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Nally
Chairman
PricewaterhouseCoopers International Ltd.
Mr. Robert E. Moritz
Chairman and Senior Partner
PricewaterhouseCoopers LLP
330 Madison Avenue, 24th Floor
New York, NY 10017
Mr. Raymund Chao
Audit and Assurance Leader, Beijing
PricewaterhouseCoopers Zhong Tian LLP
26/F Office Tower A, Beijing Fortune Plaza
7 Dongsanhuan Zhong Road
Chaoyang District
Beijing, 100020
China, People's Republic of
January 13, 2014
Re: NQ Mobile Inc.
Dear Messrs. Nally, Moritz and Chao:
I am writing to bring to your attention serious accounting and disclosure issues at your client NQ
Mobile Inc. I believe these allegations deserve the immediate attention of PwCs Global
Chairman, U.S. CEO and the PricewaterhouseCoopers Zhong Tian (PwC China) audit
engagement partner for the company.
PwC is the brand under which the member firms of PricewaterhouseCoopers International
Limited (PwCIL) operate and provide professional services. Together, these firms form the
PwC network. NQ Mobile is a China-headquartered company, with American Depositary Shares
(ADSs) listed on the New York Stock Exchange. NQ Mobile Inc.s most recent audit opinion is
signed by PwC member firm PricewaterhouseCoopers Zhong Tian CPAs Limited Company in
Beijing, the Peoples Republic of China.
As has been widely reported in the press, Muddy Waters Research issued a report entitled
Initiating Coverage on NQ Mobile Inc. (NYSE: NQ) Strong Sell on October 24, 2013. In this
report we detailed evidence supporting our belief that:
NQ is a massive fraud. We believe it is a Zero because the majority of NQs purported
2012 China security revenue is fictitious.
NQs Antivirus 7.0 is unsafe for sale to consumers, and we consider it to be spyware that
makes users phones vulnerable to cyber attack.
Page 2 of 47
NQs purported 2012 international revenue of $36.5 million, which includes revenue
from the United States, is likely less real than its PRC revenue.
The recent pivot to advertising and gaming is merely an attempt to change to a fraud that
NQ hopes will be less obvious.
NQs acquisitions are highly likely to be corrupt and part of the fraud.
NQs cash balances are very likely non-existent at the level reported. In NQs 2012 20-F,
PwC classified all cash and term deposits as Level 2 assets. NQs purported movements
of cash from its IPO almost certainly did not occur due to PRC FX controls. We believe
NQs term deposits are likely fraudulent.
Before our report was published on October 24, the stock had risen about 280 percent in 2013.
NQs stock dropped by nearly 50 percent after we issued this report, wiping out $500 million of
market value. The shares continued to slide the next day.
On October 25, the company held a conference call to respond to our allegations, and Dallas-
based NQ Co-CEO Omar Khan held television interviews with Fox Business and Bloomberg.
On October 29, 2013, we published NQs Top Ten Lies Since Friday to highlight the
companys and Mr. Khans lack of veracity while attempting to stem the severe share slide. On
November 1, NQ announced that the Independent Special Committee of its Board of Directors
retained the global law firm of Shearman & Sterling LLP to advise it in connection with its
independent review of the allegations raised in our report. Shearman & Sterling engaged Deloitte
& Touche Financial Advisory Services Limited (FAS) as forensic accountants to assist in the
matter.
Deloitte FAS is the same firm that was recently sanctioned and fined $10 million by the New
York Department of Financial Services for its lack of independence and objectivity while
conducting compliance monitoring activities on behalf of the regulator for Standard Chartered
Bank to correct money laundering violations. Deloitte is at the center of the Chinese reverse
merger fraud scandals and is the original defendant in the dispute between the Chinese audit
firms and the U.S. Securities and Exchange Commission over access to auditor work papers in
China. Deloitte China has the most clients named in fraud lawsuits of all the global audit firms in
China.
We also published a report entitled Chinese Media Views on NQ on November 1, as well as
two more detailed analyses of our claims: If You Believe in Yidatong, Youll Believe in Santa
Claus on November 6 and NQs US Veneer: Withholding Facts, Conned Men, and a
Convicted Racketeer on November 12. (We have attached a copy of all of these reports as
Exhibits A, B, C, D, E F, and G and encourage you to visit www.mudywatersresearch to view
media appearances and other commentary by our firm about NQ Mobile.)
On December 19, 2013, Muddy Waters Research made an Offer to NQs Independent
Committee to engage, at our own expense, an independent and qualified accounting firm to
evaluate the independent committees investigation of our allegations made on and following
October 24. It is necessary and reasonable for the independent committee to have a qualified
party evaluate the credibility of the investigation. Our offer cites eight examples of independent
Page 3 of 47
committees apparent dysfunction and the resulting flawed investigations of fraud allegations
made against China companies. Each of these independent committee reports exonerated the
companies of wrongdoing, but they were followed later by substantial investor losses and (often
serious) regulatory action.
Our choice of a firm to evaluate the independent committees investigation, Plante Moran, has
had an office in Shanghai for more than 15 years and employs accountants and management
consultants who are experienced in helping western companies make deals in China. They
understand the culture and the complexities of doing business in a country with unique business
etiquette, intense competition and corruption. Most importantly, they do not audit any of the
Chinese companies recently accused of fraud. Unlike Deloitte, Plante Moran and our proposed
lead partner, Martin Terpstra, are independent and objective with regard to NQ and these issues.
The following information is intended to bring to your attention concerns that we and our
accounting advisors have identified in the Companys financial statements as critical to PwCs
audits of the Companys past, present, and future financial statements and accompanying
disclosures. In particular, we are very concerned about the scope of the audit soon to begin in
earnest. We want to make sure it is sufficient to provide an appropriate opinion on the
companys financial statements as of December 31, 2013.
Under U.S. auditing standards established and enforced by the industry regulator the PCAOB,
PwC is required to plan and perform the audit of the NQ financial statements to obtain
reasonable assurancea high level of assuranceabout whether the financial statements are
materially misstated due to error or fraud.
1
As this wording suggests, auditor responsibilities are
focused on fraud and other illegal acts that result in material inaccuracies in, or omissions from,
the financial statements.
2
The auditor applies procedures for the purpose of forming an opinion on the financial statements.
Performing those activities may bring illegal acts such as fraud to the auditor's attention. For
example, AU 317, a relevant auditing standard, describes such procedures as reading minutes of
board meetings (including those of a special investigative committee of the board); inquiring of
the client's management and legal counsel concerning litigation, claims and assessments; and
performing detailed and broader substantive tests of transactions or balances. The auditor should
make inquiries into NQ management, the audit committee and any special investigative
committees concerning compliance with laws and regulations, as well as knowledge of violations
or possible violations of laws or regulations.
1
See paragraph .02 of AU sec. 110, Responsibilities and Functions of the Independent Auditor.
2
Under Sections 10A(a)-(f) of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1(a)-(f)), the auditor of an
issuers financial statements generally is required, among other things: (1) to perform procedures designed to obtain
reasonable assurance of detecting illegal acts, including fraud, that would have a direct and material effect on the
financial statements, (2) when becoming aware of information indicating an illegal act has or may have occurred, to
determine whether it is likely that an illegal act has occurred and, if so, its possible effects on the financial
statements, and (3) to report illegal acts that come to the auditors attention to various parties based on criteria in the
statute, unless the act is clearly inconsequential. Also, the auditor's responsibilities under PCAOB standards
regarding illegal acts generally are set forth in AU sec. 317, Illegal Acts. And Auditing Standard No. 16,
Communications with Audit Committees, requires the auditor to make certain inquiries of the audit committee about
violations or possible violations of laws and regulations.
Page 4 of 47
PwC U.S., and possibly other non-China PwC entities, face significant liability for the audit
opinions issued by PwC China because of the significant revenue and expenses NQ purports to
generate outside of China. By claiming significant non-PRC revenue and expenses, NQ is unlike
most other recent China frauds. (PwCs U.S. entity performs more than Appendix K review of
SEC filings because NQ has significant activity in the U.S. by virtue of its Dallas, TX co-
headquarters.) Just as Deloitte U.S. is a defendant in the civil litigation surrounding another
China fraud, ChinaCast Education, PwC U.S. cannot distance itself from the NQ audits nor avoid
civil and regulatory liability for fraud and other illegal acts.
With NQ, according to ChinaRAI, PwC is now the auditor for seven China companies suspected
of being frauds.
3
This puts PwC in a tie for third place with Friedman LLP and MaloneBailey
LLP, and behind Frazer Frost LLP (nine) and Deloitte China (17). Friedman, MaloneBailey, and
Frazer Frost are generally not regarded as industry leaders. Deloitte China has become a
particular lightning rod for the SEC, PCAOB and short-sellers.
Any PwC partner who believes the value of the PwC brand is worth preserving should take heed
of the experience of other firms operating in China. Further unqualified opinions for NQ will
likely end in embarrassment and litigation against the firm and its partners. As of January 3, NQ
is currently trading at more than 35% below its 52-week-high, which was set in October. The
damages to investors are already sufficient to justify multiple class action lawsuits.
If PwC concludes, after expanding its audit scope and performing additional tests and procedures
in response to clear heightened fraud risk, that fraud at NQ Mobile has a material effect on the
financial statementsand that the illegal act or acts have not been properly accounted for or
disclosedPwC should express a qualified opinion or an adverse opinion on the financial
statements taken as a whole. If NQ Mobile prevents PwC from obtaining sufficient appropriate
evidence to evaluate whether illegal acts material to the financial statements have (or are likely
to have) occurred, PwC should probably disclaim an opinion on the NQ financial statements.
