It has been a long time since NQ Mobile's (NYSE:NQ) conference call in response to the Muddy Waters allegations, but there has been something on the back of my mind about it ever since. If you recall, NQ Mobile's head of investor relations, Matt Mathison, led the call with a corporate crisis management case study, and the case he looked at was Johnson&Johnson (NYSE:JNJ) and how it responded to the Tylenol cyanide-poisoning episode in the 1980s. According to Mathison, to calm the fears of its customers that its products were poisoned, Johnson&Johnson removed all its Tylenol containers from the shelves and replaced them with tamper-resistant bottles.
In Mathison's words:
(Johnson and Johnson) seized the moment. They took full responsibility. They acted quickly. They didn't care about whether or not it was their fault (emphasis added).
Even though it is obvious that Mathison intended to draw a parallel to Johnson&Johnson's innocence and what he believes is NQ Mobile's, over time, I have come to interpret this story much differently. Over time, I have come to believe this story symbolizes NQ Mobile's belief that how you respond is what really matters in situations like the one it is facing. Whether what is being alleged is its fault or true is seemingly irrelevant to them. All that matters is that it responds in such a way that the company is able to create the desired impression.
I have come to this conclusion, because NQ has managed to respond in such a way, that false expectations have been created about a number of things, such as:
- The timing of its filing of the annual report
- Management's share buyback
- The timing of the completion of its independent investigation
- The validation of its term deposits (some of which we later learned were either forged or encumbered)
- The "full transparency" offer to investors interested in doing due diligence (some investors to this day have still been unable to verify their cash first-hand)
This does not even mention the instances where the expectations set were not necessarily false, but instead were effectively managed, such as when management cleverly announced its CFO's resignation in a press release raising guidance.
In each of these instances, an expectation was created that turned out to be completely different than what most of their shareholders thought. This has become such a consistent pattern that the question in my mind is no longer whether this is a coincidence, but rather, when will be the next time it happens?
In his interview with Bloomberg, I believe Carson Block pointed out the next likely instance when he mentioned how he expects NQ Mobile to tailor its "independent" investigation to the audit opinion that will be issued by PwC. Taking this a step further (I'm not sure if this is what he meant also), I believe NQ Mobile's "independent" investigation results will be used to directly influence the impression investors get from PwC's audit opinion.
To help you understand what I mean, let's consider a hypothetical example.
Let's say that PwC gives NQ Mobile a qualified audit citing a material weakness in internal control or PwC simply forces it to restate its past revenue from Yidatong. As we know, in conjunction with the filing of the 20-F, NQ Mobile will release its "independent" investigation results. NQ Mobile's investigation results could report it was entirely free of fraud, except that in September 2010, Yidatong never fully repaid the loan it was extended as was reported in its IPO Prospectus.
I believe management will do this to give people the impression that the audit opinion of PwC, which is unlikely to give very specific details on how it arrived at its conclusion, was informed by this particular finding of the "independent" investigation. While Shearman & Sterling may have conducted its investigation independent of NQ Mobile's directors, the scope of its work, what NQ Mobile allowed it to discover, and thanks to attorney-client privilege, what is ultimately shared with investors, could easily be manipulated.
The bottom line is this: if NQ Mobile receives a qualified audit opinion or an earnings restatement, you'd be a fool to think that the story told in its "independent" investigation overrides or explains it. This is particularly true, given the laundry list of Chinese companies that have been delisted in spite of positive "independent" investigation results and even more so for a company with a pattern of creating false impressions.
Disclosure: I am short NQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.