Muddy Waters has released the following proposal RE NQ Mobile Inc (NYSE:NQ)
Muddy Waters has proposed an outside audit for NQ Mobile Inc (ADR) (NYSE:NQ) at their own expense. Also see; Toro vs. Muddy Waters: Those In Glass Houses Shouldn’t Throw Stones, NQ Mobile Bet By Toro Is Highly Leveraged.
December 19, 2013
Ms. Ying Han, director
Mr. Tiewei Li, director
Mr. Xiuming Tao, director
Mr. Jun Zhang, director
NQ Mobile, Inc.
Building 4, 11 Heping Li East Street
Dongcheng District, Beijing 100013
People’s Republic of China
Dear Ms. Han, Mr. Li, Mr. Tao, and Mr. Zhang:
Part I: Our Offer to NQ’s Independent Committee
Muddy Waters, LLC hereby offers to engage, at our own expense, an independent and qualified accounting firm to evaluate the independent committee’s investigation into whether NQ Mobile Inc (ADR) (NYSE:NQ) is a fraud.
It is necessary and reasonable for the independent committee to have a qualified party evaluate the credibility of the investigation. While NQ Mobile Inc (ADR) (NYSE:NQ) has pledged to be highly transparent, the independent committee’s retention of a law firm to oversee the investigation cloaks the entire investigation in attorney-client privilege. The law is clear that directors who are not complicit in a fraud (i.e., they have themselves been defrauded by a company’s management) are not subject to liability. Thus, there is no good faith reason to have this investigation shrouded by attorney-client privilege.
The history of independent committee investigations into allegations of fraud against China issuers is a shameful one, and has cost investors billions of dollars in losses.
After many previous investigations concluded short-sellers’ claims of fraud were baseless, investors who took comfort in those conclusions went on to suffer near total losses when the stock and bond prices subsequently collapsed.
We cite eight examples in Part II of this letter of independent committees’ apparent dysfunction and resulting flawed investigations of fraud allegations made against China companies. Each of these independent committee reports exonerated the companies of wrongdoing, but were followed by substantial investor losses, and often regulatory action. Those companies are: Sino-Forest Corporation (TSE:TRE) (OTCMKTS:SNOFF), China Agritech Inc. (OTCMKTS:CAGC), Chinacast Education Corporation (OTCMKTS:CAST), China.
Integrated Energy, China Medical Technologies, Duoyuan Global Water, Sino Clean Energy, and Silvercorp.
Independent director committees are unable to investigate fraud allegations impartially. Even if the directors played no part in the fraud, confirming that a company is a fraud can be viewed as a professional embarrassment. Further, independent directors often have longstanding personal relationships with management that taint their judgment. In other cases – particularly when the directors are in China and have little connection to the United States – the directors could be co-conspirators in the fraud.
One way that such investigations are often flawed is through limiting the scopes of work given to the outside investigating firms (in this case Deloitte FAS). This work is often unduly limited by the independent committee, which only allows the investigator access to evidence that management can control through its efforts to cover up. One such limitation an independent committee could place on an advisor is to limit its review to confirming the existence of cash balances. China frauds have repeatedly been able to show cash balances to independent committees’ advisors – often by borrowing the funds.
Without an independent party to evaluate the investigation, investors will never know whether the scope of work was appropriately broad enough to carry out a good faith investigation, and thus run significant risk of being blindsided by a collapse later on.
See full PDF here.