Fraud Claims Dog QIHU

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

BEIJING ( TheStreet) -- Qihoo 360 ( QIHU) has been the target of numerous allegations of fraud by short sellers over the past few months, but the share price has been largely unaffected. I have been doing a lot of work to get a better understanding of QIHU, including speaking with the CFO, interviewing advertising customers, speaking with iResearch in China and speaking with many other investors (both long and short) who are doing their own due diligence.

I am short the stock based on valuation, but at the current moment I still have many conflicting data points from each side regarding the fraud allegations. I have spoken with various institutional longs who have conducted detailed channel checks and who feel comfortable that QIHU's ad revenue is legitimate. On the other hand, I also noticed that sometime over the past two weeks the Web site Deloitte-Watch.com popped up targeting QIHU for fraud. Deloitte-Watch.com has only appeared twice before (once targeting China Media Express and once targeting Longtop Financial), and in each case it presaged the resignation of Deloitte from the U.S.-listed China clients due to fraud.

This year DW claims to have a "smoking gun" in the form of an interview with a current or former QIHU employee who states that revenue is inflated by 40% and that there exist "ghost links" which are claimed as revenue generators but which do not in fact generate revenue. It will certainly make for an interesting audit season.

I recently came across something interesting on QIHU's Web site that I am still puzzling over. I clicked on a link (a paid advertisement) for MaiBaoBao (For those who don't read Chinese, Google translates this as "Wheat Bags"). They are an online seller of handbags and luggage and their link appears in the very top portion of QIHU's Web page (i.e., the most expensive part).

When I looked at the top of their Web page there was a note saying that Maibaobao was no longer advertising with QIHU and that users should bookmark this page themselves. I was curious about this so I called Maibaobao and spoke with about five different individuals, but couldn't really get an answer as to why they stopped advertising with QIHU.

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