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: 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 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.”
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