Exposing Jack Ma, Big Pharma, and Chinese Fraud (w/ Carson Block)

CARSON BLOCK: Short selling is a niche. Maybe the universe of potentially good shorts
is this big. As an activist short, we are a niche of a
niche. So our universe of potentially actionable
shorts is that big. So there is this difference. Most shorts– so non-activist shorts– are
out there looking for companies that are melting ice cubes or where they’re looking forward
and they think that the fundamentals are going to deteriorate, et cetera. That’s not what we do. And that’s not what short sellers who specialize
in looking for frauds and promotions, as well as heavily financially engineered companies
do. So within this niche– and this would include
some non-activist short sellers who also have the skills and the tools to look at these
companies– we’re there really helping investors understand what’s going on at these companies
because there’s this sliver of companies out there where managements are trying to hide
the ball from investors. And whether it’s from a legal perspective–
fraud– or it’s just on the right side legally. It’s not technically fraud, but it’s intellectually
fraudulent. And they produced financial statements that
obscured the economic realities of the business. So our role as activist short sellers when
we look at companies like those is to try to unpack that and explain to investors–
this is what’s really going on with the company. And this is what’s underlying the numbers. So for us, we’re looking for things that–
we’re generally looking backward. We’re not taking a more conventional investing
approach of what’s going to happen in the future. Because the future, you can argue about. We want things that are provable and that
we can prove now. And that’s basically, something that has to
have already happened. So we’re looking backward and we’re saying
when the company printed this number– say, $1 a share– is that really a good number? Or well, it looks like $0.40 of that came
from transacting with D consolidated affiliates that are funded by debt. That’s not a real business transaction there
so you should consider that EPS was actually $0.60, instead of $1. So that’s the kind of thing that we do and
we add transparency to the market. So that’s why activist short selling and the
short sellers who really specialize in unpacking those deliberately obscured situations are
important to markets. BRIAN PRICE: With all of that in mind– has
your approach, has your strategy changed over time? When you’re doing this forensic analysis of
a company, when you’re looking for certain red flags? CB: Yeah. When you ask different activist short sellers,
you get different answers. And I’m in the camp of screens don’t tell
us that much. We’re usually looking for something that is
too good to be true. Something that’s risen a lot. Something that has a lot of fanfare around
it. And then scratch the surface and see is there
something odd here? Do they have a significant divergence between
GAAP and non-GAAP earnings or growing divergence? Does the income statement look nice, but the
free cash flow statement doesn’t? We look at we do a lot of transcript analysis
or we read transcripts. So a lot of times when we get serious about
looking at a company, we’ll print out four to five years of transcripts, start with the
earliest and then read straight through. And look to see if management’s being overly
promotional. Or if there are some other things there that
cause us concern. BP: With a recent position here as in Manulife–
I want to revisit it and talk about what you saw there. And this was really an event-driven position. But now, it seems like that might be changing
a little bit. What are you anticipating? What are you seeing? Walk me through what you’ve seen since you
made that call back in October. CB: So Manulife was pretty interesting because
it was this binary event. And we became aware of a trial that was just
about to take place in Canada. And so the plaintiffs were effectively, limited
partnership. Call it a hedge fund, but it wasn’t really
sophisticated like a hedge fund. So a fund that was suing Manulife seeking
a declaratory judgment– meaning a statement by the court that the plaintiff had certain
rights. And the right that the plaintiff was seeking
from the court was the right to deposit unlimited sums into this account at Manulife that had
a guaranteed return. And basically, it was short-term money so
it had very short-term liquidity and a guaranteed minimum return of 4%. So if the court rules in the plaintiff’s favor–
the plaintiff’s name is Mosten– then Mosten could effectively turn into the world’s highest
yielding money market. So it’s binary. So if Mosten loses, then this isn’t a big
deal. But if Mosten wins, this could put significant
pressure on Manulife’s balance sheet and capital. BP: We’re talking billions. CB: Yeah. Look, if Mosten we’re able to raise billions–
which they can offer a guaranteed return on short-term liquidity of 4%, you’d think that
this would be a very attractive alternative for fund managers to stash their cash when
it’s not being used– then yes, they could potentially stuff Manulife with billions. And Manulife has to take a charge to earnings
because of that difference between what it’s able to earn and what it has to pay. So Manulife, in its litigation– one of the
expert witnesses argued in a sworn affidavit that this could be catastrophic financially
for the company. So therefore, could be a very good short. And the market wasn’t aware of this. Manulife had not disclosed the existence of
this litigation to investors. So we thought that this was an interesting
information asymmetry here. And the risk hadn’t been priced in. So we went public with the short thesis. And then what happened was the company– it
was a very half-hearted response. Just, kind of, accused us of being short sellers. And seeking to make money off of other people’s
misery. BP: It’s a song you’ve heard before. CB: Yeah, exactly. But it’s just kind of funny because since
when is an insurance company in it for the good of the society? And since when are they not screwing customers
in some way? But whatever. So there was a little name-calling. BP: Tell me how you really feel. CB: So a little bit of name-calling, but then
what happens– so this was in Saskatchewan Provincial Court. Saskatchewan was the province in which Mosten
has domiciled and in which the policy was purchased by Mosten. Two or three weeks later, the Saskatchewan
Provincial government suddenly promulgated a regulation that on its face, appears to
say that a policyholder, policy owner may not pay more money into an account than is
actually necessary to fund the insurance. So on its face, that appears to be a problem
that would frustrate the plaintiffs. So the court still has not returned its verdict. By the time that regulation was promulgated,
the arguments had already wrapped up. So we’ll see. So you could have a decision where the judge
doesn’t take the new regulation into consideration. And if it’s favorable for the plaintiff, then
they probably end up back in court with Manulife arguing that the new regulation bars this. And so it’s gotten more interesting. But it’s kind of funny because we think of
