Focus Media Holding Ltd. plunged after Muddy Waters LLC, the short-selling firm known for predicting Sino-Forest Corp.’s retreat, recommended betting against the Shanghai-based digital advertising company.
Focus Media dropped 44 percent to $14.28 at 1:44 p.m. New York time after falling as much as 66 percent, a record. Muddy Waters said in an e-mail that investors should assume the firm is betting against Focus Media shares.
The short seller said in a report today that Focus Media has overstated the number of television screens in its advertising network and may have deliberately overpaid for takeovers to mask losses. The company has written down $1.1 billion on $1.6 billion in acquisitions since 2005, according to Muddy Waters.
“Muddy Waters believes that many of the items we discuss in this report are symptomatic of a highly troubled enterprise that is run solely for the benefit of insiders,” the report said. “The problems we have uncovered are likely the tip of the iceberg, and in some cases may reflect periodic medicine that must be given to FMCN in order to keep up appearances of health.”
Jing Lu, a spokeswoman at Focus Media, didn’t return a phone call and an e-mail seeking comment on the allegations outside normal business hours in China.
Chinese companies trading in the U.S. have faced investor scrutiny this year after disclosing financial irregularities or auditor resignations, raising concern there may be widespread fraud. Carson Block, who runs Muddy Waters, helped fuel that speculation with bearish reports on corporations including Rino International Corp. and Sino-Forest Corp., which trades in Canada.
The plunge in Mississauga, Ontario and Hong Kong-based Sino-Forest cost investors including hedge-fund firm Paulson & Co. at least C$3.3 billion ($3.2 billion). More than 35 companies based outside the U.S. have had their trading halted on American exchanges because of inaccurate financial statements and other issues, according to the U.S. Securities and Exchange Commission.
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