Near the end of August, a securities class action lawsuit was brought against the China-based peer-to-peer lending company Yirendai Ltd., and some of its officers.
The basis for the class action suit, which was filed in U.S. District Court in the Central District of California, alleged that the company and some of its executives intentionally misled investors and failed to disclose important information about its business, operations and prospects. The suit has a class period between May 11 and Aug. 24 of this year.
A closer look at the situation
Among the false or misleading claims the company and certain officers allegedly made were those that led investors to believe fraud on customer loan applications was not on the rise while China was cracking down on the peer-to-peer lending market as a whole. That then could negatively impact the company’s chances to do business overall. Finally, the suit alleges that because of that closer scrutiny by the Chinese government and the company’s failure to disclose the impact it might have, other statements it made about its prospects were misleading or outright false as well.
Much of this issue was highlighted in a Bloomberg article released just days before the class action was filed. It highlighted that while Yirendai’s stock had surged from February through mid-August, disclosure of the Chinese attempts to rein in fraud in its peer-to-peer lending industry – which had become rampant – led to a solid drop in the company’s stock price more recently. One investment firm believes that there was a brief and undisclosed period of employee stock purchasing which led to some of the increase in sales prices, but the company denies that charge, and also says Yirendai believes China’s closer regulation of the P2P industry won’t adversely affect its business.
Why is China cracking down?
The reason for more regulation in the Chinese peer-to-peer lending sector is that about 1,000 companies in that industry have shuttered in the past year alone, the Bloomberg report said. One of them was even involved in the largest Ponzi scheme ever seen in that country. However, while Yirendai is a legal company, there nonetheless remains major concern over its vulnerability to tightened regulation.
Experts say that there are basically levels to which Yirendai stock cannot sink because peer-to-peer lending is so in-demand in China. However, some Wall Street experts also believe that the company is too dependent upon writing loans with a high chance of defaulting to have seen the surge continue.
How did the price move?
Less than a week before the Bloomberg report, Yirendai’s stock price sat at an all-time high of $37.50, according to Google Finance. Now, only about two weeks later, it sits at less than $27, having slumped as low as $24.50 immediately following the release of the report. However, it’s worth noting that even current levels are well above where the stock was at the start of the year, when it was less than $9.