Muddy Waters’ Founder Carson Block On Investing In Chinese Reverse Mergers: CNBC Interview

12 Apr

Herb Greenberg got the chance to sit down with Carson Block, Founder of research firm Muddy Waters today to talk about investing in Chinese stocks, especially RTO (reverse-merger) situations.

I think he brought up a term seldom heard in the financial media – Potemkin Factory – and went on to explain some very basic tenants of due diligence apparently ignored by many investors Who Should Know Better.

John Hempton of Bronte Capital talked about this last week in a post about China MediaExpress Holdings and efficient markets (or lack thereof).

Both Block and Hempton are quick to point out that many people who were long CCME and other Chinese RTO names that claimed to have done their “due diligence” took many a shortcut that ended up biting them firmly in the ass.  For instance, as Block said (re: Potemkin factories), if you want to see if a firm is legit, you don’t go on a pre-announced visit with investor relations and/or senior executives.  You show up un-announced, giving managers zero time to put on a show to make everything seem on the up-and-up.

This is not rocket science, and does not cost alot to undertake, in time and money, but I’m amazed at how many people are so quick to cut corners when investing in prima facie questionable trades where even novice investors would exercize more prudence than normal.

Is CCME (etc) a fraud?  All signs point to yes.  Does that mean investors who were “duped” (i.e. allowed themselves to be easily duped) deserve to be made whole, or anywhere close?  Not in my book, and as far as I can tell, not in anyone else’s, either.  Those who were long despite oodles of orange/red flags should consider their loss an educational expense, and keep the lessons learned in the front of their minds for the remainder of their investing/trading careers.


One Response to “Muddy Waters’ Founder Carson Block On Investing In Chinese Reverse Mergers: CNBC Interview”

  1. wayne gushue June 7, 2011 at 7:28 am #

    Is the next person/company going to target Canadian & American Companies for fraud? When can the trust be restored?

    To Carson Block

    It is obvious you & your research team is the one that is the lucrative business. Sending out a strong sell to financial websites on allegations without a firm stand & due diligence is reckless and has wiped out many families life savings not to mention the fallout from other avenues i.e., employees of the forest industry & yes Sino Forest. I find you a greedy & vindictive person. Even if Sino Forest is at fault, the fact that you would bet money the company goes to $0.00 is even more ruthless. It is quite obvious the financial gain for you based on your allegations. I am sure a conflict of interest is at play here in the future & your company will be the example in court. Do you think you have done a good thing by exposing a company from which you will benefit? I think not. I believe you will go down just like you have tried to take down Sino Forest. It is people/companies like you that create total mistrust in the world. Next time make sure you have 100 percent unequivocal proof before tagging a company as a fraud.

    On your website you say…
    In a boom, fortunes are made, individuals wax greedy, and swindlers come forward to exploit that greed.

    Who is the swindler? Who is the greedy person?



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