Investor sentiment stemming from allegations of accounting fraud at a host of Chinese companies listed on U.S. exchanges is spreading. As reported by the Wall Street Journal, the shift in sentiment is “sharp,” and investors have “dumped the stocks of some of China’s biggest Internet companies.” In the past, investors may have been willing to overlook questionable corporate governance and reporting. This is particularly true for Chinese Internet companies, whose increased profits reflect the recent social media craze. But growing concern about business risks and financial instability has caused damage to share prices of Chinese companies – even when those companies are free of accusations of wrongdoing.
The latest selling spree was triggered by an announcement last week that the Department of Justice is investigating accounting fraud at Chinese companies. This announcement adds to heightened U.S. scrutiny of accounting irregularities at Chinese companies, as mentioned in July 2011 and August 2011. Reuters has reported that Department of Justice inquiries suggest that criminal proceedings may accompany civil proceedings, although the “lack of an extradition treaty with China would make it tough to secure criminal convictions.”
OUR TAKE: We will continue to monitor U.S. investigations with respect to accounting irregularities at Chinese companies traded on U.S. exchanges, in addition to existing and pending procedural safeguards, including listing requirements for going public in reverse and related guidance on filing Forms 8-K and 10.