Q&A with Carson Block
By Lydia Chen |
July 22, 2011, Friday
|
Print Edition
Print Edition
CARSON Block, who now splits his time between the West Coast and Hong Kong, left Shanghai at the end of last year for lifestyle reasons. Shanghai Daily managed to have an e-mail interview with him this week to give our readers more insight of what he is doing.
Q: Six Chinese companies so far have been attacked by Muddy Waters. Are there going to be any more this year?
We prefer to use the word "exposed" rather than attacked, although in the case of SPRD (Spreadtrum Communications), we were raising questions rather than exposing.
Q: How do you determine which company will be the next target of short-selling?
That's a hard question to answer. We look at a number of companies simultaneously, and if one of them clearly seems to be a fraud, then we'll pursue it.
Q: How long does it usually take to complete an investigation of a company?
Thus far our normal research cycle is two to three months.
Q: You said in previous media reports that you don't have a fixed team but use consultants on a project basis. Why is that? Are you planning to set up a fixed team in the future?
Using consultants enables us to use the best people for a given project; it allows for a more flexible research approach. We may set up a small fixed team, but we'll continue using consultants as well.
Q: Are you worried that one day you will face lawsuits from companies you have targeted? What kind of precautions have you made or are going to make to prevent this from happening?
We research companies quite carefully, and we have a lot of information that we don't publish. Should we be sued, we have no doubt that we would defend ourselves successfully.
Q: What do you think of the attention Muddy Waters receives from investors and of the influence you have in the market right now?
Our primary goal is to protect investors, and in the current environment, investors are placing the burden of proof on the companies. We think that this is a healthier attitude than throwing money at anything with a good story to tell. Nonetheless, we would like investors to do their own homework on the companies and not take our word, or anyone else's word, as definitive.
Q: What is your understanding of how fraud is committed at Chinese companies listed overseas? Do you think auditors and underwriters are a part of the problem?
This is a complex issue. Professional service firms have made substantial investments in their China businesses, and there's a lot of pressure to generate revenue. I think some of them have been cutting corners as a result.
Q: Is fraud a widespread problem at Chinese firms? Please explain.
Nobody knows how widespread the problem is. But you have to differentiate between real businesses fudging numbers and companies whose primary purpose is to defraud investors and steal their money.
The former kind of company might exaggerate revenue by 20 percent and boost profit margins somewhat, and I have no guess as to how widespread that situation is.
The latter kind of company states that it is many times its actual size; in other words, its business is largely imaginary. I can't state how widespread this problem is either, but this is the type of company on which we've mostly focused to date.
Q: All the firms attacked by Muddy Waters are Chinese firms listed in overseas markets. Do you think you will focus more attention on firms that are listed in China's domestic markets, like the A-share markets?
I doubt that we'll publish A-share stocks.
Q: Could you give us a rough idea of how much you've earned from shorting Chinese firms so far?
It is our policy not to comment on this.
Q: You told CNBC that you are now looking for companies on which you could go long. Have you found any candidates?
I'm looking at a smaller US-listed Chinese company now, but I'm not sure how it will turn out.
Q: Six Chinese companies so far have been attacked by Muddy Waters. Are there going to be any more this year?
We prefer to use the word "exposed" rather than attacked, although in the case of SPRD (Spreadtrum Communications), we were raising questions rather than exposing.
Q: How do you determine which company will be the next target of short-selling?
That's a hard question to answer. We look at a number of companies simultaneously, and if one of them clearly seems to be a fraud, then we'll pursue it.
Q: How long does it usually take to complete an investigation of a company?
Thus far our normal research cycle is two to three months.
Q: You said in previous media reports that you don't have a fixed team but use consultants on a project basis. Why is that? Are you planning to set up a fixed team in the future?
Using consultants enables us to use the best people for a given project; it allows for a more flexible research approach. We may set up a small fixed team, but we'll continue using consultants as well.
Q: Are you worried that one day you will face lawsuits from companies you have targeted? What kind of precautions have you made or are going to make to prevent this from happening?
We research companies quite carefully, and we have a lot of information that we don't publish. Should we be sued, we have no doubt that we would defend ourselves successfully.
Q: What do you think of the attention Muddy Waters receives from investors and of the influence you have in the market right now?
Our primary goal is to protect investors, and in the current environment, investors are placing the burden of proof on the companies. We think that this is a healthier attitude than throwing money at anything with a good story to tell. Nonetheless, we would like investors to do their own homework on the companies and not take our word, or anyone else's word, as definitive.
Q: What is your understanding of how fraud is committed at Chinese companies listed overseas? Do you think auditors and underwriters are a part of the problem?
This is a complex issue. Professional service firms have made substantial investments in their China businesses, and there's a lot of pressure to generate revenue. I think some of them have been cutting corners as a result.
Q: Is fraud a widespread problem at Chinese firms? Please explain.
Nobody knows how widespread the problem is. But you have to differentiate between real businesses fudging numbers and companies whose primary purpose is to defraud investors and steal their money.
The former kind of company might exaggerate revenue by 20 percent and boost profit margins somewhat, and I have no guess as to how widespread that situation is.
The latter kind of company states that it is many times its actual size; in other words, its business is largely imaginary. I can't state how widespread this problem is either, but this is the type of company on which we've mostly focused to date.
Q: All the firms attacked by Muddy Waters are Chinese firms listed in overseas markets. Do you think you will focus more attention on firms that are listed in China's domestic markets, like the A-share markets?
I doubt that we'll publish A-share stocks.
Q: Could you give us a rough idea of how much you've earned from shorting Chinese firms so far?
It is our policy not to comment on this.
Q: You told CNBC that you are now looking for companies on which you could go long. Have you found any candidates?
I'm looking at a smaller US-listed Chinese company now, but I'm not sure how it will turn out.
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