Pomerantz Appointed Lead Counsel in LexinFintech Securities Litigation
On November 19, 2020, U.S. District Judge Michael H. Simon of the District of Oregon appointed Pomerantz LLP as Lead Counsel on behalf of Lead Plaintiff Matthew P. Castner in In re LexinFintech Holdings Ltd. Sec. Litig, 20-cv-1562 (D. Or.), a securities litigation being pursued on behalf of a class of defrauded investors concerning allegations that LexinFintech Holdings Ltd. (“LexinFintech” or the “Company”) failed to maintain consistent operational and compliance policies during the COVID-19 pandemic, rendering the offering documents for its initial public offering (“IPO”) invalid. Allegations include that the Company overstated its growth prospects and failed to disclose material adverse information about the size of the Company’s user base, borrowers’ delinquency rates and effectiveness of internal controls.
LexinFintech, a Cayman Islands corporation headquartered in Shenzhen China, is an online consumer finance platform “for educated young professionals in China” that provides “financial technology services, membership benefits, and a point redemption system” through their Fenqile e-commerce platform and Le Card membership platform.
The complaint alleges that, between December 21, 2017 and August 24, 2020, the defendants issued false and misleading statements and failed to disclose that: (i) LexinFintech overstated its growth prospects and metrics; (ii) the Company engaged in undisclosed related party transactions; (iii) following the COVID-19 pandemic, LexinFintech maintained low delinquency rates by providing borrowers in default new funds to make payments; and (iv) as a result, the offering documents and the Company’s public statements were materially false and misleading and failed to state information required to be stated therein.
On August 25, 2020, shortly after markets opened, Grizzly Research (“Grizzly”), an investment research firm, issued a research report on LexinFintech alleging, among other issues, that the Company reported “unfathomably low” delinquency rates by providing borrowers in default new funds to make payments and that LexinFintech engaged in undisclosed related party transactions. The Grizzly report further alleged that a review of LexinFintech’s web traffic called into question the Company’s purported growth.
Specifically, with respect to LexinFintech’s low delinquency rates, the Grizzly report stated that Grizzly “believe[s] [LexinFintech] has artificially deflated its default and delinquency ratio to give the appearance of a more healthy financial position;” that Grizzly “believe[s] . . . [LexinFintech] has been artificially increasing the maturity of the loans upon default through a feature called . . . installment on installment and . . . minimum payment;” that “this is equivalent to when your minimum credit card payment comes due . . . the company gives another extension to your minimum payment and treat[s] it as a new credit loan;” that, “[a]ccording to [LexinFintech] users, [LexinFintech] has recently been extending the maturity of their loans on the second day after they become delinquent;” and that “[t]his feature has been implemented by [LexinFintech] since 2016,” but “was only used on loans that weren’t delinquent,” whereas, “[n]ow, most likely due to effects of COVID-19, the company has deployed this tactic on delinquent loans to generate a seemingly healthy loan portfolio,” whereby “[t]he users don’t have to pay back the amount immediately and the company no longer has to book delinquencies.” The Grizzly report concluded that “the black box is so elaborately set up that even institutional investors and insurance companies are not fully aware,” and that, “[a]s long as the company can solicit more funding from investors the Ponzi scheme keeps rolling.”
On this news, LexinFintech’s ADS price fell $0.47 per share, or 5.52%, to close at $8.04 per share on August 25, 2020. As of the time that the Complaint was filed in September 2020, the price of LexinFintech ADSs continues to trade below the $9.00 Offering price, damaging investors.
Pomerantz’s LexinFintech litigation is led by Managing Partner Jeremy A. Lieberman.