Prospectus of expanding its physical store network.
65. A July 29, 2010, article translated from the Chinese, entitled "MecoxLane's
Executive Wang Hong Zheng Resigns Multi-channel Expansion of E-Commerce Gets In
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Trouble" ("July 29, 2010 article") further confirmed the resignation occurred shortly before the
IPO. The article further notes (before the IPO, but not available in English), "Nowadays,
MecoxLane's physical store has very little customers.
Materialiv Untrue & MisleadineStatements and Omissions Regarding the Company's OnlinePlatform
66. In addition to growth among physical stores, the Prospectus touted Mecox's
online platform, stating, for example: "We operate China's leading online platform for apparel
and accessories as measured by revenues in 2009, according to a report commissioned by us and
prepared by Frost & Sullivan, an independent research and advisory firm." The Prospectus
stated:
We are able to provide better "value for money" to our customers because our onlineplatform reduces our costs and expenses for product display, rental, staffing and inventory.
Our online platform is supported by our superior operational capabilities.
67. Regarding the Company's "Online Platform," the Prospectus also stated:
Online Platform for Apparel acrd Accessories in China
The online platform for apparel and accessories has gained increasing popularity in Chinaas the overall consumer market sector expands and consumers search for diversified retailformats to meet their needs
We believe the online platform for apparel and accessories, which offers customersconvenience of shopping via alternative sales charnrels and broadens merchants'access to customers, presents growth opportunities.... Sales on the online platformfor apparel and accessories are expected to experience rapid growth....
The following table sets forth the actual and forecasted online retail value of apparel andaccessories in China from 2004 to 2015.
Online Retail Value of Apparel & Accessories in China
(RMB Billion)
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Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 Page 23 of 42
.................................................._._......_.. .....
11...._-.. 3-10,7
15217.5
100 ---__ w
1879
139,9
^
5 _.. 1{i3.^1
1fi, 4 {4.4 { 5$.f
3 1
.I 1 R 1^^F.^t ^ 3^^i
1 3 ..
2004 2005 2006 2007 2008 209 201016 201 IL 20121 201_kli 2014L 2015L
68. In truth, but undisclosed to investors, Mecox's quarterly revenue growth from
their Online Platform would cease by the fourth quarter 2010. Although the fourth quarter was
well underway by the time of the IPO, the Prospectus failed to disclose that fourth quarter 2010
revenues from the "online platform" would be flat compared to those achieved in the third
quarter.
Materially Untrue and Misleading Statements and Omissions Reeardina the Company's
Marketing
69. With respect to marketing, the Prospectus also touted, "We market our products
through online advertising, targeted distribution of emails, SMS, catalogs, print media
advertising and out-bound calls."
70. Additionally, regarding marketing activities, the Company stated the following in
the Prospectus:
• "We rely on effective marketing efforts tailored to our targeted customers tomaintain and increase our revenues."
• "We conduct online advertising via portals such as Sina, search engines such asBaidu, and other popular websites."
• "We plan to acquire new customers on a cost-effective basis by enhancing ouronline advertising efforts, improving our e-commerce website and catalog design,and further diversifying our product offerings."
• `Brand image is an important factor which affects a customer's purchasing
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decision with respect to our products. Our success therefore depends on, amongother things, market recognition and acceptance of our private brands and theculture, lifestyle and images associated with the brands, some of which may notbe within our control..."
• "We will launch marketing and advertising campaigns to associate these brandswith trendy fashion events and cultural occasions."
71. In truth, with respect to marketing, as the pre-IPO Economic Herald article noted
"Currently, MecoxLane has no plan to advertise for the Company image."
Materially Untrue & Misleading Statements and Omissions Regarding the Company's InternalControls and Due Diligence
72. In addition to the foregoing, the IPO Prospectus also conditioned investors to
believe that the Company maintained an adequate system of internal controls, sufficient to
monitor and accurately report Mecox's inventory and gross margins, in part, as follows:
Management Information System
We have developed a proprietary management information system tailored for ouroperations. We continue to develop our management information system to integratetwo dimensions of our business:
• Front-end integration. All our sales operations are supported by ourcentralized management information system and share the same customerdatabase, which enables us to generate synergy between our online platformand stores.