Canada as a first world country. And this is really suspicious in terms of
the timing. Just two or three weeks after we made this
a big deal, the journal followed with an article on the situation about a day or two later
focusing on one of the people who put together the LP. So as soon as it got media attention, here
comes this new Saskatchewan regulation. Coincidence? Hard to believe. So kind of an interesting insight into our
friends to the North, who– like I said– we tend to think of Canada as pretty first
world. But maybe in some respects, things are a little
bit more clubby than we’re used to. BP: Did that recent development bolster your
confidence in the initial call on the company? CB: Well, assuming that this new regulation
had something to do with Manulife behind the scenes- – it would certainly seem to be lie
their public statement that they’re not concerned about how the case turns out. And they’re not concerned whether law is in
their favor. So yeah, it’s a sign of weakness. But at the end of the day, did they just make
the move that mutes the whole issue? That remains to be seen. BP: But ultimately, you’re still confident
in the call. CB: Well, look– so what are called was to
be clear was that we weren’t taking a view on whether the plaintiffs are going to prevail
or not because under US law, we feel that they would pretty clearly prevail. Canada has somewhat different standards of
contractual interpretation. So we looked at this with Canadian counsel
and we engaged. And it definitely passes the laugh test. Definitely poses a risk. But under this one Supreme Court decision
from a few years ago called Satva, where the court’s supposed to look at the factual matrix
around a contract– that seems like that could be an excuse for undoing bad deals by the
party that feels like they shouldn’t have done the deal. It was harder to say so I was always clear–
we don’t know how this is going to turn out. But this is not priced in and this is an issue. BP: So let’s take that and shift for a second
from Canada to China– where you’re pretty wellknown. You’ve been described as one of the most hated
men in China. So first off, is that a badge of honor? Or is that something you take issue with? CB: Depends on who exactly in China’s hating
me. But certainly at points in the past, the CCP–
the Communist Party– and I think, reasonably senior leadership knew my name or knows my
name still. And was looking to interdict our operations
in China– so that’s one. And then, yeah– there’s a group of venture
capitalists and, kind of, stock scammers– China, Inc– let’s call it because most people
think they’re respectable guys, but I know better. And we’re on the other side of stuff and they
don’t like me. But those guys are billionaires in a number
of cases and I’m not. So they must know something I don’t. BP: Well, you know a few things. And when it comes to TAL Education– that
was a pretty good call on your end. You’re going back to June. And since then, we’re down about 36%. Walk me through what you saw there. Bring us up-to-date. And does this name have further to fall? CB: So what was interesting with TAL is that
it’s a much more sophisticated form of fraud coming out of a Chinese company. I guess, backing up– if you see the movie
The China Hustle– The China Hustle says that there are about 400 companies from China that
listed mostly via reverse merger in the past decade. And that had basically gone dark, and delisted,
et cetera. So 400 or so, stock frauds. I think out of the 400– I think only one
Chinese company chairman has been imprisoned in the US. And that was a guy who is Taiwanese. So I think he was just unlucky. So nobody from China has ever been materially
punished for scamming US investors out of tens and tens of billions of dollars. They basically, just sit there in China and–
I think– laugh and give us the finger. And the SEC has tried to pursue cases where
it’s wanted to get working papers from the China affiliates of the big four auditors. And they get stymied, as well. So this is a perfect situation where if you’re
in China, and you’re looking at the US markets, and you think that you can use a company to
defraud US investors– it’s a heads I win, tails you lose proposition. Why wouldn’t you do it, basically? Since nothing has changed to disincentive
it– with the more recent IPOs, we think a lot of those companies are frauds. Now, they’re not frauds in the way that the
first 400 were, which they would say we’re doing $400 million in revenue in the real
number is $4. These are companies that do real revenue. But probably, the apologists admissions would
be that 20%, 30% of the top line is fraudulent, but they’ll grow into it. So anyway– when we looked at TAL, we saw
some transactions where they were really trying hard to make their profit numbers. So they were growing aggressively so they
were able to grow the top line. But the problem is they weren’t able to maintain
profitability so they started engineering these transactions that were fraudulent. So the first one that we’ve analyzed– they
claim to have sold a company to an investor of theirs, for $50 million US dollar gain. And then a year later, 15 months later– oh,
gee, it didn’t work out for the other company. They want to change directions. We bought it back and they just canceled the
$50 million in shares. So this was also non-cash transactions. So when TAL sold it, they received preferred
equity valued at $50 million– which is complete funny money. And then when they took it back, that equity
was just canceled. But TAL left the $50 million gain on its books. Well, the interesting thing is the fact pattern
to us, first, strongly suggested that this was totally contrived. And that there was no intent to really part
with the business. But then when we looked at it, we found that
they didn’t even sell the business. The business remained with TAL. They transfer/novated some administrator contracts,
but they didn’t novate teacher contracts– from what we saw. They didn’t novate student contracts. They didn’t transfer ownership of entities. It was just designed to do the bare minimum
amount of work, presumably, to be able to say to the auditor oh, we no longer have this
business. And oh, now we have this business back. So that was the first transaction. Then there was another transaction with a
business that they bought in 2011 called Dongfangrenli or DFRL. So DFRL was an overseas education intermediary
business. So Chinese students wanted to applied research
and apply to schools overseas, they would go to DFRL. DFRL would help them with the research. Help them the applications. And so the DFRL would get paid upfront, but
it would recognize its revenue upon the students receiving their visa to go study at the school. So it wasn’t a big business– by any means–
for TAL. But TAL disposed of it and just disclosed
that we disposed of this company to an investee. And then, TAL also announced that it had made
an investment in another company called Shunshun. And so Shunshun was also in the overseas education
intermediary business. And so TAL then sequentially made these investments
where it took big markups that produced over– in total, TAL got about $60 million in profit
