MONTAGE TECHNOLOGY GROUP LIMITED, 1 FEB 1YZO14securities.stanford.edu/filings-documents/1051/... · LOW was an affiliate of Montage, or of its subsidiaries; however, Montage did confirm

Case 1:14-cv-01036-UA Document 2 Filed 02/19/14 Page 1 of 30

UNITED STAL4ST12OURT 1 0 SOUTHERN DISTRICT OF NEW YORK

MARIA CECILIA GHILARDOITI, Individually and On Behalf of All Others Similarly Situated,

Plaintiff,

VS.

MONTAGE TECHNOLOGY GROUP LIMITED, HOWARD C. YANG, STEPHEN TAI, and MARK VOLT,

Defendants.

CIVIL ACTION NO.

CLASS ACTION

1 FEB 1YZO14

U.S.L.

r

Plaintiff Maria Cecilia Ghilardotti ("Plaintiff') brings this securities class action pursuant

to §§ 10(b), and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule

10b-5 promulgated thereunder, on behalf of all investors who purchased or otherwise acquired

Montage Technology Group Limited ("Montage" or the "Company") securities between

September 26, 2013 and February 6, 2014, inclusive (the "Class Period"). The allegations herein

are based upon Plaintiff's knowledge with respect to Plaintiff, and information and belief as to

all other matters, based upon, inter alia, the investigation conducted by and through Plaintiff's

attorneys, which included, among other things, a review of the Defendants' public documents

and press releases, Montage's public filings with the United States Securities and Exchange

Commission ("SEC"), wire and media reports published regarding Montage, securities analysts'

reports and advisories about the Company, transcripts of Montage investor conference calls, and

information readily obtainable on the Internet. Plaintiff believes that substantial evidentiary

support will exist for the allegations set forth herein after a reasonable opportunity for discovery.


I. NATURE OF THE ACTION

1. This action arises from Montage's failure to disclose its true financial condition

during the Class Period. In particular, Montage failed to disclose that LOW Technology

Company Limited ("LQW"), the Company's largest distributor, is a mere shell company that is

owned in full by an entity that was established by Montage and a Montage employee.

2. Montage purports to be a global leading fabless provider of analog and mixed-

signal semiconductor solutions. The Company specializes in providing products for the home

entertainment market and the cloud computing market. Specifically, in regards to home

entertainment, Montage designs highly integrated end-to-end solutions with customized software

for set-top boxes. Montage's set-top box solutions include tuners, demodulators and decoders,

targeted for emerging markets. Montage also offers low power memory interface solutions that

provide memory intensive server applications access to the cloud computing market.

3. Sales from set-top box solutions are vital to the Company's business, for example,

for the three months and nine months ended September 30, 2013, 91% of Montage's revenue

was generated from the sales of set-top box solutions.

4. The Company's presence in China has also been important since almost all of

Montage's engineering development takes place there and this is where Montage employs field

application engineers to help serve target end customers. Moreover, end customers purportedly

include nine of the ten largest set-top box manufacturers in China, all of whom sell solutions

optimized for viewers in emerging markets.

5. Throughout the Class Period, Montage repeatedly stressed that the revenue gained

from top-box solutions is obtained "through distributors to over 150 end customers worldwide"

The Company stated that they "have generated the significant majority of our revenue from sales

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to end customers located in Asia." Montage touted the strength of its business operations in

China, and that one distributor in particular accounted for the majority of the Company's

revenue—LQW.

6. On February 6, 2014, investors were shocked by reports that Montage's "revenue

is significantly lower than MONT has reported to investors." Specifically, Gravity Research

accused Montage of lying about its business relationship with LQW. The report entitled "Is

MONT Still 'Fabless' If It is Fabricating Its Revenue?" stated that LQW is "nothing more than a

shell company used to help fabricate MONT's financials."

7. The investment report describes the Company and LQW's intertwined

relationship by stating that LOW is 100 percent owned by Shanghai Montage Microelectronics

Technology Co. Ltd ("SMIvIT"), "an undisclosed entity established by MONT and a MONT

employee (Larry Wu)." LOW was founded by Anthony Ho (an ex-employee of Defendant Yang

at Newave Semiconductor), and its ownership was transferred less than four months after it was

incorporated to SMMT. "Every single job posting for MONT' listed Montage's subsidiaries,

and included SMMT as one of them.

8. Further, the aforesaid investment report also disclosed that LQW's registered

"office" was only a small warehouse room between 1,000 and 1,500 square feet, normally

padlocked and with no employees in sight—unheard of for an entity which supposedly accounts

for an overwhelming majority of Montage's revenue. SMMT's registered address is Room 303-

30, Building 33, 680 Guiping Rd., Shanghai. Not surprisingly that address actually does not

exist.

9. The investment report goes on to demonstrate other suspicious connections

between LQW and Montage, such as the fact that LOW was "incorporated in October 2011, the

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exact same month MONT claims to have started doing business" with LOW, and how Out of

hundreds of law offices that were available, LQW uses the "exact same small law office (C.K.

Mok & Co.) as all three of MONT's Hong Kong subsidiaries." Also providing suspicions is the

fact that "in 2010, before MONT began to use LQW as a distributor, MONT reported 26.9%

gross margins and -28.5% net margins. In 2011, after adding on LOW as a distributor, MONT

reported 73% revenue growth, gross margins that were twice as high as 2010 and net margins of

positive 15.8%."

10. Gravity Research also ranked Montage as a "strong sell," stating that they were

"shocked that investors have purchased MONT equity without forcing the company to address

the fact that the vast majority of MONT's reported revenue is coming from a recently-formed

entity with no public website and no discernible business relationships with any entities

besides MONT."

