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Just days after I said NQ Mobile (NQ) looked like a company to watch after its issue of $172.5 million worth of bonds, infamous short seller Muddy Waters has launched an assault on the software security maker, sparking a sell-off that has wiped out half of its market value. Internet search leader Baidu (BIDU) is also coming under assault from different quarters, in this case taking heat from company watchers and regulators after promising returns that many believe are unrealistic on its newly launched investment product.

There's not really a major common thread to these 2 stories other than the fact that each represents a setback for both NQ and Baidu as both are forced to react to negative backlash. Some are saying this latest short seller attack could have a chilling effect on a nascent spring for new Chinese IPOs in New York, which have recently gained new momentum after a 2-year-old deep freeze. NQ's shares tanked 47 percent after the new attack, wiping out more than $500 million in market value. Baidu's shares fell 6.5 percent in the first 3 trading days of this week after controversy began around its new product, but they bounced back somewhat on Thursday in New York.

Let's start off this "bad news" Friday with a look at NQ, whose shares had tripled over the last 52 weeks before the report came out from Muddy Waters, the short seller that helped to launch a confidence crisis against US-listed Chinese firms that has now lasted nearly 3 years. The report is classic Muddy Waters, saying at least 72 percent of NQ's 2012 mobile security revenue is fictitious, and calling the company a "massive fraud." (English article)

Not surprisingly, NQ Mobile has rejected the allegations. Also not surprisingly, at least three law firms have said they plan to file class action lawsuits against NQ on behalf of shareholders. Muddy Waters and other short sellers have a mixed track record in their attacks against US-listed Chinese firms, with some ultimately collapsing while others have disproved allegations and bounced back. It's still too early to say if NQ will survive this attack; but even if it does, I doubt the stock will bounce back to its previous levels anytime soon.

As to the bigger question of whether this new attack will dampen a recent thaw in investor sentiment toward new Chinese IPOs in New York, I suspect the answer is mostly "no." The new crop of companies preparing to list are coming under much heavier scrutiny from their investment banks and accountants than in the past, which means investors can probably be more confident about their financials. But this latest attack shows that some companies will remain vulnerable to new assaults, especially smaller ones that listed before the recent sector clean-up.

From NQ, let's look quickly at Baidu, which announced its new Baifa product this week in partnership with China Asset Management Co. The product allows users to invest spare cash in their Baidu e-payments accounts into financial markets, with the pair saying such investments could get annual returns of up to 8 percent. (previous post) That figure drew criticism from the financial world for being unrealistic, and now media are reporting the Chinese securities regulator has also voiced objection to the 8 percent figure.

Baidu has responded with a message on its microblog saying it has conformed with all relevant regulatory requirements, without specifically addressing the issue of the 8 percent return figure. I previously said that e-commerce giant Alibaba could run into these kinds of problems when it rolled out its similar Yu E Bao product earlier this year, even though Alibaba didn't promise any specific returns. At the end of the day, Baidu, Alibaba and other companies will have to deal with unhappy investors who use these new investment products with unrealistic expectations, potentially forcing the regulator to step in and tighten its oversight of the sector.

Bottom line: A new short seller attack on NQ Mobile is unlikely to dampen a new wave of New York IPOs by Chinese firms, but NQ's own shares are unlikely to bounce back to previous levels.

Source: NQ Mobile, Baidu Come Under Fire