An engineer in the R&D department at Spreadtrum Communications Inc's facility in Shanghai. US-listed chip designer Spreadtrum says allegations made by Muddy Waters are groundless. Kevin Lee / Bloomberg

NEW YORK – Shares of Spreadtrum Communications (SPRD) have rebounced strongly after an initial 34 percent fall in contrast to other Chinese stocks listed in the US markets that tumbled after allegations made by Carson Block, founder of Muddy Waters Research.

Related: Companies listed in US fight short-seller claims

Some analysts said this may be a turning point for Block, who rose to fame a year ago after a report on Orient Paper (ONP) in which he claimed it grossly exaggerated its financial statements. Orient Paper's stock plunged 60 percent after the report was issued.

Also last month, Block issued a report about Sino-Forest (SF), causing John Paulson, the largest shareholder of the Chinese tree plantation operator, to lose $500 million overnight.

Sino-Forest, whose shares plunged 82 percent after Muddy Waters accused it of exaggerating its forestry assets, soared 56 percent on July 4 in Canada after Boston-based Wellington Management Co. declared an 11.52 percent ownership stake with a 28.3 million shares purchase.

But the stock came down 10.2 percent at C$4.75 upon investors' negative sentiment after Sino-Forest postponed a tour of its forestry assets. As of July 7, Sino-Forest is trading at C$4.75.

On June 28, Block wrote an open letter to Leo Li, the CEO of Spreadtrum, asserting that there is "a high risk of material misstatement in the reported financials" of his company. Within the first hour of Block's allegation, the stock of the Shanghai-based chip designer plummeted from $24 to $8.

But when investors began to fully examine Block's letter, they realized it contained no substantive material, and Spreadtrum's stock climbed back up to $12, Li told China Daily during a phone interview.

Kevin Pollack, a fund manager at New York-based Paragon Capital LP, said during a telephone interview that it was unwise for Block to put up a "very weak attack on Spreadtrum".

"Block's credibility has been hurt because he doesn't have another Sino-Forest situation (where the stock price initially fell so rapidly). His allegation is completely overblown," said Pollack.

According to Reuters, Needham analyst Quinn Bolton noted that “nothing new is actually raised in the (Spreadtrum) letter”.

"We believe Muddy Waters is taking advantage of its success in identifying other fraudulent companies in China to raise questions about Spreadtrum in order to profit from its short position in SPRD," wrote Bolton.

During a conference call on June 29, Li held a "very detailed discussion with the shareholders about the company fundamentals." He also addressed doubts raised by Block's report over a fivefold rise in the company's inventory from 2009 to 2010 and its management changes in recent years.

Spreadtrum also announced a five-cent per American depositary share quarterly payout. "Giving out the quarterly dividend is a good way to reward our shareholders. It also shows we have cash in our bank."

Spreadtrum's shares shot back up to $17.29 on July 6 before easing to $16.85 the next day in New York.

Li said the company stock went back up because "investors do have confidence in Spreadtrum's operations."

Before Muddy Waters's allegation, Li said he was aware that "there were people shorting our stock, or China stock in general." Short sellers try to profit from the expectation that a stock's price will drop.

In reality, nobody knows how much money Block or other short sellers have made by “shorting” the shares of US-listed Chinese stocks before issuing reports accusing them of fraud. But he has caused a total of $5 billion in share losses after shorting five Chinese companies.

Li, who speaks fluent English, said he was in New York, San Francisco, Los Angeles and Europe a few weeks ago explaining the company's corporate governance to investors.

"Some of the companies he ( Block) targeted might have accounting issues. But we have solid fundamentals and fairly strong governance," said Li.

"They were trying to drive down the stock by playing on the fear or sentiment of the investors. There is a sense that if you are based in China, you are dangerous," he added.

Block's research firm is dedicated to exposing fraudulent Chinese companies. It is stated on its company website that it "sees through appearances to a Chinese company's true worth."

During a Bloomberg TV interview, Block said he thinks of himself as "someone who is protecting the investors" although he hinted that he may be wrong on Spreadtrum, saying if "we misinterpreted these points as red flags, then the company's transparency has improved and the stock is going to go up."

There are those who believe that all this short selling activity actually cleanses the whole industry. Richard G. Xu, senior managing director of Genesis International Capital LLC. in New York, said it creates a better environment for future Chinese companies to be listed in the US.

"This is a big lesson for all Chinese companies. You have to be transparent if you want to be listed in the US. For US investors, if a company is not transparent, its credibility is low. They try to avoid such companies," said Xu.

At the end of the day, it is the company's corporate governance that affects the stock market.

"The quality and transparency of the information released to shareholders and investors will have a huge impact on the company's stock. The valuation of a stock has to do with the perception of the investors," said Pollack.

Although Block's allegation has created some disturbance, Li believes it may have provided an opportunity for the company to tell its story.

"We did the right thing. That's how we stand out from the crowd. A lack of transparency is a fear to shareholders. When they buy your stock, they have a right to know. Regardless of whether you are in Europe, China or the US, it' s very important to win the trust of shareholders," said Li.

Block was asked several times to be interviewed for this story but did not make himself available.