U.S.-based investment firm Muddy Waters has alleged massive fraud at YY.com, the Chinese live streaming arm of NASDAQ-listed JOYY. Earlier this week Chinese internet search giant Baidu proposed the acquisition of YY.com for $3.6 billion in cash.

Muddy Waters, which specializes in short-selling companies whose shares it expects to decline, issued its independent research into YY.com on Thursday. JOYY shares tumbled 26% to $73.66. After hours, the stock appeared to rebound by 15% with an indicative price of $84.51.

In a preamble to its 71-page report, Muddy Waters said: “nothing could prepare us for the surreality of Baidu announcing its intention to buy YY Live from JOYY, which happened just as we were preparing to reveal that our year-long investigation shows YY Live is about 90% fraudulent.”

YY.com (which includes YY mobile app, YY.com website and PC YY) is a social media platform which positions itself as a rival to Bytedance’s Douyin and TikTok operations, and specializes in short-form video and live streaming activities.

According to company data, YY hosted 41.2 million mobile MAUs in the third quarter of 2020 — up 6% from a year earlier. However, YY’s number of paid users fell 2% year-over-year to 4.1 million.

JOYY’s businesses outside China include Singapore-based streaming and dating site Bigo. Muddy Waters also rubbished Bigo, calling it “barely more real.”

Muddy Waters said that YY.com’s star talent earn “only a fraction of their reported totals” and that supposedly independent channels on the platform are in fact controlled by YY.com. It also alleged that the benefactor fans, who give money to their favorite creators, “are almost entirely bots operating from YY’s internal network, bots operating from external bot farms, and performers roundtripping gifts to themselves.”

“We conclude that YY Live is ~90% fraudulent,” Muddy Waters assessed. “YY’s component businesses are a fraction of the size it reports, and that the company’s reported user metrics, revenues, and cash balances are predominantly fraudulent”

In its regulatory filing announcing the proposed acquisition, Baidu sang the praises of YY.com and the complementarity of the Baidu-YY businesses. “YY Live comes to Baidu bringing great synergy. YY Live stands to benefit from Baidu’s large traffic and thriving mobile ecosystem, while Baidu will receive immediate operational experience and knowhow for large-scale video-based social media development, as well as an enviable creator network that will further strengthen Baidu’s massive content provider network. Together with the team from YY Live, Baidu hopes to explore the next-generation livestreaming and video-based social media that can expand beyond entertainment into the diversified verticals on Baidu platform.”

Baidu has not responded to Variety’s requests for comment.

The Muddy Waters accusations are a huge embarrassment for Baidu, which was previously seen as a peer of Chinese tech titans Alibaba and Tencent, but has lagged behind in recent years. Baidu this week announced third quarter financial results. These showed little changed revenue of RMB 28.2 billion ($4.16 billion) and a return to profitability. Net profit was RMB13.7 billion ($2.02 billion) in the three months to September

“It’s no secret that Baidu is struggling to grow. But will Baidu really try to buy “growth” in the form of an almost completely fake business? And for $3.6 billion cash, or seven percent of its market cap?!,” said Muddy Waters. “Baidu / YY Live will be THE test of whether China Inc. is really just a few bad apples; or, whether the incessant cheating, lying, and indifference to U.S. law permeate the highest echelons of China’s public companies.

Finance and technology have been pushed to the forefront of the U.S.-China Cold War. Earlier this week, the U.S. Securities and Exchange Commission said that it was pushing ahead with plans that could require U.S.-listed Chinese companies to use auditors overseen by the U.S. or face delisting from U.S. stock exchanges. Last week U.S. President Donald Trump issued an executive order limiting U.S. investments in Chinese securities seen to have ties with or be controlled by the Chinese military.