from this series of transactions with Shunshun. But here’s the thing, DFRL was transferred
to Shunshun. So TAL lied about the timing of its investment
in Shunshun. It said it invested in December 2015. It actually invested in July 2015 and then
transferred the business after they invested. Why the lie in the 20F? The lie in the 20F was probably so that they
could avoid disclosing this as a related party transaction to their auditor and to investors
because if it were a related party, then it would have received more scrutiny. So we think TAL always had control of Shunshun–
the investee business. And that the transferred VFRL into Shunshun,
basically was there to give TAL a way to produce about $60 million in accounting profits. There was also a point when TAL bought an
additional slug of equity. They bought it from an obvious straw counterparty. So the guy who’d been CEO at the time of Shunshun–
company in which they invested– his wife set up a company in Fujian– an entity in
Fujian, which is Fujian is like, famous in China for the corruption– so set up an entity
in Fujian. Two weeks later, it received the equity from
the CEO and then it immediately flipped it to TAL. And then a month later, it deregistered. And so TAL claimed– they claimed that– I
think– they spent a few tens of millions of dollars on that slug of equity. But I mean, bullshit. Either that amount of money never changed
hands. Or if it did, the shareholders’ money, of
course– I think it was diverted into the people’s pockets– personally. So I think the actual seller didn’t really
get nearly that much money. But this also, again, seems to us, clearly
contrived to generate procurement profits from a nonbona fide series of transactions. So there was a third transaction we also highlighted,
as well, firstly. So that was the initial focus of our report–
this company is a fraud. It’s a real business, but committing fraud. And then we started getting into the fundamental
issues. How we saw that the core business– called
Payo– was actually weakening. And this was really– we saw– they had to
increasingly attempt to cover up the fundamental deterioration. So that’s basically where we are. The company never really substantively responded. Their response– the follow-up I put out to
their response, I said it looked like it was something that somebody banged out while sitting
on the toilet in the morning. So I would argue, they’ve never attempted
to refute any of what we said. And it’s pretty hard for them to. The evidence is pretty clear. We’ve got the documents, et cetera. The only thing that’s in their favor on this
one is the complexity of understanding it. What I just explained– BP: You need a corkboard
and red string. CB: Unfortunately, that might have just made
for– I know– bad TV. BP: No, no, no. It’s actually quite good because what it does
is takes us inside your mind. And we learn how you operate and think when
approaching these companies. And it gives us understanding as how complicated
it is to uncover the bullshit– as you’ve put it. CB: Yeah, so it can be. So these are not the predecessor frauds. These are more complex. But I think there a lot of them still out
there from China. BP: Let’s stay on the topic of bullshit–
it’s one of my favorite topics. With what you’ve seen with this company–
when there’s this much, almost, systemic fraudulence– does it indicate that there’s more? In your experience, is it fair to say that
there’s probably more there that we don’t even know about? CB: Yeah, and also, that’s a point that I
try to make. I believe strongly in the cockroach theory. And the reason for that is once you’ve crossed
a line– you know the line’s there. In China, I really don’t think most these
guys care about it, but they’re aware that the line is there. So once you cross it– what’s the point in
not crossing it, again? You’ve already done it. And so I think– yeah, I suspect there’s a
lot more there. But we talked about what we could actually
quantify in this case and what was glaring to us. BP: So with the cockroach theory in mind–
is it fair to say that this company has even further to fall from where we’re at now? Would that be unexpected at this point? CB: Things like that are always– it’s a tough
question because we’ve had a little bit also, in the way of a macro tailwind here or a geopolitical
tailwind. So at the time we shorted TAL– or really,
the week before– I was at a Bloomberg conference. And I was arguing that allocators of capital
and investors should start thinking of China stocks listed in the US as sin stocks for
the reasons that I already elucidated, about the inability to hold anybody accountable
for fraud. And therefore, the high probability it’s still
prevalent. But also because at the end of the day, these
companies will act as agents of the Chinese government, even though they are nominally
private companies. And that they are basically, trying to obtain
technology from the US for China strategic reasons. So in making that point, I said the hawkish
positions towards China seem to now be prevalent throughout most aspects of our business community. And really, that thinking seems to have been
adopted by a lot of people who interface with China and business on a daily basis. But it hadn’t yet percolated into the capital
markets. Everybody was still pretty bulled up on China. So there’s been a spillover effect, which
was– in a way– driven by the tariffs or the trade war. So people thought actually, this is serious
and this isn’t going to be good for China equities. So this high ground that was there in early
June when we shorted TAL, has really ceased to exist. So there has been somewhat of a tailwind there
that’s not idiosyncratic to TAL. So it’s kind of hard for me to separate out
what has been idiosyncratic to TAL versus tailwind. What do I think it’s worth? I don’t know how much fraud exists in that
company. We’ve been able to quantify it some. The other issue is, it’s what they call a
variable interest entity. So you’re a shareholder with the list co. It owns a subsidiary onshore, but that’s not
the operating subsidiary. It just has a series of contracts with the
operating company over here. Operating company is owned by the chairman,
typically, and some of his buddies. Under these agreements, the op cos are supposed
to make periodic payments of cash flow or profit to the list cos. Now, here’s the thing about VIEs– it’s kind
of funny– these China VIEs. If you can understand Chinese taxation– which
we do have in-house expertise in that– and you analyze it given companies reported taxes,
then you come out saying– well, if these numbers are real, then the VIE has never made
a single payment to the company owned by the shareholders. So what we see every time we look at a China
VIE is that from day one of putting the VIE packages in place, there are material breach. And when I put that back at the apologists–
it’s like, chairman so-and-so doesn’t like paying taxes. I’m like, holy fucking shit– that’s new. Like, I haven’t heard that before. But they’ll excuse that. So if you’re asking me what is a VIE that
never made a required payment or– as far as we can tell– never made a required payment
