Carson Block, the enfant terrible short-seller who obliterated $3-billion in market value from what was once the largest Canadian-listed forestry company, scoffs at his enemies and detractors.
The founder of Muddy Waters LLC, which published a June 2 research report alleging Sino-Forest Corp. is a “fraud” and a “multibillion-dollar Ponzi scheme,” leans back and smirks when asked about those who deride his work.
Sino-Forest chief executive officer Allen Chan has called Mr. Block a self-interested “shock jock” whose research is “inaccurate and unfounded.” Dundee Securities analyst Richard Kelertas, before abandoning coverage of the company pending the publication of an independent investigation, labelled the Muddy Waters report “a pile of crap.”
Over the course of a three-hour interview at a busy chain restaurant in Marina del Rey, Mr. Block becomes increasingly pointed as he responds to the claims of his adversaries, finally adopting a whiny, snivelling tone to mimic his critics’ condemnations.
“The company is saying ‘you don’t understand the tree business.’ The analysts say ‘oh, he doesn’t understand our industry,’” he says.
“You know what industry I do understand pretty well, it turns out? The fraud industry. So I don’t need to know trees to know fraud,” he says.
Sino-Forests insists it is no fraud, and charges Mr. Block’s “inaccurate, spurious” report was aimed at generating big profits from his short position in the company’s shares.
Canada’s capital markets have rarely encountered a character like Carson Block: Irreverent, elusive, and able to devastate a Chinese company’s share price with a single research report.
As a naysayer to the Chinese equity boom, he has fouled the punch bowl at a party that many investors hoped would be the next big thing. His work has cast a pall over the hundreds of Chinese companies that have flocked to North American markets in recent years promising investors a way to cash in on China’s roaring economy.
Mr. Block has shown that at least some of these businesses are not what they claim to be. Over the past 13 months, his Muddy Waters reports – which rely on his own business experience in China as well as unconventional investigation tactics (such as misrepresenting himself in face-to-face and telephone discussions with Chinese companies), have shattered the share price of most of his targets. Some, including Rino International Corp. and China MediaExpress Holdings Inc., have been delisted from major U.S. exchanges.
Of course, his work has also been a profitable venture for Mr. Block, who compiles short positions in the companies he reports on, ready to cash in as their stocks decline.
So how is it that a 35-year-old former lawyer, and aficionado of 1990s gangster rap rivals Tupac Shakur and The Notorious B.I.G., has been able to ferret out questionable corporate activity that eluded so many other equity analysts and high-profile investors? In the case of Sino-Forest, for example, all seven analysts who covered the company rated the stock a “buy” before Mr. Block published his report.
“I know a lot more about … China than these [analysts] will ever know,” he says.
Mr. Block, it turns out, has had his own business troubles in the Middle Kingdom. In 2008, amid the global financial crisis, he launched a self-storage business in Shanghai called Love Box Storage. The venture, which still has just one location, has struggled to secure property leases, strike joint ventures with Chinese companies, and deal with employee issues. Love Box has been pulled back from the brink of financial failure on no less than four occasions.
Its challenges, Mr. Block says, have served as expensive tuition in the school of doing business in China, and have given him an advantage over other North American equity analysts trying to evaluate Chinese companies.
“These guys are like sheep to the slaughter. How do I know? I once was one. I lost a lot of money in China through hard lessons, as did most entrepreneurs I know there, before I really understood where the pitfalls are,” he says.
“I’ve lost the kind of money in China that might make some of these guys throw themselves off a building. That’s how I understand what is going on.”
He says he learned how “easily perceptions can be manipulated in China,” particularly the perceptions of Western business people. China, he says, “is the toughest market to do business in the world. The moment you show you are making money you have ten competitors knocking off your business model.”
On a humid weekday afternoon, Mr. Block has chosen The Cheesecake Factory to meet at. Perched above a local yacht club, it serves not only cheesecake, but also weighty portions of just about anything else typically found on a casual dining menu in the U.S.
He has arrived early, and by the time we meet has already consumed a Cobb salad and a mug of iced tea. We decide to switch to beer.
Mr. Block is dressed casually in a blue pinstriped dress shirt worn, tails out, over faded jeans. His speech is just as relaxed as his dress and peppered with popular slang. He says “dude” a lot.
Muddy Waters, which takes its name not from the American blues legend but the Chinese proverb “muddy waters make it easier to catch fish,” does not maintain a permanent office. When I ask him for his business card, Mr. Block says he doesn’t have one.
“It’s not a ‘too fly’ thing,” he explains. “It’s just generally I don’t want people to know.”
That’s a bit incongruous, given how many people now know about Carson Block. By going after Sino-Forest, which once boasted a market value of more than $6-billion and major shareholders that included legendary hedge fund manager John Paulson (his fund has since unloaded its stake), he is taking his game to another level. Before his report, Sino-Forest’s market value was larger than the combined value of all the other companies he has targeted.