If NQ management refuses to accept a modified a PwC report, PwC should resign from the
engagement, possibly withdraw its opinions on prior financial statements and warn investors on
managements representations. PwC must communicate the reasons for withdrawal in writing to
the audit committee of the board of directors. If PwC is unable to determine whether the acts are
illegal because NQ imposes limitations on its work or because PwC is unable to interpret
applicable laws, regulations or surrounding facts, PwC may have to resign the NQ audit.
PwC China may soon have no choice but to resign as NQs auditor rather than issuing an
inappropriate, and unsubstantiated, unqualified opinion on the 2013 financial statements. PwC
China, PwCs U.S. firm and possibly other PwC entities outside of China will face significant
regulatory and civil liability if the firm supports a fraudulent charade.
We request that you and your audit teams carefully study the issues we have raised in the body of
this letter and be prepared to make the hard decisions we believe you must make on behalf of
investors and the integrity of the global capital markets. If we are correct that NQ is a fraud and
3
http://www.tradingfloor.com/posts/china-finance-updated-data-auditors-linked-issues-606252080
Page 5 of 47
PwC fails to inform investors and regulators of this risk, PwC will also be held liable in courts of
law and in the court of global public opinion in the event of the Companys failure.
We look forward to hearing from you and are available to respond to any questions you may
have.
Sincerely,
Carson Block, Esq.
Muddy Waters, LLC
Page 6 of 47
Table of Contents
Desktop research alone raises serious concerns about NQ being a fraud................................8
Majority of NQs 2012 China mobile security revenue is fictitious ......................................8
NQs 2012 international revenue is fictitious ........................................................................14
Lack of investment in websites inconsistent with revenue numbers in emerging markets
...................................................................................................................................................15
Lack of investment in long-lived assets outside China inconsistent with international
revenue figures.........................................................................................................................17
Ease of emerging market success makes NQ an outlier.......................................................17
Distimo data for Google Play store results inconsistent with NQ claims ...........................17
NQ revenue appears overstated given lack of investment in technology and employees .18
Deep-dive due diligence leaves no doubt NQ is a substantial fraud .......................................22
NQs largest purported revenue source, Yidatong (YDT), is a sham counterparty .....22
YDT has no physical operations whatsoever.........................................................................22
NQ secretly controls YDT.....................................................................................................24
YDTs majority (75%) owner Ms. Xu Rong is not an arms-length party.............................25
NQs cash balances are fraudulent ........................................................................................27
NQs purported VIE funds transfer would violate Chinese law............................................27
NQ presented PwC with forged term deposit documents......................................................28
NQs Chairmans lies about top customers further support our conclusion that NQ is a
fraud..........................................................................................................................................32
NQ prepaid card sales numbers are fabricated....................................................................33
NQ Accounts Receivable balance is fraudulent because of revenue fraud ........................36
NQ has made a number of mistakes with respect to its purported tax treatments, which
is clear evidence of fraudulent accounts ................................................................................37
NQ Beijing claimed that in 2011 that it paid a sales tax called Business Tax, rather than
VAT. ......................................................................................................................................37
NQ Beijings SAIC financials fail to recognize as Non-Operating Income any VAT credits
or refunds received. ...............................................................................................................38
NQs acquisitions highly likely to have fraudulent intent and accounting ........................40
Domain name purchase price is absurd ................................................................................40
PricewaterhouseCoopers Member Firms Professional and Legal Obligations And Liability
If NQ Is A Fraud..........................................................................................................................41
PwCs legal and professional obligations with regard to reports of fraud at NQ.............41
PwCs legal and professional obligations with regard to the NQ Boards independent
investigation of our allegations...............................................................................................43
More PwC China clients accused of fraud............................................................................44
We recommend PwC China resign the NQ engagement .....................................................44
Our NQ reports............................................................................................................................45
Appendix A YDT SAIC ownership record.............................................................................47
Page 7 of 47
Page 8 of 47
Desktop research alone raises serious concerns about NQ being a
fraud
Majority of NQs 2012 China mobile security revenue is fictitious
NQ is a massive fraud. We believe it is a Zero because the majority of NQs purported 2012
China security revenue is fictitious. NQ grew its China revenues from mobile security
applications at a breakneck pace through 2012:
This purported revenue growth resulted from growth in paying users in China. NQs China
paying user monthly ARPU is approximately RMB 3.
0
5
10
15
20
25
30
35
2009 2010 2011 2012
NQ Annual Security App Revenue - China ($ Millions)
Page 9 of 47
NQs growth in China-based paying users is a function of the growth of Chinas overall mobile
internet market. The chart below shows China Mobiles 3G users and two sets of estimates for
the number of mobile internet users in China. Note that the trajectories are similar to that of
NQs China paying users.
NQ, like some other companies in the mobile security application field, uses a freemium
business model. NQ gives its security applications away for free, but charges users to upgrade to
the premium version, which has an updated virus library. The graph below shows the
relationship between cumulative registered users (roughly defined as the cumulative number of
user accounts ever associated with the activation of a NQ security app), active users (users who
have utilized an app in the prior 30 days), and paying users.
0
1
2
3
4
5
6
7
2009 2010 2011 2012
NQ Security App Paying Users - China (Millions)
0
50
100
150
200
250
300
350
400
450
500
2009 2010 2011 2012
China Mobile Internet Users (Millions) 2009-2012
China Mobile 3G Users (20F) Imedia: Nationwide Mobile Internet Users CNNIC: Nationwide Mobile Internet Users
Page 10 of 47
NQs reported paying users to active users ratio of ~10% is in line with the industry. We spoke
with people who were familiar with the details of the mobile security app businesses of NQs
significant competitors that also use the freemium model: AVG, Lookout, McAfee. (NQs
claimed ratio of active users to cumulative registered users of ~40% is 1.5x to 2.0x that of the
other companies, which have active user bases of 20% to 30% of their cumulative registered
users.)
In order for NQ to have six million paying customers in China at the end of 2012, it needed to
have 57 million people who had used its applications in the prior 30 days, and 164 million
cumulative activations of its security apps in China. NQ therefore claimed market share of
approximately 60% of the China security app market at the end of 2012. NQs 2012 20-F stated:
We have captured a dominant market share in Chinas mobile security market. An
independent study conducted by SinoMR Research during the fourth quarter of 2012
indicated that our market share, in terms of registered user accounts in China, was
approximately 60% as of December 31, 2012.
4
4
NQ 2012 20-F, p. 45.
0
50
100
150
200
250
2009 2010 2011 2012
NQ China User Composition 2009-2012 (millions)
China Registered
China Active
China Paying
Page 11 of 47
NQ had a major problem though. Its claims of registered users, active users, and market share
did not pass the laugh test. Qihoo 360 (QIHU) and Tencent each offer mobile security apps that
include all of NQs premium features in a free version. QIHUs security software is ubiquitous
on PCs in China, which give it a massive distribution channel. Likewise, Tencent has enormous
distribution through its incredible user base. QIHU claimed to have a 70% market share of
mobile security apps in China, which utterly contradicted NQ:
360 Mobile Safe, the No. 1 mobile security product in China, was used by over 200
million smartphone users in China as of December 2012. 360 Mobile Safe had an
approximately 70% share of the mobile security market as of December 2012, according
to iResearch.
5
Independent research analysts supported QIHUs claims:
It is important to understand that the mobile security apps market is almost exclusively for
Android devices. Because Apples iOS platform is a closed system i.e., Apple is the exclusive
distribution platform for iOS apps iOS has far fewer security threats than does Android.
5
QIHU 2012 20-F, p. 27.
Page 12 of 47
Our own extensive surveying confirmed that NQs market share claims are grossly overstated.
Our surveys of over 800 respondents from five cities show that NQs share of the China mobile
security app market is only 1.4%. In contrast, QIHU has 73.5% market share in our survey,
followed by Tencent at 15.7%, Kingsoft at 4.9%, and other at 3.8%. Our data includes
samples from Tier 3 and 4 cities, and includes three cities in two of NQs top four provincial
markets of Guangdong, Zhejiang, Jiangsu, and Henan.
6
Chinas two leading Android app stores confirm that QIHU and Tencent are the major players in
mobile security. NQs respective share of downloads in each store is 0.42% and 1.0%,
completely undermining its claims to have had 164 million cumulative registered users, 57
million active users, and six million paying users. (Note that Baidu, which does not have a good
relationship with QIHU, owns 91 Zhu Shou. Thus, QIHUs app is not available in the store.)
6
NQ disclosed its top four markets on the October 25, 2013 conference call. If this disclosure differs from the data
NQ has provided to PwC, it is yet another instance of management lying.
Page 13 of 47
It had become obvious that NQ was lying about market share, and therefore its security app
revenue was impossible. NQ thus decided to distract the market by claiming to change its
strategic focus to more opaque businesses: gaming and advertising. In order to deflect attention
from its app business, NQ claimed that China security app revenue growth suddenly fell to zero
(actually negative in Q3 2013). The graph below shows NQs China paying users from 2009
Q2 2013, including its implausible flattening in 2013 from high growth in 2012.
While NQs China security app paying user numbers suddenly table-topped in 2013, China
Mobiles 1H 2013 results indicate that Chinas mobile internet market is still growing rapidly.
China Mobile announced that its wireless data traffic increased 129% in 1H 2013, and that its
handset sales increased significantly over 1H 2012, with particularly strong 3G handset sales.
7
According to Gartner Research: In markets such as China and Latin America, demand for
7
China Mobile Ltd. Form 6-K, filed August 15, 2013, p. A-2.
