Carson Block: Finding The Frauds | Interview | Real Vision™

[Music] [Music] I'm here today with Carson blog Carson thanks for coming telling me this is a real thrill free up in live Dinah get you on the on the channel for a while now because there's a ton of stuff I want to ask you about before I do that perhaps you could just walk people through a little bit of your background and then we'll get into some really interesting stuff with it sure well thanks for having me and appreciate your making the trip and doing the interview I grew up in the investment industry my father was an equity analyst and so I really I really enjoyed the process of stock research from an early age but what happened was over time I had more and more bad experiences with companies and with management's and so after I graduated from university I went to China looking to open up an a share equity research firm this was 1998 so way too early came back to the states did some corporate finance with a large bank for less than a year really did not like the large bank the bureaucracy etc and so then I went and worked with my father and so we worked together for a couple of years Equity Research covering micro cab companies so at the time I mean these were market caps from roughly 30 million to probably about 900 million on the high end and this this was actually it was a very disillusioning time for me because it a lot of the management's that we dealt with I later came to feel were if not outright lying to us were at least misleading us and our institutional clients so in fact we even had one company that was you know confirmed I mean adjudicated fraud and my father had been in equity analyst covering that company for over four years a very good relationship with the CFO and I remember bringing the CFO to a meeting with my best client I mean I was 23 years old and I had a multi-billion dollar equity fund as a client which you know to me was you know I was on top of the world and so I brought my father in the CFO of that company rent way to the meeting and the CFO Jeff Conway at one point looked my my client in the eye and gesturing to my father said in the 17 quarters bill has been covering us we have never missed one of his estimates that's how good we are at giving guidance about a week later there came a day when the stock did not open and guess what Jeff Conway ended up pleading guilty to securities fraud in doing some time in prison subsequently but it was and that was that was the hardest core of the experiences that I had at the time but you know you have to remember I mean this is in 2000 2001 it's the same time that WorldCom Enron HealthSouth these are all blowing up so it's the largest companies in the world we're dealing with the smallest publicly traded companies in u.s. I just felt everybody was lying to nosh and say everybody but a lot of management's were lying to equity investors and using sell-side analysts so that's a pressure that gets put on these guys right this this this farcical idea of bleeding the number you know when the guidance is lowered raised and lowered and raised and the idea was to get in within a penny of it I mean it puts pressure on these guys to do that kind of thing right well you know there's you know I I honestly think that we as investors are way too fixated on quarter on quarterly numbers like that does not incentivize management's to build good long-term businesses now that said you know there's there's the element of pressure yes but a lot of management's these guys are making serious money selling their stock you know back in the 80s there was this outcry of how management's incentives were not aligned with those of in we're not aligned with investors and so that's when you began this movement of equity compensation for senior management you know which on one level is fine I mean the you know the alternative at the time was well these guys got paid a lot of money regardless of how poorly the companies did but the problem is that a lot of management a lot of managers have figured out how to game the system and put a lot of money in their pockets and the thing that also I remember at the time I mean we you know there were other monetizing management's as I call them that you know we dealt with at the time and again a 23 years old I learned a good lesson with one company called tidal technologies this was actually legitimately a neat company they made off-premise ATMs like the ones that you see in 7-elevens they were the biggest in the world and that's a management that really put the pedal to the metal and you know sold the company out over the medium and long term in order to juice short term numbers and you know my father and you know I was the junior analyst we didn't get at that time what they were doing but back then they had a lot longer to file their forms for showing how much stock they were selling so I think they had 45 days but anyway one day it hit the tape that you know after the stock had gone to 12 and you know our largest client I mean my father's client was buying I had bought a bunch of stock between 10 and 12 dollars a share well it turns out that these guys were hitting the bid and you know so we got some clients calling us who are upset you know my father you know called the management hey you know what how do you react to this and you know their response and this is very typical of how management's respond and I think it's entirely disingenuous is well look I've only sold you know 10% or 5% of my total holdings vast majority of my net worth is tied up in the company and I remember talking to one of my father's clients and repeating that line and this is a guy who I didn't know it at the time it's actually pretty serious short seller and so we're in you know we're in touch every now and then today and he gave me a really good lesson at that time which was to tell me Carson it doesn't matter what the percentage is how much money are they putting in their pockets today and you know I brushed it off but guess what that stock pretty quickly over a period of a year went from $12 a share to bankrupt so management you know sold sold out the shareholders so that was that was also a disillusioning experience well she she what so you bring up short selling which is obviously what people know you for certainly that side of the corner and you stand out in a world where there's this just enormous mountain of bullish sell side analysis I mean you know I've worked inside investment banks and I think anyone that works and there knows that that the word is if we don't want sell recommendations it's very few of them because it's not good business right so what was it that attracted you to be that guy that wants to stand out when they go you know what I'm gonna start looking at this stuff the way the investors need to look at it and look for the ones that that you can't call that what was it that brought you to that because not many people taking that road right sure well I left the business in 2001 so or