A year before Carson Block launched Muddy Waters Capital, his hedge-fund firm, he started trying to line up a prime broker — an investment bank that could lend him stocks so he could then sell them short. But the task was proving arduous.
The problem, he believes: Block had made his name calling out China frauds, and Wall Street loved China.
After several bulge-bracket banks turned him down, Block decided to try his luck with Jefferies Financial Group, a scrappy up-and-comer known for its trading skill. Muddy Waters, then only a research firm, was based in San Francisco, so he arranged an interview with Jefferies CEO Rich Handler on his next visit to New York City.
But the meeting in Handler’s midtown office took him aback.
“You’re crazy,” the CEO told him, Block recalls.
“I think you’re addicted to the attention,” Handler went on. Block had catapulted from obscurity to fame in 2011 after a research report he penned took down Sino-Forest Corp., a Chinese company he alleged was a fraud, and tarnished billionaire hedge-fund legend John Paulson, who was one of its investors.
Since then, Block had become a regular presence on both CNBC and Bloomberg TV, where he would rail against his latest short target.
Handler counseled Block that he could make more money with less angst.
“Given where you are right now, you should be doing long stuff as well. If you want to just short, you could get on TV and you could say, ‘Yeah, we’re long XYZ, but we’re also short this thing,’ and you don’t have to come out and say this thing is a fraud,” Handler explained. “There are much more subtle ways of doing it and you could build a better business.”
What’s more, the CEO allegedly said, it was less dangerous. “You wouldn’t have all these guys wanting to stick knives in your back, and you wouldn’t be living the way that you’re living,” Handler said, responding to stories Block was telling him about the death threats he’d received and his worries about security.
Block was surprised Handler was so blunt, but he gave it some thought.
“Am I doing this because I’m addicted to the attention? Or do I have a better reason for doing this?” the then-38-year-old asked himself as he walked out.
Block, now 44, knew that Handler was correct about the blueprint for making money as a hedge-fund manager. (Handler did not respond to a request for comment.)
Being an activist short-seller would limit the amount of money he could raise. He probably wouldn’t become a billionaire.
Block also knew he could take the Muddy Waters brand and go predominantly long. “But it just never appealed to me to really be that,” he says, telling the story to Institutional Investor in a series of conversations capped by two three-hour Zooms in which he discussed — among other things — the demons that have driven him to become the most brazen, profane short-seller on the planet today.
“I’m not an adrenalin junkie,” he decided after leaving Handler’s office. “What I do is very, very personal to me.”
He adds: “I enjoy fucking with people.”
Block launched his hedge-fund firm in late 2015 — with Jefferies as one of its first prime brokers, it should be noted. Since then, the long, unrelenting bull market has forced a number of like-minded critics out of business and has diminished the fortunes of others. But despite a dark period when he threatened to quit, the regular drumbeat of lawsuits, and two investigations by European regulators, Block has survived.
None of the lawsuits or investigations found Muddy Waters in the wrong, while eight of the companies he exposed as frauds have been delisted from stock exchanges. Two others settled charges with regulators.
Not all of Block’s short campaigns have worked out, of course. Yet over the past five years, Muddy Waters has produced an annualized return of roughly 19 percent — and that’s after a 2.5 percent management fee and a 30 percent performance fee. It gained about 15 percent last year, when the broader market rose 18.4 percent. In 2021, Muddy Waters is already up close to 6 percent.
Block began by criticizing China, but his caustic gaze has landed everywhere, as he has taken on companies in Europe and the U.S. as well. He has opinions on everything from ESG — tweeting that it is “the paper straw of investing” because it’s “symbolic, not substantive” — to SPACs: “There’s so much dog shit there,” he says, calling them “a cynical predatory play on retail investors.”
Articulate and impassioned, Block goes further in his condemnations than most people, even wading into the political arena.
For example, he is now calling out attorneys at U.S. law firm Cooley. In a tweet recently pinned to his firm’s Twitter profile, Block claims the lawyers are “abetting human rights violations in China.” Citing the delicacy of the situation, he declined to discuss the matter further except to say, “Americans might not care about accounting, but they do care about human rights.” (Representatives for Cooley did not respond to a request for comment.)
