Muddy Waters Questions Validity of Focus Media's "Independent Research"

On November 21, 2011, Muddy Waters Research, which has uncovered a number of cases of fraud in the Chinese equity space, released a negative report on Focus Media Holdings Limited

. The company operates an interactive digital media network in the People's Republic of China. It has a similar business model to that of China MediaExpress Holdings

which was de-listed from the NASDAQ and is now basically worthless after fraud was uncovered at the company by Muddy Waters. In a follow up report on FMCN titled "Is Independent Verification in China Better than Toilet Paper," Muddy Waters questions the actions that are being undertaken by FMCN in order to verify the size of its LCD commercial display network screen count in China. The report states that "FMCN claims it is in the process of engaging two 'reputable' firms to verify its LCD commercial display network screen count. Although we do not know which firms FMCN will engage, the notion of having reputable firms verify FMCN's screen network size conjures of the Ghost of LCD Screen Frauds Past, CTR Market Research." The report then goes on to explain how CTR Research was integral in selling the China MediaExpress (

) fraud to investors. The implication is that the concept of a "reputable" and independent audit of FMCN's screen network is dubious in light of what occurred at CCME. The report states "CTR shows us that a client can essentially get whatever result it wants from 'independent' verifications in China - particularly when it comes to confirming the existence of tens of thousands of LCD screens." According to Muddy Waters' latest report, the issue of whether or not FMCN is accurately reporting the size of their display network is only one of many problems that the research firm uncovered at the company in their November 21 report. They write, "FMCN has left open a number of critical issues from our reports, including issues associated with phantom acquisitions, its consistent overpayments for acquisitions, and management self-dealing that continues to this day." The full report can be viewed at

. Despite the negative content in today's latest release from Muddy Waters, FMCN shares have been rising at midday. There are a lot of short-sellers in the name as a result of Muddy Waters' track record of uncovering fraud and as a result the stock is quite volatile and susceptible to sharp price moves. At last check, FMCN shares had gained 4.11% and were trading at $22.28.