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Summary

  • Muddy Waters jumped to conclusions and missed, yet again.
  • Ms. Ying Han resigned as Audit Chair for both WuXi PharmaTech and NQ Mobile for validated personal reasons. There were no disagreements between her and NQ Mobile.
  • It's highly unlikely insider shares as described by Muddy Waters were sold between 6/25/14 and 7/3/14.

Tom Smykowski: It was a "Jump to Conclusions" mat. You see, it would be this mat that you would put on the floor... and would have different CONCLUSIONS written on it that you could JUMP TO.
Michael Bolton: That's the worst idea I've ever heard in my life, Tom.
Samir: Yes, this is horrible, this idea.

Source: imdb.com

In the ever ongoing drama that investors in NQ Mobile (NYSE:NQ) live in, it was recently brought to this author's attention, the allegation that Ms. Ying Han, the Audit Committee Chair resigned due to "problems with NQ itself" and that NQ had conspired to defraud investors by assisting insiders to sell before publicly announcing her departure.

As written by fellow SA Author Muddy Waters,

"Ms. Han's resignation lays bare the corrupt nature of the "independent" investigation NQ's directors conducted. While NQ claims that Ms. Han resigned for "personal reasons," it is obvious she resigned because of problems with NQ itself. To further illustrate that point, Ms. Han still chairs the audit committee of WuXi PharmaTech (NYSE:WX)."

and that "NQ deliberately held back both (PWC expansion of audit scope) admissions so that NQ China insiders and their proxies could illegally dump more shares at existing shareholders' expense"

While I appreciate a good yarn now and then, Muddy Waters' suspicion of Ms. Han leaving due to a disagreement with NQ as well as accusing the Company of withholding information and conspiring to commit insider trading is ridiculous. Ms. Han disclosed that she had personal issues and that those issues were serious enough to require her to step down from her board position of not 1 company, but 2 companies (NQ Mobile and WuXi PharmaTech). As was disclosed by NQ Mobile at the time of her departure, there were no disagreements between her and the Company. I believe Muddy Waters' suspicion of Ms. Han having issues with NQ is unfounded as Ms. Han's departure from WuXi on 7/8/14 substantiates her reasons of stepping down due to personal reasons. In fact, I believe her relationship with NQ was so close and positive that not only did she stay around long enough to ensure that the Independent Audit was completed, but that she continued to perform in her role as Audit Committee Head until a qualified replacement was found. She performed this role despite the personal issues she was likely confronting at the same time.

With regard to Muddy Waters' magical date of June 25th being the date she informed Management of her pending departure, this author finds that hard to believe she did not inform NQ's management team much earlier. The search for Ms. Han's replacement likely took weeks, if not months to plan and execute. Finding new board members of the caliber of Max Yao and Justin Chen likely took some time and diligence on both sides. Now this is speculation on my part, but I would guess that Max Yao, the CEO of a billion dollar company in China would do some fairly heavy research on NQ before agreeing to join their board, and as Audit Committee Head no less. Given the headline risk of associating oneself with NQ, taking a week (June 25th - July 3rd) to interview, investigate and decide on accepting such a high profile role with NQ seems like a stretch.

Regarding the accusations of insider sales from June 25th - July 2nd, a few things to consider regarding this volatility.

1. Volume from 5/16/14 - 6/25/14 averaged 7.2M shares daily. I chose to start on 5/16/14 as that was the day after NQ missed its second deadline for the 20-F and volume increased significantly on a sustained basis. The volume on 6/25/14 was 5.3M shares, or 27% below the 7.2M average. The volume on 6/26/14 was 9.0M shares, or 25% higher than the 7.2M average. The volume on 6/27/14 was 15.3M, or nearly 2x the 7.2M average.

2. Altimeter sold 5.4M shares between 6/25/14 and 7/3/14. I suspect the bulk of those sales happened on 7/2/14 and 7/3/14, however if Altimeter was selling during that time frame, it's likely other institutions were as well given the steep drop in share price since 5/14/14, and the share price hitting a 52 week low on 6/25/14.

3. According to Muddy Waters, the audit was in trouble since mid-February. Wouldn't it have made more sense to sell insider shares starting in mid February or even March when NQ was trading in the low $20s? Why wait until 6/25/14 to sell if you knew you were going to have trouble with your audit hitting timelines or coming out unqualified?

4. Senior Management has been in a voluntary lockup since 9/5/12. This lockup is not set to expire until 9/5/14. If insiders truly believed they were running a scam, you would think they would have sold their shares sometime between 10/25/13 - 2/14/14 when the share price averaged around $14/sh. 2/14/14 is the date that senior management last disclosed their holdings.

Ultimately, it's this author's belief that the uncertainties surrounding the 20-F and heavy selling pressure over the preceding week had investors worried, driving volatility and volume. Insider selling, as described by Muddy Waters, was unlikely.

What does this all mean?

The departure of Ms. Han is still a negative, purely in the sense of continuity and efficiency in producing the 20-F. On the flip side, an undistracted (with personal matters) Max Yao might be more capable in working with PWC to address their needs. Investors should no longer consider Ms. Han's departure a major red flag in terms of issues between the audit committee and company or auditor, but more of a consideration of the transition risk between Mr. Yao, NQ and PWC.

The Company has yet to address their "Consideration" of PWC's expanded audit request and until they do, the share price will continue to reflect that overhang. While the discussions between company and auditor remain private, it is this author's understanding that the primary points of discussion between PWC and NQ surround arriving at a definitive scope and timeframe for PWC's extended audit. Until a resolution has been reached, this issue continues to be a major red flag for long investors to consider.

Until the 20-F is finally issued, the relationship between NQ and its Auditor will be perceived (rightfully) to be strained. Investors should continue to view this as a risk factor in their assessment of NQ. On the flip side, PWC continues to be their Auditor and based on the latest press releases, NQ continues to work with PWC in completing the 20-F. If the differences were so wide that no resolution is possible, PWC could have easily walked from the relationship by now. This continues to be a red flag for long investors to consider.

While the path ahead seems daunting, "There are many pathways forward." I happen to think my last article lays out one of those paths. It's to be determined how the additions of Taek Kwon, Max Yao and Justin Chen will affect NQ. It's this Author's belief that all three of these additions should be positive additions to NQ's leadership team. These additions constitute a green flag for long investors to consider.

Like the Jumping to Conclusions board game referenced above, Muddy Waters seems to have laid out a series of predetermined conclusions and is jumping from one conclusion to the other, crafting a story to fit whatever truth is convenient to them. To date, Muddy Waters has been absolutely wrong on each fraud claim (as supported by the results of the Independent Committee) and has become ever more daring in their slander of the company. This should constitute a green flag for long investors to consider.

Lastly, I would like to take the time to thank Ms. Han for her efforts in completing the Independent Audit and wish her well on a positive outcome for her personal issues.

Source: NQ Mobile: Jumping To Conclusions, The Muddy Waters Board Game