The Compound and Friends - The Soul of a Short-Seller

Episode Date: May 9, 2025

On episode 191 of The Compound and Friends, ⁠Michael Batnick⁠ and ⁠Downtown Josh Brown⁠ are joined by Carson Block, Founder and Chief Investment Officer of Muddy Waters Capital to discuss: how activist short-sellers expose fraud, Carson's biggest shorts, the problem with CEO compensation, and much more! This episode is sponsored by Apex Fintech Solutions. Learn more at: https://apexfintechsolutions.com/augmented-advice Sign up for The Compound Newsletter and never miss out: ⁠thecompoundnews.com/subscribe⁠ Instagram: ⁠instagram.com/thecompoundnews⁠ Twitter: ⁠twitter.com/thecompoundnews⁠ LinkedIn: ⁠linkedin.com/company/the-compound-media/⁠ TikTok: ⁠tiktok.com/@thecompoundnews⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠Ritholtz Wealth Management⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠https://ritholtzwealth.com/advertising-disclaimers⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Josh, you were on TV today. What was the talk around interest rates? Because the two of you are screaming today. Did that come up at all? I don't even think interest rates came up. The big thing going on on the show today is, like, if we're in the foothills of a recession, why is earnings growth still posting 12% growth year over year?

Like, how defensive are the largest cap companies in the country? Because the tech companies now look more like consumer staples. Like honestly, who's pulling the plug on their Netflix? And that's where the growth is coming from. Even if they lose their job, who's like really canceling? And if they cancel, do they go from premium tier to ad-supported tier? Because that's even better for Netflix, more profitable consumer. So if the S&P is increasingly looking like supported tier because that's even better for Netflix, more profitable consumer.

So if the S&P is increasingly looking like the biggest companies that matter the most are actually defensive, it's a different mindset about what does it even mean to have an economic slowdown in terms of the stock market. So that's kind of the debate. And the obvious thing to say is, yeah, yeah, yeah, it's different this time. Just wait. Of course. Right. And nobody wants to be the idiot saying, yeah, yeah, it's different this time. Just wait. Of course. And nobody wants to be the idiot saying, no, you don't understand. Apple's a consumer staple. It's

not consumer electronics. Therefore, the recession won't hit the stock market. Of course it will. But that's like the big debate people are having. Do you think like big picture kind of stuff or you worry less about that? No. I mean, when we're thematic, it's usually just in the rear view mirror. We say like, oh wow, we did a bunch of, you know, fake ESG company type shorts or even some that would be deemed real ESG companies but are actually pretty

horrible companies. So no, we don't usually think along those lines. Now that said, It affects your output though. Like it affects the results. Well, I mean, what I worry more about are our flows and technical factors. So stuff in the S&P, I mean the S&P is driven by the largest names in the index. And what, you know, the way I look at it now is that the fundamentals matter more and more just on the margins as opposed to the flows.

So if you get a lot of, and the main drivers of the flows are 401k plans, are 401k plans. Relentlessly so. Right. Every two weeks. Right. But if you get a situation in which there's increasing unemployment and the flows became net negative, then you would see all of this go in reverse. So, you know, that's, I mean, that's all of what going

reverse the flows, the flows never go in reverse. Well, but if you had net redemptions from 401k, because people I know, I know, we're I'm not, I'm not waiting around for that day. But that's the point that I make to people when, you know, I get asked, you know, I hate if I go on TV and the host is not well prepared and they're like, oh, what do you think of Nvidia? Doesn't it seem expensive? It doesn't matter. Like, don't you understand it's about the flows. The flows will keep coming. Oh, well, what'll change that? When people have to redeem from the 401k's. Please close out question number six. No but wait a minute, hold on. I think, I still believe that earnings drive companies. I would imagine that you believe that to a certain extent. It depends on the company. I mean if it's a major part of a major

index then less so. All right, okay. So for the last three years, I don't have the exact data but I was just looking at this because it surprised the shit out of me. Over the last three years, I don't have the exact data, but I was just looking at this because it surprised the shit out of me. Over the last three years, there are a lot of companies in the S&P 500 that are down 30% or more. A lot. And they're generally companies that have not performed. The businesses are not performing and therefore the stocks are not performing either. Okay.

So, well, but the thing is you have fewer and fewer people out there taking fundamental views on these stocks. That's part of the problem. You've had this big rotation from active management to passive management and one of the main drivers in addition to index flows is also companies buying back their own stock. So if a company is cash flowing, you know that marginal buyer of stock then it's not going to be the fundamental fund manager That's trawling the mid cap universe looking for the stuff that's unloved. It's going to be the company itself. So To the extent that company cash flows

Equal share buybacks and inflows into the stocks then yes, there's a link to fundamental performance. But, you know, I just think so much of it is so much of this, the US markets now are really driven by passive. The two worst, the two worst Mag-7 names this year, Apple and Tesla. Apple's doing a record setting $100 billion buyback and it still manages to so substantially underperform Microsoft that the two charts overlaid look unrecognizable. So if we're saying it's buybacks and it's and it's indexes why isn't Apple doing as well as Microsoft? I think the answer is because the fundamentals aren't as good right now. It's not growing. Well so. It's not growing and Microsoft is. So without seeing a chart, I mean, I'm guessing that there's a correlation to when we, you

know, went into liberation day land, right? In terms of. Ish. It was, it pre, so the underperformance of Apple versus Microsoft definitely predated that, but it was probably caused by that. I would say, I'd say you're, you're probably 80% right on that. But still, you would, if it's, if it's mostly buybacks and indexing, the marginal dollar that's either coming

from Apple's corporate coffers or the index buyer who's price insensitive, doesn't give a shit, it's not pushing Apple up the same way it's pushing Microsoft up. So I think there are still people doing that work and attempting it. There's less of them. There's less of them. Yeah, no, there are still people doing that work and attempting it. There's some. Just less of them. There's less of them.

Yeah, no, there are some. But I mean, there's such a disconnect between, especially when you look at valuations. I mean, the valuations, I don't sit there and think about, oh, what should Nvidia trade at? But I mean, it's so hard to find these companies that are mag 7 and say, oh, wow, you know, what a great value this is.

So. I got one. Alphabet is selling it at 60% of the market multiple. Okay. Is a mag seven on sale relative to its own price earnings history, relative to the S&P. Mm-hmm. For like, for good reason, but it's there.

Somebody wants to take the risk and buy alphabet with with search now falling, you know, so Plus a concern about the the recession coming and Denton advertising revenue and anyway, why are we talking about the mag seven? I guess I guess what I'm trying to say is the flows are 100% probably pushing up multiples over the very long term. Like, just Cape Ratio now versus its own history. It's a higher multiple than ever. But inside of the index, even amongst the 10 biggest stocks, there's pretty big dispersion these days. In 2023, there wasn't.

Those stocks all went up every day for any reason it didn't matter good news bad news let's start the show ready start the show oh my god you guys stop the clock here's a word from our sponsor. This episode is sponsored by Apex Fintech Solutions. The time to compete for next gen clients is now. Like now now. Transforming your business for the future might seem like something that you can push off,

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It's a modern on-ramp to tailored advice using your brand, your personal touch, and Apex efficiency. Learn more at apexfinetechsolutions.com slash augmented advice. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

Ladies and gentlemen, welcome to the best investing podcast in the world. Carson, we're known for our modesty. It's kind of our whole shtick. I am so excited for today's guest. We've never talked before. Like I think I've met you in passing, but we never had this conversation.

Not a long one. I think we spoke on the phone once, but yeah. All right. I have admired you from afar and I've always followed your stuff and I'm not a short seller. Michael's not a short seller. We don't know how to do that, but-

I shorted Amazon in 2011. How'd that work out? Pretty good. We don't know how to do that, but I'm friends with short sellers. Jim Chanos is a friend, and we've talked a lot about how much respect Michael and I have for Jim. And we look at you guys like just these people operating on the market in a way that's counter to what everyone else is doing, but I think you guys are part of the health of the overall ecosystem. When done correctly, short sellers will uncover things

before journalists, way before regulators, and it's needed because if the executives of publicly traded companies have no fear that anyone's gonna catch on to what they're doing, five years of that, you could imagine what our markets will turn into. So you are a governor of bullshit. We need more short sellers. Yeah. So I want to start with there. And where I want to go from just making that statement to you is to just give the listeners and the viewers a sense of like, how did you wind up becoming a dedicated short seller or an activist short seller?

