NEW YORK ( TheStreet) -- Orient Paper ( ONP) shares rallied Friday, retracing most of the week's 50% drop, as long and short investors battled over the legitimacy of the company's financial position and operational viability.Orient Paper shares were sliced nearly in half during the first four trading sessions of this week, pressured by a bearish report from Muddy Waters Research, whose principals are short the stock and would benefit by a decline in its price. Two investors with long positions in the stock -- Rick Pearson and Eric Jackson -- came to Orient Paper's defense, contending that Muddy Waters' research was ill-grounded. Pearson and Jackson are both independent investors who contribute commentary to TheStreet. In the firm's inaugural research note, Muddy Waters asserts that Orient Paper is a "fraud" and that it "overstated its 2008 revenue by 27 times." The firm cited financial statements by He Bei Oriental Paper Co. Ltd, which it claims is an operating subsidiary of Orient Paper. Muddy Waters alleges that most of the $31.5 million that Orient Paper raised between October 2009 and May 2010 "has been misappropriated."
CNBC stocks commentator Herb Greenberg wrote that China has barred the Public Company Accounting Oversight Board (PCAOB) from examining the auditors of most U.S.-listed Chinese companies. This lack of transparency is a risk to investors of many Chinese reverse-merger companies.On the other hand, traders long Orient Paper argue that the timing of the release of the Muddy Waters research note is suspect. The research firm had doubts about Orient Paper's operations in January, but the research note calling Orient Paper a fraud was not released until nearly six months later. Among other research firms covering Orient Paper, Roth Capital Partners rates the stock a buy with a $16 price target. Most recently, Roth Capital analyst Mark Tobin China's Ministry of Industry and Information Technology plans to eliminate additional papermaking capacity is a positive development for Orient Paper as it further limits the possibility of oversupply. Tobin, who operates out of Roth Capital's China office, did not immediately reply to an email seeking comment for this story. Similarly, Hudson Securities analyst Julie Chen has a buy rating on the stock and a $15 price target. Chen reiterated her rating on the stock after Orient Paper reported first-quarter earnings in May. Chen did not immediately respond to requests for comment on this story. -- Written by Robert Holmes in Boston. Follow Robert Holmes on Twitter and become a fan of TheStreet.com on Facebook.