SEC opens fraud investigation into Chinese streaming service iQiyi

17 Aug, 2020 00:38
source: Singularity Financial

Singularity Financial Hong Kong August 17, 2020 – Iqiyi Inc., a Chinese Netflix-style streaming service that’s backed by Baidu Inc., tumbled as much as 19% after disclosing that the company is under investigation by the U.S. Securities and Exchange Commission.

iQiyi revealed that the U.S. Securities and Exchange Commission is investigating the company in the wake of a report issued by noted short-seller Wolfpack Research back in April. iQiyi also admitted for the first time the existence of an internal investigation into allegations contained in the report.

Iqiyi said on Thursday that it’s cooperating with the probe, which is seeking financial and operating records dating from January 2018. Investigators are also seeking documents about acquisitions and investments that were cited by short seller Wolfpack Research in a report in April, the company said.

The company says it has hired “professional advisors” who are conducting “an internal review into certain of the key allegations in the Wolfpack Report.”

“These professional advisers have been examining the company’s books and records and undertaking testing procedures that, in their judgment, are necessary and appropriate to evaluating the key allegations in the Wolfpack Report,” Beijing-based Iqiyi said in a statement, which accompanied its second-quarter results. The review will include “accounting policy analysis, data analytics on whether the company manufactured orders and inflated revenues and/or expenses.”

The Wolfpack report, titled iQiyi: The Netflix of China? Good Luckin, alleges that iQiyi had been cooking the books, even prior to its 2018 IPO, by reporting fraudulent user numbers that are overstated by as much as 60%. The report goes on to say that iQiyi’s revenue was inflated as high as 44% to correspond with the overstated user numbers.

Wolfpack claims to have interviewed 1,563 Chinese consumers late last year, finding that many iQiyi customers had access to the higher tiers of the service via dual memberships with Xiaomi TV and e-commerce provider JD.com. The report alleges that iQiyi reported the sales on a gross basis, thereby inflating its total revenue. Wolfpack also contends that the company has consistently inflated deferred revenue from longer-term subscriptions, while overstating the value of barter transactions resulting from content trades with partners.

Despite reported growth in June-quarter earnings, Baidu-backed streaming service iQiyi has seen its stock tumble near 20% to USD 19.00 by far after it disclosed that the US Securities and Exchange Commission (SEC) was probing the firm.