Feds probe triggers Chinese tech stock tumble

DOJ joins SEC and FBI in irregularities inquiry

By Brid-Aine Parnell, 30th September 2011

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Chinese tech companies' stock has been sliding on the NASDAQ today, after a report that the US Department of Justice (DOJ) is investigating accounting irregularities at US-listed Chinese firms.

Youku, the Chinese YouTube, was particularly hard hit, down 18.3 per cent to $16.24, while search behemoth Baidu lost 9.17 per cent and online media company Sina dropped 9.7 per cent. Other Chinese stocks listed on US exchanges dropped as well.

The Securities and Exchange Commission (SEC), with the help of the FBI, has already had its nose in a number of Chinese firms, looking at the accounting practices of those who got on the market through a reverse merger. This is where a private company acquires a public shell company and reverse merges into it, thereby getting a listing without having to go through the long process of going public.

Around 25 Chinese companies have disclosed discrepancies in their filings or seen their auditors withdraw in the first half of this year, adding fuel to the fire.

The entry of the DOJ into the investigation could mean that criminal charges might be brought as well as civil proceedings. However, the US does not have an extradition treaty with China, so any criminal charges could prove difficult to prosecute.

"There are parts of the Justice Department that are actively engaged in this area," Robert Khuzami, director of enforcement at the SEC, told Reuters in an interview.

He added that a number of federal prosecutors around the US were taking part in the investigation, but didn't name them. ®

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