11. The following day, the Company denied the information in the Gravity Research

Group ("Gravity Research") investment report. Instead of directly addressing the claims,

however, Montage swerved around these allegations by means of a press release, stating instead

that they had already addressed their business relationship with LQW. Montage denied that

LOW was an affiliate of Montage, or of its subsidiaries; however, Montage did confirm that

SMMT was formed as a joint venture by Montage and Larry Wu.

12. Investors were stunned by this news of fraudulent reporting at Montage. The

share price of Montage's common stock dropped $3.76 per share, or approximately 18%, after

various reports concerning this disclosure were issued. Shares of Montage closed on February 6,

2014 at $17.45 per share, down from $21.21 per share on February 5, 2014, on unusually heavy

trading volume.

4


13. Specifically, throughout the Class Period, Defendants made false and/or

misleading statements and/or failed to disclose that: (i) the Company's largest distributor, LQW,

was a mere shell company owned by SMMT, which itself was originally formed as a joint

venture between MONT and a senior employee at Montage; and (ii) as a result of the above, the

Company's financial statements, including those regarding Montage's revenue, were materially

false and misleading at all relevant times.

14. Due to Defendants' wrongful acts and omissions, and the precipitous decline in

the market value of the Company's securities, Plaintiff and the other Class members have

suffered significant losses and damages.

H. JURISDICTION AND VENUE

15. The claims asserted in this action arise under §10(b) and 20(a) of the Exchange

Act, and Rule lOb-5 promulgated thereunder. This Court has jurisdiction over the subject matter

of this action pursuant to 28 U.S.C. §1331 and 1337, and §27 of the Exchange Act. Venue is

proper pursuant to §27 of the Exchange Act and 28 U.S.C. §1391(b). Montage has business

operations located in this District, false statements by the Defendants were made in this District,

and acts giving rise to the violations complained of occurred in this District.

16. In connection with the acts alleged in this Complaint, defendants directly or

indirectly used the means and instrumentalities of interstate commerce, including without

limitation, the U.S. mails, interstate telephone communications, and the facilities of the national

securities exchanges.

III. PARTIES

17. Plaintiff Maria Cecilia Ghilardotti acquired her Montage common stock at

artificially inflated prices during the Class Period, as described in the attached certification, and

was damaged thereby.

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18. Defendant Montage is a global fabless provider of analog and mixed-signal

semiconductor solutions currently addressing the home entertainment and cloud computing

markets. The Company is incorporated under the laws of the Cayman Islands, and maintains

business offices at 101 Metro Drive, Suite 500, San Jose, California 95110. The Company's

principal executive offices are located at Room A1601, Technology Building, 900 Yi Shan Road,

Xuhui District, Shanghai, 200233, People's Republic of China.

19. Defendant Howard C. Yang ("Yang") is Montage's Chief Executive Officer

("CEO"), and has been Chairman of the Company's Board of Directors since 2004. Defendant

Yang also is one of Montage's founders. Yang certified the Company's materially false and

misleading quarterly report on Form 10-Q for the third quarter of 2013, filed with the SEC on

November 12, 2013.

20. Defendant Mark Vol] ("Voll") is the Chief Financial Officer (4 'CFO") of the

Company, and has served in such capacity since June 2012. Voll also serves as Montage's

Principal Accounting Officer. Voll signed and certified the Company's materially false and

misleading quarterly report on Form 10-Q for the third quarter of 2013, filed with the SEC on

November 12, 2013.

21. Defendant Stephen Tai ("Tai") is one of the founders of the Company, and has

served as President and as a member of Vantage's Board of Directors since the Company's

inception.

22. Defendants Yang, Tai and Voll, (collectively, the "Individual Defendants")

possessed the power and authority to control the contents of Montage's SEC filings, press

releases, and other market communications. The Individual Defendants were provided with

copies of the Company's SEC filings and publicly-disseminated press releases alleged herein to

6


be misleading prior to or shortly after their issuance, and had the ability and opportunity to

prevent their issuance or to cause them to be corrected. Because of their positions with the

Company, and their access to material non-public information available to them but not to the

public, the Individual Defendants knew that the adverse facts specified herein had not been

disclosed to and were being concealed from the investing public, and that the positive

representations being made were then materially false and misleading. The Individual

Defendants are liable for the false statements and omissions pleaded herein.

23. The Individual Defendants and Defendant Montage are collectively referred to

herein as the "Defendants."

IV. BACKGROUND

24. Montage was incorporated as an international business company with limited

liability on March 29, 2004, and was registered in the Cayman Islands as an exempted company

on April 24, 2006. Montage conducts its business primarily through its wholly owned operating

subsidiaries in China, Hong Kong and the United States.

25. Montage, a global fabless provider of analog and mixed-signal semiconductor

solutions, purports that "[t]he foundation of its technology platform is the Company's ability to

design high performance, low power semiconductors by using its proprietary building blocks

which include radio frequency and analog front end solutions, digital signal processors and high

speed interfaces. In the home entertainment market, the Company's technology platform enables

it to design highly integrated solutions with customized software for set-top boxes." Since the

Company's inception in 2004, Montage has sold over 230 million integrated circuits, which have

been shipped to over 150 end customers worldwide.

26. The majority of Montage's revenues come from distributions made through

LOW. According to Montage's 3Q 2013 quarterly report on Form 10-Q, sales through LOW

eA


accounted for 71% of Montage's total revenue in the nine months ended September 30, 2013,

and 50% of the Company's total revenue in 2012. As of September 30, 2013, the Company had

$10.4 million of accounts receivable, $8.2 million, or 79% of which, was due from LQW.

