NQ Mobile hits back at Muddy Waters, releases account details

October 27, 2013 Leave a comment

NQ Mobile hits back at Muddy Waters, releases account details

Fri, Oct 25 2013

By Paul Carsten and Soham Chatterjee

(Reuters) – NQ Mobile Inc, the Chinese mobile security software company labelled a “massive fraud” by Muddy Waters Research Group, hit back on Friday by releasing details of its bank accounts and threatening legal action. NQ described as “false and inaccurate” the allegations by Muddy Waters, owned by short-seller Carson Block, but said a special committee of independent directors would investigate.Shares of NQ continued their slide on Friday, falling as much as 20 percent. The stock dropped by nearly 50 percent on Thursday, after Muddy Waters released its report, wiping out $500 million of market value.

“Could it be a fraud? Sure. Time will tell,” said Blake Walker, chief investment officer at Grandeur Peak Global Advisors, which holds a 2.3 percent stake in NQ Mobile.

“But actions speak louder than words and we’re encouraged at the formation of the special committee who will independently verify or refute all allegations,” he said.

Grandeur Peak has no immediate plans to cut or raise its stake in NQ Mobile, Walker said, adding that many of the allegations in the Muddy Waters report have come up before.

Short-sellers such as Muddy Waters LLC make money when the stock price of a company drops. They sell borrowed shares in the hope of buying them back at a lower price, returning them to the lender, and gaining from the difference.

“We know no better method than to just completely open up the kimono and say, ‘Here’s our cash balances by account,'” NQ Mobile co-Chief Executive Omar Khan told Reuters in Beijing, prior to the release of the details of its accounts.

Muddy Waters had said on Thursday that NQ’s cash balances were “highly likely to not exist.” (r.reuters.com/fyj24v)

The firm had claimed that at least 72 percent of NQ’s purported 2012 revenue from sales of its security products in China was fictitious, coming from a shell company called Yidatong that the research firm alleged was controlled by NQ.

The company responded by publishing on Friday a list of 14 bank accounts in mainland China and Hong Kong that showed deposits totalling the equivalent of about $295 million.

Muddy Waters appeared unconvinced by NQ’s disclosures.

NQ should get its cash balances confirmed by independent capital confirmation firms, the short seller said in an emailed response.

The firm’s previous targets have included other U.S.-listed Chinese companies such as the now-bankrupt Sino-Forest Corp and Longtop Financial Technologies Ltd, which gained notoriety for fraudulent reporting and asset stripping.

Prior to NQ’s Friday statement, Oppenheimer analyst Andy Yeung said the cash allegation was the most serious. He cut his rating on NQ’s stock to “perform” from “outperform”.

NQ was founded in 2005 and listed on the New York Stock Exchange in 2011 in an $89 million fundraising that was underwritten by Piper Jaffray. It raised an additional $69 million in a secondary offering last year.

The company completed the sale of $172.5 million in convertible bonds this month. Morgan Stanley and Deutsche Bank unit Deutsche Bank Securities Inc bought $22.5 million of that offer.

Piper Jaffray did not respond to an email request for comment. Morgan Stanley and Deutsche Bank declined to comment.

NQ shares were down 15 percent at $10.21 in late afternoon trading on the New York Stock Exchange. Up to Wednesday’s close, the stock had risen about 280 percent this year.

Filed under Investing Process, TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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