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What: Shares of Chinese education-services provider New Oriental Education
So what: The timing of announcing the SEC investigation was a bummer for New Oriental, because otherwise investors would probably be celebrating the fact that the company delivered second-quarter earnings that beat estimates on the top and bottom line. But it wasn't to be.
The actual disclosure from New Oriental doesn't sound particularly sinister. The company said the SEC alerted it on July 13 that it is investigating. On the nature of the investigation, New Oriental said:
The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly owned subsidiaries, into the Company's consolidated financial statements.
Whether that's the true nature and scope of the investigation and what the outcome will be is still unclear. However, the sharp reaction from investors isn't all that surprising, given the high level of fraud that we've seen from China-based companies listed on U.S. exchanges. Clearly, investors now have a hair trigger when it comes to the least hint of legal problems.
Now what: It's really hard to say what's next for New Oriental, because we'll have to wait and see what comes out of the SEC's investigation. Investors will want to keep a close eye on new developments, while those who have been waiting on the sidelines or had been thinking about increasing their position may want to do a deep dive into the company. If -- and that's a big if -- the investigation is relatively benign, then today's huge drop could be a buying opportunity.
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Fool contributor Matt Koppenheffer has no financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.