I'm not exactly sure how you couch what you do, but tell people like the origin story. Yeah, sure. Well, it's okay. I'd like to just explain a little bit about activist short selling. I would love that. And so where Jim and I differ, Jim will short companies for fundamental reasons, as well as if he thinks they're scammy. And actually, if you short a scammy company, whether it's a stock promotion, which is just on the right side of being legal,

or it's in the gray zone, or a fraud, it's actually a really bad short unless and until somebody tells the world what's going on. So if you're a traditional short seller where you put some risk on and then you don't really talk about it, you actually wanna stick to the fundamental space. So at least the way Jim used to run his portfolio,

there were 70 to 80 names in it at any given time. In a year in which the market screams, he expects to lose money on an absolute basis but he's there selling alpha. Now what we do as activist short sellers, we are, I mean most of us who are in this space, we're only able to really speak on five or six companies a year and we're looking for companies that are scammy. Whether they are stock promotions, they are frauds, they're doing something they shouldn't be doing and the management is hiding the ball in some respect

from investors. And so then we take short positions and we speak about them. So if you just say theoretically the universe of shortable companies were 100, what would fit into our category would be something around like five. Theoretically, the universe of shortable companies were 100. What would fit into our category would be something around like five. Five percent. Yeah, I think five percent of what people would consider the shortable universe.

And I'm just... Are you making the case that in order to be a short seller of scams and frauds, you have to be an activist because if you don't speak up, then the thing can go on for way longer and it's not a real way to invest. These days you do. You mentioned previously journalists and regulators. And the thing is, if the financial media still had investigative journalists,

I mean, there are very few. You know, what's happened obviously since the dawn of the internet is that newsroom budgets have been cut on a per-employee basis. The people who knew how to do the work are expensive older employees. They're laid off. No more Herb Greenbergs. Yeah, no more Herb Greenbergs. I mean, and he even tried being an activist short seller for a little while. But you so there were more reporters who were willing to run down something that looked fishy and there are today and it's well

It's really a problem at the publication level like the publications don't make money off of your long-form deep dive research anymore Because everybody wants clickbait headlines quick hits. Yeah, so they're not there on the regulator side a lot of people misunderstand what regulators do and don't do. And same is true of auditors. But regulators are not there proactively looking at the universe and saying, like, oh, who seems like they're cheating? They wait for a blow up. As Jim puts it, they're financial archaeologists, basically.

They're not detectives. But the other thing is, where regulators do have a role, well, I'd say they've had a very negative role to play in what I've seen since the financial crisis is that they made a decision post Enron. In the US government, there was a feeling after Enron that the government response was too harsh, especially with respect to Arthur Anderson. And so they've basically treated a lot of the managements and the people around them with kid gloves ever since. And so you have this, you know, the probability of getting caught now, doing something you shouldn't do is lower than ever. The government generally has less appetite to litigate difficult cases that are in the gray zone And the rewards and this is the crazy thing when I started doing activist short selling in 2010

You know the way I thought about it then is if you were able to scam 50 million dollars Out of investors out of your company like that put you at the big boy table Today that's a laughably low number. Like you're still sitting with the kids at Thanksgiving dinner, right? Like the numbers, because of the inflation of asset values, the numbers, the rewards are so great in absolute terms. So yeah, the incentives to-

The rewards for cheating. The rewards for cheating. So I think in modern times, the rewards for cheating have never been greater and the probabilities of getting caught have never been lower. And you also have this entire market or investor class that's really anesthetized to risk and frankly doesn't care a lot of times. I think I was going to interrupt, but this is the hallmark of a conversation with me

is everything you say generates like three questions in my mind. They're anesthetized to risk because they're not taking as much single stock risk in the way prior generations of investors did. They're not living and dying with individual companies. They're buying baskets of stocks. And if one rotten apple is in the basket, it all comes out in the wash and they end up okay versus somebody 20 years ago who had a portfolio of 20 individual stocks.

And if one of them was a fraud and went to zero, it would make a real impact on their brokerage account. Well, look, that's part of it. But I think the other factors are that kind of amazingly, I'd say we've had two generations of professional investors enter the market since the GFC. So to them what is risk? 2018, Fed decided to cut again, 2020. Risk is opportunity for them like oh things are gonna blow up you know balance sheets are too fragile.

Awesome. That means somebody's gonna to come in and bail everything out. This is fantastic. And that's not the way markets should work. I don't think it's the way that markets will work in perpetuity, but that's part of the reason why on a single stock basis, if you're talking to investors about like, hey, I think this company has some issues here. I think management, no, no, no, no, don't talk to me and like the people on the long side You used to get compensated on the long side for caring about that for caring about risk after I'd say 2013

They became the butt of everybody's joke like that's guys a value investor. Ha ha ha, you know Like so I think that that's the bigger issue is that all of the emergency monetary policy that way outlasted the emergency and went into the next emergency, which led to even greater emergency monetary policy, I think that has anesthetized investors to risk. Even as an activist short seller, a lot of times, I felt that every year the bar to find stories, for lack of a better word, that people would care about got higher. It's like, yes, the market caps of the most dysfunctional companies got larger,

but people just didn't care. And we still face that situation. So Elizabeth Holmes was unmasked by the Wall Street Journal. It's not a public company. They kind of get to it first before, because that was on an IPO track. From my perspective, I'm sure there's every bit as much fraud in the market as there always has been.

Maybe there's more, it sounds like you think there's more. But like from my perspective, why even bother? Commit the fraud with private companies, then you're just dealing with venture capitalists. That almost seems like the Wild West right now. And nobody can short those stocks because they don't trade on an exchange, can't borrow them. But like from my perspective, it looks like it just seems like it would be way easier to commit fraud in that part of the world. And that part of the world is now trillions of dollars worth of non-public equities.

I mean, what do you think about that idea? Yeah, I mean, I wouldn't assume that there isn't rampant fraud or misrepresentation. And I had this discussion several years ago with somebody who was in a pretty high profile litigation with Snap. He's actually a crypto god now, Anthony Pompliano. So I don't know if you remember that litigation

he'd come out of Facebook. And we were discussing how in the private markets when these companies go to raise money, so obviously the financials are irrelevant, right? Because they're nascent businesses. And so they're audited, but the auditors don't look at the user metrics and So what is look at the money? Well, but there's hardly it's just like oh money hit the account and they spent it

So the key thing, I mean when these companies raise money, it's based on their user metrics and it turns out that very few to zero of the VC firms actually try to diligence these numbers. And the way that Anthony explained it to me, and when I've talked to a number of other people since, it made sense, is that, it's like your typical software startup,

it's a few people working the proverbial garage. Okay, you build this, you build that, and they kind of draw straws to see who has to build the user measurement systems. Like who gets the short end of the stick here? Ah shit, like I got that. Nobody wants to do that, it's not sexy. You don't put a lot of effort into it typically,

so it's poorly done. Raise money, you know, user growth, it goes, you know, starts to hockey stick. Nobody has updated the measurement systems. And so even if you intend to accurately represent your user metrics, it's really hard because you have a very poorly done system for it that got no love once you started to raise money. Now, against that backdrop, you also have people who are willing to exaggerate or misrepresent

or even outright lie. And it's very difficult, again, when you're talking about a system that's kind of thrown together in the most efficient way possible, maybe not most efficient way, and in the laziest way possible, it's pretty difficult to contradict that. Charlie Gervais is going to jail. So she sold a startup with fake user data to JP Morgan. You would think JP Morgan being one of the most sophisticated financial players on earth

would have maybe done a little bit more due diligence before the fact, but whatever. They discovered after, they sent an email to all the users, and they looked at the response rate, which was effectively nothing, versus when they normally send marketing emails to other populations of email addresses, and they knew right away, we bought a fraud,

they convicted her. I think she's going away. Yeah, and I don't know that case in detail, but based on what I do know, I don't fault JP Morgan because that's hardcore fraud, okay, from what I understand. Deliberate. Right, she went to somebody and said,

hey, create a bunch of user profiles that look entirely random and look real. And so if you're JP Morgan and you're buying a business and you see that data and it looks real, yeah, I mean, you're going to assume that most people are not going to risk going to prison. It's completely insane. Yeah, it was a stupid fraud.

But Theranos, like Elizabeth Holmes at Theranos seemed equally insane, pretending that you can detect medical issues with a blood sample when you know you can't. How, I guess the only thing you could say there that might have been like even a dose of sanity is she thought she could fake it until she made it and eventually the technology would work.

But other than that, this is insane behavior. So I saw, I was on a, spoke at an event a few years ago. One of the speakers was Alex Gibney, and he's the one who produced the documentary on Theranos, Bad Blood, that was based on the Carrie Rue book. And he also did The Smartest Guys in the Room. And he's done a number of financial fraud documentaries in the interim.

