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On Tuesday, Chinese search engine giant Baidu announced it was acquiring a live-streaming service called YY Live from Guangzhou, China-based social media firm JOYY in a $3.6 billion all-cash deal. The purchase would be a chance for Baidu to expand into live-streaming, an enormously popular social media and retail channel in China.
But less than two days later, a report by short seller Muddy Waters Research accused YY Live of extensive fraud.
In a report published Wednesday, San Francisco-based Muddy Waters said YY Live is “almost entirely fake.” Muddy Waters said in a statement that it had been investigating YY Live for a year and was unprepared “for the surreality of Baidu announcing its intention to buy YY Live from JOYY” just as Muddy Waters was preparing to release its findings that “YY Live is about 90% fraudulent.”
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China’s live-streaming industry is booming. It’s currently worth roughly $66 billion, but analysts say the pandemic is accelerating growth so much that the market could double by the end of the year. On live-streaming platforms, influencers and celebrities broadcast real-time videos of themselves doing various activities—talking to fans, conducting makeup tutorials, even farming—and viewers can send them cash gifts or purchase products featured in the videos directly from the streams.
JOYY, which debuted on the Nasdaq in 2012, was a standout in the live-streaming market, with a market capitalization of $8 billion before the Muddy Waters report. When it released its third-quarter financial results on Monday, JOYY reported a 36% year-on-year increase in revenue, 390 million global average monthly active users (MAUs) across all platforms, and 92 million average MAUs on its live-streaming services.
But the Muddy Waters report on JOYY alleges that a majority of fans on YY Live are actually bots; live-streaming performers on YY Live receive “only a fraction” of their reported earnings, and much of the activity on the site consists of “continuous sham transactions.” It described YY Live as “an ecosystem of mirages.”
Muddy Water claimed JOYY’s other businesses—its international live-streaming arm called Bigo and its online dating service—are fraudulent too. JOYY’s shares dropped 26% on Wednesday in New York.
Baidu and JOYY didn’t immediately respond to Fortune‘s requests for comment. JOYY told Bloomberg that the Muddy Waters report was “full of ignorance about the live-streaming industry” and contained “a large number of errors with unclear logic, confusing data, and hasty generalizations.”
Muddy Waters, for its part, has an established track record of accurately alleging fraud, including identifying misconduct by U.S.-listed Chinese firms.
Muddy Waters published a report citing fraud at China’s Luckin Coffee chain on Jan. 31. Nasdaq delisted Luckin in July after Luckin revealed in April that an internal investigation had uncovered substantial sales fraud.
Muddy Waters alleged in May that GSX Techedu, a New York Stock Exchange-listed Chinese education company, had a majority of fake users. The U.S. Securities and Exchange Commission subsequently launched an ongoing probe into the firm, which several other short sellers had also flagged for fraud. GSX said it was conducting its own review of the allegations that is also ongoing.
The fraud allegations against JOYY come as the U.S. tightens regulation requirements for Chinese firms hoping to list on U.S. exchanges, a shift jumpstarted by the Luckin fraud scandal. The SEC is going forward with a plan to delist companies that don’t comply with certain U.S. audit requirements, which disproportionately applies to U.S.-listed Chinese firms.
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