Short-seller Carson Block: a fugitive CEO, Libyan spies, and $50B fraud

**Auren Hoffman** (0:00)
Hello, fellow data nerds. My guest today is Carson Block. Carson is the founder of Muddy Waters Research, the defining activist short selling firms in the last decade and a half. Since 2010, Muddy Waters has published forensic research exposing accounting fraud at publicly traded companies across China, Europe, US, and has been right enough times that 11 companies have been delisted as a result, which is a pretty awesome accomplishment, actually.
Carson, welcome to Summation.

**Carson Block** (0:29)
Yeah, thanks, Auren. Good to see you and yeah, glad to be here.

**Auren Hoffman** (0:32)
There's a point where you first smell something is wrong about a company.
You have some sort of inkling. Maybe you don't have proof yet or whatever, but you have some sort of inkling from like there to like when you actually publish something like walk us through how that works. Like, are you guys like, I feel like you're kind of like Sherlock Holmes where you're wearing like the Sherlock Holmes hat and you've got the monocle and the pipe and you're going through all the clues and everything or walk us through how it works.

**Carson Block** (1:03)
In general, I think the process is a lot less sexy than people think from the outside. I do also want to clarify that today, I think companies that we believe are committing fraud, right? Then that's really a legal question. That's maybe only 20 to 25 percent of what we write on what we deal with. I think the world's much bigger problem is gray zone conduct where probably from a legal perspective or let's talk about the letter of the law, these companies are within the letter of the law or it's a close call.

**Auren Hoffman** (1:43)
It's going to be like round tripping or categorizing expenses slightly differently or-

**Carson Block** (1:49)
Right. Capitalizing expenses where, yeah, but in terms of the spirit of the law, they're massively violating it. So to me, look, I know that from perspective of an activist short seller, if we can use the F word fraud, people pay more attention, but in reality, you don't have to be across that line legally to massively manipulate your financial statements. And so, it's one of my frustrations with the world is that people in their minds have this hard barrier, well, it's not a fraud, therefore, I don't care. But anyway, the process ends up being similar. So, the first thing to understand is that if we were a typical...
We are a hedge fund management company. So, Muddy Waters LLC, which owns Muddy Waters Research, has an affiliate, Muddy Waters Capital, that manages outside funds. So, if we were a typical hedge fund that was going long short and we're trying to short dodgy companies, say the bar to get... If you're a group of reasonably skeptical people sitting around the table, trying to decide whether a company is like decent short because it's scammy, which we could later go into this if you want, but those are often the worst shorts unless you are going to publish on them. But in the old days, pre-global financial crisis, those were companies you wouldn't want to short. So if that were basically what we're trying to do, we can usually get there in two to three weeks, which I think is probably the same as one of your tiger cubs that actually, I think, still short companies like these for some reason or some of the other funds.
For us, though, to bring something to market, the bar is a lot higher because we're not trying to talk to other short sellers. I mean, if anything, we don't want other people shorting the stock. We're trying to communicate to the long holders. And so the bar that you have to clear as a long short hedge fund manager to decide to short something because you think it's problematic company with dodgy financials, the bar you have to clear to convince long holders that there's a problem. I mean, that bar would be at least 30 feet if we're going to try to think of this in terms of distances. And the problem there, there's always a psychological problem with this, which is when you're telling some, see, we have to avoid trying to make people on the other end, the long holders, feel stupid, right? Because what we're basically saying is like, look, in a normal environment, you're fine, right?
You make your investment decisions based on the information that the company presents. And in the world in which we're supposed to live, the company is not trying to hide the ball from you. But in this case, they are hiding the ball. And here's what's really going on.