V. DEFENDANTS' FALSE AND MISLEADING STATEMENTS AND OMISSIONS OF MATERIAL FACTS

27. The Class Period begins on September 26, 2013. On September 26, 2013,

Montage announced that on September 25, 2013, the SEC entered its effectiveness order. The

SEC declared effective the Company's Form S-i registration statement, which had been filed on

August 21, 2013, and later amended on September 11, 2013 (collectively, the "2013 Registration

Statement"). Montage's September 26, 2013 press release also stated that "7,100,000 ordinary

shares at a price to the public of $10.00 per share" were being offered in the initial public

offering.

28. The 2013 Registration Statement contained a preliminary prospectus. The final

prospectus was filed pursuant to Rule 424(b)(4) on September 26, 2013 (collectively, the "2013

Prospectus").

29. The 2013 Registration Statement included the following false and misleading

statements regarding revenue:

We offer ten solutions for use in the home entertainment market and two memory interface solutions for use in the cloud computing market. In 2012 and the six months ended June 30, 2013, 94% and 91%, respectively, of our revenue was generated from sales of set-top box solutions targeting the home entertainment market in emerging markets, while the remaining 6% and 9%, respectively, of our revenue was generated from sales of memory interface solutions targeting the cloud computing market. Our solutions are built upon our foundation of 37 issued patents and an additional 46 pending patent applications as of June 30, 2013. As of June 30, 2013, we had 290 engineers in our research and development organization, of which 141 hold post-graduate engineering degrees. Our revenue has grown from $29.1 million in 2010 to $78.2 million in 2012, representing a compound annual growth rate of 64 91q, and from $33.9 million in the six months ended June 30, 2012 to $45.4 million in the six months ended June 30, 2013, representing an annual growth rate of 34%.

8


30. The 2013 Registration Statement was materially false and misleading in regards

to the Company's business relationship with LQW. The following was stated with regard to

LQW and LQW's true ownership:

We have sold a substantial majority of our set-top box solutions to end customers through three independent distributors, LQW Technology Company Limited, Qinuo International Co., Ltd. and China Electronic Appliance Shenzhen Co., Ltd. Sales through these three distributors accounted for 509o ', 18% and 9%, respectively, of our total revenue in 2012 and 6701o, 11% and 8 1%, respectively, of our total revenue in the six months ended June 30, 2013. As of June 30, 2013, we had $8.3 million of accounts receivable, 78% of which was due from LQW Technology Company Limited. We typically collect the accounts receivable from each distributor within one month following billing. We typically enter into distribution agreements with our distributors, with each distributor covering a defined customer base and/or geographic area. In addition, our distribution agreements are typically negotiated and entered into on an annual basis and prohibit the distributor from selling products or solutions competing with ours.

31. On November 7, 2013, Montage issued a press release discussing its record third

quarter 2013 financial results. The Company reported record third-quarter results with revenue

of $30.1 million, an increase of 18.8 percent (18.8%) sequentially, and 45.9 percent (45.9%)year-

over-year. Set-top box revenue increased by 46 percent (46%) from the prior year. The total

revenue figures provided in the press release are as follows:

Total revenue for the third quarter 2013 was $30.1 million, an increase of 18.8 percent compared to $25.3 million in the second quarter, and an increase of 45.9 percent compared to $20.6 million in the third quarter 2012. Total revenue consisted of $27.3 million from set-top box products, or 90.7 percent of revenue, and $2.8 million from memory interface products, representing 9.3 percent of revenue.

32. In the November 7, 2013 Press Release, Defendant Yang touted the strong

momentum of Montage's business, by stating:

We are pleased to report third quarter revenue increased 19% sequentially and 469o' year-over-year, driven by strong growth in the set-top box market combined with improving revenue from our memory interface products. We continued to convert set-top box customers to our SoC chipset, which offers a complete solution of integrated hardware and software. The pace of set-top box adoption in emerging markets has been accelerating as disposable income and


consumer demand for better entertainment are increasing. Additionally, digital transmission and HD television are only in the early stages of adoption, which we believe provides significant future growth opportunities for Montage.

33. Defendant Tai stated the following in the Press Release in regards to the

Company's business, expansion and growth:

The successful completion of our initial public offering on October 1st represented a significant milestone for the Company. We believe that Montage is well position edfor growth in the coming quarters as we continue to gain market share with our existing products as well as our newly released products in both the set-top box and memory interface markets.

34. Also, on November 7, 2013, the Company held a conference call in which

Defendants Yang, Tai and Voll touted the Company's financials. In particular, Defendant Vol]

stated:

Revenue for the third quarter was $30.1 million, an increase of 18.8% compared to $25.3 million in the second quarter, and an increase of 45.9% compared to the $20.6 million from the third quarter of 2012. Third quarter 2013 total revenue consisted of $27.3 million from our set-top box products, or 90.7% of revenue, and $2.8 million from our memory interface products, or 9.3% of revenue.

35. Defendant Yang also highlighted the Company's set-top box business and

revenue:

Starting with our set-top box business, our full customised solutions are highly valued by our customers. To date, a large majority of our set-top box revenue comes from our satellite chip Set, due to the fact that satellite is currently the transmission solution of choice in many emerging markets. But also contributing to our future growth will be our cable products, which we introduced at the beginning of this year. The primary growth driver for the cable business is the conversion from analogue to digital cable. Currently, it is estimated that only 60% of the China market has made the transition. But let's be clear: we still see significant growth opportunities in the satellite market, especially with the continued transition from standard definition to high definition.

