Investors accuse Hong Kong company of hiding costs of Chinese regulatory crackdown

MANHATTAN (CN) — Investors sued Hong Kong-based digital brokerage company after they say it downplayed the effects of its failure to comply with Chinese securities regulations — including a possible $270 million penalty — causing the company’s stock to plunge.

In the 41-page class action, filed June 26 in federal court in Manhattan, investors say Futu Holdings Limited was targeted by Chinese regulators over illegally offering cross-border securities without regulatory approval, and then continued to do business without acknowledging the extent of the trouble it faced.

After a May 22 article detailed the regulatory penalty of about $270 million confronting Futu from the Chinese crackdown, the company’s stock dropped nearly 28% in a single day. Days later, Futu’s stock fell again after the company disclosed a drop in net income due to the proposed penalties.

Futu failed to tell investors it was likely to face such regulatory penalties over its apparent noncompliance, and as a result overstated the company’s financial results, according to the investors.

The underlying investigation was officially announced by the China Securities Regulatory Commission in December 2022, accusing Futu of violating cross-border regulations between Hong Kong and mainland China.

Futu has acknowledged the CSRC investigation in multiple filings and various press releases, but the investors say the company was never fully honest about the fallout in its communications with stockholders.

“Defendants’ positive statements about the company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis,” the investors write in the complaint.

They define the class as investors in Futu between May 24, 2023, and May 27, 2026.

The company pulled its Futubull app from online stores in China as of May 2023 as part of its attempt to comply with the regulations.

The company’s stock has slightly recovered since its initial plunge on May 22 to $89.76 per share from $123.86; on Monday it traded for roughly $96.

An email to Futu’s investor relations team seeking comment on the class action and the underlying CSRC investigation was not immediately returned.

Follow @NickRummell