• Back-end integrated. Our management information system also supportsother parts of the business flow including procurement, inventorymanagement, order processing, and distribution. The integration enables abetter control of inventory and gross margin, as well as improves efficiency.
73. The Prospectus also stated:
Our online platform allows us to collect Customer data effectively andcontinuously. We systematically analyze our extensive customer database tosegment customers for targeted marketing, enhancing the effectiveness of ourmarketing activities.
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74. Thus, the Prospectus represented that Mecox had the ability to monitor its sales,
inventory, gross margin, and effectiveness of marketing "effectively and continuously," via a
"proprietary management information system" and "online platform" which would have
provided an "integrate[d]" and "continuous[]" picture of the Company's financial condition at
any given time. Accordingly, investors were conditioned to believe that the Prospectus contained
accurate, up-to-date information, including any changes in trends, known uncertainties, or
material information.
75. In truth, however, as discussed in detail above, the Prospectus failed to include
material information regarding Mecox's third quarter (completed prior to the IPO) or its fourth
quarter financial condition (well underway at the time of the IPO) or its growth strategies.
76. Indeed, Defendants had failed to conduct an adequate due diligence investigation,
which would have revealed the poor results for the third quarter 2010 (which was already
completed weeks before the IPO), the poor results for the fourth quarter 2010 (which was already
underway at the time of the IPO), as well as material inconsistencies between the financials
reported in the Prospectus and the financials reported to the Chinese government. For example,
in the Company's Prospectus, Defendants reported total net income as follows:
Net income (in thousands of $)
2007 2008 2009
Net Income 4,112 3,552 7,212
77. However, in the Company's filings in China (filed with the Administration for
Industry and Commerce), Mecox reported only $825,544.41 net profit for FY 2008, a materially
lower number that evidenced the Company's income volatility.
THE TRUE FINANCIAL AND OPERATIONAL CONDITION OF MECOX ISBELATEDLY DISCLOSED
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78. On November 29, 2010, just one month after the IPO, Defendants filed a press
release entitled "Mecox Lane Limited Announces Third Quarter 2010 Results." The press release
contained a summary of unaudited financial results for the quarter of 2010 -- which had ended
September 30, 2010, more than three ii,eeks before the IPO.
79. In that press release, Defendants began to reveal the truth about previously
undisclosed problems that excited at the time of the IPO, including:
e A decline in gross margin from the same quarter of the previous year (falling 400 basispoints from 43.7% to 39.7°/x);
• A 19.8% increase in operating expenses from the same quarter of the previous year, toreach $21.1 million for 3Q:10;
• A 20.4% increase in Selling, General, and Administrative expenses from the samequarter of the previous year, to reach $20.1 million for 3Q:10;
• An 11.6% increase in marketing expenses and an astounding 40.2% increase incompensation and benefits expenses from the same quarter of the previous year; and
• A 22.3% decrease in net revenues from directly operated stores from the same quarter ofthe previous year (a fall from $8.4 million in the third quarter of 2009 to just $6.5 millionin the third quarter 2010).
80. Also in the November 29, 2010, press release, Defendants claimed a 53.1 % year-
over-year increase in net revenues from their "online platform," resulting in 3Q:10 net revenues
from that segment of $43.9. But in issuing guidance for fourth quarter 2010, Defendants
estimated that those revenues would cease to grow, providing guidance in the online platform
segment "in the range of $43.7 million to $46.2 million."