actually 2002 I went to law school at that time and you know my thinking was by going to law school I mean I really it was kind of an amorphous notion but what I told everybody was I'd really I felt I've been really burned by bad company management's and going to law school I would learn how to better protect myself against guys like these I didn't know in what form or how but anyway at the time that I left the business also I had been having a number of disagreements with my father where there were companies micro cab companies that he really liked as as buys and I just was telling him like you know these things are too risky I mean I just you know you we so we were having philosophical disagreements and the thing was I was generally better at avoiding blow ups or getting out of a bad you know situation that was deteriorating I was better at that than I was at finding that diamond in the rough that was going to you know shoot up to the moon so at the time my father was the one who said you know maybe you should look at short selling I mean maybe that's where you should be and you know I I asked him like well you know where do I find out about that and you know he could think of one person he knew who was you know sometimes a celer but it's not somebody he had a good relationship with so I just let that notion kind of die I went to law school I took my first job out of law school with a large US firm in China and you know after after about a year and a half of practicing law I left to start the first self-storage business in mainland China so I was thinking oh well raise money go public be huge you know growing middle class etc etc things didn't exactly work out that way but what ended up happening was nine eight or nine years after I left the business 2010 my father got interested in some of these Chinese companies that had listed in the US the micro caps and he wanted me to help him diligence some of them so the first one that he threw my way his company called orient paper and so at this point I had lost faith and pretty much all of the you know safeguards that are supposed to be built into the system except for the Auditor and I thought auditors at that time performed an anti-fraud function so I already figured look investment banks don't care I mean it's all about like making this year's bonus the lawyers that companies hire I mean they're there to basically confuse investors PR firms are there to you know sell the store I mean so everybody is really aligned with management and so I was under no illusions about that but when I saw Orion paper and when I saw that it had been audited gotten an unqualified audit opinion from BDO limited out of Hong Kong which is you know one of the six largest audit firms in the world that I found stunning and so I would later come to learn and this is something you know you might want to get into but I'd later come to learn that auditors their roles are greatly misunderstood by the public and they are not there to perform anti-fraud functions so how I got into short selling was I had this it's this company orient paper that I knew was a zero I mean I'd gone and actually visited the company and and I saw that they were they had they put on this it was really a Potemkin Factory and I had done enough business in China and I'd even co-authored doing business in China for dummies you know to know that the Potemkin Factory was it was a common scam that Chinese companies would run on Western buyers you know so Western buyer would go on Alibaba or Global Sources and think that he's talking to this Factory when in reality he's talking to an individual who's very thinly capitalized and you know when the Western investor would fly out to visit the factory you know that individual would strike a deal with some factory and for the day you know he would rent the factory he put his signage on it the workers were changed their uniforms you know just the show I mean I already knew about this when I went to see or you know people in the West you know I live in Singapore spent a lot of time in Asia right so we and you know this stuff goes on but people in the West can't conceive of this stuff happen because it's like something out of a Marx Brothers movie right yeah I mean it that's one of the things we're living and doing business in China was very important to my evolution as an investor and you know into somebody you know into a short seller not just because there was this massive Chinese companies that were total frauds listed in the US but because it taught me to think in more dimensions and just when you see how in China everything needs to be questioned the ownership of you know every asset needs to be questioned the identity of the people you're talking to you learn well I mean the hard way you learn to do business that way by always having a decent measure of skepticism and doubt about what your eyes are showing you and so basically that's you know that applying that same skillset to orient paper I knew it was a fraud and I didn't really know what to do about it I called my father up and you know I said you're not gonna go along this thing but do you want to short it with me and he said he didn't want to do it so this was actually you know at the time that I went to see Orion paper was actually before they did their first audit with BDO so I figured okay this is probably some mob style pump and dump you know I grown up on Wall Street in the 90s where you had a lot of those no way they get an unqualified audit opinion they're probably gonna dump the stock before the 10k is due in March you know I've got a business to run I don't know if I have enough time to work on this thing on the side anyway so whatever I'll just it's a curiosity but I'll just move on so it wasn't until early April that just you know for the hell of it I pulled up the stock expecting to see it suspended and I saw that it had the same market cap as when I went to visit it about a hundred fifty million dollars I was stunned so I pulled up the 10k and yeah there was an unqualified audit opinion so that's what floored me and then I realized well I have I have some runway to actually do this as a side project I don't really know exactly why I'm doing it as a side project because I'm not sure you know putting a report on it as strong sell and exposing it is is gonna move any needle but all right you know it let me do it so it was basically just taking a flier that led me to put that report together and that began my career as a short seller okay so I just wanna go back in time a little bit and I want to understand what it was that that this connection with China what was it that took you to China you went you want to go there's a kid you went at the start of business you went there to look at the frauds what was that particular attraction to you with with China sure well I think it once again had to do with the influence of my father because my father was micro-cap investor and imbued me with that you know that appreciation for higher