0
1
2
3
4
5
6
7
2009 2010 2011 2012 Jun-13
NQ Security App Paying Users - China (Millions)
Page 14 of 47
feature phones fell significantly as users rushed to replace their old models with smartphones,
8
which shows that the smartphone market in China grew nicely in 2013.
To further obscure the fraud in China security apps, NQ purported to become an overnight
advertising and mobile gaming powerhouse in China. The mobile gaming revenue model, with
in-app selling revenue, advertising revenue, and distribution agreements, is far more opaque
and therefore more conducive to fraud than is the security app business.
One cannot overstate the speed with which NQ seemingly transformed itself. At the beginning
of 2013, NQ had ruled out the possibility of adopting such a model. The following is a quote
NQ chairman Henry Lin gave in an interview for Wharton in January 2013.
9
Why dont we take ads? I think the format of ads on mobile phones is not mature yet.
Furthermore, there is a fundamental conflict between our safety service, by its very
nature, and the advertising model. If you want to target ads accurately, there will be
privacy issues.
NQs 2012 international revenue is fictitious
NQ reported international 2012 security app revenue of $35.7 million, including revenue from
the United States, which is substantially fraudulent. The graph below shows NQs reported
international security app revenues from 2009 2012.
NQ has been very opaque with investors about the specific markets from which it has generated
this revenue. You as the auditor will have much more information than we do in this regard.
However, NQ has generally stated that it derives most of its international revenue from Southeast
8
http://www.gartner.com/newsroom/id/2623415
9
http://knowledge.wharton.upenn.edu/article/nq-mobiles-henry-lin-we-have-been-a-global-company-from-day-one/
0
5
10
15
20
25
30
35
40
2009 2010 2011 2012
NQ International Security App Revenue (Millions)
2009-2012
Page 15 of 47
Asia and the Middle East. In its response to our initial report, it included the below table of
some of its international markets and service providers (SPs) with which it works:
If NQs international revenue were anywhere close to real, then NQ would have cracked the code
in marketing to the global emerging markets customer. In other words, NQ claims to generate
significant revenues in numerous countries with different ethnicities, cultures, and languages.
NQ would not be the first company to experience such success, of course. Procter & Gamble,
Coca-Cola, and a handful of other companies come to mind as having succeeded across
numerous emerging markets. However, dollar for dollar, NQ appears to have been the most
successful pan-emerging market marketer ever!
Lack of investment in websites inconsistent with revenue numbers in emerging
markets
NQ appears to invest negligible money in website development and maintenance in these
markets in which it dominates the mobile security market. Below is NQs home page for Saudi
Arabia. It appears the last update is close to three years old. It prominently features version 5.6
of its anti-virus software while it is currently marketing version 7.0 everywhere else. The last
news release is from 2011. NQ replaced the logo shown on the website in June 2011.
Page 16 of 47
The Saudi Arabian website is NQs only Arabic website. We used the local versions of Google
to search for NQ websites in the UAE, Qatar, Egypt, Jordan, and Turkey. They dont exist.
Local Google searches for India, the Philippines, Indonesia, Malaysia, and Thailand also yielded
no local websites. Vietnam is the only country on the list NQ provided that has an up-to-date
local language website.
Without needing to even invest a few hundred dollars annually in building and maintaining local
language websites, NQ appears to employ the most profitable international business model ever.
NQs emerging market customers are evidently so well informed about NQs products and so
desirous of them that they flock to pay for NQ apps regardless of whether there is a website.
On the other hand, NQs 20-F states that its website is an integral part of its viral marketing,
rendering it unclear as to how NQ could have become so successful overseas (other than by
reporting fraudulent revenues):
Viral Marketing: A significant percentage of our users come from our own user
acquisition channel, namely our Internet and mobile Internet website. These users learn
of our services through existing user referrals. We expect the viral marketing channel to
continue to account for a significant portion of our user acquisition in the foreseeable
future.
10
Note that NQ claims to have made a seven figure (USD) investment in search engine
optimization for its U.S. website alone. We pointed out that its claim to have paid $1.5 million
for the domain nq.com was laughable. NQ responded by stating that the price was so high
because it purchased SEO services. With the U.S. market being such an unattractive place to do
business compared to the emerging markets, one wonders why NQ went ahead and hired Omar
Khan as Co-CEO. However, we note Omar does a fantastic job of investor relations.
10
NQ 2012 20-F, p. 45.
Page 17 of 47
Lack of investment in long-lived assets outside China inconsistent with international
revenue figures
NQ has not had to invest in any other way in order to dominate the emerging markets. Despite
generating approximately 40% of its 2012 revenue outside of China, NQ has zero long-lived
assets outside of China. Just as incredibly, only $5.5 million of its $149.5 million in cash (as of
September 30, 2013) was outside of China. Given that it has a substantial physical presence in
the United States, the cash commitment to emerging markets is incredibly small. Again, NQ
appears to be the most efficient and profitable emerging market operator ever.
Ease of emerging market success makes NQ an outlier
What makes NQs international business even more incredible is that it is able to successfully
market apps to emerging market customers who have relatively little income with which to pay
for them. Whats more, NQ is an outlier in its ability to sell security apps to emerging markets
customers. McAfee, Lookout, AVG, and Kaspersky are all unable to generate significant
revenues in emerging markets, despite two of these companies having sizable existing user bases
of PC antivirus software. None of those companies exceed approximately $10 million in annual
mobile security app revenues globally, and each of them generate significantly more money in
North America and Western Europe than they do in emerging markets.
Senior employees from these companies told us that emerging markets consumers are unwilling
to pay for security apps, despite having more malware present than developed market consumers.
According to these employees, the reason that emerging market Android phones are more likely
to encounter malware is that emerging market consumers frequently download pirated versions
of mobile apps, which is because EM consumers simply do not want to pay for apps.
Emerging market consumers have far less disposable income than do developed market
consumers, which is reflected in the monthly phone ARPUs of these markets. Thailand, which is
one of NQs markets, is a good example of this disparity. The monthly mobile phone ARPU in
Thailand is $7.13, despite 60% of Thais already using their mobile phones to access the internet.
If NQ to be believed, its Thai customers are spending approximately 20% of Thai mobile ARPU
on NQ apps. Again, NQ has worked this marketing magic in Thailand without a Thai language
website, without long-lived assets, and without a discernable cash committed to the market.
In contrast, the monthly mobile phone ARPU in the United States is $46.50. Yet, NQs sales
attempts in the U.S. have proven largely futile, while it is a money making machine in emerging
markets. NQs relative futility in the U.S. stems from fact that its materially harder for NQ to
commit fraud in the U.S. than in emerging markets.
Distimo data for Google Play store results are inconsistent with NQ claims
NQ primarily distributes its apps through the Google Play store in markets outside of China. A
company called Distimo provides one of the leading analytics services for Google Play. It
estimates that NQs global revenue for all mobile apps is only $800,000 annually. The chart
below is from Disitmo, showing the daily revenue estimates for NQ over the nine months prior
to our October 24, 2013 initial report:
Page 18 of 47
NQ responded by stating that Distimos data is flawed, in part because NQ is not a client of
Distimo. However, Distimo insisted to us that NQ has been a client since September 2012. (As
we will soon explore, lying is a major theme of NQ.)
NQ revenue appears overstated given lack of investment in technology and
employees
NQ also appears to be one of the best businesses ever when looking at its returns on computers
and employees, which are the two main inputs that determine revenue. NQ purports to have
generated more revenue per gross dollar of computer equipment than all but one of the 51
software companies and internet application development companies to which we compared it.
Facebook is the only company to earn a higher return on gross computer equipment than NQ. It
is ridiculous for NQ to claim to generate almost the same returns on computers as Facebook,
which is the worlds dominant social network and has over 1.19 billion active users.
11
NQs revenue per dollar of gross computer equipment was more than three standard deviations
above the mean. In 2012, NQ generated $46.09 of revenue per dollar of computer equipment on
the balance sheet. The mean average for the group (ex-NQ) was $13.07 per dollar of computer
equipment. The standard deviation of the group was $10.86, meaning that NQ was more than
three standard deviations above the mean.
11
http://expandedramblings.com/index.php/resource-how-many-people-use-the-top-social-
media/#.UrcGRWRDuMA
Page 19 of 47
Page 20 of 47
AVG Technologies N.V., which is one of the global leaders in mobile internet security
applications, generated only $15.47 in revenue per dollar of computer equipment. Qihoo 360
generated only $4.06 in revenue per dollar of computer equipment. McAfee, Inc., another global
leader in computer and mobile security applications, generated only $5.93 in revenue per dollar
of computer equipment in 2010, which was the year prior to Intel Corp. acquiring it for $7.7
billion.
NQs revenue per gross computers ratio is an astounding 4.3 standard deviations above that of its
China peer group of 18 companies. The following table compares Chinese software and internet
application developers.
12
12
The figures for PWRD, FENG, GAME, LONG, MOBI, YY, GA, and 700.HK are in RMB.
Page 21 of 47
NQs revenue to gross computer equipment would be more believable if it had an army of
employees writing code on paper. The only China software company with a revenue to gross
computers metric that approaches that of NQ is ASIA, which is 3.3 standard deviations above the
mean (compared to NQs 4.3 standard deviations). However, ASIAs employees are far less
productive than the average, at 1.1 standard deviations below the mean. Another strong
performer in the revenue to gross computers metric (1.3 standard deviations above the mean),
PWRD, also has employee productivity far below the average.
13
In other words, the two
companies with a ratio greater than one standard deviation above the mean return on computer
spending have highly manual processes, as evidenced by their relatively low employee
productivity measures.
