China’s Qihoo Issues Cease and Desist Letter to Short Sellers Citron

Not seeing eye-to-eye: Andrew Left, Zhou Hongyi.

Chinese software maker and search engine Qihoo 360 (NYSE:QIHU) has threatened legal action against the financial blogger Andrew Left, who runs the short sellers Citron Research, for what the company claims are “untruthful statements” that have caused “the commercial reputation of [Qihoo] to be significantly damaged.” This comes in a cease-and-desist legal letter, in both Chinese and English, that was just tweeted out by the Qihoo CEO Zhou Hongyi on his official Weibo page (here).

Qihoo’s letter today says that Citron’s reports have been “untruthful,” adding:

We believe that, regardless of being according to either Chinese laws or US laws, the practice of good faith shall be a basic legal principle, and the commercial reputation of a company should be protected from being damaged by defamation.

It comes nearly a year after Citron’s first post on Qihoo in which Left wrote that, in his analysis, Qihoo’s stock was “overvalued” and that it was a “web 1.0 brand with a web 1.0 business model.” In further posts, the financial blogger and frequent CNBC guest went on to brand Qihoo as a “fraud” and questioned the veracity of its financials – especially with regards advertising and gaming revenue. At that time, Qihoo hadn’t yet moved into the search engine business, which has boosted its stock a great deal in the past couple of months.

But it was only in August of this year that the whole war of words really blew up, when the former head of Google China, Kai-Fu Lee, leapt to the defense of Chinese tech stocks in general, slamming analysts who do ‘short selling’ of stocks for personal profit. Then, a few days after that, Lee and some other tech execs – including Qihoo’s Zhou – set up CitronFraud.com to, they say, tear apart and fact-check short sellers such as Citron. Andrew Left has earlier requested that the execs’ site cease with their own allegedly defamatory attacks on him, but the three-week deadline on that earlier legal letter has since passed by and the CitronFraud site remains up. For his part, the Citron founder insists that he has an excellent record on Chinese stocks, highlighting the mess at Longtop Financial before that company was charged with fraud and subsequently delisted.

Ultimately, it’s unlikely that the trans-Pacific bust-up will come to any legal action – either from Qihoo or Left himself. Even if it comes to court in the US, damages could be settled without any dramatic court time devoted to picking apart the rights-or-wrongs of the claims made. Let the awkward impasse continue.