under the VIE agreements, that’s also committing fraud worth and it’s in China, where you have
no recourse? I don’t know, man. I start thinking of bagels at that point. But I know that stocks go up if there are
more buyers than sellers. They go down if there are more sellers than
buyers. People out there will ascribe some value to
it that’s greater than that I ascribe. So I really don’t know where the floor for
it should be. BP: Bagels as in zero– just to be clear. CB: Yes. BP: It’s almost lunchtime, I just want to
clear about that. So I’m hearing words like bullshit, and cockroaches,
and fraud given the way China operates. Is it almost like they’re looking at America
and laughing at us, given what they can get away with? And if you agree with that– has President
Trump’s approach been correct at this point? CB: Yeah, I think that they have, especially
in the capital markets. That’s what we used to say when we first started
doing this was, we’ve been a laughing stock. So going back to 2010-2011– American investors
had been a laughing stock within these circles in China because we’re so gullible, we believe
any stupid story. And every question that didn’t have a real
answer would just be answered with oh, well, in China, there’s this thing called guanxi
And it’s not what you know, but who you know. And Chairman Wang has a lot of guanxi, that
is why it works. And people were just like OK, yeah. He’s really guanxi-nated. And they would just eat that up. And so they all thought that was funny because
in a way, it is just how gullible, how eager to believe it we were. So then we went through this period where
after we got active in the space and Citron got active– some other guys came in– we
kicked the shit out of these things. And we humiliated a lot of these company chairmen. And then, it became oh, god. We don’t want to talk about listing in America,
the short sellers– the short sellers. But China did something very smart and strategic,
which was they started cleaning up the problem. So how did they do it if these were private
companies slash companies frauds. A lot of these were complete zeros. Well, there were leveraged buyouts financed
on the debt side, by China policy banks. So China Development Bank was one of the big
lenders into these things. And so a lot of US investors– even though
these were VIEs and there was no real business there– a lot of US investors ended up getting
paid in paid premia. So the Chinese understood, very well, that
that could wipe our memories. And it did. Because then, all of a sudden, valuation started
to rise again in China. And the problem that we have in the US is
we’re stuck in this long-term, low growth trend. So everybody on Wall Street with more and
more money to allocate thanks to quantitative easing is searching for growth. Well, China is really, the only scalable growth
story in the world, even though a lot of that growth is just purely juiced by debt. And then, of course, the companies are lying
about how much they’re growing. So having wiped our memories– or maybe I
should say, anesthetized us– here come the valuations creeping back. Now, here comes Alibaba. Everybody lines up around the block to subscribe
to that IPO. And we’re off to the races. And so this generation of frauds– less egregious
than the prior generation in that the businesses are much more real, in general. But they’re still frauds. And they’re also online so there– a lot of
them are online– so it’s harder to catch them. But the thing is when they start doing the
things that TAL did– where TAL had scaled so much it needed to manufacture so much profit
that it engaged in these transactions that when you really dig into them are obvious–
well, that’s when you can catch these guys. BP: Do you take Jack Ma’s departure at face
value– what you’ve heard about it? Do you think there’s more under the surface
there than meets the eye? CB: Trying to figure out what’s– so I take
nothing from Alibaba or China at face value. What could be underneath the surface? I can’t speculate. But no, I’ve never believed him. It’s kind of funny that Alibaba was able to
IPO to such fanfare because if you go back to 2011, Jack Ma literally stole Alipay from
Alibaba. So his story was– so Alipay was the payments
unit there– and so what he did was he just transferred ownership of Alipay to himself
and, I think, some of his associates. Didn’t tell anybody. So you had board members from Yahoo and SoftBank. Just did it. Months later, they discovered this– somehow. And so then he said, oh, yeah, I had to do
that because Chinese regulations don’t allow foreign ownership of payment processors. So that’s why I did it– which gray area there. But really, was that the catalyst? And why wouldn’t you have told anybody ahead
of time? Because he did the very smart– a lot of Chinese
I’ve done business– they understand leverage so well. So here here’s the proper scenario. We have problems. The Ministry of Finance is telling us that
they’re going to revoke the license unless we transfer this. I’m willing to transfer this. I’m willing to take this. How much should I pay? And then the board– the independent board
members should say, well, maybe we need to run an auction process. Or we need to run a sale process. And maybe he comes back and for strategic
reasons– that doesn’t make sense. But whatever it is– the company still owns
it. He’s going to have to pay more if he wants
it. But in a situation in which, yeah, I took
this. Yeah, I’ll pay you for it. By the way– you’re not going to tell me how
much I’m going to pay. I’m going to tell you because your choice
is between zero and whatever I’m going to give you. So that’s not the kind of guy you want running
a public company. And if that sort of person tried to become
CEO or let’s say, GE was thinking of hiring that kind of person– oh, shareholders would
revolt. So it’s like we always give the Chinese companies
a pass because we’re like well, things are different in China. Yeah, but not in the way that is good from
the perspective of US capital markets investors. BP: Sounds like you’re saying Jack Ma is full
of shit. CB: Yeah, Jack Ma is full of shit. He is full of shit. I don’t know when he’s telling the truth and
when he’s lying. But the point is, he’s got a real track record
of being a scumbag. So hey– as far as I’m concerned– that should
disqualify him as having any credibility whatsoever. But unfortunately– for me– that’s not the
way that the markets and the world work. BP: If he were to be named CEO and chairman
of another public company tomorrow, is that an instance short in your mind? CB: No. I mean its–so what we do as activists– we
never shorted Alibaba as activists because so large and so complex. There are a number of arguments that were
put out by other short sellers who are not really activist short sellers or don’t focus
on activism. But I put these arguments out there as to
why they think it’s a fraud. And it’s compelling, but at the end of the
day– if you have more buyers than sellers, it goes up. And we’re just not– in the US right now,
we’re not risk– well, at least as of early June– just didn’t have enough of aversion
to risk to care about these problems. And to care whether it’s a fraud. So in a more risk averse environment, something
