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(Bloomberg) — Chinese livestreaming video giant Joyy Inc. dismissed allegations of fraud by Muddy Waters’ Thursday, saying the short seller’s report was replete with errors and demonstrated an ignorance of the red-hot industry.

Joyy, which is selling its YY Chinese business to search giant Baidu Inc., said the 71-page Muddy Waters report issued Wednesday was confusing and full of generalizations about a format Joyy helped pioneer, now one of the fastest-growing segments of the world’s largest internet arena.

US short-selling firm Muddy Waters has rejected the preliminary findings of a probe by France's AMF financial regulator into its criticism of retailer Casino. The comment from the short-seller comes days after Chinese search engine giant Baidu Inc decided to acquire JOYY’s domestic streaming platform YY Live for $3.36 billion in cash. Muddy Waters said the deal announcement came just as it was preparing to reveal that its year-long investigation shows YY Live is an “ecosystem of mirages”. Muddy Waters is Short Groupe Casino (CO:FP) Groupe Casino (CO FP) is one of the most overvalued and misunderstood companies we have ever come across. The basic problem with Casino is that its financial statements are literally meaningless to understanding the company’s (poor) health. The outspoken activist-short seller Muddy Waters has a reputation as a harbinger of doom for companies. A bad report, or even simply the disclosure of a short position on a company, can be a kiss of death. After a series of successful short campaigns against well-known companies, Muddy Waters has come to be viewed by some as the industry spotlight under which corporate misconduct is.

The stock was up more than 14% in pre-market trading Thursday, recouping some of the 26% selloff of the previous session that marked its biggest single-day decline. Muddy Waters called YY a “fraud tech company,” casting doubt over its sale to Baidu for $3.6 billion. The allegations now overshadow an acquisition intended to help Baidu catch up in the competitive arena of online entertainment after a late start in livestreaming video. Representatives of the company had no immediate comment.

Short sellers like Muddy Waters often conduct research on companies they suspect of being overvalued. They then sell borrowed stock in the target companies — known as “selling short” — expecting share values to fall when they publish their findings. Short sellers then buy target-company shares at lower prices to replace the borrowed stock and pocket the difference.

“Muddy Waters’ report is full of ignorance about the livestreaming industry and the livestreaming ecosystem,” Joyy said in a texted statement. “The report contains a large number of errors with unclear logic, confusing data and hasty generalizations.”

Joyy stopped short of directly rebutting the allegations in its brief statement.

Shares of livestreaming peers Momo Inc. and Douyu International Holdings Ltd., which operate similar business models, slid more than 4%. Baidu finished 1.3% lower amid a broader U.S. market decline.

Muddy Waters Research founder Carson Block earlier said Joyy’s livestreaming service YY is “guilty of bot forming, creating fake transactions and having fake users.” After a year-long investigation, Muddy Waters alleged evidence of revenue inflation: livestreamers who got paid during long periods of absence or inactivity; mismatches with local credit reports it obtained; and payments originating from company servers. Muddy Waters also disclosed it holds a short position in Joyy.

The tactics outlined in the Muddy Waters report aren’t intended to inflate revenue but to juice popularity among users, said Ke Yan, a Singapore-based analyst with DZT Research. The research company may be misjudging how common the practice was of initially using bots to generate interest, said Chen Da, executive director at Anlan Capital. It’s customary to try to goose numbers for livestreams in the hope they will draw in real users who would then contribute actual money, he said.

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“You can’t really apply the research methods used to collect fraudulent evidence against real-economy or manufacturing firms to internet firms,” Chen said. Their “business model does pay off, and there is real cash flow brought in after the fakes ‘get the ball rolling.’”

Joyy may have to spend significant time and resources to dispute Muddy Waters’ allegations of fraud, which may be difficult to disprove quickly. This may involve internal reviews with independent committees and external advisers. In the meantime, the doubt cast into investors’ minds could be an overhang, and there may be uncertainty about the completion of the pending deal to sell YY Live to Baidu, said Vey-Sern Ling and Tiffany Tam, analysts at Bloomberg Intelligence.

With YY, Baidu was supposed to get a $1.8 billion business with 4 million paying users who splurge on virtual gifts to tip their favorite performers. The acquisition marked the search engine giant’s biggest effort to diversify revenue streams beyond advertising and tap consumer spending. Once the runaway leader in desktop search, Baidu is trying to adapt its business to the mobile era but is losing ground piecemeal to up-and-comers such as ByteDance and Kuaishou.

To compete for users and advertisers, Baidu’s core search app is morphing into a platform hosting a wide array of content from articles to videos, not unlike Tencent Holdings Ltd.’s WeChat. Its Netflix-style iQiyi Inc. — whose shares plunged in April after another short seller’s report — is also going head-to-head with services run by Tencent and Alibaba Group Holding Ltd.

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Even before Muddy Waters questioned YY’s revenue model, analysts flagged its declining growth and market share losses to rivals like ByteDance Ltd.’s Douyin and Tencent-backed Bilibili Inc.

Started in 2005 as a chat tool for gamers, YY was among the pioneers of a way to monetize livestreaming by taking a cut of virtual gifts bestowed by fans. In 2014, its parent launched Twitch-style Huya Inc. using the same model. That unit was later spun off and is now in the midst of merging with DouYu International Holdings Ltd. to create a $10 billion game-streaming giant controlled by Tencent.

YY itself is now losing appeal to hotter formats like video-streaming platform Bilibili, the TikTok-like Kuaishou and TikTok’s Chinese twin Douyin — a problem also faced by Baidu’s own iQiyi. YY’s paying users actually declined 4.7% in the September quarter.

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