Muddy Waters Strikes Again; Craters Focus Media

All hell has broken loose again in the China space as a result of a report released by Muddy Waters Research on Monday. The fraud-busting firm, which has sent stocks such as China MediaExpress Holdings and RINO International to the Pink Sheets, released a detailed report on Focus Media Holding Ltd. FMCN rating the stock a "Strong Sell." In the wake of this negative release from Muddy Waters, the stock has plunged 50% on massive volume and has been halted twice. At its worst levels, FMCN shares were down as much as 65%. Volume has exploded with 47 million shares already trading hands on the day compared to a 3-month daily average of 3.5 million. Focus Media is a Hong Kong based company listed on NASDAQ which "operates an interactive digital media network." The company purports to operate LCD displays for advertising purposes in commercial buildings, supermarkets, and convenience stores throughout China along with in-elevator posters and digital picture frames in residential buildings. In addition, FMCN has 1,700 movie screens in about 280 movie theaters across China. In its report, Muddy Waters argues that the company is "significantly overstating the number of screens in its LCD network" and is also overpaying for acquisitions. Furthermore, Muddy Waters says that "Our research shows that FMCN has claimed to acquire, write down, and dispose of companies that it never actually purchased." The research firm concludes that Focus Media is "a highly troubled enterprise that is run solely for the benefit of insiders" and that "the problems we have uncovered are likely the tip of the iceberg..." The devastation in FMCN has spilled over into a wide range of China stocks that trade on U.S. exchanges - many of which are regarded suspiciously given the rampant fraud which has been uncovered in the space. For example, shares of SINA Corp. SINA have lost 10.43% to $66.50. Youku.com YOKU has lost 11.30% to $14.75 while E Commerce China Dangdang DANG is down 7.75% at $4.64, just to name a few.