seven reasons why deloitte cannot sign gsx annual audit

https://grizzlyreports.com/Website

@ResearchGrizzly

THE REPORT AND ALL STATEMENTS CONTAINED HEREIN ARE THE OPINIONS OF GRIZZLY RESEARCH, AND ARE NOT STATEMENTS OF FACT. AS OF THE PUBLICATION DATE OF THIS REPORT, GRIZZLY RESEARCH (POSSIBLY ALONG WITH OR THROUGH OUR MEMBERS, PARTNERS, AFFILIATES, EMPLOYEES, AND/OR CONSULTANTS) ALONG WITH OUR CLIENTS AND/OR INVESTORS HAS A DIRECT OR INDIRECT SHORT POSITION IN THE STOCK (AND/OR OPTIONS, SWAPS, AND OTHER DERIVATIVES RELATED TO ONE OR MORE OF THESE SECURITIES) OF THE COMPANY COVERED HEREIN, AND THEREFORE STANDS TO REALIZE SIGNIFICANT GAINS IN THE EVENT THAT THE PRICE OF GSX’S STOCK DECLINES. THEREFORE, USE GRIZZLY RESEARCH’S RESEARCH AT YOUR OWN RISK. YOU SHOULD DO YOUR OWN RESEARCH AND DUE DILIGENCE BEFORE MAKING ANY INVESTMENT DECISION WITH RESPECT TO THE SECURITIES COVERED HEREIN. THE OPINIONS EXPRESSED IN THIS REPORT ARE NOT INVESTMENT ADVICE NOR SHOULD THEY BE CONSTRUED AS INVESTMENT ADVICE OR ANY RECOMMENDATION OF ANY KIND. FOLLOWING PUBLICATION OF THIS REPORT, WE MAY CONTINUE TRANSACTING IN THE SECURITIES COVERED THEREIN, AND WE MAY BE LONG, SHORT, OR NEUTRAL AT ANY TIME HEREAFTER REGARDLESS OF OUR INITIAL OPINION. © 2020 GRIZZLY RESEARCH LLC. ALL RIGHTS RESERVED.

1

R E P O R T S

April 8th, 2021

Seven Reasons Why Deloitte CANNOT Sign GSX Annual Audit

Note on GSX Techedu Inc. (NYSE: GSX)

In February 2020 we published our first critical report about GSX. Today, over year has passed, and many inves-tors have come to see GSX for what it is. Many excellent reports were published over the last year by multiple reputable sources, making GSX the probably most exposed fraud in recent history. Unfortunately, regulators and auditors seem still reluctant to do the right thing. We strongly believe that it is within the auditors and regulators responsibility to ultimately remove GSX from a US stock exchange; In this report we focus on the issues that are within the scope and responsibility of the auditor to investigate. We also strongly believe that failure to investi-gate these issues will have serious consequences for GSX’s auditor Deloitte.

We also shares our thoughts on the recent trading environment, and GSX’s role at the center of systematic issues in today’s capital markets.

GSX is facing an important deadline. On April 30th 2021 GSX’s auditor Deloitte is supposed to give an opinion on the 2020 annual report and financial statements that GSX issued. We believe that even issuing a qualified opinion would be a grave mistake on Deloitte’s part. The issues at GSX at too glaringly obvious.

0

20

40

60

80

100

120

140

160

GSX Stock Price YTD

2


@ResearchGrizzly


R E P O R T S

April 8th, 2021


Recall that GSX previously was able to grow their topline at 300%+ yoy while maintaining profitability. GSX reported that their average marketing expense per student was merely 450RMB, less than half the industry average. It is truly ironic that CEO Larry Chen stated in an interview in June 2020 that Short-Sellers saved them over 500 million (RMB?) in marketing expenses. However, operating expenses suddenly increased close to 500% in consequent quarters. This occured after GSX had to delay its Q2 earnings and gave a rosy outlook for Q3 without any mention of exploding costs.