returns if you're willing to take higher risk and the whole idea being that if you can manage that greater risk then you some nice returns will accrue to you so I began thinking at a relatively young age I mean you know probably eighth grade or so I began thinking okay well going beyond just us micro-cap investing I mean where else would I see that kind of high reward higher risk profile so I thought emerging markets and this is probably around 89 90 so at that time the emerging market world was basically Asia and Latin and I figured that there were already enough bilingual you know native proficiency speakers of Spanish in the US that it wasn't really worth my while but there weren't I mean at least especially in my neighborhood of Summit New Jersey or my corner of the world there weren't that that many I felt Asians in the US and so I felt that it'd be easier to you know overcome or where I wouldn't I wouldn't face this massive gap in language skills and also I was I did find it to be for whatever reason I did find Asia to be fascinating the first foreign country I real foreign country I ever went to I mean so I'm not you know including Canada here but was Japan so I did that after my freshman year in high school and I did a homestay there and yeah I mean that was that was a very interesting experience and whet my appetite for Asia and so when I had to decide on universities you know my father went to University of Southern California I kind of assumed I mean I was deciding among party schools like that was warm weather party schools those were the two criteria you know for me and USC had been at the top of the list but you know I knew Los Angeles very well because I had family there so I almost went to Tulane it was only on the last day that I just thought which you can make your decision that I decided to go to USC and what swung me back in that direction was thinking about Asia and where is a better place to go to school if I want to do business in Asia in the future and you know USC hands down much better than Tulane so yeah that went to USC I started out studying Japanese then I took three years Chinese there I made a lot of friends who are from Taiwan some from Hong Kong in Indonesia studied in China while I was there so yeah I really I really tried to prepare myself as much as possible for career in Asia it's funny you know I think of myself in eighth grade thinking about emerging markets it was more sort of soccer girls I think that was those about it so when you're clearly ahead of the curve there but but once you because I didn't spend I went to Japan when I was 22 and you know I've got a cold you wanna come watch Japan today why not come home and that kind of started my love affair with Asia I hadn't I hadn't studied Japanese you know when I was out there but it's a different part of the world and and that was 1989 and it was it was very foreign back then you know there were no direct flights to Tokyo from London had to go through Anchorage I mean China is a whole league higher I mean that's a tough place to go in the late 90s and be a westerner trying to do business how did you integrate it because it's a very hard thing to do sure well just to your first comment about you know plan a had always been to be a professional baseball player if it was only 8th grade that I realized like I don't think I have the talent so then it was okay well what's plan B but in terms of China yeah very little was known in the u.s. about what was going on in China's business climate and you know stock market especially in the 90s I mean it's it's such a contrast to today when you know if you pick up the Wall Street Journal I mean they're gonna be a bunch of articles about China and back then it didn't matter and if it did there was just very little information anyway so I guess what attracted me to China I had a very I had a very naive way of looking at it but what you know I used to say hey imagine if you were the guy who brought Pepsi to China thinking that there would be like a guy who does such things so everybody knew that China you know the largest population in the world and you know the the economy was liberalizing and you know consumption yeah because I don't think people did I think that it's the interesting thing that you say I think looking back like now we kind of take that for Ripper back then I don't think people were thinking about that at all I mean it just I'm fascinated because I think it's a really bold move for a young man to make that people weren't thinking that way back then and I guess that fits in you think differently to two other people hence the short selling side of things right right well yeah okay it probably wasn't you know it probably wasn't the you know normal conversation you know to be had around the high school locker I mean that's true but again when I started thinking about emerging markets and having gone to Japan in 1990 to study it for a month for my freshman year in high school I mean that was kind of instructive or that was helpful because that turned out to be I mean the the peak of you know Japan's economy and economic power in the world so you know by the mid 90s it was pretty clear that you know Japan was sort of waning in that respect and when I was at USC I was surrounded by all of these kids who again they were from the you know the the Tigers you know that Taiwan in Hong Kong and South Korea and it was really Minh done in my roommates freshman year you know USC assigned us to live together but he was from Taiwan and I mean this kid was wearing like Armani clothes and you know Louis Vuitton everything had you know hot cars and you know like he would tell me that yeah you know just a few years ago we were so poor that you know my my three brothers and my father you know we would get on one scooter and like go up the mountain to you know like the local you know bath house and you know and and that was our that was what we did for you know for you know leisure and he would just tell me about like how poor they used to be and my mother's first deal when she started her own business you know she she bought a new apartment in downtown Taipei I mean it was incredible to hear this and was really exciting so yeah I mean Taiwan and you know in Hong Kong those things had kind of already happened so once again I was thinking about China and when I went there to study the summer before I graduated USC I mean that that also reaffirmed my you know that reaffirmed that this could be very interesting because you know you get there and you just if I had walked around with a notepad and pen which I should have done but you know after like three hours I would have had a list of you know about 30 businesses that they'll need there were just so many gaps in the economy and there was a lot of energy I mean it felt it felt like a very positive energy and things were we're moving in the right direction the Chinese were excited Westerners that I reached out to you know to have coffee with you know they were