The Soul of a Short-Seller

28:42And what I got from the early investigation, I think they were, the authorities were saying that the captain did not, like, shut the hatches or, you know. The windows. Yeah, the windows or the hatches. Yeah. And I think, and so like, I, it's a really crazy karmic thing. Extremely karmic, especially because I think the CFO who had also been acquitted was, was killed like a few days earlier in a bicycle accident. That's okay. That was the part I was, I was going to get there. There was another related, related death unrelated to the incident, but related to the situation. Yeah. And look, I think, I think it's one of those examples of how occasionally life is stranger than fiction.

29:22Yeah. Where do these ideas come from? Are you running quantitative screens or is this just word of mouth and somebody gives you a tip? How does this work? Well, first of all, we're very sensitive about using the word tip since that's a term of legal significance, you know, insider trading. I'm not in your community. No, I know. No, like, so we don't, I'm not a believer in screens because I think you get a lot of false positives and false negatives. I mean, other activist short sellers might take a different approach, but we get a lot of people, usually long, short funds, shopping us ideas, they're short XYZ.

29:58The substantial majority of the time, it just, it doesn't work for us. It might be a great short idea, but it doesn't make for great short activism. So going back to that difference between the shortable universe and what we do, you have to be provably right at the time that you speak. So if I say, oh, you know, the street has this wrong, competition is going to erode margins much faster. Like that's a, that's a, you know, like we'll find out when we get there. But you're looking for guilty beyond the reasonable doubt. Right. I'm well, I'd say the standard I look at is the civil standard. Can I prove by preponderance of the evidence in the market?

30:33I mean, I would like to do beyond a reasonable doubt, but. Can you prove what? That something the company is saying or doing is not what it appears. Correct. And to be clear also. That's a high bar. Yeah. And look, to be clear also, a lot of people associate us with, oh, you guys short frauds. 20 % to 25 % of the companies we short, we think are frauds. The other 75%, 80 % are in that gray zone where what they're doing - Yeah. It's like misleading accounting. It's - Like Herbalife? Probably illegal. Would that be in the gray zone type of thing? Herbalife was it, so the numbers were real there.

31:13Okay, so that's also one of the other lessons of business is that businesses that do things they shouldn't be doing can be great businesses from a financial perspective. So, you know, Bill Ackman was right. The FTC hit them with a record fine, but he was wrong in that it didn't matter. It was like$120 million. It's like suing tobacco companies. He wasn't even alleging fraud. He was saying this is bad for the Hispanic community because they're being scammed. He did initially call it a fraud. but a consumer fraud, not a financial fraud. Like talking people into becoming wholesalers, taking on all this inventory.

31:51And he was right. Of course, that's toxic. That's not good for anyone. But so you need to be right that there needs to be, these companies need to be a fraud. And ultimately, if that does not hit their bottom line, investors just might not care. Right. So what happens a lot of times then is we or another short activist publish on it. The idea is that we create enough scrutiny and pressure that things inside the company start to break. So people get uncomfortable with continuing that behavior. So you might start to see resignations. Maybe the auditor says, hey, look, we have an issue here. You know, and the auditor says, well, if you're going to continue to do this, we need a lot more disclosure.

32:30Oh, yeah, but that's going to basically, you know, show that Muddy Waters was right. Well, that's what our lawyers are telling us we need to do. So some managements will, and some managements will just basically back off the aggression right away. So if you look at - Oh, they'll stop doing what they were doing. So some of them will - But they'll also deny it simultaneously. Right, they'll deny it, but they'll back off or they'll double down on it. So, you know, I don't know if you were going to bring these up and I'm like jumping the gun a little bit. No, no, let's go, let's go. So if you look at a company that we shorted in November of this past year at Irisone London, it was Elf Beauty.

33:09So what we were looking at customs data and we saw that their imports fell significantly and couldn't be reconciled with what they were reporting as cost of sales. So we were saying that we think there's a serious problem here, real misstatements in the inventory accounting, the cost of sales, and also the revenue. So they denied it. Now, to be fair, they did say, hey, we had just gotten confidential treatment for our imports, at least some of their imports, as of January of 2024, which nobody asked them, well, why did you suddenly get confidential treatment? You know, they said it was for competitive reasons, but that was a total BS excuse because their suppliers are well-known.

33:52Their suppliers don't change. Easy to figure that out. So it wasn't for that reason. What did they do that in response to somebody asking questions? No, I think they, because they knew, look, I think that they messed with the numbers and I think they knew they were going to be messing with the numbers. And so they, not I think, I'm, well, Okay. In my opinion, they had a plan to mess with the numbers and they realized that they could get caught through the customs data. So they got confidential treatment on most of it. Now we went out there, we said, Hey, these numbers are problematic. They of course denied it.

34:25But then when they reported their next quarter, they lowered guidance significantly. So in my mind, that was, okay, you guys are unwinding this. You're basically, you're going to miss, you're going to try to dive below everybody's radar. but, and just hope that it doesn't go bad for you. When you say they, sorry to interrupt, but when you say they, is this like the CFO? And is this like, does everybody know who's they? Yeah, that's a good question. I mean, we're talking top management usually. And look, I'm not privy to the discussions, obviously. I can't get internal company documents, but something like that would be CEO, definitely.

35:04CFO, most likely. Maybe there are some people in accounting, but basically whoever has access. And that's one of the things we also found out was in the course of our research, they did not have good internal controls. And so when you see that with companies, yeah, it doesn't just mean that there's a risk that numbers will be accidentally misreported. A lot of times to the companies we look at, we think, yeah, that's a feature, not a bug, right? They've designed, they deliberately have weak internal controls. So that's one type of response. So again, this is - Philosophically, do you care if that's the outcome?

35:40Meaning they unwinded in plain sight. They don't say we're unwinding, let's mess with the numbers. They say sales are going to be lower next quarter, unexpectedly. To your point, they dive below the radar. The stock goes down either way. Do you need, philosophically, you, Carson Block, do you need justice? Or are you just as happy with the stock price falling and you being vindicated? Well, look, of course, I would much rather there have been an investigation and then at least civil charges, if not criminal charges. That's important to you. Well, you'd much rather have that because in my profession, you always have a lot of haters.

