NQ Mobile hits back at Muddy Waters, releases account details

Reuters

* Says short seller allegations false, but to form committeeto investigate

* Threatens legal action against Muddy Waters

* NQ shares falls as much as 20 pct on Friday

By Paul Carsten and Soham Chatterjee

Oct 25 (Reuters) - NQ Mobile Inc, the Chinese mobilesecurity software company labelled a "massive fraud" by MuddyWaters Research Group, hit back on Friday by releasing detailsof its bank accounts and threatening legal action.

NQ described as "false and inaccurate" the allegations byMuddy Waters, owned by short-seller Carson Block, but said aspecial committee of independent directors would investigate.

Shares of NQ continued their slide on Friday, falling asmuch as 20 percent. The stock dropped by nearly 50 percent onThursday, after Muddy Waters released its report, wiping out$500 million of market value.

"Could it be a fraud? Sure. Time will tell," said BlakeWalker, chief investment officer at Grandeur Peak GlobalAdvisors, which holds a 2.3 percent stake in NQ Mobile.

"But actions speak louder than words and we're encouraged atthe formation of the special committee who will independentlyverify or refute all allegations," he said.

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

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

"We know no better method than to just completely open upthe kimono and say, 'Here's our cash balances by account,'" NQMobile 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 balanceswere "highly likely to not exist." ()

The firm had claimed that at least 72 percent of NQ'spurported 2012 revenue from sales of its security products inChina was fictitious, coming from a shell company calledYidatong that the research firm alleged was controlled by NQ.

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

Muddy Waters appeared unconvinced by NQ's disclosures.

NQ should get its cash balances confirmed by independentcapital confirmation firms, the short seller said in an emailedresponse.

The firm's previous targets have included other U.S.-listedChinese companies such as the now-bankrupt Sino-Forest Corp andLongtop Financial Technologies Ltd, which gained notoriety forfraudulent reporting and asset stripping.

Prior to NQ's Friday statement, Oppenheimer analyst AndyYeung said the cash allegation was the most serious. He cut hisrating on NQ's stock to "perform" from "outperform".

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

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

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

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

View Comments (10)