And he had what I thought was a really insightful comment, which is that the vast majority of people who end up committing fraud Like she did like the Enron guys. It's not their goal at the outset it's that they do something where it's a little bit over the line and You know then they figure okay, that's it But it doesn't get better and so then the next time they move a little bit further and a little bit further, it's very incremental. And before you know it, they're just,

I mean, they're so far gone. I mean, that's like the story of FTX. I don't think Sam Beckman Fried started FTX to commit a fraud. I think that's Madoff. I think Madoff got away with it once. And then like over decades, the whole operation springs to

life but where it starts I think is not being embarrassed in front of your friends and family. Right. That's almost always the origin. 100%. So Madoff cleaned out the North Shore Country Club, he cleaned out the temples, Florida and New York, he's bi-coastal, very talented. He cleaned all these people out who were his friends. I don't think at the outset it was like, let me rob my friends and family. It was, I can't admit to these people that last month might have been a bad month

for my portfolio. So I'll take the other side on MADAR. I think that guy was a hardcore psychopath. Eventually. The reason I think that is because this guy had a very successful trading business. He was a pioneer. This is not somebody who needed the accolades,

the returns, or the money, frankly. So I put him in a different category of, because especially in this business, I'm sure you've met people where you think, okay, that's a smart, talented person. They could have made money the legitimate way But I think they just enjoyed stealing it too much. Oh that exists Yeah, I've met people where I've gotten that feel that feeling and that's look I never met Madoff

But I put him in that category So get it so getting back to the area that you play the publicly traded companies When you talk about these scammy companies, these fraudulent companies, who is benefiting and at whose expense are they benefiting? Sure, so it's almost always management. So the CEO, the founders of the company, they have a ton of stock and basically as the stock ramps, they're going to sell it.

And so they're effectively taking money from the public investors. And the thing is, so if you go all the way back, and I did start paying attention to this in the 80s, when there was that theory that came out of academia, like, hey, we need to align incentives between management and shareholders. So let's think about equity compensation.

And in theory, that's great. And up to a certain amount of compensation, it makes sense. But the thing is, companies started hiring compensation consultants or the boards did. And they're always saying, oh, no, you got to increase this guy's pay because, you know, and since the board is always the CEO's buddies, you just got this arms race where Since the board is always the CEO's buddies, you just got this arms race where everybody was giving their CEOs more and more stock comp. You get to this situation where the incentives are completely misaligned because you can throttle a company. You can make things look good while mortgaging the future of the company.

You can play that game for two or three years, get lot of stock comp sell it and then when things blow up You're fine. And one of the biggest mistakes investors always make in that situation is that oh gee, you know, he still owns You know blah million shares. It's like yeah But you know when you've taken 250 million dollars off the table already like that's the idea committees are a cartel to like that these numbers don't materialize out of nowhere, or maybe they do, but the reason why they actually get paid is because the CEO down the block at a rival company is getting the same thing.

Right. It's not like it's a thing where everyone's operating independently of what's happening around them. Right, and it just keeps raising the bar. But then my favorite dysfunctional behavior when you think about companies and compensation is mergers and acquisitions, right? It's like they acquire a company, they get bigger.

It's like, well, you know, all of my peers who run companies of similar size now, they get paid more. And so it just becomes this joke. So as I watched HP consolidate, and back in the day, I mean, first it bought Compaq, and just watching the pay rise for Meg Whitman, and it was, I don't know, I would sit there laughing, and to me it was obvious what the game was,

but whatever, a lot of people lost real money there. And then they bought that thing, Autonomy, which a bunch of people, a bunch of short sellers knew was a fraud, had written to the board. They bought it, and I think within a year, HP was complaining and filed criminal complaints against the sellers of Autonomy, or the guy who'd founded it.

Was he killed? Yeah, he died. No, was he murdered? No, that was a... You wouldn't go that far? That was a tornado, man. Like, that's, no. And his, no.

No other boats sent. Cause let's tell people what we're talking about. The guy who sold autonomy to Hewlett-Packard got sued into the Stone Age by Hewlett-Packard, right? No, he was still worth about like $300. Okay, but the lawsuit that he ended up winning was a criminal. Well, he had just been acquitted. Acquitted in a criminal trial.

Right, a criminal trial in the US. I mean, that had been like 10, 11 years of his life. And so he had a celebration party aboard the sailing yacht that he owned. They were moored off the coast of Italy. Amalfi. Yeah. Yeah. And, you know, really sadly he had his daughter on board. Yep.

He had, ironically, one of his criminal attorneys on board. An investment banker from Morgan Stanley. Right. And he had some other people on board who escaped, but the boat went down with him on it. And what I got from the early investigation, I think they were, the authorities were saying that the captain did not shut the hatches or, you know. The windows. Yeah, the windows or the hatches.

Yeah. And I think, and so like I. It's a really crazy, karmic thing. It's extremely karmic, especially because I think the CFO, who had also been acquitted, was killed like a few days earlier in a bicycle accident Yeah, that's okay. That was the part. I was gonna get there There was another related related death unrelated to the incident but related to the situation. Yeah, and look I think I think it's one of those examples of how occasionally life is stranger than fiction. Yeah

Where do these ideas come from? Are you running quantitative screens or is this just word of mouth and somebody gives you a tip? How does this work? Well, first of all, we're very sensitive about using the word tip since that's a term of legal significance, insider trading.

I meant to tell your communities. No, I know. So we don't, I'm not a believer in screens because I think you get a lot of false Positives and false negatives in other activist short sellers Might take a different approach But we get a lot of people Usually long short funds shopping us ideas. They're short xyz The substantial majority of the time it just it doesn't work for us

It might be a great short idea, but it doesn't make for great short activism So going back to that that difference between the shortable universe and what we do You have to be provably right at the time that you speak So if I say oh, you know, the street has this wrong competition is going to erode margins much fast Like that's a that's a you know, like we'll find out when we get there But you're looking for guilty beyond a reasonable doubt. Right. Well, I'd say the standard I look at is the civil standard. Can I prove by preponderance of the evidence in the market? I mean, I would like to do beyond a reasonable doubt, but...

Can you prove what? That something the company is saying or doing is not what it appears. Correct. And to be clear also... That's a high bar. Yeah, and look, to be clear also, the, a lot of people associate us with, oh, you guys short frauds. 20 to 25% of the companies we short, we think are frauds. The other 70, 70 or 75, 80% are in that gray zone

where what they're doing. Promotional. Yeah, it's like misleading accounting. It's probably illegal. Like Herbalife? Would that be in the gray zone type of thing? Herbalife was it so the numbers were real there. Okay, so that's also one of the other lessons of business

is that businesses that do things they shouldn't be doing can be great businesses from a financial perspective. So, you know, Bill Ackman was right. The FTC hit them with a record fine, but he was wrong in that it didn't matter. It was like $120 million. It's like suing tobacco companies. He wasn't even alleging fraud. He was saying this is bad for the Hispanic community because they're being scammed. So that's the thing. He did initially call it a fraud, but a consumer fraud, not a financial fraud. Like talking people into becoming wholesalers, taking on all this inventory. And he was right. Of course that's toxic. That's not good for anyone.

But so you need to be right that there needs to be, these companies need to be a fraud. And ultimately, if that does not hit their bottom line, investors just might not care. Right. So what happens a lot of times then is we are another short activist, publish on it. The idea is that we create enough scrutiny and pressure that things inside the company start to break. So people get uncomfortable with continuing that behavior. So you might start to see resignations. Maybe the auditor says, hey, look, we have an issue here. The auditor says, well, if you're going to continue to do this, we need a lot more disclosure.

Oh yeah, but that's gonna basically show that Muddy Waters was right. Well, that's what our lawyers are telling us we need to do. So some managements will, and some managements will just basically back off the aggression right away. So if you look at- Oh, they'll stop doing what they were doing. So some ofments will just basically back off the aggression right away. So, if you look... Oh, they'll stop doing what they were doing. So, some of them will...

But they'll also deny it simultaneously. Right, they'll deny it, but they'll back off or they'll double down on it. So, you know, I don't know if you were going to bring these up and I'm like jumping the gun a little bit. No, no, no. Let's go. Let's go. So, if you look at a company that we shorted in November of this past year at Irisone London, it was Elf Beauty. So what we were looking at customs data and we saw that their imports fell significantly and couldn't be reconciled with what they were reporting

as cost of sales. So we were saying that we think there's a serious problem here, real misstatements in the inventory, accounting, cost of sales, and also the revenue. So they denied it. Now, to be fair, they did say, hey, we had just gotten confidential treatment for our imports, at least some of their imports, as of January of 2024, which nobody asked them, well, why did you suddenly get confidential treatment?

They said it was for competitive reasons, but that was a total BS excuse because their suppliers are well known, their suppliers don't change, easy to figure that out. So it wasn't for that reason. What did they do that in response to somebody asking questions? No, I think they, because they knew,

look, I think that they messed with the numbers, and I think they knew they were gonna be messing with the numbers, and so they look, I think that they messed with the numbers, and I think they knew they were going to be messing with the numbers, and so they, not I think, well, okay, in my opinion, they had a plan to mess with the numbers, and they realized that they could get caught through the customs data, so they got confidential treatment on most of it.

