Per editor: Duan Lian, Yi Qijiang
The Wall Street Journal quoted sources on February 16 local time as saying that the U.S. Department of Justice launched an investigation into short-selling agencies to determine whether they lowered stock prices by sharing short reports in advance or participating in illegal trading strategies.
Sources said Carson Block, founder of Muddy Water, a well-known short-selling firm, received a search warrant from the FBI in October. One of them added that Bullock's phone was also searched.
Carlson Bullock, founder of Muddy Waters Image source: Visual China
Justice Department investigators have obtained a number of hardware devices, transactions and private chat records aimed at proving widespread collusion between the U.S. stock bears.
Muddy Water has repeatedly issued short-selling reports for Chinese-listed companies, and since its inception in 2010, half of the short-selling companies have been Chinese-listed. Among them, the three most influential shorts were for Lunuo Technology, Huishan Dairy and Luckin Coffee.
The FBI investigates short-selling agencies
The founder of Muddy Waters was investigated
According to the Financial Associated Press, people familiar with the matter revealed that as early as last October, FBI agents in the United States appeared in front of Bullock with a search warrant, and it is reported that his mobile phone was also included in the scope of the search. According to earlier reports, Andrew Left, founder of another well-known short-selling agency, Citron Research, was also investigated, and federal agents took away his computer.
It is worth mentioning that because the US stock market has been in a state of non-stop rise for a long time in the past, investors who specialize in short selling can only be counted as a minority on Wall Street, and there are not many opportunities to make money. What's more interesting is that in the course of last year's "retail vs. Wall Street", these bears were also seen as "evil people" and suffered a lot of losses.
But it is undeniable that these bears also have the highlight of successfully exposing the fraud of listed companies, whether it is Enron 20 years ago or the recent Wirecard thunderstorm. These people are often used to taking the initiative to attack and hit the listed company by surprise, but now they need to fight for their freedom.
The Los Angeles Federal Attorney's Office leads the investigation, which is known for prosecuting organized crime.
Shorting U.S. stocks is clearly legal, so whether these shorts are trading legally will be a key part of the investigation. The U.S. Justice Department is reportedly focused on whether these bears have spoofing or "scalping."
Specifically, false quotations are a relatively common illegal trading practice in the past few years, aimed at deceiving counterparties with a large number of false pending orders. For example, the instant trading price of a stock is $10.03, at which time the suspect hangs a large number of $10 sell orders, and when other sellers rush to keep up with the sale of stock at $10, the suspect quickly cancels the sell order and buys the stock at that price. When the number of repetitions is enough, a large profit can be generated.
While the strategy was found illegal as early as 2010, it wasn't until 2016 that the first commodity trader from New Jersey was sentenced to three years in prison for it. By 2020, the U.S. Department of Justice had indicted 20 people for the crime, while issuing more than $1 billion in fines to financial institutions such as banks.
Another investigation into "scalping" strategies focused on whether traders who were publicly shorting stocks took profits on their positions without disclosure.
Speaks Mandarin and has worked in Shanghai
According to the Beijing News, Muddy Water Research is a research company registered in the United States, founded in July 2010, founded by Carson Bullock. It mainly exposes the false financial reports and fraud of Chinese companies listed in the United States, and also involves some American companies.
Carson Bullock came to China after graduating from university in 2005 and has been panning for gold in China for the next few years. According to the media, Carson Bullock can speak Mandarin, has worked in a law firm in Shanghai, and has research on financial knowledge.
In 2010, during a visit to Dongfang Paper, a U.S.-listed Chinese company, Carson saw that the company's abandoned gates, old warehouse dormitories, and idle workers were very different from the financial report descriptions, and the company's inventory was basically a pile of waste paper. So on June 28, 2010, he gathered a group of people familiar with China's business rules and established muddy waters in Hong Kong.
The name "muddy water" is taken from the Chinese proverb "muddy waters to touch the fish", which is a pun: both refers to the company that specializes in investigating the "muddy waters to touch the fish" in the capital market, and also refers to "it is easier to touch the fish in the muddy water", first muddy the water, and then profit by selling coupons.