excited so yeah I mean it was you know it was pretty it was pretty intoxicating so you know this after I came back from my senior year I did the Investment Banking interview thing and um you know and I got after I got my first offer I had to really think okay well what do I want to do do I want to do the I banking here or you know what about this China idea and I kind of figured that if I didn't go and try the China idea I'd always ask myself well what if what did I miss so that's what I did and and it was a lot harder than I thought and I I washed out actually kind of quickly yeah that first time around yeah it's tough but it's it's just interesting you go over there intoxicated by the possibilities and then we'll jump back to where we were before and here you are you know cynical about what you're seeing there and I think that the whole this whole idea of this facade masking what's really going underneath I mean a that's you've built a very successful business out of that so let's let's talk about that let's talk about you the orient paper you you've seen this you've seen what's happened so what's the next step in that little journey well after I published on orient paper I mean the stock reacted far more than I'd expected I mean I thought maybe it would take down a little bit but the stock went down 55% you know the next trading day our next full trading day and you know at first I was I mean I was scared shitless yeah but this is you know not yet this was more than I had bargained for so I'm still living in Shanghai and I felt like a target but what happened shortly thereafter was a number of people reached out and you know they said hey you know I've been investing in the China space for a long time this is the tip of the iceberg you know what's going on really de-stresses me there's so many frauds you know that I'd love to you know help steer you in the right direction because I think so that there this was something you know I learned after publishing the prevalence of frauds was something that a number of smart money investors knew and people talked about but nobody had been able to do anything about it and we were the first ones to really come out and expose one of these things successfully and so yeah I just began getting this information flow and I started cracking over a cracking open ten K's of other companies and it was just the information would just jump off the page at me about you know just how ridiculous many of these frauds were and so that first in that first year really was this race when if some other people got into this game of publicly shorting Chinese companies and you know it's just it was it was there were so many frauds it was just really a question of you know doing the work you know putting the case together and basically trying to scoop the competition who is working on many of the same names but that's something we spoke about before before we were on camera and that's you know one of the things I love about what you do is is the meticulousness that you you build these cases up and and I think you know when you say you're surprised at the overreaction and the stock falling 55% I think that's testament to the quality of the case that you put together because it's easy to shop for all you know it's easy to say oh you know something's not right here and we we live in a world where people don't want to do the work I mean people are lazy they just are human nature for the most part and so there's a lot of people just say throwing mud at he's figuring would you know I picked it companies 1 there's got to be a fraud law remedy city is in China at the moment but you actually went out there and you did the Jews and you built up a case that actually still in its own and I think that's probably why these stocks reacted so when you build those cases because they I mean they're impressive to someone that just sits erase them it's like I discussed this guy's not holding back and he's really gone in there and he's all the questions are in my mind the answer is like a page ahead how do you set about constructing a ward as watertight a case as you can mm-hmm well I mean that's actually really interesting brings up some really interesting points because I mean whenever I'm researching a company you know I'll get conviction or I'll come to my view relatively early on in the process I mean if it takes us you know two to three months from beginning to publishing a report like relatively early on we'll have the view and most of the work goes into alright how do you build this case that you know longside investors are gonna say wow I can't argue with that and sell-side analysts it turns out I mean that is impossible to build you know where I mean obviously everybody you know who's on the long side you know wants you to be wrong but the approach that I took with the first few China reports that I wrote was I felt that I really needed to educate the readers as to you know this is you know especially when we were talking about government records you know this is the significance of these records alright they are held by this ministry you know this ministry has this information because blah blah blah companies are required to file information with them you know every however often this is how companies you typically approach making those filings so really needed to educate people as to how China worked and also to dispel some of the myths that I think were propagated by these companies and their promoters so a lot of it was education and then you know some of it was just I mean incontrovertible evidence you know the well there I guess you could say that there was also this relying on my credibility because from you know from day one my decision was I'm gonna put myself out there say you know I'm Carson block and you know I've got this Self Storage business in China I've been a lawyer here I chaired the mjm entrepreneurs committee in Shanghai etc etc put my bio out there say I'm an expert on this I'm you know I'm not afraid of being sued or you know regulatory action because everything I'm saying is true and you know and then basically put forward some some of the information that really at the end of the day you know did depend on our credibility so for example the second company that we wrote on is called rhino international is a company that claim to sell these flue-gas desulfurization systems to steel mills most of which were state-owned so for most investors the most interesting most damning part of that report was this was our surveying so we took rhinos purported customers and we got most of them to actually respond to a survey in which we were asking do you have FGD systems if so who are the vendors tell us the type of technology etc and so what we found is that almost none of the companies that Rhino had claims to be customers were in fact FGD customers and so that's an example of where it really you know for for the reader of this report that those surveys are damning if they believe that you know we're telling