How Short-Seller Carson Block Became The Most Hated Man In China

Carson Block

Photo: Screenshot via Bloomberg TV

Carson Block, the young hotshot short-seller who runs Muddy Waters Research, has become famous (or infamous) for shorting Chinese companies. He was a virtual unknown in Wall Street circles until his 2010 report on Orient Paper crippled the stock’s value.Due to Carson’s uncanny accuracy in developing targets to short, experts in the industry think he’s much better than the SEC at catching fraudsters in the act. James Rickards, senior managing director of Tangent Capital Partners, has declared, “Block is in the intelligence business where you gather tidbits of information, you fuse them together, connect the dots and then you draw a conclusion. The SEC is much more like cops. First the crime is committed, and then they go to solve the crime. But Block is looking at the crime in progress.”

An ex-colleague describes Block as “an arrogant guy with an independent and somewhat restless streak,” and Carson admits to having “discipline problems” from an early age.

When researching potential targets, he’s been known to misrepresent himself, pretending to be a potential customer.

But a brash personality and questionable tactics haven’t held Carson back. He’s continued his take downs in China, attributing it to his ability to see “through appearances to a Chinese company’s true worth.”

Carson’s road to the top has had plenty of speed bumps. His early business ventures ended in failure, and he’s shuffled around at least four different jobs before opening Muddy Waters.

He’s done it all inĀ  a short 36 years, so there are plenty of chapters to be written in the Carson Block story. We’ll be watching.

Carson was born in the small town of Summit, New Jersey

Summit has a population just over 20,000. Carson's father, Bill, ran a equity research firm called W.A.B. Capital (where Carson would later work), while his mother works as a real estate agent.

Source: W.A.B. Capital

In high school, Carson was more interested in partying than studying

Block first traveled to Asia at the age of 15

An exchange program gave Block the opportunity to immerse himself in Asian culture by spending the summer of 1991 in Toyama, Japan.

Source: CNBC

He got his undergraduate degree at the University of Southern California

Carson majored in business administration and graduated in 1998. After school, he shuffled through jobs, working for W.A.B. Capital as a principal and opening an investment business in Shanghai before returning to the U.S. to enhance his education.

Source: W.A.B. Capital

Carson got his J.D. from the Chicago-Kent College of Law, and went on to work for the firm Jones Day

His work with the firm was primarily in mergers & acquisitions, which provided the basis for his future researching Chinese companies.

Source: Financial Times

Block left Jones Day to co-write 'Doing Business in China for Dummies'

This is another example of a young Carson jumping from career to career, trying to find his niche. In the 2007 book, Block told readers that in China 'you may face some of the most brutal negotiations you've ever seen.'

Source: Bloomberg

He also started his own storage company in Shanghai called Love Box Storage.

The company was one of the first storage businesses in China, though it was not very successful. According to the Globe and Mail, Love Box Storage has 'been pulled back from the brink of financial failure on no less than four occasions.'

Source: Globe and Mail

In 2010, Block took a trip to China that would forever change his life.

In January, he went to Baoding City to do some research on Orient Paper for father's firm. Block was astounded at the shoddy quality of the plant, saying 'The machinery was basically scrap metal that probably belonged to a state-owned enterprise.'

Source: CNBC

Block's misgivings about Orient Paper led him to found Muddy Waters Research.

After Orient passed its next accounting audit, Carson was cajoled into action. On June 28, 2010, he published a scathing report on Orient Paper, claiming the firm overstated revenue by 40 times the previous year and rating the company 'a strong sell.' The firm's shares fell by 47 per cent over the next month.

Source: CNBC

This short-seller is also a major fan of 90s gangsta rap.

According to reports, his favourite artists are Notorious B.I.G. and Tupac Shakur -- odd, considering the two were rivals.

Source: Globe and Mail

Block's investment style is motivated partly by a desire for retribution

He didn't stop with Orient Paper, and took down Rino International a few months later

Muddy Waters released a report in November 2010 indicating that the wastewater equipment designer had exaggerated sales -- which the company confirmed eight days later. The stock tumbled 67 per cent that month and was delisted from the NASDAQ.

Source: Bloomberg

His next victim, Sino-Forest, saw its shares plummet 85 per cent in a month

The Muddy Waters report released in June 2011 compared Sino Forest to Madoff's Ponzi scheme. Hedge fund legend John Paulson was a substantial investor in Sino Forest, with holdings up to $500 million.

Source: Business Insider

2011 was a great year for Carson. He was honored as one of Bloomberg Markets 50 Most Influential People.

The excerpt from the magazine credits Block's revelation of Sino Forest's accounting fraud as the basis for his inclusion. As hedge fund manager Sahm Adrangi asserts, 'The Carson Block model of very detailed reports has set a new standard.'

Source: Bloomberg

Block has moved his attention from China because he says today's Chinese shorts are harder to find. He is also concerned for his safety.

After his dismantling of Sino-Forest, Block reported that he and his staff were harassed by agents of the Chinese government as well as 'tattooed gangsters.' He believes the Chinese government is enabling or otherwise overlooking accounting fraud by domestic firms.

Source: Bloomberg

Block's address is unlisted.

His success has come at a cost. Block has ruffled enough feathers to receive streams of death threats, so he keeps his address private.

Source: Business Insider

As you might expect by his frequent business dealings in the nation, Block speaks Mandarin.

He's not as fluent as a native speaker, but apparently does well enough to get by.

Source: Bloomberg

Block is also listed as an adjunct professor at Kent Law, his alma mater.

According to reports, Carson teaches U.S. law to attorneys from China looking to gain certification to practice in America.

Source: Kent Law

Block's most recent target is Olam International.

On November 19, Block announced he was selling Olam short. His report compares Olam's accounting practices to Enron's, a charge the firm has vigorously denied.

Source: Businessweek

Olam isn't rolling over, and has since sued Block.

The firm, which is responsible for 90 per cent of the world's peanut trade, filed a lawsuit against Block two days later, calling his statements slanderous and baseless. Olam has the backing of Temasek Holdings, Singapore's sovereign wealth fund, which happens to be its largest shareholder. Temasek has recently underwritten another bond issuance for Olam.

Source: Business Insider, Bloomberg

rumours of Muddy Waters report against a company can send its stock tumbling. That's what happened to Chinese meat processor Yurun.

If pure short-selling isn't your thing, check this out:

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