New Oriental Education provides educational programs, services, and products to students across China and delivers online courses through its online learning platforms. From March 4, 2021 through March 11, 2021, China held its annual Two Sessions parliamentary meetings, where the two main political bodies of China meet, discuss, and reveal plans for Chinas policies involving the economy, military, trade, diplomacy, the environment, and more. New Oriental Educations founder and Chairman of the Board of Directors during the Class period, defendant Michael Minhong Yu, as a member of the National Peoples Congress, was a delegate at the Two Sessions parliamentary meetings. The New Oriental Education class action lawsuit alleges that, throughout the Class Period, defendants made false and misleading statements and failed to disclose that: (i) New Oriental Educations revenue and operational growth was the result of deceptive marketing tactics and abusive business practices that flouted Chinese regulations and policies and exposed New Oriental Education to an extreme risk that more draconian measures would be imposed on New Oriental Education; (ii) New Oriental Education had engaged in misleading and fraudulent advertising practices, including the provision of false and misleading discount information designed to obfuscate the true cost of New Oriental Educations programs to its customers; (iii) New Oriental Education had falsified teacher qualifications and experience to increase student enrollments; (iv) New Oriental Education had defied prior government warnings against linking school enrollments with the provision of private tutoring services; (v) as a result, New Oriental Education was subject to an extreme undisclosed risk of adverse enforcement actions, regulatory fines and penalties, and the imposition of new rules and regulations adverse to New Oriental Educations business and interests; (vi) the new rules, regulations, and policies to be implemented by the Chinese government following the Two Sessions parliamentary meetings were far more severe than represented to investors by defendants and in fact posed an existential threat to New Oriental Education and its business; and (vii) consequently, defendants positive statements about New Oriental Educations business, operations, and prospects were materially misleading and lacked a reasonable factual basis. As news of the Chinese governments focus during the Two Sessions parliamentary meetings on the after-school tutoring industry spread, the price of New Oriental Education ADSs began to drop from $18.24 when the market closed on March 5, 2021, to $14.50 by April 1, 2021, a nearly 21% decline. Then, on May 12, 2021, news reports revealed that the impending government crackdown would be further reaching and more drastic than previously publicly known. Sources stated that anticipated rules would include measures such as banning on-campus tutoring classes, the provision of tutoring services during weekend hours, and the imposition of industry-wide fee limitations. On this news, the price of New Oriental Education ADSs dropped from $14.28 when the market closed on May 11, 2021, to $11.51 when the market closed on May 13, 2021. Thereafter, on June 1, 2021, Chinese regulators announced that they had fined 15 off-campus training institutions, including New Oriental Education, for illegal activities such as false advertising and fraud. Among the violations were reportedly fabricating teacher qualifications, exaggerating the effects of training, and fabricating user reviews. New Oriental Education was accused of faking the teaching experience of 76 teachers, a stunning 74% of all teachers surveyed. The offending companies were hit with maximum penalties for their illegal business practices, totaling a combined 36.5 million yuan ($5.73 million). Officials stated that the crackdown on the for-profit tutoring industry had grown out of the Two Sessions parliamentary meetings held earlier in the year and followed a deluge of complaints against bad industry actors, including 155,000 complaints and reports for education and training services received by authorities in 2020 and over 47,000 similar complaints and reports received by authorities in the first quarter of 2021. Many of these complaints were against New Oriental Education, including a large number for problems related to difficulties in receiving appropriate refunds from New Oriental Education. In addition to the issues outlined above, New Oriental Education reportedly: (i) provided false pricing information, including by stating that courses were being offered at a 90% discount when in fact the purported regular rate was never offered; (ii) provided fraudulent teacher certifications and other falsified credentials to prospective students; (iii) engaged in false publicity and price fraud; and (iv) failed to honor its contractual commitment to students. On this news, the price of New Oriental Education ADSs dropped approximately 16% over a two-day period. Finally, on July 23, 2021, China unveiled a sweeping overhaul of its education sector, banning companies that teach the school curriculum from making profits, raising capital, or going public. This drastic measure effectively ended any potential growth in the for-profit tutoring sector in China. Two days later, on July 25, 2021, New Oriental Education published an update on the new regulations, which stated that New Oriental Education will follow the spirit of the Opinion and comply with relevant rules and regulations when providing educational services and expects such measures to have material adverse impact on its after-school tutoring services related to academic subjects in Chinas compulsory education system. On this news, the price of New Oriental Education ADSs plummeted by nearly 70%, further damaging investors.
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