Chinese Internet stocks tumbled in New York trading after a top U.S. securities regulator said the Department of Justice is reviewing allegations of accounting fraud at firms operating out of the Asian nation.
Sina Corp., owner of the Twitter-like Weibo service in China, fell as much as 16 percent and Baidu, operator of China’s most popular online search engine, dropped as much as 12 percent after Securities and Exchange Commission Enforcement Director Robert Khuzami made the comments in an interview with Reuters that was published today.
“There are parts of the Justice Department that are actively engaged in this area,” Khuzami told Reuters in comments about allegations of possible fraud that were confirmed by John Nester, a spokesman for the SEC. Laura Sweeney, a Justice Department spokeswoman, declined to comment on whether criminal authorities are involved.
At least four Chinese Internet companies fell sharply today, triggering an SEC short-selling restriction that forces traders who want to bet on a further drop to wait after the stocks fell 10 percent from the prior day’s closing level.
Sina’s shares slid 10 percent to $72.92 at 2:31 p.m. in New York. Baidu’s American depositary receipts declined 11 percent to $107.54. Each ADR represents 0.1 common share of the company.
The big Internet names are easily subject to selloff pressure because their higher valuations to peers, according to Jeff Papp, a Lisle, Illinois-based analyst at Oberweis Asset Management Inc. There is “continued aversion to risk,” he said. “High-beta names are just not in favor in the current environment.”
Sina’s shares are traded at 143 times its trailing earnings, compared with 13 for stocks in the New York Stock Exchange Arca China Index, which dropped 1.1 percent today. The multiple for Baidu is 49.
In the past year, regulators have intensified scrutiny of China-based companies listed on U.S. exchanges amid concern that the firms weren’t complying with accounting standards. The SEC and exchanges have delisted or halted trading in more than a dozen such companies this year, and the agency has sued firms and auditors over bogus disclosures. The SEC only has power to file civil claims for securities law violations, while the Justice Department can file criminal charges.
The SEC’s investigation has focused on so-called reverse mergers, in which closely held firms buy shell companies that allow them to sell shares on exchanges without the scrutiny that would surround an initial public offering. None of the four Internet companies affected by the SEC restriction today -- including Youku.com Inc. and Sohu.com Inc. -- were listed through reverse mergers.
SEC officials have said they can’t adequately police the firms in part because the Chinese government bars U.S. regulators from inspecting auditors based in that country. Officials from the two countries have met in recent months to discuss the issue.
The SEC this month filed an enforcement action against Deloitte Touche Tohmatsu Ltd.’s China affiliates for failing to produce documents related to an investigation of Longtop Financial Technologies Ltd, which said last month that Deloitte quit because of errors in the company’s financial records. The Deloitte affiliates have said they cooperated with the SEC as much as possible under Chinese law.
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