(CapitalWatch, Oct. 8, New York) Shares in Renren Inc. (NYSE: RENN) skyrocketed 45% in early trading Friday on news that its lawsuit ended with a "rare" settlement of $300 million or more. Investors, beware: The plaintiffs' victory should not be mistaken for a sign that Renren's business operations will improve.
Litigation firm Reid Collins & Tsai LLP announced today that Renren's minority shareholders in the 2019 suit against its controlling shareholders including chairman and CEO Joseph Chen is to be resolved with a rare settlement that exceeds the damages pleaded. The firm called the outcome a "precedent-setting case law to protect investors."
Plaintiffs on the case were Heng Ren Silk Road Investments LLC, Oasis Investments II Master Fund Ltd., and Jodi Arama. The defendants, in addition to co-founder Chen, were COO James Jian Liu, former director David Chao and his investment funds, Renren's financial advisor Duff & Phelps LLC, and Oak Pacific Investment (OPI). The lawsuit alleged the executives breached fiduciary duty by using the company funds for personal investment purposes, Duff & Phelps helped out in the process, and OPI received the funds.
As told in the derivative complaint, filed in March 2019, as Renren's social network business lost popularity, the executives turned the company in a sort of a venture fund. Its IPO capital was injected into a fintech startup Social Financial, Inc. (Nasdaq: SOFI), in which Chen held personal interest. Softbank Corp., another shareholder, supported the transition, the complaint stated. Further, Chen made several other investments using Renren's IPO proceeds and returns into businesses unrelated to the failed social networking platform, which in its early popular days was likened to Facebook.
While the investments could turn up profits, Renren's stockholders had no access to the information on the portfolio – and RENN shares continued losing their value as its operating business turned up mounting losses. In 2015, Chen attempted to take Renren private in a "low-ball offer" for its outstanding shares, enraging shareholders, the complaint stated.
So, Chen, Chao, and Liu took another path. They set up OPI as a subsidiary and transferred to it Renren's profitable portfolio. They then arranged to spin off OPI, to be privately held, offering Renren investors either an "unfair" cash dividend, or shares in OPI on non-controlling "disadvantageous terms." The executives also significantly undervalued OPI, setting its worth at $500 million – while Renren's holdings of just the Social Financial were worth nearly $600 million, the plaintiffs claimed. Considering other portfolio companies, plaintiffs estimate OPI's long-term investments were worth at least $1 billion. Renren and its investors were losing millions on the transaction – and the scheme went public, with Forbes calling it "Joe Chen's Sneaky SoFi Share Snatch."
In May 2020, Justice Andrew Borrok of the Supreme Court of the State of New York denied the defendants' motion to dismiss the case and went on to deem any counterarguments non-persuasive, as JD Supra reported. The court further backed the plaintiffs, saying in March 2021 that they "sufficiently pleaded" that the defendants "committed fraud, obtaining personal benefits at the corporation's expense."
Reid Collins & Tsai said in the press release today: "Obtaining jurisdiction over these foreign defendants was no small task, but obtaining derivative standing was an even greater achievement."
Peter Halesworth, founder and manager of plaintiff Heng Ren, commented, "This is an important message American investors are sending to Chinese companies. U.S. shareholders will fight raw deals of bad actors from China in our stock markets."
A Dying Shell Company
RENN stock traded at $24.30 a share by midday Friday on the settlement news. Over the past month, its market value has more than doubled from $11 per share. But that seems like significant overvaluation on false hopes. Over the past few years, Renren's businesses had either failed or were separated. The company, which once raised over $777 million in its 2011 IPO, had to carry out several reverse stock splits as it fought off NYSE warnings for trading under the minimum of $1 per share. And its announcements today offer no plan for business recovery.
In 2020, Renren underwent several new CFO appointments and hired a new auditor, Marcum Bernstein & Pinchuk LLP. Last month, Renren appointed a new chief financial officer, Chris Palmer. Palmer has served as VP Finance at Twist Bioscience and CFO at Televerde, and held general management roles at Intel Corp.
Renren ceased to control Renren.com, its failed social networking platform, in late 2018 after selling it to Beijing Infinities Media Co. Ltd. for $60 million. While Joseph Chen likened the sale to finding a new home for the social platform, he and COO Liu are among the shareholders of Beijing Infinities. It was indeed Duff & Phelps who approved the deal.
OPI ceased to be a subsidiary of Renren in June 2018, according to company filings.
In its SEC filings, Renren attributes the majority of its revenues generated since 2017 to Kaixin Auto Holdings (Nasdaq: KXIN), a used auto marketplace that went public on the Nasdaq through a reverse merger in 2019. Meanwhile, Kaixin also recently slipped from its controlling company. In late 2020, Renren said Kaixin entered into an agreement to merge with auto marketplace Haitaoche Ltd., spiking some "investor beware" reports in the media.
Under the deal, Kaixin was to exchange 51% of its shares for 100% of Haitaoche, while Renren retained a 33.8% no-vote stake in Kaixin. And yet, earlier this year, Kaixin received another $6 million investment from Renren as it delved into the EV and RV market.
In April, Kaixin said it received Nasdaq's approval on the merger with Haitaoche and, soon after, Joseph Chen resigned as Kaixin's chairman. On June 25, the merger was closed; Kaixin is now headed by the founder of Haitaoche, Mingjun Lin.
"Although we have discontinued Kaixin from our results of operations, our results of operations may continue to be materially and adversely affected by Kaixin's financial and operating performance because of our remaining investment in Kaixin," Renren wrote in its annual report.
Reflecting its discontinued holdings, Renren's annual report shows $18.2 million in revenue for 2020, following a decline to $15.1 million in 2019 from $66.8 million in 2018. Total net loss narrowed to $22.1 million in 2020 from $107.5 million in 2019, accounting for Kaixin's discontinued operations. Losses from continued operations narrowed to $16.8 million in 2020 from $38.4 million in 2019.
Renren's ongoing operations are several SaaS businesses in the United States. These include Chime, a real estate platform, and the Trucker Path app. Another U.S. real estate platform Renren acquired in 2017, Geographic Farming, was terminated in 2020. Renren has yet to report its financials for the first half of 2021.