Now, we went out there, we said, hey, these numbers are problematic, they of course denied it, But then when they reported their next quarter, they lowered guidance significantly. So in my mind that was, okay, you guys are unwinding this. You're basically, you're going to miss, you're going to try to dive below everybody's radar, but, and just hope that it doesn't go bad for you. When you say they, sorry to interrupt, but when you say they, is this like the CFO? And is this like, does everybody know who's they? Yeah, that's a good question.

I mean, we're talking top management usually, and look, I'm not privy to the discussions, obviously. I can't get internal company documents, but something like that would be CEO definitely, CFO most likely, maybe there are some people in accounting, but basically whoever has access. That's one of the things we also found out was in the course of our research, they did not have good internal controls.

When you see that with companies, yeah, it doesn't just mean that there's a risk that numbers will be accidentally misreported. A lot of times, the companies we look at, we think, yeah, that's a feature, not a bug. They've designed, they deliberately have weak internal controls. So that's one type of response. So again, this is... So, philosophically, though, do you care if that's the outcome? Meaning they unwind it in plain sight. They don't say we're unwinding us,

messing with the numbers. They say, sales are going to be lower next quarter, unexpectedly. To your point, they dive below the radar. The stock goes down either way. Do you need, philosophically, you, Carson Block, do you need justice? Or are you just as happy with the stock price falling

and you being vindicated? Well, look, of course I would much rather there have been an investigation and then at least civil charges, if not criminal charges. Like that's important to you. Well, you much rather have that because in my profession, you always have a lot of haters. You always have a lot of people who are going to make excuses and say like, oh,, that's not, no, it's just because XYZ was happening, you weren't right, blah, blah, blah.

It's just nicer to be vindicated, especially because there's so much hatred that gets directed back toward us, like on social media, et cetera, that it is always nice when those critics go completely silent and then occasionally one or two will DM or tweet like, oh wow, I guess I really have this one wrong. The stock went from 220 to 50. Are you still short? No, we're no longer short.

So you were saying the second time. The second one is when they're just like, we already bought this boat and man, we better, we're going to defend this. And so that would be like AppLovin. So we reported on them a couple of months ago and basically the numbers are real. We're not accusing them of fake numbers. You're the primary on AppLovin.

There were a bunch who came out at the same time. So, I mean, the funny thing is we all get to the same conclusion, but through different methodology. So our methodology was the most technical in actually looking at the code and how App Lovin has created these, in violation of all the platform's terms of services, these persistent identifier graphs that track users from site to site and then hit you with retargeting ads. And that's prohibited by Google, by Facebook. So it's like you download a Solitaire game

because you're on the airplane. And before you know it, like six months later, they keep hitting you with more and more ads because they have you. Right, but unless you opt in, they're not allowed to do that. And there are also laws that prohibit that now as well as the platforms TOS.

So they say, oh, we created this great AI that delivers results that almost as good as those of the companies that actually are the platforms and that can track you because people opt in. And no, they're just violating the TOS. And so we published that. The CEO and CTO put out a response, denied it, but the thing is they didn't stop the behavior. So when we still look at these sites

and we see that they still are, they're still using these persistent identity graphs and they're just denying, denying, denying. So that's the other response. It becomes binary. It's either- That's the current position for you? You're short app loving right now? We are. So we're taking it on the chin a little bit today. That's the other response. It becomes binary. It's either position for you. Yes

We are so we're taking on chin a little bit today 12% today. Yeah, they had an earnings report Yeah, they so we put out an update yesterday was a video that showed hey They're still doing this and the CEO and CTO lied. Those were actual words So we're saying that they lied in their response when they denied that app Levin uses these persistent identity graphs response when they denied that AppLovin uses these persistent identity graphs. But the numbers were great because going back to the point about Herbalife, it turns out that when you have a business that's doing things it shouldn't be doing, it can be a pretty good business. Shouldn't be doing morally. Well, it shouldn't be doing morally and legally.

Here's the thing with that one and not to delve too deeply into AppLovin, but the platforms could shut them down. Okay, that's one risk, but if the platforms don't shut them down, this doesn't take a genius to do what they're doing. So you're going to have all of these other like tiny little ad tech companies say, oh wow, you know, we can play this game too because this is tolerated.

And so basically their margins are going to be cut to razor thin if the platforms don't do anything about it. So your thesis is like even if they keep getting away with doing this thing that you are asserting they're not supposed to be able to do on the platform that actually might not even work out well for them because then everyone else would do it too. Wait, it's $115 billion market cap? Holy shit. No, I mean in 24 last year they ramped this thing.

It was irrelevant to like... That's what I wanted to ask you. I think it was the... I forget what period of time it was the best performing stock. I don't want to say it was in the S&P. Maybe it is now, but it was in like the Russell 3000. But I remember watching this thing. I had no idea what the company did.

And then all of a sudden, a bunch of short sellers are publishing on it. So you mentioned that we all arrive a sudden, a bunch of short sellers are publishing on it. So you mentioned that we all arrive at it from a different perspective. But the number one performing stock and no one's ever heard of the company has to get a lot of attention. So yeah, to your question earlier about how do we develop ideas. So when you see something like that, everybody in my business started looking at that because it just climbed the wall. Like the stock price went vertical. Everyone's trading it.

Everyone's talking about it. Exactly, they start using AI, AI, AI. And look, back in, as soon as chat GPT happened, okay, all of us in our office, all of our peers, whenever we talked to each other, we're like, okay, we're about to get this tidal wave of AI scams. Like everything is going to call itself AI. You're licking your chops.

Yeah, exactly. Like the EV stocks in 2021, the SPACs. Yes. These things come in waves. Yeah, exactly. When, when some, so that's, so that is one of the ways that we really identify or that helps us identify things is when something gets hot, yeah, maybe like the first one, two, they're fine, third one maybe, but by the time you get like the fourth

or fifth entrant into a space or to go public, or to really start pushing this narrative in the case of AI, because these companies existed beforehand, that's when you have to take a look and say, yeah, maybe you're not really what you're saying you are, so, and yeah, and, maybe you're not really what you're saying you are. And yeah, and if there's something to do, look, but that was such a hard stock.

I feel like we got our timing reasonably correct, because if we tried to do this maybe five months earlier, we would have just been run over because of the momentum of that. So I want to ask about your process. Mm-hmm. All right. You're doing deep research. You say that an activist short seller can cover maybe five,

six names a year, right? All right, so you're sniffing around, you find something, you get a little hornier, and you're like, I really got something here. What happens if over the course of time when you're doing the research, the fraud is uncovered, the stock craters, how quickly do you put positions on, where do you set your stops, how do you take profits,

like how does all of that work? Are you short the stock, is it options? Talk about all the processes stuff. Okay, all right, so in terms of the trading positions and that risk, that does happen when we preempt each other all the time. I mean, we were working on AppLovin for maybe a

couple months and we saw a short report after short report come out and we thought shit it's over. Were they having an impact? Momentarily. That's the thing. The opportunity was still there. So we thought okay look you know nobody has published what we have. So we have you know we have this code it shows these persistent identifier graphs nobody's published that, they've talked with people in the industry who are skeptical, former employees who have negative things to say. So we still have a project, but there are definitely times when we've been preempted

and it's like, well, okay, too bad. So what we do sometimes is we put on what we call schmuck insurance, which speaking of verbal life, that's a term from that. Like I guess Carl Icahn, like he has his own version of schmuck insurance, but for us it's, okay, like in case we get preempted. If we're late.

Yeah, like let's put on 5% of our. So just the tip. What's the, yeah. Yeah, exactly, just the tip, 5%. Okay. So then how do we, then how do we trade it? Do we use options? Sometimes, but the problem that we found early on,

so I started in this business on the activist short side with Chinese frauds, and that's, I think, what really developed that short activism business was these Chinese frauds. We're gonna go back to that later. Sure. For sure. But, you know, initially it was, you know, our own capital and was like, yeah, let's buy a bunch of put options. I mean, that lasted for a few months before. Basically, as soon as market makers saw a lot of activity in the put options,

especially when you're paying like 110 vol, like, okay, everybody knows what's going on. Right. So, so what ended up, what ends up happening, and now we manage outside capital is if you're, if you're playing in the puts and the puts are not extremely liquid, the tail wags the dog. So you're going to screw up your entry pricing if you go into the put. So usually if there's a put market, it's just sort of like, yeah, let's, let's do this, you know this right before we publish. From a psychic perspective or psychological perspective,

I really enjoy selling calls right before we publish. That's always, you know. Why? Well, especially if we do it OTC. Because the people buying those calls from you don't also enjoy it. Yeah, exactly. Like there's a...

