The Righteous Rage of Carson Block

    Posted by Drew Bernstein, Co-Managing Partner, MarcumBP on May 7, 2021 8:00:00 AM

    In Forensic Accounting, Investing in China, China short-selling, SPACs

    Famed Short Seller Lets Loose on SPACs, China, Robinhood, and Archegos

    Reveals How He Would Run the SEC and the Concept Behind a New Long Fund

    Carson Block is the most famous short-seller of his generation, known for tome-length, densely researched short reports that eviscerate companies where he believes management is lying and taking shareholders to the cleaners. He is not afraid to use the f-word — “fraud” — in his reports. And as you will discover in this interview, his views on the market are laced with f-bombs and salty stories as well. So, trigger warning, folks: if you are squeamish about looking under the rock that is sometimes Wall Street, this interview may not be for you.

    At MBP, we always like to learn from those with a highly informed, opposing view. While Muddy Waters has not always hooked a juicy fish with its first cast, their reports are always illuminating. Carson is also a master of the media with regular appearances on CNBC and Bloomberg when he has a tale of corporate malfeasance to spin. And he recently launched his specialty podcast channel Zer0es TV, which has interviewed most of the dwindling crowd of activist short-sellers in a very tough market for those betting on stocks going down. At MBP, we advise companies to invest the resources in world-class accounting, internal controls, and disclosure practices precisely so that they don't come into the crosshairs of short-sellers like Muddy Waters. In this wide-ranging conversation, Carson explains the type of red flags in governance and evasive investor communications that cause the short sharks to circle for a potential attack.

    Carson was interviewed by Drew Bernstein, co-managing partner of MBP, with Crocker Coulson of AUM Media sitting in to swap some China war stories. It went something like this.[I]

    How a Short Survives a Bull Market

    Drew Bernstein:

    This has been such an extreme market environment in 2021, with many heavily shorted stocks rocketing in the first two months of the year. And then those crazy valuations crashed back to earth in March and April. What's it been like for you as a fundamentals-based, short-only fund?

    Carson Block:

    The first couple months of 2021 were a culmination of what started happening in 2020, post-COVID. As short sellers, we were dealing with a very difficult market environment throughout the second half of 2020. The most shorted stocks began a parabolic trajectory. Part of it was there was a lot of obviously retail euphoria. The high watermark for a lot of these "sh**cos" seems to be mid-February of 2021. Since then, I think retail has lost money. The call option volume is way off.

    Clearly, a much smaller portion of second-round stimulus checks made their way into the market. Retail has lost money, number one. Number two, they're looking toward the end of the pandemic and thinking about consuming that check instead of putting it into the market.

    There were some other dynamics. You don't want to blame it all on one guy, but Bill Hwang of Archegos was a real factor. It seems at one point he was slinging a book that was in excess of $100 billion. He was in really squeezy names like GSX. I think that was a powerful dynamic with Archegos and other market participants playing the short squeezes.

    But I think ultimately what happened — and this goes back to an interview that I did in December on Zer0es with Andrew Left — he predicted that 2021 would be a pretty good year for short-sellers. The reason was that the supply of speculative companies exceeded the demand by virtue of the explosion of SPAC IPOs, and de-SPACing transactions. That's the story of how the internet bubble imploded. I think there's only so much demand for highly speculative companies. With the flood of SPAC IPOs, it just became too much supply for that demand.

    Drew Bernstein:

    You have these 600 or so unicorn companies out there that are still out there. Do you consider unicorn companies speculative — because many people look at them as too big to fail?

    Carson Block:

    It seems in the IPO market — or now maybe SPAC market — as valuations of private companies exponentially increase, it relies on the greater fool theory. There would always be somebody else out there to purchase it. If you were to tell these portfolio managers, "Hey, you have to live with this company for three years," f***ing nobody would be subscribing to IPOs.

    When guys get warrant coverage, you've seen the total evisceration of the lockup theory. The average investor thinks people have confidence in this company and want to own its stock long-term. We should be at a point right now where we see air coming out of the market.