the truth and it's almost hard to believe as an investor that that something so obvious could make someone could just be outright yeah they're their customers and just blatantly lying when when you send these surveys out other responses are people pretty open when you ask some questions or are they quite guarded oh god no no we you know we had to be smart about this first of all again most these mostly steel mills or state-owned which means that there's just a very high level of laziness and indifference among the employees who work there the way that we got them to fill out the surveys was we we pretext it that we were potential customers we said we're consulting firm focused on environmental engineering we represent a very large Western company that's going to build a plant in China and they are going to be purchasing a lot of steel for that and this Western company wants to make sure that it's doing business with steel mills that meet its environmental standards so if you are interested in this order we need you to fill out these surveys in order for our client to evaluate that so we went in through the sales department and so then the sales department took that to the engineering department and in most cases made sure that the engineering department filled those out you know there's a thief to catch a thief kind of thing yeah I mean you know look I've never made any bones about the fact that when we do our research a lot of times we use subterfuge and we use covers we have to I mean a lot of people look a lot of people in the investment industry you know kind of poopoo that and I think you know look you know look upon that in a pretty negative way but you know when you have somebody who's a liar like unfortunately going in through the front door and asking them nicely it you know they're seldom going to admit in fact never going to knit that they're lying to you so yeah I mean we use some of the same techniques against people who you know we believe are criminals but you mentioned you mentioned that you you weren't concerned about being sued or any other stuff which is an interesting topic you know I remember watching David Einhorn give his presentation on Annaly Capital at the iris own conferences most people David look like a 12 year old kid when he's dead suit I mean but it was one of the most impressive presentations I've ever seen because it was again the Casey bill that was virtually flawless I mean you looked at that thing when well duh I mean this thing has got to be a zero and yet it took they sued the hell out of him and they fought this thing tooth and nail even though as it turned out we all know now with hindsight the thing was a complete phony did go to zero how do you deal with that period because these guys are not going to just go alright you caught us okay they're gonna come back and fight you tooth and nail for this stuff right well that's you know after orient paper going into orient paper again I didn't expect much of a stock price reaction so when the stock reacted that much as I said my initial you know I I mean I was freaked out I mean I you know I left China for about five weeks to try to get my head together and also because I wasn't sure that I was safe in China and during that time you know I thought a lot about the business model and you know this there were a number of hedge funds that you know we're saying hey you know if you put out research or if you if you do research and identify frauds we'd subscribe to it but we don't want you to publish it and you know I didn't look that that could have been a nice living but I thought about it and realized that AI wouldn't find it as fulfilling because I did like the whole element of exposing these guys and you know just to be totally open about this I had taken some lumps in China and I felt like I finally found a way to get back at that guy you know the guy who thought you know thinks the rules don't apply to him and is gonna do whatever he wants you know so this was somewhat therapeutic for me in the beginning you know just truth be told so the you know just publishing to a close subscriber list wasn't going to be that fulfilling and when I thought about it I felt like actually you know I could also make a decent amount of money by exposing these and so the question was can I can I make enough money so that the inevitable lawsuits and you know regulatory you know inquiries are just gonna be costs of doing business and that at the end of the day I feel like you know I'm still I'm still putting enough food on the table to make it worth all the turbulence and I kind of figured that yeah I think there is you know I think there is a model doing this and so the contrast with you know David Einhorn and allied capital is that you know for for green light this was you know allied was a relatively small position and you know I think also when they got the the pushback you know they they backed off a lot of the public battles I you know I realized that this model especially in the early days when I'm trying to establish my credibility and if I go out and call this company a fraud and this manager or criminal you know it's somebody who's gonna go down you know it's gonna be them or it's gonna be me so there was this element of feeling like I had to you know I had to fight for my life once I started the fight and I was willing to accept that and just go as hard as necessary in public in order to win so that you know so anticipating and it also really helped that or after orient paper I read David's book so I understood yeah what could happen exactly and we'll also with orient paper I mean that showed me very quickly you know orient papers initial response to the report that I put out was you know they said that my father and I had attempted to extort orient paper for money and that you know they refused to pay and that months later this was our revenge so I already saw just like how quickly they'll pull the gloves off and then you know that it's a fraud right now that seems they come out with that you know well I know I know but if you want confirmation I mean that's yeah I mean I'll it was you know it was helpful because the whole the whole moment of releasing the report and from then on had become so surreal I mean the the stock like I said the stock dropped a bunch and you know back then I mean tens of millions of dollars in market cap or you know disappeared and I mean for huge numbers to me and you know then you know Jim Cramer is you know talking about it and you know I mean this was this happened without warning basically or I I didn't I didn't anticipate this so there was a lot of sir reality and it was in a way helpful to reground me when the company came back and said that we'd attempted to extort money from them because you know when you're taking all of the all of these arrows even though you know you knew you were a hundred and ten percent correct before you published it it's still hard not to question yourself but as soon as they told that lie