NQ Mobile Fraud Allegations Suppress Shares

Long/Short Equity, Portfolio Strategy
Seeking Alpha Analyst Since 2012
NQ Mobile (NYSE: NQ) has been at the center of discourse over the past several months. This comes after Muddy Waters LLC, a research firm set on unearthing fraudulent accounting practices in China, blacklisted NQ Mobile. Before then, NQ Mobile had been on an iconic bull run. However, Muddy Waters' negative report put immense downward pressure on the share price, opening up of slew of varied comments on both NQ Mobile and Muddy Waters.
Allegations Grounded on prevalent sentiment
Past experience with Chinese firms listed on domestic securities exchange platforms presents the perfect backdrop to validate Muddy Water's allegations. Tracking back to 2012, ChinaCast Mobile was delisted from the NASDAQ following its failure to file vital documents with the Securities and Exchange Commission not once, but twice. In December 2010, it failed to file its 10-K report with the SEC. Later, in the quarter ended March 2011, it yet again failed to file its 10-Q report.
ChinaCast Mobile's delisting from NASDAQ also came around the same time when the SEC accelerated its push to flush out corrupt Chinese firms. At the time, the SEC was viewed in increasingly negative light for allowing fraudulent companies to slip through the cracks. Things reached the climax when reverse merger fraud by Chinese firms came to the foreground. The SEC opened up a probe that implicated Chinese affiliates of major accounting firms including Delloite, KPMG, Pricewaterhousecoopers as well as Ernst & Young.
This past experience with Chinese firms made Muddy Waters' allegations believable. Some of the major allegations made by the research firm include claims that NQ Mobile secretly operates a shell company called Yidatong. According to Muddy Waters, not only do NQ Mobile and Yidatong share the same email servers, but Yidatong's 75 percent owner, Ms Rong Xu, has previously worked with NQ Mobile. In addition, Muddy Waters claims that Ms. Rong Xu is a director in a company called Yiteng Beijing Technology; the same company that owns 25 percent of NQ Mobile. Adding to a slew of other equally weighty allegations, Muddy Waters also claims that NQ Mobile's antivirus collects significant amount of sensitive data and sends it to a data analytics firm in China.
Section of Investors Not Swayed by Negativity
As earlier mentioned, NQ Mobile was on an incredible bullish run before the allegations. This was in part because of its impressive Q3 results. The company's top line grew 110 percent year-on-year while non-GAAP operating income grew 150 percent on the same basis.
In view of these great fundamentals, a section of institutional investors believe that Muddy Waters' allegations are a hard sell. Altimeter Capital Management LLC and Oberweis Asset Management Inc.have increased their holdings in NQ Mobile despite close to half of its shares being under short interest.
On one end, NQ Mobile's fall could be imminent. On the flipside, however, its shares could rise incredibly if it manages to get through this dark phase. The buy/sell decision on NQ Mobile is undoubtedly a huge leap of faith.
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