    Drew Bernstein:

    Do you find that you have to deploy different hedging strategies or trading approaches to avoid being incinerated by the Reddit and Robinhood crowd?

    Carson Block:

    Yeah. We used to be short-only. I now say that we're short-long. We are generally hedge dollar-weighted, equal-basis on the long side. We do it using factor baskets. We started this about three years ago.

    You've got your software program that will analyze the movements of a particular company we're looking to short. It will try to break the beta down into much more granularity than just buying the index. If something has a high momentum component, we'll go long a bunch of momentum stocks. Then we'll go long some of the industry stocks, and similar cap weighting, etc., based on what the software tells us are the factors that drive the beta. It's been a better way to hedge.

    Our joke internally is that the purpose of hedging is to make money on it. Hedges usually go up, but sometimes they go down, even when the underlying goes up. The correlations got tough for us last year because some of the stuff we were in was still highly shorted. It got so squeezy.

    The Torments and Triumph of the Archegos Debacle

    We came out of 2020 being better traders, a much better understanding of the technical dynamics. The stock that kicked our ass harder than anything has ever done was GSX Techedu. That was one that Archegos Capital was enormous in, and between Archegos, the swap positions, plus some disclosed by Tiger Global…

    Crocker Coulson:

    And Triple Q.

    Carson Block:

    Right, the swap positions were probably a combination of Archegos, Triple Q, and Teng Yue in New York, and maybe some others. So that was over 70% of the float. Then stock got some passive buying because it's in the China indices. It's in the education indices. When you choke that much of the float and the guy from Triple Q was bragging about how he was selling at the money put options — which we heard from desks — the buyers of those put options were often option market makers, and they were going to scalp gamma. They go long GSX and try to play a little bit of the rise and try to make a little bit more than their premium on the upside while being hedged on the downside through the put.

    Between choking the float and the technical dynamics in this, it is brutal for short-sellers. We saw that dynamic play out a lot in some of these other smaller float stocks, especially where there was retail enthusiasm.

    We have to draw a Venn diagram. One circle is things that are fundamentally short-worthy, good short theses that we like. And then the other circle is things that, from a technical perspective, are shortable. We have to focus on that intersection.

    As of February, I thought that intersection could be kind of small. But since a lot of the euphoria has drained from the retail segment of the market, I'd say that that opportunity set of overlap is more significant.

    The upside is that since there's more liquidity in the options market, why don't we just buy puts now? Previously there wasn't enough liquidity in most of these puts to move the needle for us. But with the increased liquidity in the options markets does allow us in some instances to get reasonable size on puts.

    Drew Bernstein:

    You made your bones identifying what you saw as questionable or even fraudulent names from China. You then expanded your hunting grounds to the U.K. and Europe with great success. It seems like you're now focusing a lot of attention on SPACs. Is that a fair statement?

    Carson Block:

    I would say that we expanded to the U.S., U.K., continental Europe. And yeah, we've now been looking at SPACs.

    If you go back and understand the arc of my career, I grew up on the wrong side. My father was a micro-cap analyst. I learned that all management teams are good and trustworthy. If something goes wrong, just ask the CFO, "Is something wrong?" Right! I learned some pretty hard lessons early on.

    By the time I was 24, I had realized that “No, that's not the world.” And when I left the business for quite some time. I became a lawyer and then a real-world entrepreneur in China. And then, accidentally, I got back into the investment business and into short selling. I was diligencing a company for my father. When I started doing this in 2010, I'd say for the first 18 months. It was a flat-out sprint.

    Rewind to the Beginning in China

    Drew Bernstein:

    You started with the Orient Paper report in 2008, wasn't it?

    Carson Block:

    No. We published it in June of 2010.

    Crocker Coulson:

    That's seared into my brain matter.

    Carson Block:

    I can remember the exact date because it was coincidentally my mother's birthday when we published.

    Crocker Coulson:

    Happy birthday, Mom.