81. The following trading day, on the publication of this news, Mecox stock price
declined precipitously. As shares of the Company resumed trading the following day, they fell
nearly 40% — plummeting from $13.38 per share on November 29, 2010, to close at $8.15 per
share the following day, November 30, 2010. On December 1, 2010, shares of the Company
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continued to decline, closing the trading day at $6.65. The decline of more than 50% occurred on
exceptionally heavy trading volume with over 14.759 million shares traded during the two
trading days, which was more than ten times the Company's recent average daily trading volume,
82. The press release informed investors, for the first time, some of the true, adverse
conditions that existed at the time of the IPO, but were undisclosed — including, in part, the
following:
(a) At the time of the IPO, the Company had already incurred a dramatic
increase in various expense categories -- operating; marketing; compensation and benefits; and
selling, general, and administrative — as well as a decline in gross margin, which would foreseeably
continue to adversely impact the Company's revenue.
(b) At the time of the IPO, Defendants had already seen a dramatic 22.3%
decrease in revenue from Directly Operated Stores. The Company attributed the decrease in
revenue to a decline in number of stores by approximately 20, and attributed much of the decrease
in the number of directly operated stores to their "conver[sion] into franchised stores." In fact,
nearly half o£ the decrease in stores was attributable to store closures, not conversions into
franchised stores.
(c) At the time of the IPO, Defendants already had sufficient information, with
the Company's entire third quarter completed, and the fourth quarter already underway, to
determine that quarter-over-quarter growth in the online platform segment was not be sustainable,
and would not continue into the fourth quarter.
(d) At the time of the IPO, Mecox did not maintain an adequate system of
internal controls and procedures such that it would properly report and disclose these material
increases in expenses and declines in gross margins, and such that the Company did not maintain
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minimum standards of good Corporate Governance or controls and procedures, as is required by
the SEC and the Company's own internal guidelines and standards of business conduct; and
(e) At the time of the IPO, defendants had not conducted an adequate due
diligence investigation into Mecox, which would have revealed many of the issues, and which
would have prevented the sale of this Company to shareholders through the public equity markets
at that time, or at the inflated price at which these shares were originally sold.
83. On May 23, 2011, the Company filed a press release entitled: "Mecox Lane
Limited Announced First Quarter 2011 Results." In that disclosure, the Company revealed "First
Quarter 2011 Highlights," including, in part, that:
• Net revenues decreased by 2.4% year-over-year to $48.1 million from $49.3 million;
• Net loss increased by 153.0% year-over-year to $3.9 million from $1.5 million in theyear-ago period; and
• Gross profit decreased by 16.7% year-over-year to $17.4 million from $20.8 million inthe year-ago period.
84. In addition, the May 23, 2011, release reported "First Quarter 2011 Results,"
including, in part:
• "Total net revenues [of] $48.1 million in the first quarter of 2011, representing adecrease of 2.4% from $49.3 million in the first quarter of 2010."
• "Net revenues from directly operated stores [of] $5.9 million in the first quarter of2011, representing a decrease of 31.9% from $8.6 million in the first quarter of 2010.The decrease was primarily due to a decline in the number of directly operatedstores from an average of 175 stores in the first quarter of 2010 to an average of119 stores in the first quarter of 2011."
• "Net revenues from franchised stores were $4.3 million in the first quarter of 2011,representing an increase of 10.1% from $3.9 million in the first quarter of 2010." TheCompany attributed this growth "to an increase in the number of franchised stores inoperation from an average of 260 stores in the first quarter of 2010 to an average of325 stores in the first quarter of 2011" — a 25% growth in number of franchises, eventhough franchise net revenues only increased 10.1 %.
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• "Cost of goods sold [ofl $30.7 million in the first quarter of 2011, representing anincrease of 8.0% from $28.4 million in the first quarter of 2010. The increase wasprimarily clue to an increase in the cost of goods sold attributable to the Internetplatform, corresponding to the increase in its sales."
• "Gross profit [ofl $17.4 million in the first quarter of 2011, representing a decrease of16.7% from $20.8 million in the first quarter of 2010."
