Shares in Netease fell more than 10 per cent after the US-listed Chinese internet portal said it was likely to be the target of a Securities and Exchange Commission lawsuit over past accounting violations.
Netease said SEC staff had informed it of their intent to to launch a federal civil suit accusing it of breaking securities laws.
Netease restated its 2000 results two years ago, reducing reported revenue to $3.7m from $7.9m.
The accounting scandal nearly cost the company its Nasdaq listing and forced a change of senior management. The company is still controlled by founder William Ding and analysts have praised its more transparent operations and greater financial discipline.
The 2000 revenues restatement also prompted class action litigation by shareholders that forced Netease to pay more than $4m.
The company, which dominates the Chinese portal business together with US-listed rivals Sina.com and Sohu.com, stressed the SEC action related to conduct before its management shake-up.
"Netease believes that any such action will relate only to conduct that occurred more than two-and-a-half years ago and has no relation to its present management or operations," it said.
The SEC does not comment on individual investigations prior to launching legal action. The probable move against Netease marks a further increase in the agency's actions outside the US.
In recent months the US's chief financial regulator has taken strong action to protect investors from wrongdoing at non-US companies but with US listings. Companies investigated include Italy's Parmalat, Switzerland's Adecco, France's Vivendi and Mexico's TV Azteca.
The SEC's powers are often greater than its counterparts in other countries, though it works with home regulators where possible.
News of the possible lawsuit helped send shares in Netease tumbling from $50.50 to $45.38 - far below its high last year of $72.
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