It has surely been one of the roughest weeks that New Oriental Education and Technology Group has ever experienced.
Shares in the Chinese company, which are listed in the United States, plunged 35 percent on Wednesday after a critical analyst note by the Muddy Waters research firm accused it of being a fraud. Not known for shying away from strong viewpoints, Muddy Waters titled its report “Magna Cum Fraude.”
That follows a disclosure by New Oriental on Tuesday that it is being investigated by the Securities and Exchange Commission over its accounting practices, another revelation that spooked investors.
All told, shares in New Oriental have plummeted almost 58 percent this week on the New York Stock Exchange, closing at $9.64 on Wednesday.
The company, which operates schools in China, was among a wave of companies that did business primarily in China but sold shares in the United States to attract new sources of capital. American investors saw the companies as an easy way to tap into the explosive growth of the Chinese economy.
But many of these companies have run into problems, the most serious of which involve accusations of fraud. Perhaps the most notable is the Sino-Forest Corporation, a Chinese tree plantation company that Muddy Waters accused of being a giant Ponzi scheme. Sino-Forest filed for bankruptcy in Canada, where its shares were listed.
In New Oriental, the tough-talking chief of Muddy Waters, Carson C. Block, has found a new target. Mr. Block wrote in the note that while the company had posted an astonishing 392 percent growth in revenue since going public in 2006, its financial statements for at least two years appeared to be fraudulent.
In particular, Mr. Block wrote that New Oriental was lying about the nature of its franchising operations, arguing that the company’s chief executive had denied the existence of what the report said was an extensive business.
What Mr. Block has accused New Oriental of doing is using fees from its franchises to inflate the cash levels on its balance sheet in a bid to persuade its auditors to give it a clean bill of health. He added that another research firm, OLP Global, had accused the company of fraud as well.
For its part, New Oriental disclosed the S.E.C. inquiry in its latest earnings report. The company described the investigation as looking into whether some of its subsidiaries were improperly consolidated onto its own balance sheet.
Mr. Block wrote in his note, referring to New Oriental’s ticker symbol, EDU: “We believe that as a result of our exposure of these problems with EDU’s reporting, EDU will restate historical results – likely significantly; and, that its auditor will resign.”