However, NQs revenue per employee tells us that heavy reliance on manual processes is not the
reason its return on computer investment is off the charts. NQs employees are slightly more
productive than average. In other words, NQs massive returns on computer equipment are not
due to having an army of employees undertaking manual work.
Looking at NQs computer equipment per employee also suggests that NQs purported
domination of the China and emerging market mobile security app space is ridiculous. As of
2012, NQ had only $3,181 of computer equipment per employee. AVG has $25,153 of
computer equipment per employee. Qihoo 360 has $25,575. In 2010, McAfee had $55,289 in
computer equipment per employee.
13
We only compare the Chinese companies in terms of revenue per employee because of sizable differences in
employee productivity between the PRC and US.
Page 22 of 47
Deep-dive due diligence leaves no doubt NQ is a substantial fraud
NQs largest purported revenue source, Yidatong (YDT), is a sham counterparty
NQs largest purported revenue source, Yidatong (YDT), is a sham counterparty and nearly all
of the revenue NQ reported receiving through YDT is fraudulent. YDTs SAIC income
statements show that it generated a fraction ($2.9 million in 2012) of the revenue NQ has
claimed to generate through YDT ($20.2 million in 2012). Importantly, NQ and YDT do not
dispute the accuracy or authenticity of the YDT financial statements. However, NQ states that
YDT has booked its revenue on a net, rather than gross, basis.
YDTs revenue is clearly booked on a gross basis because:
The business tax YDT paid in 2012, $97,000, which is paid based on gross revenue, is
wholly consistent with $2.9 million in gross revenue (3.3%).
PRC GAAP, which is the basis on which the SAIC financial statements are prepared and
presented, requires YDT to book revenue on a gross basis because NQ is not a party to the
contracts between YDT and the mobile carriers. This treatment is consistent with that of two
PRC-listed SPs: Beijing Bewinner (002148.CH) and OurPalm (300315.CH).
YDT has no physical operations whatsoever
We did extensive research looking for YDTs operations, and visited 10 locations at which it
purportedly has an office.
In five of the 10 cases, the addresses do not physically exist i.e., there is no such building
or office at the purported location. Importantly, the address given on YDTs Contact Us
web page is one such ghost address.
In four of the 10 cases, the addresses at least existed, but nobody had ever heard of YDT, and
it is doubtful that YDT had ever been associated with the addresses.
YDT rents one office in Tianjin, but it never has any employees there. It does not have any
signage on the building and is not listed in the directory. People in the neighboring offices
had never heard of YDT.
Four of the ten addresses at which we looked for YDT were in Beijing. NQ responded that
the reason we could not find YDT is that YDT used virtual office addresses in order to fulfill
regulatory requirements.
14
This argument does not hold any water. YDT was not using
virtual offices it was using non-existent ones.
As detailed in our report, we obtained most of the addresses from YDTs SAIC files. It is illegal
to provide a false address to SAIC. While doing so is not a capital offense, there is absolutely no
legitimate reason that a business would provide false and non-existent addresses to SAIC, as it
risks unnecessary complications. A company would provide a fake address though in order to
avoid having people discover that it has no operations.
14
http://www.bloomberg.com/news/2013-11-03/nq-mobile-sales-search-leads-to-suburban-beijing-office.html
Page 23 of 47
NQs response has been that YDT has been cranking away for years in a room in the office of a
company called 9H. 9H is a company founded by YDTs majority owner Ms. Xu Rong. NQ
board member and co-founder Mr. Zhou Xu is a shareholder of 9H. Ms. Xu and Mr. Zhou are
entangled with one another in at least two other companies.
As Bloomberg News recently reported, and we confirmed on multiple occasions, YDT had no
signage in the building. Nobody at the security desk or management office had ever heard of
YDT. Bloomberg wrote: The building directory contains no listing for Yidatong, and two
guards at the first-floor security desk said theyd never heard of the company.
15
9H is in a secure building that requires a security token to activate the elevator. If the downstairs
building employees had never heard of YDT, then despite purporting to have five clients in
addition to NQ and processing approximately $35 million annually in transactions, YDT never
received a package, visitor, lunch delivery, or mail in its own name. NQs contention does not
come close to passing the laugh test.
If YDT had been at the 9H office the entire time, then there is no reason its Contact Us page,
shown below, would have referenced a non-existent building. Note there is no phone number
given either. (Since our report, YDT has substantially upgraded its website in order to appear
more legitimate. Use www.waybackmachine.org to see its prior website.)
An investor who has frequently touted NQ on SeekingAlpha.com took the below picture after
our report. The photo purportedly shows YDT inside the 9H office. According to Bloomberg
and our own site visits, the single room contains the entirety of YDTs operation at 9H. We
found the photo interesting because there are clear signs that it is a Potemkin setup. In other
words, the employees were brought into the room and seated in front of computers specifically
for the purpose of fooling the investor.
15
http://www.bloomberg.com/news/2013-11-03/nq-mobile-sales-search-leads-to-suburban-beijing-office.html
Page 24 of 47
Note that a) of the four computer screens visible, two of them are blank the employees are
staring at computer wallpaper, b) there are no telephones visible on the desks, which is surprising
given that this small group of people are processing approximately 40 million transactions per
year and presumably need to speak with mobile carriers and customers fairly frequently, c) we
see no paper files or filing cabinets, which again is surprising given the massive amount of data
the business would generate.
When we visited YDT, which was only three days after NQ provided the 9H address and before
the above photo was taken, there were only four YDT employees in the room.
NQ secretly controls YDT
Because YDT had no operations of its own and was merely a faade, NQ was YDTs entire
infrastructure. YDT repeatedly used NQ email addresses, phone numbers, fax numbers, and
mailing addresses when communicating with China Mobile, SAIC, and Chinas Ministry of
Industry and Information Technology (MIIT).
NQ responded that YDT provided NQs information so these parties could contact NQ directly.
This is a lie. The NQ contact information was the only information YDT furnished to these
bodies, and was presented as YDTs own contact information. NQ claims that YDT has several
other customers, which account for about 40% of YDTs business. YDT never furnished the
information about those customers (as YDTs own) to these parties.
YDT, which is purportedly processing approximately 40 million individual transactions per year,
was unable to furnish its own email server. In fact, YDTs email server was NQs. This is not
cost sharing or efficiency. This is just sloppy fraud tradecraft by NQ. Below is a screenshot
showing them both using NQs email server:
Page 25 of 47
We signed up for carrier billing 22 times, over all three carriers, and from 11 different provinces
(including all four of NQs largest provincial markets) between September 2013 and shortly after
our report came out. YDT, which purportedly processes at least 72.1% of NQs carrier billing in
China, was never the SP.
YDTs majority (75%) owner Ms. Xu Rong is not an arms-length party
NQ has repeatedly lied about the extent of Ms. Xus involvement with NQ. It is incontrovertible
that NQ has lied about her, and even now, NQ has only admitted to some of its lies regarding
Ms. Xu. NQ is lying about its relationship with her in order to attempt to conceal that YDT was,
and still is, an undisclosed related party.
In NQs prospectus and as recently as August 2013, NQ claimed that Ms. Xu had been a
consultant to the company for approximately six months, and left in mid-2007.
Our initial report showed the Ms. Xu was an executive employee of NQ, rather than a
consultant, and that she was with NQ well into 2008 at least.
NQ has since admitted that it had lied about Ms. Xu. It now accurately characterizes her as
an employee, and states that she resigned from NQ in December 2008.
NQ continues to lie about the other material aspect of its relationship with YDT and Ms. Xu:
The timing of when Ms. Xu became involved with YDT. NQ continues to insist that at no
time was YDT a related party. It is incontrovertible that NQ is lying.
YDTs SAIC file makes clear that Ms. Xu became the Executive Director of YDT in
February 2006. Per NQs admitted timeline of Ms. Xus employment, YDT was an
undisclosed related party through 2008, thus infecting the historical audited financials in
NQs prospectus. Below is the screenshot of the Tianjin online SAIC portal, which shows
the date on which Ms. Xu became the Executive Director:
Page 26 of 47
YDTs SAIC files show that Ms. Xu became the 75% owner of YDT in February of 2007,
making clear that NQ is even today lying when it insists that she did not own any of YDT
until after she purportedly left NQ in December 2008. See Appendix A for the SAIC
ownership record.
Ms. Xu is entangled with NQ co-founder Mr. Zhou Xu. Ms. Xu and Mr. Zhou co-own 9H
(which is YDTs purported landlord) and Jing Xiu. Ms. Xu is a Supervisor of Yiteng, which
became a shareholder in NQs VIE in 2006. (Ms. Xu and Mr. Zhou were the founding
shareholders of Yiteng, and she was the supervisor at the time Yiteng owned its share of the
VIE.)
Prior to joining NQ, Ms. Xu was an executive at two other companies Mr. Zhou led. The
relationship map below shows the present entanglement of Ms. Xu and Mr. Zhou:
On November 3, 2013, Phoenix New Media ran an article titled Getting to the Bottom of NQs
Bizarre Road to Riches, which concluded that Mr. Zhou is the power behind the throne at NQ
and YDT, and that he secretly controls YDT. The article is available at:
http://finance.ifeng.com/business/special/ruigongsi11/index.shtml.
The table below shows the various people involved with Yiteng, which appears to contain the
inner circle of the NQ fraud:
Page 27 of 47
The SP for every China Mobile registration was UM Pay, which is an SP that China Mobile
jointly owns. The SP for every China Unicom registration was Unisk, which is an SP that China
Unicom jointly owns. NQ itself was the SP for every China Telecom registration.
