Muddy Waters Attack Forces NQ Mobile CEO Khan to Fight Tarnish

Muddy Waters Attack Forces NQ Mobile CEO Khan to Fight Tarnish

By Bloomberg News – Oct 31, 2013

As Omar Khan helped whip up 1,500 guests and employees gathered in a Beijing ballroom for NQ Mobile Inc.’s eighth birthday on Oct. 25, the co-chief executive officer himself had little to celebrate. A day earlier, NQ Mobile, the maker of security software to thwart mobile-phone hackers, was accused by a research firm of inflating revenue, triggering a 47 percent stock decline. The “Never Quit” emblazoned on workers’ purple shirts was no longer just a sales slogan: It could be read as a reminder for the 38-year-old executive to dig in and defend his company.“All of the allegations are false,” Khan said as he stepped off the stage.

Khan’s challenge now is to respond to the Oct. 24 report by research firm Muddy Waters LLC. He’ll be drawing on sales skills he honed as a young executive building Samsung Electronics Co.’s Galaxy smartphone brand at trade shows. He’ll be matched against Muddy Waters founder Carson Block, who gained fame after regulators halted trading in four of the first five companies the short-seller targeted with his research.

Muddy Waters last week initiated coverage of NQ Mobile with a strong sell rating. The first sentence of Block’s 81-page report pulled no punches: “NQ Mobile is a massive fraud.” Its biggest customer, he wrote, is itself.

“If Muddy Waters is totally right, there’s no way Omar will weather it,” Michael Mahoney, senior managing director at Falcon Point Capital LLC in San Francisco, said in a telephone interview. “If Muddy Waters is a little bit right, and it was a judgment call but not falsification of the business, he’d still be tarnished.”

Samsung Star

Mahoney for now is giving Khan and NQ Mobile the benefit of the doubt. The shares have risen for three straight days, closing at $14.40 on Oct. 31 in New York. They are still down 37 percent from the day before the Muddy Waters report.

In late 2011, Beijing-based NetQin Mobile Inc. was looking for someone who could push beyond the company’s Chinese roots and help founder Henry Lin guide an international sales push for its mobile-security applications.

The company turned toward the U.S. and Khan, a young star who had made his name as Samsung Mobile’s chief product and technology officer and had recently joined Citigroup Inc. to run a global mobile team.

“NQ came to me to recruit me to join the board,” Khan said in an interview. That offer quickly changed to a co-CEO position alongside Lin. The hiring announcement in January 2012 contained a further reflection of NetQin’s vision beyond China: Its name would change to NQ Mobile.

Karachi-Born

In Khan, NQ Mobile snagged an executive with ties to multiple continents: He was born in Karachi to Pakistani parents, raised in Miami and educated at the Massachusetts Institute of Technology, and was well-traveled in China from eight years working his way up to help manage Motorola’s mobile-devices supply chain.

The bonus: Khan had sales chops to complement his technical know-how. Part of his job for Samsung had been to take the stage at trade expos, extolling the features of new products such as the Samsung Galaxy player.

When Khan joined Samsung in May 2008, it was just six months after the company agreed to use a new handset operating system fromGoogle Inc. called Android in a challenge to Apple Inc.’s just-released iPhone. In part because of the popularity of Samsung phones, Android operating systems were used in 81 percent of smartphones shipped globally in the third quarter, according to data this week from Strategy Analytics.

Android Advocate

“My role was to help create a product and a business strategy for North America,” Khan said. “I was an advocate for the Android platform and managed the relationship with Google. I was lucky enough to be the face of the company when we launched” products.

Khan said he hadn’t considered working in mobile security until NQ Mobile approached him.

“They got excited about me, and I got excited about them,” Khan said. “We’ve transformed ourselves into a mobile Internet technology platform.”

It’s the scope of that transformation that Muddy Waters founder Block is calling into question. A particular focus is on revenue, which NQ Mobile in August estimated may reach as high as $188 million this year, above the upper limit of its prior forecast of $184 million.

