iQiyi, the Netflix of China, faces SEC probe

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Shares of Iqiyi Inc., a Beijing-based Netflix-like streaming service by Baidu,  plunged early Friday after the company said it's facing a U.S. Securities and Exchange Commission investigation.

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The company said it's cooperating with the probe, which is looking into financial records dating back to Jan. 1, 2018, and acquisitions and investments that were highlighted in a report published by Wolfpack Research.

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IQIQIYI INC.19.32-2.36-10.89%

“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, including accounting policy analysis, data analytics on whether the company manufactured orders and inflated revenues and/or expenses,” Iqiyi said.

Wolfpack alleged Iqiyi inflated its revenue by as much as 44% and its daily active user numbers by up to 60%, among other things.

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“Like so many other China-based companies who IPO with inflated numbers, IQ is unable to legitimately grow their business enough to true up their financial statements,” Wolfpack Research wrote in April.

Iqiyi is at least the second high-profile Chinese company to face an SEC investigation this year. Luckin Coffee, a Xiamen-based Starbucks competitor, was delisted from the Nasdaq in March after an internal investigation found the company’s chief operating officer and other employees fabricated sales.

The Iqiyi probe comes amid calls for the U.S. to clamp down on Chinese companies listing on U.S. stock exchanges, which like other foreign firms don’t have to meet the same accounting standards as American businesses.

A Senate bill passed in May said that if the Public Company Accounting Oversight Board — a nonprofit established by Congress after the WorldCom and Enron scandals of the early 2000s — is denied access to a foreign stock issuer's books for three years, the SEC can delist shares of the company in the U.S.

Iqiyi lost 1.4 billion Chinese yuan ($204.1 million) during the three months through June as revenue edged up 4% to 7.4 billion Chinese yuan ($1 billion). The company lost 2.3 billion Chinese yuan a year ago.

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Iqiyi shares debuted on the Nasdaq after the company was spun off from Baidu in March 2018. Shares traded as high as $46.23 in June 2018 and finished at $22.22 on Thursday, giving the company a $15.84 billion market capitalization.

Shares were up 2.71% this year.

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