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NQ Mobile Sold Assets to Insider, Claims Securities Class Action

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This securities class action stems from a sale of assets by NQ Mobile, purportedly to Tongfang Investment Fund. However, the complaint claims that the assets were actually bought by an NQ Mobile insider and that the terms of the deal have ramifications for NQ that were not disclosed to the public, in violation of the Securities Exchange Act of 1934.

The class for this action is all persons and entities who bought publicly-traded NQ Mobile securities between March 30, 2017 and February 6, 2018.

NQ Mobile offers Internet services in the People’s Republic of China, but it is incorporated in the Cayman Islands.

On March 30, 2017, NQ announced that it had entered into an agreement with Tongfang in which it would sell (a) NQ’s interests in FL Mobile Jiutian Technology, representing 63% of FL Mobile, and (b) NQ’s interests in Beijing Showself Technology, representing 65% of Beijing Showself. NQ said that Tongfang was putting down RMB 150 million towards the sale, and that NQ’s COO and Chairman of the Board, Wenyong Shi, had equity interests in FL Mobile.

Less than a month later, on April 26, the company announced that, in 2016, Shi had acquired 22% interest in FL Mobile, but in November of that year reversed the purchase of 5.66%, leaving him holding 16.34%. It also announced that NQ had transferred its equity interests in FL Mobile and Showself to Tongfang and was in the process of collecting the additional purchase price.

In May, the company announced that Tongfang needed additional time to pay. In August, it announced that Tongfang had made a payment of RMB 800 million, and in November, it announced an additional payment of RMB 400 million. In December, the company announced that it had received the final payments, including RMB 200 million in cash and a “senior note” of RMB 1,770 million that paid interest of 8% and could be extended for another year.

According to the complaint, however, NQ failed to disclose several things:

  • The transaction with Tongfang included related-party transactions.
  • Because of this, NQ had agreed to payment that included a note with a high risk of default.
  • Shi had an undisclosed interest in the transaction.

On February 6, 2018, a report was published on Seeking Alpha entitled, “NQ Mobile: Undisclosed Transfer of Subsidiaries to Chairman Introduces Significant Risks…” The report contained detailed speculations about the transaction, suggesting that Tongfang was owned by NQ insiders, that the assets had been transferred not to Tongfang but to Shi, that Shi now owned nearly 80% of FL Mobile, and that the agreement allowed Shi to push off payment to nearly three years after the shares had been transferred to him.

In support of its opinions, the article asked, “[W]hat are the chances an unrelated party would pay hundreds of millions of dollars to acquire a business only to agree to transfer ownership to the seller’s chairman?”

At the news, NQ’s stock fell by over 44%.

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