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TheStreet Open House

Suspicious Timing of China MediaExpress Slam?

Updated with share price rally in China MediaExpress.

FUJIAN, China ( TheStreet) -- China MediaExpress (CCME) denied a short-seller's allegations of fraud late Thursday, claiming the bearish report was strategically released on the Chinese New Year.

Shares of China MediaExpress, which operates a television advertising network on buses in China and was created through a reverse merger, plunged 33% Thursday after California-based Muddy Waters Research accused the Chinese company of "engaging in a massive 'pump and dump' scheme whereby it significantly inflates revenue and profits in order to enrich management through earn-outs and stock sales."

Muddy Waters says it has a short position in the stock, and therefore stands to realize significant gains in the event that the price of stock declines.

Shanghai

In a public statement released late Thursday, China MediaExpress denied what it called "misleading and inaccurate allegations," saying it would issue a public statement to refute the Muddy Waters report "within a few days." The company also noted "Muddy Water's apparently strategic decision to release its 'report' at the outset of the Chinese New Year."

Most Chinese companies were shuttered to celebrate the holiday, and Hong Kong's Hang Seng and China's Shanghai Composite were closed.

In an email response, Muddy Waters told TheStreet that the firm is "puzzled that CCME's response to being accused of defrauding shareholders is to accuse Muddy Waters, LLC of intruding on management's holiday."

"Further, Muddy Waters, LLC wishes all honest managements a very happy and prosperous Year of the Rabbit," Muddy Waters' Carson Block added in an email.

Among several accusations made by Muddy Waters, the short-seller claims that China MediaExpress actually has fewer than half of the 27,200 buses it claims to have, citing data the company provides to advertisers. In addition, the firm alleges that China MediaExpress' management was lying when it announced that it had created an online shopping platform that has an agreement with Apple (AAPL) or one of Apple's distributors.

In response, China MediaExpress announced its December 2010 contract with Eading Group, which it says is one of Apple's official distributors in China to advertise Apple products, including the iPad.

Like several other Chinese reverse merger stocks, China MediaExpress has seen its share price shredded by multiple accusations of fraud. Shares of China MediaExpress were rebounding Friday, rallying 22.8% to $13.62. However, the stock is down nearly 35% over the last five trading sessions.

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