Underwriters face class action suit over fraudulent IPO of Fadu
Korea Investment & Securities headquarters in Seoul / Courtesy of Korea Investment & Securities
Korea Investment & Securities and NH Investment & Securities are to be mired in a class action lawsuit due to the controversial IPO of Fadu, a fabless semiconductor unicorn company that went public in early August.
According to Hannuri Law Firm, which will represent the shareholders of Fadu in the IPO lawsuit, the case will be brought against three defendants — Fadu, Korea Investment and NH Investment. The two securities firms are the main underwriters of the public offering procedures.
The case will be Korea's first collective lawsuit related to IPO procedures that will be brought against a company that went public in a controversial manner as well as the key underwriters of the IPO.
On Thursday, the law firm officially started receiving applications both online and offline from would-be plaintiffs among Fadu shareholders wishing to join the class action.
"The law firm is now receiving a lot of calls from victims — Fadu shareholders. The lawsuit is expected to be filed as early as within a month," Park Phil-seo, partner at Hannuri Law Firm, told The Korea Times on Thursday.
He explained that this case shows many elements of violation concerning the Financial Investment Services and Capital Markets Act.
"An investment prospectus is written by an underwriter, after conducting due diligence in good faith over a company that aims to go public. While the prospectus should provide detailed information on the company's earnings and growth forecasts to investors who do not have much information about the company's financial status, the documents of Fadu failed to serve their supposed purpose in this case," the law firm partner said.
The senior attorney explained that Article 125 of the capital markets act, which addresses false representation, and Article 178, which covers socially unfair transactions, fraudulent plans and manipulative techniques, seem to have been violated during Fadu's IPO process.
"According to the capital markets act, if there are false statements in an investment prospectus, both the company and the underwriters of the IPO process are to be held legally accountable, as they failed at assuming their gatekeeping role in their due diligence," he said.
Flash controller architecture for solid-state drives (SSDs) and storage products / Courtesy of FADU Technology
Fadu's corporate value at the time of the IPO in August was acknowledged at around 1.5 trillion won ($1.1 billion) yet it plummeted by nearly 40 percent in just three months to 914 billion won, as of 2 p.m., Thursday.
Its stock price began its nosedive when Fadu released a shocking quarterly result earlier this month. The company's second- and third-quarter revenues stood at only 59 million won and 300 million won, respectively, which drew a huge contrast from the prospectus's rosy outlook. The investment prospectus submitted during the IPO process stated that the fabless chip maker would garner 120 billion won this year, followed by 371.5 billion won in 2024 and 619.5 billion won in 2025.
As the firm's first-quarter revenue stood at only 17.6 billion won, there's no way the earnings estimate for this year could be realized.
Given that a total of 276,692 people invested 193.7 billion won in Fadu's IPO, the number of affected shareholders could easily exceed tens of thousands.