“We believe it is a zero,” Block wrote in his report on NQ Mobile. “At least 72 percent of NQ’s purported 2012 China security revenue is fictitious. NQ’s largest customer by far is really NQ.” Muddy Waters also alleged that Tianjin Yidatong, NQ Mobile’s largest trade debtor, is controlled by NQ Mobile and not an independent company.

Muddy Waters

The effect was immediate: NQ Mobile, whose shares had more than tripled this year through Oct. 23, plummeted 47 percent on the day of the report and dropped the next two sessions as well.

The stock reaction was a testament to Block’s fame for short-selling calls starting in June 2010, including last year’s Muddy Waters report on Sino-Forest Corp., which lost 74 percent in one day and eventually filed for bankruptcy protection. A short sale is one in which stock is borrowed and sold, with the hope of profit by repurchasing the shares later at a lower price to be returned to the lender.

For Khan and his team, the report was a call to action. They defended NQ Mobile in press statements, interviews, presentation slides and telephone calls.

“The truth and facts are on our side,” Matt Mathison, vice president of capital markets, said on a conference call, adding he welcomed any third party to check the company’s cash.

NQ Mobile said Oct. 29 it had sued Muddy Waters in Beijing. Zachery Kouwe, a spokesman for the research firm, said today that Muddy Waters hasn’t yet seen such a lawsuit.

NQ’s Response

“For us it’s all hands on deck,” Khan, who is back in Dallas and helping reach out to customers, said in the interview. “We are returning to business as normal. Our partners have stood by us.”

Even so, some of the companies NQ Mobile lists as partners or customers are staying away from extensive public comment.

According to NQ Mobile, it has “broad contracts” to preload mobile-security solutions onto smartphones from Lenovo Group Ltd., Huawei Technologies Co. and ZTE Corp. All rank among the top five vendors in China, the world’s largest smartphone market.

“We can confirm NQ is indeed a supplier, but we can’t provide further details,” said Brion Tingler, a New York-based spokesman for Lenovo. “As a standard practice, we do not discuss details of supplier relationships.”

Scott Sykes, a spokesman for Huawei, and Liang Lan, a spokeswoman for ZTE, both declined to comment on NQ Mobile.

China Mobile

NQ Mobile also frequently cites China Mobile Ltd., the world’s largest carrier, as a partner with a relationship stretching back seven years and including mobile-security protection for uses, malware and security solutions for the carrier’s app store, a spam sample database and game content.

Rainie Lei, a Hong Kong-based spokeswoman for China Mobile, and Li Jun, a spokesman for the carrier’s state-owned parent company in Beijing, both declined to confirm any of those contracts or to discuss the carrier’s relationship with NQ Mobile.

Muddy Waters questions some other partnerships, such as the one with Tianjin Yidatong, as possible shell companies controlled by NQ Mobile.

Khan countered that Yidatong is simply one of NQ Mobile’s service providers, an unrelated party, and that the company has addressed this before in filings. When asked why reporters have been unable to reach Yidatong at its registered addresses or phone numbers, he drew a comparison to Delaware-incorporated companies that have operating headquarters in other states.

Partner Scrutiny

U.S. partners say they are keeping close tabs on the developments. That’s the case for Kris Snyder, chief executive officer of Vox Mobile Inc. in Independence, Ohio, who met Khan in summer 2012; their companies cooperate on mobile-security products.

“I have financial and fiduciary responsibility to look at the business relationship,” Snyder said in an interview. “We’ve been looking at the numbers. We haven’t seen anything that causes us to interrupt our relationship with NQ Mobile.”

Khan had a “contagious energy” when they met last year, said Snyder, adding that the men have spoken since the Muddy Waters report. Now, “he’s emotionally gone through a roller coaster.”

Khan says he has no qualms about his decision to jump in as co-CEO of a company rooted in China. “I am very used to working in global cultures,” he said. “I’ve always had a close relationship with our financial team and our auditors.”

“We are one of the most scrutinized companies out there,” Khan said. “I know the business model, I know the technology. I am very comfortable.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Olga Kharif in Portland atokharif@bloomberg.net