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NQ fraud accusations


dpetrescu
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Off-topic from value investing but has anyone been following the ongoing saga with NQ Mobile? It was down 30% Thursday on announcement audit chair/board member left for personal reasons. I have a very tiny put position but have been following this more out of interest and to learn about fraud.

 

The company in October 2013 was accused by Muddy Waters of fraud with high publicity. However, it was really J Capital, based in China (The woman cofounder often writes for the economist and FT) were the ones to first accuse the company of fraud with a report back in 2012. So far nothing is yet certain if they did commit fraud.

 

NQ Completed an "internal" Audit in June that did not find any wrongdoing but missed the deadline to release its yearly audited report. It is interesting what happened afterwards. They announced that a couple third parties purchased ~1% of two separate subsidiaries, at a price that implies a valuation 10x higher than what NQ paid of for the acquisitions just a year ago. This was highly suspicious. (NQ is a "platform" company so they make a lot of acquisitions). On Wednesday, NQ was up 10% on rumors over Twitter that the audited yearly report was about to be released. The next day, on a low volume day before July 4, they released the announcement. The director share sale lockout is soon about to expire.

 

 

 

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NQ Completed an "internal" Audit in June that did not find any wrongdoing but missed the deadline to release its yearly audited report.

That technically wasn't an internal audit but an investigation.  (Internal audit refers to something else in the auditing world.)

 

Buried in that press release was this tidbit:

 

Despite the Investigation Team's extensive review of documents and data provided by sources both within and outside the Company, the Investigation Team could not verify that the devices it collected and copied contained all responsive information at the time the copies were made.  On many devices, the Investigation Team observed indications that some information might be missing, and the Company's management and staff were unable to provide a credible explanation for what the Investigation Team observed.

 

2- Regarding the 30% drop on July 3rd: 

 

Part of the drop could be attributed to the board member leaving for personal reasons.  Some cynical people out there might assume that the departure was not for personal reasons.  This is partly because being a director is a very high paying part-time job.  As well, the timing is suspicious.

 

On top of that, cynical people might assume that insiders are stonewalling its auditors (PWC).

 

In addition, following the June 4, 2014 release of the summary findings of the independent investigation conducted by the independent Special Committee of the Board, the Company's independent auditors, PricewaterhouseCoopers Zhong Tian LLP ("PwC"), communicated to the Company that it would need to perform additional procedures and expand the scope of its 2013 audit work. The Company's Board and Audit Committee are considering PwC's request.

 

*Cynical viewpoints on NQ may turn out to be incorrect.

**Disclosure:  I am short NQ common shares.

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