‘Betting on human nature’: Short seller Carson Block on fraud, death threats and why he’s sniffing around UK firms
Two days after we speak, one of Carson Block’s team sends over a new notice posted on the site of the US regulator, the Securities and Exchange Commission.
“SEC Charges Electric Vehicle Co. for Misleading Revenue Projections.” XL Fleet, the firm in question, had allegedly misled investors with wildly fanciful forecasts ahead of a Spac merger.
But some two and a half years prior, in March 2021, Block had already placed his short bet and sounded the alarm on the firm.
“Shows the value of what they do,” read the email.
Block is a man keen to stress the virtues of his brand of aggressive full-frontal short selling, in which he launches damning reports exposing alleged fraud and then profits from a plummeting share price.
He’s been at the heart of some of the most high-profile battles of the past decade and built his name exposing dodgy accounts at a string of Chinese companies via his investment outfit Muddy Waters Research, most notably the Toronto-listed lumber fraud Sino-Forest in 2011.
It’s also brought him his fair share of troubles and attention. Block fell under the eye of lawmakers in the US last year over alleged stock manipulation and has attracted regulatory attention on both sides of the Atlantic. His reputation for wielding the spotlight while laying siege to firms has also rubbed some up the wrong way.
But aside from the moral debate of his trade, a bristling Block also makes no bones of the fact he enjoys the fight.
“Early in my career as a short seller, I’d long assumed that if I felt confident I could go back to being the long side investor looking for companies, priced reasonably, that aren’t misleading and difficult to understand, I’d happily do so,” he tells City A.M. from his office in Austin, where he runs $345m in funds for Muddy Waters.
“Now, there’s the reality that I think in many respects, that would bore me.”
Financial pedigree
Block’s path to renegade short seller is in some ways an unusual one. While activist investors often cultivate an image of outsiders shedding light on the murky jiggery pokery of the traditional financial world, Block is steeped in it.
The son of an analyst father, he says he was writing and editing investment reports for his dad aged 12.
“I always was drawn to the industry,” he adds. “I mean, once I accepted that I was not going to be a professional athlete. I figured I would go into investing.”
After graduating with a finance degree in 1998 he took off to China and launched an ill-fated investment firm specialising in Chinese firms. It was some years later, after a sojourn to build up his skills at law school (“I needed to understand how to avoid predatory management and people who wanted to f*ck me”), the short selling career began to form.
“My father got really excited about these Chinese reverse mergers in the US and he was basically trying to revive his career. So he asked me to check one of them out,” he recalls.
“I looked at the filings for the first time before flying up to tour the factory. And it was obvious that they were lying about so many things in the filings. It was just jumping off the page.
“It was just stunning. This thing had a market cap of $150m, had just reported revenue for 2009 of $103m, and the actual revenue of this business was probably only about two and a half or $3m.”
Block sounded the alarm and began to circulate a note around his Wall Street contacts. It went viral. The share price cratered, tips began to flow in and Block’s new career began to take shape – not before cutting short the career of the man who helped start it, however.
“That was the final nail in the coffin of my father’s career, because that basically isolated him from the people who were still in his network willing to do business,” he says.
“It’s a little bit Oedipal in that regard, I guess.”
Retribution
Block straddles a controversial line in the world of global finance. Like the burnt investors in his dad’s contact book, cratering share prices and reaping bumper rewards often tends to make a lot of people angry.
A quick search of his name on Linkedin will reveal an angry imposter profile with job descriptions including “making money at all costs” and “I had no responsability [sic] whatsoever!”. Targets also don’t tend to take kindly to the attacks.
“I’ve had a few of these situations in which the CEO on the other side has become fixated. And it’s become really personal,” he says. The boss of Casino, the French retailer, even sent a private investigator after him posing as a Wall Street Journal reporter.
Another person reportedly said to a friend of Block’s “If I don’t kill Carson first, he’s going to kill me.” (Block denies he was going to…)
Stock manipulation is the charge most often levelled at Block and his ilk. While so-called trash and cash reports are illegal on both sides of the Atlantic, there is little regulators can do to determine the motives of an activist when they publish a damning report.
In the US, Block fell under the gaze of the SEC last year for alleged stock manipulation, a charge which he denies. His campaign against Casino in France also drew the attention of regulators in 2016. In the UK, London-listed legal finance outfit Burford Capital accused Muddy Waters of stock manipulation after it shorted the firm, a claim he called “preposterous”.
But despite those battles, in the UK authorities and politicians seem to be warming to his side of the argument. The City minister has called short-selling an “important tool” in the market arsenal and a number of regulatory tweaks rolled out this year will make short selling an easier art.
Investors for example will be subject to slacker restrictions on disclosures, meaning they do not have to reveal their identity or announce their positions to the market until they cross a higher threshold of issued share capital.
He insists it’s a good thing for the UK market as a whole.
“If there’s not a legal violation, the FCA is not going to hold them accountable,” he says.
“We’re the only force that’s out there that can impose accountability for violating the spirit of the law, not just the letter of the law.”
The fact that the UK is going to make it easier for short sellers to operate is “good for the markets”, he claims.
Provided that there are capital markets, I think our profession will be as eternal as that of prostitution. We’re just betting on human nature.
UK listing? Red flag
Unsettlingly for some UK firms, however, he says he is actively scoping out the opportunities on this side of the pond. Despite London’s best attempts to promote itself as a tech hub, he says being listed on this side of the Atlantic as a tech firm is enough of a reason for him to begin sniffing around.
“When you see tech companies that are listed outside of the US, it’s almost always a flag,” he says.
“The money allocated to tech investing in the US is just massive. And so if you’re not raising money in the US for something that’s tech, the implication is that the people are not that bright. Relative to the talent that you’re gonna get in Europe in tech, the US is going to have the sharper people.”
He claims the recent move by the chancellor and pension firms to channel more retirement cash into UK start-ups is also going to be “similar to the SPAC boom in the US”.
“There are going to be so many charlatans who come out of the woodwork and so much money lost,” he says.
London, he argues, is particularly susceptible to this kind of fraud. The ingrained status structures and premium placed on class has led to credulity and tendency to swallow up corporate fibs, he says.
“You have this much more clubby atmosphere than you do in the US,” he adds.
“The personal relationships and the focus on pedigrees, you know, ‘where did he go to school?’ I think that at times it does make UK investors more susceptible.”
Human nature
Block’s barbs at the City are unlikely to win him many friends when he pays a visit. But he seems relaxed about it.
Unlike many in the Square Mile, he sees the activist short sellers’ role as stepping in where regulators cannot. He does of course have plenty of detractors who would say he is just out to line his pockets.
But business for Block is good. Despite the drumbeat of fraud scandals that rear their head every few years, he says there are always more coming down the track.
“Provided that there are capital markets, I think our profession will be as eternal as that of prostitution,” he says.
“You’re just betting on human nature – the darker side of human nature. That’s all.”