Carson Block, founder of Muddy Waters LLC, said he’s lost interest in betting against Chinese stocks and speculates the government is protecting fraudulent companies.
“China has gotten harder in the sense that the government has really taken the side of the fraud,” Block said in an interview on Bloomberg Television’s “Market Makers” program today. “The government is working with a number of these companies to try to conceal records that are public. When you are up against that sort of strength of the ability to revise history, it becomes difficult. That is one of the reasons we’re not that interested in China anymore.”
A phone call to the State Administration for Industrial and Commerce, which compiles corporate records in China, wasn’t answered after business hours in Beijing. An official at China’s consulate in New York, who asked not to be identified because it’s against their policy, said that she’s not in a position to respond to Block’s comments.
Block, 36, shot to fame by betting on declines in stocks of Chinese companies listed in North America, including Sino-Forest Corp. Muddy Waters alleged companies falsified their accounting and misled investors in a series of research reports. Sino- Forest, based in Hong Kong and Mississauga, Ontario, slumped 74 percent before eventually filing for bankruptcy protection in March after Block questioned its plantation assets.
Since Sino-Forest, Muddy Waters has focused on New Oriental Education & Technology Group Inc. (EDU:US) and Focus Media Holding Ltd. (FMCN:US) Their shares have all rebounded after initial slumps when Block questioned their accounting. Both companies have denied any wrongdoing.
New Oriental, an education service provider based in Beijing, has risen 28 percent since July 17, the day before Block said financial statements from the company’s units were fraudulent.
Focus Media, the Shanghai-based advertising company that Block claims overstated its network, has posted a 22 percent advance in its American depositary receipts this year. Focus Media has attracted a $3.5 billion buyout offer from a group of private-equity firms including Carlyle Group LP. (CG:US)
“If there’s something that happens that can fundamentally alter your prices, you have to be pragmatic,” Block said.
Block has most recently targeted Singapore-listed Olam International Ltd. (OLAM), saying in a 133-page report published today that the commodities trader runs a high risk of failure. Olam, the world’s second-largest rice trader, is the first non-Chinese company Block has said he is betting against.
Olam is suing Muddy Waters and Block for defamation as the stock has slumped more than 10 percent in Singapore since the short seller’s first allegations against the company on Nov. 19.
Block, a lawyer, said today that he stands by Muddy Waters’ report on Olam and is ready to defend himself in court. Block also said he has no plan to take outside investors’ money when asked whether Muddy Waters would start a hedge fund.
“Every now and then we’ve discussed that possibility,” he said. “I don’t think we can continue communicating with the market our short ideas the way we do now if we took outside capital.”
Block’s allegations over the past two years have increased investor scrutiny of Chinese companies trading on North American stock exchanges. The Bloomberg Chinese Reverse Mergers Index (CHINARTO), which tracks 81 Chinese companies that gained U.S. listings after buying firms that already trade, has tumbled 68 percent since the end of 2009. Companies including China MediaExpress Holdings Inc., an advertising company, have withdrawn their listings after Block alleged financial irregularities.
China began limiting access to corporate filings this year after short sellers used them to highlight accounting discrepancies in companies listed abroad.
China Development Bank Corp, the state-owned lender charged with working to boost the nation’s competitiveness, is providing more than $1 billion to assist companies, including meat producer Zhongpin Inc.and Fushi Copperweld Inc. (FSIN:US), a manufacturer of steel wire, leave the U.S. stock market.
Since April 2010, 49 companies -- including Focus Media and 7 Days Group Holdings Ltd. (SVN:US) -- have announced their intention to go private and de-list from U.S. markets, according to a report by Roth Capital Partners issued Nov. 5.
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