'Pot stirrer' behind Muddy Waters

UNITED STATES - To some in the investing community, Mr Carson Cutler Block is merely out to make a quick buck by criticising firms and putting pressure on their share prices.

To others, he is an independent voice who highlights questionable practices of firms.

Opportunist or crusader, there is little doubt that the founder of Muddy Waters Research has taken the investing world by storm.

His firm was started only two years ago but he has already claimed the scalps of several Chinese-listed firms by short-selling their stock.

Short-selling involves borrowing a company's shares and then immediately selling them, in the hope that the share price will fall. The short-seller then buys back the stock and profits from the difference.

Some investors, like hedge funds, do this if they believe a company's share price will fall.

But Mr Block, 36, who is Muddy Waters' only full-time employee, takes a different approach. Using a team of hired researchers, accountants and fraud investigators, he delves deep into the company's books, sometimes even visiting its factories to build their case.

It can take months of intensive research before a report is issued. By then, the firm would have taken a short position on the company.

One of its most sensational scalps was Chinese forestry giant Sino-Forest, which was, up to May, listed on the Toronto Stock Exchange.

Before the Muddy Waters report, published in June last year, Sino-Forest had a market capitalisation of US$5 billion (S$6.1 billion). Within a month of the report being published, comparing the firm to a Ponzi scheme, Sino-Forest's share price plummeted 85 per cent.

Eventually the firm had to file for bankruptcy and delist from the stock exchange.

Muddy Waters' first report, issued in June 2010, was on Orient Paper, a Chinese paper firm. Orient Paper's share price dropped 47 per cent in the following month.

But Muddy Waters' track record has not been perfect.

In November last year, it issued a report against Chinese manufacturer Focus Media, alleging that it was over-stating its stock of liquid crystal display (LCD) monitors by 50 per cent.

Focus Media's stock price dived nearly 40 per cent the day after the report was issued but has since steadily recovered.

US-based Integrity Research, an equity research fund which has been tracking short-sellers like Muddy Waters, has questioned the firm's practices, noting that there is "potential bias" in its reports.

"Muddy Waters' primary purpose for distributing their research to other investors is to convince them to also short (sell) the stocks they have already taken short positions in themselves," said the firm.

Mr Block, 36, said in an interview with Bloomberg that he is not a "ninja assassin" out to take down companies, and that his goal is to protect investors' interests.

But he admits that he takes pleasure in stirring the pot. "I have always taken some pleasure in being a bit of a pain in the ass," he once said in an interview.

Growing up in New Jersey, Mr Block honed his skills at equity research working for his father's research firm WAB Capital.

In 1998, he graduated from the University of Southern California and moved to Shanghai to start an equity research firm to cover the stock market there.

But it did not materialise, as he could not find good companies to invest in. So he moved back to the United States to study at the Chicago- Kent College of Law.

After graduating with a law degree, he tried his hand in China again, this time to work at the law firm Jones Day in 2005.

But he quit after a year, with plans to start a wealth management firm in Singapore, catering to wealthy Chinese.

But that too did not pan out. He then started a small firm selling self-storage space called Love Box that he operated in Shanghai for almost three years.

His big break came in 2009, after his father sent him to check on small Chinese firms listed in the US. They included Orient Paper.

An opportunity was brewing and he grabbed it. In June 2010, Muddy Waters Research was formed. Under the company's name, Mr Block started to distribute his report on Orient Paper to contacts in the investing industry.

He initially thought the report would make the stock "trade down a point or so" but it went viral and Orient Paper's prices slumped almost 50 per cent within days.

Muddy Waters' original focus was on Chinese firms but in September Mr Block told Bloomberg he had started to cast his net overseas and was eyeing firms in the US, Japan and India. He did not say then that Singapore was on his list too.

Last week, Mr Block revealed his hand.

Speaking at an investment conference in London, he shocked the Singapore investment community when he said he was betting against commodity giant Olam International's shares.

He accused Olam of booking profits on transactions before it is clear how deals will work out over time.

But Olam has since hit back at the short-seller, calling the attack unfair and baseless.

Olam has also initiated a defamation suit against Mr Block and his firm, according to papers filed with the Singapore High Court.

So far, the one key piece of information missing is the report that Muddy Waters usually issues against its targets.

Apart from a letter Muddy Waters released last Tuesday which attacked Olam, it has maintained radio silence.

Local analysts have expressed confidence that Olam would see this episode through and the majority have not yet downgraded their outlook for Olam.

Said CIMB analyst Lee Wen Ching: "We have examined these allegations and found them not totally unjustified, though not new to the market either.

"We believe Olam will be able to ride out the storm. Muddy Waters' track record is spotted with hits and misses."