Back in April, Chinese video streaming company iQiyi (NASDAQ:IQ) was hit by allegations of fraud. Wolfpack Research and short-seller Muddy Waters, which spotted Luckin Coffee‘s fraudulent accounting before the regulators did, accused iQiyi of inflating its revenues by 27% to 44% in 2019.
Moreover, Wolfpack claimed iQiyi had inflated its revenues all the way back to 2015, long before its spin-off from Baidu (NASDAQ:BIDU) in 2018. That timeline seemingly implicated Baidu, which maintains a majority stake in iQiyi, and both stocks initially sank. Those troubles worsened in August, when iQiyi disclosed an SEC probe of its accounting practices.
But in early October, iQiyi said it concluded an internal review and “did not uncover any evidence that would substantiate the allegations.” The review was conducted by an independent audit committee with the assistance of professional advisors, including a top accounting firm which isn’t iQiyi’s auditor. It also said it will “continue to cooperate with the SEC.”
iQiyi and Baidu aren’t out of the woods yet, but the announcement lifted both stocks. Should investors assume the worst is over?
Did the short-sellers follow Muddy Waters’ lead?
If we track the short interest in iQiyi and Baidu this year, we’ll notice Wolfpack’s report in April didn’t attract a stampede of short-sellers to either stock, and the percentage of shorted shares remained fairly stable: