Chinese cloud-based content delivery service provider Xunlei is now facing not just one but two class action suits, this for allegedly spreading misleading information to its investors, consequently boosting their stock price.
The lawsuits, Li vs Xunlei and DOOKERAN Etc vs Xunlei, are filed against Xunlei and its executives: CEO Chen Lei, current CFO Eric Zhou, and former CFO Wu Tao. The claim was raised by stock investors who bought in within Oct.10, 2017 to Jan.11, 2018.
According to the filed suit, the misleading information first came when Xunlei announced during that period that it would shift its focus to blockchain technology. Later on, it did launch a blockchain-based token exclusively for its own cloud services. The suit alleges that the initial coin offerings made by the company were in actuality unlawful, a situation which was kept hidden from them through a series of statements constituting falsehoods. Because of this deception which cost them serious investments, the plaintiffs are now seeking relief through the courts.
This development is relevant largely because it is the first time that investors have come together to file a suit going after public companies that made questionable moves pivoting their services into the fast-growing cryptocurrency and blockchain turf. Xunlei is NYE Stock Exchange-listed, and was one of those companies publicly traded who, in 2017, saw a rapid rise in stock price before taking a sharp plunge when they made the transition to blockchain technology.
The Big Pivot
Based on the facts of the case, Xunlei made the first announcement of OneCoin, their own blockchain-based cryptocurrency, on Oct. 10, 2017. OneCoin, otherwise known as Wanke Coin (and later renamed to Lianke or LinkToken) was supposed to be a reward for the company’s cloud users willing to share on the platform their bandwidth considered idle. To become eligible, the users would need to purchase OneThing Cloud from the company, a hardware that will let them share their idle bandwidth and cloud storage. In their earnings release for November, the company has reiterated their new blockchain pivot strategy.
In a statement, Li was quoted as saying, “Xunlei is transforming itself from a traditional internet service provider of membership subscription to a growth-oriented company developing innovative cloud computing products and exploring emerging blockchain technology.”
Subsequently, the company enjoyed a stock price surge from about $4 per share to as much as $25 in that little time between October and November. This surge, however, was not sustained and instead headed a sharp south, which prompted the investors take legal action.
What made Xunlei’s move suspicious was the timing of it all—the pivot occurred a mere month after the Chinese central bank set down a ban on initial coin offerings in the domestic front. CEO Chen, had given public reassurances that the Wanke token is not viable for trading, but instead takes on a purely utilitarian purpose. Given the nature of the token, it follows therefore that they do not constitute an initial coin offering, which supposedly proves they are abiding by the Chinese law.
For the plaintiffs, however, this is but another falsehood given by the company because Wanke Coin has all the characteristics of being an ICO, although disguised under a supposed business strategy redirection or pivot. Their belief is further strengthened by the fact that the company did require users to buy the OneThing Cloud hardware before they can receive token awards. Even more suspect was how the company bypassed the ICO regulation through an “initial miner offering,” essentially disguising the true intent of the new business model. China’s National Internet Finance Association (NIFA) specifically called out Xunlei on this in an announcement on Jan.11.
“In the case of Lianke issued by Xunlei, for example, the issuing company in effect substitutes Lianke for the duty to pay back project contributors with legal tender, making it essentially a financing activity and a form of disguised ICO. In addition, with frequent promotional activities and publishing of trading tutorials, Xunlei has lured many citizens without sound discernment into IMO activities,” noted NIFA.
While the NIFA is not a regulatory agency, and is merely a self-regulatory association, its observations do bear weight since it was formed by the People’s Bank of China and is duly recognized and authorized by the state council. The slump of Xunlei’s stock price, tumbling from $22.9 to $16.27 since its opening on Jan. 12, was therefore due to its own false statements, which also drew in the interest of regulators to look into their unlawful activity.