Okay. So... Eventually they really don't enjoy it. So there was a quote that somebody attributed to Stan Druckenmiller, who, look, I don't know if this is true, but somebody who heard him say this once, I guess it was years ago, Stan Druckenmiller said, yeah, you know,

like obviously most of what I do is long, but I like short selling more. And why? Because you know somebody's getting f**ked. Yeah, I get it. I get it. There's a Wall Street mentality too, of like, it's not enough for me to win,

the other person must also lose. There's a little bit of that. Yeah, I mean, I think when you do, look, when you do this business and you take a lot of shit from people, I mean, there's a lot of hatred directed toward you. Yeah, you definitely like you have to have thick skin or you know, or else Yeah, you're not gonna be in this business very long But you know, there's you definitely when with those days when you win and the haters lose There's a little bit of a revenge factor. When you get a vindication, do you push or do you like,

like when it breaks, do you say, all right, we are so right, we're going to push it. Or do you take profits? No, because usually it's like, I mean, it's collapsed, right? So it's like, why would you? It's not undervalued stocks. These are outright frauds that are being unmasked. Yeah, like everybody who sold, who could have sold,

has already just sold. And so then you end up doing that stuff that Melvin was doing, which was so stupid. When you're holding a stock that's collapsed to like a dollar as a short because, oh, I don't want to realize taxable gains on it, like the asymmetry of that position is so moronic. So no, we don't do that.

And we're very quick to say, you know what? That's good, don't look a gift horse in the mouth. I want to stay on this, because I think this is the most fascinating thing. Everybody hates their short sellers, because nobody ever says, thank God that fraud got unmasked before I could buy the stock. Because no one ever thinks of themself

as the person who would invest in a fraud. Right. But of course, the longer a fraud goes on and the bigger it gets by market cap, the higher the likelihood that an innocent, random buyer might end up holding the stock. So people don't give you guys credit for the things that you clean up. So that's one. But two, there is a common perception, and I want to hear if you think it's a misperception. People don't like to see a stock get ganged up on by multiple short sellers at once.

And even if it turns out those short sellers are vindicated, that's where the hate comes from. Especially if they're in the stock. And let's face it, a lot of very online traders are gonna be in the highest momentum stocks, and a lot of those high momentum stocks are gonna end up the targets of activist short sellers because the way they got high momentum in the first place was by bullshitting people.

So you have this perfect stew of extremely online aggressive traders. They're in stocks they barely know anything about other than the price is rising. Those stocks are bullshit and that's why they're rising. And then you guys come along and look at it and say, look at this, this is a fraud or this is a scam or this is a promotion.

You guys call it out, the stock gets hammered. To the person who's long that stock, they're not interested in your pursuit of truth and justice. All they know is I bought this thing yesterday. I'm down 36%. So that's where the hate comes from. And I assume you get that.

Yeah. Well, doesn't make you wrong. Right. It just makes it more understandable. Well, I had this really interesting experience in December of 2010. So I just moved back from China. We'd published on two Chinese companies and I was at a holiday party in Sausalito

and I was introducing myself as guy who owns a self-storage business in China, which I did before I started Muddy Waters. And anyway, this guy to whom I was introduced. He said he was an engineer He asked me at one point. He said hey, do you ever look at these Chinese stocks that are listed here and Had a few drinks so I was maybe a little bit Looser lips than I wanted to be at that point in time, but I do I well I was like, you know I've done some by the way a lot of them were SPACs too, back then.

Yeah, yeah. They were the RTOs. Yeah. They were RTOs and people don't remember, but there were investment banks that were, that was 80% of their business. Oh yeah. Like Rodman and Renshaw. Maxim group and Rodman. Roth capital.

Roth is still here. Think Maxim is too. But I was like, yeah, I've done some stuff and I kind of published some things on some companies. We weren't seeking out for writing this stuff or? I'd set up a website and my first report I sent to 50 people who were in the markets whom I'd last spoken nine or 10 years earlier

who probably knew me as Bill Block's son, not as Carson Block. and that report went viral. And next thing I know, day later Jim Cramer's screaming on CNBC about how I must be a fraud, and I'd never met the guy or what have you. So. Which was the stop? This was called Orient Paper.

So this was June of 2010. You went there. Yeah, yeah. You went to the paper factory. Yeah, yeah, yeah. Because my father wanted me, he thought it was a long, he sent me there to do due diligence on it and it was a total farce.

I remember reading these articles. It was a Potemkin factory. The night before I went to the factory, I finally sat down and read the K's and Q's. And there was a snow delay in Beijing, I was sitting in the airport in Shanghai. I was with a friend who's in manufacturing, and so we were bringing him on as a consultant.

And he and I were sitting at separate tables, just reading through the filings, and we're just bursting out loud, laughing at the absurd claims in this. And it's like, so we knew it was f***ed up, and my buddy was, he's like, you know, am I wasting my time here, Carson? I'm like, look, maybe we can short this thing.

I don't know. Like, I don't know what my father would say. What price was it trading at when you go over there to look at it as long? Is it like a $30 stock? Well, I think it was about 850, which is 150 million market cap. Oh, it was small, okay.

Yeah, it was small. I mean, look, at the time, that was not as small as it seems today. But I mean, today, that would be equivalent to roughly $700 million market cap. But so anyway, we knew there were serious problems. We get to the factory, walk in, and my friend leaned over to me is like, Oh my god, we got them. I mean, it was it was a Potemkin factory, the loading dock that supposedly would, dock that supposedly was servicing 100 trucks a day

just didn't exist. There was one truck that was lazily idling there. They claimed that they had about five million dollars of raw materials inventory on the balance sheet. And my buddy, it's just these heaps. So the company made a corrugating medium for boxes. So the wavy layer in between the outer layers of a box. So their inputs are basically old boxes and scrap boxes. So my buddy, they've got these just giant trash heaps of old boxes. That's what they're-

That's their inventory that's got a balance sheet value in the case. the five million dollars Right. So my buddy climbs to the top of one looks around came down and said to me If this is worth five million dollars, the world is a much richer place than I ever knew right and so this scam there though Is so it's an American investment bank an American law firm Making tons of money in fees for bringing this thing public, listing it on the American stock exchange. Yeah, I think it was AMEX. So they'd uplisted from OTC and raised some money.

Now you got brokers, and I knew these guys, brokers selling the stock retail to clients. So everyone's getting paid along the way, and as long as the fraud is perpetuated in China, all the American parties continue to get paid. Yeah, so what's the problem? People say like, oh, these short sellers are conspiracy theorists.

It is a f***ing conspiracy. You can't do this with one person. Well, if you want to get a little bit conspiratorial about this. I do. It's a podcast. So I had been a lawyer in China. So I was with Jones Day and we did,

I focused on mergers and acquisitions and foreign direct investments So every time there was a local company involved, you know So say for JV first thing you did was as as a lawyer Well, you I'd send somebody to do this go to this local office called the State Administration of industry and commerce Go to the local office and you get the company's SAIC file. Just filled with lots of information, including the financials, the onshore financials. Now when we did that for Orient Paper, I mean we found that the onshore financials, rather than the revenue having been about hundred million dollars,

the real revenue that they were reporting to the PRC government, which they don't want to f*** with, in contrast to the consequence-free SEC, was about $3 million. So, and... So they tell the truth to the Chinese government and they bullshit the exchange here in New York. Right. Because they're never going to get in trouble for lying to American investors.

And in fact, nobody ever did get in trouble. Um, so these SAIC files had lots of information on the equipment, valuation of the equipment. I mean, we're looking at the appraisal reports for the equipment. This stuff was carried on the balance sheet at $60 million. I mean, the appraisals had them at like $8 million. So there were so many contradictions there. like $8 million. So there were so many contradictions there.

And after a few more China shorts, it became obvious to me that, oh my God, all these American law firms that are doing the securities work that are helping with these offerings in the US, none of them are looking at the SAIC files, which again is like standard, like this is step one in foreign direct investment,

like JV and M&A practice. So what are they doing? They're taking the auditor's word for it and it's a bullshit auditor? Like where are they? How are they? If they're not doing that bare minimum that you say, what are they getting paid for? Well, getting paid to do the deal to look the other way. But that, to me, I felt that at a very high level, decisions had been made. I mean, there weren't that many US law firms doing this type of work,

especially in the reverse merger space, but I felt that decisions had been made. Systemically. Right, that they were going to entirely avoid using SAIC files in the work that they did. What's the stock that they did. What's the stock that you lost the most money on, that you were the most wrong about? Well, I wasn't wrong, but I lost the most money. No, Sunrun.

