Lerach Coughlin Stoia Geller Rudman & Robbins LLP announced this week that a class action has been commenced in the United States District Court for the Southern District of New York on behalf of purchasers of KongZhong Corporation (NASDAQ: KONG) American Depositary Shares (ADSs) during the period between July 9, 2004 and August 17, 2004. The complaint charges KongZhong, a mobile services company in China, and certain of its officers and directors with violations of Sections 11, 12 and 15 of the United States Securities Act of 1933.
KongZhong describes itself as "the leading provider of advanced second generation, or 2.5G, wireless interactive entertainment, media and community services, in terms of revenue, to customers of China Mobile Communications Corporation, or China Mobile, which has the largest mobile subscriber base in the world." The complaint alleges that the prospectus filed with the SEC in connection with the initial public offering of KongZhong common stock, which took place at the beginning of July, 2004, was materially false and misleading.
The Prospectus, which forms part of the Registration Statement, became effective on or about July 9, 2004, and 10,000,000 of KongZhong's ADSs (with each ADS representing 40 ordinary shares) were sold to the public, thereby raising approximately $100 million. Of the $100 million raised, approximately $20 million went to certain selling shareholders.
Specifically, the complaint alleges that the Prospectus was materially false and misleading because they failed to disclose and misrepresented the following adverse facts, among others: (a) that in early June 2004 the Company had carried inappropriate content on its interactive voice response (IVR) service, which was in violation of the Company's agreement with China Mobile; (b) that in response to the Company's violation of its agreements with China Mobile, the Company would be subject to sanctions that could materially impact or alter its business going forward; and (c) as a result of the foregoing, the Company's relationship with China Mobile would be negatively impacted.
On August 9, 2004, KongZhong issued a press release announcing its financial results for the second quarter of 2004, the period ending June 30, 2004. The Company reported earnings of $0.19 per ADS.
Then, on August 18, 2004, KongZhong issued a press release announcing that it had been notified by China Mobile of a sanction imposed on the Company. In addition to suspending the Company's new applications for new products, according to the press release, China Mobile also suspended the approval of the Company's applications, if any, to operate in new platforms until June 30, 2005. In response to this announcement, the price of KongZhong ADSs declined to $5.59 per ADS.
