Carson Block says he has nothing to hide.
The suddenly high-profile stock researcher and investor doesn't have an office and won't say where he is. But facing regulatory scrutiny and a potential lawsuit, Mr. Block says he's ready to come to Toronto to defend himself and his research, which has attacked Sino-Forest Corp. as an alleged fraud and sent the company's stock into a tailspin.
The Ontario Securities Commission revealed on Wednesday that it is "investigating matters related to Sino-Forest" but would not comment on the scope, whether it's focused on the company or includes Mr. Block's Muddy Waters LLC.
Sino-Forest urged Canadian regulators to probe Muddy Waters and any investors connected to the small firm before the publication of the June 2 report on the Toronto-listed forestry company. The company is also preparing legal action against Mr. Block and his firm.
Mr. Block, who returned to the United States on Tuesday from Hong Kong, welcomes the attention.
"I have nothing to hide," he said in an interview by telephone on Wednesday. "I'm looking forward to working with the OSC and I'm sure I'll be speaking with them on multiple occasions. Whatever I can do to help them further ... I stand ready to do that."
Mr. Block profited from the massive decline in Sino-Forest stock by short selling the shares, a bet that they would decline in value. He said he built his position before he published his report and remains short on the stock.
There are allegations, suggested by Sino-Forest and levelled by analyst Richard Kelertas of Dundee Securities, that Mr. Block "pre-marketed" his research to hedge funds before it was published. It is not illegal for investors to share information but there is the question of actively promoting work that is known to be false.
"I can substantiate every claim I've made - and then some," Mr. Block said. While he didn't specifically deny whether he spoke with other investors before he published his report, he noted it would have hurt his own trading position to let others in on his research. He added that a short position in Sino-Forest was building this spring for various reasons, including general skepticism around some companies working in China and momentum trading on the part of investors.
"This idea that I would be telling all my buddies about it, and this and that, is misguided," Mr. Block said. "It's really naive. But it fits certain people's world views well, that they haven't been lied to by management, that Carson Block must be the bad guy, and he's part of this cabal of evil short sellers."
Mr. Block, 35 and a lawyer by training, is surrounded by an air of mystery. On Wednesday, interviewed on a mobile phone with a Los Angeles area code, he didn't disclose his location and suggested his safety could be in jeopardy. "It's a little bit of an alternate reality," said Mr. Block. "It's not the easiest way to make a living."
Mr. Block splits his time between North America and Asia, doesn't have an office - working with just an Apple computer and his BlackBerry - and is the only employee of Muddy Waters, the research firm he started last year. He has issued a series of reports alleging fraud at companies working in China, several of which seem to have been prescient.
"I'm happy to stand in my corner of the financial world and provide a counterweight," Mr. Block said. "I don't want to pretend to be Goldman Sachs. We are Muddy Waters. If we are the shock jocks of the investment world" - echoing a phrase levelled at him by Sino-Forest - "then so be it."
Interviews with several sources indicate that U.S.-based hedge funds were circling the company and trying to build up short positions well ahead of the Muddy Waters report - though no one said it was specifically because they knew Mr. Block was preparing to publish.
Bill Majcher, a former RCMP officer who specialized in securities crime and now works in Hong Kong at the investment arm of Chinese conglomerate Sunwah Group, said he was approached several weeks ago by representatives of U.S. hedge funds looking to profit from alleged discrepancies between Sino-Forest's public disclosures in North America and records with Chinese authorities.
"I got invited to participate," said Mr. Majcher. He declined to get involved in the so-called "bear attack" on Sino-Forest.
"There has to be as much scrutiny into Muddy Waters and market manipulation as Sino-Forest," Mr. Majcher said.
Mr. Block said the researchers he hired to help compile his report indicated there were signs that other people were independently investigating Sino-Forest. "There were funds out there doing their own work, believe me," said Mr. Block.
Large Sino-Forest investors told the company at its annual meeting on May 30 that hedge funds had been calling to ask to borrow stock, a source close to the company said. In order to short a stock, one must borrow shares from a current investor, sell them and hope to buy them back at a lower price, to make money and to return them to the original investor.
Sino-Forest has also complained Mr. Block didn't contact the company before he issued his report. In the course of Muddy Waters' research, Mr. Block has said he spoke to the company once, for two hours, with investor relations manager Louisa Wong. Ms. Wong said she had never spoken with him and Mr. Block on Wednesday admitted he didn't identify himself as Carson Block from Muddy Waters.
David Horsley, Sino-Forest chief financial officer, said Mr. Block and other short sellers are using unsubstantiated allegations to exploit a growing skepticism regarding Chinese companies by North American investors.
"He was very opportunistic, in terms of a market that was already shaky about Chinese companies given some of the other research he has put out there," Mr. Horsley said in an interview on Tuesday. "His timing was probably such that it was enough to push that market over the edge and he chose Sino-Forest. It's more a reflection of the sentiment that was in the market as opposed to any of the specific allegations against Sino-Forest."