A pedestrian walks past Tencent Holdings Ltd.’s new under construction headquarters in Shenzhen, China (Photographer: Qilai Shen/Bloomberg)

Tencent Music Executive Is Accused of Defrauding Early Investor

(Bloomberg) -- A Chinese investor accused the co-president of Tencent Music Entertainment Group, which could fetch as much as $1.23 billion in an IPO this month, of using lies and threats to get him to sell his stake in a company that eventually became part of China’s largest music-streaming service.

The investor made the claim in an arbitration proceeding in China against the company, Co-President Guomin Xie and others, and he repeated it Wednesday in a U.S. lawsuit seeking documents from four underwriters of Tencent Music’s initial public offering. The online-music arm of Tencent Holdings Ltd., China’s largest social-media company, is planning to list in the U.S. on Dec. 12.

In the arbitration, Hanwei Guo claims he invested $26 million in an entity called Ocean Music in 2012 after repeated invitations from Xie, who he says promised the company would be profitable within two years and would go public in the U.S. within three. While the company received investments totaling $100 million, Guo says in his filing in federal court in New York, he was told that the business was failing and that he should sell his stake. Xie and his associates hired someone to threaten him with government interference if he didn’t complete the sale, Guo alleges in court documents.

“Faced with threats, coercion and intimidation, and denied access to the information that would have revealed the true value of Ocean Music, Guo sold his shares” while Xie proceeded to build the company into a “streaming giant,” according to the filings.

The arbitration is before the China International Economic and Trade Arbitration Commission. In it, Guo is seeking a return of parts of his equity stakes and compensation for the gains he might have realized, according to court documents.

Beyonce and Taylor Swift

“Historical financial documents and information possessed by Tencent Music’s banking advisers could be highly relevant to Mr. Guo’s claims,” Tai-Heng Cheng, an attorney for Guo, said in a statement. The suit seeks information from underwriters including Deutsche Bank AG, JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley.

Tencent Music, Deutsche Bank, JPMorgan and Bank of America declined to comment on the litigation. Morgan Stanley didn’t respond to a request for comment.

Guo has flagged the case and his concerns to the U.S. Securities and Exchange Commission ahead of the IPO, according to Greg Marose, a spokesman for the investor.

The SEC declined to comment.

Tencent Music, which competes with products from Alibaba Group Holding Ltd. and NetEase Inc., has been scooping up content. It has deals in place to distribute songs from artists including Beyonce and Taylor Swift after signing up with some of the world’s largest record labels, including Universal Music Group, Warner Music Group and Sony Music Entertainment.

The IPO will let American investors bet on the Chinese market for music-streaming services, which have brought new life to a business plagued by piracy. Tencent’s growth in China mirrors inroads by Spotify in the U.S., where streaming has helped music sales grow at their fastest rate since the 1990s.

Tencent Music’s platforms are becoming important vehicles for U.S. pop stars such as Katy Perry and Rihanna to reach a Chinese audience, alongside homegrown artists including Jason Zhang and Joker Xue. The company will remain closely linked to its parent, Tencent Holdings, which holds 59 percent of the shares before the offering.

The case is In re application of Hanwei Guo, 18-mc-00561, U.S. District Court, Southern District of New York (Manhattan).

©2018 Bloomberg L.P.