What should investors think of a company that holds an initial public offering, projects astronomical growth, then admits it lacks even personnel who are skilled in proper reporting? The complaint for this class action alleges that Longfin Corporation stock rose and plunged in a matter of months, based on false impressions of the corporation provided or sustained by its management, in violation of the Securities Exchange Act of 1934.
The class for this action is all persons and entities who acquired Longfin common stock between December 15, 2017 and April 2, 2018 and were damaged thereby.
Longfin serves financial businesses and trading platforms, offering trade and physical commodities products to companies in the Americas and Africa. Just before the beginning of the class period, on December 13, 2017, it held a Reg A+ initial public offering (IPO) on NASDAQ.
The company was beginning to use blockchain technology and cryptocurrencies for global trade financing for small and medium-sized businesses. On December 15, it announced it was acquiring Ziddu.com, which uses blockchain technology for global micro-lending. In response, Longfin’s stock rose by over $5 a share, to $72.38. The acquisition attracted the attention of investors and news outlets.
In a press release a little over a month later, on January 23, 2018, the company’s CEO said that securing funding for the acquisition would “enhance the visibility and revenue growth of the company in a rapid way. We are confident in our goal of reaching a 250% revenue growth rate organically…”
On March 16, Russell added Longfin to its Russell 2000 Index and Russell 3000 Index, as part of a quarterly addition of companies with recent IPOs. At this, the company’s stock price rose again to $64.50.
However, the complaint claims that the company did not meet Russell’s criteria for inclusion. Rather than correct the mistake, the complaint says, the company used it to claim that investors had confidence in the company.
Ten days later, on March 26, Citron Research called Longfin a “pure stock scheme” and said its “[f]ilings and press releases are riddled with inaccuracies and fraud.”
The same day, Russell removed Longfin from its indices. Longfin’s stock closed at $34.68 on March 28.
To make matters worse, Longfin had promised to file its Form 10-K annual report by March 30, but failed to do so. On April 2, with the report still not filed, the company’s stock fell to $14.31.
After the close of trading, Longfin filed its annual report. As quoted in the complaint, it stated in part, “We have identified several material weaknesses in our internal control over financial reporting.” The section detailed problems, such as that “the company lacks qualified personnel who fully understand GAAP reporting requirements, possess appropriate skills … or have proficiency in the SEC reporting environment.” It also revealed that the Securities and Exchange Commission (SEC) was conducting an investigation of the company.