* 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 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
"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
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
Block, who was once a practicing lawyer, said he found many
executives were "lying through their teeth" about their
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
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
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