Around a decade ago, Carson Block was preparing to live inside a self-storage facility he owned in China to defend it from a hostile manager of the business park. In response the manager threatened to shut Mr Block’s business down. The experience, which eventually resulted in the US consulate stepping in, was formative in helping Mr Block “see the matrix” in China and “question everything”. Either the company was lying or I was lying.
Someone was going to go down Mr Block’s reputation precedes him. An appearance on Bloomberg TV two years ago, in which he said he would shortly identify his next short selling target in Hong Kong, triggered a fall in the Hang Seng index. “From time to time he strikes gold but there’s a lot of self-promotion involved,” said one executive who invests in hedge funds. Critics say that his attacks can cause needless damage to companies and their shareholders while he moves on to his next target.
Mr Block went to work with his father, a period he describes as “very embittering” as he was “lied to by a parade of management” of internet companies. He quit equity analysis for law school, later moving to Shanghai before leaving law and setting up the self-storage business in 2007. His move into corporate investigations came when his father grew interested in Chinese companies listing in the US. Lunch with an executive of a company called Orient Paper led to an invitation for him and a friend to Orient’s factory.
A long delay en route at Shanghai airport gave them opportunity to pore over Orient’s filings. “We were laughing” at the claims in the filings, said Mr Block. “We knew there was significant bullshit here. Mr Block eventually issued a report and sent it to former acquaintances from his time in finance and law.
The following day, the stock tumbled. The allegations he was making, however, meant the stakes were high. “In the early days it was financial blood sport,” said Mr Block. “Either the company was lying or I was lying.
Someone was going to go down. His big breakthrough was Muddy Waters’ claims of fraud at Toronto-listed Sino-Forest, a Chinese forestry company once valued at more than $8bn and in which US star hedge fund trader John Paulson was a major shareholder. The firm collapsed and the regulator has since declared it a fraud. Some situations have proved more bruising.
Muddy Waters’ main fund gained 20 per cent last year, according to numbers seen by the Financial Times. That followed gains of around 15 per cent in 2017 and around 16 per cent after launch in 2016. Following the report, Burford lambasted such short attacks as “a fundamental menace to an orderly market”. Unsurprisingly, Mr Carson rejected the idea.
“Over the medium-to-long-term, if the activist is wrong, the company is not going to stay in the dirt,” he says.
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