Around a decade ago, Carson Block was preparing to live inside a self-storage facility he owned in China to defend it from a hostile manager of the business park.
Stocking up on food, water and a generator, and fitting the windows with iron bars, Mr Block had stopped paying rent after learning the manager had been skimming off rental payments for himself. In response the manager threatened to shut Mr Block’s business down.
The experience, which eventually resulted in the US consulate stepping in, was formative in helping Mr Block “see the matrix” in China and “question everything”. Now head of Muddy Waters hedge fund, Mr Block, 43, has built a reputation as one of the world’s most feared, and followed, short-sellers. He questions and attacks businesses around the world that he believes are using suspect accounting practices.
A highly critical report issued this week on London-listed litigation finance specialist Burford Capital is the latest of his high-profile attacks, which can have devastating consequences. At one point on Wednesday, the company’s shares plunged as much as 72 per cent after Muddy Waters criticised the accounting that Burford uses to value litigation cases.
Burford has described Muddy Waters’s report as “false and misleading” and said it is “solvent, generates strong cash flow and has good access to expansion capital”. Since Wednesday, Burford shares have clawed back some of the declines, closing up 15 per cent on Friday.
Mr Block’s reputation precedes him. An appearance on Bloomberg TV two years ago, in which he said he would shortly identify his next short selling target in Hong Kong, triggered a fall in the Hang Seng index.
“Carson definitely heralded a wave, me included, of people intrigued by the notion that you can couple free speech with investing,” said Daniel Yu, founder of rival short-seller Gotham City Research.
However, others are less impressed with his tactics, which often involve making big claims that are not always proven. A Muddy Waters report last month triggered a fall in the shares of Hong Kong-listed sportswear brand Anta, although the stock has since risen.
“From time to time he strikes gold but there’s a lot of self-promotion involved,” said one executive who invests in hedge funds. Critics say that his attacks can cause needless damage to companies and their shareholders while he moves on to his next target.
Mr Block’s father Bill was an equity analyst with a reputation for credulity, a fact brought home when an acquaintance told Carson over a meal that he would get short selling ideas from looking at the stocks Bill Block had been recommending.
Mr Block went to work with his father, a period he describes as “very embittering” as he was “lied to by a parade of management” of internet companies. He quit equity analysis for law school, later moving to Shanghai before leaving law and setting up the self-storage business in 2007.
His move into corporate investigations came when his father grew interested in Chinese companies listing in the US. Lunch with an executive of a company called Orient Paper led to an invitation for him and a friend to Orient’s factory. A long delay en route at Shanghai airport gave them opportunity to pore over Orient’s filings.
“We were laughing” at the claims in the filings, said Mr Block. “We knew there was significant bullshit here.”
Mr Block eventually issued a report and sent it to former acquaintances from his time in finance and law. The following day, the stock tumbled.
The allegations he was making, however, meant the stakes were high.
“In the early days it was financial blood sport,” said Mr Block. “Either the company was lying or I was lying. Someone was going to go down.”
Incredibly, Mr Block actually ended up losing around $600 on his trade at Orient Paper, even though his report triggered the sell-off in the shares he had been shorting. “I didn’t understand how to trade options,” he admitted.
His big breakthrough was Muddy Waters’ claims of fraud at Toronto-listed Sino-Forest, a Chinese forestry company once valued at more than $8bn and in which US star hedge fund trader John Paulson was a major shareholder. The firm collapsed and the regulator has since declared it a fraud.
Some situations have proved more bruising. His campaign against French retailer Casino saw the regulator open an investigation into Mr Block in 2016. The following year Mr Block claimed someone had been trying to solicit information about his campaign, using tactics including impersonating a journalist and pretending to be a regulator.
Despite Mr Block’s fame, his firm is relatively small in hedge fund terms at around $225m in assets, according to a regulatory disclosure — a result, perhaps, of the limited opportunity set.
Muddy Waters’ main fund gained 20 per cent last year, according to numbers seen by the Financial Times. That followed gains of around 15 per cent in 2017 and around 16 per cent after launch in 2016.
Following the report, Burford lambasted such short attacks as “a fundamental menace to an orderly market”.
Unsurprisingly, Mr Carson rejected the idea. “Over the medium-to-long-term, if the activist is wrong, the company is not going to stay in the dirt,” he says.
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