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36. On November 12, 2013, Montage filed its quarterly report for the third quarter of

2013 on Form 10-0 ("3Q 2013 10-0") with the SEC signed by Defendant Vol]. The 30 2013

10-Q reported financial results substantially similar to the results provided in the November 7,

2013 press release and conference call.

37. In the Form 10-0, Defendants Voll and Yang falsely certified that Montage's 3Q

2013 10-0 did not contain any false or misleading statements, or omit to state any fact necessary

to make statements made not misleading, and that the statements fairly presented the Company's

financial condition and results of operations.

38. On January 30, 2014, the SEC declared effective the Form S-i Montage had filed

on January 17, 2014, and later amended on January 27, 2014 (collectively, the "2014

Registration Statement"), in connection with the Company's secondary offering held on January

31, 2014. The Prospectus filed pursuant to Rule 424(b)(4) on January 31, 2014 (the "2014

Prospectus") stated that the Company was offering 1,000,000 ordinary shares, and that the

selling shareholders were offering 4,350,000 ordinary shares, at a price to the public of $21.00

per share.

39. The 2014 Registration Statement stated the following in regards to revenue:

In 2012 and the nine months ended September 30, 2013, 94% and 91%, respectively, of our revenue was generated from sales of set-top box solutions targeting the borne entertainment market in emerging markets, while the remaining 6% and 9%, respectively, of our revenue was generated from sales of memory interface solutions targeting the cloud computing market. Our solutions are built upon our foundation of 44 issued patents and an additional 48 pending patent applications as of December 31, 2013. As of December 31, 2013, we had 300 engineers in our research and development organization, of which 151 hold post-graduate engineering degrees. Our revenue has grown from $29.1 million in 2010 to $78.2 million in 2012, representing a compound annual growth rate of 64%, and from $54.5 million in the nine months ended September 30, 2012 to $75.4 million in the nine months ended September 30, 2013, representing an annual growth rate of 38%.

11


40. The 2014 Registration Statement also stated the following about LQW, one of its

"independent distributors":

We have sold a substantial majority of our set-top box solutions to end customers through three independent distributors, LOW Technology Company Limited, Qinuo International Co., Ltd. and China Electronic Appliance Shenzhen Co., Ltd. Sales through these three distributors accounted for 71%, 8% and 7%, respectively, of our total revenue in the nine months ended September 30, 2013, and 50%, 18% and 9%, respectively, of our total revenue in the year ended December 31, 2012. As of September 30, 2013, we had $10.4 million of accounts receivable, $8.2 million or 79% of which was due from LQW Technology Company Limited. We typically collect the accounts receivable from each distributor within one month following billing. We typically enter into distribution agreements with our distributors, with each distributor covering a defined customer base and/or geographic area. In addition, our distribution agreements are typically negotiated and entered into on an annual basis and prohibit the distributor from selling products or solutions competing with ours.

41. The statements made above are false and misleading because Defendants

misrepresented and failed to disclose adverse facts, which were known to Defendants, or

recklessly disregarded by them, including that: (i) the Company's largest distributor, LQW, is a

mere shell company owned by SMMT, which was a joint venture formed between MONT and a

senior employee at Montage, and (ii) as a result of the above, the Company's financial

statements, assurances and expectations with regard to the Company's growth, operations and

business prospects were false and misleading at all relevant times.

VI. THE TRUTH EMERGES

42. On November 6, 2014, Gravity Research accused Montage of lying about its

business relationship with its largest distributor in China—LOW. The article stated that the

Company had been exaggerating its revenue figures because LOW is a shell company that is

owned by a previously undisclosed entity established by Montage and a Montage employee.

43. The investment report entitled "Is MONT Still 'Fabless' If It is Fabricating Its

Revenue?" describes the Company and LQW's intertwined relationship indicating that LQW is

12


100 percent owned by Shanghai Montage Microelectronics Technology Co. Ltd ("SMMT"), "an

undisclosed entity established by MONT and a MONT employee (Larry Wu)." LQW was

founded by Anthony Ho (an ex-employee of Defendant Yang at Newave Semiconductor), and

the ownership of which was transferred less than four months after it was incorporated to

SMMT. "Every single job posting for MONT" listed Montage's subsidiaries and included

SMMT as one of them.

44. Moreover, the investment article further states that Larry Wu was also appointed

as the legal representative, executive director, and general manager of SMMT, and that Mr. Wu

is still currently listed as the contact person for SMMT on multiple websites. Also, the Vice

President of Finance and Administration at MONT (Su Lin/Phoebe Su) was appointed as the

initial auditor of SMMT.

45. Furthermore, the following was stated in regards to the suspicious transfer of

SMMT's ownership interests to Thu Yan and Chen Yueci, in pertinent part:

According to a recent filing, ownership of SMMT was transferred to Zhu Yan (* , received 60% ownership interest) and Chen Yueci received 40%

ownership interest). We believe this was done to make it more difficult for investors to link MONT with LOW in advance of the MONT IPO.

The current legal representative of SMMT is listed as Zhu Yan.

Zhu Yan is also the legal representative of Yunduan Technology (Shanghai) Co. Ltd. ("Yunduan"), which is owned by Yunduan Media Company Ltd (a Hong Kong entity), which is controlled by the parents of Stephen Tai (President of MONT). A website listing contact information for Yunduan17 shows that Yunduan's address is the exact same address (down to the room letter) that previously belonged to MONT.

