By Scott Patterson
Muddy Waters LLC, one of the world's most renowned short
sellers, wrote an anonymous 2015 report that first drew attention
to suspicious activity behind an enormous aluminum cache in the
Mexican desert -- a stockpile that helped spawn federal
investigations and highlighted aluminum trade imbalances with
China.
The report's author had been a secret until Thursday, when Muddy
Waters founder Carson Block said in an interview that his firm was
behind the report. He said Muddy Waters planned to reveal its
authorship in a court filing -- in response to a lawsuit from a
California company it had targeted in the same report.
The San Francisco-based short seller first gained fame in 2011
following its revelations about fraudulent practices at Chinese
forestry company Sino-Forest Corp., which later filed for
bankruptcy. Mr. Block has a reputation for investigating Chinese
companies, including most recently a Hong Kong-listed furniture
maker and a dairy-farm operator.
Short sellers, which profit by betting on a company's share
price falling, often work to highlight weaknesses in the company's
balance sheet or, at times, nefarious behavior.
Muddy Waters' investigation -- which resulted in the anonymous
report -- shows the extreme lengths some short sellers go to search
out information on public companies and shape a narrative about
them for the market.
Mr. Block said Muddy Waters used an alias, Dupre Analytics, to
allege in a July 2015 report that the founder of Chinese aluminum
producer China Zhongwang Holdings Ltd., Liu Zhongtian, was
committing fraud. The report claimed Mr. Liu used billions in loans
from Chinese banks to secretly purchase his company's aluminum and
ship it overseas to facilities he controlled to make the company
appear more profitable than it actually was.
The report claimed Mr. Liu and his family were involved in "the
largest and most complex China fraud ever uncovered."
Mr. Block said he sent investigators around the world to gather
evidence to produce the report. His firm wrote the Dupre report in
a disorganized way to ensure no one would associate it with Muddy
Waters' style, Mr. Block said.
After the report was released, trading in China Zhongwang's
shares was halted for about two weeks in Hong Kong.
Mr. Block said his firm made a only "very small profit" from
trades around China Zhongwang -- which he is no longer shorting --
but considered it "the best work we've ever done."
China Zhongwang didn't immediately respond to a request for
comment. The company has always denied any connection to aluminum
stockpiles in Mexico, Vietnam and elsewhere and has called the
Dupre report "incorrect." The company's shares recovered and are
now more than 20% higher than when Mr. Block's report emerged.
The U.S. levied large tariffs on China Zhongwang in 2009 in
response to allegations that it was dumping cheap aluminum on the
American market. The company has never responded to those
accusations.
In November, China Zhongwang said Mr. Liu had resigned from his
position as chairman, citing health reasons.
The Journal, in a series of articles beginning in September
2016, reported on alleged links between China Zhongwang and one of
the world's largest aluminum stockpiles in Mexico, massive amounts
of which were secretly moved around the world, according to company
records, interviews, trade documents and legal filings. The sheer
amount of metal helped depress global aluminum prices and is one
reason for calls in the U.S. to slap new trade restrictions on
Chinese aluminum.
Mr. Liu has denied any connection to the aluminum shipments.
"These things have nothing to do with me," he said in a 2016
interview with the Journal.
Mr. Block said Muddy Waters would officially reveal its identity
in response to a California civil lawsuit in San Bernardino
Superior Court filed by Perfectus Aluminum Inc., which the Dupre
report mentioned at length.
Perfectus, based in Fontana, Calif., said Dupre's report damaged
Perfectus by making what it said were false allegations of fraud
that were ultimately circulated in the wider mass media. Perfectus
is asking for unspecified compensatory and punitive damages.
Mr. Block, in response to the allegations, said he stood by
Dupre's findings.
Perfectus was once owned and operated by Mr. Liu's son,
according to corporate-registration documents reviewed by the
Journal, but it has denied any connections to China Zhongwang or
Mr. Liu.
About a year ago, U.S. customs officials seized $25 million
worth of aluminum owned by Perfectus at a California port, the
Journal reported. In September, the Justice Department alleged in a
civil complaint that Perfectus evaded $1.5 billion in tariffs by
conducting an illegal scheme to smuggle banned aluminum into the
U.S.
Perfectus declined to comment on Thursday. The company has
denied evading tariffs. It has sued the U.S. government and is
seeking the return of the material.
Mr. Block said he decided to publish the report on China
Zhongwang anonymously because of safety concerns. It was a tough
decision, he said, since it deprived his firm of credit for the
report and likely diminished its impact.
Mr. Block said he first learned about China Zhongwang from
another hedge fund investigating the company. A Muddy Waters
researcher was familiar with China Zhongwang and agreed that it
would be a good company to investigate, Mr. Block said.
Mr. Block was shown a photograph of a giant field of aluminum
encircling a factory in a desert in Mexico. The facility was run by
a company called Aluminicaste Fundición de México, which Mr.
Block's investigators later concluded was at one time owned by Mr.
Liu's son. Aluminicaste has denied any connection to Mr. Liu or his
son. Attempts to reach Mr. Liu's son were unsuccessful.
Mr. Block said he in 2015 dispatched investigators to China, who
started to track shipping containers full of China Zhongwang
aluminum. After they discovered that some containers were going to
a port in Vietnam, they sent investigators to the port. From there,
they tracked the shipments to a company partly owned by Jacky
Cheung, a business associate of Mr. Liu's who later became CEO of
Perfectus. Attempts to reach Mr. Cheung were unsuccessful.
By the summer of 2015, Mr. Block said, he decided he had enough
information to reveal his findings about China Zhongwang.
Write to Scott Patterson at scott.patterson@wsj.com
(END) Dow Jones Newswires
February 08, 2018 19:50 ET (00:50 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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