like that could be better short. But a really large complex company like that,
probably easier ways of getting traction. BP: Fair enough. So we’ve flown from Canada to China, let’s
come back to the US. And let’s talk about something that you’re
particularly passionate about now. You’ve been an outspoken proponent of the
role that activist short sellers can play in keeping certain executives in check, especially
when it comes to pharmaceuticals. Talk to me a little bit about what you’re
seeing right now that has you troubled. And what you’re trying to do to correct it. CB: Past few days that I’ve been in New York–
I’ve been talking about the idea that as activist short sellers, that we can openly short companies
purely for moral reasons. That we can say to the longs– you should
sell this company because this company is toxic to society. I’m going to explain how. Nobody’s done that previously, to say that
this is purely a moral short. When it’s been done or attempted, it’s been
put in the wrapper of the regulator is going to wake up after 15 years and do something
about this. And a lot of long investors feel that’s hollow
because regulators act on only a percentage of companies that they could or should act
on. And when they do, it usually takes a while. So those arguments about the regulators don’t
move investors. But when I was thinking about this and looking
at some of the truly egregious examples of companies that we’ve had in recent years–
so one of them was INSYS Pharmaceuticals– the thing is when you read about these companies
in the media after it’s clear that they’ve– in the case of INSYS– bribed doctors to prescribe
highly addictive– even for an opioid– highly addictive opioid to people who would not have
qualified to receive that prescription. Bribed doctors to prescribe it, people got
hooked, people have died. So read about that. Usually the way the media explains it is,
well, this was in the pursuit of corporate profits. But the reality is that these are not one-off
discrete events. The common thread is really, the lifeblood
of these events. And that is the capital markets. So in the case of INSYS, the former CEO made
over $50 million net selling his stock. So in the case of American Addiction Centers–
which was another problematic company, where the company and its former president were
indicted for murder– for death that occurred at the facility. I should disclose that the judge dismissed
the indictment, but I think that he was a sufficiently bad actor– he made over $21
million selling his stock. Most of it after the indictment was announced
and he left the company. So what I’m getting at is that long investors
are providing the financial incentives for this kind of bad behavior. So what I think, as short activists, we need
to do is– when we see in INSYS, rather than saying the FBI is at INSYS and they’re investigating–
we say this is what they’re doing. Now if you, as a major investor, or you, as
a sell-side analyst with a buy on it– if you don’t change that, you’re helping to keep
a bit under the stock. You are giving them financial incentive–
in this case or in case of INSYS– to kill people. Don’t think that your hands are clean. Now before I told you this, before you were
on notice– I understand. But now that you know, you have to act. And if you don’t, you Mr. Sell-side analyst
or Miss portfolio manager– I’m going to start naming you publicly. Because I want people to know. I want your kids to see this online and come
home and ask you– hey, is it true that you’re somehow enabling this company to do these
horrible things? And you can have that conversation. Now, people might say gee, that’s kind of
harsh. But– BP: If people are dying. CB: Well, people are dying. And look, this is coming from somebody who
has had innumerable venomous things written about him on the internet. My kids are not quite old enough to get online,
but obviously, they will in the next several years. And I’m happy to have the conversation with
them and explain it because I know that I don’t have a problem at the end of the day. But can these other people say the same thing? So that’s what I think, as short activists–
when we see these truly immoral companies, let’s just drop the talk about the regulators. Let’s go right at the heart of the issue. And let’s tell investors that they should
get out of this and stop giving these guys a bid for their stock. And if they don’t get out of it, let’s start
saying, hey I talked to Joan Smith over at XYZ firm. I showed her this information. She’s aware of this and she didn’t take the
buy-off. In fact, she raised her target price. This is reprehensible or this is deleterious–
whatever adjective you want to use it– and put that out there. So I think we can open up a new front here
and really target the most toxic companies in our markets by doing this. BP: You mentioned one– are there any others
on your radar that fall within this bucket? CB: So when I was at the case learning conference
yesterday, I gave examples of three companies that are subject of activist campaigns by
other short activists. And they haven’t couched them in these moral
terms, but I think that these potentially could be– they’re already battlegrounds,
but they potentially could be battlegrounds where we start talking about the moral dimensions
of continuing to own them. One of them is Medifast, which is multi-level
marketer. It sells meal replacement shakes and powders. So an activist who published on that and had
tested some of these and determined that lead and other heavy metal content in there was
much higher than should be and was dangerous– company had a pretty terse response to that. Another is Health Innovations Insurance–
HIIQ or HIIQ. They sell short-term insurance. The accusations there are that they are scamming
their customers. Their customers think they’re getting much
more comprehensive coverage than they actually are. And if those allegations are correct– and
that’s been the subject of three separate activist short seller campaigns and currently
being investigated by 42 states so I’m sure that’s normal. So if those allegations turn out to be correct,
then I think that rises to the level of immorality. Because it’s not just that you’re taking money
from people, but you’re also narrowing their access to health care. So you could really be messing with people’s
lives. And then the final example that I cited is
called Acadia Healthcare– ACHC. And so this is a roll-up of inpatient behavioral
treatment facilities. They treat kids, as well as teens and adults. And the activist who published on this– he
published links to a number of news articles that show a five-year-old kid died in a van
in custody. 10-year-old kid died. Number of deaths. Abuse by staff. And the crux of the short seller case there
is that when they roll these companies up, they borrow money to do it. So they buy facilities and then they cut staffing
costs. So the staffing cost ratios are apparently–
according that activists– much lower than they should be. And they jam in more beds. So you’ve got fewer people to provide care. You’ve got more people to whom to provide
care. And this really resonates when you look at
