UPDATE 1-China's Longtop gets Wells notice from SEC

Mon Aug 29, 2011 8:31am EDT

* Wells notice indicates possible civil charges

* ADRs were delisted; auditor, CFO resigned

* Accounting of many Chinese companies questioned

NEW YORK, Aug 29 - Longtop Financial Technologies Ltd LGFTY.PK said on Monday it may face civil charges by the U.S. Securities and Exchange Commission, signaling stepped-up regulatory enforcement of possible accounting irregularities at Chinese companies.

In an SEC filing, the maker of software for Chinese financial services companies said it received a "Wells notice" from the SEC on Aug 24. Such a notice indicates that SEC staff plans to recommend that the Commission take legal action, and gives a company a chance to mount a defense.

Longtop said the Wells notice stemmed from its May 23 announcement that auditor Deloitte Touche Tohmatsu CPA Ltd had resigned, and that the company's annual reports from 2008, 2009 and 2010 should not be relied upon. It also said the SEC will decide whether to suspend or revoke its securities.

In May, Longtop linked Deloitte's resignation to what the auditor called "recently identified falsity" in company financial records, and "deliberate interference" by Longtop management in the audit process. [ID:nL3E7GN1X1] Longtop's chief financial officer, Derek Palaschuk, resigned that month.

Longtop is among the largest Chinese companies linked this year to potential accounting fraud, often by research firms and short sellers such as Citron and Muddy Waters.

Since March, roughly 30 Chinese companies have seen their auditors resign, and more than two dozen have been delisted from U.S. exchanges. [ID:nL6E7J11FS]

Based in Xiamen, Longtop had a $1.08 billion market value prior to a May 17 trading halt. The New York Stock Exchange is delisting its American depositary receipts. [ID:nL3E7JH1XX] The ADRs closed Friday at 66 cents on the Pink Sheets. (Reporting by Jonathan Stempel; Editing by Derek Caney)

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