Olam International Ltd. (OLAM), whose shares have fallen 9.5 percent since short seller Carson Block said it might fail, sued him for defamation two days later. He responded with a 133-page report that called the commodity trader an emperor with no clothes.
“The fight’s not just in the courtroom, which may take a long time to play out,” said Nicholas Hanna, a lawyer at Watson Farley & Williams LLP in Singapore. “The immediate fight is who wins over the market.”
Olam has replied more aggressively to Block and his Los Angeles-based research firm Muddy Waters than their previous targets. Besides the lawsuit, the Singapore-based company has rebutted allegations of accounting flaws in a 45-page response and held several meetings with investors, analysts and the media. Its shares have regained ground after falling 21 percent in U.S. trading the day of Block’s first comments.
“The frustrating thing in this whole exercise is that when you throw so much mud, something will stick,” Olam’s Chief Executive Officer Sunny Verghese, who bought 1 million Olam shares on Nov. 30, said in an interview.
The company will offer $750 million in bonds and as much as $500 million in warrants to existing shareholders in a bid to reassure investors, it said today in a statement after halting its stock. Its second-biggest shareholder, Singapore’s state- owned investment company Temasek Holdings Pte., has agreed to buy any rights not taken up by other shareholders, Olam said.
The transaction will be aimed mainly at repaying borrowings and will address any “lingering doubts” about Olam’s liquidity, CEO Verghese said at a press conference in Singapore.
Block, a 36-year-old former lawyer, first said on Nov. 19 that he was selling Olam shares short -- borrowing them to profit by buying them at a lower price later. He told Bloomberg Television on Nov. 27, after issuing his report on the world’s second-largest rice trader, that Muddy Waters prepares to litigate all its reports.
“If we have to defend it in court, then we’ll defend it in court,” Block said. “It’s the nature of the game.”
Verghese, 53, said Nov. 28 that Olam will take all legal steps to get redress, noting that might require getting hold of hedge funds he believes are behind Block and Muddy Waters.
Muddy Waters said two days later that it’s not working in concert with a group of hedge funds and demanded that Verghese retract and apologize for comments it said were defamatory.
Block’s first comments against Olam at a conference in London were slanderous, libelous and malicious falsehoods, Olam said in a lawsuit filed Nov. 21 at Singapore’s High Court.
Even serving the lawsuit on Block and Muddy Waters will take time as they aren’t in Singapore, and should Olam eventually win its case, enforcing a judgment in the U.S. will be difficult because of its free-speech protection laws, according to David Tan, an associate professor at the National University of Singapore’s law faculty.
Defamation and malicious falsehood complaints by companies in Singapore have succeeded before, with Judge Andrew Ang noting in a 2008 ruling that defendants have to respond with precision even to an ambiguous claim.
In the case brought by WBG Network (Singapore) Pte against rival health products seller Meridian Life International Pte, Ang found that Meridian’s defense of fair comment failed because its statement wasn’t based on fact.
Defamation cases against short sellers in the U.S. have had less success. In state court in New York in August, Silvercorp Metals Inc. (SVM) lost its lawsuit against two websites that accused it of potentially committing accounting fraud.
The Chinese silver miner, which claimed it was subject to false, defamatory statements as part of a scheme to drive down its stock, is appealing Justice Carol Edmead’s decision to dismiss the complaint as the statements were “constitutionally protected opinion.”
Muddy Waters, by issuing such a long and detailed report, is either prepared for a hard-fought battle or feels that they are beyond reach, according to Gideon Benaim, a reputation protection lawyer at Michael Simkins LLP in London.
People sue for defamation more to vindicate their reputation in the court of public opinion than for money, he said.
“Whether Olam can recover costs or damages may be of little significance to them,” said Benaim.
Olam has sued Block and Muddy Waters much faster than previous targets such as Sino-Forest Corp., the Chinese timber company that slumped 74 percent before eventually filing for bankruptcy protection in March.
Sino-Forest, which rebutted fraud allegations, didn’t sue for defamation until nine months after Muddy Waters first made them, at the same time it filed for bankruptcy. Block had said the lawsuit was without merit.
Other companies Block has bet against and reported on including Focus Media Holding Ltd. (FMCN:US) and New Oriental Education & Technology Group have seen their shares recover. Olam is the first company Muddy Waters has issued a report on since New Oriental (EDU:US), and isn’t China-focused like earlier targets.
Block says he’s no longer interested in betting against Chinese stocks because he thinks the government is protecting fraudulent companies.
Olam’s shares climbed 4 percent on Nov. 29 after Temasek said it has maintained its position in the company and Verghese told journalists and analysts that it had more than S$10 billion ($8.2 billion) of liquidity and its customers are supportive. The stock rose 1 percent to close at S$1.575 on Nov. 30.
Olam’s 5.75 percent bonds due September 2017 were quoted at 85.7 cents on the dollar today, the first increase since Nov. 21, according to Bloomberg prices.
Thirteen out of 20 analysts tracked by Bloomberg recommend investors buy Olam shares. Five have hold ratings while two including Religare Capital Market’s Vincent Fernando advise shareholders to sell their stock.
Fernando, who cut his rating from buy on Nov. 28, said it would be hard for Olam to fully disprove concerns until it can show positive free cash flow. Other analysts including UOB Kay Hian Holdings Ltd.’s Eugene Ng mostly dismissed Block’s statements.
“The difficulty for any company embroiled in such allegations is that even if the company is ultimately proven right, the damage has been done,” said Gareth Hughes, Hong Kong-based Asia head of dispute resolution at Ashurst LLP.
Block, named one of 50 most influential people in finance by Bloomberg Markets in 2011, also has his credibility at stake.
Verghese impugned Muddy Waters’ integrity by repeatedly calling them manipulators and his comments went beyond the right to free speech, the research firm said on Nov. 30.
“Particularly given that Olam was apparently lightning quick to file its own defamation suit against us,” Muddy Waters said. “We reserve the right to take appropriate legal action.”
The case is Olam International Ltd. v Muddy Waters LLC, Carson Block. S987/2012. Singapore High Court.
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