Where is the cost saving that we “short-sellers” provided? This kind of cost structure development is completely unrealistic as explored in multiple in depth research report published by short sellers. We believe this is evidence that GSX is pressured and can no longer cook their books as aggressively as they used to. Short sellers forced GSX’s hand and the increased scrutiny caused auditors to have a closer look at cash and related accounts. Conse-quently GSX had to come up explanations for the missing cash, which led to the invention of fictitious expenses. While the scheme is fairly obvious from the outside, auditors are in a position to actually verify expenses, billing, counterparts, bank wires and money flow. We strongly believe that Deloitte will find serious issues with verifying expenses. Specifically we doubt that bank wires underlying the transactions exist. It is up to Deloitte to verify this.

source: CapIQ

Reason 1: Abrupt Exploding Expense Confirms Cooking Books


http://vd3.bdstatic.com/mda-kf6pwhwd0fsff9si/mda-kf6pwhwd0fsff9si.mp4?playlist=%5B%22hd%22%2C%22sc%22%5D


@ResearchGrizzly


3

There have been multiple reports deep diving into the number of teachers without teacher certificates, or with fake certificates. As we have originally pointed out in our initial report, the vast number of tutors and teachers is simply unrealistic. According to Lujiu Caijing, Gaotu over reported qualifying teachers by 80%. These teachers appeared originally in their 2019 annual report, and magically disappeared once the Bureau of Education required GSX to publicly list them.

Moreover, of the few teachers that did have teaching qualifications, research indicates that many were fraudu-lent. Teacher certificate ID numbers are set up in a specific way, where certain digits represent genders and certain digits represent the grade they can teach. Researchers have identified that at least 15 teachers are teach-ing in grades they are not supposed to, or worse, magically changed genders. We encourage our readers to review the in depth reports on the teacher certification number fraud here.

Teachers and their verification numbers should be easy for auditors and related regulatory parties to check. All teachers and their Teacher Certificate are documented on the following website, http://www.gxis.net/zhengshu/. It requires a person’s National ID number and a Teacher Certification Number. Auditors only need to double check that all their Teacher Certificate Numbers in fact belong to the correct corresponding teacher, and that an employment contract exists with such teacher. We strongly doubt that GSX can produce these documents as they are harder to fake than other accounts.

source: GSX Website

source: http://www.gxis.net/zhengshu/

Reason 2: Gender Flexible Teachers

R E P O R T S

April 8th, 2021



https://m.sohu.com/a/453912363_250147/?pvid=000115_3w_a

https://www.deloittefraud.com/


@ResearchGrizzly


4

As we’ve initially pointed out in our report, the returns on GSX’s long-term financial assets are surprisingly low given how much cash they supposedly have. This prompted us to believe that they might have fake cash balanc-es. Investors have dug in deeper and found even more lies and inconsistencies in this respect. The verification of cash balances and investment liquid investment accounts should be fairly straight-forward. It requires verifica-tion of the bank balances and investment account balances. It would be a debacle to find out later that the cash balances did not exist, and all it would have taken was a call by the auditor to the bank to confirm the bank balance. This exact scenario has recently played out at Wirecard, and Ernst Young finds itself rightfully at the center of the outrage about audit failures. We see a similar debacle on the horizon for Deloitte if they were to sign off on GSX’s cash balances.

Reason 3: Long Term Investments

The recent private placement of $870m announced in December 2020 remains mysterious. GSX did not give any information about the identity of the purchaser, which is exceedingly strange for a placement of this size. We believe this lack of disclosure indicates potential related party transactions, circular funds and other problematic issues with the financing. We simply find it extremely difficult to understand why investors, who dare to back GSX while the company is under scrutiny, is reluctant to disclose their name and position. This is again a very easy issue to figure out for an auditor with access to internal documents. Deloitte does have the definitive answers to the following questions and its in their responsibility to inform investors about the truth: Did this placement really occur and who are the buyers? GSX also did not use a broker, which is unheard of for a transaction this size. CEO Larry Chen said they didn't need a broker because they had investors familiar with their business.

Reason 4: Mysterious Private Placement

In our initial report we outlined what we believe to be blatant CAPEX fraud. In January 2020 GSX purchased real estate for over RMB300m, but our research indicates that the purchase price was in reality on a fraction of what was reported to US investors. Even before the public scrutiny, GSX faced the problem of missing cash balances that came with fake profits. We believe the CAPEX fraud that occurred in January 2020 is easy to catch for audi-tors. We firmly believe that a flow of funds memo and corresponding wire confirmations do not exist for this transaction.

Reason 5: Land Acquisition

We advise the auditors to go over the key issues outlined within the whistle blower lawsuit, as well as other short seller reports. For your benefit, Grizzly has compiled the following key things to check into. Note some of which is overlapping with previous points. We are restating these in prevention of negligence. 1. Reconciliation of GSX financials in 2018. GSX financials deviate significantly from China SAIC financials. A retrospective examination of bank accounts, taxes filed will be able to indicate this as well.2. Related Parties: Auditors should investigate the current status of the potentially related parties we identified in our report, as well as additional related parties identified by Citron/Scorpio.3. Order Brushing: Enough has been said regarding this. Simply look at the mountain of data/screenshots and other evidence out there that show how many fake students GSX has.4. Teachers: Grizzly initially identified that GSX teachers were not what they marketed them to be, that many were merely cheap new grads with made up profiles. More recently, the website Deloitte watch conducted deep dive research and found even more issues regarding their teachers and teacher certificates. Please refer to previ-ous point.

