Shareholders in New York 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 initiate a lawsuit in federal court in the Southern District of New York on Aug. 9 through the shareholder rights law firm Johnson Fistel, alleging that Tuya 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 launching an investigation and calling for the lead plaintiff’s attorney to join them by Oct. 11.
The law firm Vincent Wong of East Broadway in Chinatown, New York, also announced on Oct. 3 that a class action lawsuit has been filed suing Tuya Inc., the company’s principals, and the intermediary that underwrote the offering, on behalf of all individuals or entities who purchased Tuya’s American Depositary Shares (ADSs) in or traceable to the company’s IPO in March 2021.
2021 US IPO Raised $946 Million
Headquartered in Eastern China’s Zhejiang Province, Tuya Inc. operates a global IoT cloud platform.At its U.S. IPO event on March 18, 2021 it sold 43.59 million ADSs at a price of $21 per share, totalling $946 million.
Chinese state media at the time touted the event as being the world’s first IoT cloud platform to make an honorary debut on the New York Stock Exchange.
Hagens Berman alleged in its indictment that Tuya’s IPO documents hyperbolized the company’s historical growth, “claiming it was driven by the ‘thriving ecosystem’ of customers, made up of brands, OEMS, industry operators, and system integrators, who generated revenue for Tuya by selling products through e-commerce marketplaces, such as, Amazon.com. The statements allowed Tuya to go public and raise over $946 million in gross proceeds.”
The plaintiff alleges that Tuya’s IPO documents “failed to disclose that: (1) a material portion of Tuya’s China-based customers were engaged in the widespread and systematic manipulation of reviews and product offerings in violation of Amazon.com’s terms of use; (2) prior to the IPO, a consumer investigation and data breach had exposed 13 million records of organized fake review scams linked to over 200,000 Amazon account profiles; and (3) as a result, there was a substantial risk that a material portion of Tuya’s significant customers would be barred from using Amazon.com’s platform, negatively impacting Tuya’s business, revenues, earnings and prospects.”
Fake Reviews on Amazon
To support their claim, plaintiffs cited the famous report by the UK-based consumer insight website Which? (www.which.co.uk), released on April 16, 2019 and titled “Revealed: Amazon plagued with thousands of ‘fake’ five-star reviews.”“Which? found that the top-rated items were dominated by unknown brands with names such as ITSHINY, Vogek, and Aitalk, which in many cases had thousands of unverified reviews—meaning there is no evidence that the reviewer has even bought or used the product,” the report said.
In August 2020, UCLA and the University of Southern California jointly published a study analyzing the market for products with fake reviews, and found that “the vast majority, 84 percent, are located in China.”
In September 2020, Amazon deleted approximately 20,000 product reviews, after a Financial Times investigation uncovered that several little-known Chinese brands were profiting from posting fraudulent reviews.
As a result, the plaintiffs allege that, unbeknownst to investors, a significant portion of Tuya’s Chinese customers engaged in illegal activities to misleadingly promote and sell their products in the e-commerce marketplace, and are therefore at high risk of being banned from using the Amazon platform, negatively impacting Tuya’s business, revenues, earnings, and prospects.
According to the indictment: “Further, on March 1, 2021, more than two weeks before the IPO, a data security organization, Safety Detectives, had recovered a database that exposed 13 million records of organized fake review scams linked to over 200,000 Amazon account profiles, many of which implicated Tuya’s clients.
“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 use. In subsequent weeks, Amazon banned hundreds of Chinese brands across thousands of sellers’ accounts, many of which were clients of Tuya. Amazon stated that these sellers knowingly, repeatedly, and significantly violated Amazon’s seller policies, especially the ones around review abuse.”
Tuya’s Share Price Plummets
On Aug. 19, 2021, Tuya reported its second quarter financial results, providing estimated revenues of $83 million to $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.”As of August 2022, Tuya’s share price had fallen below $2 per share—90 percent below its IPO price. Investors who purchased shares last year suffered huge losses.
The U.S. court has asked all parties in the lawsuit to file status updates by Oct. 30.
Tuya headquarters did not respond to a request for comment from The Epoch Times by press time.
