Another Chinese company is being investigated by the US Securities and Exchange Enforcement Agency. It is interesting to note that this company, which has been hit by short selling, has seen its share price rise, rather than fall, by 200% over a period of several months. But what will happen after the last 3 years of filings with regulators? The company said it was “unpredictable”.
U.S.-listed Chinese online tutoring company Whom to Learn from (GSX Techedu) plunged 12 percent on Wednesday and continued to fall 5.44 percent on Thursday to close at 5.44 percent per share on the New York Stock Exchange (NYSE) after news broke on Wednesday (Sept. 2) that it was under review by the U.S. Securities and Exchange Commission (SEC). 78.75 USD.
The report, filed with the SEC on Sept. 2, says that after the short-selling firms issued their reports, the SEC’s Enforcement Division requested financial and operational records from January 1, 2017.
The report also states that the SEC’s engagement followed an internal independent review of key allegations in the reports by a third-party professional consultant hired by the audit committee of the company’s board of directors.
In April, the Chinese RuiXiu coffee chain, once hailed as the world’s fastest-growing in the world, was exposed as a fraud by short-sellers after it raised more than $1 billion, resulting in the company admitting that most of its 2019 sales were faked. The scandal caused its shares to plunge, and it was delisted from the Nasdaq and entered over-the-counter trading, where its shares are now trading at $1.20.
Last month, video streaming service provider iQiyi was revealed by short-seller Wolfpack Research to have overstated its 2019 revenue by as much as 8 to 13 billion yuan. iQiyi said the SEC has requested financial records and other documents, and the company has hired a professional consultant to conduct an internal audit. The stock closed at $22 on Thursday.
The SEC’s investigation into the “follow-the-leader” probe is based on allegations from at least five short sellers, including short-sellers Citron Research and Muddy Waters Research.
Andrew Left is the editor of the online investment newsletter Citron Research and the author of the “Follow the Whom” short selling report. In mid-April of this year, he published a short-seller’s report stating that the Beijing-based online after-school tutoring company’s annual revenue was inflated by 70%.
In a letter to the SEC, Citron Research said that Learning from Whom engaged in an “aggressive and persistent fraud” by using shell companies to shift costs on its books, allowing it to acquire customers at half the cost of competitors with better financing and become the only profitable company in the K-12 online learning space.
According to a report released by Muddy Waters Research on May 18, 73.2 percent of online students who can be identified as “follow me” are “bots,” while less than 20 percent are actually students.
However, neither of the two short-selling firms’ strikes has been able to curb the growth of Follow Me shares. Reuters reports that from the time Citron Research published its short report on Who’s Who in mid-April to mid-August, the stock soared 200%. Even at today’s share price, the stock is up 160%.
It’s a matter of supply and demand,” said Yaffe Kuo, a New York-based investment expert and head of Pride Capital Management, “and if the evidence doesn’t stack up, the big shareholders won’t talk to you. Because he’s not like Raisin Coffee where you can measure them one by one, now it’s difficult to ask how many of them are robot students.”
And Yaffe Kuo said that short selling is also risky, “because the short sellers have to sell the stock first, and if the big investors don’t sell but still buy, are you going to be forced to take a position?” The stake in Learn From Whom is basically held by Chinese investors and U.S. institutions,” said Yafu Guo.
“The company’s board members and executives, as well as an employee stock ownership platform, collectively owned nearly 60 percent of the company’s stock as of Feb. 29, 2020, according to a report filed with the SEC by Follow the Whom.
According to CNN Business, the top 10 institutional holders of the company’s stock are financial giants: Morgan Stanley, Goldman Sachs, Citigroup, Nomura Securities, Credit Suisse, Banc of America Securities, Bank of America, UBS Securities, JPMorgan Chase, and Mitsubishi UFJ Securities, all of whom own about 38 percent of the total.
Reuters reported in August that Citron Research is betting that the Trump administration’s tougher line on U.S.-listed Chinese companies “could help curb the rise of Who’s Who,” according to the company. Citron Research’s accusations are false and unfounded, according to Who’s Who.
In May, the U.S. Senate unanimously and without debate passed the cross-party Foreign Company Accountability Act, which would require foreign companies listed in the U.S. to comply with U.S. auditing requirements.
“The company’s quarterly financial report, filed with the SEC on September 2, showed impressive results, with net income of RMB 1,653.0 million for the second quarter ended June 30, up 366% from the same period last year. The company expects net income for the third quarter to be in the range of RMB1.936 billion to RMB1.966 billion, an increase of 247.6% to 253.0% year-over-year.
What will be the future fate of this China-listed company in the U.S. stock market? Perhaps, as the report says, the results and consequences are “unpredictable.
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