"Gross margin [of] 36.1% in the first quarter of 2011, compared to 42.3% in the firstquarter of 2010. The decrease in gross margin was primarily due to the combinedeffects of (i) the increase in weighting of the Internet business in total netrevenues, which generated a Iower margin than other seginents; (ii) the increasein net revenues from third-party branded products, for which the profit marginis lower than for the products under the Company's own proprietary brands;and (iii) the increase in the number of franchised stores in operation, where theCompany offered a higher average discount rate to its franchisees."
• "Loss from operations [ofl $5.5 million in the first quaver of 2011, representing anincrease of 180.2% from $2.0 million in the first quarter of 2010."
• "Net loss [ofl $3.9 million in the first quarter of 2011, representing an increase of153.0% from $1.5 million in the first quarter of 2010. Non-GAAP net loss was $3.4million in the first quarter of 2011, representing an increase of 364.7% from $0.7million in the first quarter of 2010. Basic and diluted loss per American depositaryshare ("ADS") attributable to Mecox Lane shareholders was $0.07 in the first quarterof 2011."
(Emphasis added).
85. Through this release, the truth began to be revealed as investors learned that, at
the time of the IPO (but contrary to statements in the Prospectus), Mccox had abandoned support
for its physical stores --- an approach that would negatively impact net revenues, gross margins,
and cost of goods sold, and would increase the Company's dependence on its online segment.
Rather than increase the number of directly-operated stores (as represented in the Prospectus),
Defendants closed some and converted others into lower-margin franchises. Moreover, the
revenues derived from the franchises were disproportionately low when compared to the increase
in the quantity of franchise stores.
86. The following trading day, on the publication of this news, Mecox stock price
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declined precipitously. As evidence of this, as shares of the Company resumed trading the
following day, shares of Mecox fell almost 28%, plummeting from $496 per share on May 23,
2011, to close at $3.59 per share the following day, May 24, 2011. On May 25, 2011, shares of
the Company continued to decline as investors digested this news, trading to a low of $3.33
before closing the trading day at $3.52. The two day decline of almost 29% occurred on
exceptionally heavy trading volume with over 2.0086 million shares traded during the two
trading days. Furthermore, shares of Mecox continued their drastic descent throughout the week
finally closing at $3.40 on May 27, 2011-- a four day decline of approximately 32%.
CAUSATION AND ECONOMIC LOSS
87. In connection with the IPO, defendants issued a materially untrue and misleading
Prospectus. These filings were essential in allowing defendants to complete the IPO at the
inflated price of $11 per share to raise proceeds over nearly $130 million, and to create a public
market for trading in Mecox stock.
88. By improperly characterizing the Company's financial prospects, Defendants
presented a misleading image ofMecox's business and future growth prospects. Within the IPO
Prospectus, Defendants repeatedly emphasized the ability of the Company to integrate its
acquired assets and consistently reported expenses and gross profit margins within expectations
sponsored and/or endorsed by defendants. These claims caused and maintained the inflation in
Mccox's stock at the time of the IPO, and thereafter until the truth about the Company was
ultimately revealed to investors.
89. On November 29, 2010, however, after investors began to learn the truth about
the Company, and learned that Defendants could not operate the Company according to plan, that
expenses had risen well above expectations, that gross margins had fallen well below plan and
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below historical trends, and that Defendants could not operate the Company in accordance with
the expectations sponsored and/or endorsed by the Individual Defendants, shares of the Company
collapsed. Defendants' belated disclosures had an immediate, adverse impact on the price of
Mecox shares.
90. These belated revelations also evidenced Defendants' prior misrepresentation of
Mecox's business prospects due to Defendants' untrue statements. As investors and the market
ultimately learned, the Company's business prospects had been overstated. As this adverse
information became known to investors, the prior inflation was immediately eliminated from
Mecox's share price, and shareholders were damaged as a result of this related share price
decline.
