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The shares of Livedoor, under investigation for alleged market manipulation, were temporarily suspended as a newspaper reported that the Japanese internet company had falsified its 2004 earnings.

In a statement sent to the Tokyo Stock Exchange on Wednesday, Livedoor said: “We will make utmost efforts to investigate the fact and will report as soon as we conclude.” Trading in the shares was resumed at the start of the afternoon session.

The article in the Yomiuri Shimbun, citing unnamed people, claimed that the company “window-dressed” its account by transferring profits from three affiliates to cover a Y1bn deficit.

The company, already under investigation for suspected market manipulation, was last quoted at Y596, down 14.4 per cent at its lowest daily limit on Tuesday. The plunge in Livedoor’s share price reduced the company’s market capitalisation by Y105bn.

Late on Monday, Japanese prosecutors and officials from the Securities and Exchange Surveillance Commission raided Livedoor’s offices and the homes of three executives, removing documents and computers in their search for evidence that the group had deliberately misled investors.

The investigation into Livedoor sparked the Tokyo stock market’s biggest one-day fall in nine months on Tuesday as concerns grew over allegations that the internet company’s top executives may have been directly involved in market manipulation.

On Tuesday the benchmark Nikkei 225 Average fell 2.84 per cent to 15,805.95, its biggest one-day percentage drop since last April. The Tokyo Stock Exchange’s Mothers section for start-up companies fell nearly 12 per cent.

Takafumi Horie, Livedoor president, told reporters early on Tuesday that the internet services group was co-operating with investigators and would conduct an internal investigation into the suspicions by the Tokyo District Court’s Public Prosecutors Office of illegal activity.

However, the authorities have obtained e-mails to back up allegations that Livedoor deliberately provided misleading information to boost the share price of a subsidiary, leading Japanese newspapers reported on Tuesday.

The prosecutors suspect Mr Horie and two of his deputies gave orders to an internet advertising subsidiary, Livedoor Marketing, to announce the acquisition of a publishing company, even though the publisher was already controlled by Livedoor, Japanese media reported. The allegation is that the false information was intended to boost the share price of Livedoor Marketing, the reports said.

The spreading of such false information in an attempt to boost share prices is a violation of the Securities and Exchange Law and could lead to a fine of up to Y50m ($430,000) or imprisonment of up to five years.

Although the investigation has only just started, the prosecutor’s office has a track record of acting only where it has substantial evidence.

“The prosecutor’s office is timid when it comes to white collar crime because it has a huge economic impact,” says Hiroshi Kamano, a Tokyo lawyer.

The investigation into a high-profile company and its young president, who was revered by many as a model for young Japanese entrepreneurs, has had an impact well beyond the stock market.

Prime Minister Junichiro Koizumi was put on the defensive, with Shizuka Kamei, an outspoken member of the Lower House who ran against Mr Horie in last autumn’s election, criticising the Japanese leader for choosing the internet entrepreneur as a candidate in his district.

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