Reason 6: GSX whistle blower lawsuit

R E P O R T S

April 8th, 2021



https://www.deloittefraud.com/fake-investments

5


@ResearchGrizzly


We believe the key underlying reason that Deloitte cannot issue GSX an audit opinion for 2020 is this: Deloitte faces real and serious monetary consequences if they signed off and GSX later turned out to be a fraud. We believe it is just a question of when, not if, GSX is widely recognized by even regulators as a fraud.

There will be severe consequences if Deloitte continues to sign off on GSX. Unlike EY, who got away from a fine on Lukin Coffee by not issuing an audit report on their 2019 earnings statement, Deloitte will put itself into huge regulatory risks and fines if they choose to sign off on the report. The mountain of evidence that point to GSX being a fraud are simply overwhelming.

Don’t make a mistake about it: GSX might be the biggest capital markets fraud in recent history. We believe the company has faked almost its entire financials, and still reached a market capitalization in excess of $30bn. This is approximately three times the size of Wirecard at the height of its fraud, and almost measures up to the likes of Enron with a market cap close to $60bn before the company blew up. The mind-boggling thing in our mind is the scale of the fraud: How could a company that we believe fabricates over 90% of its financials reach this size? Future regulators and market participants will look back on this period and rightfully guilt regulators and stake-holders who failed to protect the public from this fraud.

While fines for auditors are usually so small that they make committing fraud financially worthwhile, it is other penalties that Deloitte should be concerned about. Just recently in 2020, PCAOB imposed a $250,000 penalty on Marcum LLP and prohibited the firm from auditing clients in China for three years. The PCAOB and the Securities and Exchange Commission have been cracking down on Chinese companies for not complying with PCAOB standards and threatened to delist Chinese companies after a string of auditing scandals involving companies including Luckin Coffee and GSX Techedu. GSX is currently under investigation by the SEC.

According to our estimates Deloitte generates approximately $150M in annual revenue from Chinese clients.

Would Deloitte really want to sacrifice three years of business from so many other Chinese firms for just one firm?

Reason 7: Consequences for Auditors

R E P O R T S

April 8th, 2021



https://www.yicaiglobal.com/news/auditor-ey-denies-liability-for-luckin-coffee-financial-scandal

https://www.accountingtoday.com/news/pcaob-sanctions-marcum-from-doing-china-audits


@ResearchGrizzly


6

R E P O R T S

April 8th, 2021



GSX is the poster child for everything that is wrong in our current capital markets: Rampant market manipulation, crazy leverage, obviously fraudulent financials, and regulators

failing to act.

GSX at the Center of Systemic Issues - Stock Manipulation Left and RightNotably, GSX has been affiliated most recently with convicted stock manipulators. The manipulation played out in front of our eyes throughout 2021. We all watched, regulators did nothing.

After multiple exposes on GSX in mid 2020, option activity suggests that the stock was drive up by gamma squeezes. Ridiculous amounts of short dated options were bought and sold to artificially drive up GSX stock price. We saw that traders were actively “marking the tape” for GSX, bidding up GSX stock in the final trading hour. Whoever was behind this manipulation wanted to keep their identity hidden. As documented here, GSX stock has a disproportionate amount of dark pool orders. The majority of GSX shares are held in the name of investment banks that have total return swap agreements with investors who are able to conceal their identity through this mechanism. Between the disclosed position by Tiger Global and swaps approximately 75% of the float was controlled by unknown ultimate beneficiaries. This set the perfect stage for rampant manipulation.

These manipulations were well documented and exposed. Regulators stood by and did nothing.

Crazy Leverage Poses Systemic RiskThe true holders of GSX have managed to conceal their identity through total return swap agreements with banks. It has been speculated, and we also strongly suspect, that the second main reason for employing total return swaps is that it enabled the manipulators to circumvent regulatory leverage restrictions, and possibly, to fool investment banks by posting the same collateral for multiple swaps therefore acquiring even more leverage.The devastating effects of this leverage could be observed on March 26th, when GSX stock dropped by over 50%. New outfits reported that block trades were offered by major banks. What triggered this sudden sell off? Invest-ment banks might have found out that swap holders were violating leverage requirements or other clauses in their agreements between the banks and the swap holders. A sell off in an unrelated position might have triggered a margin call. Regulators might have contacted the banks, which caused the sudden sell off. Whatever the real reason, it is glaringly clear that crazy leverage causes volatility and instability in financial markets. GSX showcases the risks embedded in the leverage like no other company in today’s market.