91. As a direct result of investors beginning to learn the truth about the Company, on
November 29, 2010, as shares of the Company resumed trading, shares of Mecox fell over 50%
in just two trading days, plummeting from $13.38 per share on November 29, 2010, to close at
$6.65 per share on December 1, 2010. The two-day decline occurred on exceptionally heavy
trading volume with over 14.759 million shares traded during the two trading days — more than
ten times the Company's recent average daily trading volume. This dramatic share price decline
eradicated much of the inflation from Mecox's share price, causing real economic loss to
investors who purchased this stock in, or in connection with, the Mecox IPO.
92. Furthermore, the Company's pre-IPO decision to abandon support for its physical
stores continued to impact its financial health and growth. On May 23, 2011, after the close of
trading, the Company filed a press release announcing first quarter 2011 results. In that press
release, the Company revealed year-over-year declines in net revenues (of 2.4%), gross profit (of
16.7%), net revenues from directly operated stores (of 31.9%), the number of directly operated
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stores (down from an average of 175 to 119), and gross margin (down to 36.1% from 42.3%).
The Company also reported a 153% increase in net loss, 8% increase in cost of good sold (which
the Company attributed to its online platform), and 180.2% increase in loss from operations.
93. These poor results were attributed, in large part, to "a decline in the number of
directly operated stores," "the increase in weighting of the Internet business in total net revenues,
which generated a lower margin than the other segments," and "the increase in the number of
franchised stores."
94. The stock's precipitous decline after defendants' prior misrepresentations and
illegal and improper conduct came to be revealed and was apparent to investors, evidences that
the prior inflation in the price of Company shares was eradicated. As a result of their purchases
of Mccox stock in connection with the IPO, including those who purchased shares traceable to
the Offering in the public markets immediately thereafter, plaintiff and other members of the
Class suffered economic losses, i.e., damages under the federal securities laws.
Additional Allestations in Support of Materialitv of Misstatements and Omissions
95. Further confirming the true conditions and prospects of the Company's pre-IPO
decision to abandon support for its physical stores, and the inherent conflicts between its physical
store network and its online sales, an article titled, "Case study of B-School: Achilles heel of
Mecoxlane's Three-Channel Strategy," translated from the Chinese magazine, Sales and Market
Magazine, dated January 28, 2011, revealed the following:
• "In my opinion, Mecoxlane's online business and offline business not only cannotcomplement each other, but constitute very serious conflicts."
• "The fact was, during its development of physical store business, its strategy wasto increase its franchisee stores constantly and kept distributing inventory to thefranchised stores in order to increase the group's revenue instantly."
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• "Mecoxlane was planning to be listed and it needed quick revenue for its IPO, butit decided to choose street stores."
• "In order to be listed as soon as possible, [the Company] chose poor locations,unsatisfactory products and expanded rapidly."
• "Mecoxiane's Q3 2010 filings shows that its physical stores' revenue droppeddramatically, indicating that Mecoxlane's poor management in this section. At thetime of its IPO, it had 158 physical stores, but by the time of Q3 2010 filing, thenumber decreased to 143. The trend of closing physical stores in inevitable."
96. On March 1, 2011, the Company conducted its 2010 fourth quarter earnings call
wherein the Company's again disclosed its pre-IPO decision to abandon support for its physical
stores, which was contrary to statements in its Prospectus. The 2010 first quarter earnings call
PowerPoint presentation revealed, in part, that:
• "Partnering with strategic investors to expedite pace for Mecox Lane to becomethe leading online fashion platform."
• "Work with SINA on many fronts of Internet marketing."
• "Leverage S1NA's strong brand name and Internet marketing expertise to furtherramp up Mecox Lane's Internet platform."
97. The Company's PowerPoint presentation further revealed that at that time, just
four months after the IPO, Mecox had already agreed to partner with SINA, the largest Chinese-
language infotainment web portal, to ramp up its inters-ict platform. Mecox disclosed that SINA
would acquire 19% of Mecox's total outstanding and issued shares and has the option to
purchase, within two years, 11.9% of Mecox's current outstanding shares.
