Reuters: Deals: Sino-Forest bankruptcy not my fault: short seller

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Sino-Forest bankruptcy not my fault: short seller Apr 3rd 2012, 03:29 The company logo of Sino-Forest is displayed at the entrance of its office in Hong Kong June 8, 2011. Credit: Reuters/Xavier Ng By Daniel Bases WASHINGTON | Mon Apr 2, 2012 11:29pm EDT WASHINGTON (Reuters) - The congratulatory e-mails for Carson Block started to arrive on Friday afternoon, within hours of Toronto-listed Chinese forestry company Sino-Forest Corp (TRE.TO) filing for bankruptcy protection and 10 months after his short-selling research firm, Muddy Waters, accused the company of exaggerating its assets. Then the e-mail from his cousin landed, asking him about the $4 billion in damages Sino-Forest said it was seeking against him, his firm and other unnamed parties in a lawsuit that neither he nor his lawyers have yet been served. Block, in an interview with Reuters on Monday, said that it is "absolutely not" his fault that Sino-Forest, whose stock was halted on August 26, 2011 after dropping more than 70 percent following the allegation in a Muddy Waters report, is in such trouble. "It remains to be seen how big a deal this becomes. First of all, resolutely we believe this is groundless. Without understanding Canadian procedure, I cannot comment on how quickly we can get rid of this," Block said about the legal action the company said it is taking. "If this business really were the business that the company had previously presented to the market, then it would be flourishing right now and probably would be free cash flow positive for the first time in its existence," he said. Sino-Forest was granted protection by the Ontario Superior Court of Justice under the Companies' Creditors Arrangement Act, the equivalent of U.S. Chapter 11 filing. Messages left with Sino-Forest's investor relations department seeking its response to Block's comments were not immediately returned. The 35-year-old Block, who has never been sued before, is perhaps the best known member of a group of short-selling investors and financial bloggers who exposed fraudulent accounting practices among China-based companies with U.S. or Canadian stock listings. The size of the announced lawsuit has brought some focus back to his life, he says. Before he had found himself drifting while trying to build a bunch of laptop toting analysts into a more formal research business with a permanent home following Muddy Waters' series of reports in 2010-11 about Chinese companies listing in the U.S. and Canada. Block said the size of the damages Sino-Forest says it is seeking was so huge that there was "almost a comic element". Sino-Forest is the most prominent among a series of recent accounting scandals that have tainted the image of Chinese companies listed in North America. The scandals have prompted trading halts, de-listings, lawsuits and regulatory probes in both the United States and Canada. SECRECY Muddy Waters has made an outsized name for itself in this small corner of the financial markets. It has issued reports on six companies and has raised a question with the management of a seventh. There were just two people, Block and a partner who has since ended his working relationship with the outfit, behind the first Muddy Waters' report on Orient Paper (ONP.A) in June 2010. The stock fell precipitously after the report's publication but the management defended itself vigorously, later saying it felt victimized by Block. The stock has yet to recover. By September 2010 Block, who speaks Mandarin, says he was living in Shanghai, with debts "in the low six figures", traveling to New York on the cheap, flying economy and staying in low budget hotels. Block says since Muddy Waters began publishing its research on Chinese companies he has gotten at least five death threats or threats of bodily harm to either himself, his wife or his father, making him cautious about revealing his exact home base in the United States. The same goes for information on his fledgling firm. He would only say that around 15 people are now working for Muddy Waters, not all of them full-time. A number are based in China but he declines to say where. The firm does not have clients for its research, rather it runs itself much like the proprietary trading desks at major investment banks that trade on the firm's behalf rather than investors. There is no hedge fund structure in place at Muddy Waters. "Why do people think we have clients?" Block said in answering a question on his business structure. "It is run like a prop house. Substantially all of the money that is involved is basically money from the people doing the research. A couple of friends have given me small amounts of money, it is in there as a favor," he said. Now he is a sought after voice on Chinese business and corporate governance issues, appearing on financial television shows or making keynote speeches, such as at an investment conference in Washington this week. His debt now paid, Block said "no comment" when asked if he was now at least a millionaire. He pondered for a moment to add, "I'm not a billionaire and I don't have $4 billion to pay Sino-Forest." (Additional reporting by Ryan Vlastelica in New York; Editing by Martin Howell and Ed Davies) Link this Share this Digg this Email Reprints

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