King of the short-sellers: I’ve got a hit-list of UK firms
• Britain is ripe for a ferocious wave of investor attacks says Carson Block • Predator who humbled Burford and NMC reveals his rebellious youth • But he says he doesn’t want to rely on ‘punching firms in the face’ for cash
THE feared activist investor who has taken on hospitals operator NMC Health – a member of the prestigious FTSE 100 – and litigation finance firm Burford Capital has set out plans to expand and target more UK companies.
In his most open interview to date, Carson Block, the founder of US short-selling firm Muddy Waters, reveals how his tough upbringing shaped him as a thickskinned investor.
He says the UK is ripe for shortselling – where investors bet against companies whose shares they believe to be overpriced and set to fall heavily. And, in a revelation that will send shudders through the City, the American reveals he has a number of new targets already lined up.
Speaking to The Mail on Sunday, he also tells of plans to expand, moving his firm from California to New York, and reveals that he feels sorry for private investors who have been ripped off by poorly or negligently-run firms.
Block has become the world’s best-known activist short-seller. These not only place bets against firms, but publish damning reasons in reports for all to see. He has risen to prominence in Britain in the past six months after targeting NMC, which runs hospitals in the Middle East, and Burford, listed on the London Stock Exchange’s junior AIM market. He typically targets firms he believes have suspect accounting.
Burford’s share price slumped in August after a Muddy Waters report, while shares in NMC have collapsed by nearly 70 per cent since Block’s firm released its report in December last year, wiping £3.8billion off its value and putting it on course for ejection from the FTSE 100 index of blue-chip London-listed shares.
Muddy Waters said it had ‘serious doubts’ about NMC’s financial statements, accused it of ‘manipulating’ its balance sheet and said it had the ‘hallmarks of significant fraud’. NMC denied this but launched an investigation.
The report kicked off a series of events leading to the resignation of the company’s co-chairman and founder last week. It emerged that Indian-born tycoon BR Shetty may have misreported his stake in NMC to the stock market.
The company is still waiting for Shetty to clarify his shareholding after it was revealed that an Abu Dhabi bank may have sold £92 million of shares it previously said were owned by Shetty. There is confusion after some of his stock was pledged to other investors and banks as security for loans.
Block says: ‘We made clear we think there are serious internal control and governance issues at NMC. This is incontrovertible proof. But is it more than that?’
He suspects NMC might have undisclosed debt, saying: ‘I think the debt that’s collateralised by these share pledges has been used to inflate profits at NMC.
‘Some people took that initial report and felt it was a compendium of all the problems this company could possibly have and that we looked everywhere. That is completely wrong. I don’t know how deep the rot goes here.’
Block says he ‘couldn’t have predicted’ exactly how the NMC attack would play out, but says he is not surprised ‘there are lots of skeletons in the closet of NMC’.
‘In terms of whether I feel vindicated, people will see in these events what they want to see,’ Block says, adding that some investors think, despite the issues, ‘there’s still a real business here’.
He adds: ‘But there are other people – and I think this is the correct view – who will say “man, there were some serious issues at this company – as far as I’m concerned the company has no more
‘Usually short-sellers are socially awkward’
credibility and is uninvestible”.’
Block, 43, who is married with two young children, has made his fortune ‘shorting’ firms – a legal, recognised trading tactic where investors borrow shares, sell them, buy them back at a lower price before returning them to the lender, pocketing the difference.
But the controversial investor – who admits that activist shortsellers are usually ‘socially awkward people’ and ‘outsiders’ – attracts plenty of criticism. This normally comes from investors who hold shares in the companies he is attacking, but also from the companies themselves. Burford said his short attack had ‘the hallmarks of market manipulation’.
Block says: ‘The criticism doesn’t bother me. Maybe the hardest part is sometimes controlling my urge to answer in a snarky way. I do this because this is my personality.
‘As I went through school growing up, I was saying things that were unpopular and challenging people in ways that made them uncomfortable. So I’m used to the sniping and criticism. If you’re thin-skinned and feel this is a great idea for you, it probably isn’t.’
Block says he had a tough upbringing in New Jersey. His parents divorced when he was six and he went on to live with his father as a teenager. He says: ‘I had to grow up pretty quickly but it also made me something of a target for derision. It was a very wealthy town and people didn’t get divorces as often. So at a young age, parents were concerned about their kids hanging out with me. I didn’t make it better because I swore a lot.’
His father, a former equity analyst and polio survivor, had a speech impediment. But Block says his father ‘never let that cow him’ and ‘didn’t care what people thought about him’. He adds: ‘There’s a lot of good in that and perhaps that’s a big part of what enables me to do what I do now.’
However, Block’s attitude got him into trouble. At elementary school, he was told he held the record for detentions. He says: ‘My father thought that was funny because he viewed himself as so anti-establishment. He viewed it as a badge of honour and so did I as a result. It didn’t really get better.’
Block studied business and finance at university in California, then worked in investments with his father, analysing firms during the dotcom boom. He says: ‘We were lied to by a procession of management. The largest companies in the world were being shown to be frauds. I wanted to be an investor, I had a passion for it, but just felt that the public markets were infested with bad actors.’
So he went into law and became a lawyer in Shanghai to further his ambitions in business, but after just a year, he helped a friend set up a self-storage business in China, which Block then took over. While running it, his father asked him to take a look at a Chinese company listed in the US called Orient Paper. What Block found was ‘complete fraud’. He compiled a report, sent it out to people he had worked with and it attracted huge attention, and the share price dived.
He was then deluged with requests from investors, and decided to form a business, focusing initially on Chinese companies. Five years later he began managing other people’s money.
Now, after making waves in the UK with NMC and Burford, he is planning to expand his firm beyond activist short-selling. A move this year from California to New York is on the cards for Block and his nine-strong team. He says: ‘My desire over the next couple of years is to diversify my fund management business away a little bit from activist short-selling so we don’t always rely on punching companies in the face to generate income. It would be nice to have a broader range of strategies.’
Block has his sights on several targets and sees opportunities in the UK after his recent success.
‘We’re looking at names in a few markets, and the UK is one of those markets where there are some names we’re poking at,’ he says, stopping short of naming them.
Block says the UK is a good market for activism, adding: ‘There is much more of a culture of open debate and freedom of speech. Nothing in the world compares with the first amendment and even the UK’s culture can be a little bit deferential to the old boys’ club, but I do see the UK as a jurisdiction
‘We were lied to by a procession of bosses’
that thinks public debate and reasonable dissent is valuable.’
That contrasts with other European countries, where short-sellers are viewed less favourably. The French regulator, for instance, launched an investigation into Muddy Waters after it raised questions about the financial health of supermarket group Casino.
He attacks the German regulator, which has opened investigations into several short-sellers and newspaper reporters, accusing them of potential market manipulation over reports of suspected accounting irregularities into payments company Wirecard.
‘When it comes to the Wirecard affair, you might as well be accusing a company in Zimbabwe of corruption and fraud, because nobody in Germany seems to care. It’s absolutely stunning,’ he says.
But he is defensive of regulators generally, though they have come in for criticism over a string of recent high-profile scandals. He argues their job is to punish wrongdoing, saying: ‘Regulators are not there to be prophylactics preventing problematic companies from listing.’
Block says he feels sorry for private investors, but only those ‘scammed by management’, not burned by his short attacks. His message to them is be aware the odds are stacked against them.
He says: ‘When companies lie that’s a problem, but by the same token if you understand you are the least sophisticated market participant, I don’t know you should be putting meaningful money to work here.’