What happened

Shares of JOYY (NASDAQ:YY) have bounced back today, up by 16% as of 12 p.m. EST, after the company defended itself against fraud allegations made by short seller Muddy Waters. The stock plunged by 26% yesterday after the prominent bear released a lengthy 71-page report accusing the company of misrepresenting transactions and user engagement.

So what

Muddy Waters alleged that JOYY uses internal and external networks of bots to create gift transactions that represent an estimated half of gift volume on YY Live, the company's live-streaming platform that Baidu (NASDAQ:BIDU) just agreed to purchase for $3.6 billion. The short seller argued that YY Live's user metrics are inflated and that revenue is fraudulent. Muddy Waters also questioned JOYY's reported cash position.

Green stock chart with a line going up.

Image source: Getty Images.

"Muddy Waters' report shows its lack of a basic understanding of the live streaming industry in China," JOYY fired back. "The operating metrics disclosed by JOYY are commonly used and publicized by its industry peers."

The company backed up its defense by saying it would allow its balance sheet to be verified by third-party advisors. JOYY also said that its dividend policy is a "testament to the Company's confidence in its operating cash flow" and that it remains committed to its $300 million share repurchase program.

Now what

Chinese companies are frequently the target of fraud allegations, in part due to lax accounting standards and controls in China. The SEC is advocating stronger regulations that would require Chinese companies listed in the U.S. to comply with stricter auditing rules. Fraud allegations are serious, and JOYY investors should tread carefully and conduct due diligence.

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