The Securities and Exchange Commission is investigating Hong Kong-based Longtop Financial Technologies Ltd. after the company was sued by an investor who claimed that the company had overstated profit margins.

In his lawsuit, the investor, Joe Milkus, alleges that people who purchased Longtop shares between June 2009 and April suffered severe losses because the shares fell 30% at the end of April. Around this time, questions had been raised about the company’s finances. Milkus’ lawsuit has been filed in a federal court in Los Angeles.

The troubles for Longtop, a software company, began on May 23, when its auditor resigned, claiming in his resignation letter that there were several falsehoods in the company’s financial reports. The U.S. Securities and Exchange Commission began investigating the auditor’s allegations. Milkus filed his lawsuit on the very same day. His lawsuit seeks unspecified compensatory damages.

Lawyers have already filed at least 20 investor lawsuits against several companies based in China and listed on U.S. stock exchanges. According to estimates, there are at least 370 reverse merger companies that have obtained U.S. listings since 2004 alone. In a reverse merger a closely-held company is taken public by purchasing a company which is already publicly traded. The Securities and Exchange Commission is looking at securities violations from overseas companies especially carefully. The S.E.C. has already set up a special task force to look for fraud by overseas companies who are listed on U.S. stock exchanges. The agency is looking especially closely at Chinese reverse mergers.

The agency has also begun an investigation, asking auditors for information on these Chinese firms. At least eight China-based companies have had their registrations revoked since December alone. More than 24 other companies have also reported other problems, including accounting issues and auditor resignations to the agency since March.

A California securities fraud lawyer typically comes across a number of violations including the following

  • broker fraud
  • insider trading
  • investment fraud
  • market violations
  • accounting malpractice
  • misrepresentation of profitability
  • breach of fiduciary duty
  • unauthorized stock trading

A person may be eligible to file a lawsuit if he has sustained losses because of a broker or investment company making unsuitable investments, trading excessively and failing to diversify investments sufficiently.

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