Not unless you're wrong. No, no, but this, Sunrun. So here's the deal. So we were, in summer of 22, we were about to publish on Sunrun and how the company is systematically abusing the tax incentives, the investment tax credits, arguably committing tax fraud. And this is the case with all of these rooftop solar companies, but Sunrun was the biggest. So I had been paying attention to the climate bill, right?

So as of this moment in July of 22, climate bill is dead. That goddamn Joe Manchin, he won't agree to it, this and that. Nobody's talking about it. So we hit peak risk. Market closes. 20 minutes after the market closes, so we're publishing the next day. 20 minutes after it closes, headline, Joe Manchin agrees to climate bill. The next day, closes headline, Joe Manchin agrees to climate bill. The next day, that opens up 25%. Now we had beta hedges on, but- There was a lot of short interest in the stock. Well, I mean, everything in the green and climate space and solar ripped that day. So all those names opened up 25%. And then I made a major tactical error because our

question was, well, should we publish this thing or just take our losses, get out of it, wait for things to settle down and then do it? And my tactical error was, well, everybody's focus today seems to be on the tax credits associated with these projects or with solar since everybody's focus today seems to be on the tax credits associated with these projects or with solar since everybody's excited about the quote climate bill. So let's put it out there. It was absolutely subsumed by the cacophony of noise. Nobody noticed it.

Nobody cared. Stock had opened up 25%. It closed up 30%. So, I mean, that was... Did you close your short that day? Yeah, we closed our short that day. Let's do some of your greatest hits and the things that you're most well known for.

The first time I ever heard about you was either Focus Media or Sinoforest. I think Sinoforest is the more interesting story to me just because I remember more vividly. I forget which hedge fund manager it was, but somebody presented this thing either at Irisone or at some big event as a long. And I know John Paulson had a big stake in this, but there were well-known quote unquote brand name hedge fund managers with big money and they were invested in this Sino Forest, which I guess

effectively was like a timber play out of China. And that's I think the first time I had ever read something that you put out or saw the response to it. But tell us about Sino Forest. Sure. It was a really big stock at one moment. Yeah. I mean, at the time it seems like it was quite big.

I think it had a market cap of about five billion EV of eight, which again, in 2011. You'd say it'd be 20? Yeah, yeah, those were reasonably real numbers. And the largest shareholder was John Paulson. So what had happened was we had a very bitter battle over another US listed China company called China Media Express, CCME.

There were a few other short sellers involved in that too, including Andrew Left of Citron Research. That was such a bitter battle because it was audited by Deloitte and Deloitte ended up resigning with flying colors. The resignation letter is one that was just made clear that all these accusations were accurate. So as soon as that cratered, got a call from somebody who was a PM at a very large New York based hedge fund.

And they said, okay, congratulations on China Media Express. I'm gonna talk at you about a company. You heard of Sinoforest and I hadn't heard of it because it was listed in Canada. I knew all the names at you about a company. You heard of Sinoforest, and I hadn't heard of it because it was listed in Canada. I knew all the names of all the US listed. Toronto listed? Yeah. OK.

Yeah. It was TSX listed. And so they started saying, OK, so this is a company that supposedly does a billion, whatever, a year in revenue, $1.1 billion or something in gross profit, but it never issues VAT invoices to its customers. It instead relies on its customers pay its suppliers, blah, blah, blah, and have them issue the VAT.

They start listing a bunch of factors and having practiced law in China, I already know that if the facts they're citing are correct, this thing is a substantial fraud because you don't do business in China that way. They were violating the law, if you believe them and believe their disclosures in 10 to 15 different ways that were material. So I looked it up and like, my God, it's got debt on it. It's got CDS. Wow, like this can be a big trade.

So, previously my team had been somewhat small and we were generally all working remotely from one another. 2010, 2011? This is, this is 11. So this conversation I had was probably the end of March of 11. And I said, okay, I need to add people to the team. So I ended up adding to the team a PRC attorney, a few other people.

I kind of, you know, approached me over the past year and change. And I rented an office space in Hong Kong, brought us all together. And it was fantastic because SinoForce had been public for 16 years. So there were so many problems. As we're reading through those SAIC files, SinoForce had over 100 entities. So that was well over 100 SAIC files we had to read through.

And it seemed like at least once a day, somebody would just laugh out loud and say, oh my God, like obviously forged bank letters, right? From like HSBC with like the worst chinglish you can imagine and like crooked logo and stuff like that. And also we found out that from the very, one of the SAIC filings from its original entity, we found that they'd been lying since day one.

So they went public via reverse merger onto what was then the Toronto Venture Exchange. And so they told this story about how they had this joint venture with the local forestry bureau and these were the results. That joint venture never got started. That SAIC file had letters from the forestry bureau, the local forestry bureau saying, hey, you've never committed the money that you promised to commit. And instead, you've stolen assets from the joint venture and blah, blah, blah. And it never produced anything. Yet for years... There's no trees. Right. Yeah. There's no forest, but they don't have the trees. They were. So they sold stock.

Mm-hmm. That was the business. They sold stock to Canadians. The real business was being public and that was the case for a lot of these Chinese companies listed here is that the real business was being public. Did that go to zero? Yeah. Did you ride it to zero? No. Okay. Is that the most money you've ever made on one of these? Or it's one of your larger trades? Well, we had an external balance sheet at the time. I mean, I would say my take home on that, that's probably still about the biggest. I mean, especially at that time, that was life changing money for me.

What does an external balance sheet mean? Like other people's money? Other investors. You were doing a hedge fund? So no, I didn't have my own hedge fund because I'd wanted to set up my own hedge fund, but the problem was it was so expensive to do it nobody would prime for us either. And when you're shorting stocks,

you need to have real prime broker that can get stock borrow. They don't wanna be involved with that. Yeah, I mean everybody was like, nah, go fuck yourself, not interested. So there was with that. Yeah, I mean, everybody was like, nah, go f*** yourself, not interested. So there was a hedge fund that, you know, it was more of a family office at the time, but they said, look, we're, you know, what we'll do is we'll put the positions on and we'll pay you a percentage of the profit. And so that's how that worked.

Did you ever have an interaction with Paulson or any of the high profile hedge funds that were caught in that stock? So it was funny, right before I went out to Hong Kong, I got an email from somebody at Paulson. Wasn't Paulson himself, but it was one of his PMs. And he said, hey, we'd love to talk to you. At that time, I was getting those emails from hedge funds not that infrequently.

So I was going to New York anyway, and I thought alright It'd be good for me to sit down and just hopefully establish credibility Like I already knew that we were gonna be working on SinoForce. I'm pretty certain We were gonna go the distance in terms of publishing it So it's a little bit tricky. I went into the meeting and you know, like how did you start this business? This is how I started it. This is what I look for, you know, look guys, this is what's really happening in China and what people don't know. And then it turned to, so do you ever look at real asset companies?

You mean like real estate? Yeah, real estate or forestry or stuff like that. Yeah. Implying that you are out of your depth in looking at Sino Forest? No, no, no, wanting to know if I had a view. Trying to feel me out. Oh, so they were nervous. Yeah, trying to feel me out on that.

Oh, that's interesting. And, you know, that was an awkward question, and, you know, I didn't want to lie, but I didn't want to say, oh, by the way, guys, I'm working on Sinoforest. So I had to kind of dance around. I'm like, well, I think there are a lot of problems in the space. There was that big Hong Kong listed forestry fraud

called China Forestry. It just seems to me that with these assets, really difficult to actually track ownership. So yeah, I don't know. But anything in particular, then it was their turn to be coy. It's really difficult to actually track ownership. So yeah, I don't know. But anything in particular, then it was their turn to be coy and that was that. Would you say that that one put you on the map though?

Yeah, that absolutely did. Because a lot of articles were written about it because of the people who lost money. Well, especially because of John Paulson. I mean, that was from a profile making perspective. That was huge, right? It's not only was it a profile making perspective, that was huge, right? It's not only was it a big company, but it was because John Paulson.

So I remember, I think my favorite article at the time was Business Insider. The headline was something like, meet the man who just cost John Paulson 500 million. And it showed my- I bet you that was my friend Lynette Lopez. If I had the bet. I don't know if Lynette was doing this yet actually, but it showed and had a picture taken from my wedding where I'm in like a Hawaiian shirt in LA

and it's like I'm got this big grin on my face and so you know Luck and coffee. This is fairly high-profile and more recent. The quote unquote Starbucks of China, stock collapsed 90%. Right, well it was actually delisted, but this is one that I don't deserve credit for. So it's misattributed to me. We published somebody else's research because what happened was there was a hedge fund that had done all this work. They did great work.