    Carson Block:

    I almost forgot to call her that day because it was so insane. I was still living in Shanghai at the time.

    Drew Bernstein:

    It was insane for all of us.[ii]

    Carson Block:

    So, the next 18 months were crazy, right? Because then we realized there was a systemic issue. All these people reached out. I would just open the 10-K and start laughing. And we had real competition — guys like Citron Research, and Kerrisdale, and Glaucus — to try to expose these things before somebody else did.

    When I came up for air and thought about why all of these abject frauds from China were able to list in the U.S? It's conflicts of interest. It's disclaimers. And the beauty of securities lawyers just writing verbiage that nobody can stay awake to read.

    Drew Bernstein:

    Andrew Fastow said, "A great lawyer writes a 10-K that's legally compliant, that nobody understands."

    Carson Block:

    Exactly. There were portions of the filings that, on the first pass, I knew something was interesting there, but I would have to read it several times to understand it. A great example is Sino-Forest. In their 2009 annual reports — the last annual report it had published — they had a note regarding accounts receivable. Buried in the middle of that disclosure was a sentence to the effect, "A majority of the accounts receivable are settled by instructing the debtors to settle accounts payable."

    I was like, "What the f**k does this mean?" And I think what this means is, "The majority of our accounts receivable, we don't even receive the money. We don't even pretend to receive the money. We're just telling the buyer to pay our supplier directly."

    This activity was so illegal in China because of the VAT implications. And it turned out to be more than a majority of their revenues. When there was a bankruptcy court, the administrator ultimately stated that over 95% of the reported gross profit had never hit Sino-Forest's bank accounts.

    Drew Bernstein:

    Jon Carnes told me when I asked him, "What's the biggest mistake of your life?" He said: "China Sino-Forest," he tells me. "Had I just spent $500 to get on an airplane and go there, I would have been very rich."

    Carson Block:

    We didn't have the credibility to go after that one until after China MediaExpress. That was a really, really bitter fight. Andrew Left of Citron came out two or three days before we did. But it hung around with a market cap of around a billion because investors fell back on this Holy Trinity. They said, you've got Hank Greenberg, since C.V. Starr was the biggest shareholder. He really knows China. Then you've got audited by Deloitte. And then Global Hunter, whose analyst was very supportive. But when Deloitte resigned with flying colors, back when the auditors could do that, the whole story fell apart. That was the springboard for us to do Sino-Forest.

     After about 18 months, I just took a breath, and I tried to think about how these companies were able to list. And I realized these are the exact root causes that drove me out of the industry in the beginning. And that's the lack of accountability, the conflicts of interest, and just how the system is set up.

    So, it was at that point, I realized, this really should be a global business that I'm in.

    Carson Gets Interested in SPACs

    Drew Bernstein:

    What's attracted you to the SPAC vehicle as potentially having some attractive targets to apply your unique skills?

    Carson Block:

    Number one, the size and liquidity of these things. It was a big deal in the early days when we wrote on a company that had a billion-dollar-plus market cap. Now, these complete pieces of s**t are five, six billion dollars, day-in, and day-out.

    From a technical perspective, there is ample liquidity, especially post-warrant exercise. A lot of stock has to be unloaded. If you get in that period in between when the warrants are exercisable and when the lockup expires, you will have this tailwind because these guys are going to just be slamming bids to get out — assuming you're not massively wrong.

    Also, you don't get a really choked float. After the PIPE, it's a really fragmented ownership base. So, it's harder for the thing to get squeezed upon you.

    The other thing, in my view, is that after the explosion in SPAC issuance last year, there is a rush to do these de-SPACing transactions. It was preying upon retail investor euphoria. The SPAC promoters are probably going to take umbrage at the word prey. I get it. I think the vast majority of them are not sitting around and laughing at how stupid retail is and saying, "Ha, ha, ha. How do we screw them?" I just think people have an easy time telling themselves whatever they need to when it comes to an opportunity to make a lot of money in a really short period of time.

