U.S. to investigate Chinese tech firms for fraud

Chinese internet stocks have taken a plunge as the U.S. Justice Department announced that it was considering an investigation into allegations of fraud. 

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NEW YORK, NY (Catholic Online) - The news was announced by U.S. financial services regulator, Robert Khuzami. After the announcement, Chinese internet stocks dropped.

Youku, a video sharing service modeled after YouTube dropped 18 percent. Baidu, the Chinese search engine dropped 9 percent, while rival search portal, Sohu lost 5.3 percent and messaging service Sina dropped 9.5 percent.

The concerns over fraud came after accounting irregularities were discovered amongst several Chinese firms whose stock are traded in the U.S.. 

Khuzami told reporters, "There are parts of the Justice Department that are actively engaged in this area." He also confirmed that federal prosecutors were involved in the investigation. He did not say which companies they were looking into. 

Chinese corporations have been under fire recently for a rash of allegations about their accounting practices. The Deloitte Touche Tohmatsu accounting firm resigned after they found what they said was evidence of falsified financial records from the software company, Longtop.

Questions have also been raised about the manner in which some Chinese firms have obtained their U.S. stock market listings. Chinese firms have been using a method called, "reverse merger" which involves a smaller U.S. firm that is already listed on the stock exchange buying the larger Chinese firm. This avoids a stringent disclosure requirement that normally opens the company's books to prospective investors. 

Khuzami told reporters, "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. It is...a big issue for us."

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