NQ Mobile Inc. (NQ:US) jumped the most on record in New York yesterday after the Chinese mobile-service provider said an internal investigation didn’t find any evidence of fraud.
American depositary receipts of NQ Mobile surged 31 percent to $9.99, the biggest gain since its 2011 debut. The ADRs sank 47 percent on Oct. 24 after Muddy Waters LLC, the research firm founded by short seller Carson Block, said in a report that the company overstated revenue and misrepresented cash balances. The Bloomberg China-US Equity Index slipped 0.7 percent to 101.40 as solar makers fell after a U.S. decision to impose preliminary duties on Chinese solar equipment imports.
An investigative team assembled by NQ Mobile found no evidence it engaged in the fraudulent conduct alleged by Muddy Waters and said its cash balances were “verifiable and consistent with public disclosures,” according to a statement from the company distributed by PR Newswire. The team did make recommendations to improve internal controls, the company said.
“Hopefully it’s an indication that this has primarily been a manipulated campaign to smear mud at NQ,” Jim Oberweis, president of Oberweis Asset Management, which holds shares in NQ Mobile, said in a phone interview from Lisle, Illinois. “It takes a long time to defeat those types of campaigns, but this is a great first step. We’ll continue to hold our investment in NQ.”
The iShares China Large-Cap ETF (FXI:US), the largest Chinese exchange-traded fund in the U.S., slid 0.8 percent to $37.14, retreating from the highest level this year.
Yingli Green Energy Holding Co. (YGE:US), the largest solar manufacturer, dropped 4.1 percent to $2.83, extending its decline into a fourth day. Trina Solar Ltd. (TSL:US), China’s second-largest panel maker, sank 4.5 percent to $12.39, a two-week low. China is subsidizing certain solar products, such as panels and modules, which could be assigned countervailing duties, according to a preliminary determination by the U.S. Commerce Department’s International Trade Administration.
The Hang Seng China Enterprises Index, also known as the H-share index, retreated 0.5 percent to 10,317.82 after rising to a seven-week high. The Shanghai Composite Index fell 0.7 percent to 2,024.83 yesterday.
The investigation into NQ Mobile, which did nothing to change Block’s opinion of the company, was carried out by law firm Shearman & Sterling LLP and auditor Deloitte & Touche Financial Advisory Services Ltd.
NQ Mobile is “unequivocally a fraud,” Block said in an e-mailed statement. “This press release is just another in a long line of whitewashes carried out by China companies that are defrauding U.S. investors, written by directors in China who have no accountability to U.S. authorities.”
NQ Mobile’s report “speaks for itself,” Kim Titus, a spokesman for the company, said in an e-mailed response to a request for comment on Block’s statement and whether the internal report would be made public.
Ron Brandsdorfer, a spokesman from Shearman, and Anisha Sharma of Deloitte didn’t return e-mails and calls for comment.
The company has twice delayed the filing of its audited annual report, known as a 20-F, as it waited for the final results of the investigation into Block’s allegations. Oberweis said the filing of that report would be the expected next step for NQ Mobile.
The investigation team, led by partners in the U.S. who managed teams based in both the U.S. and China, conducted a “thorough review” of cash reported on the company’s financial statements and cash transactions, NQ Mobile said. It found no evidence that the company’s revenue was inconsistent with public disclosures and concluded that its past and present relationships with business partners in China and overseas serve legitimate commercial objectives.
NQ Mobile also said the team’s review of documents and data provided by internal and external sources “could not verify that the devices it collected and copied contained all responsive information at the time the copies were made. On many devices, the investigation team observed indications that some information might be missing.”
Block said signs that information may be missing diminished the credibility of the special committee’s findings.
“By the committee’s own admission, there was significant data tampering,” Block said. “It’s therefore ridiculous that the committee, which is comprised entirely of Chinese directors who are de facto unaccountable to U.S. authorities, can claim to have concluded there was no wrongdoing.”
The investigative team has made “a series of recommendations to further enhance the company’s internal controls,” according to NQ Mobile’s statement.
“The idea that this report is some whitewash is pretty funny,” Taek-Geun Kwon, chief investment officer of Toro Investment Partners LP, a San Francisco-based hedge fund that holds NQ Mobile shares (NQ:US), said by e-mail. “How do the critics explain the fact that it was not the committee itself, but rather their service providers who did the nearly eight months of work to arrive at their own conclusions independently of anyone employed by the company?”
Muddy Waters, best known for exposing fraud at Sino-Forest Corp. in 2011, said in an 81-page report last October that at least 72 percent of NQ Mobile’s purported 2012 China security revenue was fictitious. It also alleged that Tianjin Yidatong Technology Development Co., the company’s largest customer, is controlled by NQ Mobile itself. It gave the stock a strong sell rating and called it “a zero.”
NQ Mobile, based in Beijing, said on May 30 it expected unaudited first-quarter revenue to be above its previously estimated range of $75 million to $76 million. It projected second-quarter sales between $83 million and $84 million, compared with a median forecast of $79 million by three analysts surveyed by Bloomberg.
Calvin Zhang, a money manager at PNC Capital Advisors, said he’s listening more to what the special committee and regular auditor PricewaterhouseCoopers are saying about NQ Mobile rather than to Muddy Waters.
“Who do you trust? We have Shearman & Sterling, Deloitte & Touche and PWC on one side, and then” Muddy Waters on the other, Zhang, who holds NQ Mobile shares, said in e-mailed comments yesterday. It’s time to focus on the company’s “booming business fundamentals.”
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