you know and I mean that's a lie that I knew was a lie in my bones like more deeply than I could you know know or feel that these numbers they publish were lies you're right that did help steal my resolve so and yeah and just make me feel like there's no way there's no chance in hell that I made even the slightest mistake with these guys yeah it's funny because I've spoken to people a lot about this and it's a it's a common misconception amongst people that aren't in this business and people focus on you know traders being the prime example and it's all about the money you know yeah I can make so much money make so much money and you know every good trader that I've ever spent time with or work with or come across it's never about the money it's about being right it's about figuring the puzzle out making a stand of being right that's really what good traders and good analysts that's what they care about because the rest of it follows if you're right in the trading environment you can make money if you're right as an analyst you're gonna make good cause you're gonna make money and it's it's that to me has always been the game it's about figuring this thing out so so as a short seller you really are you know there's contrarians and then this short sentence particularly in in this little period we've had in the last sort of six or seven eight years now coming on for hell how is it being a short seller in a market that does nothing but go up even though you kind of can't figure out why how do you keep yourself together and keep searching for me do we we had that stage where you know this famous thing about the bezel always comes out in there really frothy periods do you feel that we're entering a stage where these shorts are really a lot and run a low welcome are gonna start to come bubbling through the surface or are we not there yet do you think well in this in order to answer this question you know I have to differentiate myself from the more traditional short sellers you know like Jim Chino serves you you know those guys are running books that have anywhere from twenty to a hundred names short and everything is a relatively small position I'm an activist short seller and so I'm much more concentrated but I'm also you know telling the world what my thesis is so from from my perspective I mean I generally don't have risk on unless it's a name that I'm covering and so from my perspective you know 2013 wasn't really painful you know a lot of short sellers got carried out but I didn't have to sit there and you know lose money passively on these companies so the way I look at it is it's created more opportunity for me you know I I think one of the areas that's really interesting is the financial these companies that are heavily financially engineered and so Enron is a good example I don't believe Enron failed because it was a fraud I mean yes Enron was a fraud but those elements aren't what I believe brought it down what I think brought it down were it was the were the legal things that it was doing things that could still be legal today we're you know back then they called it mark-to-market accounting you know spend a couple hundred million dollars on a deal now you know and discount what it's worth to the present we looked at a company and we shorted publicly a company a few years ago based in Singapore called olam that was doing a lot of that and I think they were doing a cruder version of that but you know that financial engineering is so prevalent I mean maybe not quite on the Enron scale but there certainly our businesses I think that are analogous to that but you know it's kind of funny about a year ago I heard a partner at one of the world's largest hedge hedge funds give a talk and he was saying we love financial engineering you know and we look for companies and when you think about it this I mean this is kind of how up the world has become that you have such a concentration of assets among hedge funds that I mean these guys who are managing tens of billions of dollars I mean they they can't look at small companies on the loss like they have to find big opportunities to allocate and so when you're looking at these large cap these mega cap companies I mean really how do these things grow you know you look at the world economy today and you tell me how the average mega cap company is really going to grow you know and they'll bring in a new CEO and it's not that he's some genius who figured out you know strategies that Andy that nobody else in the company could have figured out I mean a lot of times that growth that makes its way into the bottom line really is financial engineering and so I think that's why it's become so prevalent so I look at that as now an opportunity there is an element of timing to it and baby back in 2013 the opportunity was a little too new but I think with what's happened recently with you know valiant and I I don't have a view on valiant but that's a financial engineering story you know with investors getting burns there and also these companies having taken advantage of their engineered financial statements in order to take on more debt I think it's becoming for an activist investor an activist short seller I think it's becoming pretty fertile grounds to find these companies that aren't necessarily frauds but just where the fight the financials are you know really misleading as to the economic health of the business and you know noble group is another example well I mean it seems to me from the outside that the beauty this time around the cycle for someone who does what you do is that these companies that you're going to find this stuff going on big companies right I mean they're gonna be companies they're not gonna be little obscure micro caps I mean the big company's been forced down this roof almost by markets by shareholders by performance incentives and and there is some some rather big fish' gonna gonna come to the surface I suspect yeah III think that's a hundred percent correct I mean 2011 you know there was a very strong theme that you know we were obviously you know among the largest participants in which was you know shorting Chinese frauds listed in North America but I do think that we could be looking at you know a theme for 2016 where it's it's shorting heavily financially engineered companies and yeah I think this has started you know in 2015 and Noble hasn't made you know that hasn't made big waves in the West but obviously in Asia it has valiant is very you know I mean that is making a lot of waves so this could end up being a big theme for for 2016 well fighting is an interesting one because of some of the high-profile names that that had big bets on this day and I think for anyone that's that's just kind of sitting there observing the parade you kind of think well you know he's a smart guy he's not gonna get caught out by something that's a fraud I mean you know and and valiance taken down some some pretty serious investors who it seems have all pretty much doubled down on this