NQ initially responded that its proprietary BOSS system chooses the SP for each transaction
based on numerous factors. This does not pass the laugh test. First, it is almost impossible that
we would have never had a transaction processed by YDT were YDT really processing a
significant portion of NQs carrier billing. Second, it is entirely logical for a company to use the
same, carrier owned, SP for every transaction on that carrier.
NQs cash balances are fraudulent
We believe NQs term deposits are likely fraudulent. PwC approved classification of all cash and
term deposits as Level 2 assets in NQs 2012 20-F. NQs purported movements of cash from its
IPO almost certainly did not occur due to PRC FX controls.
NQs cash balance as of December 31, 2012 is, therefore, overstated by at least approximately
$47 million by virtue of it having been legally impermissible for NQ to have injected ~$47
million in IPO proceeds into its Variable Interest Entity (VIE). NQ has not responded to this
conclusion in our report. We believe they can find no counterargument.
NQs purported VIE funds transfer would violate Chinese law
PwC clearly erred by failing to note that NQs contention, from 2011 onward, that its offshore
entities loaned ~$47 million to the VIE is inconsistent with PRC law. PwCs error is clearer
because it also failed to note that this contention is inconsistent with NQs disclosures contained
in its F-1, and 20-Fs for both 2011 and 2012. NQs disclosure reads in relevant part:
Due to the restrictions imposed on loans in foreign currencies extended to any PRC
domestic companies, we are not likely to make such loans to our consolidated affiliated
Page 28 of 47
entities, Beijing Technology, NationSky, Beijing Feiliu, and QingYun (Tianjin) Financial
Management Co., Ltd., or Tianjin QingYun, each a PRC domestic company. However, if
such loans become necessary for the operations of our PRC subsidiary or consolidated
affiliated entities, these statutory limits and other restrictions may materially and
adversely affect our liquidity and ability to fund operations in the PRC by limiting a
source of cash for these PRC entities. Meanwhile, we are also not likely to finance the
activities of our consolidated affiliated entities by means of capital contributions due to
regulatory restrictions relating to foreign investment in PRC domestic enterprises
engaged in our line of business.
16
NQs strategy to deflect attention from this problem has been to purportedly liquidate its term
deposits and transfer funds into a new bank account. (We address problems with the purported
term deposits infra.) We do not dispute that the new account came to hold $103 million.
However, we note that it took almost two weeks to complete the transfers, despite management
having repeatedly insisted to investors on the October 25
th
conference call that NQ could receive
immediate liquidity from its term deposits.
We also note that the imposition of another bank account particularly one with the purpose of
receiving lumpy inflows adds an additional layer of complexity, should PwC seek to confirm
whether the cash ultimately came from operations. We also note that on November 29
th
, NQ
proposed amendments to its Articles of Association that clarify the mechanics for founders
pledging shares. (The amendment was approved on December 23
rd
.) Above and beyond all else
though, NQ could not have legally had the funds it claims in its VIE.
NQ presented PwC with forged term deposit documents
Even though NQ claimed to be effectively cash flow neutral since inception (and thus rendering
cash confirmations irrelevant to supporting the existence of NQs revenue), its historical cash
balances are substantially overstated by virtue of NQ having had no legal means (or legitimate
purpose) to move approximately $47 million of IPO proceeds into its VIE without passing
through its WFOE. NQs method of gaming the cash confirmation process has been to present
term deposits from smaller Chinese banks, which is similar to how Satyam defrauded investors
and PwC.
NQs VIE cash balance is per se overstated by at least $47 million. As discussed supra, NQ had
no legal means of lending approximately $47 million of IPO proceeds directly to the VIE. NQ
fraudulently claimed to have flowed funds in this manner presumably in order to divert IPO
proceeds without detection. (It would have been more obvious if NQ had claimed to contribute
these funds to its WFOE, but did not do so.)
PwC is now on notice that NQ has presented its auditors with fraudulent term deposit
documentation. In response to our initial report, NQ released a table listing 14 of its purported
term deposits. From the table alone, we can tell that five of the term deposits are forged because
the interest rates do not accord with the effective interest rates as of the dates of the deposits
16
NQ 2012 20-F, p. 24. See also NQ F-1, p. 27.
Page 29 of 47
some rates are higher than the effective rates, some rates are lower than the effective rates.
These incorrect rates are the product of document forgery. See NQs table below with the
incorrect rates highlighted.
17
PwC can look up the effective interest rates on these term deposits on the banks respective
websites.
False term deposits are not new to China frauds. From the recent lawsuit against the Deloitte
firms and the companys executives and directors for the ChinaCast fraud:
The largest assets on ChinaCasts balance sheet were term deposits. As disclosed in
the 10-K, Term deposits consist of deposits placed with financial institutions with
remaining maturities of greater than three months but less than one year when
purchased. 2007 Form 10-K at F-13. For the fiscal year ended December 31, 2007, term
deposits comprised over eighty percent of ChinaCasts total bank balancesSpecifically,
the 2007 10-K represented that the Company has not entered any financial guarantees or
other commitments to guarantee the payment obligations of any third parties. 2007 Form
10-K at 25. Plaintiffs specifically read, reviewed, and relied on these representations in
purchasing securities of ChinaCast.These representations regarding term deposits and
the absence of financial guarantees were blatantly falseAs of December 31, 2007, at
least 76% of the Companys term deposits were pledged to guarantee the debts of third
parties {i.e., at least RMB 455,310,000 were pledged out of the RMB 596,768,000 total).
None of these pledges were disclosed.
In NQs rebuttal, it bizarrely presented a receipt that NQ purports as evidence of an RMB 50
million term deposit. (The receipt is below.) In reality, that receipt is a receipt for a pledge of
RMB 50 million. The type of form is for a pledge. Thus, if the form below is
genuine (despite its varying ink colors, inconsistent misalignments, and being a bank rather
17
The original table is contained in NQs October 26, 2013 response to our report on p. 4.
Page 30 of 47
than customer copy), it means that NQ has undisclosed debt, and thus the cash is
encumbered.
NQs term deposits are all purportedly held at smaller Chinese banks, which is likely significant
to how NQ commits this aspect of its fraud. NQs CFO, KB Teo, told us before we published our
report that NQs term deposits were all held at Chinas top tier banks, specifically at China
Merchants Bank and Bank of China. While it is well established that China-based issuers have
committed cash confirmation fraud at Chinas Tier 1 banks with the complicity of branch staff, it
is even easier to gain the complicity of the branch staff and management at non-Tier 1 banks.
PwC, of course, has been defrauded through term deposits in emerging markets before. PwC
was Satyams auditor when Satyam passed off forged term deposits as real. It should be noted
that Satyams management faced criminal punishment in India. China has never attempted to
punish management of a US-listed fraud, thus making fraud even more likely to occur in China
(and in NQs case) than in India and Satyam.
NQ has routinely presented auditors with forged documents. We obtained various receipts and
invoices purportedly issued to and by NQ for historical periods. These invoices almost certainly
have been incorporated in PwCs audits of NQ. Some of the invoices are clearly fraudulent
because they are issued on vouchers that by law went out of use on January 1, 2011.
On June 13, 2010, SAT issued a notice changing the uniform general tax invoices.
18,19
Under the
notice, SAT canceled 12 types of general invoices, including the Beijing Commercial
Corporation Invoice (). However, NQ repeatedly received these canceled
Commercial Corporation Invoices from its vendors after this format went out of use.
18
http://www.bjtax.gov.cn/bjsat/zwgk/zcfg/gsgb/201012/201104/t20110417_17330.html
19
The Beijing tax bureau issued the notice as part of implementing a national policy.
Page 31 of 47
The invoices that replaced the Commercial Corporation Invoice were available beginning August
1, 2010, and SAT ceased being provided to businesses on October 1, 2010. Beginning January 1,
2011, companies were prohibited from issuing the Commercial Corporation Invoice. We have
obtained numerous non-compliant invoices issued to NQ. PwC should have realized that these
invoices were non-compliant, and thus were likely to be forged.
Below is an image of one such non-compliant invoice dated June 27, 2011 well after these
invoices stopped circulating.
In other cases, the invoices show that NQ is purchasing products from companies that are outside
the vendors scopes of business. Confirming that purchase invoices conform to vendors scopes
of business is easy to do via the SAIC website.
The above invoice is one such example. It is an invoice for mobile phones NQ purportedly
purchased. However, as shown below, that vendors scope of business is selling stationery.
Page 32 of 47
NQs Chairmans lies about top customers further support our conclusion that NQ
is a fraud
Chairman Henry Lin lied about the identities of NQs second and third largest revenue sources
on NQs conference call held in response to our initial report. Disclosures in NQs 2012 20-F
make it clear that Chairman Lin was lying. Chairman Lin lied on the call because (as an old
proverb holds) one lie requires 1,000 to cover up it becomes hard to keep all of the lies straight.
On the call, an investor asked the following question: Just on the revenues, we had some debate
about, what is your true revenue number? And given Yidatong's had some allegations as well,
would you be able to provide some verification from your number 2 and number 3 customer? I
think in the 20-F you've got an 11% and an 8% customer. Could you name them, and could they
provide verification of those revenues?..And who are the number 2 and number 3 customers?
Chairman Lin answered that UM Pay and Info2Cell were numbers 2 and 3. This is clearly a lie
because both are SPs, and are, therefore, part of the carrier billing channel. If either UM Pay or
Info2Cell were the second or third largest revenue sources (at 11% and 8% of total net revenue,
or $10.1 million and $7.3 million, respectively), then NQs carrier billing channel would have
accounted for more than $27.9 million in 2012. (Recall that YDT was $20.2 million and China
Mobile was $1.8 million.)
