A Cayman-registered Chinese delivery service that saw the largest initial public offering in the United States last year is accused in class-action lawsuits of misleading investors in connection with the fundraising.
Investors have sued ZTO Express and its underwriters in at least two class-action suits alleging the company inflated its profit margins in the offering documents for the IPO by omitting less profitable “network partners” from its financial statements.
The plaintiffs in the cases further claim that the underwriting investment banks that sold ZTO Express shares during the offering should have uncovered the false accounting and the failure to report material information.
ZTO’s American depositary shares currently trade at around $13. The IPO price was $19.50.
The two class-action suits, filed in May by the city of Birmingham’s pension fund in Alabama and in mid-August by law firm Bottini & Bottini in the District Court for the Southern District of New York, seek to recover damages under U.S. federal securities laws. Other law firms have announced they intend to file similar suits.
In its registration statement, Shanghai-based ZTO explained that it uses a partner network to “provide pickup and last-mile delivery services, while [the company controls] the mission-critical line-haul transportation and sorting network within the express delivery service value chain.”
The plaintiffs claim that ZTO, which gets most of its delivery business from Chinese e-commerce firm Alibaba, had issued “untrue statements” and omitted “crucial realities” in its registration statement. They also said ZTO inflated profit margins by keeping certain low-margin segments of its business out of its financial statements.
“ZTO used a system of ‘network partners’ to handle lower-margin pickup and delivery services, while maintaining ownership of core hub operations. By keeping the ‘network partners’ businesses off its own books, the company was able to exaggerate its profit margins to investors,” they said.
In its pre-IPO filing ZTO claimed: “We have achieved superior profitability along with our rapid growth. Our operating margin, which is the ratio of our income from operations to revenues, in 2015 was 25.1 percent, which was one of the highest among the major publicly listed logistics companies globally.”
The plaintiffs said they relied on this and other statements in the offering documents, only to suffer a material loss from the subsequent share price drop.
ZTO rejects the allegations and stated it would vigorously defend itself.
The underwriters who assisted the Chinese company in the public offering are also named as defendants in the suits. The plaintiffs argue that lead underwriters Morgan Stanley and Goldman Sachs together with China Renaissance Securities, Credit Suisse, Citigroup and JP Morgan Chase should have conducted reasonable due diligence on the business and operations of ZTO.
Because of their inside access to information and regular communication with the logistics company’s management “the underwriter defendants were negligent in not knowing of the company’s undisclosed existing problems and plans and the materially untrue statements and omissions contained in the registration statement,” the Alabama pension fund said in its suit.
Lawsuits for allegedly misleading investors are not uncommon following lackluster IPOs. Facebook and Snapchat faced lawsuits when their share price headed in the wrong direction after an offering, and earlier this year Blue Apron was sued for failing to recognize the risk that Amazon would enter its industry with the acquisition of Whole Foods, a move that led Blue Apron to cut its market valuation by half.