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SEC Launches Probe Into IQiyi Over Fraud Allegations

Shares of Chinese streaming service iQiyi Inc. are losing more than 11 percent in Friday's pre-market activity after it said that the U.S. Securities and Exchange Commission has launched a probe into the company.

While reporting its second-quarter financial results on Thursday, iQiyi said that the SEC's Division of Enforcement is seeking from the company the production of certain financial and operating records dating from January 1, 2018.

The SEC has also sought documents from iQiyi related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.

Further, iQiyi said that after publication of the Wolfpack report, it hired professional advisers to conduct an internal review into "certain of the key allegations" in the Wolfpack Report. The internal review is ongoing.

In April, Wolfpack Research alleged in a report that iQiyi was committing fraud well before its initial public offering or IPO in 2018 and has continued to do so ever since.

The research firm accused iQiyi of fraud and inflating its financial numbers, saying that iQiyi inflated its 2019 revenue by about 8 billion yuan to 13 billion yuan, or 27 percent to 44 percent.

"Our research shows us that iQIYI, Inc. was committing fraud well before its IPO in 2018 and has continued to do so ever since. 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 said in its report.

iQiyi was spun off from Chinese search engine giant Baidu Inc. in 2018.

Shares of another China-based company Luckin Coffee, Starbuck's biggest rival in China, were delisted from the Nasdaq in June after the coffee chain admitted to fabricating its sales figures for 2019.

In early July, Luckin Coffee said that a special committee of its board found that the company's net revenue in 2019 was inflated by about 2.12 billion yuan.

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