what private equity has done to say, ManorCare. Washington Post, last weekend, ran a really
good article– a couple of weekends ago– about– I forget which PE firm– but when
they acquired ManorCare in 2007, they extracted all the cash out of it they could. They sold the real estate and leased it back. So they turned an asset into debt. The cash was gone because it went into the
PE owner’s pockets. And then after a few years, they were struggling
to service their debt. So they started cutting costs, cutting costs,
cutting costs. Patients were– according to Washington Post–
patients were being neglected. Deaths resulted. And that sounds like that’s similar to what
the activists in Arcadia is alleging. So if that’s true, that’s not acceptable. So those are three companies where, I think,
we could see– if the activists are correct– we could see this focus on the morality of
owning the shares. In the case of Acadia, the banks that lend
money to Acadia to roll-up facilities. BP: I don’t think anyone would argue that. CB: And I don’t have positions in them. BP: Thank you for that. But that all being said– I don’t think anybody
would argue that in America, we have a broken health care system. And we have a corrupt health care system,
perhaps even fraudulent. Of everything you’ve accomplished in your
career as an investor– would it, perhaps, be the greatest accomplishment for you if
as a short selling activist, you could somehow change this industry and make it better and
make it fair? Is that something you’ve thought about? CB: Well, look, I think it’d be delusions
of grandeur for me to say that I can change that industry. BP: But you’re trying. CB: Well, I want to pick off– the way I think
about it is, ourselves or other short activists picking off the really bad apples. And hopefully, that would have a wider spread
effect. I guess the way I’m thinking about it right
now is I’m thinking more about changing slight– well, maybe it’s not that slight– changing
the culture of investing. So investing is inherently an amoral activity. If I think this is going to go up, I’ll buy
it. If I think it’s going to go down, I’ll sell
it. But the amorality of investing– I believe–
is increasingly leading to immoral outcomes. And why is that? I think there’s some big picture factors that
we have to look at. So technological supremacy has devolved from
the government to the private sector last decade or maybe, the late ’90s. And that the government doesn’t understand
what it’s regulating. Private sector has more power. Then also, humans– my observation is that–
we invent and innovate far faster than we’re able to adjust to our creations. And so we don’t understand the risks and how
to manage those risks. And so whether we’re talking about financial
derivatives, offshore drilling, nuclear power plants– what have you– we create things
that we don’t understand. And when you look at where our base is in
terms of the power of the things we’ve created– mistakes here have tremendous implications. So I believe that the private sector is more
powerful over our lives than at any point in modern times because of the factors that
I’ve just mentioned. And when you want to look at the implications
of that– one of the things I cited in my presentation– was I think in 2017, there
were about 63,000 overdose deaths in the US from opioids and heroin. There were 58,000 soldiers killed total–
American soldiers killed total the entirety of the Vietnam War. This is a huge number and we can trace a not
insignificant portion of the blame back to Purdue Pharma and its unwillingness or inability
to understand the potential for abuse of Oxycontin. So when you look at that, we don’t live in
the world that Benjamin Graham lived in. This isn’t a world where we should or can
be a moral about these allocation decisions when certain behaviors are potentially so
far over the line. I think, as investors, we need to change this
culture and bring morality into it. Now the question is, where’s the line? Yes, that’s a subjective question. I don’t think that investors right now– since
we’re starting from this amoral standpoint– I don’t think that they’re ready to move to
the point where they’d say, well, if it’s a business that’s financially preying upon
poor people and their lack of sophistication, then I’m going to dump it. That would be great, but I don’t think we’re
there. So I think that when we’re talking about businesses
or companies that could really do material harm to people– not just financially– that’s
where, I think, most people can agree is over the line. And health care is great for that sort of
thesis because you have companies that are– you have innumerable health care parasites. They’re either ripping of individuals, ripping
off the system, or both. But they’re also narrowing access to health
care. And that’s fucking with people’s lives. And so I think that’s an area to look to really
find these companies and try to rein them in. And yeah, it would be great to be able to
just take some of these bad actors out of the game. I don’t know if it’s something where the Hydra,
where the new head would pop up. Or if you could really change the game over
the long-term. My experience with the China frauds and the
short-term nature of investors memories is not encouraging, in that regard. But since we’re in an environment where monetary
conditions are tightening some, then maybe things would work a little differently, in
this case. BP: Well if your track record is any indication,
it should say that some of these companies should be a little bit nervous with you targeting
them. So I’m interested to see how these things
play out. And hopefully, it spurs some good and some
positive change. CB: Let’s hope. BP: But with your track record– which I mentioned–
I wanted to drill down a little bit on your career and what you’ve accomplished. As far as your trophy case, is there one particular
move or one particularly decision that you made that stands out amid the rest? Is there a Jackie Robinson steals home moment
that you’ve had in your career that you like to highlight? CB: Well, the initial decision to do this–
honestly– to my knowledge, at that point nobody had put out the kind of research report
that I put out. So what was going on then– 2010, I was living
in Shanghai. I’d been out of the investment business for
nine years so I’d started the first self-storage company in mainland China and I was just trying
to keep that afloat. And I came across a fraud from China listed
in the US. And put together 30 some odd page report exposing
it as a fraud. And it was a company called Orient Paper so
I was very plain spoken. Orient Paper is a fraud. It has raised and stolen tens of millions
of dollars. They claim to have acquired XYZ for $5 million. Reality– most of this money has been stolen. Nobody would have paid more than $500,000
for it. And this type of report just hadn’t existed. And so here I was– I didn’t have, at that
time, much money to short it. I’d blown through my personal savings in order
to get that self-storage company off the ground. And I’d spent about $15,000 of hard research
costs on this thing. And I’m really wondering– I’ve got $2,000,
maybe I’ll buy some puts– is this worth it? What am I doing here? But then, I was fawned at that time of thinking