36:19You always have a lot of people who are going to make excuses and say like, oh, no, that's not, no, it's just because X, Y, Z was happening. You weren't right. Blah, blah, blah. it's just nicer to be vindicated, especially because, you know, there's so much hatred that gets directed back toward us, like on social media, et cetera, that it is always nice when those critics go completely silent and then occasionally one or two will, you know, DM or tweet like, oh, wow, I guess I really have this one wrong. The stock was from 220 to 50. Yeah. Are you still short? No, we're no longer short. So you were saying the second type.

36:57The second one is when they're just like, you know, we already bought this boat and man, we better, we're going to defend this. And so that would be like AppLovin. So we reported on them a couple months ago. And basically the numbers are real. We're not accusing them of fake numbers. That was you? You're the primary on AppLovin? There were a bunch who came out at the same time. So, I mean, the funny thing is we all get to the same conclusion, but through different methodologies. So our methodology was the most technical. in actually looking at the code and how AppLovin has created these, in violation of all the platforms' terms of services, these persistent identifier graphs that track users from site to site and then hit you with retargeting ads.

37:44And that's prohibited by Google, by Facebook. They found a way. So it's like you download a solitaire game because you're on the airplane, and before you know it, like six months later, they keep hitting you with more and more ads because they have you. Right. But unless you opt in, they're not allowed to do that. And there are also laws that prohibit that now, as well as the platform's TOS. So they say, oh, we created this great AI that delivers results that almost as good as those of the companies that actually are the platforms and that can track you because people opt in. And no, they're just violating the TOS.

38:19And so we published that. The CEO and CTO put out a response, denied it. But the thing is, they didn't stop the behavior, right? So when we still look at these sites and we see that they're still using these persistent identity graphs, and they're just denying, denying, denying. So that's the other response. It becomes binary. It's either - That's a current position for you? Yes. You're short app-loving right now? We are. So we're taking on the chin a little bit today. Up 12 % today. They had an earnings report. Yeah. So we put out an update yesterday. It was a video that showed, hey, they're still doing this.

38:55And the CEO and CTO lied. Those were actual words. So we're saying that they lied in their response when they denied that Apple 11 uses these persistent identity graphs. But, you know, the numbers were great because going back to the point about Herbalife, it turns out that when you have a business that's doing things it shouldn't be doing, it can be a pretty good business. Shouldn't be doing morally. Well, shouldn't be doing morally. and legally. And, you know, here's the thing with that one and not to delve too deeply into app loving, but the platforms could shut them down. Okay. That's one risk.

39:29But if the platforms don't shut them down, this doesn't take a genius to do what they're doing. So you're going to have all of these other like tiny little ad tech companies say, oh, wow, you know, we can play this game too, because this is tolerated. And so basically their margins are going to be, you know, platforms don't do anything about it. Oh, so your thesis, like, even if they keep getting away with doing this thing that you are asserting they're not supposed to be able to do on the platform, that actually might not even work out well for them because then everyone else will do it too. Wait, it's$115 billion market cap?

40:02Holy shit. No, I mean, in 24, last year, they ramped this thing. It was irrelevant to, like, it's insane. That's what I wanted to ask you. I think it was the, I forget what period of time, but it was the best performing stock. I don't want to say it was in the S &P. Maybe it is now, but it was in like the Russell 3000. But I remember watching this thing, I had no idea what the company did. And then all of a sudden, a bunch of short sellers are publishing on it. So you mentioned that we all arrive at it from a different perspective, but the number one performing stock and no one's ever heard of the company has to get a lot of attention.

40:34Well, so yeah, to your question earlier, right? About how do we develop ideas? So when you see something like that, everybody in my business started looking at that because it just climbed a wall. Like the stock price went vertical. Everyone's trading it. Everyone's talking about it. Exactly. They start using AI, AI, AI. And look, back in, as soon as ChatGPT happened, okay, all of us in our office, all of our peers, whenever we talk to each other, we're like, okay, we're about to get this tidal wave of AI scams. Like everything is going to call itself AI. You're licking your chops. Yeah, exactly.

41:09Like the EV stocks in 2021, the SPACs. Yes, exactly. These things come in waves. Yeah, exactly. So that is one of the ways that we really identify or that helps us identify things is when something gets hot, yeah, maybe like the first one, two, they're fine. You start sniffing around. But by the time you get like the fourth or fifth entrant into a space or to go public, you know, or to really start pushing this narrative in the case of AI, because these companies existed beforehand, that's when you have to take a look and say, yeah, you know, maybe you're not really what you're saying you are.

41:45So, and yeah. And if there's something to do, look, I mean, but I mean, that was, that was such a hard stock. I mean, I feel like we got our timing reasonably correct because if we tried to do this, you know, like maybe five months earlier, we would have just been run over because the momentum of that. So I want to ask about your process. All right. You're doing deep research. You say that an activist short seller can cover maybe five, six names a year, right? All right, so you're sniffing around, you find something, you get a little hornier, and you're like, I really got something here. What happens if over the course of time when you're doing the research, the fraud is uncovered, the stock craters?

42:23How quickly do you put positions on? Where do you set your stops? How do you take profits? Like, how does all of that work? Are you short the stock? Is it options? Talk about all the process and stuff. Okay, all right. So, well, in terms of the trading positions and that risk, That does happen when we preempt each other all the time. I mean, we were working on AppLovin for maybe a couple months. And we saw a short report after short report come out. And we thought, shit, it's over. Were they having an impact? Momentarily. That's the thing. The stock rebounded. The opportunity was still there. So we thought, OK, look, nobody has published what we have.

43:01So we have this code. It shows these persistent identifier graphs. Nobody's published that. It's been, they've talked with people in the industry who are skeptical, former employees, you know, who have negative things to say. So we still have a project, but there are definitely times when we've been preempted and it's like, well, okay, too bad. So what we do sometimes is we put on what we call schmuck insurance, which speaking of Herbalife, that's a term from that. Like, I guess, Carl Icahn, like, you know, he has his own version of schmuck insurance, but for us, it's okay. Like in case we get preempted.

