Proposed Securities Class Action Claims Fastly Hid Ties to TikTok Prior to Government Ban

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Fastly, Inc. and its top officers face a proposed class action that claims the edge cloud platform provider failed to disclose to investors that its largest customer was the Chinese company behind the controversial TikTok app.

According to the 18-page securities suit, investors were unaware that government actions taken against TikTok in the name of national security would negatively impact Fastly’s business and thereby financially injure stockholders.

The lawsuit out of California relays the “wildly popular” social media app owned by ByteDance has been the subject of concern for some time due to its ties to China. Per the complaint, U.S. officials called for an investigation into TikTok as early as October 2019, warning the app could pose a national security risk, while a proposed class action filed the following month claimed the app contained Chinese surveillance software.

Meanwhile, Fastly represented to investors in a May 2020 earnings call that the company’s customers “seem to be in good shape” while failing to disclose in a shareholder letter and quarterly report that one of its biggest customers was “under intense scrutiny” from U.S. officials over “serious security risks,” the lawsuit says. Per the case, Fastly thus concealed a “material risk” that its business would be negatively impacted should the government take action against TikTok.

On July 31, President Trump, the suit says, “dealt a major blow to TikTok” with the announcement of his plans to ban the app from operating in the U.S. due to concerns that the Chinese government could access users’ private data.

It wasn’t until after market close on August 5, the case states, that Fastly hosted an earnings call for its Q2 2020 results wherein the company announced “for the first time” that ByteDance was its “largest customer in the quarter” and a significant customer during Q1, accounting for 12 percent of the company’s revenue for the previous six months.

Per the complaint, Fastly’s CEO further stated that “[a]ny ban of the TikTok app by the US would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the US, the loss of this customer’s traffic would have an impact on our business.”

Upon this news, “the market was shocked,” the lawsuit says, with Fastly’s share price dropping roughly 17.7 percent from the previous day’s closing price.

The next day, August 6, President Trump issued an executive order to take effect in 45 days that would ban any U.S. person or company from transacting with ByteDance, stating in relevant part that TikTok’s data collection “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information – potentially allowing China to track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage.”

On this news, Fastly’s share price fell another 11.5 percent, injuring investors, the case alleges.

The lawsuit looks to represent anyone who purchased Fastly common stock between May 6, 2020 and August 5, 2020 and were damaged thereby.

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