back to Risky Business and that line that Tom Cruise’s friend told him, which is– “Joel,
sometimes you just gotta say what the fuck.” BP: Make your move. CB: And I felt like, look, I don’t have anything
to lose here because I’ve got the self-storage business that it’s not making me money. If they want to take it from me, then maybe
I’m better off. So there’s a power in having nothing to lose. Or sometimes there’s a power in having nothing
to lose. And so I just went for it. And the next day, that stock was down as much
as 55%, which far exceeded my expectations. And I was scared shitless. I’m living in China. I thought maybe, it’s going to take down a
few percent, but that’s how this business was born. So it’s certainly in people When people tell
me yeah, I’ve heard about you– they think about Sino-Forest. But a lot of people either haven’t heard or
forgotten about Orient Paper. But really, that first decision– what’s my
upside? I didn’t really see– maybe I’d get some consulting
gigs for banks who wanted me to diligence. The companies– before I realized that they
were all frauds and the banks didn’t want to know that– so I didn’t see a lot of upside. And of course, there was potential downside,
like I’m living in China. And they’re going to send guys after me or
who knows. Maybe get tied up in litigation. So that was the seminal decision that everything
to date has flowed from. BP: Is that true? We’re you looking over your shoulder as living
in China? Were you afraid of what was going to happen
as a result of that? CB: Even before that, I had something I was
fond of saying to other expat business people, other expat entrepreneurs who agreed with
it– I said, you’re not truly doing business in China until the construction workers show
up and threaten to kick your ass. And I’d already been through that. I went to visit Orient Paper shortly before
Chinese New Year. So there was this construction firm that I
had employed briefly the prior calendar year– that coming up on Chinese New Year, they were
stiffing their employees. So what they did was they told the construction
workers. And this was not uncommon for construction
companies in China. Well, I can’t pay you unless I can collect
these receivables from so-and-so and so-and-so. We didn’t owe these guys any money, but they
figured, well, here’s a white guy. He’ll probably cave in and just, I don’t want
any trouble. So they sent the construction workers to my
office and I told them to go fuck themselves. And they were calling me on the phone and
trying to harass me. And so I was already looking over my shoulder. And then I worried that when I went to Orient
Paper, I’d seen too much and they realized that I was onto them. So then I was doubly looking over my shoulder
because I didn’t understand how this company had gotten there. This looked a lot– to me– because I grew
up on Wall Street in the ’90s. And in micro caps, there were a lot of mob-backed
stock scams. So I was wondering is this US organized crime
meets Chinese organized crime? So are there mobsters who might come looking
for me? So yeah, I didn’t I really didn’t know the
risks. And once I published– Jim Cramer, I was on
his show, when somebody called in asked about Orient Paper, saying I must be a fraud. And got all these people writing horrible
articles about me or blog posts on seeking alpha on the street.com. And people sending death threats and posting
my father’s address online and saying, let’s go down and give him a piece of our mind. It was a pretty freaky time. BP: At that point, do you call the FBI? What do you do? How do you keep living your life if your life’s
being threatened? You’re trying to do your job. Your family members address are being posted. That’s a wild existence. How do you go on? How do you keep doing what you’re doing with
all that in your mind? CB: So this was the initial thing that happened. So a few days after we published on Orient
Paper, my wife and I decided to get out of China for a bit. We needed to do so, anyway, for at least a
month pretty soon so that we didn’t become subject to PRC global taxation because we’d
been living there for almost five years. So went to the US and it was calmer there. And really tried to think about what to do. But at the same time, now I was getting inquiries
from main portfolio managers at all of these serious hedge funds. And everybody wanted to sit down and talk. And so it’s like wow, there really is a business
here. And by the end of the month, in the states
that I took– I was looking at two options. So I knew that there was a business here,
identifying at least Chinese frauds. And writing research reports exposing them
or writing research reports on them. The question was, did I want to do that publicly
and expose them and pursue this activist short seller model that I didn’t know existed prior
to my publishing? Or do I want to get a handful of subscribers,
and collect fees, and run a much lower risk of litigation and regulatory backlash? And that would have been the calmer life,
but I felt like this was the right move. It was a combination of things. Yes, I felt it would be more lucrative. But I also knew that litigation would be a
cost of doing business in that it takes a lot of time. But there was also this element of I want
to expose these companies. What good does it do any way to tell a handful
of hedge funds this thing’s a fraud? If nobody points out to the market that it’s
a fraud, then really, who cares? The stock can go up. So I felt like I did want to expose these
guys, as well. So that’s why I chose the path that I did. And after about a year of doing that, I took
a step back and realized that issues that really frustrated me in the first iteration
of my investment career when I was on the long side– the conflicts of interest, and
lying by managements, and I felt like they used sell-side analysts– those issues, they’re
what the heart have allowed these Chinese companies, these frauds, to list in the US. But those issues have enabled a lot of non-Chinese
companies to also do things they shouldn’t be doing in terms of their financials, whether
it’s fraudulent or just intellectually fraudulent. So realized, this business can be global. So my business– really, what I depend on
for this business to work is that people will not stop doing the wrong thing. So people stop doing the wrong thing, then
you know what? I can shut down and I’ll be a long-oriented
investor. But so long as they don’t, then there is a
business for me to do. BP: Well, Carson, it’s been an absolute pleasure
hearing from you. And as we close here, there’s always one question
I like to ask any guest I speak with– is there anything that I haven’t asked you about
that you want to mention? CB: No, we’ve been pretty comprehensive. BP: I think we’ve, kind of, covered the whole
world here. CB: Yeah, it’s the world that matters. BP: And the world where you can make some
difference. So I really appreciate you coming on and giving
us the time because I know you’re a busy man. But it’s always great to hear from you. CB: Thank you. BP: And be careful out there. CB: All right, you, too. BP: Thanks so much, Carson. CB: Cheers, thanks