During a recorded phone call with Zhu Yan on January 15, 2014, she claimed that she was not in the office and would not be working for the next few weeks since she was not feeling well and Chinese New Year (which was weeks away at the time of the call) was coming up. During the call, we inquired about obtaining price quotes for set-top box chips (MONT's bread and butter), and Zhu Yan appeared to be uncomfortable and claimed that she was not selling such products.

13

(100% Ownership)

Contributed

Montage Technology 10% of Capita

(Shanghai) Co. Ltd. (PRC)

Shanghai Montage :)electronics Tech fl(

Co. Ltd. (PRC)

100% Ownership)


She stated that she only had a small relationship with MONT (a strange comment for the legal representative and 60% owner of the parent company of LQW, MONT's Largest distributor), and insisted that we continue future correspondence through text messages rather than calls. We believe that Zhu Yan is a front for MONT.

46. This graphic displays the relationship between Montage, LOW and SMMT:

MONT US-Listed Equity -

(100% Ownership)

Montage Technology Holdings Co. Ltd. (Cayman)

(100% ownership)

Montage Technology Hong Kong Ltd. (HK)

I Undisclosed Entity

Wu Lila Engineering Director at

MONT and a MONT

shareholder

Montage Technology Company Ltd. (HK)

Reported Sales

LQW Technology Company Ltd.

Purported Primary Distributor (>70% of Reported 2013 Revenue)

Contributed 90% of Capital Wu Lei

rl , /"Larry Wu") Appointed as legal

representative, executive director,

and general manager of SMMT

14


47, Below is another representation of the relationship between Montage and the

different parties:

.—Montage Technology Holdings Co. Ltd. (Cayman)

MONT

&I Is

MOITII Parent

d

Cn

o

pin y

Tripa,tnf PrtSIflofMO

fldirecllyo,10%of I

I IyWU

own%of Montag

Ion nbaPCa.Ut

DlEdgofMIOgNT

Trv

Staphenlal

'S'..

SttphenThri Montage Technology (Shanghai) parent, Co. Ltd. Wu Lei (,AZ/"Larry Wu m) Ph.SuIsVpoJ \ *

long Wa Chao (F69911) isqBoo pnve5tedkMBl.3,nm Kual Lap Tai (W)

steptienTers I Shanghai Montage Microelectronics

I Technology Co. Ltd. (SMM)

it MO

Yunduin Hk AppantrdaiIejaIrepe1bt1r. etecutIvedIruct &ieneruim.nagrV \ppoIntedaiAudltrtcfsMIc7

of SMMT Vunduan Media Wu Lei(/i.arry Wu-) Su Lin (/"Phoebe Su**)'

Company Ltd. (HK) Thu Tan iucc,.dedwu

I

i i YunduanKkown5 I tPui1IePII'SPZiIIflUe 100%of LOW I puppet: Iheeddreaa lca%otvunduan OSMMT used for Zhu Diziiri I

Shangl%al Zhu Yan AW ! Thuluwa, LQWccapaiatefllfrg, I

Yunduan Technology 3 actually Phoebe I ...—.- £ (Shanghai) Co., Ltd. Zhu Van is lep) I LQW Technologlr 1 otLOW

repranantitteof Yunduin5hanghap Company Ltd. —Zhu Dexiu

/, MONri Purported Pthny Diutributorl

L 70"afRoparted2013 Revenue)

48. Further, the investment report exposed how LQW's registered "office" was a

small warehouse room between 1,000 and 1,500 square feet, which was normally padlocked and

with no employees in sight—unheard of for an entity which supposedly accounts for an

overwhelming majority of Montage's revenue. A security guard working at the building the day

that Gravity Research representatives visited LQW stated that "LQW has moved into its room a

few months ago, but he had never seen anyone from LQW entering or exiting the premises."

The subsequent photographs were taken of the registered "office" of Montage's largest

distributor:

15


16


49. Gravity Research representatives also attempted to Visit SMMT's registered

address at Room 303-30, Building 33, 680 Guiping Rd., Shanghai. Not surprisingly that address

actually does not exist.

50. The investment report goes on to demonstrate other suspicious connections

between LQW and Montage, such as how LQW was "incorporated in October 2011, the exact

same month MONT claims to have started doing business" with LQW, and that out of hundreds

of available law offices LOW uses the "exact same small law office (C.K. Mok & co.) as all

three of MONT's Hong Kong subsidiaries." Also suspicious is how "in 2010, before MONT

began to use LOW as a distributor, MONT reported 26.9% gross margins and -28.5% net

margins. In 2011, after adding on LQW as a distributor, MONT reported 73% revenue growth,

gross margins that were twice as high as 2010 and net margins of positive 15.8%."

51. Gravity Research's investment report also ranked Montage as a "strong sell,"

stating that they were "shocked that investors have purchased MONT equity without forcing

the company to address the fact that the vast majority of MONT's reported revenue is coming

from a recently-formed entity with no public website and no discernible business relationships

with any entities besides MONT."

52. The Company issued a statement in response to the Gravity Research investment

report, with Defendants still attempting to disguise their scheme. Montage stated the following,

in pertinent part:

Regarding Allegations about LOW Technology Company Limited:

LOW Technology Company Ltd. is not an affiliate of Montage or its subsidiaries. Mr. Anthony Ho is a seasoned industry veteran with more than 30 years of experience in semiconductor sales and distribution. Mr. Ho was previously Director of Business Development at AS COMM HK Ltd from July 2003 to February 2006. When Montage first began shipping product in 2005, ASCOMM

17


HK Ltd. was one of our primary distributors, and Mr. Ho the lead account manager. Based on this prior working history, Mr. Ho agreed to form LQW to distribute Montage products. As is common in the industry, LQW also works with Montage's other distributors, but revenue is still not recognized until delivered to an end customer. During Montage's [P0 road show, many investors inquired about LOW due to it being our largest distributor. We noted the following points in response to these questions:

1. Montage has contracted with LQW and conducts business with LQW because they are able to offer attractive business terms to Montage such as non-refundable advanced payments for product inventory.

