CAGC China Agritech, Inc. (MM)

Little-known Longtop Financial Technologies Ltd. (LFT) may be the halted Chinese stock that U.S. markets can't shrug off.

The New York Stock Exchange stopped trading in the software company's American depositary receipts Tuesday, and investors were still in limbo more than 24 hours later. The exchange cited "news pending" as the reason for the halt. Longtop, like a dozen or more recently halted Chinese stocks, has been battling accusations of fraud and mismanagement.

Investors fear that the company is the latest and most significant in a string of prolonged halts of Chinese stocks that trade in the U.S. But unlike the small stocks in which trading was previously halted, investors have more than $1 billion tied up in the company's ADRs.

Longtop couldn't be reached Tuesday or Wednesday, though after trading hours Wednesday the company said in a release it wouldn't announce fourth-quarter results as planned on May 23. It wasn't clear whether the postponement was the news over which the stock was halted. An NYSE spokesman didn't immediately respond.

"Most foreign investors in China have realized that this has been a problem for a very long time," said Foxhall Capital Management Chief Executive Paul Dietrich of the trend of accounting problems and stock halts, but Longtop's case was especially disconcerting because the company has some of the positives that U.S. investors in China often look for, he said.

Longtop's auditor is the China member firm of Big Four accounting firm Deloitte, and foreign investors often look to a well-known auditor as a line of defense, Dietrich said. "A lot of people thought that the solution was for these Chinese companies to have major global auditors," Dietrich said, adding that the auditor faces "some real questions."

A Deloitte spokeswoman declined to comment.

Longtop may also be viewed differently because of the method it used to access U.S. markets. Unlike the rash of U.S.-traded shares of Chinese companies that have been halted in recent months, Longtop had a successful initial public offering in 2007. So-called reverse mergers, whereby a company joins with a U.S. firm with no significant operations, have figured prominently in the stock halts. The method has been a kind of backdoor entry into U.S. markets for many Chinese companies.

The halts of other Chinese companies' stocks have dragged on in several cases, wreaking havoc on owners of the stocks and disrupting activity in areas linked to the equities market, like stock options. China Agritech Inc. (CAGC) is one company whose U.S. shares haven't traded in more than two months.

As the accusations against Longtop mounted, the securities lending business has reflected heightened skepticism. The retail rate to borrow Longtop's stock, a proxy for bearish short selling, nearly quadrupled during the month to May 10, said Andrew Shinn, director of research for SunGard's Astec Analytics business unit. The listed options market has also seen increased activity in bearish puts to sell shares.

William Blair & Co. analyst Christopher Shutler downgraded the firm's investment rating on the stock to "market perform" from "outperform" Wednesday, citing the uncertainty over the halt and the unknown timing for its lifting. Negative news is likelier than a positive outcome, he wrote in a client note that said the analysts would revisit their view "when additional data become available." Other stock analysts were quiet as the halt stretched into a second day.

With many U.S. investors eager for a slice of China's impressive growth, the rash of stock halts capped by Longtop's problems this week underscored the need to invest broadly in the country and avoid attempting to pick stocks, some portfolio managers said.

"These types of stocks are definitely a dangerous investment universe," said Chad Deakins, portfolio manager of the RidgeWorth International Equity Fund. He said his fund's preferred approaches include investing in major multinationals with operations in China.

Some saw a silver lining in the fact that the accusations being aired today may not have seen the light of day a decade ago. "I'm actually happy that these things are coming out, in general," Foxhall Capital Management's Dietrich said. "This says something good about China--that the regulatory process is starting to work."

Longtop's stock last changed hands at $18.93. It traded as high as $42.86 in November. In the Wednesday release, the company said it would announce its earnings release schedule "once the date has been determined."

-By Brendan Conway, Dow Jones Newswires; (212) 416-2670; brendan.conway@dowjones.com

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