Today the stock price of NQ Mobile Inc (ADR) (NYSE:NQ) dropped from $22 per share to $10.63. At 12:56PM today, it was at $21.95 within an hour, the stock price was $9.55. This is because Muddy Waters Research Group labeled NQ Mobile as a “massive fraud.” Now NG Mobile is threatening Muddy Waters with legal action and has released details of their bank account. Muddy Waters is owned by short-seller Carson Block. NG is going to form a special committee of independent directors to investigate the matter. When the stock dropped by almost 50% today, it wiped out around $500 million in market value.
Grandeur Peak Global Advisors owns 2.3% of NQ Mobile and the chief investment officer of the company, Blake Walker, said “Could it be a fraud? Sure. Time will tell.” He added that the formation of the special committee will independently verify or refute all allegations. Grandeur has no plans to raise or cut their stakes in NQ Mobile. He said that many of the allegations in the Muddy Waters report have come up before.
As a short-seller, Muddy Waters has been able to make money when the stock price of a company drops. They sell borrowed shares with a goal of buying them back at a lower price and returns them to the lender. They gain from the difference.
In an interview with Reuters, NQ Mobile co-Chief Executive Omar Khan said “We know no better method than to just completely open up the kimono and say, ‘Here’s our cash balances by account.'”
Muddy Waters went as far as saying that NQ’s cash balances were “highly likely to not exist.” Muddy Waters claimed that at least 72% of their 2012 revenues were from sales of their security products in China and it was fictitious. They said that the revenues came from a shell company known as Yidatong, which was controlled by NQ. NQ Mobile published a list of 14 bank accounts in mainland China and Hong Kong that showed deposits totaling around $295 million. Muddy Waters was not convinced by these numbers. Muddy Waters said that NQ should get their cash balances confirmed by independent capital confirmation firms.
NQ Mobile went started in 2005 and was listed on the New York Stock Exchange in 2011 as part of an $89 million fundraising that was underwritten by Piper Jaffray. They raised an additional $69 in a secondary offering last year.