Momo Responds to Allegations of Short-seller; Stock Rebounds 4%

After the short-seller report and Momo's decline of 5 percent Wednesday, Momo issued a statement today saying the allegations were erroneous and misleading.

Anna Vodopyanova
    Jun 28, 2018 12:20 PM  PT
Momo Responds to Allegations of Short-seller; Stock Rebounds 4%
author: Anna Vodopyanova   

The stock of Momo Inc. (Nasdaq: MOMO) rebounded more than 4 percent in trading today after the company, a mobile social networking app, said the allegations of the short-selling firm Spruce Point contained unsupported claims and "misleading conclusions."

Spruce Point Capital Management LLC released a 70-page research report Wednesday titled "Mo(mo) Money Mo(mo) Problems" on the Beijing-based company, claiming investments into Momo carried "serious risks." The short-teller said that after months of doing "primary forensic research" into Momo, it set its price target of the company at $23 per share to $32 per share. 

In a statement today, Momo said the short seller's report contained "numerous errors, unsubstantiated statements, and misleading conclusions and interpretations regarding events relating to the company." In trading Thursday, its shares recovered 4 percent from a drop of 5 percent Wednesday. The company's shares were trading at $44.64 per American depositary share Thursday afternoon in New York.

Among the problems listed by Spruce Point, the firm said that it found that in November, the State Administration for Industry and Commerce (SAIC) in China charged Beijing Momo with "Filing Corporate Information With the Intent To Conceal The Truth and Falsify." The charge was followed by the resignation of three directors from the company that same month. Momo then submitted corrected filings, a review of which led the short-seller to conclude that the company could have inflated its profits and reported an incorrect timing of a business transfer.

In addition, the report said that Momo's variable interest entity (VIE), Beijing Momo, has a number of subsidiaries, specifically, nine first-level and 114 second-level entities, which the company has not disclosed. Spruce Point alleged that those undisclosed businesses allowed the company "to extract benefits for themselves or hide the true nature of the operations."

The short-seller also alleged that Momo had ties to a popular illegal gambling platform, Pokermaster, that was shut down in February. According to the report, the company invested in, and possibly operated, the platform, but did not disclose revenue or earnings from it.

Spruce Point also said that Momo filed certain documents by mail with the intent to extend the public notification time. Rather than electronically filling the traditional disclosures when insiders sold stock, the report said that Momo had filed "numerous" Forms 144 by "snail" mail. These forms showed that the company's insiders have sold $2 billion of its stock since its initial public offering in December 2014.


(Source: Spruce Point Capital Twitter)

Momo replied to these and other allegations from Spruce Point by saying that it "remains committed to maintaining high standards of corporate governance, as well as transparent and timely disclosure in compliance with the applicable rules and regulations of the United States Securities and Exchange Commission and the NASDAQ Global Select Market."


(Source: Spruce Point Capital Twitter)

In a Twitter post Thursday, Spruce Point countered Momo's statement: "When the facts speak for themselves, the only thing a company can do is issue a blanket response that dismisses none of our concerns in any detail." 


The stock of Momo fell more than 5 percent to $42.86 per share Wednesday after short-seller Spruce Point released its report.

Momo recovered Thursday to $44.64 per share, up 4 percent in mid-afternoon trading.

(Source: Thomson Reuters Eikon)