Risk & Compliance

GSX Techdu Shares Fall Amid SEC Probe

The China-based online education company is being probed for allegedly inflating sales.
Lauren MuskettSeptember 3, 2020

China-based online education company GSX Techedu has confirmed it is the subject of an investigation by the Securities and Exchange Commission following allegations it was inflating sales.

GSX reported revenue of about $233 million for the second quarter, a more than four-fold increase year over year. It also said enrollment in its K-12 online course increased more than 300% year over year.

In a filing, the company said it was asked last summer by the SEC’s enforcement unit to share “certain financial and operating records” going back to 2017.

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The company has been a target for short-sellers in recent months.

In May, Carson Block of Muddy Waters Research said he had shorted the company’s stock after concluding it was, “a near-total fraud.”

Citron Research short-seller Andrew Left said the company’s suspicious enrollment numbers stood out in the highly competitive online education industry.

“That was a very important part of the short thesis,” Left said. “If the audits are done properly it will go to zero and delist.”

GSX also allegedly used shell companies to disguise expenses. The company has denied the allegations and said it had, “engaged third-party professional advisers to conduct an internal independent review” before the SEC’s review.

A number of Chinese companies have been caught in accounting scandals, including Luckin Coffee and iQiyi.

In June, Luckin said it would not contest Nasdaq’s decision to delist the company after a financial misconduct scandal that led to the firing of its chief executive officer and chief operating officer and sent its share price plummeting.

Last month shares of the streaming service iQiyi fell after it disclosed it too was the subject of an SEC investigation. That probe was prompted by a report from Wolfpack Research that accused iQiyi of inflating revenue and user numbers.

The company’s shares dropped 17% Wednesday morning on the news. They were down more than 5% Thursday.