FUJIAN, China (
(CCME) shares rallied today after Chief Executive Officer Zheng Cheng defended the Chinese company against what he said was an attack by short sellers.
China MediaExpress, which operates a television advertising network on buses in China and was created through a reverse merger, were climbing nearly 11% to $15.34 after Cheng wrote in a letter to shareholders that short sellers "timed and coordinated their efforts" in "reckless and baseless attacks" against the company. Short sellers make money from declines in share prices.
Last week, Muddy Waters Research accused China MediaExpress 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." Citron Research and Bronte Capital also released similarly bearish reports on China MediaExpress on Jan. 31 and Feb. 1, respectively.
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.
In his letter, Cheng categorically denied the allegations made in the three publications and lashed out at the alleged short sellers, arguing that a conflict of interest exists for short sellers that taints the objectivity and legitimacy of their research reports.
"By using the anonymity of the Internet and publicizing as many unfounded allegations as they can craft, they can make it look as if there is a ground swell of criticism against the company when in reality all the claims emerge from a small group of self-interested parties," Cheng wrote. "As long as they can drive down the stock price when the U.S. markets are open (even if there is a holiday in China) and then cover their short position cheaply and quickly, they have accomplished their goal."
Muddy Waters released its critical report on China MediaExpress on the Chinese New Year, when most Chinese businesses are closed to observe the holiday. Both the Hang Seng and Shanghai Composite were closed for trading when the research note was released.
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, 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
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or one of Apple's distributors.