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Law360 (April 27, 2020, 5:06 PM EDT ) A Chinese co-living company operating under the Danke and Dream Apartment brands was sued in New York federal court for allegedly misleading investors about its risks, including the threat it faced from the novel coronavirus, when the company launched its initial public offering earlier this year.
Investor Katherine Wandel launched a proposed class action Friday accusing Phoenix Tree Holdings Ltd., its executives and underwriters of misleading her and others about the risks the company faced from the deadly COVID-19 pandemic. Wandel also alleges Phoenix Tree failed to mention disputes from tenants accusing the company of enrolling them in loans without their knowledge, using the proceeds to run its business and having customers pay down the balance.
Phoenix Tree owns a Beijing-based online co-living platform that links property owners with mostly young renters willing to share living space in order to save money.
The suit targets Phoenix Tree, CEO Jing Gao and other executives, as well as its underwriters — including Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC — for the company's roughly $130 million IPO in January.
"Because the offering materials did not disclose anything about the coronavirus, much less the impact it was then having or could have on the company, [American depositary shares] purchasers had no opportunity to consider how the worsening situation might impact the company, including the company's relationship with its renters," according to the suit.
While Phoenix Tree mentioned the risks the company could face from diseases such as Ebola, SARS or H1N1, its disclosures to investors, declared effective Jan. 16, didn't include discussion of the novel coronavirus, which the lawsuit alleges was "ravaging China" and in particular Wuhan, a significant hub for the company.
"And complications associated with the coronavirus were adversely affecting Phoenix's business, as tenants contracted the virus, lost employment, or otherwise experienced difficulty in honoring their leases and paying their rent," according to the suit.
The World Health Organization said it first learned on Dec. 31 of a virus in Wuhan that would later be identified as the novel coronavirus and that has now spread to millions of people around the world.
On March 25, Phoenix Tree announced its financial results for the end of 2019 and said it expected COVID-19 to affect its business, which hurt its price on the New York Stock Exchange, according to the lawsuit. Details on the stock-price fall were not mentioned in the lawsuit.
In its Jan. 17 IPO debut, Phoenix Tree began trading at $13.50 per share, down from an original plan to sell shares between $14.50 and $16.50 each.
The company's share price has been on a downward trajectory since, experiencing more serious dips in price in February and then early to mid-March, which roughly matches the performance of the rest of the New York Stock Exchange since COVID-19 began spreading worldwide.
On March 25, Phoenix Tree closed at $7.65 per share, the same price where it ended trading the day before. On March 26, the company's stock closed slightly up at $7.91 per share and by the end of the week was trading at $9. On April 6, the company's share price fell to its lowest point of $5.85, before experiencing a modest recovery.
Founded in 2015, Phoenix is a Cayman Islands company operating in China and opened its first units in Beijing, according to its website. In October 2017, the company opened in its sixth city in the country, Wuhan, and is now in 13 markets, it said.
Wandel is seeking to be appointed lead plaintiff for the proposed class action and for Robbins Geller Rudman & Dowd LLP to be appointed lead and class counsel.
The lawsuit is seeking damages, prejudgment interest, and attorney fees and costs.
Counsel for the investor and a representative for Phoenix Tree did not immediately respond to requests for comment Monday.
Wandel is represented by Samuel H. Rudman and Joseph Russello of Robbins Geller Rudman & Dowd LLP and Ralph M. Stone of Johnson Fistel LLP.
Counsel information for the defendants was not immediately available.
The case is Wandel v. Gao et al., case number 1:20-cv-03259, in the U.S. District Court for the Southern District of New York.
--Additional reporting by Tom Zanki. Editing by Janice Carter Brown.
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