U.S.-listed Chinese firms hit by probe report

Chinese companies with U.S. equity listings saw their shares plummet Thursday on news a federal criminal probe has been opened into allegations of accounting irregularities at many China-based companies.

The U.S. Department of Justice is joining the Securities & Exchange Commission and the FBI in the investigation the companies with U.S. listings. The probe surrounds dozens of companies that earned their places on the exchanges through so-called “reverse mergers” with U.S. firms whose only asset was their publicly traded shares.

The companies, such as Longtop Financial Technologies (LGFTY, quote), later cost U.S. investors millions of dollars when the accounting problems were revealed.

“There are parts of the Justice Department that are actively engaged in this area,” Robert Khuzami, director of enforcement at the U.S. Securities and Exchange Commission, told Reuters. “I think that you will see greater (Department of Justice) involvement as time goes on.”

The DOJ has the power to file criminal charges while the SEC is only empowered to bring civil penalties.

Youku.Com (YOKU, quote) fell more than 18%, Baidu (BIDU, quote) fell more than 11%, Sohu.Com (SINA, quote) declined 9.7%, Shanda Interactive Entertainment (SNDA, quote) dropped more than 9%, and China Sky One Medical fell 3.8%, (CSKI, quote),

The SEC and the Public Company Accounting Oversight Board are scheduled to meet with their Chinese counterparts next month to discuss joint inspections of auditing firms.

“Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue,” Khuzami told Reuters. “It is … a big issue for us.”

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