I want to share this with the community as I feel should be made public not only to day traders or traders alike but to the general public. Lately many Emerging economies have been rushing to join the US exchanges. This is of course is good but bad in a way if they do not adhere to SEC accounting regulations. Many investors could potentionally be hurt if they’re falling prey to hot Indian, Chinese, or other hot market stocks.  Today I witnessed once again, a negative report targeting a Chinese Company trading on the NASDAQ with a market cap of $200 million. I’ve witnessed this poor company lose almost 50% of it’s market cap due to a report that negatively or quite prescriptively bravely calling out improper accounting practices by yet another Chinese company listed on the US exchanges. It’s either the SEC is missing something within their due diligence or Chinese firms are falsely smudging their numbers. I’d like to share my opinion in both positive & negative aspects of this wild ride in this stock. In any event this action sure damaged many stock holders in a company named Spreadtrum Communications (Nasdaq:SPRD); a fabless semiconductor company that designs, develops and markets baseband processor, radio frequency (RF) transceiver and turnkey solutions for the wireless communications and mobile television market. The Company offers a portfolio of integrated baseband processor solutions that support a range of wireless communications standards, including global system for mobile communications (GSM), general packet radio service (GPRS) and time division synchronous code division multiple access (TD-SCDMA), an international third generation (3G) standard for wireless communications promoted by China. Its solutions also offer a range of multimedia capabilities, such as television-out, moving picture experts group layer-3 audio (MP3) digital audio playback, touchscreen, JAVA acceleration, motion picture experts group 4 (MPEG4) and 64-channel polyphonic ringtone playback. In June 2011, the Company acquired 8.44% of MobilePeak Holdings, Ltd.

Let me give you the play by play in short form. The Muddy Waters report found below was released @ 11:20 AM. Blocks of 444,000 shares were sold. For the next 27 mins the stock was in a fire sale and badly damaged. By 11:47 almost 11 million shares were exchanged or mostly sold short. In that 27 minute period, SPRD went from $13.29 to $8.59. That’s a 54% gain on the short!!! That was a quick gain in short time. But ironically it’s not over….the stock begins to turn back up. From these levels, I thought it was oversold, so it was bound to recoup some losses. From $8.59, SPRD caressed the weighted moving average to $ 9.32 then dropped back down to $8.80. I figured it would settle around these levels…..but it continued it’s upward bounce to the 100 day moving average. By 12:10, SPRD had bounced from $8.80 to $11.44 resulting a 30% gain. An advanced trader with the proper tools could have scalped anywhere from 20% to 75% gains in 20-50 minutes. That’s a lot of money to be made by a fast acting trader. With trades like these, you have to be thankful of this one time opportunity. These don’t come often, believe me!!!

As we all know, one who gains is another’s lost. There’s always 2 sides to the stock market game. Think about the investors or institution that own this stock. What if they had placed a stop limit order….OUCH!!!! That’s a terrible loss. You think it would be fair, for a known short -seller to make such an announcement knowingly this will significantly pressure the stock downward. Let’s take for example the Hedge Fund investor named John Paulson experienced with Sino-Forest. Muddy Waters was again the culprit in this damaging find more descriptively found below. Muddy Water’s report cost John Paulson’s Fund to lose $500 million. You think Mr. Paulson will choose Mr. Block to be his advisor, because apparently his team messed this one up pretty badly. This is what happens when you’re on the wrong side of the trade.

In the options Market, traders were also hurt. Opening investors blitzed bearish puts that grant the right to sell shares for prices such as $9, $10, $11 by the July expiration. Spreadtrum’s options volume soared to the highest level on record, Trade Alert data showed. Still, those who reached for exceptionally bearish Spreadtrum positions were stung by the stock’s quick snap-back. Buyers of $5 July puts paid an average of $1.50 for the contracts early in the session. Those contracts fell in value to just 30 cents later in the afternoon. More than 124,000 Spreadtrum puts changed hands versus 42,000 calls, which grant the right to buy shares.

Is Mr. Block of Muddy Waters a Victor or Villain or is the SEC too slow to react?

Read this report issued by Muddy Waters run by Carson C. Block. It was an open letter to SPRD Chairman Li. Apparently this report was released to Reuters which then sparked a massive fire sale. To be exact, a 1565%  increase from avg daily volume. See the chart above. Actual report in it’s entirety is found here.

