China tech stocks dive on threat of US fraud probe

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Chinese internet stocks have dived in New York trading after the US Justice Department said it was considering launching a fraud investigation.

The news was disclosed by Robert Khuzami, director of enforcement at the US financial services regulator.

Youku, which models itself on web video firm Youtube, was among the hardest hit, falling 18%.

Chinese search engine firm Baidu fell 9%, rival portal site Sohu lost 5.3%, and messaging firm Sina dipped 9.5%.

The fraud concerns have arisen after accounting irregularities emerged at a number of Chinese firms whose shares are traded in the US.

"There are parts of the justice department that are actively engaged in this area," said Mr Khuzami, when asked by the Reuters news agency whether criminal cases were being prepared.

He also confirmed that other federal prosecutors are involved in the investigation, but did not identify them, nor which Chinese companies and auditors are being looked into.

'A big issue'

The probe is the latest spotlight to fall on Chinese companies and their accounting practices.

Deloitte Touche Tohmatsu resigned as auditors for software firm Longtop earlier this year, after the accountancy firm claimed to have uncovered evidence of falsified financial records.

Start Quote

We have to find a path to resolution of this issue.”

End Quote Robert Khuzami Securities and Exchange Commission

Questions have also been raised over the indirect way in which some Chinese firms obtained their US stock market listings.

Normally, a firm conducts a formal "initial public offering" on a stock exchange - something that is heavily regulated in the US and requires the detailed disclosure of a firm's finances to prospective investors.

However, many Chinese firms followed another route to market known as a "reverse merger".

This method involves the Chinese company being bought up by a smaller US firm that was already listed on a stock exchange, such as the Nasdaq, thereby minimising the company's disclosure requirement.

"Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable," said Mr Khuzami.

"We have to find a path to resolution of this issue. It is...a big issue for us."

A former investment banker who now works at the Securities and Exchange Commission, Mr Khuzami has built himself a reputation as someone who is happy to go after some of the biggest names in the financial industry.

He has also filed against Goldman Sachs for misleading investors.

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