Carson Block, the founder of Muddy Waters, is one of the biggest names in the activist short seller community. His model is relatively simple and highly controversial. Starting with a deep research process they identify market frauds and accounting mispractice, take a large short position and then publish a short report that makes public what they found. Making this information public will often push the share price down (and sometimes alert authorities to take their own actions) and Muddy Waters will make money on their short position.
Muddy Waters has been particularly focused on Chinese companies, after making its name with reports on Sino-Forest and NQ Mobile. The documentary The China Hustle does a good job of telling Muddy Waters’ story.
The activist short seller model has come into criticism as it has got more prominent and more funds try to emulate it. In particular because activist short sellers sometimes get it very wrong. But the US Department of Justice is investigating the activist short seller community for a whole other reason – allegations of collusion amongst firms. According to this article, “Prosecutors and the Securities and Exchange Commission are examining whether short sellers are improperly teaming up to attack public companies”.
For Carson Block, the world has flipped. The research his team put out often was used by authorities to start their own investigations. Activists were helpful in authorities’ efforts to regulate the market. But now things have changed and Muddy Waters is in the spotlight.
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