On July 31, plaintiff Nina Wang filed a putative class action on behalf of purchasers of Cheetah Mobile securities. The two-count complaint contended that the Beijing-based mobile internet company and several of its executives violated U.S. securities laws by failing to disclose key facts about business viability after it experienced a substantial stock drop. The proposed class period includes individuals and entities who purchased the securities between March 25, 2019, and February 20, 2020.
Cheetah Mobile offers “mobile utility products,” popular games, and a live streaming product. Advertisers that market with Cheetah Mobile have “direct access to highly targeted mobile users and global promotional channels.”
On February 21, prior to the market open, Cheetah Mobile divulged that its Google Play Store, Google AdMob, and Google AdManager accounts had been disabled because some of its apps were non-compliant with Google policies, “resulting in invalid traffic.” According to the complaint, Cheetah Mobile share price then fell nearly 17 percent, dropping to $2.99 from $3.60 during atypically large trading volume.
The plaintiff asserted that the defendants failed to disclose crucial information to investors, specifically, “that (i) certain of Cheetah Mobile’s apps were not compliant with the terms of its agreements with Google; (ii) as a result, there was a reasonable likelihood that Google would terminate its advertising contracts with the Company; (iii) as a result of the foregoing, the Company’s ability to attract new users would be adversely impacted; (iv) as a result, the Company’s revenue was reasonably likely to decline; and (v) as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”
The plaintiff also argued that Cheetah Mobile’s warnings to investors were inadequate, pointing to the company’s annual 20-F Form filed with the Securities Exchange Commission for calendar year 2018. Describing its relationship with Google, Cheetah Mobile wrote in its 20-F Form that, “[b]ecause a limited number of customers contribute to a significant portion of our revenues, our revenues and results of operations could be materially and adversely affected if we were to lose a significant customer or a significant portion of its business.”
The plaintiff averred that the foregoing disclaimer was merely a “generic ‘catch-all,’” not tailored to actual risks Cheetah Mobile knew about. In turn, the plaintiff accused the company and its executives of securities fraud under Section 10(b) of the Exchange Act. This anti-fraud provision creates liability for omissions or misstatements of “material facts,” in other words, information that investors would want to know about in making buy or sell decisions.
The complaint contended that Cheetah Mobile and its executives deceived the investing public and caused its stock purchasers to overpay for the security. By failing to warn investors about the risks that the company’s Google accounts could be frozen, it “conceal[ed] adverse material information about Cheetah Mobile’s financial well-being and prospects,” according to the plaintiff.
The second cause of actions accused the executive defendants of violating Section 20(a) of the Exchange Act, which holds individual actors accountable for securities fraud. The complaint named the company’s CEO and a past and current CFO as the defendants.
The plaintiff claimed that “by virtue of their high-level positions and their ownership and contractual rights, participation in, and/or awareness of the Company’s operations and intimate knowledge of the false financial statements… disseminated to the investing public… ” the executives helped perpetuate the fraud. The plaintiff sought class certification, compensatory damages, and litigation costs and fees.
The plaintiff is represented by Pomerantz LLP and Bronstein, Gewirtz & Grossman, LLC.