https://www.sec.gov/comments/emerging-markets/cll9-7449534-220988.pdf


@ResearchGrizzly


7

R E P O R T S

April 8th, 2021


Seven Reasons Why Deloitte CANNOT Sign GSX Annual AuditWho is behind the Manipulation Scheme?Recent news have speculated, and an interview with Julian Robertson seems to confirm, that Tiger cub Bill Hwang and his fund Archegos Capital was suffering from recent sell of in GSX, as their positions were forcefully liquidated by banks. The story and scale are mind boggling. According to articles Bill Hwang managed to amass a $15bn fortune, that we has able to leverage to over $80bn in investments. Take a step back and digest these numbers, they are truly unprecedented. Hwang has also been involved, as many Tiger Global alumni, in insider trading and his firm paid a sizable fine to the SEC to settle charges.

Qian Yongqiang, the founder of hedge fund QQQ Capital bragged in Twitter in June that he would personally guarantee GSX stock would go above $100. He seems to be involved as well. Another Tiger Global affiliated fund, Teng Yue, was also reported to have had sizable losses in GSX’s recent sell off. It seems that a cabal of hedge funds, at least partly affiliated with Tiger Global, have coordinated to manipulate GSX’s stock price. We want to caution our readers to take these reports with a grain of salt, as they are based on insider talk and not objectively verifiable. We also are very skeptical of the assumption that Bill Hwang had personally amassed a $15B fortune, given that Tiger Global founder Julian Robertson is listed with a net worth that is only a fraction of this. Only a fraction of the truth has come to light so far. Whoever is behind the scheme, the SEC has the authority and duty to protect investors form this rampant manipulation by scrupulous hedge funds.


@ResearchGrizzly


8

R E P O R T S

April 8th, 2021


Seven Reasons Why Deloitte CANNOT Sign GSX Annual AuditWithout Referees the Incentives are PervertedSo it turns out that in absence of regulatory intervention, a massive fraud with a tight float is the new favorite long play for hedge funds who think of themselves as elaborate players. These are people who love gaming each other for profits, they have no regard for any social responsibility as capital allocators and couldn’t care less that they are bidding up a complete fraud.

GSX set the perfect stage for the manipulation: A heavily shorted stock (because it is an obvious fraud), lots of liquidity(worthwhile pursuing), a management team that is willing to coordinate(our speculation), a float that could be cornered unbeknownst to investors(Thanks to swap agreements with willing investment banks), and heavy leverage that can be employed (thanks to investment banks). But the situation needs one more critical ingredient to make everything work: Regulators who are unwilling to act. If regulators were to step in and shut down GSX stock, and we believe there are many reasons to do so ranging from fraudulent financials to stock manipulation, the game ends immediately. We believe what has happened is that after multiple smoking gun exposes in mid-2020 some hedge funds were scratching their head why no regulatory intervention happened. And when they realized that the referee had left the stadium, they started manipulating the stock more aggres-sively without consequences thinking of themselves as playing a meta game. The same people are blowing up and getting margin calls right now. But this has always been their destiny, after all, we are talking about people who like to go 6x leverage in heavily concentrated stock portfolios. In the meantime, the focus of these folks is on collecting fees, they don’t care about the societal damage they cause or who they drag down with them in the end.

Games only last so long. The market might be a voting machine in the short run, but it works more like a weigh-ing machine in the long run. But what can give us confidence that GSX cannot be manipulated upwards again as it was done before? Here we come back to the importance of regulatory intervention.

The capital markets are supposed to give access to capital to good users, and deny access to capital to the abusers. If regulators want to preserve this function they have to step in and shut down the most glaring fraud in today’s capital market. We appeal once again and will not stop doing so until it is done:

Shut down GSX!

R E P O R T S

Full Legal Disclaimer***

IMPORTANT LEGAL DISCLAIMER THIS REPORT AND ALL STATEMENTS CONTAINED HEREIN ARE THE OPINIONS OF GRIZZLY RESEARCH, AND ARE NOT STATEMENTS OF FACT. Reports are based on generally available information, field research, inferences and deductions through Grizzly Research’s due diligence and analytical process.

Our opinions are held in good faith, and we have based them upon publicly available facts and evidence collected and analyzed including our understanding of representations made by the management of the companies we analyze, all of which we set out in our research reports to support our opinions, all of which we set out herein. HOWEVER, THEY REMAIN OUR OPINIONS AND BELIEFS ONLY.