Shortly after we publicly exposed the lie, Bloomberg television interviewed NQ Co-CEO Omar
Khan, and specifically asked him who the second and third largest revenue sources are. He
refused to answer.
Obviously if the records NQ provided to PwC show that UM Pay and Info2Cell (or any other
carrier or SP) were in fact the second and third largest 2012 revenue sources, there is a major
problem because that would contradict the disclosures in the 20-F.
If, as we expect, the records show that the second and third largest revenue sources were
international prepaid card distributors, then the PwC offices responsible for confirming those
revenues must use extra diligence in confirming the 2013 revenues from these sources. These
revenue sources are outside of China, and unlike with China-source revenue, the SEC is quite
likely to be able to investigate the veracity of these records.
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Page 33 of 47
NQ prepaid card sales numbers are fabricated
In response to our initial report, NQ disclosed that it sells 600,000 prepaid cards per month at an
average net monthly revenue of $0.60 (RMB 3.67). This is a lie NQ sells nothing approaching
its claimed 7.2 million cards per year.
After speaking with customer service multiple times and searching the internet, we found only
two stores in China selling NQ prepaid cards. One store was a computer mall basement kiosk
in Beijing, and the other was a kiosk in a computer mall in Guangzhou. Customer service told us
that the Beijing kiosk is the only store in Beijing that sells the cards. Both stores reported that
they sell an immaterial number of prepaid cards. The one-year prepaid cards they carried had
NQs old logo, which was replaced over 2 ! years earlier in June 2011.
There are only three stores on Taobao selling NQ cards. The Beijing kiosk operates two of the
stores, and the Guangzhou kiosk operates the other Taobao store. The table below shows the
total revenue of these Taobao stores for all products. Clearly these stores sell very few NQ
cards online or in the real world.
Page 34 of 47
NQ responded that it sells its cards in over 5,000 stores, at a rate of approximately 600,000 cards
per month. NQ provided the below list of some of its leading retailers as evidence of this.
20
In addition to only listing 15 locations, the Beijing and Guangzhou locations are all kiosks in the
same mall in their respective cities.
Phoenix New Media visited one of the Beijing kiosks and noted that the placement and sales of
those cards were suspicious. More importantly, providing a sampling of stores rather than the
list of 5,000 is a clear fraud tactic. China MediaExpress (CCME) did the same thing when we
exposed that its largest purported contract with Ba Shi bus company in Shanghai was a lie.
CCME gave a partial list of three of the purported 1,000+ buses it had under contract through Ba
Shi. (We showed the three buses were fakes because the license plate numbers belonged to
passenger vehicles.)
Just as CCMEs attempt to cover up was incompetent, NQs initial cover up with respect to the
cards was incompetent. The photos below come from NQs October 26, 2013 response to our
report. NQs photos, which purport to prove that it sells approximately seven million prepaid
cards per year in China, show that it was quickly trying to create a faade of significant prepaid
card sales.
20
NQ Response Presentation dated October 26, 2013.
Page 35 of 47
The above picture seems to be trying to show that there is a kiosk that prominently advertises the
NQ cards by hanging a large sign in the background. We tend to think that if the store, which is
a Hosin hardware retailer, really did want to hang a NQ sign up, it would first turn off the light
boxes in back of the banner.
This photo shows NQ prepaid cards in a Hot Buy counter at a store. We wonder how hot the
cards are. They show NQs old logo, which was replaced in June 2011.
Page 36 of 47
Heres another store selling NQ cards. The cards in the middle once again show NQs old logo.
If this were not a ruse, then it would mean NQ ordered several years of prepaid cards in early
2011, and is still working its way through that inventory.
NQ also responded to our point about the lack of prepaid card sales by stating that it does not sell
its cards online. This sleight of hand is designed to distract from the point: If NQ were really
selling anywhere close to seven million cards per year, they would be fungible, in demand, and
selling in volume on Taobao.
NQ Accounts Receivable balance is fraudulent because of revenue fraud
A review of NQs days sales outstanding shows that NQs reported revenues were always highly
suspect:
0
50
100
150
200
250
0
20
40
60
80
100
120
140
160
180
Q4
10
Q1 11 Q2 11 Q3 11 Q4 11 Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Days $ Million
NQ DSO and LTM Revenue Q4 2010-Q3 2013
LTM Rev DSO
Page 37 of 47
NQs competitors advised us that they receive payment within 45 days from the date of invoice,
even in emerging markets. NQ is a true outlier in having such high DSO. Note that NQs DSO
has ticked down in recent quarters. We believe NQ has been able to decrease its DSOs because
NQ is round-tripping money from acquisitions it makes (we discuss how NQ appears to be
massively overpaying for its acquisitions infra), and NQ has recently been on an acquisition tear.
NQs fraudulent ARs must occasionally be paid down, which requires real cash. The massive
overpayments would easily allow for that, while leaving ample cash to put in the pockets of NQ
management and the selling shareholders. (NQs outsize share compensation to unnamed
management and consultants further enables the round tripping.)
As we previously noted, NQ is fairly unique in that it claims to have a sizable amount of non-
PRC revenue. Using share issuance to pay for acquisitions is also unusual for US-listed PRC
companies. Such companies usually pay for acquisitions (legitimate and corrupt) with cash.
However, it is not a coincidence that both of these unique conditions co-exist.
NQ needs to provide its offshore sham counterparties with cash to pay down the ARs. It is much
easier to get cash into the PRC, legally and illegally, than out of it. By buying PRC businesses
with offshore currency (shares), NQ is able to facilitate the fraudulent pay down of offshore
ARs. This conclusion is all the more obvious when considering NQs substantial reported PRC
cash balances, which would indicate that it does not need to primarily issue shares to buy these
companies.
NQ has made a number of mistakes with respect to its purported tax treatments,
which is clear evidence of fraudulent accounts
These numerous tax mistakes are proof of book cooking. NQs book cookers made the
following tax-related errors in producing fraudulent financials for its various entities.
NQ Beijing claimed that in 2011 it paid a sales tax called Business Tax, rather
than VAT.
NQ claims that NQ Beijing began paying VAT in lieu of Business Tax in 2012 due to the
expansion of a VAT pilot program to Beijing.
21
Software sales have been subject to VAT since
2001.
22
The VIE and WFOE obtained their software developer VAT certificates in 2006 and
2008, respectively. In order to maintain the VAT certificates, the companies would have needed
to pay VAT on prior years software sales. The expansion of the pilot program to Beijing applied
to industries other than software sales,
23
and thus would not have necessitated a sudden shift to
VAT in 2012.
The likely explanation is that the book cooker realized that, because VAT is administered more
closely than Business Tax, it was advantageous to claim NQ is a Business Tax payer; however,
the 2012 VAT reform gave NQ less room to maneuver with its auditor.
21
2012 20F, p. F-29.
22
http://www.xm-n-tax.gov.cn/gswz/jsp/fgkcx/xl.jsp?bm=200506031617445742
23
http://www.chinatax.gov.cn/n8136506/n8136593/n8137537/n8138502/11735466.html
Page 38 of 47
NQ Beijings 2011 SAIC financials show that the company essentially paid no Business Tax,
despite claiming that NQ Beijing was subject at the time to Business Tax of 3% to 5%.
24
NQ
Beijings 2011 income statement shows NQ Beijings purported 2011 domestic revenue as being
RMB 113.6 million. (Business Tax only applies to domestic revenue.) However, the income
statement shows that NQ Beijing paid only RMB 8,000 (eight thousand) in Business Tax and
surcharges in 2011. NQ Beijing should have paid at least RMB 3.4 million (340K, or 0.3% of
revenue) in 2011 Business Tax.
25
In 2012, NQ Beijings book cooker had the opposite problem. While the SEC filings claim that
NQ Beijing began paying VAT in 2012, the SAIC income statement shows that NQ Beijing paid
RMB 6.3 million in business tax on RMB 154.7 million in domestic sales. NQ Beijing should
have paid far less in Business Tax and surcharges because at least 35% of the revenue should be
taxed with VAT, in addition to the revenue being taxed with VAT under the pilot reform. Under
PRC GAAP, VAT payments are not recorded in income statement accounts they are shown
only as taxes payable on the balance sheet. Therefore, the RMB 6.3 million is not mislabeled
VAT. It is just another mistake NQ made because its financials are fraudulent.
NQ Beijings SAIC financials fail to recognize as Non-Operating Income any
VAT credits or refunds received.
Once again, NQs book cooker struggled with the taxes relevant to revenues. To understand the
VAT problem, one first needs to understand NQs claim about NQ Beijings income tax
treatment. NQ claims that NQ Beijing receives a corporate income tax preference for qualified
software companies. In order to qualify for this income tax preference, at least 35% of NQ
Beijings revenue would have to come from software sales. At least half of the software sold
must be developed in-house.
The effective VAT for in-house developed software is 3% of sales, which consists of the 17%
statutory VAT NQ pays on its software sales, netted against a) VAT it paid on its inputs, which
are generally very low for software companies, and b) a credit or refund from the tax bureau
sufficient to ensure the effective VAT is 3%. Again, NQ Beijings SAIC financials show that its
domestic revenue was RMB 113.6 million and RMB 154.7 million in 2011 and 2012,
respectively.
PRC GAAP mandates that the VAT credit or refund be recognized as Non-Operating Income.