    If you're a SPAC promoter, rather than looking skeptically at a company's projections and asking yourself, "Do I think they can really make these?" You’re like, "Well, they could make these projections. F**k it. Sign them up!" That is the twisted incentive structure of SPACs. And retail doesn't get the joke, right? They're like, "Oh, well, all these sophisticated institutions are in this." And it's like, bro, just like raining stock down on your head, man. Like nobody's going to tell retail that, right?

    Crocker Coulson:

    Well, fortunately, we're interviewing you. So, someone will.

    Carson Block:

    Yeah. When I try to tell retail that, like I usually get a whole bunch of like D.M.s, of like, "F**k you."

    The stuff in Asia is obviously more egregious than how it works in the U.S. For these big conferences in Asia, the big, long-only P.M.s would arrive and would be met at the airport with limos that would have “talent” in the limos and other party favors. And they're told, "Look, if you want this kind of treatment, year-in-and-year-out — because it's probably a lot more fun for the week than your life back home — you've got to be there for the IPOs, man. You've got to help us out."

    It's just that the human weaknesses that can be exploited are myriad.

    Drew Bernstein:

    Can you take us through some of the SPAC names that you've gone after lately?

    Carson Block:

    There are only two that we published on. Hindenburg Research has done more. The first one was MultiPlan. It's ironic because we weren't on a SPAC theme at that point. We heard about MultiPlan from some credit-focused investors. The idea of doing short activism in credit has interested me for a while. Because every time we go public, we're using brand equity. If we were doing this every week or every other week, people would stop listening, right? And you don't have 25 awesome shorts, at least activist shorts, in a given year anyway.

    Sometimes these things, no matter how right you are, the stocks go up. So, every time you come out with a new name, you are taking a brand risk. People are going to touchdown dance on social media about the s**t that went up and didn't work. But with credit, you can hit a much more sophisticated audience. Credit investors might not be capable of launching rockets. But they are much more sophisticated than equity investors. And the channels for targeting credit investors can be very narrow, so we don't have to use a lot of brand equity. There's no point in going on CNBC to pound the table on something that's purely a credit short.

    There we were, doing the work on it as a credit short, when, lo and behold, Churchill announced that its SPAC vehicle was going to buy it. I'm an atheist, so I don't say prayers, and I don't believe in karma, but…

    Crocker Coulson:

    Do you believe in luck?

    Carson Block:

    Sometimes you have to.

    Churchill Capital Rescues A Year of Misery

    I hated last year on a personal level. I hated the misery that I saw out there; I hated the societal dysfunction that this exposed. I spent most of the year just really solemn. Despite getting just shafted on GSX — and Nano-X wasn't great for us either — I did get a business gift. The gift was Churchill Capital being dumb enough, lazy enough, or whatever to buy f****ing MultiPlan when we had our short thesis.

    It's a business that's been around a long time. There's no blue-sky story on it. It went public after four or five straight private equity groups had defiled the corpse. They were losing their largest customer, and their largest customer was setting up a competitor that intended to deliver the service at a much more reasonable cost. So, yeah, that was MultiPlan.

    The one that we did more recently — that is a middle-of-the-fairway, just ridiculous SPAC — is XL Fleet Corp. They help create hybrids — or, someday, electric vehicles. They have bolt-on hybrid systems for fleet trucks, pickup trucks, and box trucks. They were saying, "We did $7 million in revenues in 2019, and we're going to do $1.4 billion in 2024."

    I was like, "Really?"

    We can't attack a future number, just like I cannot win a debate about whether God is real or not. But we could focus on the intellectual bridge to get investors to believe this $7 billion projection. They cited a pipeline of $220 million. But the pipeline, which is not GAAP, not audited, turns out to have been, at least from our research, greatly exaggerated.

    It's really three questions that we ask.

    Is the material information that the companies put out there materially accurate? Or has there been a lie of commission?