43:37But yeah, like let's put on 5 % of our - Yeah, exactly. Just the tip, 5%. Okay. So then how do we trade it? Do we use options? Sometimes. But the problem that we found early on. So I started in this business on the activist short side with Chinese frauds. And that's, I think, what really developed that short activism business was these Chinese frauds. We're going to go back to that later. Sure. For sure. But, you know, initially it was, you know, our own capital and was like, yeah, let's buy a bunch of put options. I mean, that lasted for a few months before basically as soon as market makers saw a lot of activity in the put options, especially when you're paying like 110 vol, like, okay, everybody knows what's going on.

44:23Right. So what ended up, what ends up happening, and now we manage outside capital, is if you're playing in the puts and the puts are not extremely liquid, the tail wags the dog. So you're going to screw up your entry pricing if you go into the puts. So usually if there's a put market, it's just sort of like, yeah, let's do this right before we publish. from a psychic perspective or psychological perspective, I really enjoy selling calls right before we publish. That's always - Why? Well, especially if we do it OTC. Because the people buying those calls from you don't also enjoy it. Yeah, exactly.

45:02Like there's - Eventually, they really don't enjoy it. So there was a quote that somebody attributed to Stan Druckenmiller who, look, I don't know if this is true, but somebody who heard him say this once, um i guess it was years ago stan druckenmiller said yeah you know like obviously most of what i do is long but but i like short selling more and why because you know somebody's getting yeah i guess so i get it there there's a it's there's a wall street mentality too of like uh it's not enough for me to win the other person must also lose there's there's a little bit of that yeah i mean i think when you do look when you do this business and you take a lot of shit from people.

45:45I mean, there's a lot of hatred directed toward you. Yeah, you definitely, like, you have to have thick skin or, you know, or else, you know, you're not going to be in this business very long. But, you know, there's, you definitely, when those days when you win and the haters lose, you feel good. There's a little bit of a revenge factor. When you get vindication, do you push or do you, like, when it breaks, do you say, all right, we are so right, we're going to push it? Or do you take profits? No, because usually it's like, I mean, it's collapsed, right? So it's like, why would you, you know. It's not undervalued stocks.

46:19These are outright frauds that are being unmasked. Yeah, like everybody who sold, who could have sold has already just sold. And so then you end up doing that stuff that like Melvin was doing, which was so stupid. When you're holding a stock that's collapsed to like a dollar as a short because, oh, I don't want to realize taxable gains on it. Like the asymmetry of that position is so moronic. So no, we don't do that. And we're very quick to say, you know what? Like, that's good. Don't look a gift horse in the mouth. I want to stay on this because I think this is the most fascinating thing. Everybody hates their short sellers because nobody ever says, nobody ever says, thank God that fraud got unmasked before I could buy the stock.

47:02Because no one ever thinks of themselves as the person who would invest in a fraud. Right. But of course, the longer a fraud goes on and the bigger it gets, by market cap, the higher the likelihood that an innocent random buyer might end up holding the stock. So people don't give you guys credit for the things that you clean up. So that's one. But two, there is a common perception. And I want to hear if you think it's a misperception. People don't like to see a stock get ganged up on by multiple short sellers at once. and even if it turns out those short sellers have vindicated, that's where the hate comes from, especially if they're in the stock.

47:43And let's face it, a lot of very online traders are going to be in the highest momentum stocks and a lot of those high momentum stocks are going to end up the targets of activist short sellers because the way they got high momentum in the first place was by bullshitting people. So you have this perfect stew of extremely online aggressive traders. They're in stocks. they barely know anything about other than the price is rising. Right. Those stocks are bullshit and that's why they're rising. And then you guys come along and look at it and say, look at this. This is a fraud or this is a scam or this is a promotion.

48:17You guys call it out. The stock gets hammered to the person who's long that stock. They're not interested in your pursuit of truth and justice. All they know is I bought this thing yesterday. I'm down 36%. So that's where the hate comes from. And I assume you get that. Yeah. Well, it doesn't make you wrong. Right. It just makes it more understandable. Well, I had this really interesting experience in December of 2010. So I just moved back from China. We'd published on two Chinese companies. And I was at a holiday party in Sausalito. And I was introducing myself as a guy who owns a self-storage business in China, which I did before I started Muddy Waters.

49:02And anyway, this guy to whom I was introduced, he said he was an engineer. He asked me at one point, he said, hey, do you ever look at these Chinese stocks that are listed here? And I had a few drinks, so I was maybe a little bit looser-lipped than I wanted to be at that point in time. You said, do I? Well, I was like, you know, I've kind of done some things recently. By the way, a lot of them were SPACs too back then. Yeah, yeah, they were the RTOs, yeah. They were RTOs and people don't remember, but there were investment banks that were, that was 80 % of their business. Oh, yeah. Like Rodman and Renshaw.

49:36Maxim Group. Yeah. And Rodman. Roth Capital. Roth is still here. I think Maxim is too. But I was like, yeah, I've done some stuff and I kind of published some things on some companies. Were you in Seeking Alpha and writing this stuff? I'd set up a website. And my first report I sent to 50 people who were in the markets, whom I'd last spoken nine or 10 years earlier, who probably knew me as Bill Block's son, not as Carson Block. And that report went viral. And, you know, next thing I know, like a day later, Jim Cramer's like screaming on CNBC about how I must be a fraud. And like I'd never met the guy or what have you.

50:15Which was the stock? This was called Orient Paper. So this was June of 2010. You went there. Yeah. You went to the paper factory. Yeah, because my father wanted me, he thought it was a long. He sent me there to do diligence on it. And it was a total fraud. I remember reading this. I remember reading these articles. It was a Potemkin factory. The night before I went to the factory, I finally sat down and read the Ks and Qs. And there was a snow delay in Beijing. I was sitting in the airport in Shanghai. I was with a friend who's in manufacturing. And so we were bringing him on as a consultant. And he and I were sitting at separate tables, just reading through the filings.

