Did Muddy Waters really do anything wrong?

PHOTO: Did Muddy Waters really do anything wrong?
Above photo is research director and founder of Muddy Waters Research LLC, Carson Block.

The role of financial research firm Muddy Waters (MW) in this week's plunge in the shares of commodities firm Olam International has come under intense scrutiny, with most observers critical of MW for indulging in reverse front-running: it short-sold Olam's shares before going public with its reservations about Olam's financials.

The fact that Olam's price duly crashed after those reservations were aired fuelled criticism since MW presumably then made a killing from its actions.

Speak to dealers and close market watchers and it's clear that some believe MW may be guilty of unethical behaviour and maybe even manipulation.

"You can't short a stock and then tell the world the company is lousy and that it might collapse any time," said one observer.


Really? How is this different from a large investor buying into a company first, then declaring that he, she or it is bullish on that company?

Why should a short-sale and bearish declaration be viewed differently from a purchase-cum-bullish announcement?


Based on what is currently publicly known, should MW be taken to task for its actions - or is this simply a case of emotions running high, resulting in allegations being made in the heat of the moment that upon close examination don't stand up?

Olam, on its part, has said it is taking legal action against the US firm.


The saga by now should be familiar: At an investment conference in London on Monday, MW's research director Carson Block said his firm thought Olam was in danger of collapsing under its debt load.


Mr Block also raised issues over Olam's accounting for biological assets, described Olam's finances as being not a black box but a "black hole" instead, and revealed that because of its concerns, MW was short on Olam's stock.


In response, Olam did the correct thing: it quickly suspended its shares for most of Tuesday's session and issued a strong defence.

However, upon resumption of trading that afternoon, its shares still collapsed 13 cents or 7.5 per cent to US$1.61 (S$1.97).



Did MW do anything wrong?


It had a view on Olam, took a position based on that view and then made both its view and position public.

True, it may have profited from the way things panned out (we don't know if it covered its short positions) but the investing public - which presumably includes thousands of highly trained, rational individuals - did not have to accept MW's view as being cast in stone, and could reasonably have been expected to make its own assessment on where the share price should head.



If, for instance, the public disagreed with MW's opinion and Olam's shares had soared when trading resumed on Tuesday, MW would have lost a bundle.

Moreover, there were maybe six hours between Olam being suspended and the resumption of trading for the market to digest MW's worries - unquestionably ample time even for a relatively inefficient market to form an opinion on whether those worries were merited.


Finally, note that Olam is an institutional stock - which means its investors are sophisticated; certainly more so than the average retail player.

In short (no pun intended), MW effectively issued a "sell" on Olam, put its money where its mouth was, and announced this to the world.


If the world decided to accept MW's "sell" - even if only for a day since the stock recovered 8.5 cents yesterday - then that is not MW's problem.


Of course, there are still the financial concerns MW raised and it remains to be seen whether they materialise.

Olam has vigourously denied them and is still waiting for a detailed MW report so that it can file a comprehensive rebuttal.


But as things stand now, all MW is guilty of is adding volatility, excitement and talking points to an otherwise listless and dull market. But wrongdoing?

Based on what is publicly known at the moment, not at all.