As former CNBC journalist Herb Greenberg, one of the first to interview Block, puts it, “Carson does what he does with great purpose.”
Block runs a small firm — its assets are now around $260 million — but punches above his weight in influence. He has his detractors (though several of them declined to comment for this story), but he is admired by billionaire hedge-fund managers and activist short-sellers alike.
For example, Pershing Square Capital Management CEO Bill Ackman swore off short selling after his bruising battle with Herbalife, saying the “brain damage” wasn’t worth it. As for Block, Ackman says, “I’m a fan. He does great research.”
Others see Block as a role model. “I wouldn’t have found a career in short activism if Carson hadn’t blazed the trail,” says Nate Anderson, whose Hindenburg Research became well known last year for its explosive exposé of electric-truck maker Nikola Corp.
Block, says Anderson, isn’t just “messing” with people for fun. “He enjoys holding truth to power. He’s going after people who are running scams and crooked management teams and their supporters, whether it be investment banks or auditors who are earning handsome fees to look the other way.”
Muddy Waters’ research may be highly lauded, but most people don’t wait to read it before making the trade. Stocks fall immediately after Block names them — and sometimes before: High-frequency, or algorithmic, traders constantly scrape his website looking for a new short report, sometimes even seeing the name on the URL before it becomes public, according to Block. In Europe, where regulations force him to disclose short positions, the mere notice that he was short one stock — Solutions 30 — led it to tumble 20 percent in a day. (More than a year later, Block accused the company of potential money laundering and ties to the Sicilian mafia and organized crime in Eastern Europe, which it denies.)
In 2020, however, markets turned vehemently against Muddy Waters. While the hedge fund ended the year up handsomely, two companies Block accused of being frauds defied his analysis and soared: By the end of the year, shares of GSX Techedu and Nano-X Imaging had gained 40 percent and 58 percent, respectively, from the date of Muddy Waters’ reports, according to Breakout Point, which tracks short activists.
It started with GSX, a Chinese online education company. In a report published May 18, Muddy Waters claimed that at least 70 percent of its users were bots, which GSX denied.
Muddy Waters was the third short-seller to lambaste the company, but the stock barely budged. The day of Block’s report, it closed at $32.84 on heavy trading, down 7 percent from the prior day’s close. But by August it had hit $141.78, before coming back to $51.71 by year-end.
“I mean, things have gone up, but this tripled within a couple of months,” he says.
Block isn’t one to give up, so he began trying to figure out what was going on. Was it high-frequency trading? Passive flows from index funds and exchange-traded funds carrying the stock higher?
While he believes both played a role, last summer Block also learned from two insiders in the U.S.-China investment world that some Tiger Cubs — including Bill Hwang, who had been running a family office called Archegos Capital Management since settling insider-trading charges, and his protégé Tao Li, who runs hedge fund Teng Yue Partners — were behind the runup. Hwang and Li used highly leveraged swaps to conceal their positions. Another Tiger Cub, Chase Coleman’s Tiger Global Management, was also one of GSX’s top shareholders.
Meanwhile, the founder of Singapore-based QQQ Capital Management admitted in a now-deleted tweet that he was trying to squeeze shorts by selling GSX puts.
“Everyone knows GSX is a fraud,” says Block. “The problem is the hedge-fund players who decided to squeeze the shorts.”
In late March, GSX shares tanked, a victim of the massive liquidation of Hwang’s portfolio, creating a fair amount of schadenfreude at Muddy Waters. Notably, the big investment banks, known to have extended Archegos so much leverage, refused to do business with Muddy Waters, according to Block.
One denial came years ago from Credit Suisse, whose prime brokerage salesman had called Block while he was at the hospital awaiting the birth of his first child. “It was the first time I ever heard the sentence, ‘The reputation risk committee has denied us doing business with you,’” he recalls.
(Credit Suisse, which says it lost $4.7 billion during the Archegos liquidation, was the lead underwriter for the GSX IPO.)
Muddy Waters is still short GSX, which is now down more than 50 percent this year, although it ripped in January during the GameStop Corp. trading frenzy.
“That was a weird time,” Block says, shaking his head. “Everybody expected us to be dead.”