He has shorted a number of Chinese stocks
Delisted to Luckin Coffee
With the increasing number of Chinese-funded companies listed in the United States in recent years, around 2010, more than 40 new institutions in the world have added aerial stocks, including Muddy Waters, Glaux, Anonymous Analysis, Meiqijin, Gotham City, etc., and the main short bids they choose are Chinese stocks listed in the United States and Hong Kong stocks.
Since 2019, the Chinese stocks that have suffered shorts include: US-listed Luckin Coffee, 58.com, Who to Learn, Uxin, BeiGene, Qutoutiao, and Credit, etc., and Hong Kong-listed ANTA Sports, China Feihe, Kingdee International, Bosideng, Zhou Black Duck, etc.
Most of the problems pointed out by these companies are financially related. For example, Muddy Water questioned ANTA Sports's inflated sales and net profits; GMT questioned 58 Tongcheng's fictitious profits, excluding loss-making businesses from profit and loss through consolidation and splitting; BoliDas questioned Bosideng's exaggerated revenue and profits; and Meiqijin questioned BeiGene's inflated revenue.
Both U.S. stocks and Hong Kong stocks have relatively perfect short-selling mechanisms, and the impetus for research institutions to short-sell comes from profiting from the decline of individual stocks, but only if the market recognizes the content of the short-selling report, which often requires detailed evidence. For example, the anonymous short-selling report for Luckin Coffee (only released on behalf of Muddy Waters) hired more than a thousand people to collect store data.
In the past, companies that have suffered from short selling have often seen their stock prices plummet and delisted.
According to Interface News, taking the famous short-selling agency Muddy Water as an example, it has shorted more than 16 Chinese stocks since its inception in 2010, including Focus Media, New Oriental, Good Future, Huishan Dairy, ANTA Sports, and Man Wah Holdings, the parent company of Chivas Sofa, etc., of which 9 have been delisted, which can be said that the "hit rate" is amazing.
More well-known to the Chinese people is the Luckin Coffee Incident in 2020.
According to the "Daily Economic News" previously reported, on January 31, 2020, Muddy Water published a short report on Luckin Coffee on Twitter, accusing it of suspected financial fraud.
In the face of the 89-page report, Luckin Coffee issued a denial on February 3. Two months later, the situation took a sharp turn. Before the U.S. stock market on April 2, Luckin announced that COO Liu Jian and some of his subordinate employees engaged in misconduct from the second quarter to the fourth quarter of 2019, with sales of about 2.2 billion yuan in forged transactions.
Self-exposure led to a decline in stock prices. Luckin plunged 81.6 percent at the opening, triggering six circuit breakers during the day, wiping out about $5 billion in market value.
Before the US stock market on April 7, Luckin Coffee announced the suspension of trading, waiting for more information to be disclosed. At that time, Luckin's stock price was only $4.39, which had fallen 90% from the year's high of $51.83, and the market value was only about $1.1 billion.
More than a month later, on May 19, the NASDAQ exchange informed Luckin Coffee that it must be delisted, although former chairman Lu Zhengyao was "deeply disappointed and regretful" by the decision to be delisted without waiting for the results of the investigation; on June 23, due to the failure to submit the annual report, Luckin Coffee received a delisting notice again, and suspended trading from nasdaq on June 29, with a stock price of only $1.38 when the delisting was made.
At present, Luckin has paid a considerable price for its financial fraud and other historical problems, the stock price. On February 5 this year, Luckin announced that it had paid a fine of $180 million (about 1.2 billion yuan) to the U.S. Securities and Exchange Commission, and the two sides reached a settlement.
There are exceptions, of course. In 2009 and 2012, New Oriental suffered two short sellings of citron and muddy waters, but in the end they were safe and sound, and the stock price rose several times since then. Yu Minhong once accused Muddy Water of "writing reports with an abusive attitude, which is also unprofessional." He was referring to the many emotional expressions in muddy waters, such as that Yu Minhong was a liar.
Edited | Duan Lian Yi Qijiang
Proofreader | Sun Zhicheng
Daily economic news synthesizes self-interface news, financial associated press, Beijing News, per economic network, public information, etc
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