98. Accordingly, this further evidences the Company's pre-IPO decision to abandon
support for its physical stores by bringing in a major partner, within just four months of the IPO,
to help Mecox become a leading online fashion platform --- a radical shift away from the plan
stated in the Prospectus.
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99. Further confirming the true conditions and prospects of the Company's pre-IPO
decision to abandon support for its physical stores, which was contrary to statements in its
Prospectus, in an article titled, "MecoxLane's CEO Gu Beichum: Intensive Competition
Resulted in Declined Net Profit Last Year," translated from China Business News, dated March
3, 2011, Defendant Gu is quoted as follows:
"In the future, Mecox Lane will focus on online business, therefore thecooperation with Sina will certainly help expanding the online business of Mecox
Lane."
• "In addition, some of our directly operated stores are converting to franchisedstores gradually. In the near future, we will not expand our physical stores greatly.Instead, we will put our resources on the online platform and business."
100. Further confirming the true conditions and prospects of the Company's pre-IPO
decision to abandon support for its physical stores, which was contrary to statements in its
Prospectus, an article titled, "MecoxLane's CEO Gu Beichum. Focus on e-commerce," translated
from the Chinese website, Sina.conn, dated March 25, 2011, Defendant Gu Beichum, CEO of
Mecox Lane, reveals the following.
• "CEO Gu stated that Mecox Lane also experienced great changes in the marketover the past one year. Orders placed by direct calls from catalog customers aredecreasing, while there is a[n] increasing number of people who place onlineorder through MI8.COM ."
e "These earliest catalog customers have also converted to be online shoppers ingreat rush like tidewaters in the recent two years."
• "Mecox Lane has adjusted its channel strategy to conform to the customer'stransformation, and put more resources into its website building and online
marketing."
• "As Gu puts it, Mecox Lane's focus of this year will be centered on the e-commerce service. Mecox Lane has invested and built in Wujiang an operatingcenter of 140,000 square mcters. The warehousing function of this center is
highlighted."
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101. Finally, on May 23, 2011, the Company conducted its 2011 first quaver earnings
call wherein the Company's again disclosed its pre-IPO decision to abandon support for its
physical stores, which was contrary to statements in its Prospectus, and which continued to
negatively impact its financial health and growth. Rather than increase the number of directly-
operated stores (as represented in the Prospectus), Defendants closed some and converted others
into lower-margin franchises. The 2011 first quarter earnings call PowerPoint presentation
revealed, in part, that:
• "While we continue to operate our call center and retail store businesses, we arestrategically focused on growth of our Internet platform..."
• "Continued conversion of directly-operated stores into franchised stores during Q12011."
• "Further invest in our Internet marketing, acquire new customers from the Internetand explore different methods of achieving customer acquisition."
102. Additionally, during the 2011 first quarter earnings call, the CEO of Mecox,
revealed, in part, that:
• "As we mentioned we are think, talking about to, negotiating with a few potentialbuyers who will with an interest in buy out the whole of our stores, so we will nothave at this moment have a plan to change the direct manage stores or franchiseestores, which in the end we have to have one solution for all the stores."
103. Therefore, only eight months after the Company's IPO, and contrary to the stated
plan in the Prospectus to expand its physical store network, Defendants are already ill
negotiations to sell off the entirety of its the physical stores (direct and franchisee).
CLASS ACTION ALLEGATIONS
109. This is a class action on behalf of all persons who purchased Mecox shares or
traceable stock pursuant to the October 2010 Prospectus (the "Class"), excluding Defendants and
their affiliates, Class members are so numerous that joinder of them all is impracticable.
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105. Common questions of law and fact predominate and include: (i) whether
Defendants: violated the Securities Act; (ii) whether the Mecox IPO Prospectus misrepresented
and/or omitted material facts; and (iii) the extent of and appropriate measure of damages.
