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The Lunch

Carson Block: The man who felled a forestry giant Add to ...

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.”

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