Yet he’s somewhat sympathetic to the Reddit retail investors behind that GameStop short squeeze. “We’re all so angry right now,” he says, referring to the Covid pandemic. “They just wanted to break something.”
Block knows what that feels like.
Explaining the rage that has driven his short-selling career takes Block back to his childhood.
“It’s always been kind of an inch deep. At my core is some amount of rage that will never disappear,” he says. “The parts of my life later on when I succeeded were really about learning to control it and then harness it effectively. It’s like, ‘Wow, I built a business off that.’”
Block spoke openly about his past during multiple Zoom interviews conducted from his bare-bones Sonoma County office, where he’s working alone these days, dressed in T-shirts and zip-up pullovers. (He has closed Muddy Waters’ San Francisco office, and others in his ten-person firm work remotely.)
Behind Block is the setup for his frequent television interviews and for the interviews streaming on his new video channel, Zer0es TV, where he has interviewed short-sellers Jim Chanos of Kynikos Associates and Andrew Left of Citron Research, among others. An abstract painting bought at a garage sale hangs on the wall, facing the camera.
After more than two hours of talking, Block orders a salad for lunch via DoorDash, then walks downstairs, holding his laptop, to pick it up. He passes a workout station, casually mentioning that he can bench press almost 300 pounds.
Block is relaxed and given to sarcasm, often at his own expense. But at six feet tall, with his close-dropped hair and broad shoulders, he is also a tough guy who revels in his masculinity, which he considers an important asset.
“Maybe it’s superstition, but being able to muster that aggression at the drop of a hat — I think a lot of it is testosterone — is a big advantage as a short-seller,” he says.
Testosterone notwithstanding, it may be difficult for an outsider to grasp what Block is so angry about. Now worth tens of millions of dollars, he grew up in affluent Summit, New Jersey, where many of the town’s denizens worked on Wall Street, as did his father.
The rage began to build, he says, soon after his parents divorced. He was six, and one of his parents — he won’t say which — descended into alcoholism.
“Things got worse and more complicated in third grade,” he recalls. “The school nurse was conducting classes on drugs and alcohol and explained, ‘It’s a depressant, and if you drink enough of it then you pass out. Does anybody know what that means?’”
Block raised his hand. “I do,” he told the class. Block says he went on to “dump out all of the shit going on almost every night that I’m with that parent. And how I have to call the emergency squad every now and then, because I’m worried that they can’t wake up, that they might be dead.”
“I didn’t realize that a social stigma would be attached to me for a long time,” he says. Many of his friends were no longer allowed to play with him and, worse, he says, school officials did nothing to help.
“It was this feeling of betrayal by the adults,” he says.
“I wasn’t able to put a word to it, but that’s when I began to hate hypocrisy and hypocrites. I saw all of these adults lecturing us on the evils of drugs and alcohol, and not a single fucking one of them lifting a finger when it was real,” he says, taking a deep breath and then a long sip of water.
Betrayal became a familiar theme for Block. Even though he was a discipline problem, and an erratic student as a result, by middle school he had decided he wanted to work on Wall Street, like his father, an analyst.
Wall Street naturally led Block to his first encounter with securities fraud. That occurred after he graduated from the University of Southern California and was briefly working for his father, who had been touting a company called Rent-Way.
“I remember taking my father and the CFO, Jeff Conway, on a non-deal roadshow, and at one point he looks our client in the eye and said, ‘In the 17 quarters Bill [Block’s father] has been covering us, we’ve never missed one of his estimates. That’s how good a handle we have on the numbers.’”
The junior Block was impressed. A few weeks later, however, Conway didn’t show for a meeting with Block’s father. Then, says Block, “the stock was halted, and guess what?” He rolls his eyes: “Accounting fraud.”
“That one actually was adjudicated to be a fraud,” he continues. “Conway pled guilty, and found Jesus in prison also,” he says, adding that he has been an atheist since second grade.
The experience convinced Block to go to law school, which was a turning point. “Up to that point, I hated liars. I hated hypocrites. I hated cheaters, but I also didn’t have a lot of respect for rules because I was always getting in trouble for breaking rules. So law school was where I first started to understand why this is important in society,” he says. After he graduated from the Chicago-Kent College of Law in 2005, Block’s next stop was law firm Jones Day’s Shanghai office.
