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The shares of iQIYI plummeted on Thursday and the after-hours trading following a fraud investigation by the SEC into the Baidu-backed firm.
The shares of Chinese Netflix-style service provider iQIYI Inc (NASDAQ: IQ) plunges after the Securities and Exchange Commission (SEC) launches a fraud investigation into the company. The early allegations of fraud in iQIYI were first brought to limelight by Wolfpack Research, a self-proclaimed “activist research and due-diligence firm,” who released a report accusing iQIYI of fraud and inflating its numbers.
This report has placed iQIYI on the radar of SEC, a situation that became more necessary following the Donald Trump administration’s clampdown on Chinese companies operating in the United States. This determination was further precipitated by the Luckin Coffee scandal, which happened back in April.
According to iQIYI , the SEC is “seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.” Obligated to comply with the ongoing investigations, iQIYI said:
“It has employed the services of professional advisers to conduct an internal review into certain of the key allegations”.
The shares of iQIYI which closed 2.43% on Thursday crashed further after hours of trading. IQ stock was 10.98% down after hours and it is currently pegged at $19.30 per share.
Details About the Wolfpack Research on iQIYI
iQIYI was brought into the United States market by Chinese search giant Baidu Inc (NASDAQ: BIDU) in a U.S. Initial Public Offering (IPO) back in 2018. The well-backed IPO raised over $2.2 billion for the new firm and Baidu’s stake in iQIYI is over 56% to date. Renowned as the “Netflix of China”, it has become one of the major content streaming platforms in the country with new markets emerging abroad.
The Wolfpack Research group alleges that iQIYI’s IPO was flawed by inconsistent data claiming the streaming service company “was committing fraud well before its IPO (initial public offering) in 2018 and has continued to do so ever since.” In the report, Wolfpack Research alleged that iQIYI inflated its 2019 revenue by approximately 8 billion yuan ($1.13 billion) to 13 billion yuan ($1.98 billion), or 27% to 44%.
Wolfpack Research believes that:
“IQ does this by overstating its user numbers by 42%-60%. Then, IQ inflates its expenses, the prices it pays for content, other assets, and acquisitions in order to burn off fake cash to hide the fraud from its auditor and investors”.
These bold claims are now been investigated by the SEC.
Similarities to Other Multinational Scandals
This year has seen the rise and fall of different multinationals. Though not a Chinese business entity, Wirecard AG (NASDAQ: WDI) got embroiled in a scandal that saw about 1.9 billion euros varnish from the payment service provider’s balance sheet. Worthy to note that the Wirecard (WDI) scandal was pre-reported by UK based Financial Times almost a year before auditors uncovered the missing funds, a situation that bears similarities with this iQIYI scandal allegations.
Chinese coffee conglomerate Luckin Coffee Inc (OTCMKTS: LKNCY) also experienced a similar negative media buzz when an investigation reveals that the company’s COO Jian Liu fabricated 2019 sales data up to a tune of 2.2 billion yuan ($310 million).
With the growing China-US economic tensions, the discovery of Chinese firms being embroiled in any form of scandal or fraud helps the United States to propound its no-tolerance case for other Chinese business outfits operating on the U.S. soil.