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TheStreet Open House

The 5 Dumbest Things on Wall Street This Week: Nov. 1

Stock quotes in this article: TEVA, MCD, JCP, GS, SHLD

5. Muddy's Return

Welcome back Muddy Waters to that same old place that you thrashed about.

NQ Mobile (NQ) publicly slammed a highly critical report of its accounting by Muddy Waters, aka short-seller Carson Block, last Friday, calling it "false and inaccurate." The Chinese mobile security software company blasted Block's claims that the company is a "massive fraud" by releasing details of its bank accounts and threatening legal action.

The company did, however, agree to form a special committee of independent directors to investigate Block's assertions. Shares of NQ continued to plummet this past week after tumbling nearly 50% last Thursday from $23 to $12 when Block alleged that at least 72% of NQ's purported 2012 revenue from sales of its security products in China fictitiously came from a shell company called Yidatong that was controlled by NQ. NQ lost $500 million in market value when the report was first released.

"We know no better method than to just completely open up the kimono and say, 'Here's our cash balances by account,'" NQ Mobile co-Chief Executive Omar Khan told Reuters. NQ published a list of 14 bank accounts in mainland China and Hong Kong Friday that showed deposits totaling approximately $295 million.

Unfortunately, market watchers were unmoved by NQ's kimono-opening. The company's stock sank 20% last Friday and another 10% Monday after Block once again doubted NQ's cash balances and sales figures, maintaining they should be confirmed by an independent source, not its own special committee. On Tuesday Block was at it full bore once again with a report: "NQ's Top Ten Lies Since Friday". (Full disclosure. We love the title.)

First of all, we here at the Dumbest lab are pleased as plum wine to once again have Block stirring up big trouble in little Chinese stocks. We were somewhat disappointed this summer when he tried his bombastic shorting strategy on a domestic name, American Tower, to less than stellar results.

And while the names have all changed since Block last hung around the shady world of Chinese stocks, the schemes have remained and the responses are still less than sound. NQ's decision to form an independent committee, for instance, is the same knee-jerk response Sino-Forest made in 2011 when a similar Muddy Waters report accused that company of fraud. Much better was its decision on Tuesday to transfer $16.4 million in real money to a recently-opened Standard Chartered Bank account, a move which helped the stock regain some of its losses.

Now we're not saying that NQ will follow the likes of Sino-Forest and Longtop Financial Technologies into bankruptcy and ignominy. The company still has its share of supporters on Wall Street -- it recently sold $173 million in convertible bonds -- and Kahn, who was Samsung's Mobile Chief Product and Technology Officer before coming to NQ, also maintains a high level of Street cred.

In other words, it's still early in the game and as much as we love Block's Sino-rabble-rousing, we're not giving him the win just yet.

That said, Kahn needs to come up with a whole lot more than a denial, some obligatory money-moving and a silly special committee because right now Block has certainly got him on the spot.

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