A class action lawsuit has been filed by against Chinese data center operator Vnet, alleging security fraud.
US law firm Berger Montague is taking action on behalf of investors who held Vnet stock between April 8, 2022 and February 15, 2023. It says the company and its co-founder Josh Sheng Chen failed to disclose information about financial difficulties it was experiencing, which ultimately led to the company’s shares being devalued.
Vnet, formerly known as 21Vianet, has more than 50 data centers in more than 30 cities across China, totaling around 475MW.
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The lawsuit alleges that, in August 2021, Vnet co-founder Sheng Chen and his companies entered into a $50.25 million margin loan facility with lender Bold Ally, pledging all of his shares in GenTao Capital and other companies as collateral. At the time, Sheng Chen, GenTao, and their affiliates owned approximately 78.52 million Vnet shares, the lawsuit said.
On February 13, 2023, before the market opened, Bold Ally announced that Sheng Chen and GenTao has defaulted on the loan, and that it would exercise its rights under the agreement to buy 48,515,634 Class A ordinary shares and 27,757,992 Class B ordinary shares of Vnet.
On this news, Vnet’s shares fell $0.20, or 3.2 percent, and the price continued to decline by $1.09, or 17.8 percent, over the next 24 hours.
Then, on February 15, 2023, Vnet disclosed that its board of directors had authorized the issuance of up to 555,000 newly created Class D ordinary shares to Sheng Chen, and that these shares would be granted a 500-to-1 vote per share power. Vnet stated this measure was required in order to “protect the [c]ompany’s interests and continued stability.” This led to another fall in the company’s share price.
Berger Montague’s complaint alleges that the defendants failed to disclose to investors that GenTao was experiencing financial difficulties and was at risk of defaulting on the loan agreement. As a result, there was a substantial likelihood that Bold Ally would acquire Sheng Chen’s significant ownership stake in Vnet. It also claims the company withheld its plan to issue new shares to Sheng Chen, thus diluting investors’ interest in the company.
Any one Vnet shareholder who wishes to be part of the action has until February 26 to contact Berger Montague.
DCD has contacted Vnet for comment on the allegations. The company’s last financial results, released in November, saw it post RMB1.89 billion ($258.6m) for the third quarter of 2023, up 4 percent year-on-year. At the time, the business also revealed it had received a $299 million equity investment from Success Flow International Investment Limited and Choice Faith Group Holdings Limited
