Waters Get Muddy for Short Seller


New York, NY – According to an article published by Bloomberg last week, Muddy Waters, the well-known short seller and Chinese research firm, has been struggling in recent months to convince hedge funds that its latest targets should be sold short, like one of its earlier targets – Sino-Forest Corp.

Background on Muddy Waters

Muddy Waters was founded in 2010 by Carson Block, a 35 year old US lawyer, who had moved to Shanghai in 2005 to work for law firm Jones Day.  In 2007, Mr. Block opened his first company – a self-storage firm called Love Box Self Storage.   Mr. Block’s introduction to short-selling research came in 2009 when his father, the owner of research firm W.A.B. Capital, asked him to do research on Orient Paper Inc., a China-based paper manufacturer and distributor listed on the American Stock Exchange.  W.A.B. Capital never issued the report.

However, in June 2010, Orient Paper became the subject of Muddy Waters’ first research report. Published on the firm’s website, the report alleged that Orient Paper had overstated its 2009 revenue by about 40 times, and that it overvalued its assets by at least ten times.

Muddy Waters made a name for itself when on June 2nd, 2011 it released a research report which said that Sino-Forest, Corp. a timber plantation operator, headquartered in  Mississauga, Canada, and with plantations located in southern China, claimed to own land that didn’t show up in government records.  The share price of Sino-Forest plunged more than 70% in two days, and the firm lost $3.3 billion of market value after the report was released and hasn’t traded since August.

Click here for more details on Muddy Waters.

Recent Calls Less Successful

Two of the firm’s more recent calls, however, have been much less successful than its report on Sino-Forest.

On June 28th of last year, Muddy Waters issued a research report on Spreadtrum Communications, a Shanghai-based designer for wireless communications chips.  Muddy Waters reported that it expected “a high risk of material misstatements” in Spreadtrum’s  financial reporting, citing a six-fold surge in inventory in 2010.  Muddy Waters also questioned why then Chief Executive Officer Ping Wu and Chief Financial Officer Richard Wei left the company months before it reported 137% revenue growth in the third quarter of 2009 over the previous quarter.  The company’s shares tumbled as much as 34% in the first day after the report was released.  However, Spreadtrum’s stock price is now trading at $14.11 — up 5% from the day before the Muddy Waters report was released.

On November 21, 2011 Muddy Waters alleged in its research that Shanghai-based Focus Media overstated the number of screens in its LCD network by 50% and that it significantly and deliberately overpaid for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005.  Focus Media’s share price dropped 39% from $25.50 on the first day following the release of the Muddy Waters report.  Focus Media shares are now trading at $26.23 – 2.9% higher than the day before Muddy Waters initially published its report.


So, does this mean Muddy Waters was wrong in their more recent calls?  It is really hard to tell.  Some argue that the rise in the share price of Spreadtrum and Focus Media is more a reflection of the general rebound in Chinese stocks rather than the fundamental strength in these companies.  However, others suggest that it is highly unlikely that Muddy Waters will be able to replicate the success they had with Sino Forest, due to the already depressed price of Chinese stocks, and the fact that larger companies have the resources to fight back against Muddy Waters’ accusations.

Regardless of the cause, the fact that Muddy Waters’ recent research calls have not panned out could dampen hedge funds willingness to jump in and short stocks identified by the Chinese short seller in the future.



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