Shares of prominent Chinese digital media and advertising company Focus Media Holding Ltd plunged as much as 66 percent on Monday, after short-selling firm Muddy Waters accused the company of significant overstatement of the number of screens in its LCD network, among other charges.

U.S.-listed shares of the company closed at $15.43 a share, losing $1.3 billion in market capitalization. Focus Media had a market value of about $3.41 billion based on its Friday closing price, making it one of the largest targets for short-sellers of North American-listed Chinese companies.

Muddy Waters said Focus Media has been fraudulently overstating the number of screens in its LCD advertising display network by about 50 percent, and put a strong sell recommendation on the company's stock.

Focus Media's chief executive Jason Jiang said on Tuesday in a posting on China's Twitter-like microblog service that short-sellers spreading rumors should be legally punished and the firm will be vindicated by its good fourth-quarter results.

Focus Media Holding said later Tuesday the Muddy Waters report is completely untrue.

The Muddy Waters report about Focus Media is completely untrue, spokesman Alan Ji told Reuters.

Ji said the firm would be releasing its statement rebutting Muddy Waters' claims before U.S. markets open on Tuesday.

The extreme volatility has caused it to be halted several times. It hit a session low of $8.79, its lowest price since September 2009. More than 77 million shares traded on Monday, for its busiest day ever after the report.

The share decline is the latest in a string of influential bearish notes from Muddy Waters, as well as its director of research, Carson Block, one of the most prominent short-sellers of Chinese companies listed on North American exchanges. Block was unavailable for comment on Monday.

DEALS QUESTIONED

The company operates flat-panel display screens in commercial buildings in more than 100 cities and also has screens in elevators in 35 cities and screens in supermarkets and convenience stores, according to its most recent earnings report.

Muddy Waters said Focus Media reported in regulatory filings that it has 178,382 screens, while according to its media kit the company has fewer than 120,000.

The firm also wrote that the company has significantly and deliberately overpaid for deals and has written down $1.1 billion out of $1.6 billion in acquisitions since 2005, exceeding the company's enterprise value by a third.

FMCN has written at least 21 acquisitions down to zero and then given them away for no consideration ... as a result FMCN has an accumulated deficit of $437.4 million, Muddy Waters wrote in a note.

However, Credit Agricole Securities analyst James Lee said the Muddy Waters note stated things that happened two years ago, the impact from which was already reflected in the stock price.

Two years ago it was a hyper competitive industry where people were making acquisitions at high prices. And they (Focus Media) wrote down financial investments in 2008-09, but we already lived through that cycle, Lee said.

Muddy Waters shorts the stocks it covers and profits off any share decline. Of the six companies Block has written on before Focus Media, only two continue to trade: Oriental Paper Inc and Spreadtrum Communications .

In June, the firm accused Canada's Sino-Forest Corp of fraud. Investors lost billions of dollars and regulators and law enforcement officials in Canada are investigating the company.

The short-seller said Focus Media's overpayments include fraudulently booking at least six mobile handset advertising acquisitions that it never made.

According to Nasdaq, a number of trades on the stock on Monday appeared to be erroneous, but all of them have been ruled legitimate.

(Additional reporting by Divya Sharma in Bangalore and Melanie Lee in Shanghai; Editing by Maju Samuel, Kenneth Barry and Muralikumar Anantharaman)

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