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iQIYI, Baidu's Video Unit, Discloses SEC Investigation; Shares Tank

IQIYI fraud allegations first raised by short seller Wolfpack Research being probed by securities regulators.

Shares of Baidu  (BIDU) - Get Baidu, Inc. Sponsored ADR Class A Report and iQIYI  (IQ) - Get iQIYI, Inc. Sponsored ADR Class A Report were active in after-hours trading Thursday after each reported financial results, and after iQIYI disclosed that the Securities and Exchange Commission requested financial and operating records dating to Jan. 1, 2018 as part of a probe of issues raised by a short-seller.

Baidu, which owns 56% of iQIYI, posted quarterly revenue of $3.7 billion and adjusted earnings per share of $2.08. Wall Street had expected the company to report earnings of $1.38 a share on revenue of $3.7 billion. iQIYI reported revenue of $1 billion and a diluted net loss of $0.28 per share.

In April, short seller Wolfpack Research accused iQiyi of inflating user numbers and revenue, writing in a report that the Chinese online entertainment firm, which competes with Tencent  (TCEHY) , inflated its 2019 revenue by approximately $1.13 billion to $1.98 billion, between or 27% and 44%.

According to Wolfpack, iQiyi also inflates its expenses, the prices it pays for content, acquisitions and other line items in order to burn off fake cash positions and hide the fraud from investors and auditors. 

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“The SEC's Division of Enforcement is seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020,” iQiyi said in a statement. 

The company is also conducting its own internal investigation, according to the statement, and plans to cooperate with the SEC. 

Shares of iQiyi plunged 12.2% in after hours trading on Thursday after disclosing the SEC investigation. Baidu shares fell 6.6%.