50:51and we're just bursting out loud laughing at the absurd claims in this. And it's like, so we knew it was f***ed up. And my buddy was, he's like, you know, am I wasting my time here, Carson? I'm like, look, maybe we can short this thing. I don't know. Like, I don't know what my father would say. What price is it trading at when you go over there to look at it as long? Is it like a$30 stock? Well, it was, I think it was about 850. It's 150 million market cap. Oh, it was small. Okay. Yeah, it was small. I mean, look, at the time, that was not as small as it seems today. But I mean, today that would be equivalent to a roughly$700 million market cap.

51:28But so anyway, we knew there were serious problems. We get to the factory, walk in, and my friend leaned over to me. He's like, oh my God, we got them. I mean, it was a Potemkin factory. The loading dock that supposedly was servicing 100 trucks a day just didn't exist. There was one truck that was lazily idling there. You know, they claimed that they had about$5 million of raw materials inventory on the balance sheet. And my buddy, like, it's just these heaps. So, the company made a corrugating medium for boxes. So, the wavy layer in between, you know, the outer layers of a box. So, their inputs are basically old boxes and scrap boxes.

52:14So my buddy is – they've got these just giant trash heaps of old boxes. That's what – That's their inventory that's got a balance sheet value. A$5 million. So my buddy climbs to the top of one, looks around, came down and said to me, if this is worth$5 million, the world is a much richer place than I ever knew. Right. So this scam there though is – so it's an American investment bank, an American law firm making tons of money in fees for bringing this thing public, listing it on the American stock exchange. Yeah, I think it was Amex. So they'd uplisted from OTC and raised some money. Now you got brokers, and I knew these guys, brokers selling the stock retail to clients.

52:57so everyone's getting paid along the way and as long as the fraud is perpetuated in China all the American parties continue to get paid yeah so what's the problem people say like oh these short sellers are conspiracy theorists it is a f***ing conspiracy you can't do this with one person well if you want to get a little bit conspiratorial about this I do it's a podcast so I had been a lawyer in China so I was with Jones Day and I focused on mergers and acquisitions and foreign direct investments. So every time there was a local company involved, so say for JV, first thing you did was as a lawyer, well, I'd send somebody to do this, go to this local office called the State Administration of Industry and Commerce, go to the local office, and you get that company's SAIC file, just filled with lots of information, including the financials, the onshore financials.

53:52Now, when we did that for Orient Paper, I mean, we found that the onshore financials, rather than the revenue having been about$100 million, the real revenue that they were reporting to the PRC government, which they don't want to f**k with, in contrast to the consequence-free SEC, was about$3 million. So they tell the truth to the Chinese government and they bullshit the exchange here in New York. Because they're never going to get in trouble for lying to American investors. And in fact, nobody ever did get in trouble. So these SAIC files had lots of information on the equipment, valuation of the equipment.

54:32I mean, we're looking at the appraisal reports for the equipment. The stuff was carried on the balance sheet at$60 million. I mean, the appraisals had them at like$8 million. So there were so many contradictions there. And after a few more China shorts, it became obvious to me that, oh my God, all these American law firms that are doing the securities work that are helping with these offerings in the US, none of them are looking at the SAIC files, which again is like standard. Like this is step one in foreign direct investment, like JV and M &A practice. So what are they doing? They're taking the auditor's word for it.

55:12and it's a bullshit auditor? Like where are they, how are they, if they're not doing that bare minimum that you say, what are they getting paid for? Well, getting paid to do the deal, to look the other way. But that, to me, I felt that at a very high level, decisions had been made. I mean, there weren't that many US law firms doing this type of work, especially in the reverse merger space. But I felt that decisions had been made. Systemically. Right, that they were going to entirely avoid using SAIC files in the work that they did. What's a stock that you made that you lost the most money on, that you were the most wrong about?

55:48Oh, well, I wasn't wrong, but I lost the most money. No, Sunrun. Not unless you're wrong. No, no, but this Sunrun. Oh, yeah, yeah. So here's the deal. So we were, in summer of 22, we were about to publish on Sunrun and how the company is systematically abusing the tax incentives, the investment tax credits, arguably committing tax fraud. And this is the case with all of these rooftop solar companies, but Sunrun was the biggest. So I had been paying attention to the climate bill, right? So as of this moment in July of 22, climate bill is dead. That goddamn Joe Manchin, he won't agree to it, this and that.

56:28Nobody's talking about it. So we hit peak risk, Market closes. 20 minutes after the market closes, so we're publishing the next day. 20 minutes after it closes, headline, Joe Manchin agrees to climate bill. The next day, that opens up 25%. Now, we had beta hedges on, but - There was a lot of short interest in the stock. Well, I mean, everything in the green and climate space and solar ripped that day. So, you know, so all those names opened up 25%. And then I made a major tactical error because our question was, well, should we publish this thing or just take our losses, get out of it, wait for things to settle down and then do it?

57:16And my tactical error was, well, you know, everybody's focus today seems to be on the tax credits associated with, you know, these projects or with solar since everybody's excited about the, quote, climate bill. So let's put it out there. It was absolutely subsumed by the cacophony of noise. Nobody noticed it. Nobody cared. Stock had opened up 25%. It closed up 30%. So, I mean, that was. Did you close your short that day? Yeah, we closed our short that day. Let's do some of your greatest hits and the things that you're most well-known for. The first time I ever heard about you was either Focus Media or Sino Forest.

57:57I think Sino Forest is the more interesting story to me, just because I remember more vividly. I forget which hedge fund manager it was, but somebody presented this thing either at Iris Zone or at some big event as a long. and I know John Paulson had a big stake in this, but there were well-known quote unquote brand name hedge fund managers with big money and they were invested in this Sino Forest, which I guess effectively was like a timber play out of China. Right. And that's, I think the first time I had ever read something that you put out or saw the response to it. But tell us about Sino Forest.