26
However, NQ Beijing had no such income in either 2011 or 2012. If NQ Beijings SAIC
financials were not fraudulent, they would show at least a few million RMB in Non-Operating
Income in each year. Per a newsletter posted by the Haidian Tax Bureau (the tax bureau that
receives taxes from NQ Beijing), cumulative VAT refunds to approximately 2,000 Haidian
24
2012 20F, p. F-29.
25
VAT for qualified software companies would be 3% of sales after refund. If all sales are VAT sales, the business
tax and surcharge will be at least sales*3%*10% (10% surcharge rate)
26
http://www.tjsat.gov.cn/bd/0200/020002/20120508172346812.html
Page 39 of 47
software companies in 2011 exceeded RMB 380 million (an average of about RMB 200,000 per
company).
27
NQ omitted a purported income tax preference for NQ Beijing from its 2011
prospectus
In the prospectus, NQ stated that NQ Beijing was subject to the prevailing income tax rate of
25% on taxable income for the years ended 2008, 2009, and 2010.
28
However, in the 2011 20-
F filed only 10 months later, NQ stated that NQ Beijing was qualified as a software enterprise
under the New CIT Law, which was entitled to enjoy an income tax exemption for the first two
years when it became profitable, followed by three years of preferential income tax rate of 12.5%
up to 2015.
Therefore, NetQin Beijing was not required pay any income tax for the years ended December
31, 2009, 2010, and 2011.
29
Omitting a tax preference from the prospectus is much less likely
when the companys financials are genuine.
NQs SEC disclosures and SAIC financials show that NQ is shifting
impermissibly high amounts of income from NQs variable interest entity
(VIE) to NQ Beijing in order to avoid paying income tax
NQ claims that NQ Beijing was exempt from corporate income tax in 2011, while the VIE paid
corporate income tax at 15%.
30
Under NQs onshore corporate structure, the vast majority of
NQ Beijings 2011 revenue consisted of sales to the VIE. The year before (2010), NQ Beijing
only booked RMB 1.5 million in revenue, so the VIE would not have been shifting revenue to it
until 2011.
By purporting to shift about two-thirds of the VIEs revenue to NQ Beijing in 2011, NQ lowered
the VIEs gross margin from 62% in 2010 to 17% in 2011. Purportedly as a result of this shift,
the VIE paid only RMB 106,000 in income taxes in 2011, which was only 27.7% of the VIEs
2010 income taxes, while the VIEs purported revenue grew 193.2% in 2011.
NQ Beijing and the VIE are located in the same building and pay taxes to the same district tax
office. PRC tax law requires business between related entities to be conducted at prices
equivalent to those for arms length transactions.
31
It is implausible that the VIE would be
permitted to shift this much profit from an entity that pays income taxes to one that does not.
The reason NQs SAIC financials show this revenue shift is because the Company pays minimal
PRC taxes because it has far less profit than it claims. The Companys SAIC and SEC financials
are fraudulent.
27
http://www.bjsat.gov.cn/BJSAT/qxfj/hd/sy/zfxxgk/zfxxgkml/gzdt/201112/t20111209_74408.html
28
2012 20F, p. F-30.
29
2011 F0F, p. F-28.
30
2011 20F, p. F-28.
31
http://www.chinatax.gov.cn/n8136506/n8136593/n8137681/n8817331/n8817348/8820018.html.
Page 40 of 47
NQ claims that Beijing Feiliu (FL Mobile or FL) paid no income tax in 2012
and 2013, and a reduced rate thereafter
This claim is based on the assumption FL Mobile was approved for a software enterprise tax
preference under the new tax law. This can't be true. The preference is only available for newly
established software companies. FL was established in 2009, but obtained qualified software
company status only in 2011.
32
(FL would have gone through the qualification process after
establishment in order to be eligible for VAT refunds.) In order to enjoy the tax holiday, FL
would need to have obtained its qualification in 2010.
FLs tax preference (forgetting the qualification timing issue) would only be valid for two years
from and including its first profitable year. NQ reported in its 20-F a US GAAP profit of
$119,000 in 2011 on sales of $2.1 million (from SAIC).
33
It is unlikely that FL was unprofitable
in 2011 for PRC tax accounting purposes. The claim that FL would not have to pay tax in 2013
seems to be another example of bungled tax treatment resulting from fraudulent accounting.
NationSkys balance sheet shows too little tax due as of December 31, 2012
NQ purports that Nation Sky generated $12.6 million of revenue in 2012, although NationSkys
SAIC financials actually show $15.2 million of revenue. (The profit numbers are essentially the
same though.) Chinese companies file monthly tax returns for VAT and Business Tax, while
they file income tax returns on a quarterly basis. The yearend taxes payable balance should be at
least approximately RMB 600,000. The balance sheet shows only RMB 38,000 payable.
Another suspicious element of NationSkys income statement is that its 2012 sales and
marketing expenses of only $479,000 seem too low to support a sales, presales, and marketing
staff of over 80 people in 10 offices.
NQs acquisitions highly likely to have fraudulent intent and accounting
NQs acquisitions are highly likely to be corrupt and part of the fraud. NQ is massively
overpaying for its acquisitions, which is integral to committing its fraud. Our desktop, SAIC
file, and on-site research makes clear that many of NQs acquisitions are of businesses that are
barely if at all operating. Yet, NQ pays millions of dollars in shares for these companies.
Domain name purchase price is absurd
NQ must really know its emerging markets well though because when we wrote that its claim to
have paid $1.5 million for the domain www.nq.com was absurd, NQ responded by explaining
that the purchase price was so high because it included search engine optimization. Clearly, the
United States is an awful market in which to do business if it requires such large expenses, and
yet one can become an emerging markets juggernaut without even having a website.
32
http://www.chinasoftware.com.cn/GGDetail3.asp?sID=5897&ssID=233990#233990
33
NETC, FY 2011, 20F, F-35
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PricewaterhouseCoopers Member Firms Professional and Legal
Obligations And Liability If NQ Is A Fraud
PwCs legal and professional obligations with regard to reports of fraud at NQ
PwC is, by virtue of our research and this letter, on notice that NQ is a substantial fraud. The
reasonable assurance audit standard under US Generally Accepted Audit Standards apply
because NQ is listed on a US stock exchange. NQ is such an egregious fraud that a court will
likely hold PwC entities liable for professional negligence for any additional unqualified audit
opinions even though this standard is legally high but relatively low given investors
expectations.
Under US auditing standards, established and enforced by the industry regulator, the PCAOB,
PwC is required to plan and perform the audit of the NQ financial statements to obtain
reasonable assurance, which is a high legal level of assurance, about whether the financial
statements are materially misstated due to error or fraud.
34
As this wording suggests, auditor
responsibilities are focused on fraud and other illegal acts that result in material inaccuracies in,
or omissions from, the financial statements.
35
The auditor applies tests and procedures for the purpose of forming an opinion on whether the
financial statements are fairly presented according to Generally Accepted Accounting Policies.
Performing those activities may bring illegal acts such as fraud to the auditor's attention. For
example, AU 317, one relevant auditing standard, describes such procedures as reading minutes
of board meetings including those of a special investigative committee of the board, inquiring of
the client's management and legal counsel concerning litigation, claims, and assessments and
performing detailed and broader substantive tests of details of transactions or balances. The
auditor should make inquiries of NQ management, the audit committee and any special
investigative committees concerning compliance with laws and regulations and knowledge of
violations or possible violations of laws or regulations.
The audit profession seems to have staved off fatal damages from auditing frauds over the past
couple of decades by clinging to the ambiguity of what exactly constitutes reasonable
assurance. Herein lies the major disconnect between investors expectations of how well audits
are performed and the reality. The public believes that reasonable assurance means a sufficient
level of professional skepticism and diligence such that the likelihood of an issuer committing
fraud and an auditor failing to detect it are minimized. In reality, public company auditors rarely
34
See paragraph .02 of AU sec. 110, Responsibilities and Functions of the Independent Auditor.
35
Under Sections 10A(a)-(f) of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1(a)-(f)), the auditor of an
issuers financial statements generally is required, among other things: (1) to perform procedures designed to obtain
reasonable assurance of detecting illegal acts, including fraud, that would have a direct and material effect on the
financial statements, (2) when becoming aware of information indicating an illegal act has or may have occurred, to
determine whether it is likely that an illegal act has occurred and, if so, its possible effects on the financial
statements, and (3) to report illegal acts that come to the auditors attention to various parties based on criteria in the
statute, unless the act is clearly inconsequential. Also, the auditor's responsibilities under PCAOB standards
regarding illegal acts generally are set forth in AU sec. 317, Illegal Acts. And Auditing Standard No. 16,
Communications with Audit Committees, requires the auditor to make certain inquiries of the audit committee about
violations or possible violations of laws and regulations.
Page 42 of 47
detect frauds because of the excuse for ineptitude that a reasonable assurance standard
provides.
The professional standards auditors must follow unfortunately eventually contradict earlier best
intentions to meet investor expectations that auditors will plan and execute an audit to detect
material misstatement. Even with good faith and integrity, mistakes and errors in judgment [by
auditors] can be madeAs a result of these factors, in the great majority of cases, the auditor has
to rely on evidence that is persuasive rather than convincing.
36
This phrase will not totally exculpate PwC from liability in the NQ case because we have
provided convincing evidence that NQ is a fraud. The bar for PwC to issue an unqualified
opinion is no longer just persuasive, and it is not limited to whether NQs financial statements
are reasonably free from material misstatement. To evade liability for additional audit
opinions, PwC must now solicit evidence that is convincing that a) NQs financial statements
are free of material misstatement; and, b) that Muddy Waters evidence, research, and conclusion
that NQ is a fraud are patently wrong. Professional skepticism insists on it.
