The DOJ is stepping in to investigate accounting irregularities at US-listed Chinese firms. Though we fall short of concluding that any wrongdoing has occurred across our Chinese equity coverage universe, we think such negative news adds a layer of uncertainty to the group that won’t be assuaged anytime soon.
The Guardian reported:
“There are parts of the Justice Department that are actively engaged in this area,” said Robert Khuzami, director of enforcement at the U.S. Securities and Exchange Commission.
“I think that you will see greater (Department of Justice) involvement as time goes on,” said Khuzami, a former federal prosecutor himself, when asked why no criminal charges have yet been filed in the massive Chinese accounting scandal.
“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 said. “It is … a big issue for us.”
On Thursday, Youku.com (YOKO) fell 18.3%, Baidu (BIDU) fell 9.2% and is now trading below the low end of our fair value estimate range, while Sohu.com (SOHU) fell 4.7%, Sina Corp (SINA) fell 9.7%, and Shanda fell 9%. We’d wait for the storm to clear before considering investing in these stocks, as the risk/reward remains decidely imbalanced when fraud is a possible outcome.