NetEase Sinks on SEC Wells Notice

NetEase.com ( NTES) fell 9% after the Chinese Internet company said U.S. regulators might sue it over a financial restatement.

Beijing-based NetEase said Monday that the staff of the Securities and Exchange Commission had recommended a civil suit against the company. NetEase said it believed the potential suit is related to an investigation the SEC has been conducting of a restatement previous management did for the fiscal year ended Dec. 31, 2000.

NetEase said it received a Wells Notice indicating the staff's recommendation, and that it would have a chance to respond before the agency takes formal action. The company said it continues to cooperate and that it seeks to have the matter resolved.

After last year's tireless rally, 2004 has brought mixed tidings to NetEase and its rivals. The company's stock surged in 2003, along with shares in Chinese Internet peers Sina ( SINA) and Sohu ( SOHU). In fact, even after a sharp sectorwide selloff that started in earnest last month on the heels of Sohu's weak earnings outlook, NetEase shares are up more than 300% on a year ago.

Supporters of these companies say that their shares represent an opportunity to get a piece of the inevitable growth of the Internet economy in China. But doubters wonder whether Chinese Internet and wireless data services growth will be as fast and profitable as hoped, and whether stocks will collapse as they did in the U.S.' dot-com bust.

On Monday, NetEase slipped $4.50 to $46. Sohu added 49 cents to $24.95 and Sina dropped 80 cents to $38.49.

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