While some analysts spend hours reading annual reports trying to evaluate the future prospects of a company (tip – they’d be better down the pub going by their record as we reveal in the latest edition of our unique magazine out on Thurs), or poring over industry data and listening intently to conference calls, there is one firm that spends most of its time within, strangely, the website of the US regulator – the Securities and Exchange Commission (SEC).
Carson Block
A profitable investment is a tough ask at the best of times and the usual decision-making process of going through a company’s reports and numbers is sometimes just not enough. Investors need to be a little more imaginative with regards to their ways of getting valuable information about a company prospects. And so is the case with the investment company Muddy Waters, founded and headed by the now infamous 36-year-old-short-seller Mr Carson Block. Instead of going through the usual 100-page annual reports, they prefer to read letters exchanged between the SEC and listed companies.
Muddy Waters was created in 2010 in Shanghai by Block and it has made a name for itself in shorting Chinese companies listed on the US markets and exposing them as frauds. It’s biggest successes being Rino International that collapsed in spectacular fashion and the lumber company Sino Forest where non other than John Paulson lost almost half a billion dollars in 2011. It has been revealed that Block looks inside the public database of the SEC, searching for all the letters exchanged between the SEC’s corporate finance team and Chinese companies relating to the adequacy of disclosures of regulatory filings.
Sino Forest 2 year weekly chart
The SEC oversees company reports to ensure that investors are (supposedly) operating in a safe trading environment. The “CorpFin” team looks into thousands of regulatory filings searching for any mismatch between US law and company disclosures and ask them to amend or disclose additional information whenever necessary.
Muddy Waters analyse this mail and try to spot any future problems from the attention that certain companies receive from the SEC. Where Block deems there to be a mismatch between the company’s statements and the regulators perceptions, this prompts further analysis by Muddy Waters and ultimately results in the short sale of the target company’s stock. A method that has been very lucrative for Block and his hedge fund clients.
Given the extensive short-selling mainly of Chinese companies which fail to disclose information or indeed, simply produce fraudulent statements, it is no surprise that Muddy Waters has recently had to relocate to L.A. with Chinese officials making life difficult for Block and his company (note to oneself – do not invest in Chinese companies listed overseas!)
In the Rino case in 2010, Block bet against the stock and helped drive the stock price from $13 to almost zero. Rino omitted important information regarding the departure of its accountant, who had resigned due to uncertainty regarding the ability of the company to continue as a going concern. Later, some investigators who were actually hired by the company to probe fraud allegations also left while the company failed to disclose the information. Rino’s conduct ended with the company being delisted from Nasdaq. This was Block’s first big scalp and so cemented his prowess as a short seller and in which it is rumoured he personally collected millions in profits.
We take out hat off to Block for digging deeper and more “cutely” than other analysts and believe he deserves his outsized rewards. If only other analysts would show such flair and intelligence!