He does not have an office and his work experience comprises a short stint as a corporate lawyer before founding a self-storage business in Shanghai. Yet Carson Block, the 35-year-old American short-seller responsible for felling the share price of mainland timber company Sino-Forest has just become one of the most attention-grabbing commentators on corporate China.
Block's research house Muddy Waters, which he concedes does not have any other permanent employees, made headlines worldwide with a June 2 report claiming Sino-Forest, a Toronto-listed company that says it is China's biggest forestry firm, was not publishing accurate accounts.
By the close of trade Friday, Sino-Forest's shares were down 71 per cent. That means Block has scored a big profit from his short sale. Investors who hold Sino-Forest stock believing it would rise, including billionaire US hedge fund manager John Paulson, have lost out. Paulson & Co. is Sino-Forest's largest shareholder. The investment company manages more than US$30 billion of assets and is best known for making spectacularly successful bets during 2008 that US house prices would fall.
Short selling - a bet that a stock price will fall-involves borrowing shares you don't own in the hope of buying them back later at a lower price. It's nothing new but Block's twist on the practice is to publish on his website sensational, yet seemingly well-researched, reports claiming the companies he targets to sell short are frauds.
He focuses on Chinese companies listed in Canada and the US, where many such companies are now under intense regulatory scrutiny. Sino-Forest is the fourth Chinese company Block has singled out since founding Muddy Waters in June 2010. Shares of the other three have fallen between 57 per cent and 95 per cent below their value the day before Block first wrote about them.
The name of Block's firm, according to its website, comes from a Chinese proverb which holds that 'muddy waters make it easy to catch fish'. In other words, says the website, 'opacity creates opportunities to make money ... This way of thinking has been part of Chinese culture for centuries, and it is institutionalised in the modern PRC.'