We conducted research and analysis based on public information in a manner than any person could have done if they had been interested in doing so. You can publicly access any piece of evidence cited in this report or that we relied on to write this report.

Grizzly Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

We are entitled to our opinions and to the right to express such opinions in a public forum. We believe that the publication of our opinions and the underlying facts about the public companies we research is in the public interest, and that publication is justified due to the fact that public investors and the market are connected in a common interest in the true value and share price of the public companies we research. All expressions of opinion are subject to change without notice, Grizzly Research does not undertake a duty to update or supplement this report or any of the information contained herein.

Recipients of the research report are professional investors who are expected to make their own judgment as to any reliance that they place on the research report. You represent that you have sufficient investment sophistication to critically assess the information, analysis and opinion on this website.

You further agree that you will not communicate the contents of reports and other materials on this site to any other person unless that person has agreed to be bound by these Terms of Use. If you access this website, download or receive the contents of reports or other materials on this website on your own behalf, you agree to and shall be bound by these Terms of Use. If you access our website, download or receive the contents of reports or other materials on this website as an agent for any other person, you are binding your principal to these same Terms of Use.

AS OF THE PUBLICATION DATE OF THIS REPORT, GRIZZLY RESEARCH (POSSIBLY ALONG WITH OR THROUGH OUR MEMBERS, PARTNERS, AFFILIATES, EMPLOYEES, AND/OR CONSULTANTS) ALONG WITH OUR CLIENTS AND/OR INVESTORS HAS A DIRECT OR INDIRECT SHORT POSITION IN THE STOCK (AND/OR OPTIONS, SWAPS, AND OTHER DERIVATIVES RELATED TO ONE OR MORE OF THESE SECURITIES) OF THE COMPANY COVERED HEREIN, AND THEREFORE STANDS TO REALIZE SIGNIFICANT GAINS IN THE EVENT THAT THE PRICE OF GSX Techedu Inc.’S STOCK DECLINES. THEREFORE, USE GRIZZLY RESEARCH’S RESEARCH AT YOUR OWN RISK. YOU SHOULD DO YOUR OWN RESEARCH AND DUE DILIGENCE BEFORE MAKING ANY

INVESTMENT DECISION WITH RESPECT TO THE SECURITIES COVERED HEREIN. THE OPINIONS EXPRESSED IN THIS REPORT ARE NOT INVESTMENT ADVICE NOR SHOULD THEY BE CONSTRUED AS INVESTMENT ADVICE OR ANY RECOMMENDATION OF ANY KIND. FOLLOWING PUBLICATION OF THIS REPORT, WE MAY CONTINUE TRANSACTING IN THE SECURITIES COVERED THEREIN, AND WE MAY BE LONG, SHORT, OR NEUTRAL AT ANY TIME HEREAFTER REGARDLESS OF OUR INITIAL OPINION.

To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. Note that GSX Techedu Inc.. and insiders, agents, and legal representatives of GSX Techedu Inc.. and other entities mentioned herein may be in possession of material non-public information that may be relevant to the matters discussed herein. Do not presume that any person or company mentioned herein has reviewed our report prior to its publication.

This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.

By downloading and opening this report you knowingly and independently agree: (i) that any dispute arising from your use of this report or viewing the material herein shall be governed by the laws of the State of [New York], without regard to any conflict of law provisions; (ii) to submit to the personal and exclusive jurisdiction of the superior courts located within the State of [New York] and waive your right to any other jurisdiction or applicable law, given that Grizzly Research is a Delaware limited liability company; and (iii) that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of this website or the material herein must be filed within one (1) year after such claim or cause of action arose or be forever barred. The failure of Grizzly Research to exercise or enforce any right or provision of this disclaimer shall not constitute a waiver of this right or provision. If any provision of this disclaimer is found by a court of competent jurisdiction to be invalid, the parties nevertheless agree that the court should endeavor to give effect to the parties' intentions as reflected in the provision and rule that the other provisions of this disclaim-er remain in full force and effect, in particular as to this governing law and jurisdiction provision. You agree that the information on this website is copyrighted, and you therefore agree not to distribute this information (whether the downloaded file, copies / images / reproductions, or the link to these files) in any manner other than by providing the following link: http://GRIZZLYREPORTS.COM. If you have obtained research published by Grizzly Research in any manner other than by download from that link, you may not read such research without going to that link and agreeing to the Terms of Use on the Grizzly Research designated website.

***


seven reasons why deloitte cannot sign gsx annual audit

Documents