“This is the big leagues,” says the former high-school baseball and football player. “These guys have a lot of money.” In addition, he notes, “[Canada] is a totally different market where nobody knows us and we don’t have credibility. We know there will be immense pressure for somebody to be prosecuted so we have to be very careful to make sure we do not overstep. We know with some bad breaks we might be looking at the wrong end of that gun, so to speak. We went into Sino-Forest prepared to go to war.”
Whether or not Mr. Block and Muddy Waters overstepped with the sensational June 2 report remains an open question, and in due course the company could disprove its critics. The forestry firm, whose share price has plunged to below $5 from more than $20, has strongly denied the allegations and initiated an independent investigation headed by PricewaterhouseCoopers to produce a report on the company’s finances, assets and business practices. It is expected to take several months.
In the meantime, questions remain. An on-the-ground investigation in China by The Globe and Mail found discrepancies in Sino-Forests’ public statements regarding its timber holdings. A key Sino-Forest partner in Yunnan Province as well as Chinese forestry officials said the company controls far less timber than it has claimed. Sino-Forest disputes The Globe report.
The Ontario Securities Commission has said it is also investigating “matters related” to Sino-Forest and Mr. Block says he wants to help the regulator and co-operate fully with the inquiry.
He won’t, however, disclose the size of his Sino-Forest short position or whether he’s already culled any profits from the stock selloff.
“None of the Ferraris in the parking lot belong to me,” he says.
Indeed, when the restaurant valet hands him his keys Mr. Block climbs into a late-model Toyota Camry and speeds off into the fading light of another comfortable Los Angeles evening.
Carson C. Block: curriculum vitae
Grew up in the wealthy Manhattan suburb of Summit, N.J. Was “No. 1 in class in parties hosted during junior and senior year,” he says.
Permanent residency: Unknown
1998: Earned a business degree from the University of Southern California, where he also studied Chinese.
2002-05: Earned a degree from Chicago-Kent College of Law.
August, 1998: Moved to Shanghai, where he tried to start a Chinese equity-focused research firm. He soon abandoned the plan and moved back to California.
1999: Worked at the L.A. office of CIBC World Markets for seven months.
1999-2001: Joined father William Block’s firm WAB Capital, which links micro-cap companies with potential institutional investors in exchange for warrants or preferred stock.
2005: Returned to Shanghai to join the corporate practice of U.S. firm Jones Day.
2007: Left the law firm with plans to start a Singapore-based wealth management business for wealthy Chinese. Stayed in Shanghai to co-author Doing Business in China for Dummies.
2008: Launched troubled Shanghai self-storage business, Love Box.
Muddy Waters’ first report:
June 28, 2010: Muddy Waters publishes a report on Orient Paper Inc., alleging the Chinese company is a fraud. Before publishing, Block and his business partner Sean Regan buy $4,000 worth of Orient Paper “put” options.
“I think the total profits on the trade were like $5,000 to $7,000. I didn’t make shit on that,” he says.
On his newfound notoriety.
“It is a very strange moment in my life. When I look in my inbox there are probably about 10 interview requests. It would be nice to be able to spread that out over a lifetime and not just have this one period of intense interest and then fade back into obscurity.”
“This is the problem that a lot of these analysts have. I can tell from experience that you don’t know what you don’t know. I have been there. I, at least know what I don’t know. You versus me when it comes to China, I’m sorry... you can’t hold a candle.”
On wiping out billions in stock market value:
“I didn’t wipe it out. Management that commits fraud wipes it out...People lost some real money. I understand that and I feel sympathy for them but I protected them against losing more money and that is what I feel good about.”
On Canadian retail investor reaction vs. Americans:
“I don’t think you guys have sent me any death threats. I don’t know, maybe it’s because you don’t have enough guns in your country. I haven’t got the death threats I usually get.”
On the sensational language his reports use:
“I’m not in the business of being equivocal. Once I know that this is an overstatement of several hundred million dollars that is F-R-A-U-D.”
On his future opportunities:
“Manage other people’s money or keep it the way it is? Publish or don’t publish? These are questions I’m trying to answer right now. If there were a time to evolve this into something more than doing single stock research, I guess this would be the time.”
On disguising himself in a one-on-one meeting with Sino-Forest’s head of investor relations:
“I even combed my hair forward for a “Dumb and Dumber” kind of look. I tried to sound really dumb and speak even more slowly than usual. I went in with a rumpled appearance. I just tried to seem like an idiot.”
On why investors and firms need China:
“For both retail investors and the professional service firms, China was the panacea to cure the doldrums of the burst internet bubble. As soon as the tech bubble burst the professional service firms all rushed into China. Then we saw all these financial products coming out of China. It is not a coincidence. You keep interest rates low and liquidity on like the central banks have done and you’ve got too much money that is chasing too few solid investments.”