On May 18th, short-seller Muddy Waters Research claimed that at least 70% of GSX's users are fake and that the real number is likely to be 80% or higher. At the same time, Muddy Waters Research suggested that Chen Xiangdong, the founder and chairman of GSX's has pledged at least $318 million worth of shares, which may cause the stock price to plummet. GSX's share fell 7.3% to close at $32.84 on the stock market today and the market value also shrank by about US $ 600 million.
Muddy Waters stated that it analyzed 54,055 users and attendance data files in this report. Through investigation, Muddy Waters found four types of bots, including Precise Joiner, IP Joiner, Burst Joiner, and Early Joiner. Muddy Waters also suggested that the total number of bots in GSX's has reached 80.8%. Additionally, Muddy Waters assumed that the fraudulent portion of GSX's revenue is at least equal to the percentage of fraudulent users.
In the report, Muddy Waters quoted a statement from a person who claimed to be a former manager at GSX. This former manager explained various details of GSX's extensive bot operation and mentioned three companies that provide robot services to GSX, including Weishi live teaching app under GSX and Beijing You Lian Huan Qiu, which GSX holds 30% of the shares.
The report pointed out that GSX pays a certain percentage of the commission (for example, 2%) or provides free advertising space to hire the above companies to buy courses via fake accounts. In this way, it inflates the income and replaces the money which was supposed to pay to external companies for purchasing courses with market fees.
In response, GSX said that Muddy Waters had a poor understanding of company's operational details. As for the multiple Precise Joiners and Early Joiner situation issues pointed out by Muddy Waters, GSX stated that these issues are not related to bots operations. Instead, they were due to the process of switching from small-sized class to large-sized class teaching mode. Additionally, GSX suggested that based on the full-price data from January to March 2020, the company recalculated the IP coincidence rate and concluded that the coincidence rate was 0.78% instead of 28.2%. Besides, GSX denied that it used third-party apps to achieve scalping.
Since February 2020, GSX has been accused of financial fraud by five short-selling firms. In February, Gruzzly Research suggested that GSX's business is fraudulently inflated. In April, Citron Research published three reports saying that 70% of GSX's revenue is overstated and fraudulent and 40% of GSX's users are not real. In May, Scorpio VC reported that GSX forged its financial and business data.