Why NQ Mobile, Inc. Shares Skyrocketed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of NQ Mobile (NYSE: NQ  ) continued their volatile ways Monday, rising more than 17% after SEC filings revealed Morgan Stanley  (NYSE: MS  ) has opened a 5.2% passive stake in the controversial Chinese mobile Internet services specialist.

So what: As it stands, remember the stock is currently trading more than 46% below its 52-week-high, which was set in October, just before noted short seller Muddy Waters accused the company of fraud. If Muddy Waters is ultimately proved wrong, it could undoubtedly be a great opportunity for long-term investors.

But this isn't without some level of precedent; Astute investors know several hedge funds already jumped in with at least 5% stakes shortly after Muddy Waters' initial report, most notably including ChinaRock Capital, Altimeter Capital, and Toro Investment Partners. This in mind, having a well-known name like Morgan Stanley on board undoubtedly serves as a solid vote of confidence that everything is on the up-and-up at NQ, especially given the significant uncertainty surrounding its future of late.

Now what: The move will likely drive some short-sellers out of their positions over the next few days. But considering the folks at Muddy Waters didn't back down even as NQ threatened lawsuits and formed an independent director committee to investigate the claims, I sincerely doubt it'll do anything to discourage Muddy Waters from sticking to its guns.

Also, remember Muddy Waters made things interesting earlier this month, when it offered to pay an impartial accounting firm to review the findings of NQ's independent director committee -- an offer I still think NQ would be wise to accept, by the way, as an effective means to show it has nothing to hide and definitively disprove Muddy Waters. That hasn't happened yet, which is why I remain unwilling to put my money at stake in NQ Mobile stock until the matter is fully resolved.

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On December 30, 2013, at 6:14 PM, stanstan wrote:

    Ofcourse Muddy Waters won't back down. Did you think they would just reverse their thesis because MS took a stake? No. But the stock has still moved against you short sellers by nearly 17% and that will continue happening. More hedgies and wall street co will start taking long positions irrespective of what Muddy Waters does going ahead.

    This is Herbalife 2.0 all over again. Ackman still hasn't covered and he is sitting on about 700million worth of losses.

  • Report this Comment On December 31, 2013, at 2:48 AM, qwertyasi123 wrote:

    I don't get it Steve -- Are you suggesting that Deloitte and Shearman wont do a completely independent audit on all of the MW allegations as NQ has already stated they will do?

    Why would they need to involve a third auditor to examine the work of the independent auditor (Deloitte) which is already checking the work of the original auditor (PWC) as well as the veracity of the MW claims.

    And don't you think it is rather convenient that MW will only pay for this "free audit" only if its done by one particular guy at one particular audit firm which is not exactly top tier.

    Tbh, I think this was always a delaying tactic by Mr Block, which would allow him and his big shorts to continue to cover.

    Unfortunately for him, now that big name funds and banks the likes of Morgan Stanley are choosing to do their own due diligence and vote on the veracity of Muddy Waters' claims with their wallets, these sorts games will no longer be effective.

  • Report this Comment On December 31, 2013, at 7:08 AM, SeymoreButts wrote:

    You have made a huge assumption from the beginning that what Muddy Waters wrote about is true. Muddy Waters are a fictional company who write hit reports on Chinese companies to short them. Their track record is incredibly bad, aren't they 0-7 for non reverse IPO's ?

    You probably didn't look at who Muddy Waters are did you, try to find an address for this fictional company. Steve, do a tiny bit of DD before writing this stuff, you will embarrass yourself.

    NQ are partnered with the biggest phone companies in the world - real companies who buy real products from NQ. They are busy running a successful company but you would like them to legitimize a fictional company by entering another 2-4month audit by some shower in the US?

    Your question all along should have been 'who are Muddy Waters?'. They wrote a hit piece and missed, get over it Steve.

  • Report this Comment On December 31, 2013, at 9:50 AM, SeymoreButts wrote:

    Here are some of Muddy Waters greatest hits. They are interested in volatility, not fraud, they short sell Chinese companies because it's so easy to scare people and make huge profits. Then again, maybe Muddy Waters on their own have found massive fraud where no other instistutional investor or business partner can find it......