As is well known by now, China didn’t work out as planned. After leaving Jones Day, Block started a self-storage company that failed after he learned his landlord was cheating him. He quickly discovered that “good people can’t get ahead there. And that’s a sad realization.”
Block, who’d studied Mandarin and once believed that China was the future, was disillusioned. “What I saw there was a society where rules didn’t matter and everybody was breaking rules, and it was a fucked-up place as a result,” he says.
But it wasn’t until Block’s father asked him to look into a Chinese company called Orient Paper in 2010 that Block stumbled upon short selling. After visiting the company’s operations, he concluded its business wasn’t real, and his research to that effect hit Wall Street like a bomb.
“These corrupt motherfuckers had brought their toys to the sandbox of the U.S. markets,” he says. “I was determined. I’m going to mow you motherfuckers over. Because I know how your system works here. I know how to get information on you pieces of shit. And I’m going to send you fucking packing.”
Block named his research firm Muddy Waters after a Chinese proverb that translates as “muddy waters make it easy to catch fish,” and almost immediately big funds were calling. The next year his Sino-Forest report sealed his reputation.
Once Block started making millions of dollars from short selling, he faced another problem: Friends and partners began stealing from him or otherwise defrauding his company. One case involved two “very close associates who put the business [of Muddy Waters] at risk while they surreptitiously made many millions of dollars,” he says.
Block declined to name the individuals but says their betrayal was “deeply, deeply, deeply, deeply personal.” Both he and his wife had termed the trio a “band of brothers.”
“The thing is, when you’re the fraud guy and you get just absolutely defrauded and fucked like that, you feel stupid,” says Block. Since then, he says, his circle of friends has shrunk and he has put “layers” between himself and those seeking to do business with Muddy Waters.
But the incident wouldn’t be the last time he questioned himself.
In the summer of 2017, Block learned from his lawyers that prosecutors in Germany were close to seeking an indictment of Muddy Waters for manipulation, based on alleged inadequate disclosures in a report it had done a year earlier on Ströer, a billboard company whose insiders Muddy Waters had accused of making egregious profits from self-dealing transactions and problematic accounting. (Ströer called its claims “far-fetched.”)
Block was stunned.
“I’m prepared to answer for anything we write, for any way we trade, but the fucking disclaimer?” he says. The notion of going to prison over that seemed absurd, especially since he had checked the language in his report with German counsel.
Other matters were also going sideways at Muddy Waters. The hedge fund was being sued by St. Jude Medical, another short target, and it was under investigation by French regulators over its short of Groupe Casino.
Eventually, all three would go away, but Block couldn’t know it at the time.
“I just felt like I was fighting on all sides, and the prospect of the criminal indictment — that was the big shock.”
Block says he wondered “whether the FBI would kick down the door in the middle of the night and drag me out of bed, and would I be away from my kids and my wife. It put me in a head space that I hadn’t been prepared to go to.”
So he left San Francisco, taking his pregnant wife and three-year-old son to a summer home they’d purchased in Sonoma County, where they now live full time.
“I very seriously considered retiring at that time,” he says, even toying with the idea of a second career as a teacher. “I just wanted to hide in a deep, dark place underground and not come out for years.”
“I was fighting scared,” he says. “You never want to fight scared. You don’t have the edge when you’re in that place. And I didn’t know if I would come back from it.”
The team at Muddy Waters, led by partner Freddy Brick, took over the day-to-day running of the business, and friends like fellow short-seller Dan David, founder of Wolfpack Research, encouraged Block to stick with it.
“It was a very rough time,” recalls David. “I did what a friend does. You go over successes. You go over the good we’re putting into the world.”
After a long absence, Block returned to the office and rededicated himself to the battles of short selling. He also began talking publicly about shorting companies based on their immorality, which he calls “morality shorts.”
Not everyone in the short world agrees with him on that. “Carson is very much a jihadist in terms of short selling. He does this for a moral principle. I don’t,” says Citron Research’s Left, who decided to quit publishing short research after being targeted by Redditors for his GameStop short. “If you want to change the world, there are wonderful ways to do that. But you’re not changing the world, in my opinion, writing short reports.”
Left has a more cynical take: “This is just a way to make money.”