58:38Sure. It was a really big stock at one moment. Yeah, I mean, at the time, it seems like it was quite big. I think it had a market cap of about 5 billion EV of 8, which again, in 2011. Did it say it'd be 20? Yeah, those were reasonably real numbers. And the largest shareholder was John Paulson. So what had happened was we had a very bitter battle over another US-listed China company called China Media Express, CCME. And there were a few other short sellers involved in that too, including Andrew Left of Citron Research. So that was such a bitter battle because it was audited by Deloitte. And Deloitte ended up resigning with flying colors.

59:20I mean, the resignation letter is one that was, you know, just made clear that all these accusations were accurate. So as soon as that cratered, got a call from somebody who was a PM at a very large New York-based hedge fund. and they said, okay, congratulations on China Media Express. I'm going to talk at you about a company. Have you heard of Sino Forest? And I hadn't heard of it because it was listed in Canada. I knew all the names of all the U.S. listed. Toronto listed? Yeah. Okay. Yeah. It was TSX listed. And so they started saying, okay, so this is a company that supposedly does, you know, billion, whatever, a year in revenue, 1.1 billion or something in gross profit, but it never issues VAT invoices to its customers.

1:00:10It instead relies on its customers, pay its suppliers, blah, blah, blah, and have them issue the VAT. And they start listing a bunch of factors. And having practiced law in China, I mean, I already know that if the facts they're citing are correct, this thing is a substantial fraud because you don't do business in China that way. You're like, they were violating the law. You know, if you believe them and believe their disclosures in, you know, 10 to 15 different ways that were material. So, um, you know, I, I looked it up and like, my God, it's got debt on it. It's got CDS. Wow. Like this can be a big trade.

1:00:48Yeah. So, um, I, you know, previously my team had been somewhat small and we were generally all working remotely from one another. 2010, 2011. This is, uh, this is 11. So this conversation I had was probably at the end of March of 11. And I said, okay, I need to add people to the team. So I ended up, um, adding to the team, a PRC, um, attorney, um, few other people. I kind of, you know, approached me over the past year and change. And I rented an office space in Hong Kong, brought us all together. And it was fantastic because Sinoforce had been public for 16 years. So there were so many problems as we're reading through those SAIC files.

1:01:36Sinoforce had over 100 entities. So that was well over 100 SAIC files we had to read through. And it seemed like at least once a day, somebody would just laugh out loud and say, oh my God, like obviously forged bank letters, right? From like HSBC with like the worst chinglish you can imagine and like crooked logo and stuff like that. You know, and also we found out that from the very, one of the SAIC filings from its original entity, we found out that they'd been lying since day one. So they went public via reverse merger onto what was then the Toronto Venture Exchange. And so they told this story about how they had this joint venture with a local forestry bureau, and these were the results.

1:02:21That joint venture never got started. That SAIC file had letters from the forestry bureau, the local forestry bureau, saying, hey, you've never committed the money that you promised to commit. And instead, you've stolen assets from the joint venture and blah, blah, blah. And it never produced anything. Yet for years. There's no trace. Right, yeah. Sino Forest, but they don't have the trees. So they sold stock. That was the business. They sold stock to Canadians. The real business was being public. And that was the case for a lot of these Chinese companies listed here, is that the real business was being public.

1:03:00Did that go to zero? Yeah. Did you ride it to zero? No, no, no, no. Is that the most money you've ever made on one of these? Or it's one of your larger trades? Well, we had an external balance sheet at the time. I mean, I would say my take home on that, that's probably still about the biggest. I mean, especially at that time, that was life-changing money for me. What does external balance sheet mean? Like other people's money? Other investors. You were doing a hedge fund? So, no, I didn't have my own hedge fund because I'd wanted to set up my own hedge fund. But the problem was it was so expensive to do it.

1:03:33Nobody would prime for us either. And when you're shorting stocks, you need to have real prime broker that can get stock borrow. They don't want to be involved with that. Yeah, I mean, everybody was like, nah, go f*** yourself, not interested. So there was a hedge fund that, you know, it was more of a family office at the time. But they said, look, we're, you know, what we'll do is we'll put the positions on and we'll pay you a percentage of the profit. And so that's how that works. Do you ever have an interaction with Paulson or any of the high profile hedge funds that were caught in that stock?

1:04:05So it was funny. right before I went out to Hong Kong, I got an email from somebody at Paulson. It wasn't Paulson himself, but it was one of his PMs. And I said, hey, we'd love to talk to you. At that time, I was getting those emails from hedge funds not that infrequently. So I was going to New York anyway. And I thought, all right, it'd be good for me to sit down and just hopefully establish credibility. I already knew that we were going to be working on Sino forest. I'm pretty certain we were going to go the distance in terms of publishing it. So it was a little bit tricky. I went into the meeting and, you know, like, how did you start this business?

1:04:44This is how I started it. This is what I look for. You know, look, guys, this is what's really happening in China and what people don't know. And then it turned to, so do you ever look at real asset companies. You mean like real estate? Yeah, real estate or forestry or stuff like that. Yeah. Implying that you are out of your depth in looking at Sono Forest? No, no, no. Wanting to know if I had a view. Oh, so they were nervous. Yeah, trying to feel me out on that. Oh, that's interesting. And, you know, that was an awkward question. And, you know, I didn't want going to lie, but I didn't want to say, oh, by the way, guys, you know, I'm working on Sinoforest.

1:05:27Yeah. So I had to kind of dance around. I'm like, well, you know, I think there are a lot of problems in the space. There was that big Hong Kong listed forestry fraud called China forestry. You know, it just seems to me that with these assets, really difficult to actually track ownership. So yeah, I don't know. But anything in particular, then it was their turn to be coy. And, and that was that, but. Would you say that that one put you on the map though? Yeah, that absolutely. Because a lot of articles were written about it because of the people who lost money. Well, especially because of John Paulson.

1:05:59I mean, that was, you know, from a, from a profile making perspective. Yeah. That, that was huge, right? It's not only was it a big company and, you know, uh, but it was because John Paulson. So I remember, I think my favorite article at the time, uh, was business insider. The headline was something like, meet the man who just cost John Paulson 500 million. I bet you that was my friend, Lynette Lopez. If I had to bet. I don't know if Lynette was doing this yet, actually. But it showed and had a picture of me taken from my wedding where I'm in like a Hawaiian shirt in LA. And it's like, I got this big grin on my face.

