Greenberg: Was Research Firm Hoodwinked?

When it’s too good to be true, and too easy, maybe it is for a reason.

Wednesday a research firm called Muddy Waters Research, which specializes in Chinese stocks, issued a report that claimed “irrefutable evidence of fraud” at Chinese MediaExpress—a Chinese company that claims to put advertising on inter-city buses in China.

Key proof, according to Muddy Waters: The recording of a phone call between a ChinaMediaExpress sales rep and a Muddy Waters analysts pretending to be a potential customer. Muddy Waters put together a slide show of the call, with English translations.

It’s remarkable stuff, if it’s true. And I stress the word, “if.”

Here’s the chronology, according to Muddy Waters:

On January 11 an analyst from Muddy Waters, claiming to be from a small company, called the company’s headquarters asking to speak to the sales department.

On February 3 Muddy Waters initiated coverage on the company with a “strong sell.” The report included a copy of a sales presentation Muddy Waters—acting as a customer—had received from the company.

Within days the company fired back, refuting the claims of Muddy Waters and another research firm, Citron Research.

Now for why I question if it was hoodwinked:

On February 23, Muddy Waters says it sent a detailed letter to various partners at Deloitte, the company’s auditor, “supporting our allegations of fraud.”

Then—and this is where it starts sounding weird to me—six hours later, according to Muddy Waters, its analyst received a call from the sales rep at China MediaExpress wondering if the analyst knew who had “disseminated the sales information.”

The analyst, first caught off guard, then went on to record the call, which included the kind of claims that should startle any investor.

Call me skeptical (even cynical), but if you didn’t know better, you the company was just waiting for the opportune time to strike back with a reverse-sting of sorts. (I can just see the sales rep surrounded by company officials as she made the call.)

Was Muddy Waters hoodwinked? I’ve asked via the contact form on their website and haven’t heard back. Haven’t heard back from China MediaExpress, either.

My take: Even if it was somehow set up, Muddy Waters may very well be right about China MediaExpress—as right as it was with serious allegations about Rino International, a China stock that has been delisted by Nasdaq.

But also know this: If you are in the business of raising red flags, companies may pull out all stops in an effort to ruin your credibility. To think that China MediaExpress didn’t hire detectives to know everything possible about Muddy Waters, including possibly wiretapping and other tactics, is foolhardy. (At least one company went so far, a few years ago, as to steal my phone records!)

You can never be too sure.

In response to my comments, Carson Block, who runs Muddy Waters, said: "Having done (an unrelated) business in China where we routinely encountered 'spies' looking to learn about our business model, I'm quite familiar with disseminating misinformation. We did so when speaking with persons who did not appear to be bona fide customers. That doesn't mean that we (MW) can't be tricked, but we generally corroborate our information before going on the line."

*This post has been updated.

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