NEW YORK, March 31, 2021 /PRNewswire/ -- Roche Freedman LLP, a national shareholder rights litigation firm, represents Lead Plaintiff James Pappas in the federal securities class action, In re Qutoutiao, Inc. Securities Litigation, Case No. 1:20-cv-06707 (S.D.N.Y.).
Investors who purchased American Depository Shares ("ADSs") of Qutoutiao, Inc. ("QTT") in its September 2018 initial public offering ("IPO") or April 2019 secondary public offering ("SPO") are encouraged to contact the firm before May 10, 2021.
Mr. Pappas filed a Consolidated Amended Class Action Complaint for violations of the federal securities laws in this case on behalf of anyone who (a) purchased or otherwise acquired QTT ADSs pursuant or traceable to its September 2018 IPO; (b) purchased or otherwise acquired QTT ADSs pursuant or traceable its April 2019 SPO; and/or (c) purchased or otherwise acquired QTT securities between September 14, 2018 and December 16, 2020, both dates inclusive (the "Class Period").
QTT offers a mobile application called Qutoutiao, meaning "fun headlines" in Chinese, that provides a customized feed to its users of aggregated articles and short videos from professional media and freelancers. On September 14, 2018, QTT issued its IPO and sold 13.8 million ADSs at a price of $7.00 per share. Then on April 5, 2019, QTT issued its SPO and sold 3.3 million ADSs at $10 per share.
The class action alleges that Defendants violated federal securities laws by issuing materially false and misleading information in QTT's Offering Documents and in public statements during the Class Period. Specifically, the Amended Complaint alleges that Defendants made false and misleading statements that: (i) mischaracterized QTT's targeting of users in Tier-3 and Tier-4 cities as due to their having more time and disposable income to spend on the internet when in fact, advertisers wanted to run non-compliant ads in those cities because regulators were more lenient and users were less aware of their rights in those cities; (ii) inaccurately described the benefits of, and reasons for, replacing QTT's third-party advertising agent, Baidu, with Dianguan by not disclosing that the change allowed QTT to avoid the oversight Baidu had been providing which had prevented it from selling more non-compliant ads; (iii) misleadingly touted QTT's advertising revenue without disclosing that a significant number of ads whose claims could not be substantiated and thus were considered false advertisements under applicable regulations or provided links to illegal online gambling platforms; (iv) misleadingly touted QTT's 2017 and 2018 revenue without disclosing that the aggregate revenue of its subsidiaries reporting in China was at least RMB 187.6 million and RMB 620 million less, respectively; (v) negligently promoted QTT's ability to monetize user traffic without disclosing that such monetization required it to set up separate teams with different processes and procedures for qualified versus unqualified advertisers in order to sell non-compliant ads; and (vi) failed to adequately warn investors that certain "Risk Factors" listed in the Offering Documents had already materialized at the time of the Offerings as QTT was violating the applicable advertising laws and regulations by running non-compliant ads so QTT would inevitably face increasing regulatory scrutiny, reputational harm and decreased revenue when the truth became known.
The truth was partially revealed on December 10, 2019 through a report published by Wolfpack Research entitled "QTT: Fake Revenue, Non-Existent Cash, Undisclosed Related Parties." The Wolfpack Report alleged, among other things, that (1) QTT's "revenue is generated solely by the accounting department" so only RMB 798 million of its RMB 3.02 billion reported revenue was actual revenue and (2) QTT "exists to enrich its Founder and CEO, Eric Tan, and promote his VC fund's other ventures by creating its own in-house 'advertising agent' in order to direct significant amounts of ad traffic to undisclosed related parties owned by Tan" and remove restrictions that had been preventing QTT from doing so, thereby "perpetrat[ing] the unmitigated ad fraud that [Wolfpack] observed in [its] sample." On this news, QTT's share price fell 4% to close at $2.86 per share on December 11, 2019, on heavy trading volume.
Then on July 15, 2020, the truth about QTT's revenue was further revealed when China's state-controlled broadcaster, CCTV, aired its annual show documenting the use of improper ads on QTT's platform (the "CCTV Exposé"). The CCTV Exposé resulted in the temporary suspension of the QTT App from Chinese app stores. On these revelations, the price of QTT's ADSs fell more than 24%. Further, the CCTV Exposé forced QTT to finally come clean and enact remedial measures to halt its illegal practices.
As a result, on December 16, 2020, QTT had to report that its revenue for the third quarter of 2020 had plummeted, dropping 19.7% year-over-year with a remarkable 23.1% drop in advertising revenue. The year-over-year growth justifying investors' interest was gone, replaced with a revenue decline. As QTT conceded, this significant revenue drop, which caused the ADS price to fall by another 24%, was due to the "remedial measures undertaken by [QTT] in response to the report by [CCTV] on certain advertisements." Simply put, QTT had been caught with its hand in the cookie jar. And the stark drop in revenue following QTT's corrective actions unequivocally confirms that—contrary to its Offering Documents and other Class Period statements—the use of nonconforming advertisements had been central to QTT's plan for revenue growth. Defendants' false and material misstatements caused a significant decline in the value of QTT's securities and resulted in millions of dollars in losses to investors.
Roche Freedman LLP is actively investigating the wrongdoings alleged in the Amended Complaint. If you believe you have suffered damages as a result of Defendants violations of the federal securities laws or have further inquiries regarding this matter, please contact Vel Freedman ([email protected]) at (305) 306-9211, Ivy T. Ngo ([email protected]) at (646) 876-3568, or Constantine Economides ([email protected]) at (305) 851-5997.