case 1:10-cv-09053-rws document 19 filed 06/02/11...

Case 1:10-cv-09053-RWS Document 19 Filed 06/02/11 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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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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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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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


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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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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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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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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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

20


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

21


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)

22


.................................................._._......_.. .....

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

23


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.

24


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

25


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."


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

26


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

27


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 %.

28


• "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.


29


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

30


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

31


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."

32


• "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.

33



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."


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."

34


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.

35


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


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.

36


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


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



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.

37


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


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



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


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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case 1:10-cv-09053-rws document 19 filed 06/02/11...

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