NQ Mobile Inc. (NQ) declined to a one-month low as short sellers boosted their bets against the Chinese mobile-service provider to a record high after Muddy Waters LLC accused the firm of inflating sales.
Shares sank 4.6 percent to $11.30 in New York, the lowest close since Nov. 7, after declining as much as 11 percent earlier. Short interest, or shares borrowed and sold on expectations they will fall, rose to 14.1 million shares as of Nov. 29, from 13.8 million two weeks earlier, according to exchange data released yesterday.
The company has lost more than half of its market value since Oct. 23, the day before Muddy Waters said the company was “a massive fraud” and the shares are worth less than $1. Investors including Altimeter Capital Management LLC and Oberweis Asset Management Inc. have increased their holdings, setting up the stage for a showdown between bulls and bears as NQ says its accounting and businesses are legitimate.
“From the short sellers’ perspective, the reward is meaningful there -- if Muddy Waters proves right, the stock has potentially $10 or more on the downside,” Sachin Shah, a merger arbitrage strategist at Albert Fried & Co LLC. in New York, said in a phone interview.
Muddy Waters, the research firm founded by short seller Carson Block, said in an 81-page report last month that at least 72 percent of NQ’s purported 2012 China security revenue is fictitious. It also alleged that Tianjin Yidatong Technology Development Co., NQ’s largest customer, is controlled by NQ itself.
NQ, which has headquarters in Beijing and Dallas, has denied the accusations. It hired the law firm Shearman & Sterling LLP last month to review Muddy Waters’s allegations.
Kim Titus, a Dallas-based spokesman with NQ Mobile, declined to comment immediately when contacted by phone by Bloomberg News.
Altimeter Capital increased its holdings to 6.1 percent of shares outstanding from 1.5 percent, becoming the largest shareholder in NQ, according to a regulatory filing on Nov. 13.
Jim Oberweis, president of Oberweis Asset Management, said in a Nov. 18 interview that his company doubled its holding to 1.8 million shares of NQ Mobile last month, after conducting its own due diligence.
“We’ve done enough of fundamental research to realize that the most of the allegations against NQ are not correct,” said Oberweis said by phone from Lisle, Illinois. Oberweis’s $190 million China Opportunities Fund (OBCHX) has returned 52 percent this year, according to data compiled by Bloomberg.
Toro Investment Partners LP, a hedge fund based in San Francisco, has added holdings in NQ Mobile since Nov. 12, when it disclosed that it held a 5 percent stake in NQ, Chief Investment Officer Taek-Geun Kwon wrote in an e-mailed reply to questions today.
NQ’s short interest doubled from 7.4 million at the end of August, according to the exchange data. As of the end of November, the short interest accounted for about 45 percent of shares outstanding, according to data compiled by Bloomberg.
In a twitter post today, Muddy Waters referred to an article on the Seeking Alpha website that negatively mentioned NQ.
Muddy Waters and Block shot to fame in 2011 after it accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it file for bankruptcy protection.
Since then, his short bets against companies including New Oriental Education & Technology Group Inc. (EDU) and Focus Media Holding Ltd., have proven less successful as their share prices rallied following initial declines.
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