Professional standards also contradict investors expectations when they allow auditors the we
were duped excuse. Because of the characteristics of fraud, a properly planned and performed
audit may not detect a material misstatementFor example, auditing procedures may be
ineffective for detecting an intentional misstatement that is concealed through collusion among
personnel within the entity and third parties or among management or employees of the entity.
Collusion may cause the auditor who has properly performed the audit to conclude that evidence
provided is persuasive when it is, in fact, false
37
As the New York State Society of CPAs wrote, in spite of a reasonable assurance standard
[the accounting profession] is still not in a position to assure the public that a GAAS audit
has a high likelihood of detecting fraud.
38
However, by virtue of our research, PwC is now on notice that NQ management and directors
have colluded with third parties particularly Yidatong. We show that Yidatong is an
undisclosed related party and NQs largest source of purported revenue. Because this collusion is
now established as a fact, and is no longer just a possibility, PwC must investigate and respond
accordingly.
Auditors that fail to detect fraudulent documentation are given another out by professional
standards that provide in relevant part In addition, an audit conducted in accordance with
generally accepted auditing standards rarely involves authentication of documentation, nor are
auditors trained as or expected to be experts in such authentication...
39
In general, the vast majority of document review during a financial statement audit is carried out
by junior staff. PwC China does not comply with U.S. professional audit standards because many
36
AU 230.11
37
AU 230.12
38
http://www.nysscpa.org/cpajournal/2005/1105/special_issue/essentials/p28.htm
39
AU 230.12
Page 43 of 47
Chinese junior auditors never obtained degrees in accounting. (Individuals who are licensed to
audit public companies for U.S. stock exchange listed companies must meet stringent education
and experience requirements that always include significant university credits in accounting
coursework.
40
) A wet behind the ears accounting major is not the best detector of fraudulent
documents. But it would be even more extraordinary if a recently graduated Chinese non-
business major could detect fraudulent documents in China, the worlds largest market for
forgeries.
We cite numerous instances in which NQ has likely forged term deposit slips and invoices. PwC
is now on notice that NQ is furnishing examples of potentially forged documentation that was
provided to auditors by management to substantiate balance sheet account amounts.
PwCs audit of NQs 2012 results was clearly sloppy. Additional examples of sloppiness over
and above the previously discussed alleged NQ fraud that PC missed or looked the other way on
include:
Failure to ensure that disclosures about cash balances by entity are correct. (As we explain
supra, we suspect that much of the cash on NQs balance sheet is not really there.)
Classifying Cash and Equivalents as a Level 2 asset in 2012, and reclassifying 2011 Cash and
Equivalents as Level 2. We cannot conceive of a circumstance under which Cash and
Equivalents could be Level 2 assets. If this was not a sloppy mistake, then PwC should
require NQ to disclose the special circumstances surrounding its Cash balance.
Not booking restricted share issuance related to performance issuance.
Failure to ensure that share-based compensation is recorded at the correct entity.
Failure to validate that receivables from NQs largest purported trade debtor, Yidatong
(YDT), are aged over four months beyond what the contracts permits.
Permitting NQ to reclassify significant costs from Cost of Sales to R&D, which substantially
boosted NQs gross margin.
PwCs legal and professional obligations with regard to the NQ Boards
independent investigation of our allegations
On December 19, 2013 Muddy Waters Research made an Offer to NQs Independent Committee
to engage, at our own expense, an independent and qualified accounting firm to evaluate the
independent committees investigation of our October 24 and subsequent allegations. It is
necessary and reasonable for the independent committee to have a qualified party evaluate the
credibility of the investigation. Our offer cites eight examples of independent committees
apparent dysfunction and the resulting flawed investigations of fraud allegations made against
China companies. Each of these independent committee reports exonerated the companies of
wrongdoing, but they were followed later by substantial investor losses and serious regulatory
action.
PwC has an obligation under Generally Accepted Auditing Standards (GAAS) to determine if
audit committee or the board has responded appropriately to our allegations and any others that
have been made, from within or outside the company. Under Sections 10A(a)-(f) of the
40
http://nasba.org/licensure/gettingacpalicense/
Page 44 of 47
Securities Exchange Act of 1934 (15 U.S.C. 78j-1(a)-(f)) PwC may, in certain circumstances,
have an obligation to report the matter directly to the Securities and Exchange Commission
(SEC) if the company fails to do so. As a result of these requirements, PwC must make sure any
investigation of allegations of any serious wrongdoing that may affect the financial statements
are investigated thoroughly, independently and that appropriate action is taken by the Board and
appropriate disclosures made.
Our choice of a firm to evaluate the independent committees investigation, Plante Moran, has
had an office in Shanghai for more than 15 years ago and employs accountants and management
consultants who are experienced in helping western companies make deals in China. They
understand the culture and the complexities of doing business in a country with a unique
business etiquette, intense competition and corruption but, most importantly, do not audit any of
Chinese companies recently accused of fraud. Unlike Deloitte, Plante Moran and our proposed
lead partner, Martin Terpstra, are independent and objective with regard to NQ and these issues.
More PwC China clients accused of fraud
According to ChinaRAI, with NQ, PwC now is the auditor for seven China companies suspected
of being frauds.
41
This puts PwC in a tie for third place with Friedman LLP and MaloneBailey
LLP, and behind Frazer Frost LLP (nine) and Deloitte China (17). Friedman, MaloneBailey, and
Frazer Frost are generally not regarded as industry leaders; and, that Deloitte China has become a
particular lightning rod for the SEC, PCAOB, and short-sellers. Therefore, any PwC partner
who believes the value of the PwC brand is worth preserving should take heed that further
unqualified opinions on NQ will end in embarrassment and litigation for the firm. This is
particularly the case because the smaller firms seem to have cleaned up their acts in China more
than the major firms.
42
We recommend PwC China resign the NQ engagement
PwC U.S. and possibly other non-China entities face significant liability for the audit opinions
issued by PwC China because of the significant revenue and expenses NQ purports to generate
outside of China. By claiming significant non-PRC revenue and expenses, NQ is unlike most
other China frauds. PwCs U.S. entity presumably performs more than Appendix K review
because NQ spends a significant amount of its purported expenses in the U.S. by virtue of its
Dallas, TX co-headquarters. Just as Deloitte U.S. is a defendant in the civil litigation
surrounding another China fraud, ChinaCast Education, PwC U.S. will not be able to sufficiently
distance itself from the NQ audits so as to avoid civil and regulatory liability.
Any PwC partner who believes the value of the PwC brand is worth preserving should take heed
of the experience of other firms operating in China. Further unqualified opinions for NQ will
likely end in embarrassment and litigation against the firm and its partners. As of January 3, NQ
41
http://www.tradingfloor.com/posts/china-finance-updated-data-auditors-linked-issues-606252080
42
The six largest accounting firms are routinely hiding behind the skirt of Chinas MOF, CSRC, and state secret
laws. The smaller U.S. firms do not usually have the luxury of arguing that their activities in the PRC are legally
and morally separate from U.S. partners.
Page 45 of 47
is currently trading at more than 35% below its 52-week-high, which was set in October. The
damages to investors are already sufficient to justify multiple class action lawsuits.
If PwC concludes, after expanding its audit scope and performing additional tests and procedures
in response to clearly heightened fraud risk, that fraud at NQ Mobile has a material effect on the
financial statements, and the illegal act or acts act have not been properly accounted for or
disclosed, PwC should express a qualified opinion or an adverse opinion on the financial
statements taken as a whole. If NQ Mobile prevents PwC from obtaining sufficient appropriate
evidence to evaluate whether illegal acts material to the financial statements have, or are likely to
have, occurred, PwC should probably disclaim an opinion on the NQ financial statements.
If NQ management refuses to accept a modified a PwC report, PwC should resign from the
engagement, possibly withdraw its opinions on prior financial statements and warn investors on
reliance on managements representations. PwC must communicate the reasons for withdrawal
in writing to the audit committee of the board of directors. If PwC is unable to determine whether
the acts are illegal because NQ imposes limitations on its work or because PwC is unable to
interpret applicable laws or regulations or the surrounding facts, PwC may have to resign the NQ
audit.
PwC China may soon have no choice but to resign as NQs auditor rather than issuing an
inappropriate, and unsubstantiated, unqualified opinion on the 2013 financial statements. PwC
China, PwCs US firm, and possibly other PwC entities outside of China will face significant
regulatory and civil liability if the firm supports a fraudulent charade.
Our NQ reports
We have issued five reports on NQ. The reports are available from our website free of charge
and without registration at www.muddywatersresearch.com/research/. The following lists the
titles of our five NQ reports.
NQ Mobile: China Fraud 2.0 (initiating coverage), October 24, 2013.
NQs Top Ten Lies Since Friday, October 29, 2013.
Chinese Media Views on NQ, November 1, 2013.
If You Believe in Yidatong, Youll Believe in Santa Claus, November 6, 2013.
NQs US Veneer: Withholding Facts, Conned Men, and a Convicted Racketeer,
November 12, 2013.
In addition, we made an offer to NQs independent committee to engage, at our own expense,
Plante & Moran PLLC to evaluate the investigative process. Our offer letter cited eight instances
in which purportedly independent committees of directors found no evidence to support
allegations of wrongdoing, and the companies investors subsequently lost billions of dollars
largely due to widespread belief the companies are fraud. In several cases, regulators or courts
took actions against the companies.
Page 46 of 47
We informed the independent committee that our offer would expire after 19 days on January 7,
2014. The committee failed to respond in any manner to our offer by the expiration date.
Page 47 of 47
Appendix A YDT SAIC ownership record