    Has the company put out all material information? Or has there been any lie of omission

    Or is the market correctly understanding what the company has put out? Most commonly, that would be like drug trial results that people don't understand.

    With XL, they presented all the customer logos. But the vast majority of those customers had not reordered, and most of the orders had been small. Hype and bulls**t. That is the middle-of-the-road for how activist short-sellers would look at most of these SPACs.


    Facing Down the Smart Money and the "Lots of Money"

    Drew Bernstein:

    One of the differences, Carson, with SPACs, is that often they have very sophisticated investors as part of a sponsor team or PIPE investors. We talked about MultiPlan, and Michael Klein had great success with Clarivate. You had people like Michael Dell, the Kingdom of Saudia Arabia, Laurene Powell Jobs – does it give you pause when you are going up against "smart money" like that?

    Carson Block:

    Well, first of all, the smart money will make mistakes. Just go to Sino-Forest, right? John Paulson's not a dumb guy, and he didn't suffer for lack of resources. Please don't put Saudi Arabia in the "smart" money category.

    Crocker Coulson:

    How about the “lots of money” category?

    Carson Block:

    In the "lots of money" category, yeah. No f***ing way they're smart. I don't know that Michael Dell is sitting down, pouring through the data, and looking at these things. It's a family office. A reasonably big family office, with people who up f**k up, people who realize that they don't get paid well unless there are deals.

    That's one of the dynamics that I think many people misunderstand about Temasek, the Singaporean sovereign wealth fund. The senior ranks of Temasek are staffed by people who have come out of banks for a few years to do their time at Temasek and want to go back to banks. So, what are you going to do when you're at Temasek? You're going to pay your banker friends, and the banks can make their rips on that.

    So, it's not Michael Dell making the decision.

    Drew Bernstein:

    I assume that you steer clear of SPACs before the de-SPACs since the cash in trust puts a pretty hard floor on the lower limits of the valuation?

    Carson Block:

    What do you do as an activist short-seller? What are you going to attack? Maybe if the deal's been announced but hasn't closed, and it's trading at a hefty premium. We like to do it post-warrant exercise, or at least when the warrants are exercisable.

    Drew Bernstein:

    How do you analyze the shareholder base of a SPAC name? Does that influence whether it makes a viable or attractive short target for you?

    Carson Block:

    In the window of time that we're looking at for a SPAC, we think there's a lot of fragmentation of the float among retail investors. In this environment — where we have to think a lot about float concentration and whether there is a supply of stock available for sale — a fragmented float is preferable for us. We obviously don't know the individual retail guys who own this unless we wanted to go on Twitter or Reddit and find some of them. But a more fragmented base is better.

    It's funny. We used to prefer a more significant concentration of institutional investors. Not the passive guys, but the active guys. But now we are thinking about controlling floats. When you look at stocks through that lens, retail is much better, much less likely to result in a squeeze.

    Drew Bernstein:

    What's your big picture view on SPACs as a financing structure? Do you simply think that there are some juicy, rotten apples in this barrel? Or do you have concerns about SPACs generally as an alternative path to going public?

    Carson Block:

    Well, again, looking at the incentive system there for the promoters, like you said earlier, even if it's a lousy deal, getting it for basically free can be very lucrative. Structurally, there's a problem. Charlie Munger said pretty much all you need to know about investing when he said, "Show me the incentives, and I'll show you the outcome." So that's one issue: structurally, they are unfavorable for anybody who wants to buy and hold the stock.

    But the other thing, it's interesting because securities regulations get into a murky area concerning the First Amendment and free speech. When you have the IPO process, you have these limitations that are almost prohibitions on making forward-looking statements about the business. If a company were to do that, that would be conditioning the market, and it could torpedo the IPO.

    SPACs are exempt from that because they're treated like it's an operating business that makes an acquisition — Microsoft buying XYZ company and wanting to communicate to the market what its expectations of the business are. That’s good when you're talking about an operating business acquiring another company. That's pro-transparency. But SPACs are not operating companies.