2. Since Montage already directly supports our set-top box end customers with additional software and engineering capabilities, LQW is a good fit to support Montage's logistics requirements.

Regarding Allegations about the History of Shanghai Lanqi Micro-Electronics Technology Company Ltd:

Shanghai Lanqi Micro-Electronics Technology Company Limited (SLMT, in Chinese: , also referenced as "SMMT" in the Gravity Research story.), was formed on December 24, 2008 as a joint venture by Montage Technology (Shanghai) Co. Ltd. ( ) -- the major operating entity of Montage Technology Group, Limited (Montage) and Mr. Lei Wu (a Chinese citizen) who was the first employee of SLMT.

The purpose of establishing SLMT was to form a 100% domestic entity in order to participate in certain potential government funded projects. However, this effort was not successful at the time.

On July 3, 2009, Montage Technology (Shanghai) transferred its equity interest in SLMT, which was documented in the Industrial and Commercial Bureau of Shanghai Xuhui District and is a matter of public record. A legal opinion was issued by Commerce & Finance Law Offices (a Chinese law firm as only a Chinese law firm can issue Chinese legal opinions in China) confirming that SLMT's 100% ownership was actually and beneficially owned by a third party subsequent to July 3, 2009.

Montage Technology (Shanghai) has not held an ownership interest in SLMT since July 3, 2009, at which time SLMT was no longer an affiliate of Montage Technology (Shanghai).

53. Investors were stunned by this descriptive news of the Company's Chinese

business relationships. Overall, the share price of Montage common stock dropped $3.76 per

18


share, or approximately 18%, after various reports regarding these business relationships

surfaced. Shares of Montage closed on February 6, 2014, at $17.45 per share, down from $21.21

per share on February 5, 2014. This massive stock price decline wiped out approximately $103.4

million in the Company's market capitalization on unusually heavy trading volume.

54. As a result of Defendants' wrongful acts and omissions, and the precipitous

decline in the market value of the Company's securities, Plaintiff and the other Class members

have suffered significant losses and damages.

VII. SCIENTER ALLEGATIONS

55. As alleged herein, Defendants knew that the public documents and statements

issued or disseminated in the name of the Company were materially false and misleading; knew

that such statements or documents would be issued or disseminated to the investing public; and

knowingly and substantially participated in or acquiesced in the issuance or dissemination of

such statements or documents as primary violations of the federal securities laws. As set forth

elsewhere herein in detail, Defendants, by virtue of their receipt of information reflecting the true

facts regarding Montage, their control over, and receipt or modification of Montage's allegedly

materially misleading statements, and their associations with the Company which made them

privy to confidential proprietary information concerning Montage, participated in the fraudulent

scheme alleged herein.

VIII. PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE AND MATERIAL OMISSIONS

56. Plaintiff asserts two bases for a presumption of reliance in this action. First, the

material omissions are presumed to have inflated the market prices of Montage common stock

under the presumptions stated in Affiliated Ute. Citizens of Utah v. United States, 406 U.S. 128

(1972). Second, at all relevant times, the market for Montage common stock was an efficient

19


market that promptly digested current information with respect to the Company from all

publicly-available sources, and reflected such information in the market prices of the Company's

securities.

57. Throughout the Class Period, Montage common stock was traded on NASDAQ,

an efficient market that promptly digested current information with respect to Montage from

publicly available sources, and reflected such information in the prices of Montage's shares.

58. The evidence that Montage common stock traded on an efficient market at all

relevant times includes the following:

i. Montage common stock met the requirements for listing, and was listed

and actively traded on the NASDAQ, a highly efficient and automated

market;

ii. As a regulated issuer, Montage filed periodic public reports with the SEC

and the NASDAQ;

During the Class Period, Montage was followed by multiple securities

analysts who wrote reports about Montage that were distributed to their

clients. Each of these reports were publicly available and entered the

public marketplace;

iv. Montage regularly communicated with public investors via established

market communication mechanisms, including through regular

disseminations of press releases on the national circuits of major newswire

services and through other wide-ranging public disclosures, such as

communications with the financial press and other similar reporting

services; and

20


V. Montage securities were liquid and traded with moderate to heavy volume

during the Class Period.

L1]

Based on these indicia, a presumption of reliance applies.

IX. LOSS CAUSATION/ECONOMIC LOSS

60. During the Class Period, as alleged herein, Defendants engaged in a scheme to

deceive the market, making materially false and misleading statements and omissions.

Defendants presented a misleading picture of Montage's business operations and financial

prospects. Instead of truthfully disclosing during the Class Period that Montage was engaged in

misconduct in China, Defendants falsely reported Montage's financial condition and outlook.

61. Defendants' false and misleading statements had the intended effect, and caused

Montage's stock to trade at artificially inflated levels throughout the Class Period—to a high of

approximately $25.63 per share on January 17, 2014.

62. As alleged herein, the truth about Montage's overstatement of its financial

condition and outlook began on February 6, 2014. The share price of Montage common stock

dropped $3.76 per share, or approximately 18%, after various reports concerning these

misrepresentations and omissions were disseminated. Shares of Montage closed on February 6,

2014, at $17.45 per share, down from $21.21 per share on February 5, 2014. This massive stock

price decline wiped out approximately $103.4 million in the Company's market capitalization on

unusually heavy trading volume.