1:06:36And so, you know, right under. Luck and coffee. This is fairly high profile and more recent. The quote unquote Starbucks of China, stock collapsed 90%. Right. Well, it was actually delisted, but this is one that I don't deserve credit for. Okay. So it's misattributed to me. We published somebody else's research because what happened was there was a hedge fund that had done all this work. They did great work. And the guy reached out to me and said, hey, would you publish this? And I said, listen, you know our process. You know that we have to recreate the work, right? We're going to like, so you did all this field work.

1:07:17We'd have to do all this field work. So I'd love to get a look at what you've done. But to be honest, it's going to take a few months before we can actually publish it. And so I guess he was pissed off at me. And he sent it out to like everybody except me. And so I started hearing about this draft from other short sellers. And, you know, who just don't know China nearly as well as we do. and nobody published on it. And so, you know, because they can't attest to that work. So it was unpublished and I thought, you know what? Let me talk to the guy, see if we can get access to the data room and what we can do, if we can validate the work, you know, we'll do it on a sampling basis, kind of like we're auditors.

1:08:01If it lines up, then we will say, we are short, luck in coffee, because we think it's a fraud. This work was carried out by another party. However, we have evaluated it and believe it to be accurate. And a couple of days later, that's exactly what we did. So what was the scam? I don't, I have no idea. What was the scam? Because it still operates as a business, right? Right. So it was fake revenue and fake profit. But what the way that they were pulling it off, you know, the thing is with most frauds, I mean, there's an element of practicality that enters into it because you have to forge a lot of paper.

1:08:40And so if you're going to do – so Luckin, I mean, the average ticket size is like a few US dollars, right? How do you forge that much paper from that many stores? Transactions. And you'll put in like try to make the bank account sync up. So what he did, what the controlling shareholder did was he created this fake corporate sales business. And so it was one or two counterparties that supposedly accounted for, you know, like 40 % of revenue. Like we're buying gift cards in bulk. And so EY, after we published that work, that was somebody else's, you know, they were kind of forced to actually look a little bit harder than they normally wanted to.

1:09:22And, you know, when they came across those invoices, they asked maybe, you know, three questions. And, you know, it's like, uh-oh, yeah, it's a fraud. And so then they went to the audit committee. And look, the boards of these companies were always in on it. Okay, like these Chinese companies. They were never independent. They were never there to safeguard the outside shareholders' interests. Right. But when the auditor, you know, which the auditors were basically, I'm not going to say they were in on it, but they were basically, their role is to not rock the boat. They don't want to discover fraud.

1:09:55It's a big account. Well, not only that, but it became a problem for them because, you know, they would, you know, if they found fraud, like, so, okay, in theory, if an auditor has been auditing a company for multiple periods, discovers fraud, okay, in theory, it's in their, it's in their interests to expose it and cut off the liability and stop accruing additional liability. In practice though, that's not how it works. It's always settled. So if you're an auditor, you think, well, we've already issued unqualified opinions on two years or three years of financial statements. You know this thing is just going to get ugly and it's going to be years of litigation.

1:10:36The best thing that we could do is to not discover fraud. I'm not saying that they discover it and say, oh, man, let's pretend that didn't happen. I think they deliberately design audit procedures, especially in a high-risk environment like China, to not discover fraud. And so that's why I make this point of saying that EY, I'm sure, very reluctantly looked into this. So, you know, so basically they brought it to the board, you know, or at least the audit committee. And again, I'm sure they were all in on it, but that's opinion. But, you know, at that point, what are they going to do? Then they have to basically, you know, throw the chairman under the bus like, oh, you bastard.

1:11:14How dare you? But, you know. So, Carson, the business of Money Waters, you guys are publishing research. You're shorting stocks. Is it a hedge fund or is it your own money? How does it work? So it's a hedge fund and we don't get paid for publishing. So we basically, we manage, yeah. See, here's where I have to be careful because there's, you know, the SEC cares about the F word, which is the fund word, right? So I can't make it sound like I'm engaging in a general solicitation. So - Okay. Carson is not promoting his fund. He's giving us information about it. Don't invest in it, whatever you do.

1:11:49I would not want that. Okay. So we use the S word, strategies. So we have a strategy where we, without outside capital, I mean, a lot of it, look, there's a good portion of my own, I mean, I'd say the substantial majority of my net worth is in these strategies where we short the stocks and then we publish on them. So that's basically how that works. In that order, which is why you end up sometimes in a spotlight that you don't always want to be in. Yeah. Okay. Yeah. Can we talk about that? Yeah, absolutely. So you have a hedge fund. You know you're going to publish. And part of the reason that you're going to make money in your investment strategy is because the rest of the market is going to read your research and realize, you're right.

1:12:34Something wrong with this company. They're going to sell it. They're going to want to get out of it. Okay. Long investors do that all the time. Long investors are long a stock. And then they go out and say, I love this stock. I bought it because A, B, C, D. Okay. for some reason it's asymmetric there there's a problem with doing it in the other way saying i'm short the stock and i hate it and i think something's wrong with this company for some reason that's more problematic why do you think that is well the simple answer is if you come out and say something nice about a stock nobody's going to complain they could say pump and dump they could say manipulating they could they just don't automatically i feel like with activist shorts, the automatic response is, oh, this guy's trying to crash the stock.

1:13:19Right. Well, look, you're basically accusing the people who run the company and by extension the company of acting in bad faith. And they have a lot of resources. They can spend on PR, legal. And so what are they going to do? They're not going to admit like, yeah, you got me. Yeah, you know, good catch. Of course. So they have to come out and they have to resist. And then you have a lot of, especially in the institutional investor world, I think that this is probably the most overcompensated industry on the face of the earth, right? There's so many people who are just mediocre and lazy and make real money.

