Carson Block defended the short-selling practice on Wednesday, telling CNBC it plays an important role in protecting investors by identifying companies that could mislead investors.
“I started this business 11 years ago to eliminate a number of cheats from China listed in the US,” the founder of Muddy Waters Research told “Squawk Box.” “We have eight de-listings of companies worldwide and two other regulatory actions that have led to sanctions. It seems pretty American to me if we are there to protect investors.”
Block has been a closely watched short seller since he wiped out Sino-Forest, which was finally listed on the Toronto Stock Exchange in 2012, in the aftermath of the 2011 Muddy Waters report. It accuses the Chinese timber company of fraud. In 2018, plaintiffs in a civil lawsuit against Allen Chan, co-founder and CEO of Sino-Forest, will receive billions of dollars in damages.
Last week, Block announced his latest short position, accusing XL Fleet of exaggerating its sales pipeline to justify future revenue projections.
XL Fleet, which makes electric propulsion systems to turn traditional commercial and municipal vehicles into hybrids, vehemently denied Muddy Waters’ allegations in a statement on Monday. The Boston-based XL Fleet said the short-selling report “contains numerous factual inaccuracies, misleading statements and erroneous conclusions.”
The use of short selling – essentially a bet that a stock will fall – was examined in the wake of the Reddit-powered short print in GameStop that began in January. The stock in the video game trader has very short interest, which some small investors realized and started buying GameStop shares and call options to move the price upwards.
Short sellers borrow shares of a stock and then resell them in the market, with the aim of buying them back later at a lower price. Then they return the borrowed shares and earn the difference. If the opposite happens, as with GameStop, shorts could try to buy back the stock at current higher prices to limit their financial losses.
Hedge funds such as Melvin Capital, which cut GameStop short, believed that the value of the company would decline as the retailer shifted towards e-commerce and more players turned to digital downloads instead of buying the physical disk. . Melvin’s founder Gabe Plotkin explained the rationale for the shorting of GameStop during a congressional hearing in February.
Block’s Muddy Waters chooses its short targets differently and often bets on companies that they believe are misleading investors, rather than just having a dwindling business in secular decline.
Another company Muddy Waters bet teen was Luckin Coffee – announced early last year that it believes the Chinese firm is committing fraud. An internal investigation by Luckin Coffee later determined that its chief operating officer was producing sales, and the stock was eventually removed from the Nasdaq months later.
Block, like all short sellers, has financial incentives to lower its target shares, and it is known that the public announcement of positions of its firm moves the share prices, even if only temporarily. That’s why some people criticize people like Block for going on television, for example, to discuss the clumsy bets of his firm.
Andrew Ross Sorkin, CNBC, directly questioned about those who want to place restrictions on short sales or claim that Block’s public campaigns against companies are not an American way, Block pushed back.
“The other side of this is, my perspective is that you are effectively saying well then, ‘Fraud, scam, exaggeration and money for it is the American way,'” Block said, reiterating that “if we try to get the economic incentives out there,” he said. a small number of people to take advantage of the naivety, that is American, to expose and remove. ‘
The volatile actions in GameStop and the role that social media played in attracting retail investors to the heavily valued stock have raised questions about how short sellers will approach positions in the future. Plotkin, for example, told Congress he believes hedge funds will adjust their strategies to prevent them from being caught again in such dramatic short pressures.
One firm, Citron Research, has already said it does not want to publish more short-selling research in order to seek long positions.
While Block said he thinks GameStop could have changed the dynamics in some ways, he said he first noticed a noticeable change last year. One company, Muddy Waters, said that ‘we’ ripped ‘, and that was new,’ Block said.
“It told us that there’s a lot going on in the market that has nothing to do with fundamental factors, and it’s really technical,” he said. ‘This year before GameStop we thought a lot about flow and how passive [management] and ETFs are distorting markets, so when we see GameStop, I think, it’s just the five-alarm fire that says these markets are really separated, in many cases, from the fundamentals of the underlying asset. ‘