(This story was updated with a comment from research firm Muddy Waters, whose principals are short the stock.)



) --

Orient Paper


shares surged Friday despite another bearish research note released by Muddy Waters Research, a firm that has a short position in the Chinese paper company's shares.

Orient Paper

shares were climbing by 57 cents, or 12.8%, to $5.03 after hitting an intraday high of $5.63 earlier Friday. Traders posting on Internet message boards and Twitter attributed the spike in Orient Paper's share price to a short squeeze. More than 1.44 million shares of Orient Paper changed hands by 12:30 p.m. ET Friday, compared to the average daily share volume of 643,000.

The rally comes one day after Muddy Waters Research continued the war of words with the Chinese company by posting a research report that once again claims Orient Paper engaged in fraudulent activity.

Muddy Waters' research note Thursday cites an article by Chinese publication

21st Century Business Herald

, which investigated many of Muddy Waters' claims that lead the firm to conclude Orient Paper is committing fraud.

More on Orient Paper Video: Orient Paper Factory Tour

According to Muddy Waters' own translation of the 21st Century Business Herald article, financials that Orient Paper provided to investors in response to Muddy Waters' allegations overstate profit and taxes paid by an operating subsidiary of Orient Paper by close to 400%. The article also alleges that the operating subsidiary's largest supplier, Dongfang Trading, is "a shell company that has virtually no recorded revenue the past two years."

"Our thoughts are that having a supplier that is a captive shell company makes it easier to produce documents that would fool the auditors," Muddy Waters wrote, adding that the article shows that paper industry experts told the 21st Century Business Herald reporter that Orient Paper's claimed inventory turnover is "well above what is usual."

Thursday's research note was the latest in a volley of attacks between Muddy Waters and Orient Paper. In its inaugural research report issued June 28,

Muddy Waters Research

asserts that Orient Paper is a "fraud" and that the company "overstated its 2008 revenue by 27 times."

Muddy Waters' principals, who are short the stock and would benefit by a decline in its price, cited financial statements by He Bei Oriental Paper Co. Ltd., which it claims is an operating subsidiary of Orient Paper. Muddy Waters also alleges that most of the $31.5 million that Orient Paper raised between October 2009 and May 2010 "has been misappropriated."

Orient Paper has denied the allegations, claiming that Muddy Waters was incorrect in citing financial statements of He Bei Oriental Paper Co. Ltd, and that the company's operating subsidiary is actually named Hebei Baoding Orient Paper Milling Co., Ltd.

Last week, Orient Paper said it has retained law firm Loeb & Loeb, which plans to work with its audit committee to retain a Big Four audit firm to conduct an independent investigation into allegations of fraud by Muddy Waters.

Muddy Waters principal Carson Block attributes the rally in Orient Paper shares Friday to a video on the

Wall Sreet Media

Web site.

"Today, the stock may be up as a result of a video tour of ONP shown on a site that frequently features Chinese micro-caps in a positive light," Block writes in an email to


. "We note that there are a number of issues in the way the video is presented and within the video itself, including machinery that is freshly painted and other clear signs of staging."

While Orient Paper shares were jumping Friday, the stock has lost more than 40% since Muddy Waters' initial report.

-- Written by Robert Holmes in Boston


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