Shares of some Chinese companies listed on exchanges in the United States tumbled on Thursday after a top American regulator said that the Justice Department was reviewing accounting irregularities at various companies based in China.
Chinese Internet companies were particularly hard hit, including Youku and Tudou, Chinese video posting sites, as well as Baidu, Sohu and Sina, also Internet stocks. The drop in share prices came after Reuters published an interview with Robert Khuzami, the enforcement chief at the Securities and Exchange Commission, who indicated that federal prosecutors were looking into possible accounting frauds.
“There are parts of the Justice Department that are actively engaged in this area,” Mr. Khuzami said, according to Reuters.
The S.E.C. confirmed his comments. The Justice Department declined to comment.
Youku’s American depository receipts closed down 18 percent, Tudou ended down 10 percent, Baidu fell 9 percent, Sohu dropped almost 5 percent and Sina fell nearly 10 percent.
Not all United States-listed Chinese companies suffered — some stocks rose during the session, including LDK Solar’s American depository receipts, which rose more than 1 percent.
An area of particular interest for regulators has been so-called reverse merger companies. These go public by purchasing the shares of defunct public companies and assuming their tickers. In recent months, such companies have been criticized by researchers who claim to have found repeated instances of fraud in their accounting.
The Securities and Exchange Commission has halted trading in more than a dozen such stocks this year, often after auditors have resigned over accounting irregularities. While some Chinese companies have fired auditors, others have restated earnings or owned up to lying about assets. These admissions have cost billions of dollars in market value and harmed other reverse-merger companies that have not been accused of any wrongdoing.
The share prices of a number of reverse merger companies fell sharply on Thursday, including AgFeed Industries and China Auto Logistics.
The steep losses in stocks have also prompted a wave of shareholder lawsuits against companies, auditors and even the banks that ushered these companies to market. One in every four federal securities class-action lawsuits filed this year relates to such firms, according to a study published this summer by the Securities Class Action Clearinghouse at Stanford Law School and Cornerstone Research in Boston.
One recent high profile example is Sino-Forest, whose share price was decimated after Muddy Waters Research charged that it was falsely claiming assets and that it amounted to a Ponzi scheme. China MediaExpress and Duoyuan Global Water are other reverse-merger companies whose stock prices have tumbled this year after accusations of fraud.
Reverse mergers have enabled companies to tap the American capital markets without having to undergo the arduous process of an initial offering.
But as more and more of these companies come under fire from bloggers and investors betting against their share prices, the government has started to take a closer look at them.
The S.E.C. has sent a steady stream of warnings to investors about the risks associated with investing in such companies. Exchanges have delisted the companies that have fallen under scrutiny or failed to file disclosures and statements in a timely manner.
But while the S.E.C. has been vocal about its investigation of these firms, it was unclear until the interview with Mr. Khuzami whether the Justice Department was looking into these allegations as well.
Article source: http://feeds.nytimes.com/click.phdo?i=dda59170c58426f5ef576840127cbd0e
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