X. NO SAFE HARBOR

63. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements described in this

Complaint. Many of the specific statements described herein were not identified as "forward-

looking" when made. To the extent that there were any forward-looking statements, there was

21


no meaningful cautionary language identifying important factors that could cause actual results

to differ materially from those in the purportedly forward-looking statements. Alternatively, to

the extent that the statutory safe harbor does apply to any forward-looking statements described

herein, defendants are liable for those false forward-looking statements because at the time each

was made, the particular speaker knew that the particular forward-looking statement was false,

and/or that the forward-looking statement was authorized and/or approved by an executive

officer of Montage who knew that those statements were false when made.

XI. CLASS ACTION ALLEGATIONS

64. Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) of

the Federal Rules of Civil Procedure on behalf of all persons who purchased or otherwise

acquired Montage common stock during the period between September 26, 2013 and February 6,

2014, inclusive (the "Class"), and who were damaged thereby. Excluded from the Class are

Defendants, other officers and directors of Montage at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns, and any entity in

which Defendants have or had a controlling interest.

65. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Montage common stock was actively traded on the

NASDAQ. While the exact number of Class members is unknown to Plaintiff at this time, and

can be ascertained only through appropriate discovery, Plaintiff believes that there are hundreds

or thousands of members in the proposed Class. Record owners, and other members of the

Class, may be identified from records maintained by Montage or its transfer agent, and may be

notified of the pendency of this action by mail, using the form of notice similar to that

customarily used in securities class actions.

22


66. The disposition of the claims in a class action will provide substantial benefits to

the parties and the Court. Montage had over 27.5 million shares of stock outstanding, which

were owned publicly by at least hundreds of persons and entities.

67. Common questions of law and fact exist as to all members of the Class, and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

• whether the federal securities laws were violated by Defendants' acts as alleged herein;

• whether statements made by Defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of Montage;

• whether the Individual Defendants caused Montage to issue false and misleading financial statements during the Class Period;

• whether Defendants acted knowingly or recklessly in issuing false and misleading financial statements;

• whether the prices of Montage common stock during the Class Period were artificially inflated because of the Defendants' conduct complained of herein; and

• whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.

68. Plaintiff's claims are typical of the claims of the other members of the Class, as

all members of the Class are similarly affected by Defendants' wrongful conduct in violation of

the federal law that is complained of herein.

69. Plaintiff will adequately protect the interests of the Class, and has retained

competent counsel experienced in class action securities litigation. Plaintiff has no interests

which conflict with those of the Class.

70. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

PJAJ


COUNT ONE For Violation of § 10(b) of the Exchange Act

and Rule 10b-5 Against All Defendants

71. Plaintiff incorporates by reference each and every preceding paragraph as though

fully Set forth herein.

72. Plaintiff asserts this Count pursuant to § 10(b) of the Exchange Act, and Rule

lOb- 5 promulgated thereunder, against Defendants Montage, Yang, Tai and Vol].

73. During the Class Period, Defendants disseminated or approved the false

statements set forth above, which they knew or deliberately disregarded were false and

misleading in that they contained misrepresentations, and failed to disclose material facts

necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading.

74. Defendants violated § 10(b) of the 1934 Act and Rile 10b-5 in that they:

a. employed devices, schemes and artifices to defraud;

b. made untrue statements of material facts or omitted to state material facts

necessary in order to make the statements made, in light of the

circumstances under which they were made, not misleading; or

C. engaged in acts, practices and a course of business that operated as a fraud

or deceit upon Plaintiff and others similarly situated in connection with

their purchases of Montage common stock during the Class Period.

75. By virtue of their positions at Montage, Defendants had actual knowledge of the

materially false and misleading statements and material omissions alleged herein, and intended

thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, Defendants

acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose

such facts as would reveal the materially false and misleading nature of the statements made,

24


although such facts were readily available to Defendants. Said acts and omissions of Defendants

were committed willfully, or with reckless disregard for the truth. In addition, each Defendant

knew, or recklessly disregarded, that material facts were being misrepresented or omitted as

described above.

76. Information showing that Defendants acted knowingly, or with reckless disregard

for the truth, is peculiarly within Defendants' knowledge and control. As the senior executive

managers and/or directors of Montage, the Individual Defendants had knowledge of the details of

Montage's internal affairs.

77. The Individual Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, the Individual

Defendants were able to and did, directly or indirectly, control the content of the statements of

Montage. As officers and/or directors of a publicly-held company, the Individual Defendants

had a duty to disseminate timely, accurate, and truthful information with respect to Montage's

businesses, operations, future financial condition and future prospects. As a result of the

dissemination of the aforementioned false and misleading reports, releases and public statements,

the market price of Montage securities was artificially inflated throughout the Class Period. In

ignorance of the adverse facts concerning Montage's business and financial condition which

were concealed by defendants, Plaintiff and the other members of the Class purchased or

otherwise acquired Montage securities at artificially inflated prices and relied upon the price of

the securities, the integrity of the market for the securities, and/or upon statements disseminated

by Defendants, and were damaged thereby.

78. Plaintiff and the other members of the Class have suffered damages in that, in

reliance on the integrity of the market, they paid artificially inflated prices for Montage common

25


stock. Plaintiff and the other members of the Class would not have purchased Montage common

stock at the prices they paid, or at all, if they had been aware that the market prices had been

artificially and falsely inflated by Defendants' misleading statements.