    Oh Steve, call investor relations at NQ, they will provide you with the contact details for Standard Chartered (main office), you can confirm the cash directly with SC.....at the main office.....

    1.) On Nov. 21, 2011 Muddy Waters attacks Focus Media Holdings (FMCN) which prior to that was trading for $25.50 by publishing their “Strong Sell” report. However, MW’s allegations and other concerns were never proven and the stock presently trades at $27.50, which is up 185.30% off the original closing low of $15.43 set the day following the attack.

    2.) On Mar. 10, 2010 Muddy Waters attacks Fushi Copperweld (FSIN) which prior to that was trading for $5.79 through the use of a slide deck presentation. However once again MW’s allegations and other concerns were never proven and the stock presently trades at $9.50, which is up 55.70% following the attack. In fact, FSIN actually went up 5.46% to close at $6.10 the day after MW’s attack leaving one to incur that maybe the slide deck was a dud.

    3.) On July 18, 2012 Muddy Waters attacks New Oriental & Technology Group which at that time was trading for $14.62 by publishing their “Strong Sell” report. The stock drop (35.0%) to $9.50, but once again none of MW’s allegations were never substantiated and therefore eventually dismissed by the market. The stock now trades at $27.50, or up 185.30% off the original closing low of $9.50, which was set the day after the attack.

    4.) On Nov. 10, 2013 Muddy Waters attacks Olam International (OLAM SP) by publishing another one of their now infamous “Strong Sell” report. However, Muddy Waters concerns were mostly dismissed by the market and the stock’s price was hardly affected

  • Report this Comment On December 31, 2013, at 10:01 AM, SeymoreButts wrote:

    Other than Stock Advisor's pick's, the junk on fool is as bad as the pump and dump spam we all get. Yawn.

  • Report this Comment On December 31, 2013, at 12:36 PM, SeymoreButts wrote:

    Below is a snippet from an article written on SA today - it's very relevant to the points I;ve been trying to make to you Steve. Shareholders putting this whole thing to bed, up 30 odd % last two days.

    http://seekingalpha.com/article/1923021-nq-mobile-when-emoti...

    Independent director committees are unable to investigate fraud allegations impartially. Even if the directors played no part in the fraud, confirming that a company is a fraud can be viewed as a professional embarrassment. Further, independent directors often have longstanding personal relationships with management that taint their judgment. In other cases - particularly when the directors are in China and have little connection to the United States - the directors could be co-conspirators in the fraud.

    The short seller attempts a shot across the proverbial bow by issuing the letter ahead of the independent committee's findings. But the attempt is really a cleverly crafted Guilt by Association fallacy, which is the logical fallacy of trying to refute or condemn someone's standpoint by evoking the negative ethos of a collective to which he/she belongs. The short seller cleverly groups all independent special committees as one collective group and then argues that it is inevitable that NQ Mobile's independent special committee will do a poor job because other independent special committees did a poor job.

    The letter also does the job of Essentializing, which is the logical fallacy of arguing that something is a certain way "by nature," that no amount of proof can refute. The short seller makes this invalid argument by stating that independent special committees are, by their very nature, unable to honestly perform the tasks given to them and no amount of evidence they produce can refute this.

    And finally, and most troubling, the short seller attempts to shift the burden of proof from him proving that NQ Mobile is a fraud, to NQ Mobile's special committee proving their investigation is credible; this despite the fact that Deloitte & Touch had already been retained as an independent forensic examiner. Shifting the Burden of Proof is the most classic of logical fallacies that challenges opponents to disprove a claim, rather than asking the person making the claim to defend his/her own argument.

    While the December 19th open letter to NQ Mobile seems ominous, when examined under the microscope of logic, the premises drawn in the letter do not support the conclusions and therefore, the letter's conclusions must be rejected as false.

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9/17/2014 4:01 PM
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