    If the king of the market said to me, "You can write the regulation here as to how SPACs, how much they may disclose, and how they disclose," it would be difficult. Because you would want to make sure that you are differentiating SPACs from other publicly traded companies, and you're not limiting their speech. Honestly, if there were fresh challenges to some of the IPO restrictions, I don't know whether they'd survive scrutiny on First Amendment grounds.

    For investors, it's buyer beware. But the real cure for it — and this might sound callous to say — but retail investors have to get spanked to learn their lesson.

    What If Carson Got Tapped to Run the SEC?

    Drew Bernstein:

    If President Biden were to call you tomorrow and say, "Carson, Gary Gensler is out, and I want you to run the SEC," what would be your top ideas would you bring to the commission to change how SPACs are regulated?

    Carson Block:

    Well, first, we'd have to talk about the prohibition on marijuana in the administration.

    Drew Bernstein:

    Sure. But what would be the first thing you’d do to clean it up?

    Carson Block:

    I have a problem in general with safe harbor protection of forward-looking statements. Whether it’s a SPAC or just a company that's a seasoned issuer, I think that, without chilling speech, we need to look at how liability can attach for egregious misrepresentations. That's something I would want to look at. And it's hard because you're talking about a really fine line here between chilling speech and providing a blanket exemption to say whatever you feel like saying. I would look at safe harbor statements to narrow the scope of the protection that they provide.

    I'd say my overall top choice for cleaning up markets — though not a panacea — would be to eliminate attorney-client privilege during the internal investigations. That's like you've got cancer on your foot, but the doctor doesn't want to tell your head that. The shareholders are kept in the dark about the state of their own company about extremely material matters.

    Drew Bernstein:

    Do you think that could be remotely realistic?

    Carson Block:

    Realistically, can anything be accomplished? Anything substantive? There's so much sand in all of the gears of reform in our government and society. I don't think you can even fix your f****ing golf club these days.

    Drew Bernstein:

    The explosion of the SPAC is the most promising development to drive the revival of new public company formation in a long time. I'm sure that you're aware that the number of U.S. public companies has been declining for the last 20 years. The SPAC boom means more innovative companies, accessing growth capital, increasing jobs, and more investment choices.

    Surely that's a good thing, whether you're playing the long or short side of the market?

    Carson Block:

    It's funny how ‘innovative company” has become a synonym Sh**co. Every real piece of s**t calls itself an innovative company — especially when they're complaining about short sellers.

    I do think that there's an issue with the reduction in the number of publicly-traded companies. And yes, at the bottom end of the market, there's a substantial compliance burden. That's one of the reasons, when I look at a micro-cap company, the burden of being public relative to your size is substantial. Why would you be public?

    The reduction in public companies also speaks to more significant trends at work in the economy, which is consolidation — that so many industries are turning into oligopolies. There are lots of reasons for that. One of my favorite things to complain about is the tax code and how its complexity is pro-large business and anti-small-and-medium business. Structurally, throughout our economy, we greatly favor consolidation. Monetary policy is another big part of that since mergers and acquisitions are driven by cheap debt.

    The number of public companies should be increased, but not by lowering standards and making it cheaper for even sh***ier companies to list.

    Drew Bernstein:

    I know that Andrew Left famously announced he was out on the short game in late January after being subjected to an online trolling campaign, as well as taking some significant losses. I wonder about the personal impact on you. When you launch a campaign against a name with broad retail ownership or significant institutional backing, what have you experienced? Does it freak you out?

    Carson Block:

    Okay, so the Andrew thing first. In 2020, Andrew's fund, which manages outside capital, was up net 155%. Now, that guy has put up far bigger numbers than I ever will. But he did not do that on the short side. Andrew has a very robust strategy, or group of strategies, that are not involving activist short selling.

    So, if you're Andrew, you get to a point, I'm sure, where it's like, "Well, why is this worth it? Why is all the vitriol worth it?" — when it might've even been a drag on his performance last year, for all I know.

