NQ Mobile Should Accept Muddy Waters' Offer

Back in October, shares of NQ Mobile  (NYSE: NQ  ) plummeted by more than 60% after the Chinese mobile Internet services company was accused of fraud by noted short-seller Muddy Waters.

To be sure, Muddy Waters pulled out all the stops in its 80-page report, not only asserting "at least 72% of NQ's purported 2013 China security revenue is fictitious," but also claiming "NQ's cash balances are highly likely not to be real."

NQ Mobile has aggressively defended itself since then by threatening legal action against Muddy Waters, detailing multiple cash transfers to Standard Chartered Bank, and forming a special committee of four independent directors to investigate the claims.

Your move, NQ
Nonetheless, Muddy Waters has maintained its relentless pressure on the firm.

Heck, Muddy Waters founder Carson Block even took to Bloomberg TV today to reiterate his belief NQ Mobile's efforts are likely part of a massive cover up to hide its fraud, saying "Independent director committees are not effective ways of investigating possible wrongdoing of companies."

Take Sino-Forest, for example, at which Muddy Waters aimed its crosshairs back in 2011 and whose own committee subsequently cleared it of any malfeasance -- mere months before the Chinese forestry firm filed for bankruptcy protection in Canada.

But that's where Muddy Waters' latest offer to NQ Mobile comes in.

Specifically, in an open letter to NQ's independent committee Thursday, Block offered to foot the bill if NQ would allow widely respected, Michigan-based accounting firm Plante & Moran to perform their own independent evaluation of Muddy Waters' claims -- that is, as long as NQ consents before midnight on Jan. 7. 

The stakes are high
And you know what? Putting aside the admittedly infuriating prospect of enabling its aggressor, I think NQ Mobile should take the deal.

After all, if they truly have nothing to hide, what do they have to lose? And with so much publicity surrounding the events, you can also bet the folks at 85-year-old Plante Moran aren't particularly interested in putting their sterling reputation at risk, so will happily provide an impartial review of Muddy Waters' report.

If Muddy Waters is proven wrong, NQ Mobile investors would be able to definitively put this entire debacle behind them. However, if NQ is concealing fraud on any level, it's definitely not going to agree to risk letting Plante Moran have a look.

In the end, though, and as deep as both parties have dug in their heels, you can be fairly certain this roller-coaster ride will end terribly one way or the other. For the sake of NQ Mobile investors, I sure hope Muddy Waters is wrong.

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Read/Post Comments (16) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2013, at 7:53 PM, mjf6175 wrote:

    "And with so much publicity surrounding the events, you can also bet the folks at 85-year-old Plante Moran aren't particularly interested in putting their sterling reputation at risk,..."

    Your logic here is somewhat confusing. On the one hand you say that Plante/Moran would not put their reputation at risk. So just what is Price Waterhouse (NQ auditors) and Deloitte (independent auditors) doing? Are they not doing the same? And are they "well respected" as well? Which according to you is apparently not sufficient. If accepted, you have an auditor (P/M) checking and auditor (Deloitte)who is already checking the first auditor (PW). Maybe get a fourth then?

    Your bias shows in another of your comments: "you can be fairly certain this roller-coaster ride will end terribly one way or the other. For the sake of NQ Mobile investors, I sure hope Muddy Waters is wrong." And could you have added or said that for the sake of Muddy Waters you hope they are right? No you did not and ergo a key reflection to your short position or writing on behalf of same.

    Poor job at writing FUD......

  • Report this Comment On December 19, 2013, at 10:21 PM, Kimberley wrote:

    Hi Steve,

    As a writer for this event, you should have the general knowledge of US GAAP and GAAD. Currently NQ has already followed the related regulation.

    If you think there are two rules for NQ to follow due to the money loss of Water Muddy?

    In addition, if Fool.com should filtered this kind of report.

  • Report this Comment On December 19, 2013, at 10:52 PM, drfredg wrote:

    Yeah. And Barack Obama should hand deliver his birth certificate to Donald Trump. The burden of proof lies with short-selling Muddy Waters. So far all allegations have been nonsense. With time, all will be resolved. And, if Block is shown to be wrong, he should be incarcerated. He will have hurt a ton of people, both financially and emotionally.

  • Report this Comment On December 20, 2013, at 1:33 AM, TMFSymington wrote:

    @mjf6175, Sure, but PW and Del. aren't charged with digging into Muddy Waters' full allegations -- that's what Plante & Moran would be doing...which, in theory, should come to the same conclusions of NQ's independent committee assuming everything's on the up and up. In short, if Muddy Waters is footing the bill, why not let them do it? Also, no short positions or hidden agendas here..see our disclosure policy.

    @Kimberley, do you mean US GAAP and GAAS (generally accepted auditing standards)? In any case, while it actually looks like MW was wrong at this point about NQ's "not real" cash balances, (and keeping in mind I'm no accounting expert -- are you? -- not what I'm trying to accomplish here) I was under the impression it's definitely NOT normal to classify *all* their cash as a level 2 asset.

    @drfredq, That's why MW is offering to do the leg work. Again, if NQ has nothing to hide, why not let Plante Moran dig in? That said, remember not ALL the allegations have been proven "nonsense" -- even NQ's still working to discredit MW's entire report (which MW says they took two months to prepare).

  • Report this Comment On December 20, 2013, at 2:12 AM, Mega wrote:

    PwC and Deloitte are legitimate businesses in the US. Not so much in China where they and other big name auditors have enabled too many frauds to count. They are separate organizations from the US auditors who they happen to share a name with.

