Longtop receives notice from US SEC

China-based software provider could face civil action

Longtop Financial, the China-based software provider, said it may face civil action from the US Securities and Exchange Commission for failing to provide current financial statements to investors.

The disclosure by Longtop comes as regulators in the US and Canada have increased scrutiny of companies with operations based in China whose shares trade on US exchanges.

On Friday, the Ontario Securities Commission halted trading in shares of Sino-Forest, a China-based timber company, saying it may have identified fraud. On Sunday, Sino-Forest said its chairman and chief executive had voluntarily resigned.

Longtop made headlines in May when its auditor Deloitte Touche Tohmatsu resigned, alleging that information in the company’s accounts regarding cash at bank and loan balances, and possibly regarding sales revenue, had recently been found to be falsified.

The resignation followed reports by two research firms that raised questions about the accuracy of the company’s financial statements, which Longtop denied. Following the reports, the New York Stock Exchange halted trading in shares of Longtop in May and earlier this month delisted the shares.

In a regulatory filing on Monday, Longtop said it had received a Wells notice from the SEC, which is a warning that the agency’s staff has decided to recommend filing an enforcement action against the company. The decision to take action requires approval by the commission. The SEC is focusing on the company’s May disclosure, Longtop said.

Longtop quoted the SEC’s Wells notice, dated August 19, stating that as a result of the auditor’s resignation the software provider’s financial statements in 2008, 2009, and 2010 “are now considered unaudited and the company does not have any reports with current reliable financial information available to the investing public. Therefore, Longtop is delinquent in its reporting obligations under the securities laws.”

The SEC also said it may seek to suspend or revoke the company’s securities registration.

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