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New Oriental plunges after Muddy Waters' fraud allegations

(Reuters) - Shares of New Oriental Education & Technology Group Inc EDU.N crashed 33 percent on Wednesday, after short seller Muddy Waters alleged that the Chinese educational services provider's accounts are fraudulent.

New Oriental said on Tuesday the U.S. Securities and Exchange Commission was probing the company’s finances, wiping out more than a third of the company’s market value. Nearly $2 billion has been wiped off the company’s market value since Monday.

The Muddy Waters report alleged that New Oriental had lied about its entire store network being company-owned and that the company actually had numerous franchisees.

“These franchisees are not a hidden bonus for investors. Rather, they are part of a substantial fraud in EDU’s accounts,” Muddy Waters said in the report.

“It is virtually certain that EDU uses the upfront franchise and other fees to inflate its cash balances in order to receive unqualified audit opinions from its auditor.”

New Oriental, which offers English language tuition and test preparation courses in China, has grown from a small night-school to one of the largest providers of private educational services.

Oppenheimer downgraded New Oriental Education to “perform,” citing uncertainty created by the SEC investigation.

New Oriental was not immediately available for comment.

Shares of the company, which now has a market value of $1.47 billion, closed down 35 percent at $9.50 on Wednesday on the New York Stock Exchange.

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Reporting by Megha Mandavia in Bangalore; Editing by Viraj Nair

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