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NQ Mobile – still in the balance following Muddy Waters negative report last October

Posted by on June 4, 2014.

NQlogoNQ Mobile, a global Chinese provider of mobile internet services, has announced preliminary results of a 6 month investigation conducted by a team of its own independent directors, and Shearman & Sterling LLP and Deloitte & Touche Financial Advisory Services Limited: together comprising the Investigation Team. The investigation followed accusations made by short seller Muddy Waters last October:

NQ is a massive fraud. We believe it is a “Zero”. At least 72% of NQ’s purported 2012 China security revenue is fictitious. NQ’s largest customer by far is really NQ. Our research estimates that NQ’s real market share in China is only about 1.5%, versus the approximately 55% it reports. We estimate that its China paying user base is less than 250,000, versus the six million NQ claims.
Initiating Coverage on NQ Mobile Inc. (NYSE: NQ) – Strong Sell

NQ Mobile’s share value fell sharply after this report. It put together the Investigation Team to look into and evaluate Muddy Water’s claims. Now it has announced preliminary findings, which in a nutshell, are summarised thus:

The Investigation Team did not find any evidence that the Company had engaged in the fraudulent conduct alleged by Muddy Waters.

As a result, NQ’s share value rallied yesterday.

The stock surged 11 percent, the most in two weeks, to $12.36 yesterday in New York. The rally cuts into the 46 percent selloff since Block said in October that NQ Mobile was “a massive fraud,” allegations that the Beijing-based company denies. The stock was the biggest gainer in the Bloomberg index of the most-traded Chinese stocks in the U.S., which rose 0.2 percent.
NQ Mobile Surges as Probe Turning Up No Evidence of Fraud

Carson Block

Carson Block

But Carson Block, founder of Muddy Waters, isn’t letting go just yet. He points out that NQ’s annual report (the 20-F being prepared by PricewaterhouseCoopers) has been delayed by 15 days. The official reason is that it awaits the final report from the Investigation Team.

Block, founder of Muddy Waters LLC, said in an e-mail to Bloomberg News that the delaying of the annual report shows Pricewaterhouse-Coopers is “clearly uncomfortable” and has been unable to complete its audit. “This discomfort is telling, given that the timing of our initial report gave ample time” for PricewaterhouseCoopers to plan the audit, he wrote.

So things are looking a bit better for NQ – but the reality is it’s not over until the fat lady (the Investigation Team) sings its final song.

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