And as Block has learned, making money in itself can feel pretty good.
Muddy Waters recently struck gold — literally — and Block felt the rush that a big score brings.
In 2018, Muddy Waters did something totally out of character that went virtually unnoticed: The hedge fund took a small long activist stake in a junior Canadian mining company, GT Gold Corp., and in March that company agreed to be acquired by mining giant Newmont Corp.
“It’s a four-bagger for us,” Block says, raising four fingers as he widens his blue eyes and smiles. “The day that I found out we were going to make like 4x, it was actually a pretty good feeling.”
The nice thing about those emotions is that, in contrast to short selling, he explains, “they don’t really have a tail liability.”
That’s because the more money Muddy Waters makes on a short, the worse the blowback.
The more one of his shorts closes down, “the more likely they are to sue; the more ad hominem shit is going to come back at us; the more fucking whack jobs are going to threaten me through direct message and tell me to fuck myself,” he explains. “It’s like you never stop looking over your shoulder.”
“You never get to feel good. You never allow yourself to feel the joy of success. Every success is like, ‘But how is this one going to come back at us?’”
Nonetheless, he still thinks the excitement from making money on the long side is “hollow.”
“I mean, what did I feel good about? Honestly, I felt good about making money, right? Whereas on the short side, the best part emotionally about doing what I do occurs in the research process, because you’re solving puzzles. It’s like I know these guys are fucked up, but I’m trying to figure out how they’re doing this. Why exactly they’re doing it. And then when you find that key information or you solve a puzzle, that’s the best it ever gets,” Block says.
Muddy Waters’ investors, which include family offices, funds of funds, and endowments, don’t really care about any of that, he says. They just like his returns.
Even so, all the Sturm und Drang surrounding activist short selling makes Muddy Waters a hard sell. Allocators worry about headline risk; Block says he doesn’t care.
To prove his point, two years ago he put on an off-color awards show called the Fidouchies starring Stormy Daniels — a takeoff on the awards given to people in the financial world. Block’s awards were for “financial malfeasance,” with the trophy a statue of gold buttocks with testicles attached. Even some of Block’s biggest supporters found it in bad taste.
“I thought he was above that,” says former CNBC journalist Greenberg, now a partner at Pacific Square Research.
Block shrugs. “I did the Fidouchies so raw because I wanted to say, ‘This is who we are.’” As for investors, he admonishes, “Don’t start this conversation with us if you don’t understand this, because I’m not going to pretend to be what you need me to be to tick all the right boxes.”
Before Covid shuttered the world, Block had planned to move to New York to build a small multi-strategy firm, thinking Muddy Waters might one day become something of a mini-Third Point, albeit still primarily focused on activist short selling. He thought it could run as much as $500 million.
Block hasn’t entirely given that up that notion, though he is uncertain about New York’s future, post-Covid, and plans to move to Austin, Texas, this summer for the time being.
Earlier this year, he launched a new short activist fund with a slightly different trading strategy. As it turned out, the fund’s would-be anchor investor had a large position in Melvin Capital Management, which lost more than 50 percent during the GameStop short squeeze.
As a result of those losses, that investor backed out of the new fund, called Domino, which ended up launching with about $13 million. Quips Block: “The dominos didn’t fall very far.”
Now Block’s team is exploring the idea of a long-biased fund that would invest in companies in emerging markets in Asia and Eastern Europe that could benefit if China’s authoritarianism leads to a loss of direct foreign investment post-Covid, which he predicts will happen.
In the meantime, Block plans to soon return some capital to his investors, capping the current hedge fund around $180 million.
As he ponders what’s next, Block remembers the conversation with Jefferies CEO Handler some six years ago, which often brings him back to a fight he got into in seventh grade.
After skirmishing in class, he and another boy decided to take their fight outside. But when Block arrived at the meeting place, he says, “I noticed this dude’s pretty big. He’s bigger than I am.”
The other boy quickly began to knock him down, but Block wouldn’t give in.
“I was on the ground trying to get up, or trying not to fall down, and he kept asking, ‘So you give up?’ And I said, ‘No.’ And he punched me in the head. ‘Do you give up?’”
“I took that beating,” Block says. “I did not give up. I just took the fucking beating until they pulled him off of me.”