106. Plaintiff's claims are typical of those of the Class. Prosecution of individual
actions would create a risk of inconsistent adjudications. Plaintiff will adequately protect the
interests of the Class. A class action is superior to other available methods for the fair and
efficient adjudication of this controversy.
CLAIM FOR RELIEF
COUNTFoi• Violations of §11 of the Securities Act Against the Company
107. Plaintiff incorporates each and every allegation above as if stated herein.
108. On or about October 26, 2010, the Company completed an IPO of 11.742 million
shares of Mecox's ADS at $11.00 per share, for total proceeds of at least $129.162 million.
109. Each of the statements alleged herein relating to Mccox's prospects and financial
results made in the October 2010 Prospectus were untrue or misleading when issued. The true
but undisclosed facts were that defendants could not operate the Company according to plan, that
expenses had risen well above expectations, that gross margins had fallen well below plan and
below historical trends, and that defendants could not operate the Company in accordance with
the expectations sponsored and/or endorsed by Defendants. These omissions were a violation of
SEC Regulation S-K, Item 303(a), which requires that trends which will have a material effect on
a registrant's results be disclosed.
110. Mecox, as the issuer of stock in the IPO, has absolute liability for the
misstatements.
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111. By reason of the conduct herein alleged, the Company violated §11 of the
Securities Act.
COUNT IIFor Violations of §11 of the Securities Act Against the Individual Defendants
112. Plaintiff incorporates each and every allegation above as if stated herein.
113. The Individual Defendants each signed Mecox's IPO Registration Statement
and/or filed that Prospectus with the SEC and distributed it to investors.
114. On or about October 26, 2010, the defendants named in this Claim for Relief
completed an IPO of 11.742 million shares of Mecox's ADS at $11.00 per share, for total
proceeds of at least $ 129.162 million.
115. Each of the statements alleged herein relating to Mecox's prospects and financial
results made in the October 2010 Prospectus were -untrue or misleading when issued. The true
but undisclosed facts were that defendants could not operate the Company according to plan, that
expenses had risen well above expectations, that gross margins had fallen well below plan and
below historical trends, and that defendants could not operate the Company in accordance with
the expectations sponsored and/or endorsed by Defendants, including the Individual Defendants.
These omissions were a violation of SEC Regulation S-K, Item 303(a), which requires that
trends which will have a material effect on a registrant's results be disclosed.
116. The Individual Defendants owed to the purchasers of the stock, including Plaintiff
and the Class, the dirty to make a reasonable and diligent investigation of the statements
contained in the Prospectus at the time it became effective, to ensure that those statements were
true and that there was no omission to state material facts required to be stated in order to make
the statements contained therein not misleading.
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117. The officers and directors of Mecox who were signatories to the Registration
Statement were responsible for the preparation of the Prospectus. By virtue of the material
misrepresentations contained in the Prospectus, plaintiff and the Class have been damaged.
118. By reason of the conduct herein alleged, the Individual Defendants violated § 11 of
the Securities Act.
COUNT IIIFor Violations of §11 of the Securities Act Against the Underwriter Defendants
119. Plaintiff incorporates each and every allegation above as if stated herein.
120. The Underwriter Defendants each permitted their names to be included on the
cover of the Prospectus as the Underwriters.
121. On or about October 26, 2010, the Underwriter Defendants underwrote an IPO of
11.742 million shares of Mccox's ADS at $11.00 per share, for total proceeds of at least
$129.162 million.
122. Each of the statements alleged herein relating to Mecox's prospects and financial
results made in the October 2010 Prospectus were untrue or misleading when issued. The true
but undisclosed facts were that defendants could not operate the Company according to plan, that
expenses had risen well above expectations, that gross margins had fallen well below plan and
below historical trends, and that Defendants could not operate the Company in accordance with
the expectations sponsored and/or endorsed by the Individual Defendants. These omissions were
a violation of SEC Regulation S-K, Item 303(x), which requires that trends which will have a
material effect on a registrant's results be disclosed.
