Focus Media Shares Got Crushed: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese digital advertising company Focus Media (NAS: FMCN) were getting hammered by investors today, falling as much as 66% in intraday trading after short-seller Muddy Waters alleged that the company has engaged in fraud.

So what: In a sign of just how skittish Chinese-stock investors are and how much credibility Muddy Waters has garnered, the research firm's just-released coverage on Focus Media has absolutely torpedoed the stock. Muddy Waters' report alleges that the company is significantly overstating the number of television screens in its advertising network and that it may have been deliberately overpaying for some acquisitions to mask losses.

Now what: Muddy Waters has recently been in the news after an interim report on the investigation into Sino-Forest -- which Muddy Waters also alleged to be a fraud -- said that it appears that the bookkeeping at Sino-Forest was in order. In other words, after a massive plunge in Sino-Forest's stock, which walloped many major investors including John Paulson, it looks like Muddy Waters could have whiffed there. But with the final report due later in the year, that's still to be determined.

That said, quite a few other companies on the wrong end of Muddy Waters research -- including Rino International, China MediaExpress, and Duoyuan Global Water -- have fallen and give no indication of getting back up.

Which group will Focus Media join? Unfortunately, that's a question that it may take some time to sort out.

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