MARSHALL, Texas (CN) - The Chinese data security firm NQ Mobile concealed that its main product is "actually spyware," and its market value fell by $500 million on the news, a shareholder claims in a federal class action.
Josh Hsieh sued NQ Mobile, three investment banks that underwrote its initial public offering and 12 company directors.
NQ Mobile, founded in 2005, is a Cayman Islands company with headquarters in Texas and China. It sells security services for smart phones.
The company went public in May 2011, issuing "7.75 million American Depository Receipts ... representing 38.75 million Class A common shares," the complaint states.
Hsieh's lawsuit cites an 81-page report issued by research firm Muddy Waters LLC on Oct. 24, "which began, 'NQ is a massive fraud,'" according to the complaint.
"Muddy Waters uncovered evidence that a majority of NQ's China revenue is fraudulent; its largest customer is actually owned by the company; NQ's market share was overstated several times over; the company's most important product, its 'Antivirus 7.0,' was actually spyware that made customer phones more susceptible to hacking; NQ is surreptitiously gathering personally identifiable information from customer phones without their knowledge or consent and transmitting back to the Peoples' Republic of China; and several acquisitions were actually shell companies," the complaint states.
Hsieh claims that NQ's share price then dropped from $22.98 to $12.09 in one day.
"The company's market capitalization fell from more than $1 billion to approximately $500 million, wiping out approximately half a billion dollars of shareholder value in a single day. Trading was halted," Hsieh says in the complaint.
NQ's directors denied the allegations and held a press conference the day after Muddy Waters' report broke "repeating many of their earlier false statements to investors," Hsieh claims.
It wasn't long before other media outlets came sniffing around.
"On November 3, 2013, Bloomberg News published an article confirming many of Muddy Waters' accusations. Two days later, on November 5, 2013, the company's own lead manager in the IPO, defendant Piper Jaffray, announced it had suspended its rating on the stock. ... Shares plunged further, closing at $9.52," the complaint states.
Hsieh seeks class certification and damages for Securities Exchange Act violations.
He is represented by George McWilliams of Texarkana.
The investment bank defendants are Piper Jaffray & Co. of Minnesota, and New York-based Oppenheimer & Co. Inc. and Canaccord Genuity.
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