And they wanted, the guy reached out to me and said, hey, would you publish this? I said, listen, you know our process. You know that we have to recreate the work. We're going to, like, so you did all this field work. We'd have to do all this field work. So I'd love to get a look at what you've done. But to be honest, it's going to take a few months before we can actually publish it. And so I guess he was pissed off at me and he sent it out to like everybody except me.

And so I started hearing about this draft from other short sellers and, you know, who just don't know China nearly as well as we do and nobody published on it. And so, you know, because they can't attest to that work. So I, it was unpublished and I thought, you know what, let me talk to the guy, see if we can get access to the data room. And what we can do, if we can validate the work, you know, we'll do it on a sampling basis,

kind of like we're auditors. If it lines up, then we will say, we are short, luck in coffee, because we think it's a fraud, this work was carried out by another party, however, we have evaluated it and believe it to be accurate. And a couple days later, that's exactly what we did. So what was the scam? I don't, I have no idea. What was the scam?

Because it still operates as a business, right? Right. So it was fake revenue and fake profit, but the way that they were pulling it off, the thing is with most frauds, I mean there's an element of practicality that enters into it because you have to forge a lot of paper. And so if you're going to do, so Luckin, I mean the average ticket size is like a few US dollars, right? How do you forge that much paper from that

many stores and you'll put in like, try to make the bank account sync up. So what he did with the controlling shareholder did was he created this fake corporate sales business. And so it was a is one or two counterpart parties that supposedly accounted for like 40% of revenue, like we're buying gift cards in bulk. And so EY, after we published that work that was somebody else's, they were kind of forced to actually look a little bit harder than they normally wanted to.

And when they came across those invoices, they asked maybe three questions and it's like, uh-oh, yeah, it's a fraud. And so then they went to the audit committee. And look, the boards of these companies were always in on it. Okay, like these Chinese companies, they were never independent,

they were never there to safeguard the outside shareholders' interests. But when the auditor, which the auditors were basically, I'm not going to say they were in on it, but they were basically, their role is to not rock the boat. They don't want to discover fraud. It's a big account. It's a big account. Well, not only that, but it became a problem for them because, you know, they would, you know, if they found fraud, like, so, okay, in theory, if an auditor has been auditing a company for multiple periods, discovers fraud, okay, in theory, it's in their interests to expose it and cut off the liability and stop accruing additional liability.

In practice, though, that's not how it works. It's always settled. So if you're an auditor you think well, you know We've already we've already issued unqualified opinions on two years or three years of financial statements You know, this thing is just going to get ugly and it's gonna be you know years of litigation The best thing that we could do is to not discover fraud I'm not saying that they discover it and say oh oh man, let's pretend that didn't happen. I think they deliberately design audit procedures with, especially in a high risk environment like China, to not discover fraud. And so that's why I make this point of saying

that EY, I'm sure, very reluctantly looked into this. So basically they brought it to the board, or at least the audit committee. And again, I'm sure they were all in on it, but that's opinion. But at that point, what are they going to do? Then they have to basically throw the chairman under the bus like, oh, you bastard, how dare you? So Carson, the business of Money Waters, you guys are publishing research, you're shorting stocks.

Is it a hedge fund or is it your own money? How does that work? So it's a hedge fund. And we don't get paid for publishing. So we basically, we manage, yeah. See here's where I have to be careful because there's, you know the SEC cares about the F word, which is the fund word, right?

So I can't make it sound like I'm engaging in a general solicitation, so. Okay, Carson is not promoting his fund. He's giving us information. Don't invest in it whatever you do. I would not want that. Okay, so we use the S word strategies. Okay, so we have a strategy where we without outside capital, I mean a lot of it, look, you know, there's a good portion of my own, I mean I'd say substantial majority of my net worth is in these strategies, where we short the stocks and then we publish on them.

So that's basically how that works. In that order, which is why you end up sometimes in a spotlight that you don't always want to be in. Yeah. Okay. Can we talk about that? Yeah, absolutely. So you have a hedge fund, you know you're

gonna publish, and part of the reason that you're gonna make money in your investment strategy is because the rest of the market is gonna read your research and realize you're right, something wrong with this company, they're gonna sell it. They don't want to get out of it. Okay. Long investors do that all the time. Long investors are long a stock, and then they go out and say, I love this stock. I bought it because A, B, C, D, okay. For some reason, it's asymmetric.

There's a problem with doing it the other way, saying I'm short the stock and I hate it, and I think something's wrong with this company. For some reason, that's more problematic. Why do you think that is? Well, the simple answer is, if you come out and say something nice about a stock, nobody's going to complain. They could say pump and dump. They could say manipulating. They could. They just don't automatically. I feel like with

activist shorts, the automatic response is, oh, this guy's trying to crash the stock. Right. Well, the look, you're you're basically accusing the people who run the company and by extension, the company, of acting in bad faith. And they have a lot of resources. They can spend on PR, legal, and so, what are they gonna do? They're not gonna admit like,

yeah, you know, yeah, good catch. So they have to come out and they have to resist. And then you have a lot of of especially in the institutional investor world I Think that this is probably the most overcompensated Industry on the face of the earth, right? There's so many people who are just Mediocre and lazy and make real money. And so when we come out and say hey and make real money. And so when we come out and say, hey, things are not what they seem with this,

it goes to a lot of their insecurities on an individual level. Makes them look like they're not doing anything. Right, and. Yeah, I agree with that. But even, but to be clear and to be fair, even if they, you know, even if somebody is bright, even if they are reasonably diligent, you can still get defrauded.

I mean, in the midst of my muddy waters business, I was defrauded incredibly badly by a couple of people who got involved early on, right? And the reason, you know, what, and that made me realize, okay, the reason that I was defrauded is the same reason that a lot of smart and diligent investors themselves are defrauded, which is if you're looking to buy something, in my case, it was to buy talent,

in everybody else's case, it's to buy a stock. If you're looking for reasons to like something, you have to think kind of conventionally about why you might not like it. You cannot be thinking simultaneously, yeah, do I, you know, do I think that this market makes sense, do I think it's gonna grow, and are these people lying to me? Mentally, you'll never invest in anything. Right. Mentally, nobody can wear both of those hats. That's such a great point. So, if your starting point is everything I'm reading about this company might be fake, you

never invest in anything. Right. You have to start with a baseline assumption of trust, whereas on the other side, on the short selling side, you kind of have to start with, if this is fake, how is it fake? Right, and so it's like we can look at, again, the fifth company that started claiming, oh, we're big AI and this and that, and we can look at, we can parse every statement,

say, yeah, that wording is know, that looks, you know, that wording is kind of weasely, and the fuck does that disclosure mean? Come on, man, like, what is that? So we can do that because we're putting on that hat of effectively looking for deception. But you cannot simultaneously look for the good and look for the really bad.

It's just mentally not possible. So it's not to say that investors who, you know, I think even really smart and diligent investors, to be fair to them, they can get defensive about this because there's an implication like, oh, you're stupid. You know, I mean, some of them are. Is there a personality type that's a prerequisite to become a professional short seller?

Do you have to be, like Chano's named the firm for, his original firm was like Greek for skeptic. Do you have to start off cynically or skeptical as like a predisposition to be successful in what you do? I think so, but the thing about, one of the things about Jim is that he has like a very, you know, he has real pedigree, right? He graduated from Yale.

If I look around activist short sellers, there's only one person who has a good pedigree, and that is this guy Soren Andal of Blue Orca, who's a good friend and he's also based in Austin. And I always kid him, I'm like, how did you get into this? University of Chicago undergrad, Harvard Law School, you were at Sullivan and Cromwell. Meaning he could do anything.

Right. And he chooses to do this. Well, it's, I think when you're smart enough, you can do anything. But usually when you're on that establishment path, you usually don't deviate from it or deviate from it that early in your career and deviate from it so radically. I mean, the people he used to work with at Sullivan and Cromwell, some of them presumably are at law firms now where they're engaged to evaluate his reports and find ways to attack him.

So that is a really big pivot. And so for Jim, again, Jim's business is not being an activist short seller. So I don't really know what it is about Jim that makes him. On that distinction, there was a time, there was an era where David Einhorn was one of the most famous short sellers and an activist shorted that. He wrote a book. Was it a short guarantee or?

No. It was fooling some of the people all the time. No, no, no. What was the company? What was the underlying company? It was Allied Capital. Allied Capital. Maybe a short guarantee was Ackman who was also doing this stuff. Well, Ackman did the monolines. I don't think that a shirt guarantee was going to make it. Einhorn went after Lehman as an activist. So there wasn't always this black and white.

You're either an activist short or you're an investment short. So like a lot of these, but they're all out of that business now because all it does is draw negative attention, create enemies, put them in the regulators crosshairs, and they were just like, f*** it, I'm buying Chipotle.