    For me, we also do this because we think there's a purpose to it. You have to treat this like a business and respect it as a business, and we are fiduciaries. But we also do see a sense of purpose in that. I think that the bar for me to say, "This isn't worth it," is a lot higher than it is for Andrew.

    "Anger Is the Emotion I Experience Most Richly"

    Drew Bernstein:

    That's something that Dan David would say. I'm surprised to hear it from you, honestly.

    Carson Block:

    There was a really good profile on me in Institutional Investor recently where I talk about getting legitimately angry at the people who cheat the system. A big part of that was what happened early in my career, where we were getting lied to. We were long a company that was adjudicated to be a fraud, called Rent-Way. And my father had followed the company for years, was really tight, he thought, with the CFO, who went to prison. There was anger from that.

    Also, when I was in China, and I had real-world business experience. And I can't overstate how valuable it is to try to have a real-world experience, especially asset-heavy business — if you want to understand investing — because it is so different from just looking at spreadsheets and models and the numbers.

    It was hard. I never succeeded. I thought this would be a great idea, the first self-storage in mainland China. And that's when my education began. I just really enjoyed the challenge. I enjoyed creating an entity that took all of these disparate pieces, the people, and the money, and became this organism. I was enamored with that concept prior to writing my first short report.

    When I looked around at people in China, who just disrespect the rules of entrepreneurship because they cheat, lie, and effectively steal money through these lies, they avoid the laws of economics and business. I really disliked that. Dealing with that guy in China who just was like, "Eh, rules don't apply to me. Go f**k yourself. You're an American. You're an attorney. You're not going to break the rules. I am. F**k you." I hated that guy.

    So, when I came across Orient Paper, you've got to understand it was cathartic. It was like, "Oh, one of these motherf***ers has come to the U.S. Now, this is all my rage in dealing with guys like you in China and getting f***ed by you for years coming right back at you."

    That was part of the purpose in the early days, and it continues. Although I'm frankly kind of numb at times, and that sucks. It's like, "Oh, another China fraud. Okay." It used to be the most amazing thing. "Oh, my God, they totally made up this supplier! Holy s**t!" Now, it's like, “Yeah, yeah, fake supplier, fake customer, okay.” It's hard to get that charge.

    It's a personal dysfunction, but I function best when I'm angry. Anger has always been the emotion that I experience most richly. It helps when I can take my rage and redirect it against people.

    Some of these — especially if we're talking about the financially engineered companies where they're not breaking the law — I'm sure these CEOs when we come out with a report, and I'm just ripping into them and their stock promoters. I'm sure they're sitting there going, "Why the f**k did they pick on us? What are we doing that 1,000 other guys aren't doing?"

    Drew Bernstein:

    Just make sure you pick up the phone and call me before you get angry at me.

    Carson Block:

    There might have been deception there on the part of Archegos. Look, Bill Hwang has engaged Sitrick and Company since this has happened, which tells me two things.

    Number one, the stuff that's fallen in between his sofa cushions is far more money than I'll ever have. Number two, he's worried about something. Because this is not a high-profile guy, he's not somebody who needs to have this sterling reputation. I think that that relates to concerns about litigation and potential liability. I really, really hope the SEC looks at the trading in GSX because I just can't see that these guys went long GSX on such large size because they believed the fundamentals were so good.

    Look, the major point here. There's a difference between compliance and ethics. We don't live in a world that thinks of ethics anymore. So the best you can get is compliance, which sometimes overlaps with ethics.

    Questions should have been asked. But if these were all done through different swap counterparties, I can't pound the table as hard and say that the primes should have been asking questions and looking at these trades — although God knows we've had our trades scrutinized numerous times by the primes.

    Crocker Coulson:

    That's because you're not the most popular kid in the class… I'm sure this comes as a surprise to you.

    Carson Block:

    Yeah. I know. Seriously.

    How Muddy Waters Zeroes in on A SPAC Target

    Drew Bernstein:

    Your team must screen many stocks; have you ever met a SPAC you like?

