* Says short seller allegations false, but to form committee to 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 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." ()
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.