Has China Short Seller Muddy Waters Research Lost Its Touch?

Integrity Research Associates is out with a report questioning the latest short sell calls of Muddy Waters Research, the company that made a name for itself by short selling Chinese companies it accused of financial irregularities. Muddy Waters Research is run by Carson Block and has an unusual business model in which it gives away its research for free. It makes money by short selling the companies that it says have financial irregularities that could be signs of fraud, then giving away its research for free in hopes that other investors short sell the stocks based on Muddy Waters Research's evidence. Muddy Waters Research is very open about its business model and informs readers of its research reports that the company is likely to already have a short position in the company that it is discussing. However, many investors are still uneasy about the conflict of interest inherent in the Muddy Waters Research business model. The success of Muddy Waters Research's early reports put a damper on much of the criticism that the company faced because the early companies that it covered did appear to be involved in financial shenanigans aimed at pumping up their stock prices. Integrity Research Associates said in its report that "Muddy Waters made a name for itself when on June 2nd, 2011 it released a research report which said that Sino-Forest, Corp. a timber plantation operator, headquartered in Mississauga, Canada, and with plantations located in southern China, claimed to own land that didn't show up in government records. The share price of Sino-Forest plunged more than 70% in two days, and the firm lost $3.3 billion of market value after the report was released and hasn't traded since August." After early successes like its Sino-Forest call, investors and the media began to take notice whenever Muddy Waters Research published a report on a Chinese company. But recent reports from the company have investors wondering if Muddy Waters Research has lost its touch. Integrity Research Associates said that "on November 21, 2011 Muddy Waters alleged in its research that Shanghai-based Focus Media overstated the number of screens in its LCD network by 50% and that it significantly and deliberately overpaid for acquisitions, writing down $1.1 billion out of $1.6 billion in acquisitions since 2005. Focus Media's share price dropped 39% from $25.50 on the first day following the release of the Muddy Waters report. Focus Media shares are now trading at $26.23 – 2.9% higher than the day before Muddy Waters initially published its report." Prior to its Focus Media misfire, Muddy Waters Research said that Spreadtrum Communications

had a “a high risk of material misstatements”. According to Integrity Research Associates, "Muddy Waters also questioned why then Chief Executive Officer Ping Wu and Chief Financial Officer Richard Wei left the company months before it reported 137% revenue growth in the third quarter of 2009 over the previous quarter. The company's shares tumbled as much as 34% in the first day after the report was released. However, Spreadtrum's stock price is now trading at $14.11 — up 5% from the day before the Muddy Waters report was released." Early on it may have seemed that the release of a Muddy Waters Research report was a good way for traders to make a quick profit, based on the company's proven track record of releasing research reports that could lead directly to a target company's share price plunging and even having its stock eventually delisted because of being exposed by Muddy Waters Research. However, Integrity Research Associates says that the company's more recent track record will cause hedge funds to hesitate before shorting the stocks covered by Muddy Waters Research. Investors might want to be careful and not assume that a Muddy Waters Research report will automatically cause a stock's share price to drop.