* Criminal complaint alleges breach of securities law
* Citi downgraded stock in July
* Shares rally 2.6 pct Tuesday
TAIPEI, Dec 13 (Reuters) - HTC Corp, the world's No.4 smartphone maker, has filed a criminal complaint against Citigroup Inc's Taiwan unit, a Taiwan prosecutor said on Tuesday, alleging the broker's research contributed to a fall in HTC's share price.
HTC, whose rapid rise in the cut-throat handset industry had made it an investor darling until early this year, has lost much of its lustre in recent weeks as its models struggle to compete with Apple Inc's iPhone and Samsung Electronics Co Ltd's Galaxy range.
Its shares have tumbled from a high of more than T$1,200 ($39.72) in April to as low as T$403 earlier this month. HTC has twice cut its earnings forecast recently, stoking investor concern over future profits.
"HTC submitted its case in August and we have been in the process of handling it," said Huang Mou-hsin, deputy chief prosecutor at the Taipei Prosecutors Office. "HTC sued Citi Global Markets for violating stock transaction law," he said, declining to elaborate further.
HTC declined to confirm or deny the action, saying it did not comment on legal cases. Citi Global Markets Taiwan said in a statement that the matter is being reviewed by the authorities and it would be "inappropriate to provide any comment."
Taiwanese newspapers reported on Tuesday that HTC and Citi had run out of time for a settlement, so prosecutors had stepped in.
Citi downgraded HTC to sell in a report dated July 7, according to Thomson One data. It cited a valuation de-rating due to concerns over its planned acquisition of graphic technology firm S3 Graphics, slower growth in the smartphone market and competition from Samsung.
It upgraded the stock to hold on Sept. 29 and then rated it neutral on Oct. 31. On Nov. 24 it cut the rating to sell again after HTC lowered its fourth-quarter revenue guidance.
According to Starmine data, 23 analysts currently rate the stock a hold, six rate it a sell and three rate it a buy. Three months ago 15 rated it a strong buy, eight a hold and two a sell.
"HTC is using the lawsuit as a gesture to say its outlook is not as bad as the research report indicated and to ask foreign analysts to keep quiet or at least to stay a bit low-profile," said K.H. Lin, vice president at the fund unit of Yuanta Financial Holding Co Ltd.
"For long-term investors, however, HTC is probably not a good buy. We are very worried about the future of HTC due to its patent war with Apple and others. The lack of a powerful pool of patents is the most vulnerable part for HTC and other Taiwan companies."
HTC is fighting legal battles on several fronts and faces a crucial ruling in the United States on Wednesday in a patent case with arch-rival Apple that could result in a ban on HTC's handsets being sold in the United States.
The suit is seen as a proxy for the larger fight for market share between Google Inc's Android cellphones and tablets, many of which HTC makes, and Apple's product line.
Samsung, which also makes Android products, is locked in similar court fights with Apple.
The International Trade Commission, a U.S. trade panel that investigates patent infringement involving imported goods, will deliver its ruling on Wednesday.
HTC shares closed up 2.65 percent on Tuesday at T$426.
"The rise is because the current share price is too low and valuations are way under," said KGI Securities analyst Richard Ko in Taipei. "The price already reflects the risk of future court judgements."