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Olam sues short-seller Muddy Waters after accounting questioned

Carson Block, founder of short-selling research firm Muddy Waters. Attacks by Mr. Block on Olam International are ‘baseless and unsubstantiated’ the commodities trader says.


Olam International took its battle with short-seller Muddy Waters Research to court on Wednesday as the Singaporean commodities trader fought off criticism of its accounting practices and debt levels that has hit its bond and share prices.

Olam, 16-per-cent owned by Singapore state investor Temasek, has filed a suit against Muddy Waters and its founder Carson Block in the High Court of Singapore, alleging libel, slander or malicious falsehoods for statements Mr. Block made at a London conference on Monday, a company spokeswoman said.

She said Olam was seeking unspecified damages.

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"We have not received a lawsuit and, should we have to defend ourselves, we will do so vigorously," a Muddy Waters spokesman said.

Muddy Waters, which makes money by betting against companies, has issued devastating reports in the past few years, mainly aimed at China-based firms. Some of the reports crushed shares of the targets, although others were able to recover.

Mr. Block's comments, which had singled out Olam's accounting practices and questioned its prospects, triggered a fall in Olam's Singapore-listed shares on Tuesday of 7.5 per cent.

The stock rose 5.3 per cent on Wednesday.

Muddy Waters kept up its attack with a letter dated Nov. 20 and posted to its website that criticized Olam's debt and cash burn, but this time investors took the salvo in their stride. Traders and analysts noted the letter was not as scathing as previous, formal research reports issued by Muddy Waters.

"The detailed report is still not out yet," said a Singapore trader referring to Olam's stock rebound. The trader was not authorized to speak publicly. It is unclear whether Muddy Waters will publish a formal report on Olam or not.

Olam's shares rebounded on Wednesday and were the biggest gainers in the benchmark Straits Times Index, which ended flat. Although the stock clawed back some of the previous day's loss, it is still down about 20 per cent so far this year, while the index is up 12 per cent.

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Analysts said the saga may be a long, drawn-out affair.

"It does show that Olam is putting up a good fight, but the outcome of this case remains to be seen," said Wen Ching Lee, analyst at CIMB Research in Singapore.

"Investors could be hesitant to buy the shares until this entire saga has blown over. Right now there is a lot of uncertainty as to whether Muddy Waters will make further allegations," she said.

Olam on Tuesday gave a strong defence of its business, calling Mr. Block's attack "baseless and unsubstantiated" and assuring that it could fund operations for 18 months even if it were shut out of the debt markets. It also said it would consider share buybacks after the drop in its stock price.

Muddy Waters followed by stepping up its offensive.

"Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached," said the relatively brief letter, addressed to Olam's CEO and its board.

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This was not the first time accounting has been questioned at Olam.

In February 2011, the company denied there were inaccuracies in its accounts after a CLSA analyst raised concerns about internal controls, citing multiple and sometimes significant differences between Olam's audited and unaudited statements.

Muddy Waters cited the 2011 CLSA note in its letter.

"Olam has since increased its a) debt load by approximately S$900-million, b) cumulative investment cash burn by approximately S$2-billion ($1.63-billion U.S.), and c) cumulative operating cash burn by approximately S$500-million," the letter says.

Olam has $4.125-billion of outstanding debt, including bonds and loans, according to Thomson Reuters CreditViews. The bulk of its bonds are held by retail investors who can be quick to unload paper, making for volatile prices.

Olam's bonds were trading steadily on Wednesday, but below the levels seen before the Muddy Waters' allegations.

The bonds due in 2017 were at 93-94.5 cents on the dollar and 2020s were at 94.5-96, both recapturing more than half their losses at the previous day's lows. Before the allegations surfaced, the bonds were at 98 and 101, respectively.

Olam has grown from its origins in Nigeria into a diverse agricultural commodities trading company with interests ranging from cocoa and coffee to nuts and sugar.

Chief executive Sunny Verghese has led an expansion that has seen it take on larger commodity players such as Noble Group and Wilmar International.

Muddy Waters may not be the only firm betting against Olam, which is the most borrowed stock among Singapore's top 30 companies, suggesting heavy demand from short-sellers.

Nearly 80 per cent of Olam's shares that can be borrowed were out on loan, compared with an average of about 6 per cent for the index constituents, according to Markit Securities Finance.

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