Carson Block of Muddy Waters Research appeared on Bloomberg Television earlier today to discuss NQ Mobile Inc (ADR) (NYSE:NQ), saying that the company will send up like Sino-Forest Corporation (TSE:TRE) (OTCMKTS:SNOFF). He said that NQ’s reaction today is “typical” and “pretty much standard fraud playbook.”

Carson Block

NQ Mobile Inc (ADR) (NYSE:NQ) CEO Omar Khan called in to Bloomberg Television this afternoon to address Muddy Waters’ allegations. Khan said, “We have been very busy responding to the nonsense…We are a very transparent company, we have had two independent investment banks validate our cash balances.” He said that the accusations show “gross misunderstanding of how the carrier ecosystem works in China.”

Carson Block:

Omar Khan:

Carson Block on his reaction to NQ Mobile claiming that everything he has said about the company is false:

“The reaction–this is typical. We’ve called a number of companies frauds. Four of them have been delisted. Except for one company, everyone comes out and says these allegations aren’t true, you don’t understand the business, we’re going to form a special committee. This is pretty much standard fraud playbook.”

Carson Block  on how long it’s taken him to build the thesis on NQ Mobile:

“We worked on NQ for about two months. We did a lot of on-the-ground work trying to find physical presence of its customers, trying to find retailers that have phones with the apps preinstalled, surveying over 800 people in different parts in China to see whether they have this app on their phone. We did a lot of analysis of government files regarding NQ, its various entities, the companies it acquires and also its largest customer, which we concluded is itself. We did a lot of Internet research. We downloaded the app. We had computer engineers analyze the code of the app. We tried to make payments close to 60 times through their payment portal. So we did a lot of work on this company.”

Carson Block on whether he’s shorted NQ already:

“Yeah. As we disclosed on the cover page of our report, we had a short position on the stock before publication.”

Carson Block on whether he will lose money if the stock does not go to zero:

“The stock was in the 20s just before we published. We don’t comment generally on specific trading matters, but the stock is at zero. I think you can infer where the trading price was, we’re okay with the progress so far.”

Carson Block on CEO Omar Khan:

“We pointed that out of all the China companies, Omar Khan is not a director or officer of any of those companies. But of course he is on the board of the Cayman company, but our point is, this is a guy that sits in the U.S. The company kind of gave some information as to what his geographic responsibilities are–this is something we have tried to get out of the company previously–but it is clear that he is not involved in the oversight or management of any of the China companies. Now I don’t know that that exculpates him from anything, but what the company said is not a refutation of the fact, although they certainly spun it that way.”

Carson Block on whether NQ’s bank statements are not enough to prove that its cash is real:

“That’s not enough. We’ve seen companies defraud auditors numerous times in China with forged bank statements. One of my team members tells a story of reviewing a bank statement dated February 31st once in their work in the China investment world. Anyone who has an Inkjet can forge statements. The questions we really have are why is all of your cash–not just the term deposits–why is all of your cash level 2? We have not seen that elsewhere. The company cited certain companies from China as having all cash as level 2. One of the questioners who called in after that said, no, that’s not the case. These companies have some level 1 cash. So this is a major red flag, but yeah, we expect the company to be able to print out some statements and maybe even set up a website–as Longtop Financial did–that show fake cash balances. This is nothing unusual.”

Carson Block on how NQ compares to his call on Sino Forest:

“Sino Forest–five former executives in the company are being sued by the Ontario Securities Commission for securities fraud. The auditor who resigned refused to certify 2011 financial statements. The company was delisted by the Toronto Stock Exchange. We expect a similar outcome here. Sino Forest–whatever business it had that was real–it was a tiny fraction of what it claimed. This is similar. The market caps and enterprise values of the company are different, but when you talk about the percentage of the business that is real, this is very similar to Sino Forest. Our expectation is that the regulators will act against this company aggressively. We certainly think that there is a good chance of auditor resignation. Auditors don’t like to do that, but in this case I think it is going to be hard not to.”

Carson Block on how NQ’s conference call has changed his perception on its operations:

“A lot of the response is pretty standard playbook. The interesting part was the questions and answers. They were asked repeatedly about how they couldn’t even have one dollar in operating cash classified as level 1 and the company failed to respond to that. I think one of the management members called me and my team racist and I think that’s typical of the strength of their response. There were some interesting moments where management had very difficult times answering investors calls about key points…There is some interesting stuff there.”

Carson Block on whether he’s shorting any other Chinese companies right now:

“At this point there’s nothing that we are prepared to discuss that we are doing.”

Carson Block on whether he’s in conversations with NQ’s management:

“Yes, we have done that previously. We have done that not as Muddy Waters though.”

———————-

Khan on Muddy Waters’ allegations:

“We were very busy earlier responding to this nonsense. We take these allegations very seriously. They are all completely false. We approached it with transparency and we hosted a conference call with our investors and analysts this morning, nearly 400 people dialed in, for two and a half hours. We transparently and openly addressed their questions until the last question was answered. We are building an extremely amazing business globally, not just in China. We are a global internet platform company. Muddy Waters showed gross misunderstanding of not just our business but our industry as well as businesses that we are in.”

Khan on Carson Block arguing that at least 72% of NQ’s 2012 reported China security revenue is fictitious:

“We have multiple billing channels. We have partners in greater China that are not just direct to consumer. We are part of a broad ecosystem. We have partnerships with OEM distributors that preload our software, partnerships

1, 2  - View Full Page