Suspicious Timing of China MediaExpress Slam?

Updated with share price rally in China MediaExpress.

FUJIAN, China ( TheStreet) -- China MediaExpress ( CCME) denied a short-seller's allegations of fraud late Thursday, claiming the bearish report was strategically released on the Chinese New Year.

Shares of China MediaExpress, which operates a television advertising network on buses in China and was created through a reverse merger, plunged 33% Thursday after California-based Muddy Waters Research accused the Chinese company 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."

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.
Shanghai

In a public statement released late Thursday, China MediaExpress denied what it called "misleading and inaccurate allegations," saying it would issue a public statement to refute the Muddy Waters report "within a few days." The company also noted "Muddy Water's apparently strategic decision to release its 'report' at the outset of the Chinese New Year."

Most Chinese companies were shuttered to celebrate the holiday, and Hong Kong's Hang Seng and China's Shanghai Composite were closed.

In an email response, Muddy Waters told TheStreet that the firm is "puzzled that CCME's response to being accused of defrauding shareholders is to accuse Muddy Waters, LLC of intruding on management's holiday."

"Further, Muddy Waters, LLC wishes all honest managements a very happy and prosperous Year of the Rabbit," Muddy Waters' Carson Block added in an email.

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 to have, 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 Apple ( AAPL) or one of Apple's distributors.

In response, China MediaExpress announced its December 2010 contract with Eading Group, which it says is one of Apple's official distributors in China to advertise Apple products, including the iPad.

Like several other Chinese reverse merger stocks, China MediaExpress has seen its share price shredded by multiple accusations of fraud. Shares of China MediaExpress were rebounding Friday, rallying 22.8% to $13.62. However, the stock is down nearly 35% over the last five trading sessions.

Earlier this week, Citron Research released a similarly bearish report on China MediaExpress, citing discrepancies in documents filed to China regulators and credit rating agencies as well as financial analysis. The firm argues that China MediaExpress does not exist at the scale it is reporting to the investing public.

After Citron's negative report was released, China MediaExpress issued a press release saying it "strongly disagrees with the views expressed" and that investors should continue to rely on filings the company has made with the SEC.

Other Chinese reverse mergers, including Rino International ( RINO.PK), Orient Paper ( ONP), China Green Agriculture ( CGA) and China Education Alliance ( CEU) have been slammed by critics over similar claims that filings made in the U.S. contain questionable or misleading financial statements.

In December, TheStreet reported that the Securities and Exchange Commission is focusing on stock promoters, investment bankers, auditors and law firms that have been active in recruiting Chinese companies to U.S. stock exchanges and raising capital for those companies by selling new shares.

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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