After Muddy Waters Report, NQ Mobile Falls by Half

When the stock market opened on Thursday, NQ Mobile, a Chinese mobile security company, had a valuation of $1.1 billion. Just hours later, half of its value was erased.

Call it the Muddy Waters effect. A short-selling firm known for its scathing reports on Chinese companies, Muddy Waters released a harsh assessment of NQ Mobile on Thursday, calling it a “massive fraud.”

NQ Mobile immediately experienced a stomach-turning plunge, with its shares falling more than 50 percent. The stock, which opened the day at $23 a share, fell as low as $8.46 before recovering slightly to close at $12.09. The company is listed on the New York Stock Exchange.

In its research note, Muddy Waters argued that “at least 72 percent of NQ’s purported 2012 China security revenue is fictitious,” saying the company was a “zero.”

“NQ’s largest customer by far is really NQ,” Muddy Waters, which is run by Carson C. Block, said. The note added that the company’s “future is as bleak as its past,” and that its “acquisitions are highly likely to be corrupt.”

In a statement, NQ said the accusations were “false,” adding that it would issue a more detailed response before the market opens in the United States on Friday.

“NQ Mobile will respond quickly, transparently and forcefully to these false allegations regarding our company,” the statement said.

The damage control effort wasn’t enough to prop up the stock, which previously had experienced a rapid rise this year as big investors reported holding significant stakes. SAC Capital Advisors, a big hedge fund contending with accusations of insider trading, is a major investor in NQ Mobile, according to disclosures at the end of August.

SAC, which is owned by the billionaire Steven A. Cohen, was the company’s 10th largest shareholder, with a 1.91 percent stake as of Aug. 28, a disclosure shows. And a unit of SAC, CR Intrinsic, was the fifth-largest holder, with a stake of 2.86 percent.

A previous bet by Muddy Waters affected another big hedge fund. In 2011, Muddy Waters released a critical report on Sino-Forest, a Chinese forestry company, wiping billions of dollars from its market value. Sino-Forest’s investors included Paulson & Company, the hedge fund run by John A. Paulson.

On Thursday, Muddy Waters said NQ Mobile was a “strong sell.” Though the company says it has a 55 percent market share in China, the number is actually closer to 1.5 percent, Muddy Waters claimed.

On its Web site, NQ Mobile says it “strives to become the most trusted mobile Internet platform for consumers and enterprises around the world.”

Not all of Muddy Water’s calls result in big stock movements. In July, shares of the American Tower Corporation fell just 1.1 percent on the day that Muddy Waters called it a “strong sell.”

After American Tower announced a big acquisition in September, Muddy Waters said in a report that it was “more skeptical than ever.”