Right, and you have to work. That's what I would do if I were them. And you honestly have to work so much harder per dollar that you make on the short side. You know, so for, and you just love it. But when you become a billionaire, the last thing you,

mostly the last thing you, mostly, the last thing that most of them would want to do, is like, let me go stir some shit up and get into some fights. Right, it's like financially, it's not going to move the needle for them to be activist short sellers at this point in time. I mean, don't forget Dan Loeb.

I'd say Dan was the most aggressive of them. His letters were legendary. Even before that, he was Mr. Pink on the most aggressive of them. His letters were legendary. Even before that, he was Mr. Pink on the Yahoo Finance chat boards, like very foul-mouthed. And he doesn't like people to remember that now, because he's like Mr. Institutional. But yeah, so yeah. Those guys are gone.

My point is those guys are gone. So what are you still doing? It's not worth it. Well, OK, so... That's a live audience here, right? They love you. Oh, can I ask you in the same vein before you answer that question? The Hindenburg thing is so fascinating to me.

What's Nate? Nate Anderson, yeah. What a... I mean, this guy came out of nowhere. He dismantled probably, I don't know, ten horrendous frauds. And then at the very top of his game, he toppled a billionaire in India. He unveiled the Nikola Tesla, the fake Tesla company where they were rolling the truck downhill. At the very peak of his powers, he goes, I'm good. Like I said, everything I said I was gonna do, I did it.

And I made money along the way, and I made other people money, and I saved people from scams. And that's it, I'm out. Like that was so fascinating to me, the entry and the exit. I wanted to get your take on it. Well, so the thing is that a lot of people don't know, he had been doing this for a number of years before anybody heard of him.

Okay, so this is for the audience, Hindenburg research. don't know, he had been doing this for a number of years before anybody heard of him. Okay. So this is for the audience, Hindenburg research. Yeah. So he was, I mean, he, you know, it was, I don't know, maybe four years, I want to say, of him just grinding it out, like not making much money, getting sued, a lot of frustration. And then he hit all of a sudden with Nikola and the rolling the truck down the hill and that massively elevated his profile. And so it's one of those things like once you break through and you have a profile then it becomes a lot easier and he was getting in so he did Square, he did a Donnie, he did

Icon but he was also doing a lot of smaller, easier frauds, he wasn't managing outside, or smaller, easier scams, I would say. He wasn't managing outside capital, which is something, my firm's kind of boxed in because if we were to take a $10 million short position in something, it's not worth the, we're not going to move the needle for our investors and-

It's a lot of aggravation that comes over. And the legal risk is the same, right? If they sue, it's gonna cost just as much to deal with that. So, yeah, Nate had been doing it for a number of years, so he put a lot of miles on himself then. And, you know, in a way, it's, I think he's one of the very few people who've left the world

of short selling, whether it's traditional or activist, on top. Pretty much everybody else, they're in it until they blow up. That guy's amazing to me. I mean, the amount of courage that it takes to fight people as powerful as the people that he was going up against, and he was winning, I mean, it's nuts to me. I get why he would want wanna walk away from it, even at the top of his game.

Yeah, like we were going to, in 2012, we were gonna report on something that, it was a real business, but they were committing, in our view, some level of fraud. And then Icon went over 10% in it. Carl Icon. Yeah, and we were just like, you know what? Let's not do this.

This guy is so vindictive that he could just chase us around from short to short, lift offers, and there was Nate. Nate's like, I got it. Not only am I going to short something that Icon's over 10% in, I'm going to short Icon Enterprises. Unbelievable. And just kick them right in the balls as hard as I can. I think he ended his career effectively.

Yeah, I think so. Carson, any short bombs you're working on? I mean, we're always working on some, right? You will not be the first to hear about it. Well, so Michael asked you a question and I preempted it, but I do want to hear. So like, what gets you... I know this is about money, of course, but it's always about more than money. So like, what are you still doing this for in your mind besides the money and like what

motivates you? What gets you excited? Well, so we have broadened the business significantly in recent years and I mean I think from a personal and professional growth standpoint, if I weren't broadening the business then I don't know. I don't know if I'd be doing it anymore. Like I enjoy it at times, but it's, you know, it does put a lot of mileage on you. There's a lot of litigation. You know, I went through this investigation. I mean, I've been investigated by three different governments and you know, it's never found

anything wrong. But you know, it's Is that the worst part? Is that worse than lawsuits? Yeah, the investigations, especially the DOJ, SEC one. That one was definitely worse, especially because I'd helped them make so many cases over the years. It really made me question everything, like my reality, because it's like, how did I... You're like, wait, I'm one of the good guys. I'm Spider-Man. How did I become the bad guy? Well, in the comics, the superheroes

get chased by the law too sometimes. Yeah, and so that's what happened there. But no, we do stuff that's mostly long-oriented in the junior mining space. And then we started investing long in Vietnam and public equities. And we're about to expand that into India as well, and I'm really excited about that. So, you know, like that, that's the stuff

that gets me out of bed as well, is that there is opportunity to grow. But honestly, if it were just short activism, I mean, I've seen almost all the scams. They used to be really excited, like, oh wow, that customer's fake, you know, but now it's, the customer's fake. Okay. Now it's just the same scams over and over be really excited like oh wow that customer's fake you know when I was Eh, the customer's fake. Now it's just the same scams over and over. Yeah, it's the same it's the same thing

Well on on behalf of the people who have read your stuff and learned from you over the years And maybe were kept out of trouble by stuff you've done I would just say it's really remarkable way to earn a living remarkable way to build a reputation and you did it and Congratulations on that. You are very public, and I want to tell people, obviously all the short sellers seem to love Twitter, for some reason, or X.com. That seems to be where you guys hang out the most.

Is that the best way for people to follow along as you publish or as you talk about things? Yeah. Okay. We have problems with the email distribution list. Okay. So... A lot of fake emails? No, just...

Every time we want to send something out, there's like an error from the email. It's like it's that last mile that always gets us with publishing. So Twitter makes it easier. So yeah, at Muddy Waters Re is the, and it's, and I also tweet a lot of my own personal shit there too, so.

Okay, well we really appreciate you coming in. I've been looking forward to this ever since we booked it and this did not disappoint. I've had so many questions I've always wanted to ask and you were amazing, thank you so much. We always end the show by asking people what they're most looking forward to. So I know Michael's already,

I think you probably could guess Michael's is game three on Saturday, which they're playing inexplicably at three o'clock in the afternoon. I can't believe it. I have no idea why that's the case. What are you most looking forward to? In life or professionally? No, I mean, I talked about India,

I'm really excited about that. But, you know, in life, going away for the summer. But in the sports life, tomorrow, big Little League game. I coach my son's Little League team. I used to. Say more. Say more. Are you the head coach? I'm the assistant. The head coach is like a really serious about. Never do the head coach. Never be the head coach unless you were born to do it. Yeah, no he's an email job and it's a mother management job. Oh no he's good at like that that part.

I mean that's not the heart because he knows who to draft for you know quote good families. Yeah. But the just a big thing. But no mean, he's just an excellent, like he gets on everybody about like, Hey, you know, when you feel the ground ball, you got to have your left toe pointed up and wait on your right foot. And you know, nobody ever did that with me when I was even playing high school ball. So, uh, dude, God bless, God bless the little league coaches. I still remember my little league. I was never an athlete, um, but I still remember my little league coaches.

I could tell you their names and what age I was. That's so elemental for young kids to grow up playing sports. It's not even about the sports stuff. It's about being on the team. The coach is the person facilitating it. So, do you know Michael does a little bit of coaching here and there? Nothing? I'm like the assistant to the assistant. I like running all the kids on the front office. He's the front office guy. He makes the trades. Exactly. All right. Carson, we're gonna let you go. Thank you so much for being here.

We really appreciate it. Thanks guys. I want to congratulate John on four years with the Compound. And I said this privately. I don't want to make you blush and say it publicly for all the listeners. Duncan was game changing for what we do here with all our shows, but you are the person that made it sustainable and made it so that we could put out as much as we put out. I know the audience loves you. I wanted to tell them, four years,

you've been hugely instrumental. Duncan, you're pretty okay too. Shout out to Rob Nicole, Chart Kid Matt, shout out to Sean, Graham, Keith, everybody who helps us with the show each week, we appreciate you. Daniel, that's it from us. Guys, please leave a rating and review. Please follow Carson Block on X.com and we will see you soon.

Thanks again. Thanks guys. That was really warm up. I just wanted you to feel for the show. Was that good? Yeah, that was fun. Thanks guys. That was really warm up. I just wanted you to feel for the show. Was that good? Yeah, that was really warm up. I just wanted to get a little bit of a feel for the show. Was that good?

Yeah, that was fun.