123. The Underwriter Defendants owed to the purchasers of the stock, including
Plaintiff and the Class, the duty to make a reasonable and diligent investigation of the statements
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contained in the Prospectus at the time it became effective, to ensure that those statements were
true and that there was no omission to state material facts required to be stated in order to make
the statements contained therein not misleading.
124. The Underwriter Defendants were responsible for the preparation of the
Prospectus. By virtue of the material misrepresentations contained in the Prospectus, plaintiff
and the Class have been damaged.
125. By reason of the conduct herein alleged, each defendant named in this Claim for
Relief violated § 11 of the Securities Act.
COUNT 1VFor Violation of §15 of the Securities Act Against the Defendants Shen, Ying, and Gu as
Control Persons of the Company
126. Plaintiff incorporates each and every allegation above as if stated herein.
127. Defendants Shen, Ying, and Gu, by reason of their stock ownership and positions
with Mccox, were controlling persons of Mecox and are liable under § 15 of the Securities Act.
Each of these Defendants was a control person of Mecox by virtue of his or her position as a
director and/or senior officer of the Company and as a result of his large equity interest.
125. Each of these Defendants is liable for violating § 15 of the 1933 Act based on their
ability to control the Company, which violated § 11 of the 1933 Act as alleged in Count I above.
This ability stems from their management positions and/or ability to control those persons in
management positions, access to information regarding Mecox's operations and/or financial
condition, ability to cause and direct the dissemination of that information, and/or the ability to
prevent the issuance of, correct, or cause to be corrected, the misleading statements in the
Prospectus.
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129. Defendant Shen, Chairman of the Board of Directors, owned over 250 million
ordinary shares (both prior to and after the Offering, through which he sold over 2 million of his
personally held shares), for a pre-1PO stake in the Company of 75.9%. Defendant Ying, Vice
Chairman of the Board of Directors, owned over 14.5 million shares in the Company — an
approximately 4% stake. Defendant Gu, Chief Executive Officer and a Director of the Company,
owned over 49 million ordinary shares in the Company pre-IPO, for a nearly 14% stake in the
Company. Together, these three Defendants controlled 88% of the Company's ordinary shares
prior to the IPO.
PRAYER
WHEREFORE, plaintiff prays for judgment as follows: declaring this action to he a proper
class action; awarding damages, including interest; and such other relief as the Court may deem
proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by juuy.
Dated: May 31, 2011 Respectfiilly submitted,
KAHN SW_ ICK & FOTI, LLC
Kim E. Miller_500 Fifth Ave., Suite 1810New York, NY 10110Telephone; (212) 696-3730Facsimile: (504) 455-1498-and-Lewis S. Kahn206 Covington StreetMadisonville, Louisiana 70447Telephone (504) 455-1400Facsimile: (504) 455-1498
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POMERANTZ HAUDEKGROSSMAN & GROSS LLPJeremy A. Lieberman100 Park AvenueNew York, New York 10017Telephone: (212) 661-1100Facsimile: (212) 661-8665-and-Patrick V. DahlstromTen South La Salle Street, Suite 3505Chicago, Illinois 60603Telephone: (312) 377-1181Facsimile: (312) [email protected]
Co-Lead Counsel for Lead Plaintiff Westendand the Class
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CERTIFICATE OF SERVICE
I hereby certify that this Amended Complaint was filed in hard-copy form andcopies of this Amended Complaint will be sent electronically to counsel for allDefendants as listed below on May 31, 2011.
Kim E. Miller
Robert MalionekLATHAM & WATKINS LLP885 Third Ave., Suite 1000New York, NY 10022Telephone: (212) 9061200Facsimile: (212) [email protected]
Counsel far Mecox Lorne Ltd. and the IndividualDefendants
William J. SushonO'Melveny & Myers LLP7 Times SquareNew York, NY 10036Telephone: (212) 326-2000Facsimile: (212) [email protected]
Counsel for Under- tit ,riter• Defendants
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