  • Report this Comment On December 20, 2013, at 4:19 AM, Sintra61 wrote:

    This guys are a joke , now they want a different auditor? This is unreal block should be put in jail in opinion

  • Report this Comment On December 20, 2013, at 4:54 AM, harkvasa wrote:

    If MW agrees to also pay for all of the time that NQ management and staff would be required to spend with the auditors( like put up $1 Million in escrow from which NQ gets paid for their time) that MW is sending at their expense, then I would say it makes sense; otherwise as a shareholder of NQ; I would not want to see management spend their time with MW's auditors.

  • Report this Comment On December 20, 2013, at 7:25 AM, SeymoreButts wrote:

    Steve, for the record, have you read the muddy waters report and the subsequent rebuttals on SA ? If so you would likely be asking "who are muddy waters and what is their track record". You are peddling the allegations of an individual from a fictitious firm against the DD performed by Morgan Stanley, PWC and a list of institutional investors the length of your arm who went to China after the allegations were made and turned the place upside down. As a result, no partners have left and the institutional investors have mostly added to their positions - and after all that you still look at the situation from Carsen Blocks side of the fence - why don't you wait for Deloitte's audit finding and stop peddling this short sellers nonsense, if you are on the side of shareholders you'd use your soap box to advise some caution at making investment decisions on the back of an infamous short seller with a terrible track record. Unless of course you also don't trust Deloitte (and then were into tinfoil hats territory).

    Practice some journalistic balance my friend, I know this is all exciting and garners interest but this is not Fox News, let's add some perspective.

  • Report this Comment On December 20, 2013, at 10:14 AM, MKArch wrote:

    <<<Steve, for the record, have you read the muddy waters report and the subsequent rebuttals on SA ?>>>

    ****************************

    http://caps.fool.com/player/chinarto.aspx

    You mean this record?

  • Report this Comment On December 20, 2013, at 5:52 PM, SeymoreButts wrote:

    No, that's not what I mean, did you read my post at all ?

    Muddy Waters said there's no cash, $100m wired to Standard Chartered later (off apparently fictitious revenue) and the meat of his short thesis is up in smoke, after that he has thrown a bunch of innuendo against the wall and we have lazy commentators regurgitating the refuted none sense.

    Wait for the audit and then we will know either way.

    Here's a story, look into the murky world of short sellers, co-ordinated short raids, naked shorting and give us an interesting look behind these activities, that would actually be a fun read.

  • Report this Comment On December 20, 2013, at 6:59 PM, odwallafan wrote:

    I don't think Steve has that much experience in investing. Here is Steve's credentials:

    For seven years after graduating from the University of Montana, where he studied Computer Science and Mathematics, Steve Symington worked in the defense & aerospace industry as a Sales Engineer who happened to love long-term investing. Naturally, that led him to The Fool, where he has served as a writer & analyst since early 2013.

  • Report this Comment On December 20, 2013, at 7:51 PM, TMFSymington wrote:

    @odwallafan, Feel free to check out my record at http://caps.fool.com/player/tmfsymington.aspx

  • Report this Comment On December 20, 2013, at 8:11 PM, MKArch wrote:

    S.B.,

    You might want to try reading the auditor resignation letters at the already outed frauds. The link I posted will should give you plenty to choose from. You can find interesting little tidbits like bypassing the local branches of banks and verifying cash with the main office and fake bank web sites. The link I provided doesn't lie about the chiscam record.

  • Report this Comment On December 21, 2013, at 6:46 PM, SeymoreButts wrote:

    Do you seriously think that Deloitte, PWC, Standard Chartered, Morgan Stanley and a swath of institutional investors all missed that alter boy trick, that scam is known by the average retail investor, do you seriously think that would get past every compliance professional in the above list ?

    Are you suggesting NQ have managed to convince a local SC bank to commit fraud ? Don't you think counsel for SC main office would be all over this issue considering how much media attention these fraud allegations have garnered. Maybe your not suggesting that significant collusion is taking place between NQ and a litany of third parties who would all have to be in on this fraud at the risk of ruining their reputation.

    Maybe your saying it's possible that this could have happened, a lot of things are possible of course, innuendo is so easy to create, we have seen many casual commentators regurgitating Muddy Waters' allegations as if they were fact, in fairness you could apply the same allegations about most any Chinese stock and you would see their PPS drop like a stone, which is exactly what the author wanted.

    As I said before, the allegations have been refuted, one of their largest investors went to china (something Muddy waters did not do) and spent 3 weeks dissecting the company and it's partners and came back doubling their investment.

    Why don't you comment on exactly what your issue is with the company as opposed to throwing a lot of tired, generic none sense about Chinese stocks at the wall? I'm interested in your perspective after you yourself have done some DD.

  • Report this Comment On December 22, 2013, at 8:20 AM, MKArch wrote:

    I'm not just saying it; it's already happened at the already outed frauds. Yes big four auditors missed the fraud until the shorts forced them to look deeper. Yes local branches of banks colluded in the fraud necessitating verifying cash at the main branches. Bank web sites were faked, documents forged, you name it, they do it. You are sadly mistaken if you are relying on the local office of the auditor (big 4 or not) to have looked for fraud before M.W. report.

  • Report this Comment On December 23, 2013, at 9:37 AM, Sintra61 wrote:

    would be nice if you shut up , because you are certain bias

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