GSX Techedu Shares Drop 13.6% As SEC Probes Short Seller Claims Of Tampered Earnings

Shares of chinese online education company GSX Techedu Inc GSX dropped in the regular and after-hours session on Wednesday, as reports suggested the company is under probe from the Securities and Exchange Commission over allegations that its sales numbers are fudged.

What Happened: According to Financial Times, the company received a notice from the SEC for sharing financial and operating records from 2017 onwards. The FT report comes just after the company announced a 367% bump in its second-quarter net revenues on a year over year basis.
Short-sellers flagged inconsistencies in the company’s earnings release were declared on Wednesday.

Carson Block from Muddy Waters Research claimed in May that almost 80% of the users in the GSX platform were fake, FT noted. Whereas another short seller from Citron Research, Andrew Left, feels that conducting proper audits could bring down the stock price to zero and lead to delisting the company.

Why Does It Matter: Investor faith in Chinese companies started dwindling after reports of the Luckin Coffee Inc. LKNCY fraud emerged, according to Left. It was not long before Muddy Waters Research claimed that Chinese streaming video-on-demand platform IQIYI Inc IQ 2019 revenues were inflated by $1.13 billion.

Price Movement: GSX shares closed 12% lower at $83.28 on Wednesday, and traded another 1.5% lower at $82 in the after-hours session.