thing now I don't know how much of that is hubris and how much of it is no conviction and how much of it is you know what it's not a fraud but it feels to me like it's far more of the former and less of the latter mmhmm yeah I mean look there there are very smart people on both sides of valiant and you know that's what makes a market it's unclear in my view it's unclear what valiant is right now I think it's very difficult to get an informational advantage on either side and you know to me that's a situation that just tells me but stay away I'm not going to go short not going to go long it's best left to to play out well one you didn't stay away from and the one I guess the the put you own everybody's right over the sign of forest right I mean that's that's the one that really kind of brought you to the attention I mean certainly I'm sitting on the Singapore and that made some serious waves and I just said just walk us through that story because it's a really interesting story and and and a huge feather in your cap sure well to understand how sign of force came about you have to look at the company just before that our two companies before that that we shorted publicly and that was a company list in the u.s. called China media Express so they claimed that they put these advertising TVs on intercity buses in China and that was a very very bitter war basically where I mean there was actually a a class-action attorney who put up a website looking for plaintiffs to you know consider suing me and it was audited by Deloitte you know it had CV stars its largest outside investor and you know obviously you know star has been involved in AIG has been involved in Asia and China for so long that you know it's a lot of investors assumed that that was the smart money so that was I took a lot of arrows it was really hard and then we want it resoundingly when Deloitte resigned and in its in a resignation letter made it clear that the company was a near total fraud so after CCM II went down this one hedge fund called me up and you know the person on the other end said I'm gonna speak at you about a company I don't want you to tell me if you're gonna work on it or what have you but you know this company is called sino forests you know and I hadn't heard of it because it was traded in Canada so yeah I pulled it up and I saw the market cap into debt and I thought my god and then he started just explaining some of the high-level points that they had you know where things that jumped out at me were you know they buy standing timber you know the trees they sell trees without cutting them down and they buy from a trading company sell to a trading come and they make a 55% gross margin doing this yeah ridiculous just absolutely ridiculous they don't pay their own taxes their customers file the tax documents for them know that you don't do that in China you just you don't so there were some things that really jumped out and you know I and and I only you know I only got this idea shown to me because of you know winning si si ma after such a high-profile battle and so anyway I cracked open the annual report for sino forests I mean just red flags jumping out all over and I thought this is the real deal and so I hadn't you know I hadn't done this before I mean generally my team my team had been kind of small up to that point it had grown sort of incrementally with each project but we worked remotely I'd been working a lot from the states although I've been traveling to Asia for four meetings but I decided to have bring everybody together and we we rented a serviced office in Hong Kong so we actually got really nice office in IFC which which helped I mean having nice environment and kind of grueling days but yeah we just cranked on this thing from you know four I'd say I mean really heads down you know just going at it for about six weeks the work started before that but I mean from the time that I hit the ground in in Hong Kong till the time that we released it it was about seven weeks and yeah I mean it was but what does that make it visit when you say people talk about you know we did a long day's researching this stuff what does that look like as to us it's like okay well what are you doing you called the company saying are you a fraud and what what does give us a little bit of how you really do that stuff because it must be fascinating okay so the way that so we had a lot of documents that had to be read many of which were in Chinese so on so on one hand I had three native Chinese speakers one was an accountant a former auditor yeah there was a lawyer and the as an entrepreneur and so they put their desks in a cluster and they had just I mean there were probably over 10,000 pages of Chinese documents and so they developed a system to go through them and look for problems and you know and they would report to me at the end of the day and I would ask him a number of questions and we had a list of you know the entities I mean cyno Force had over 100 entities in the PRC so you know but it but the thing that was really fun about that is I mean at least once a day one of them would call out and say oh my god like look at this kid look this must be a fake a forged bank letter you know and they'd show me you know you know like a chase bank letter that was obviously fake you know or an HSBC letter or I mean it was it was a lot of fun I mean there were just so many problems with this company because you know it had been public for 16 years at that point in time so it's just a long track record of filth I mean even going back to Allan Chan's priests I know forced days where he was stiffing like a state-owned enterprise you know for 700 thousand US dollars you know and just the court records there I mean just you know bouncy and used bouncing the check and you know it just it was amusing but there was a lot to read through and on my end you know I made sure I've read through every annual report I read through you know almost every filing I'm over 16 years you know so that took a hell of a lot of time and I was coordinating our field work and so we're getting you know reports coming in you know from the from the investigators who were going to visit purported suppliers you know trying to find customers I did take I had a phone call and I took a meeting with their their internal IR person she didn't know she was talking to me and you know and I was getting I tried to disguise myself a little bit but you know basically trying to you know we we knew what they were telling other investors and the lies they were telling but I wanted to get some of those you know I wanted to make sure they you know they were saying that they were consistent in that yeah I mean it was just you know we were just sifting through enormous amounts of information and so then you know we have you know we have our case I mean there were so many arguments I mean they were we kind of do this thing where I'll put arguments or points on the whiteboard you know these you know you know this company is