July 4 (Bloomberg) -- NQ Mobile Inc. plunged in New York after the Chinese mobile-security service provider said its audit committee head will step down and PricewaterhouseCoopers Zhong Tian LLP sought to expand its review of the company’s 2013 financial statements.
American depositary receipts of NQ Mobile sank 32 percent to $4.58, the biggest tumble since Muddy Waters LLC, the research firm founded by short seller Carson Block, said Oct. 24 that the company overstated revenue and misrepresented cash balances. NQ Mobile has lost four-fifths of its value in the eight months since Block issued the report.
The losses yesterday deepen a rout that has picked up over the past months after the company twice delayed the filing of full-year audited results to U.S. regulators and posted lower-than-estimated earnings. NQ Mobile said in a statement yesterday that Ying Han, chairwoman of its audit panel, will resign and that PwC Zhong Tian needs to widen the scope of its 2013 audit work. It didn’t say why a wider review was needed nor did it provide an estimated date for the report.
“They can’t articulate or offer more transparency on why PwC is going to take longer, that’s what matters more,” Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co., said in a phone interview. “When you are leading the release with somebody leaving, it doesn’t resonate confidence, and you follow up with PwC needing more time. That empowers the shorts.”
Hedge fund Altimeter Capital Management LLC said it held the rights to acquire 0.4 percent of NQ Mobile’s shares, according to a regulatory filing dated and published yesterday. Earlier yesterday, Altimeter reported in another filing that it held beneficial ownership of 11.2 percent of outstanding shares as of June 25. As of a January filing, Altimeter was the largest holder of NQ Mobile shares.
John Kiernan, Altimeter’s chief financial officer, didn’t immediately respond to a call and e-mail seeking comment. John Nester, a spokesman for the Securities & Exchange Commission, didn’t immediately return an e-mail seeking comment.
The Bloomberg China-US Equity Index added 0.3 percent yesterday to a seven-month high of 108.49. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., climbed 1.1 percent to $38.43, extending its weekly increase to 3.3 percent. The Shanghai Composite Index fell 0.2 percent at the close today, paring its gain this week to 1.1 percent.
Beijing-based NQ Mobile, which has denied Block’s assertion that it inflated revenue, said on June 4 that while an investigative team found no evidence it engaged in the fraudulent conduct alleged by Muddy Waters, the team did make recommendations to improve internal controls. ADRs jumped 31 percent that day, and have tumbled 54 percent since.
Zachery Kouwe, a spokesman for Muddy Waters, declined to comment by phone yesterday on NQ’s statement. Caroline Nolan, a spokeswoman at PwC in the U.S., didn’t immediately respond to phone calls seeking comment.
NQ Mobile said in yesterday’s statement that it appointed two new independent directors to the board and the audit committee, adding that Han was leaving for “personal reasons” and that there were no conflicts between her and the company.
“Her resignation tells me there was probably disagreement and possibly bad blood between the board and the auditors,” Vijay Marolia, chief investment officer at Regal Point Capital Management, a short seller, said in an e-mailed comment. “I believe PwC smells something fishy. At the very least, they’re making sure all the bases are covered.”
The investigation team assembled by NQ Mobile, comprising law firm Shearman & Sterling LLP and auditor Deloitte & Touche Financial Advisory Services Ltd, conducted a “thorough review” of cash reported on the company’s financial statements and cash transactions, NQ Mobile said in its June 4 statement. The probe found no evidence that the company’s revenue was inconsistent with public disclosures.
Han’s resignation happens at a sensitive time as the company has yet to file its 2013 report, according to Jun Zhang, an analyst at Rosenblatt Securities Inc.
“Her departure is bad as it takes a lot of communication between PricewaterhouseCoopers and the audit committee to complete the audit,” he said by phone from San Francisco.
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