100 comments

  1. I've worked for a Chinese company in China. I can personally attest that it is totally normal in China for the "leaders" to pocket the money. There was nothing I could do when I saw them laundering money invested by the South Korean government. Some very easy napkin calculations showed without a doubt that millions of dollars were just disappearing from normal operations. This is so normal in China, i would dare to say that no Chinese company doesn't do this.

  2. @29:45 "that's not the kinda guy you want running a public company." and "…shareholders would revolt…"

    So remind us…who again runs Tesla? 🤣

  3. Amazing and very inspiring! Thanks to Real Vision Finance for putting this up! (And the interviewer, Mr Price, for the great job!)

  4. Regarding Manulife and Canada, what people need to understand is that Canada is highly corrupt. In BC, for example, Vancouver and other parts of Canada were used to launder hundreds of billions of dollars from China. Not only did people turn a blind eye, but they also allowed it to happen despite warnings from the RCMP police. Governments here have always been more than happy to throw Canadians under the bus.

  5. The SJW attacks and folding of CEOs to mob mentality that is anti moral destroying tradition and truth as inherent consideration of do no harm in your investing, but not embrace the ever changing SJW irrationality-it’s substance and a traditional moral outlook of right and wrong.

  6. They should talk about who invented Ponzi schemes, whose shameless greed got the world into a great recession, who are the world top wealthiest people but pay little tax….. Which companies exploited Chinese child labor to profit?

  7. After China has banned Jack Ma from every leaving China with his family, I I doubt that he's in bed with them. If he was, why would they threaten him in such a way?

  8. There are a lot of US companies doing the same thing but American style. Creative accounting to write uncollected loans at it's full value and then borrowing or leveraging it to borrow more themselves. What would happen if that imaginary initial debt/asset at the start of that stacked tower were to stop paying or collapse? And they don't have the hard cash/assets to cover the lose? Would the tower fall?

  9. The description of the American for profit healthcare companies he points out is disgusting. This is why regulation is important.

  10. Love the open and unfiltered passion in this guy. Tells it like it is, no BS. Very interesting angle to investment and exposing so many rotten business people. Great guy, great interview, thoroughly enjoyed it! Keep it coming Real Vision Finance!

  11. Hahaha, what a lame attempt to slam Canada. They are simply not a bunch of Capitalist pigs Carson. And of course the US is soooo upstanding…bahahahaha.

  12. Investors (American) in China are “naive”.
    What were these naive investors doing in business in China and trusting them blindly?
    You have to be pretty greedy to be that “naive”.

  13. There are far bigger problems in Canada. Prime Minister Trudeau unjustly interfered with the Attorney General in order to make her relent on criminal cases against SNC Lavalin. He was found in breach of ethics and also guilty of gaining financially from conflicts of interest. His defence — he was saving a Quebec Company and preventing companies from any other province from picking up jobs from a Quebec government. He then fired the Attorney General (from British Columbia) and her parliamentary backer (from Ontario) and put a Quebec man in place of the "foreign" women.
    Polls are showing a tight race. If Trudeau and the Liberals get in again you will see corruption like never before!

  14. I love people that are honest something we have lost as a society, most u.s Corporations are cooking their books and the way I see it the rest of the world is the same

  15. Thank You, Carson Block! I've always felt investing into a Chinese owned company was a house of cards. You brought more light to the subject. Yet, there are still many individuals< ETF's and so forth that continue buying shares of these companies. Are we really that stupid….sadly yes.

  16. I haven't heard of him, Mr. Carson Block, so far, but from this interview I felt great interest about him. 👍 Let me check.

  17. Billionaires loves doing business in Hong Kong because it's a great asylum for Criminals. Even in US, all they have to do is pay some bribe money which is legal under the Lobbying.

  18. Short all vaccines makers. Thank me in 5 years. Already started turning, Merck currently in lawsuit in the US. The tip of the iceberg. Vaccines are the keystone of the pharma model and all sorts of diseases enabled by weakened immune systems (and bad lifestyle obviously…)

  19. I wish more people would follow Carson's idea that investors shouldn't be enabling immoral, evil companies that exist only to take advantage of and harm customers.

  20. Americans have destroyed dozens of countries just think of how they robbed irak. Americans have no right to judge whatsoever.

  21. Having lived and worked in CN for ~15 years, I concur with Carson on the often fraudulent business dealings. On the other side of the coin, I have some faith in Xi Jinping to slowly get to grips with this attitude by CN business people.

  22. I agree with this guy on his activist shorting of immoral companies in relation to opioids. The Left, however, do this and its becoming henious bullying of any company who doesn't agree with their social agenda. There has to be a limit somewhere

  23. In general investors trust publicly listed companies way too much, including in the US. How soon we forgot about Enron etc. Next sounds like it might be GE to fall.

  24. China has been collecting the worlds wealth 1 dollar at a time for the past 30 years and now all these western henchmen of plutocracy are winging about China after they sold out western manufacturing for short term profits. A government that takes donations from the private sector, has turned out to be worse than communism. Capitalism has evolved a highly developed world, but now it’s gone to far. How much more is there to develop? Money just makes people want more money and it never ends. It’s time the world stopped building and instead start fixing.

  25. What this guy talks about is why American investors should not buy Chinese company ADR shares. They are mirages, not real equity. The CCP would never allow foreigners to have actual stakes in their companies.

  26. The west tend to forget that CCP is totalitarian system…dictate the system to “craft and mask” the truth how they want it….the west may not realise that masking is part of every day life in China

  27. I apologise on behalf of the Chinese, having been brought up under atheistic ideology; and, letting materialism fill the void. Without which, there's no standpoint to say, "don't take that money," if it's just on the road to reaching their goal of having more materialistic wealth.

  28. Look I get it why many people don’t trust the ccp, but this constant hatred of Jack Ma and calling him a fraud sounds like sour grapes. At the end of the day he’s worth 23 billion and you’re not. So give the guy a bit of credit:)

  29. China has deceived, cheated, stolen, and outsmarted America and the world for decades (in many cases criminally). I'm not even talking about this video per se'. But I have only known or understood the depth of this for a couple of years. So many people the world over are totally brainwashed by the CCP and their massive propaganda engine (that we all believed and bought into all this time).

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