1:14:00And so when we come out and say, hey, things are not what they seem with this, it goes to a lot of their insecurities on an individual level. Makes them look like they're not doing anything. Right. Yeah, I agree with that. But to be clear and to be fair, even if somebody is bright, even if they are reasonably diligent, you can still get defrauded. I mean, in the midst of my Muddy Waters business, I was defrauded incredibly badly by a couple of people who got involved early on. Right. And the reason, you know what, and that made me realize, okay, the reason that I was defrauded is the same reason that a lot of smart and diligent investors themselves are defrauded, which is if you're looking to buy something, in my case, it was to buy talent, you know, everybody else's case, it's to buy a stock.

1:14:52If you're looking for reasons to like something, you have to think kind of conventionally about why you might not like it. Right. You cannot be thinking simultaneously, yeah, does this, you know, do I think that this market makes sense? Do I think it's going to grow? And are these people lying to me? Mentally, you'll never buy anything. You'll never invest in anything. Right. Mentally, nobody can wear both of those hats. That's such a great point. If your starting point is everything I'm reading about this company might be fake, you never invest in anything. Right. You have to start with a baseline assumption of trust, Whereas on the other side, on the short selling side, you kind of have to start with, if this is fake, how is it fake?

1:15:32Right. And so it's like we can look at, again, the fifth company that started claiming, oh, we're big AI and this and that. And we can look at, we can parse every statement, say, yeah, you know, that looks, you know, that's good. That wording is kind of weaselly. And the f*** does that disclosure mean? Come on, man. Like, what is that? So we can do that because we're putting on that hat of effectively looking for deception. But you cannot simultaneously look for the good and look for the really bad. It's just mentally not possible. So it's not to say that investors who, you know, I think even really smart and diligent investors, to be fair to them, they can get defensive about this because there's an implication like, oh, you're stupid.

1:16:17You know, I mean, some of them are. Is there a personality type that's a prerequisite to become a professional short seller? Do you have to be – like Chanos named the firm for his original firm. Like Greek for skeptic. Do you have to start off cynically or skeptical as like a predisposition to be successful in what you do? I think so. So, but the thing about, one of the things about Jim is that he has like a very, you know, he has real pedigree, right? He graduated from Yale. If I look around activist short sellers, there's only one person who has a good pedigree. And that is this guy, Soren Andal of Blue Orca, who's a good friend and he's also based in Austin.

1:17:06And I always kid him. I'm like, how did you get into this? University of Chicago undergrad, Harvard Law School. You were at Sullivan and Cromwell. Meaning he could do anything. Right. And he chooses to do this. Well, I think when you're smart enough, you can do anything. But usually when you're on that establishment path, you usually don't deviate from it or deviate from it that early in your career and deviate from it so radically. Yeah. I mean, the people he used to work with at Sullivan and Cromwell, some of them presumably are law firms now where they're engaged to evaluate his reports and find ways to attack him.

1:17:44So that is a really big pivot. And so for Jim, again, Jim's business is not being an activist short seller. So I don't really know what it is about Jim that makes him - On that distinction, there was a time, there was an era where David Einhorn was one of the most famous short sellers and an activist short at that. and he wrote a book. Was it a short guarantee or? No. It was fooling some of the people all the time. No, no, no, no, no. What was the company? What was the underlying company? Oh, it was Allied Capital. Allied Capital. Maybe a short guarantee was Ackman who was also doing this stuff.

1:18:21Well, Ackman did, he did the mono lines. I don't think that a short guarantee was one of them. Einhorn went after Lehman as an activist. So there wasn't always this black and white. You're either an activist short or you're an investment short. So like a lot of these, But they're all out of that business now because all it does is draw negative attention, create enemies, put them in the regulators' crosshairs, and they were just like, f*** it, I'm buying Chipotle. Right. And you have to work – That's what I would do if I were them. And you honestly have to work so much harder per dollar that you make on the short side.

1:18:58You know, so for – And you just love it. But when you become a billionaire, the last thing you – mostly the last thing that most of them would want to do is like let me go stir some shit up and get into some fights. Right. It's like financially it's not going to move the needle for them to be activist short sellers at this point in time. I mean don't forget Dan Loeb. I'd say Dan was the most aggressive of them. His letters were legendary. Even before that, he was Mr. Pink on the Yahoo Finance chat boards. Like very foul-mouthed and he doesn't like people to remember that now because he's like Mr.

1:19:33Institutional. But yeah, so yeah. Those guys are gone. My point is those guys are gone. So what are you still doing? It's not worth it. Well, okay. So that's a live audience here, right? They love you. Oh, can I ask you in the same vein before you answer that question? The Hindenburg thing is so fascinating to me. What's Nate? Nate Anderson, yeah. I mean, this guy came out of nowhere. He dismantled probably, I don't know, 10 horrendous frauds. And then at the very top of his game, he toppled a billionaire in India. He unveiled the Nikola Tesla, the fake Tesla company where they were rolling the truck downhill.

1:20:18At the very peak of his powers, he goes, I'm good. Like I said, everything I said I was going to do, I did it. and I made money along the way and I made other people money and I saved people from scams and that's it, I'm out. Like that was so fascinating to me, the entry and the exit. I wanted to get your take on it. Well, so the thing is that a lot of people don't know, he had been doing this for a number of years before anybody heard of him. Okay, this is for the audience, Hindenburg Research. Yeah, so he was, I mean, he, you know, it was, I don't know, maybe four years, I want to say, of him just grinding it out, like not making much money, getting sued, a lot of frustration.

1:21:01And then he hit all of a sudden with Nikola and the rolling the truck down the hill. And that massively elevated his profile. And so it's one of those things, like once you break through and you have a profile, then it becomes a lot easier. And he was getting, and so he did Square. He did Adani. He did Icon. but he was also doing a lot of like smaller, easier frauds. He wasn't managing outside, or smaller, easier scams, I would say. He wasn't managing outside capital, which is something, you know, my firm is kind of boxed in because, you know, if we were to take a$10 million short position in something, it's not worth the, you know, like we're not going to move the needle for our investors.

