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TheStreet Open House

NQ Mobile's 'Massive Fraud'? Not So; Muddy Waters Research, Shorts Shocked: StockTwits

NEW YORK (TheStreet) -- After a big storm, it looks like the water is clear for NQ Mobile (NQ).

Today, the Chinese mobile security, gaming and advertising company announced the results of an independent investigation of fraud allegations made by Muddy Waters Research, a firm run by short-seller Carson Block. The investigative team found no evidence of fraud.

Long investors celebrated the news on StockTwits.com. The stock climbed nearly 35% in premarket trading to $10.25. The stock had fallen nearly 68% since Muddy Waters made its Oct. 24 allegations of fraud. The stock had 57.61% short interest, according to ShortSqueeze.com.

$NQ just went from 7.50 to 6 to 7.50 on the release of forensic accounting review related to Muddy Waters accusations... ? Steven Spencer (@sspencer_smb) Jun. 4 at 08:11 AM

$NQ is going to correct itself fast. PT $33 by one analyst. ? Justin Lynch (@MyPlainUsername) Jun. 4 at 09:01 AM

In the October report, Muddy Waters called NQ "a massive fraud." The firm said that at least 72% of the company's 2012 China security revenue is fictitious and that its cash balances are "highly likely to not be real."

But the investigation team refuted such claims. The team, led by Shearman & Sterling and Deloitte & Touche Financial Advisory Services, said it verified 99.8% of NQ's cash deposits. They did not check two accounts because they were too small to warrant the expense of verification. The team also verified all cash transactions exceeding $1 million and all cash transactions related to the company's convertible bond offering.

$NQ the investigative report is amazing and thorough on how it was done. No wonder NQ wasn't allowed to talk about it. NQ came clean ? ali kothari (@ally786) Jun. 4 at 08:48 AM

In addition to verifying the cash in NQ's accounts, the team said that they investigated financial activities and business relationships -- and verified them.

"The investigation team determined that the company's cash balances were verifiable and consistent with public disclosures. The investigation team did not find evidence that the Company's revenues were inconsistent with public disclosures," said the report.

Some investors argued that the company and shareholders should sue Muddy Waters for its unfounded claims.

$NQ Muddy Waters should be sued and shut down for good! ? chris garvey (@fitplan) Jun. 4 at 08:23 AM

But Muddy Waters may yet disagree.

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