Chinese company Tuya faces class action lawsuit in New York over allegedly misleading investors

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New York shareholders have filed a class action lawsuit against Tuya Inc., a Chinese AI and Internet of Things (IoT) platform.

Lian Xiaomeng, a Chinese national, was the first to file a lawsuit in federal court in the Southern District of New York on August 9 through shareholder rights law firm Johnson Fistel, alleging that Tuya had violated federal securities laws in its March 2021 initial public offering (IPO).

Four other law firms – Shareholders Foundation, Levi & Korsinsky, Hagens Berman and Robbins Geller Rudman & Dowd – followed suit, announcing they were opening an investigation and asking counsel for the lead plaintiff to join them in here on October 11.

The law firm Vincent Wong of East Broadway in Chinatown, New York, also announced on October 3 that a class action lawsuit had been filed against Tuya Inc., the company’s officers and the intermediary who underwrote the offer, on behalf of all individuals. or entities that purchased Tuya’s American Depository Shares (ADS) during the company’s March 2021 IPO or are traceable to that date.

2021 U.S. IPO raised $946 million

Based in Zhejiang province in eastern China, Tuya Inc. operates a global IoT cloud platform.

During its IPO in the United States on March 18, 2021, it sold 43.59 million ADS at a price of $21 per share, for a total of $946 million.

Chinese state media at the time touted the event as the world’s first IoT cloud platform to make its honorary debut on the New York Stock Exchange.

Hagens Berman alleged in his indictment that Tuya’s IPO documents hyperbolized the company’s historic growth, “saying it was driven by the ‘thriving ecosystem’ of customers, made up of brands, from OEMs, industrial operators, and system integrators, who have generated revenue for Tuya by selling products through e-commerce marketplaces, such as Amazon.com. The statements allowed Tuya to go public and grossing over $946 million in gross proceeds.

Plaintiff alleges that Tuya’s IPO documents “did not disclose that: (1) a significant portion of Tuya’s China-based customers were engaged in the widespread and systematic manipulation of product reviews and offerings in violation of Amazon.com’s Terms of Service; (2) prior to the IPO, a consumer investigation and data breach revealed 13 million records of organized fake scams linked to more than 200,000 profiles of Amazon accounts; and (3) as a result, there was a substantial risk that a significant portion of Tuya’s valued customers would not be permitted to use Amazon.com’s platform, which would negatively impact Tuya’s business, revenue, profit and outlook.

Fake reviews on Amazon

In support of their claim, the plaintiffs cited the well-known report by UK-based consumer information website Which? (www.qui.co.uk)published on April 16, 2019 and titled “Revealed: Amazon plagued by thousands of ‘fake’ five-star reviews”.

“Who? found that the top rated items were dominated by unknown brands with names like ITSHINY, Vogek and Aitalk, which in many cases had thousands of unverified reviews, meaning it doesn’t there is no evidence that the reviewer even purchased or used the product,” the report said.

In August 2020, UCLA and the University of Southern California jointly released a study analyzing the market for products with fake reviews and found that “the vast majority, 84%, are located in China”.

In September 2020, Amazon removed around 20,000 product reviews, after a Financial Times investigation found that several little-known Chinese brands were profiting from posting fraudulent reviews.

Accordingly, the plaintiffs allege that, unbeknownst to investors, a significant portion of Tuya’s Chinese customers have engaged in illegal activities to deceptively promote and sell their products in the e-commerce market, and therefore face a high risk of being banned from using the Amazon platform, negatively impacting Tuya’s business, revenue, profit and prospects.

According to the indictment: “Furthermore, on March 1, 2021, more than two weeks before the IPO, a data security organization, Safety Detectives, recovered a database that exposed 13 million records of organized fake scams linked to more than 200,000 Amazon profiles, many of which involved Tuya customers.

“Then on July 9, 2021, it was reported that Amazon had “closed 340 online stores of one of its largest Chinese retailers in the first half of this year,” as it cracked down on paid reviews. and other violations of Amazon’s Terms of Service. Over the next few weeks, Amazon banned hundreds of Chinese brands on thousands of seller accounts, many of whom were Tuya customers. Amazon said these Sellers had knowingly, repeatedly and materially violated Amazon’s Seller Policies, particularly those regarding review abuse.

Tuya’s share price plummets

On August 19, 2021, Tuya announced its second quarter financial results, providing estimated revenue of $83–86 million, in addition to its projects, well below the previous estimate of $110 million. The company blamed the poor performance on “a number of challenges” affecting its customers, “including Amazon’s strict enforcement of seller policies, rising raw material prices, and shortages of semiconductor components.”

By August 2022, Tuya’s share price had fallen below $2 per share, or 90% below its IPO price. Investors who bought stocks last year suffered huge losses.

The US court has asked all parties to the lawsuit to file status updates by October 30.

Tuya Headquarters did not respond to an Epoch Times request for comment before press time.

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