On September 21, 2022, the Securities and Exchange Commission reached a settlement to resolve insider trading charges against Sheng Fu, the Chief Executive Officer of Cheetah Mobile Inc., and Ming Xu, the company’s former President and Chief Technology Officer, related to allegations that the two jointly established and sold Cheetah Mobile securities, pursuant to a purported 10b5-1 trading plan, while in possession of material nonpublic information.
According to the SEC order, in 2015 Cheetah Mobile, a China-based mobile internet company that was incorporated in the Cayman Islands, was informed by one of its largest advertising partners that the partner was going to change the algorithm used to calculate fees for ad placements which could potentially cut revenues from the partner in half if Cheetah Mobile was not able to improve the quality of its ad placements. Approximately one-third of Cheetah Mobile’s revenues were derived from the placement of third-party ads provided by this particular partner. By the end of 2015, Cheetah Mobile realized that it would not be able to implement a solution to prevent a drop-off in revenues from this advertising partner and, for two consecutive quarters, noticed that revenues were decreasing. However, despite their awareness of this material nonpublic information regarding the decreasing revenues, in late March 2016, Fu and Xu established, through a jointly held entity, a trading plan to sell some of their holdings of Cheetah Mobile securities. According to the order, Fu and Xu sold 96,000 American Depository Shares (ADS) before disclosing the negative revenue trend to investors which enabled them to avoid losses of approximately $200,000 and $100,000, respectively. The SEC further determined that Fu made materially misleading public statements about the revenue trends during a March 2016 earnings call and was responsible for the company’s failure to disclose the negative revenue trend in a 2016 annual report.
According to the cease-and-desist order, Fu and Xu violated the antifraud provisions of the Securities Exchange Act of 1934 for the unlawful sale of the ADS securities, while Fu additionally violated the antifraud provisions of the Securities Act of 1933 and was found to have caused Cheetah Mobile’s violations of issuer reporting requirements. Without admitting or denying the SEC’s findings, Fu and Xu also agreed to undertake a number of actions in order to avoid further securities violations. In addition, Fu agreed to pay a civil money penalty of more than $550,000, and Xu agreed to pay a penalty of just over $200,000.