Muddy Waters has accused NQ of being a fraud and falsifying its cash balances. NQ has waged a campaign to defend itself, issuing multiple press releases and holding a 2-hour conference call with investors. What doesn’t make sense is the steps that NQ is willing to go to “prove” that its cash is real. It has transferred a little over $100 million into its account at Standard Chartered Bank, giving up interest on its term deposits to do so. What kind of sane business manager would do this? At best, the CEO is an idiot for throwing away free money.
The press release from NQ states:
As previously disclosed, a complete update on the Company’s balance sheet will be provided in NQ Mobile’s regular Q3 earnings release, including the impact of forfeited accrued interest income resulting from the transfer of term deposits from Industrial Bank Co. Ltd and Bank of Jiangsu.
If NQ is legitimate, then this exercise is useless. If NQ is a fraud, it should act like a legitimate company anyways and ignore Muddy Waters (or counterattack them on their calls with HRBN and FMCN). Their behaviour is downright bizarre. Only a fraudulent CEO would care so much about the company’s image.
The thing about frauds is that the longs want to believe in the company. For example, take a look at Lance Armstrong. People want to believe that the sport of cycling is clean (the sport is not clean). They want to believe in his story of somebody who conquered cancer and went on to dominate the Tour De France. For a long time, his fans have ignored all of the compelling evidence against Lance Armstrong, ignored his bullying tactics, and ignored how he destroyed the lives of some of his critics. It’s not hard to preach to the converted. NQ didn’t need to do much to defend its reputation. I think that their best tactic would have been to attack Muddy Waters’ credibility. Muddy Water has made failed calls on HRBN and FMCN. Some of Muddy Waters’ arguments are weak. As I understand it, there are legitimate explanations as to why cash balances are level 2 instead of level 1. Had they simply gone after Carson Block for being a dirty short seller, the company would maintain its reputation with its fans and believers. To try to “prove” that its cash balances are real is totally unnecessary. The longs will believe you if you say that the cash balances have been audited by a big four accounting firm.
*Disclosure: No position. I have no interest in shorting a stock where the interest on the borrow is 82%. I have been short FMCN in the past; I actually think highly of Muddy Waters.