On September 15, 2025, Pomerantz secured a victory on behalf of a proposed class of investors in VNET Group, Inc.’s American Depositary Shares (“ADSs”), by defeating, in large part, the defendants’ motion to dismiss securities fraud claims.
The claims arise from a loan taken out by VNET’s Co-Founder and Chairman of the Board, Josh Sheng Chen, Mr. Sheng Chen’s default of that loan, and the impact of that default on VNET’s business.
VNET is a holding company that, through its subsidiaries, provides hosting and related services, including data center, cloud, and virtual private network services through which customers can connect to the internet in China.
The plaintiffs allege in their First Amended Complain (“Complaint”) that in August 2021, Mr. Sheng Chen took out a $50.25 million loan from Bold Ally (Cayman) Limited, using his stake in VNET as collateral. This loan agreement stipulated that if VNET’s share price fell below $8.50 for two consecutive days, Bold Ally could cancel the loan and demand full repayment. Additionally, it specified that if the worth of Mr. Sheng Chen’s Class A shares fell below a threshold of $63 million, he would immediately be in default. Within two months of Mr. Sheng Chen entering into the loan, both provisions were triggered, giving Bold Ally the ability to terminate the loan and seize Mr. Sheng Chen’s shares. The seizure of Mr. Sheng Chen’s shares could have been catastrophic for VNET, as the company has just entered into financing agreements for hundreds of millions of dollars with Blackstone Tactical Opportunities. These financing agreements allowed Blackstone to redeem its convertible notes early if, among other things, Mr. Sheng Chen ceased to be the largest holder of VNET’s voting power and if he resigned or was removed from the Board of Directors. Essentially, the default of Mr. Sheng Chen’s personal loan, and subsequent seizure of his shares by Bold Ally, directly threatened the continued stability of VNET.
Critically, from the start of the Class Period (March 30, 2022 to February 17, 2023), Mr. Sheng Chen was in default of his loan agreement with Bold Ally, making the potential seizure of his shares an ever-present threat, wholly dependent on Bold Ally’s actions.
Nevertheless, throughout 2022 and into 2023, Mr. Sheng Chen hid this risk from VNET investors. The defendants discussed the Blackstone loan with investors without ever mentioning the growing risk posed by Mr. Sheng Chen’s default. More egregiously, Mr. Sheng Chen actually filed his financing agreement with Bold Ally in a Form Schedule 13D but redacted all provisions that would let investors discover that he was already in default of the financing agreement. The plaintiffs also allege that the defendants further misled investors later in the Class Period by discussing VNET, its ADSs, and the company’s plans while failing to disclose Mr. Sheng Chen’s default and the growing risk it posed.
On February 13, 2023, Bold Ally announced that Mr. Sheng Chen had officially defaulted on his loan and that Bold Ally had decided to enforce the terms of the loan and seize his shares. On this news, VNET’s share price fell 17.8%. On February 15, 2023, VNET announced that its Board of Directors had created 555,000 new shares, entitled to 500 votes per share, to be issued to Mr. Sheng Chen upon the seizure of any shares by Bold Ally. This move would ensure that Mr. Sheng Chen would retain his position as largest holder of VNET voting power and prevent the Blackstone loan from defaulting. On this news, VNET’s share price fell an additional 8.07%. Finally, on February 17, 2023, the defendants disclosed a letter between VNET and Bold Ally admitting that Mr. Sheng Chen had been notified at least five times of his default throughout the Class Period. On this news, VNET’s share price fell 9.47%.
The Court upheld all of the alleged misstatements in the Complaint and held that scienter – i.e., defendants’ fraudulent intent – was adequately alleged as to all of the individual defendants. The Complaint thus adequately alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
There are several notable aspects of the Court’s decision denying the defendants’ motion to dismiss, including its rejection of defendants’ arguments concerning the elements of falsity, scienter, and loss causation.
Falsity
Even with strong allegations that Mr. Sheng Chen and VNET purposefully omitted key information, which would have alerted investors to the risks associated with Mr. Sheng Chen’s default, from their statements about Mr. Sheng Chen’s loan, the plaintiffs still had to overcome the defendants’ arguments that their statements would not have misled investors.
The Court rejected the defendants’ argument that this was a pure omission claim, and instead held that because the defendants made affirmative statements about Mr. Sheng Chen’s loan with Bold Ally, VNET’s financings, and the associated risks to VNET’s ADSs, they “did so in a deceptively incomplete fashion.” Essentially, the Court reaffirmed the principle that omitting critical information that “creates a misleading impression about information that is material to investors” is actionable.
The Court also rejected the defendants’ argument that the risk of a default did not need to be disclosed because “there was never a real risk” of Mr. Sheng Chen losing his shares and being removed from the Board. According to the Court, because the risk of Mr. Sheng Chen losing his shares had materialized due to his default, the fact that Bold Ally never actually seized his shares and removed Mr. Sheng Chen from the Board was immaterial. Ultimately, the Court found that a risk does not have to completely materialize for it to need to be disclosed, but rather that plaintiffs need only show that it was present or increased and was not disclosed.
Scienter
The Court rejected the defendants’ argument that scienter cannot be established by the defendants’ positions alone, holding that the plaintiffs instead plead that, by virtue of the defendants’ positions, they had access to specific information – namely, the terms of the Bold Ally and Blackstone loans – that were withheld from the public. In essence, the Court affirmed that scienter can be established by a defendants’ access to contradictory information, especially when the complaint specifically identifies the contradictory information.
Loss Causation
The Court rejected the defendants’ argument that the disclosures in February 2023 did not constitute revelations of concealed information, but rather reflected new developments. The Court held that Mr. Sheng Chen’s default, Bold Ally seizing shares, and VNET creating new shares were fully matured risks that revealed existing facts that had been previously concealed. Therefore, the Court’s ruling reaffirmed the principle that a development of a risk can be used to establish loss causation, especially when those developments reveal the existence of facts previously hidden from investors.
The case is In re VNET Group, Inc. Securities Litigation, No. 1:23-cv-11187 (S.D.N.Y.)