Chinese streaming service iQiyi faces SEC probe

Shares of iQiyi tumbled on Friday after the launch of an SEC probe into fraud allegations against the company. Yahoo Finance's On the Move panel discusses.

Video Transcript

JULIE HYMAN: We also want to talk about-- speaking of various investigations, I just mentioned a few moments ago the company in which Baidu owns a majority stake is called iQiyi. It's been called the Netflix of China, and now the Securities and Exchange Commission is investigating it.

It was sort of sparked by a researcher's report on this, a company called Wolfpack that made allegations against the company earlier in the year. Ines, the stock is down quite a bit since this news of the SEC investigation came out. What's at the center of these various allegations here?

INES FERRE: It's basically that Wolfpack had put out this research-- and Muddy Waters had also shorted the stock back in April-- saying that-- basically calling this a fraud, saying that the company has overstated its numbers, saying that it's inflated user numbers and also its revenue.

So the SEC probe actually cites some of the acquisitions and investments that were in this Wolfpack Research. And iQiyi is saying that it's cooperating with the SEC, but it's not really giving a time frame or what kind of impact this kind of investigation or probe will have on the company. Now, Jefferies is keeping its bullish rating on the stock. It's keeping a buy on it, saying that this near-term headwind don't change the long-term story.

But I will tell you that it comes at an interesting time of when there are rising tensions between the US and China, where there's a risk that people are talking about of whether Chinese companies may be delisted here in the US. And, of course, also you had the situation with Luckin which had Muddy Waters shorting Luckin over its allegations of fraud and then what happened with its own investigation with Luckin and subsequently the delisting of that stock.

So this will be something that will be paid attention to definitely over the coming months. Right now, the stock is down 15%. iQiyi had reported its quarterly results, but it's all really getting overshadowed over this SEC investigation.

JULIE HYMAN: Yeah, it's interesting that you brought up Luckin, right? And that was the other sort of spectacular blow up, if you will, based on accounting allegations. It's also interesting that it's Wolfpack and not Muddy Waters in this particular case because Muddy Waters-- Carson Block's short-selling research firm has been active on this front for years trying to sniff out what Carson says are accounting irregularities in various Chinese companies. Sino Forest is another that comes to mind that has been among his targets and that have ended up sort of crumbling as a result. So it'll be interesting to see what happens this time around and if there are more of these types of issues that will come up going forward.

Adam, I know that you're looking at this also in the sort of wider context.

ADAM SHAPIRO: Yeah, I mean, when you talk about a Cold War, if that's even the appropriate term, you've got news out of the "Jerusalem Post" that the United States and Israel close to signing a memorandum of understanding that Israel would not use Chinese equipment as that country builds out its 5G networks. We have, for instance, India also taking steps against TikTok. So you've got to wonder, are, you know, the allies aligning pro-US, pro-China and how that's going to play out?

I mean, Rick, you understand the politics of these kinds of things. It's as if the world is readjusting to the new war.

RICK NEWMAN: Sure, but let's go back to these companies. It sounds as if what-- I mean, it's worth keeping in mind that these companies we're talking about, Luckin and now iQiyi-- did I say that right, Julie, "I-chi-E," the Netflix of China-- that these are actually real. These are not fraudulent businesses. These are real businesses that sound as if they are inflating their numbers.

And this is not a Chinese phenomenon. You know, we've certainly had companies here in the United States that have done this. You know, remember General Electric back in the Jack Welch era the way they smoothed their earnings. You know, some people thought they were always pulling sales to or from the last or the next quarter just to keep things going, and they were very artful at it. But we certainly had other companies in the United States that have done that.

So it sounds like a financial-discipline issue that-- I don't know where the enforcement needs to come from here. But, you know, short sellers and activists getting on the case of these companies are definitely a good thing. So maybe we'll see more of that from the likes of Wolfpack and Muddy Waters and some others.

JULIE HYMAN: I have a feeling we will. All right, guys.