VIPKid, a Chinese online tutoring provider, is reportedly suing rival GSX Techedu for allegedly stealing trade secrets, just days after a short-seller called the firm a “blatant fraud”, accusing it of overstating its profits by 70%.
VIPKid has also sued two GSX Techedu employees involved in the scheme, according to China.com.cn, a Chinese state-backed news portal, which reported that the staff members used customer information obtained while working at VIPKid to promote sales at their current employer.
The case, in which VIPKid alleges that the employees breached non-disclosure agreements, has been accepted by a Beijing court and will see VIPKid seek around $1.13 million in damages.
The law suit is a sign of the fierce competition within China’s highly lucrative online education market, which has seen a boom in demand since the outbreak of Covid-19 shut down hundreds of thousands of schools and jolted more than a billion students worldwide into online classes.
GSX Techedu, which is listed on the New York Stock Exchange but based in China, closed at $33.59 on Friday 17 April, up 5.9% from the day prior but down considerably from a high of $45.42 in February.
The legal case could hardly come at a worse time for GSX Techedu, which earlier this week was called “the most blatant Chinese stock fraud since 2011” in a report published by US-based short-seller Citron Research. It was the second report this year to accuse the organisation of fraud.
Citron Research called on the US Securities and Exchange Commission, Wall Street’s watchdog, to halt trading in GSX Techedu shares and launch an investigation. On 15 April, US law firm Wolf Haldenstein Adler Freemand & Herz announced that it was investigating “serious and disturbing class action claims” about GSX Techedu on behalf of shareholders.
“GSX Techedu Inc. is overstating revenue by up to 70% and should immediately halt trading and launch an internal investigation,” Citron said in the report. “They are not even in a ‘fake it till you make it’ situation. Their forward growth trajectory is as foolish and fraudulent as their previous financials.” GSX Techedu has denied all allegations.
In December last year, a Chinese regulator said that GSX Techedu had used its mobile app to illegally gather user information, including personal ID card numbers and bank account details, according to Caixin Global, a prominent independent Chinese media outlet.