REUTERS SUMMIT-Short seller Carson Block considers hedge fund

Mon Nov 26, 2012 6:59am EST

* Hedge fund to focus on short-selling corporate stocks

* Block successfully shorted Chinese companies

* Block's Muddy Waters LLC produces short-selling research

By Jennifer Ablan

Nov 26 (Reuters) - Short seller Carson Block, the founder of research firm Muddy Waters LLC and who has exposed accounting problems at a slew of Chinese companies, is considering launching a hedge fund dedicated toward betting against companies.

"It's something we've thought about," Block said in an interview with Reuters TV for the Reuters Global Investment 2013 Outlook Summit that begins on Monday. "The short answer is 'maybe.'"

Block, 36, has become a rising star in the $2 trillion hedge fund industry after he publicly challenged the accounting practices of a series of Chinese companies that trade on North American stock exchanges -- and then successfully bet against them by using his own money to short their stocks.

If Block was to start a short-selling fund, he would follow in the footsteps of prominent short sellers such as Jim Chanos, whose Kynikos Associates manages about $6 billion.

To date, Block's most prominent takedown is of Sino-Forest Corp, whose shares slumped 74 percent before the Chinese tree plantation operator eventually filed for bankruptcy protection in March.

The collapse forced hedge fund king John Paulson to book $105 million in losses on the stock. Paulson's firm also was sued by a prominent Miami investor, who claimed Paulson failed to conduct proper due diligence on Sino-Forest.

Block's Muddy Waters specializes in producing short-selling research that he distributes free of charge. The firm makes money by trading its principals' own capital, meaning Block puts his dollars behind his work.

He used to be based in Hong Kong but fully relocated to California after receiving death threats. Muddy Waters is not registered as an investment advisor in any jurisdiction.

Block got into the short-selling game after becoming disgusted with the micro-cap stock world, where he used to work for his father's firm, W.A.B. Capital. The firm wrote research reports for small companies, helping to raise their profiles in the market.

Block, who was once a practicing lawyer, said he found many executives were "lying through their teeth" about their company's prospects.

Still, he said he has some reservations about rolling out a hedge fund focused solely on shorting.

"The nice thing about our business model is that when we find problems, we communicate those to the market," he said. "We're up against heavy, heavy artillery on the other side. Companies, they have these massive IR (investor relations) budgets in many cases, and you've got the analysts at banks that usually return fire. At least we can make a dent."

Block said he met with hedge fund pioneer Michael Steinhardt several months ago in New York who encapsulated his feelings about launching a dedicated short fund. "He was saying, 'I shorted more stock than anybody else alive. But net-net over the years, I am flat on my shorts,'" Block said.

Steinhardt's spokesman said he was not immediately available to comment.

WHISTLEBLOWER AWARD

Asked if Muddy Waters would monetize its work through alternative means, such as seek a whistleblower award, Block said that is a possibility.

"We generally approach the regulators now after we publish," he said, adding he is happy to provide them with more information than what Muddy Waters has released publicly.

"It is a business for us but we also do believe that the presence of these companies is poisonous for the capital markets and we would like to see that cleaned up," Block said.

Block has recently turned his sights on companies in emerging markets beyond China. At a hedge fund conference in London last week, he raised red flags on Singapore commodities trader Olam International Ltd's accounting practices and debt levels.

Olam, 16 percent-owned by Singapore state investor Temasek , filed a suit against Muddy Waters and Block in the High Court of Singapore, accusing them of libel, slander or malicious falsehoods. Olam also is seeking unspecified damages, costs and an injunction against republication of Block's comments.

Block accused Olam of booking profits on transactions before it is clear how they would work out over time. Olam Chief Executive Sunny Verghese said on Nov. 20 that Block's statements were intended to cause panic among shareholders of the company, which is a supplier of 20 commodities from cocoa to rubber.

Muddy Waters posted a letter on its website, saying it stands by its research. "We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking."

It was a tough and immediate response from a rebel trader, who admits to being a big fan of gangsta rap.

To watch the Reuters TV video interview with Block click here:orooks-inside-chinas-massive?videoId=239358963&videoChannel=117851

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