a short because or or this company is a fraud because you know normally we get maybe five major arguments I mean we had literally 20 some-odd points that we felt were you know smoking guns that which that were showing that this company was a fraud I mean we we had work done in suriname you know we had some work done in New Zealand it was just you know it was just incredible just everything this company did or touched was just filthy but what what point you stole because you could you could go on forever right doing that if it keeps unraveling at what point you say okay enough we have a case here we don't need anymore we need to go publish this thing so what was really then driving us was what was happening in the market people were figuring this this company out I mean I actually a guy an investor from China who was pretty pretty smart money guy reached out to me while I was in Hong Kong and you know just said hey if you're in Hong Kong I'd love to sit down take a meeting with you so yeah I am we sat down for a drink and he said you need to take a look at this company sino forest you know and I I mean I had to really you know play it close to the vest on that one because I certainly didn't want anybody front-running us but the you know the other I mean it was really what was going on in the market I mean the stock was selling off a lot short interest was climbing and yeah people were figuring it out and what ended up happening it looks like the second and third largest shareholders which were fidelity and Temasek and looks like they largely sold out before we came to market but the stock had gone from 25 down to about 19 maybe 18 by the time we published so we were feeling a sense of urgency again in those days it was compared there were you know other people who were exposing frauds and you know we've done all this work and we wanted to make sure we got credit for it so yeah I mean we basically you know at the end of May you know we we realize like if we have such an overwhelming case here that there's no point in continuing to work on this like let's let's get this thing out there soon so so you know it's China it feels like the China fraud thing I don't come to be able to say this but it's it's done it's played out that is not really where the focus is where's the next ground do you think I mean we've spoke a little bit about about some big multinational companies but but is there a place you look at anything you know this is gonna be the next Ground Zero well we're still we still look at China I mean China is too stock fraud as Silicon Valley rest of Technology yeah like it's you know but it doesn't seem as it's not a sexy anymore right the Chinese stop for all think people I mean I can't remember the last time there was a big lot of noise about a Chinese fraud and you're right they go on all the time we've seen hundreds oh yeah I mean the frauds have gotten better at covering their tracks in the u.s. I mean Hong Kong certainly has you know some interesting opportunities from a fraud short perspective I mean those don't make the big headlines in the US but you know it's you know it's not about headlines it's you know I mean it's business but aside from China we're really interested in Europe actually we think Europe has some companies that a number of companies that are really problematic heavily financially engineered indebted and where investors just haven't done the work I think that's probably somewhat endemic in Europe where I think a lot of investors just you know there's I think there's a code that they observe where it's just very impolite to ask hard questions and you know given especially what's happened with you know you know with interest rates in Europe and you know this environment that's conducive to bad companies borrowing yeah I think that's really created a lot of you know ticking time bombs basically yeah so just to wrap things up just just one last question when you when you sit down and you think yourself okay I've got a sense that this thing might be a fraud and there any immediate red face you've got I spoke to a guy he said I always look at the options I always look good the options packages and the options have been put out and I can tell you with a fairly of certainly just looking at the options programs whether companies a fraud hosts I start go find you know barrel this thing and I am but is there anything that you go right this is the first two or three places I look and there are always tell tales in there well the balance sheet is where you know I mean the balance sheet usually when companies committing fraud it's too pretty up its income statement and so that will almost always show up in the balance sheet unless they have a very sophisticated way of committing fraud but so when you start to see balance sheet accounts that don't make sense you know blowouts and accounts receivable inventories a lot of capex you know really raises questions and you know there are I mean one of the things that we do is we really try to look at it almost psychologically you know why did management say this why did they do that and a lot of times you see companies doing strange things and you know management I'll give whatever explanation but we say okay well is there is there a hypothesis that better fits you know that action that action those statements that action and you know if that hypothesis you know to us seems to be more likely like hey you know if these guys were really you know just trying to bailout and mortgage the future of the company this makes more sense than well you know we had a customer who requested blah blah blah so you know those are those are the things that we do so I wouldn't say that you know we don't we don't have you know I don't usually have these moments where I you know I look at it for five minutes and say aha although you know it's I know forest yes so it's it's really it's a combination of things and just you know spending a lot of time thinking about you know what the numbers mean and what management statements mean because we're a it's been a real pleasure of thoroughly enjoy this and hopefully we can do it again sometime thank you very much thank you [Music]

Channel: Real Vision Finance

Views: 35,865

Rating: 4.8958902 out of 5

Keywords: Investing videos, finance videos, finance interviews, finance, finance 101, business finance, finance major, investing, trading, economy, real vision, real vision app, real vision tv, real vision videos, real vision finance, finance interview, investing interview, real vision interviews, the interview, carson block manulife, carson block china, carson block consulting, carson block interview, carson block shorts, carson block equifax, Muddy Waters, fraudulent businesses

Id: m4ixm17ktZE

Length: 60min 21sec (3621 seconds)

Published: Tue Dec 04 2018

Reddit Comments

[u/[deleted]]

Great interview. Thanks.

[u/tardigradetimeline]

This dude is a boss.

Major props to the true short sellers out there who put on rubber underwear everyday.