It is very sobering and likely to dissuade you from ever investing in that stock. quotes delayed at least 15 minutes, all others at least 20 minutes. leadership team, celebrate their IPO as they ring the New York Stock Exchange opening bell, Thursday, June 6, 2019. CNBC made that argument when it analyzed the LK stock debacle in April. They called TAL Education (TAL) ‘fake finance’ in 2018. 3 Key Takeaways From the Luckin Coffee Stock Fraud, immediately poo-pooed its rival’s research, it defended Luckin Coffee two hours after the tweet, 7 A-Rated Gold Stocks to Buy For Your Portfolio Hedge, BABA could defraud investors if management wanted to, 7 Outdated Tech Stocks to Sell Before It’s Too Late, Louis Navellier and the InvestorPlace Research Staff, Don’t Chase CIIG Merger in the EV Stock Buying Frenzy, Matt McCall and the InvestorPlace Research Staff, What Did the Stock Market Do? GSX Techedu Chairman and CEO Larry Xiangdong Chen, right, along with members of the company's ... [+] leadership team, celebrate their IPO as they ring the New York Stock Exchange opening bell, Thursday, June 6, 2019. Famous short selling research firm, Muddy Waters, is going after another Chinese company after highlighting questionable accounting at Luckin Coffee, now … Famous short selling research firm, Muddy Waters, is going after another Chinese company after highlighting questionable accounting at Luckin Coffee, now halted on the Nasdaq. Luckin Coffee, the Chinese rival to Starbucks, was suspended from trading following Muddy Waters ... [+] allegations of sales accounting fraud. Muddy Waters said it was shorting the stock, expecting it to fall. In January 2020, Muddy Waters Research said it had received an “anonymous” report on Luckin Coffee (NASDAQ:LK). Net income increased 336.6% to RMB148 million, from RMB33.9 million in the same period of 2019. The lessons are very sobering indeed. Opinions expressed by Forbes Contributors are their own. The U.S. may not be able to effectively regulate Chinese companies that list on U.S. exchanges. 1125 N. Charles St, Baltimore, MD 21201. According to him, all Chinese listed stocks are an “extreme fraud risk.” He cast a skeptical eye at Chinese e-commerce giant Alibaba (NYSE:BABA) back in 2014, according to The New York Times, saying that BABA could defraud investors if management wanted to. The statement warns investors of “heightened risks” from stocks based in these countries, as a result. The Public Company Oversight Board is supposed to inspect and audit foreign auditing companies. Muddy Waters said they downloaded data from more than 200 paid K-12 education courses which equaled 54,065 unique users. 1125 N. Charles St, Baltimore, MD 21201. My work has appeared in The Boston Globe, The Nation, Salon and USA Today. GSX is an almost completely empty box.”. IQ stock tumbled 14% after the report. Earlier this year, Muddy Waters uncovered a suspected accounting fraud at major Chinese coffee store chain Luckin Coffee, which the Chinese company admitted to in April. 2020 InvestorPlace Media, LLC. Doesn't follow the herd. “China is to stock fraud as Silicon Valley is to technology,” he said, noting he had no evidence of Alibaba fraud, but used the company to illustrate his point. You may opt-out by. Article printed from InvestorPlace Media, https://investorplace.com/2020/05/lk-stock-fraud-lessons-muddy-waters-research/. “Based on the near total faking of users, we assume that the fraudulent portion of GSX’s revenue is at least equal to the percentage of fraudulent users,” report authors wrote. Muddy Waters says that GSX founder and CEO Larry Xiangdong Chen recently pledged at least $318 million of his own stock. Another major takeaway: Don’t trust some Chinese companies listed on Nasdaq or the New York Stock Exchange. LK stock last traded at $4.39 on April 6. According to the The Wall Street Journal, the SEC admitted in a recent statement that it has limited ability to promote and enforce its standards in emerging market countries. The company’s offices in Hong Kong and Arizona were not open for comment. “Long holders of GSX face the risk that the margin lenders will be forced to aggressively sell the stock, crashing the price,” according to Muddy Waters. Three months later, Luckin announced fired its CEO and COO and the stock was prevented from trading on NASDAQ. According to their research, around 70% of its users are fake. Three months later, Luckin announced fired its CEO and COO and the stock was prevented from trading on NASDAQ. Muddy Waters said, at the time, the report seemed credible. Second, don’t invest in Chinese companies. Many of them turned out to be frauds. Their stock is up 40% year-to-date, beating the MSCI China by a country mile. It kept its position in the stock. Net revenues increased 382.0% year-over-year to RMB1.3 billion. Muddy Waters is well known for going after Chinese entities listed in the U.S. Only now, their concerns over companies cooking their books comes at a time when President Trump has hinted that Chinese companies need to abide by anti-fraud regulations, the Sarbanes-Oxley Act, or should not be allowed to list on an American exchange. Luckin … LK stock … But according to CNBC, “China is one of the few countries that has not been cooperating with the board.” The article interviews Sen. Marco Rubio of Florida and his dislike for non-complying foreign listed companies listed in the U.S. First, don’t easily turn away from Muddy Waters reports, especially in regard to Chinese companies. The company posted an extensive 89-page paper implying that LK stock was both a fraud and a broken business. So far iQIYI is denying the report is true. The author of the report claimed to have documented 11,260 hours of store traffic surveillance video that suggests Luckin inflated the number of items sold per store per day by 69% in the third quarter of 2019 and 88% in the fourth quarter of 2019. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes. Their stock is up 32% since. Without users, there is no revenue. On May 6, GSX announced strong first quarter earnings as many students were stuck at home in coronavirus quarantine. Rival research company Citron Research immediately poo-pooed its rival’s research on Luckin Coffee in January. Copyright © All Rights Reserved, This is a BETA experience. But CNBC does not say what these stocks will be in the future. I write about business and investing in emerging markets. Copyright © 2020 InvestorPlace Media, LLC. Financial Market Data powered by FinancialContent Services, Inc. All rights reserved. Bottom line: if you end up having an urge to invest in Luckin Coffee after it starts trading, do this first. The report charges the “Netflix of China” of fraud and inflating its numbers. All rights reserved. This one is Chinese online educator, GSX Techedu Inc. (GSX). In fact, CNBC correctly points out that about a decade ago many Chinese companies started going public in the U.S. via reverse mergers. As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Their info is based on GSX’s student user and attendance data. Citron Research lost big. © 2020 Forbes Media LLC. The CNBC article was even more critical on the ability of the SEC to oversee auditing in China. (AP Photo/Richard Drew). GSX shares opened 10% lower but recovered somewhat and are now down 6.8% late morning. 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