So who is Carson Block? Muddy Waters describes the 34-year-old as “an entrepreneur who’s practiced law and pioneered an industry in China.” He founded a company called Love Box Self Storage, “a near luxury service for high income Chinese consumers. Prior to his entrepreneur days, he was an attorney for Jones Day in Shanghai, where he acted primarily for foreign clients involved in direct investment and M&A in China. He speaks Madrin, and after practicing as a lawyer for one year (he said originally he thought he’d never practice after law school), he switched into research for hedge funds and for his father, who’s an investor. He’s also an adjunct professor of the Chicago-Kent College of Law, where he graduated with a JD, and teaches an overseas program in Shanghai for the school. He earned a B.S in Business Administration from the Marshall School of Business at USC. He founded Muddy Waters in June of 2010 and told Barron’s that what he does, in one sentence is: “exposing what I believe are substantial frauds before they suck up more money from investors.”

Here’s a video of Mr. Block on a CNBC interview on April 12, 2011.

Muddy Waters The Chinese have an old proverb, “浑水摸鱼” (muddy waters make it easy to catch fish). In other words, opacity creates opportunities to make money. This way of thinking has been part of Chinese culture for centuries, and it is institutionalized in the modern PRC. Western investors and their regulatory systems are inherently unprepared for muddy waters environments. Moreover, Harvard-educated Chinese analysts based in New York usually have little more in common with Chinese company managers than you do. As a result, many sub-par Chinese companies find ways to game the system and trade at inflated values. At the same time, a number of well-run and well-positioned companies are under-appreciated because their managements, often abandoned by RTO or IPO sponsors, are awkward to foreign investors.

Reuters Reporting below

Muddy Waters Research, a firm specializing in finding Chinese companies it believes are frauds, shorts the firms’ shares and publicizes the charges on its website. Muddy Waters first gained prominence last June with a scathing report against Orient Paper Inc (ONP.A), which it called a “fraud” that had overstated its 2009 revenue by about 40 times. The company disputed the allegations, but the stock, which closed at $8.41 the day before the report, now trades at $3.71, down 56.5 percent. All of the relatively small firm’s subsequent reports had similarly outsized impacts — a source of controversy to critics.

“If something doesn’t work out … these guys could have a situation where they went after a company and made money but couldn’t substantiate their claims,” said Boyd, who has also written critical reports, but does not hold positions in the companies he writes about. The Muddy Waters reports “were brilliantly reported and laid out, but you can never get past the fact that they’re doing this for money,” Roddy Boyd, the editor of thefinancialinvestigator.com in Wilmington, North Carolina told Reuters last month.

Others are not as glowing. Drew Bernstein, the chairman of Orient Paper’s audit committee and co-managing partner of Marcum Bernstein & Pinchuk in New York, last month said the Muddy Waters report was full of “enormous allegations” that were untrue and that a lawsuit against the firm was probably justified. But so far Muddy Waters’ influence has only grown with each subsequent report. Duoyuan Global Water Inc (DGW.N) slumped 29.3 percent from its close before the April 4 report until April 19, when its shares were halted. They have not traded since. RINO International (RINO.PK) plummeted 96.5 percent, from $15.52 before the report to 55 cents currently, while China MediaExpress Holdings (CCME.PK) is down 91.8 percent to $1.28. Both stocks were delisted by the Nasdaq following the charges and currently trade on the pink sheets.So far it has made money on its first six bets.

Many would envy the firm’s record as even the most experienced short sellers have a number of misses before they hit the jackpot. And even when stock watchers are correct about a company being overvalued, it can sometimes take the market several years to catch up to the prediction. Muddy Waters’ track record is based on a Reuters analysis of the published research that is available on the firm’s website. It is not clear whether Muddy Waters or its director of research Carson Block have made other research calls or taken other positions. The target prior to SPRD was the infamous Sino-Forest Corp(TRE.TO), a forestry plantation company whose shares fell 65 percent after the firm, led by Block, accused the company of theft and fraud. Sino-Forest fought back on Monday, accusing Muddy Waters of defamation and saying it was mulling its legal options. The response helped shares rise more than 50 percent to C$8.01, though they remains well below its last close before the report at C$18.21.

Of the five companies Muddy Waters is known to have advised investors to sell, with all asserting some level of accounting irregularities, two have been delisted from the NASDAQ and one has not traded since April. Of the two that continue to trade, neither has come anywhere close to approaching the levels they changed hands at before the reports. But a portfolio comprised of these six companies would be up an estimated 66.9 percent if the investor had shorted the shares and bought in the day before each report was issued. If the trader had leveraged their bets using options, the returns could be even larger. ”If you’re going to make accusations of fraud the way Muddy Waters does, you’re going to have to be correct” to be effective,said Michael Shaoul, chairman of Marketfield Asset Management in New York. “You need a greater standard of care.” Block agrees, saying short-sellers have to be accurate in their reports because false claims would diminish their credibility and limit their influence on shares, a major revenue source. The firm discloses that it shorts the stocks it covers but does not disclose the amount it has in assets under management.

Partial Open Letter below