UPDATE: NQ Mobile Announces Special Committee's Independent Probe Did Not Find Evidence of Fraud
NQ Mobile (NYSE: NQ), a leading global provider of mobile Internet services, today announced the results of the independent investigation conducted by an independent Special Committee of its Board of Directors and carried out by its independent counsel Shearman & Sterling LLP and Deloitte & Touche Financial Advisory Services Limited acting as forensic accountants (together, the "Investigation Team").
On October 25, 2013, the Company's board of directors formed an independent Special Committee, consisting of four independent directors of the Company, to conduct a review of fraud allegations made by short seller Muddy Waters the previous day. The following is a summary of the work done by the Investigative Team in conducting that review, along with its principal findings:
Scope of the Investigation
The Investigation Team was led by partners in the United States who managed teams based in both the U.S. and China. The Investigation Team conducted a far-ranging investigation of NQ's business activities and financial records in response to the allegations made in Muddy Waters' October 24, 2013 report (and in six subsequent reports and letters issued through January 13, 2014). The following major investigative actions are representative of the broad scope of work done by the Investigation Team:
(i) The Investigation Team conducted a thorough review of cash reported on the Company's financial statements and the Company's cash transactions, which included the following procedures: obtained bank confirmations for the Company's accounts through in-person visits and mail; verified 99.8 percent of NQ's cash deposits as of December 31, 2012 (the Company's last audited financial statement); confirmed the Company's major account balances at multiple points in time from November 2013 through February 2014; verified all cash transactions exceeding $1 million, all cash transactions related to the proceeds of the Company's convertible bond offering, and all cash transactions that the Investigation Team otherwise determined merited review, ascertaining in each case whether the transaction appeared to have a legitimate business purpose and the source and/or recipient; and confirmed the authenticity of major savings accounts in Beijing by tracing cash deposits made by the forensic accountants without notifying Company management or its staff.
(ii) Reviewed and examined selected financial information and records (such as principal financial documents, ledgers and vouchers, bank slips and advices, revenue forecast and other financial forms, invoices, organization charts, and contracts) for any indications of fraudulent activity or improper financial reporting.
(iii) Reviewed and examined selected databases of the Company (including those relating to the tracking of accounting data, tax data, and customer transactions) for any indications of fraudulent activity or improper financial reporting.
(iv) Conducted more than 50 interviews in Beijing and elsewhere with top Company management and other staff with professional responsibilities implicated in the Muddy Waters initial report and subsequent reports and letters, top management of the Company's subsidiaries, and key personnel at selected business partners of the Company, including extensive diligence with Yidatong personnel.
(v) Investigated the Company's major business partners in China and overseas through site visits; in-person and telephone interviews with staff; corporate information searches; related party searches; review of the business partners' financial documentation (where provided by the business partners); review of aging accounts receivable; review of applicable contract terms and performance under the contract; and tests of product functionality, where appropriate.
(vi) Reviewed NQ's major acquisitions by (a) analyzing the Company's purchase contracts and related transaction documents, (b) reviewing the Company's related due diligence work product and valuation materials, including the targets' SAIC records and other documents bearing on the identities of parties to the transactions, and the targets' business models, and (c) reviewing the revenues generated by the target companies after being acquired by NQ.
(vii) Collected and copied devices and emails from the Company's top management and persons with professional responsibilities related to the Company's activities referred to in the Muddy Waters allegations; processed millions of unique documents (including Company emails and other files), applied extensive English- and Chinese-language keyword search terms; and reviewed the resulting documents using the services of qualified attorneys.
Despite the Investigation Team's extensive review of documents and data provided by sources both within and outside the Company, the Investigation Team could not verify that the devices it collected and copied contained all responsive information at the time the copies were made. On many devices, the Investigation Team observed indications that some information might be missing, and the Company's management and staff were unable to provide a credible explanation for what the Investigation Team observed.
 This number represents 100 percent verification of all queried accounts; the Investigation Team did not attempt to confirm two accounts with low balances, where, because of the location, the cost of verifying the sums involved outweighed the value of conducting the procedure.
The Investigation Team did not find any evidence that the Company had engaged in the fraudulent conduct alleged by Muddy Waters. Specifically, subject to the above:
(i) The Investigation Team determined that the Company's cash balances were verifiable and consistent with public disclosures.
(ii) The Investigation Team did not find evidence that the Company's revenues were inconsistent with public disclosures.
(iii) The Investigation Team did not find evidence that the Company made major payments during the period under review except for legitimate business purposes to benefit the Company and its shareholders.
(iv) The Investigation Team found that (a) the Company's past and present relationships with business partners in China and overseas (including Yidatong) serve legitimate commercial objectives, (b) with regard to Yidatong in particular, the Company's revenues and cash flows from customers to carriers through Yidatong are verifiable and consistent with public disclosures, and (c) the overall relationship between Yidatong and NQ Mobile is consistent with the Company's public disclosures.
(v) The Investigation Team found that the Company evaluated its acquisition targets after conducting due diligence (using internal resources) that included examining the business models, financial information and commercial viability of the target companies. The Company's acquisitions have contributed to increasing its revenues and user traffic.
(vi) The Investigation Team found that the Company's handling of its May 2011 IPO proceeds did not reflect any departures from market practice.
(vii) The Investigation Team found that the Company, during the period before its May 2011 IPO, had some lax internal controls and informal business practices; to a limited degree, these informal business practices persist. These findings, however, do not reflect fraud.
(viii) In investigating the allegations relating to the Company's acquisition of its current domain name ("nq.com") in 2011, which allegations the Investigation Team found were not supported by the evidence, the Investigation Team found that the purchase price also included certain services, and that the service element was not unbundled from the capital expense in accounting for the transaction. This did not affect the Company's stated revenues, did not suggest any fraudulent diversion of assets and was not material to the Company's financial statements.
The Investigation Team made no effort to evaluate judgments by Muddy Waters as to the soundness of the Company's business strategy.
The Investigation Team has made a series of recommendations to further enhance the Company's internal controls, which the Company's Board of Directors has adopted and directed the Company's management to implement. The Company intends to take measures to enhance its internal controls in the immediate future and will strive to emerge from this process a stronger overall organization.
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