By Daniel Bases
WASHINGTON, April 2 (Reuters) – The congratulatory e-mails
for Carson Block started to arrive on Friday afternoon, within
hours of Toronto-listed Chinese forestry company Sino-Forest
Corp filing for bankruptcy protection and 10 months
after his short-selling research firm, Muddy Waters, accused the
company of exaggerating its assets.
Then the e-mail from his cousin landed, asking him about the
$4 billion in damages Sino-Forest said it was seeking against
him, his firm and other unnamed parties in a lawsuit that
neither he nor his lawyers have yet been served.
Block, in an interview with Reuters on Monday, said that it
is “absolutely not” his fault that Sino-Forest, whose stock was
halted on Aug. 26, 2011 after dropping more than 70 percent
following the allegation in a Muddy Waters report, is in such
trouble.
“It remains to be seen how big a deal this becomes. First of
all, resolutely we believe this is groundless. Without
understanding Canadian procedure, I cannot comment on how
quickly we can get rid of this,” Block said about the legal
action the company said it is taking.
“If this business really were the business that the company
had previously presented to the market, then it would be
flourishing right now and probably would be free cash flow
positive for the first time in its existence,” he said.
Sino-Forest was granted protection by the Ontario Superior
Court of Justice under the Companies’ Creditors Arrangement Act,
the equivalent of U.S. Chapter 11 filing.
Messages left with Sino-Forest’s investor relations
department seeking its response to Block’s comments were not
immediately returned.
The 35-year-old Block, who has never been sued before, is
perhaps the best known member of a group of short-selling
investors and financial bloggers who exposed fraudulent
accounting practices among China-based companies with U.S. or
Canadian stock listings.
The size of the announced lawsuit has brought some focus
back to his life, he says. Before he had found himself drifting
while trying to build a bunch of laptop toting analysts into a
more formal research business with a permanent home following
Muddy Waters’ series of reports in 2010-11 about Chinese
companies listing in the U.S. and Canada.
Block said the size of the damages Sino-Forest says it is
seeking was so huge that there was “almost a comic element”.
Sino-Forest is the most prominent among a series of recent
accounting scandals that have tainted the image of Chinese
companies listed in North America. The scandals have prompted
trading halts, de-listings, lawsuits and regulatory probes in
both the United States and Canada.
SECRECY
Muddy Waters has made an outsized name for itself in this
small corner of the financial markets. It has issued reports on
six companies and has raised a question with the management of a
seventh.
There were just two people, Block and a partner who has
since ended his working relationship with the outfit, behind the
first Muddy Waters’ report on Orient Paper in June 2010.
The stock fell precipitously after the report’s publication but
the management defended itself vigorously, later saying it felt
victimized by Block. The stock has yet to recover.
By September 2010 Block, who speaks Mandarin, says he was
living in Shanghai, with debts “in the low six figures”,
traveling to New York on the cheap, flying economy and staying
in low budget hotels.
Block says since Muddy Waters began publishing its research
on Chinese companies he has gotten at least five death threats
or threats of bodily harm to either himself, his wife or his
father, making him cautious about revealing his exact home base
in the United States.
The same goes for information on his fledgling firm. He
would only say that around 15 people are now working for Muddy
Waters, not all of them full-time. A number are based in China
but he declines to say where.
The firm does not have clients for its research, rather it
runs itself much like the proprietary trading desks at major
investment banks that trade on the firm’s behalf rather than
investors. There is no hedge fund structure in place at Muddy
Waters.
“Why do people think we have clients?” Block said in
answering a question on his business structure.
“It is run like a prop house. Substantially all of the money
that is involved is basically money from the people doing the
research. A couple of friends have given me small amounts of
money, it is in there as a favor,” he said.
Now he is a sought after voice on Chinese business and
corporate governance issues, appearing on financial television
shows or making keynote speeches, such as at an investment
conference in Washington this week.
His debt now paid, Block said “no comment” when asked if he
was now at least a millionaire.
He pondered for a moment to add, “I’m not a billionaire and
I don’t have $4 billion to pay Sino-Forest.”
(Additional reporting by Ryan Vlastelica in New York; Editing
by Martin Howell and Ed Davies)
