Famed activist short seller Carson Block pulls no punches as he takes aim at Canada, Jack Ma and the U.S. pharmaceutical industry in this interview with Brian Price. Block, who serves as CIO of Muddy Waters Research, discusses the red flags he looks for when hunting for fraud, and reveals which companies are currently on his radar. Carson also touches on how his line of work has led to both tremendous success and death threats. Filmed December 4, 2018 in New York.
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Activist Short Selling: A Niche Within A Niche (w/ Carson Block) | Interview | Real Vision™
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Transcript:
Hey, it's Brian Price for Real Vision. Today, we're speaking with Carson Block-- Muddy Waters Research founder and CIO. Carson has built a fascinating career by taking a forensic approach to uncovering fraud in public companies. And while that success has led to significant wealth, it's also led to numerous threats on his life. We're going to hit it all.
However, we begin by defining the important difference between short sellers and those who take an activist role in calling out a suspect company. Enjoy.
Short selling is a niche. Maybe the universe of potentially good shorts is this big. As an activist short, we are a niche of a niche. So our universe of potentially actionable shorts is that big. So there is this difference.
Most shorts-- so non-activist shorts-- are out there looking for companies that are melting ice cubes or where they're looking forward and they think that the fundamentals are going to deteriorate, et cetera. That's not what we do. And that's not what short sellers who specialize in looking for frauds and promotions, as well as heavily financially engineered companies do.
So within this niche-- and this would include some non-activist short sellers who also have the skills and the tools to look at these companies-- we're there really helping investors understand what's going on at these companies because there's this sliver of companies out there where managements are trying to hide the ball from investors. And whether it's from a legal perspective-- fraud-- or it's just on the right side legally. It's not technically fraud, but it's intellectually fraudulent. And they produced financial statements that obscured the economic realities of the business.
So our role as activist short sellers when we look at companies like those is to try to unpack that and explain to investors-- this is what's really going on with the company. And this is what's underlying the numbers.
So for us, we're looking for things that-- we're generally looking backward. We're not taking a more conventional investing approach of what's going to happen in the future. Because the future, you can argue about. We want things that are provable and that we can prove now. And that's basically, something that has to have already happened.
So we're looking backward and we're saying when the company printed this number-- say, $1 a share-- is that really a good number? Or well, it looks like $0.40 of that came from transacting with D consolidated affiliates that are funded by debt. That's not a real business transaction there so you should consider that EPS was actually $0.60, instead of $1. So that's the kind of thing that we do and we add transparency to the market. So that's why activist short selling and the short sellers who really specialize in unpacking those deliberately obscured situations are important to markets.
With all of that in mind-- has your approach, has your strategy changed over time? When you're doing this forensic analysis of a company, when you're looking for certain red flags?
Yeah. When you ask different activist short sellers, you get different answers.
