On Wednesday, the Securities and Exchange Commission (SEC) instituted Cease-and-Desist proceedings against Sheng Fu and Ming Xu (Respondents) pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934.
Respondents are present or former officers of Cheetah Mobile, Inc. The SEC Order instituting the proceeding also sets forth an agreed Cease-and-Desist Order imposing a “civil money penalty” on each respondent and imposing certain restrictions on Respondents’ ability to trade in Cheetah Mobile securities going forward. The SEC’s action arose of Respondents’ alleged sales of Cheetah Mobile’s securities while in possession of material non-public information and misrepresenting a “known negative trend” regarding advertising revenues in analyst communications and SEC filings.
The document contains detailed “findings” by the SEC “made pursuant to Respondents Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.”
Respondent Shen Fu “is, and was during the relevant period, CEO of Cheetah Mobile.” Respondent Ming Xu “was President and CTO of Cheetah Mobile during the relevant period.” Respondent “Ming Xu resigned from Cheetah Mobile in June 2018.” Both Respondents are residents of China.
“Cheetah Mobile, incorporated in the Cayman Islands with a principal place of business in Beijing, China, is a mobile internet company.” Cheetah Mobile’s American Depositary Shares are traded on the New York Stock Exchange, and the company is a “foreign private issuer required to file annual reports with the Commission on Form 20-F.”
In 2015 and 2016 China Mobile “earned up to one-third of its revenues by placing within its applications third-party advertisements provided by its largest advertising partner, an advertising division of a major social media platform (the ‘Advertising Partner’).”
During the summer of 2015, the Advertising Partner advised Cheetah Mobile that it was changing its “algorithm that determined fees for ad placements, and that, unless Cheetah Mobile improved the quality of its ad placements, the algorithm could halve the revenues that the Advertising Partner paid to Cheetah Mobile.” By the end of 2015, it was clear that Cheetah Mobile “would not be able to implement a solution that would prevent a drop-off in revenues from the Advertising Partner algorithm change, and Cheetah Mobile’s revenues from the Advertising Partner began to decline.”
The SEC found that in its quarterly conference call in March 2016 and in its 20-F form for the year 2015, Cheetah Mobile failed to disclose this “known negative trend.” Shortly thereafter, “On May 19, 2016, Cheetah Mobile “disclosed its lower-than-expected second quarter 2016 revenue guidance and announced that it did not expect to meet its previously issued revenue and earnings guidance for the full year 2016.” Cheetah Mobile’s stock fell 18%.
Prior to the May 2016 disclosure, the Respondents created a 10b5-1 plan, and through a jointly controlled entity, sold Cheetah Mobile securities, and thereby “avoided losses of $203, 290 [Sheng Fu] and $100,127 [Ming Xu] respectively.”
The Respondents’ undertakings pursuant to the Cease and Desist Order generally mandate the individuals to advise the SEC of their transactions in Cheetah Mobile securities for five years. In addition and most significantly, Respondent Sheng Fu will pay a civil money penalty of $550,580; and Respondent Ming Xu will pay a civil money penalty of $200,254.