1:21:45And it's a lot of aggravation. And the legal risk is the same, right? If they sue. It's going to cost just as much to deal with that. So, um, so yeah, Nate had been doing it for a number of years. So he put a lot of miles on himself then. And, you know, in a way it's, I think he's one of the very few people who've left the world of short selling, whether it's traditional or activist on top, I mean, pretty much everybody else they're in it until they blow up. That guy's, that guy's amazing to me. Um, I mean, the amount of courage that it takes to fight people as powerful as the people that he was going up against, and he was winning.

1:22:22Yeah. I mean, it's nuts to me. I get why he would want to walk away from it, even at the top of his game. Yeah, like we were going to, in 2012, we were going to report on something that was a real business, but they were committing, in our view, some level of fraud. And then Icon went over 10 % in it. Carl Icon. Yeah, and we were just like, you know what? F*** that. that. Let's not do this. This guy is so vindictive that he could just chase us around from short to short, lift offers. And there was Nate. Nate's like, I got him. Nate's like, not only am I going to short something that Icon's over 10 % in, I'm going to short Icon Enterprises and just kick them right in the balls as hard as I can.

1:23:04I think he ended his career effectively. Yeah, I think so. Okay. Carson, any short bombs you're working on? I mean, we're always working on some, right? But You will not be the first to hear about it. Well, so Michael asked you a question and I preempted it, but I do want to hear. So like what gets you – I know this is about money, of course, but it's always about more than money. So like what are you still doing this for in your mind besides the money and like what motivates you? What gets you excited? Well, so we have broadened the business significantly in recent years. And I mean, I think from a personal and professional growth standpoint, if I weren't broadening the business, then I don't know.

1:23:44I don't know if I'd be doing it anymore. Like I enjoy it at times, but it's, you know, it does put a lot of mileage on you. There's a lot of litigation. You know, I went through this investigation. I mean, I've been investigated by three different governments and, you know, never found anything wrong. But, you know, it's. Is that the worst part? Is that worse than lawsuits? suits yeah the investigations especially the doj sec one um that one was that one was definitely worse especially because i'd helped them make so many cases over the years you know it's like i mean it really made me question everything like my my reality because it's like how you know i'm one of the i'm one of the good guys how did i become the bad guy well in the comics and in the comics the superheroes get chased by the law too sometimes yeah and so that that's what happened there.

1:24:31But, um, but now we've, you know, we do stuff that's mostly long, uh, long oriented in the junior mining space. Um, and then we've, we started investing long in Vietnam and public equities, and we're about to expand that into India as well. And I'm really excited about that. So, you know, like that, that's the stuff that gets me out of bed as well, is that there's opportunity to grow. But honestly, if it were just short activism, I mean, I've seen almost all the scams. They used to be really excited. Like, oh, wow, that customer's fake. You know, when I was, eh, the customer's fake. Now it's just the same scams over and over.

1:25:07Yeah, it's the same thing. Well, on behalf of the people who have read your stuff and learned from you over the years, and maybe were kept out of trouble by stuff you've done, I would just say it's really remarkable way to earn a living, remarkable way to build a reputation. And you did it. And congratulations on that. You are very public. And I want to tell people, obviously, all the short sellers seem to love Twitter for some reason or X.com. That seems to be where you guys hang out the most. Is that the best way for people to follow along as you publish or as you talk about things? Yeah. Okay.

1:25:44We have problems with the email distribution list. So a lot of fake emails. No, just every time we want to send something out, there's like an error, you know, from the email. It's like, it's that last mile that always gets us with publishing. So Twitter makes it easier. So yeah, at Muddy Waters Re is the, and I also tweet a lot of my own personal shit there too. So, okay. All right, well, we really appreciate you coming in. I've been looking forward to this ever since we booked it. And this did not disappoint. I've had so many questions I've always wanted to ask, and you were amazing. Thank you so much.

1:26:22We always end the show by asking people what they're most looking forward to. So I know Michael's already. I think you probably could guess Michael's is game three on Saturday, which they're playing inexplicably at 3 o 'clock in the afternoon. I can't believe it. I have no idea why that's the case. What are you most looking forward to in life or professionally? No, I mean, I talked about India. I'm really excited about that. um but you know in life um going away for the summer but in the sports life uh tomorrow a big little league game i you know i coach uh my son's little league team i used to play more say more are you the head coach i'm the assistant the head coach is like a really serious never do the head coach never be the head coach unless you were born to do it yeah no he's an email job and it's a mother management job.

1:27:12Oh, no, he's good at like that. That part. I mean, that's not the heart because he knows who to draft for, you know, quote, good families. Yeah. But the which is a big thing. But no, I mean, he's just an excellent like he gets on everybody about like, hey, you know, when you feel the ground ball, you got to have your left toe pointed up and wait on your right foot. And, you know, nobody ever did that with me when I was even playing high school ball. So, uh, dude, God bless, God bless the little league coaches. I still remember my little league. I was never an athlete, um, but I still remember my little league coaches.

1:27:44I could tell you their names and what age I was. That's so elemental for, you know, for young kids to grow up playing sports. It's not even about the sports stuff. It's about being on the team. Yeah. The coach is the person facilitating it. So, um, do you know, Michael does a little bit of coaching here and there? Oh, nothing. I'm like the assistant to the assistant. I like wrangle the kids. He's the front office guy. He makes the trades. All right. Carson, we're going to let you go. Thank you so much for being here. We really appreciate it. Thanks, guys. I want to congratulate John on four years with the compound.

1:28:17And I said this privately. I don't want to make you blush. I'm going to say it publicly for all the listeners. Duncan was game changing for what we do here with all our shows. But you are the person that made it sustainable and made it so that we could put out as much as we put out. I know the audience loves you. I wanted to tell them, four years, you've been hugely instrumental. Duncan, you're pretty okay, too. Shout out to Rob Nicole, Chart Kid Matt. Shout out to Sean, Graham, Keith, everybody who helps us with the show each week. We appreciate you, Daniel. That's it from us. Guys, please leave a rating and review.

1:28:53Please follow Carson Block on X.com, and we will see you soon. Thanks again.

1:29:03I just want to get here. I want you to steal for the show. Is that good? Is that good? Yeah.