November 22, 2011, 2:18 AM EST

By Nikolaj Gammeltoft

(Corrects company name in seventh paragraph.)

Nov. 22 (Bloomberg) -- Investors who bought Focus Media Holding Ltd. shares following bullish reports last week by firms, including Bank of America Corp. and Goldman Sachs Group Inc., lost as much as 66 percent after short seller Carson Block questioned its accounting.

The Shanghai-based advertising network plunged 39 percent and dropped as low as $8.79 yesterday. Block's firm, Muddy Waters LLC, said Focus Media overstated the number of television screens in its ad network and may have overpaid for takeovers to mask losses. Analysts from at least 10 firms had "buy" ratings prior to the report, Bloomberg data show.

"As a fund manager, if I see a sell recommendation from Muddy Waters, I'm going to sell and ask questions later, and it looks like that's what people did," Robert Lawton, managing partner at Catoosa Fund LP in Los Angeles, said in a phone interview yesterday.

More than $1.36 billion of Focus Media's value was wiped out, the biggest erosion of market capitalization following a Muddy Waters report since June, when it said Toronto-traded timber producer Sino-Forest Corp. was misleading investors. Focus Media Chief Executive Officer Jason Jiang declined to comment on the allegations in a telephone interview yesterday.

Fosun 'Studying Report'

Calls made today to Focus Media spokeswoman Jing Lu's office in Shanghai were not answered, and she did not respond to two e-mails seeking comment.

Fosun International Ltd., based in Shanghai, said it is Focus Media's largest shareholder. Fosun owned 16 percent of Focus Media as of July 19, according to Bloomberg data. Fosun shares fell 6.5 percent to HK$4.16 as of the lunchtime trading break in Hong Kong.

"Fosun is seriously studying Muddy Waters' report on Focus Media and we won't make further comment," the company said in a statement today. "Fosun will continue to invest in outstanding companies with China growth potential."

Catherine Leung, Goldman Sachs's Hong Kong-based analyst on the stock, raised her price estimate to $45 from $42 on Nov. 18, a day after Focus Media reported profit that beat analysts' predictions by 12 percent, according to data compiled by Bloomberg. Bank of America's Eddie Leung boosted his price forecast to $41 from $39, saying "execution remains solid," according to a Nov. 18 note from the Hong Kong-based analyst.

Rino, Sino-Forest

Leslie Shribman, a representative of Goldman Sachs, and Bank of America's Susan McCabe declined to comment.

Chinese stocks trading in the U.S. have faced investor scrutiny this year after companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations. Block helped fuel the speculation with reports on corporations, including Rino International Corp. and Sino-Forest.

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.

Focus Media is overstating the number of screens in its ad network by about 50 percent, Muddy Waters said. Block's firm said Focus Media has also overstated the value of takeovers, leading to writedowns of $1.1 billion following $1.6 billion of acquisitions since 2005.

Short Selling

Muddy Waters said investors should assume the firm is betting against Focus Media shares. It's the seventh company targeted by Muddy Waters and the second-largest by market value behind Sino-Forest.

"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," Muddy Waters said in the report, which was posted on its website. "The problems we have uncovered are likely the tip of the iceberg."

The short seller spurred a 74 percent drop in Sino-Forest between June and August after saying the timber owner overstated the value of its assets. Before Muddy Waters issued its Sino- Forest report, there were nine ratings on Sino-Forest shares, according to data compiled by Bloomberg. All of them were "buy" recommendations.

The average share-price estimate for Sino-Forest was C$30.75. The stock tumbled to C$4.81 before trading was halted by Canadian regulators. Analysts were on average forecasting that Focus Media will climb to $42.22 before yesterday's report from Muddy Waters, compared with a closing level of $15.43.

Spreadtrum Backfires

Spreadtrum Communications Inc. has gained 83 percent since Muddy Waters published a letter dated June 28 to management asking about inventory and deferred costs on its balance sheet.

"This is the real Carson Block compared to his last report on Spreadtrum," Eric M. Jackson, president and founder of Ironfire Capital, said in a telephone interview. The Naples, Florida-based hedge fund doesn't have a position in Focus Media.

"He spends months preparing these things, does a lot of research, put it together in a comprehensive report, which is difficult for companies to blow off."

Short selling, or selling borrowed shares with the hope of profiting when they fall, totaled 10 percent of Focus Media's shares available for trading as of Nov. 18, the highest level since October 2010, according to Data Explorers, a New York- based research firm. Short sellers profit from price declines by selling borrowed securities and replacing them with stock bought at lower levels.

Options Trading

Focus Media put-option volume rose to a record 49,960 contracts on Nov. 15, six days before the Muddy Waters report, according to data compiled by Bloomberg. Volume set a new high of 140,746 yesterday, as December $17 puts were the most actively traded bearish contracts on the stock, jumping more than sevenfold to $3.90 each.

Focus Media's 2005 U.S. initial public offering was managed by Goldman Sachs, Credit Suisse Group AG, CIBC World Markets Inc. and Piper Jaffray Cos., according to data compiled by Bloomberg. It has sold shares in six additional equity offerings since then, the data show.

The company's shareholders also included, as of Sept. 30, Fred Alger Management Inc., Alkeon Capital Management LLC, American Century Investments Inc. and Capital World Investors.

Hibre Teklemariam, an external spokeswoman for Alger Management, didn't respond to an e-mail and a telephone call seeking comment. Greg Jakubowsky, compliance officer at Alkeon, declined to comment. Justin Emily Wills, a spokeswoman for American Century Investments, and Chuck Freadhoff, a spokesman for Capital World Investors, also declined to comment, citing company policy not to comment on holdings.

Focus Media's board members include Neil Shen, a founding and managing partner of Sequoia Capital China in Hong Kong. Shen did not return two telephone calls and one e-mail seeking comment.

--With assistance from Dune Lawrence and Whitney Kisling in New York; Stephanie Wong in Shanghai; and Edmond Lococo in Beijing. Editors: Nick Baker, Joanna Ossinger, Michael Tighe

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net