COUNT TWO For Violation of §20(a) of the Exchange Act

Against the Individual Defendants

79. Plaintiff incorporates by reference each and every preceding paragraph as though

fully set forth herein.

80. Plaintiff asserts this Count pursuant to Section 20(a) of the Exchange Act against

the Individual Defendants.

81. The Individual Defendants, by virtue of their executive leadership positions in

Montage, had the power and authority to cause Montage to engage in the wrongful conduct

complained of herein, and to control the contents of Montage's annual and quarterly reports and

press releases. They were provided with copies of the Company's reports and press releases

alleged herein to be misleading prior to or shortly after their issuance, and had the ability and

opportunity to prevent their issuance or to cause them to be corrected.

82. As officers and/or directors of a publicly owned company, the Individual

Defendants had a duty to disseminate accurate and truthful information with respect to

Montage's financial condition and results of operations, and to correct promptly any public

statements issued by Montage which had become materially false or misleading.

83. Because of their positions of control and authority as senior executive officers, the

Individual Defendants were able to, and did, control the contents of the various reports, press

releases and public filings which Montage disseminated in the marketplace during the Class

Period concerning Montage's results of operations. Each of the Individual Defendants exercised

control over the general operations of Montage, and possessed the power to control the specific


activities which comprise the primary violations about which Plaintiff and the other members of

the Class complain. The Individual Defendants therefore, were "controlling persons" of

Montage within the meaning of Section 20(a) of the Exchange Act. In this capacity, they

participated in the unlawful conduct alleged which artificially inflated the market price of

Montage Securities.

84. Montage violated Section 10(b) and Rule lOb-5 by its acts and omissions as

alleged in the Complaint, and as a direct and proximate result of those violations, Plaintiff and

the other members of the Class suffered damages in connection with their purchases of the

Company's common stock during the Class Period.

85. By reason of their control of Montage, the Individual Defendants are liable

pursuant to Section 20(a) of the Exchange Act for Montage's violations of Section 10(b) and

Rule 10b-5, to the same extent as Montage.

XII. PRAYER FOR RELIEF

WI-IEREFORE, Plaintiff prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;

B. Awarding Plaintiff and the other members of the Class damages, including

interest;

C. Awarding Plaintiff reasonable costs and attorneys' fees; and

D. Awarding Plaintiff such other or further relief as the Court may deem just and

proper.

27


XIII. JURY DEMAND

Plaintiff, on behalf of the Class, hereby demands a trial by jury.

Dated: February 19, 2014 LAW OFFICES OF CURTIS V. TRINKO, LLP

By:_____ Curtis V. Trinko (C1'-1838) Jennifer Traystman (JT-7583) C. William Margrabe 16 West 46th Street, 7th Floor New York, NY 10036 Tel: (212) 490-9550 Fax: (212) 986-0158 Email: [email protected]

Liaison Counsel for Plaintiff

SAXENA WifiTE PA. Joseph E. White ifi Lester R. Hooker 2424 North Federal Highway, Suite 257 Boca Raton, FL 33431 Telephone: (561) 394-3399 Facsimile: (561) 394-3382

RYAN & MANISKAS, LLP Katharine M. Ryan Richard A. Maniskas 995 Old Eagle School Rd., Ste. 311 Wayne, PA 19087 Tel: (484) 588-5516 Fax: (484)450-2582

Counsel for Plaintiff


CERTIFICATION

. c 6h\&rAt4iaintur.j declare. as to the âlnhns asserted under the kderal securities laws dint

I. PlointitThsss reviewed the complaint and authorizes its fling.

Plaintiff did not purcluise the security that Is the suhjecl of ibis action iii the dIrection of Plintifls counsel or in oi*rta

Participate in any private slaliort.

3. PIainilfl 1 Is willing to serve as it representative pony on bhIf of the class. either InctMduiilly or as part of ó group, iflchilIflg

prnidIng tusliiitony, at deposition or trial. if neccasaly, l understand that is not a claim form, and that my ability to shore in any recOvery Lis a

member or Ihi class is not dependetsi upon esecutinu of this PlithitilFCcrtillcutloii.

4. I'Iaintlfl's purchase and sole transaction(s) in the Moulage Technology Group Limited (NASDAQ: MONT) security that is:thc

subject of this action during 11w Class Period IS/lire 05 follows.

I 1tJlC1I.5SERS SALES

4

5. Plaintiff has complete authority to bring to suit to rectner for investment losses on behI I of purchaserS. ortho subject securities

described herein (iiichidiiig i'laiimtiI1 siii) c -otiiers. any corporations or miter esititles, and/or arty benehiclol lntiieru),

6. During the ilirec years prior in the date nIihiis Ccriliicnthin. l'laliititilias not sought to scrte or 5crcd us it representativeporty

for a class in an iidoii filed under the 6dcruI securities Inns, emccpt as described below___________________________________

7. Plrihitill'will irni accept ouiy payment for scrviiig as a reprcseiitauku party on hduiII'ohhie class beyond Plaintifi's pro otto share

or any nrcovcr3, ccept such reasonable costs and epei1ses (including lost nuges) directly relating in the representation of the class as ordered or

aprolved by Ike court.

I declare inider penalty oIperjury that die rorcguliig Is tnre and comet

F.sccuied this jL) day Of Frn(2014,

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Documents

MONTAGE TECHNOLOGY GROUP LIMITED, 1 FEB 1YZO14securities.stanford.edu/filings-documents/1051/... · LOW was an affiliate of Montage, or of its subsidiaries; however, Montage did confirm