Bloomberg News

Muddy Waters Looking at More ‘Suspicious’ Companies, Block Says

July 01, 2011

July 1 (Bloomberg) -- Carson Block, founder of Muddy Waters LLC, said he’s looking at “a number of suspicious” Chinese companies that may have accounting irregularities after research by the short seller on Sino-Forest Corp. prompted the stock’s largest drop in 17 years.

“Even good companies, in order to compete for capital, I think a lot of companies cut corners on their financials,” Block said in a Bloomberg Television interview from Hong Kong today. “We’ve got a number of companies that were suspicious and we’re looking at them.” Block said he doesn’t have a timeframe for when he might issue a report on another company.

Five companies traded in North America that have been targeted by Block since June 2010, including Sino-Forest, have lost almost $5 billion in market value after he questioned their accounting, according to data compiled by Bloomberg. A sixth, Spreadtrum Communications Inc., has gained 22 percent since Muddy Waters published a letter dated June 28 to management asking about inventory and deferred costs on its balance sheet.

“If Spreadtrum has fantastic answers and everything is the way it should be and we misinterpreted these points as red flags, then the company’s transparency has improved and the stock is going to go up,” Block said in a separate Bloomberg Television interview yesterday. He said on June 28 that he’s shorting the stock and stands to profit if the price declines.

Short-selling involves the sale of borrowed stock to profit from a subsequent decline. Block said in today’s interview that he still has short positions in three of the companies for which he has published reports.

Sino-Forest Declines

Sino-Forest, the Hong Kong-based operator of tree plantations, plunged 64 percent on June 3, the largest drop since March 1994, after Muddy Waters said the company overstated its timber holdings. Chief Executive Officer Allen Chan has denied the accusations. The stock rose 20 percent to C$3.20 on the Toronto Stock Exchange yesterday.

“We continue working on Sino-Forest, analyzing the accounting closely,” Block said. He said he hasn’t yet decided whether to release these findings publicly.

Sino-Forest’s shares fell 33 percent on June 14 after it released first-quarter earnings that missed analysts’ estimates and said a probe will slow the pace of acquisitions. Sino-Forest declined 4.5 percent on June 17, when the company posted information on its website to counter Block’s assertion that one of its customers is a subsidiary.

“The company has had the microphone and platform from which to respond,” Block said yesterday. “When it has opened up its mouth the stock and the bonds have gone lower. Rather than the company having anything confidence-inspiring to say, they’ve continued to spook investors.”

Business Transparency

Louisa Wong, a senior manager of investor communications and relations at Sino-Forest, couldn’t immediately be reached by telephone at her office in Hong Kong.

“Our company has solid business fundamentals and we are very interested in providing business transparency,” Diana Jovin, a Spreadtrum spokeswoman, said by telephone from Shanghai.

Block said yesterday he’s betting the decline in Sino- Forest isn’t over.

Inconsistencies have been found in the valuation of Sino- Forest’s holdings in China’s Yunnan province, the Globe & Mail said June 18, citing Chinese government officials and forestry experts it didn’t identify. The newspaper’s report was an “incorrect portrayal” of the company’s business, Sino-Forest said in a statement on June 20.

Paulson & Co. sold all its stock in the company, according to a June 20 regulatory filing. John Paulson’s New York-based hedge fund, which made $15 billion in 2007 wagering against subprime mortgages, had been Sino-Forest’s biggest shareholder.

Accounting Concerns

Spreadtrum, the Shanghai-based chip designer questioned this week by Muddy Waters about its accounting, said June 29 that Block’s letter to Chief Executive Officer Leo Li highlighting accounting concerns is groundless. Spreadtrum plunged as much as 34 percent on June 28, the day Block released the letter to management, before narrowing the loss to 3.5 percent at the end of trading.

Spreadtrum gained 15 percent to $15.76 as of 4 p.m. in New York Stock Exchange trading yesterday. Block said that in a worst-case scenario he misread Spreadtrum’s financial statements, and the company can provide a satisfactory response to his questions. Block said his intention in publishing the Spreadtrum letter was to protect investors by improving transparency and not to push the stock down.

“I like to point out the issues and start a dialogue and get people thinking about these red flags before we come out with a report that sends the stock down,” Block said yesterday. “I’m getting uncomfortable actually with this idea that, you know, we’re ninja assassins that are going to take the stock price down.”

-- Nikolaj Gammeltoft, Erik Schatzker, Helen Yuan. With assistance from Jimi Corpuz in New York. Editors: Lena Lee, John Liu

To contact the reporters on this story: Erik Schatzker in New York at; Nikolaj Gammeltoft in New York at Helen Yuan in Shanghai at;

To contact the editor responsible for this story: Nick Baker at

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