Carson Block: Zero or Hero?
The Alexey Vayners and Jeffrey Changs occupy a special place in the hearts of Wall Street’s young and restless. But what about a guy like Carson Block? Does he qualify as the epitome of someone the young monkey on the come up does or does not want to become? Since Eddie already outlined the Sino-Forest situation, I won’t address much of that issue.
What I am curious about is how you guys feel about Block, himself. After all, when you are a gangster rap loving 34 year-old guy who may have just cost John Paulson half-a-billion, its hard for people to look at you without a strong opinion.
Block is the founder and research director of Muddy Waters Research, a firm that claims to see through appearances to a Chinese company’s true worth. In a lot of ways, Block is precisely what many of you aspire to become. A self made player in the world’s most lucrative game. Things is… its lonely at the top. As young Carson continues to carve out his niche as Chinese equity shorting authority, he is making enemies at a fast clip.
There are going to be people who say, well, I caused this. In one sense, yes, had I not published on that date, then the money would not have been lost. But on the other hand, I really feel that this company is a cancer on the financial system, because it just keeps sucking in more money every year.
Block made a name for himself exposing China MediaExpress Holdings Inc. (CCME) and Rino International Corp. (RINO), down 93% and 96% respectively since he called out their shady financials.
So tell me guys, what do you make of this man? Is he a hero or a villain? He certainly seems to me like the type of guy who defines how a free market can be made most orderly by active informed participants. Do you agree or disagree? Before you answer…here’s another quote from Carson about The Street…
I’ve started to think of investment banks and the investment banking industry as just manufacturers of financial products. They have to keep bringing new product to market, and in a situation where there’s so much pressure to do that, you’re definitely going to have poor financial product that gets brought to market.
We sit here criticizing and analyzing a great many of the industry’s aspects. Yet now, when (seemingly) one of our has come along to challenge the big boys…I don’t hear many tooting his horn. Why?
China bears are constantly being marginalized and guys like Block who are ready to call out inefficiencies, irregularities and fundamental overvaluations of Chinese companies are challenging the status quo so many investors have been riding. I think the guy deserves major credit for going beyond the consensus and investigating the "true value" of companies like Sino-Forest and Orient Paper. It will be interesting to see if others start looking for similar overvaluations and irregularities in such depth.
He's the financial industry equivalent of a real OG (Original Gangster)
Investment banks are in fact "just a manufacturer of financial products". Sit down with many different funds and they are all looking for new ideas that's the reason why all these products are being churned out. We sat down with a mega fund, pitched them garbage, knowing it was garbage they happily bought it. We have an idea of what they will do with it. But in the end it's always about bringing new products to market.
Fukn Hero! why cant a guy call someones bluff.
Block is definitely the real deal, and any monkey's who are serious about making real money and not just being high dollar wage slaves should take a page out of his playbook.
The big opportunity today if you're a decent analyst is to find something that smells fishy, suss out the fraud behind it, and then build a massive short position and bring it all crumbling down.
Is it definite that Paulson lost money?
Ed, isn't that verging on market manipulation? A fine line surely.
My larger worry/hope, is that again these are the companies we see. How many more out there are businesses built on complete fabrication? How endemic is this problem?
It's not manipulation if it's based on fact. And there are shit-tons of fraudulent companies out there, and even more that are simply shady. In fact, it's a good deal easier to find companies that are shams in today's market than to find any that represent true value.
the thing is from what i can tell hes doing this for other hedge funds as well and distributing such information before the actual report is released. i believe he took on sino-forest on behalf of a fund and surely he'd also let some of his best clients pay for his reports. i agree with trazer there is a very fine line of market manipulation even though SEC hasn't started looking at these guys yet and nothing is leading me to believe they will change anytime soon
TORONTO, CANADA - June 6, 2011 – Sino-Forest Corporation (TSX: TRE) (“Sino-Forest” or the “Company”), a leading commercial forest plantation operator in China, today provided further response to allegations by short seller, Muddy Waters, LLC. The Company believes Muddy Waters’ report to be inaccurate, spurious and defamatory. Muddy Waters’ self-interest is transparent: to make money from the fall in Sino-Forest’s share price on the back of a decline that itself precipitated.
Chairman of Sino-Forest, Mr. Allen Chan, commented:
"I have spent 17 years building Sino-Forest and I can promise investors we are not guilty of the charges levied against us. The Company has grown significantly over the past five years; a period of time in which our financial statements have been audited by Ernst & Young a leading international audit firm, and during which we have been thoroughly scrutinized by several groups of major international underwriters and their well known legal counsel both inside and outside of China in the course of seven public and major private offerings."
What does this say for the auditing industry? How can an outside investor sniff something out that the auditors didn't see, when they have all the access they want. Although auditors are not required to catch fraud, the alleged fraud at hand would be hard to miss. Curios to see how this plays out. Its obvious the public values some small time investors opinion much more than a reputable auditing firm, which I think is bad for the markets.
The auditing function (of public accounting firms, namely the Big 4) is not designed to sniff out fraud. The function is really only capable of measuring the effectiveness of internal controls in the absence of collusion. Get the right two people together, and those controls pretty much go out the window. The report made on the financial statements is largely supported by the strength of the internal controls. The report basicly says, these financials are reasonable because we tested the controls and no single individual could likely circumvent them. I was talking to the partner that heads the fraud and forensics division at a local CPA firm earlier this week. He said the external auditors find only 5% of the frauds committed by a company. More frauds are uncovered by accident, coming in at 8%! SOX requires the audit, but what it requires of the audit is not conducive to uncovering fraud.
Can anybody give me an argument as to why what he does is bad?... I'm not trying to imply that nobody can, I just don't think I have as much of an understanding about this kind of stuff to do it myself
If Block makes money by uncovering shady practices, so be it. He found a niche market for himself, all the better for market efficiency
Yeah, the Chinese hate this guy. He says he gets death threats all the time and he basically lives in hiding.
No its not
http://www.sinoforest.com/flash/mapofoperations.html
Sino Forest is China based and founded, its Hong Kong
i think what's happening is that this guy was right on one of his early calls (largely by luck. if you look at the alleged fraud and the actual, there are some discrepancies between the predicted and actual), and now retail investors and small time hedge funds are pretty much trading off of his reports. they don't necessarily think it's true, but they think that others will think it's true. kind of a self-fulfilling prophecy.
i remember reading an article about how his father was imprisoned for doing almost the same thing as him. spreading "reports" and "analysis" to pump up US penny stocks and then doing some shit to manipulate the markets. went to jail for that because that was in the US. carson is lucky he is in hong kong. if i remember correctly, he was a generalist at cibc world markets in la (honestly, i didn't even know they had an office there) and then went for an mba at usc. went to palos verdes high or something.
and he is just lucky that people will trade on what he says. nothing "heroic" about it.
I second that
I think that is off base...you can criticize the man all you want but he was dead right on RINO Interational and CCME, two frauds that his reports helped bring down and were delisted from US exchanges after the auditors and management resigned.
I will believe a crook is telling me something is a fraud before the guy with pedigree. A crook knows what to look for.
Muddy Water's isn't the only firm and Sino-Forest isn't the only company in play. Check out some of the work Kerrisdale has done (HF with the best Q1 record). This is one of the favorite reports on RM fraud as its done with a forensic accounting stance: http://kerrisdalecap.com/wp-content/uploads/2010/11/CEU-Report-November…
It's like Dexter hunting serial killers
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