    Carson Block:

    Actually, we don't screen at all. There are other activist short-sellers who do. We're not looking for specific metrics that trigger our scrutiny because we feel like we get so many false positives and false negatives without context. You need to understand the big picture to put any of these things in context.

    Now, that said, we have started looking at a lot of the SPACs. The list of de-SPACing SPACs, especially stuff that seems highly promotional and dodgy, is pretty long. This is maybe somewhat akin to the early days of what I was doing with China, although all of those were screamingly obvious when I cracked open the 10-K.

    We know that the sea is deep, so we're quickly poking at these things and seeing which ones have the problems close enough to the surface so we can seize on those. If it's not that close to the surface, we just move on to the next one and look for the one that is.

    That's partly because we feel a little bit of this race-against-time factor. Because how long are these things going to maintain their valuations before this all collapses? Or how long until Nate [Nathan Anderson of Hindenburg Research] or somebody else goes and publishes on them? We're trying to do that initial work kind of quickly.

    But in general, the way that we usually evaluate things at the top of our funnel is really: What seems too good to be true? What's got a lot of hype and euphoria around it? And then we just start looking for qualitative issues. A lot of it then is print out four years of transcripts and start reading through all the transcripts sequentially. Is the talk promotional? Are they evading questions?

    One of the most asinine exercises in investing is being on a conference call as opposed to reading the transcripts. Because you see all the time, when you read these transcripts, questions don't get answered. The way to not answer a question on a conference call is to throw a bunch of verbiages out there — buzzwords and bullshit. And at the end of a two-and-a-half-minute non-answer answer, the person who asked the question is just; they don't want to want to say, "I'm too stupid to understand you." So they're just like, "Oh, okay. All right. Thanks, guys."

    Crocker Coulson:

    As someone who sometimes writes those scripts and answers, I am trying not to feel offended.

    Carson Block:

    Right. There's a real skill to evading a question in a verbose way. Anyway, we look at the transcripts, and we like to see what's been evaded. Is that consistent? And are there other elements of what the CEO and CFO are saying that makes us say, "That could be interesting?"

    Muddy Waters Goes Long U.S.-China De-Coupling

    Drew Bernstein:

    Last question, Carson. Do you ever see yourself transitioning to the long side? Or is this short stuff just in your blood?

    Carson Block:

    I'd find it much more intellectually rewarding than long side stuff is. But we're looking at doing something that would be long-oriented now. But it has a little bit of synergy with what I've done on the short side. Coming out of COVID, I think that a significant portion of the world's foreign direct investment, the incremental dollars, will be directed away from China, and there will be beneficiaries of that.

    Some of that is just COVID-involved supply chain disruptions. But this trend was occurring before COVID. And I think that China has itself to blame. It's become increasingly totalitarian and repressive, corrupt, and problematic, and aggressive over the years.

    I can't stand President Trump. But the one major thing that he got right was, absent him, most of America, and indeed the political class, would not have awoken to the issues, the whole of society threats that China and its government — not its people — but its government posed to the United States.

    So, launching a long product trying to capture the growth in some of these other economies and areas of the redirection of FDI dollars away. In many ways, it's not as exciting as short selling and solving a puzzle. But it's an interesting business, and it's one also that I believe in. Because I can't stand the Chinese Communist Party. I feel like there's a synergy between my feelings towards the CCP and what this product would hopefully do.

    Drew Bernstein:

    Thank you so much, Carson. We may not agree on everything. But this interview has been enlightening.


    My pleasure. Glad we could do it.

    [i] The interview has been edited for clarity and concision, as best we could with someone with views as far-ranging and provocative as Carson Block.

    [ii] Carson Block published his first short report on a company called Orient Paper. Drew Bernstein served as audit chair at the time. A special committee of the board retained a law firm and forensic accounting firm that found no evidence of fraud. Orient Paper was a client of Crocker Coulson’s investor relations firm at the time, CCG Investor Relations.

    Learn more MBP SPAC