On the evening of December 16th, a short report against KE Holdings Inc. brought the muddy waters that had been silent for a period of time back to public view.

Since Muddy Waters was founded in 2010, half of the "hunted" companies are Chinese-listed stocks. Over the past 11 years, muddy waters have stirred the capital market many times, and there have been numerous cases of shorting, including the fame of Oriental Paper in the first World War, the embarrassing moment of Spreadtrum Communications and NetQin, and the "sealing God" of Huishan Dairy. There are also fruitless returns to TAL Education Group, Anta, iQIYI, Inc. and other companies.

Companies targeted by muddy waters are inevitably frightened and worried, but it is not the end of the world. According to the time Weekly reporter combed, muddy waters in recent years, "rollover" cases are increasing, the frequency is much more than in the early days.

"spoiler" muddy waters, is it an angel or a devil?

"intruder" Bullock

Carlson Bullock, founder of Muddy Waters, is a ruthless role that Chinese shareholders have heard of, but the starting point of his career is not the capital market.

Carlson Bullock is a real China hand. After graduating from Kent University Law School in Chicago in 2005, he has been panning for gold in China for a long time and can speak some Chinese. Carlson Bullock had a lot of work experience in his early years, first as a lawyer in Shanghai and later as a self-help repository company. In addition, he also does research for fathers and hedge funds in the investment brokerage business.

Carlson Bullock's early career experience was mediocre and unsuccessful. In 2010, when his career was difficult to take a turn for the better, he founded a company named after the Chinese idiom "fishing in troubled waters" to become a hit in the air.

His establishment of muddy waters is full of coincidences. Occasionally, someone found his father and recommended Oriental Paper. His father asked Bullock, who is familiar with China, to investigate the company to decide whether to invest. The first "prey" of muddy waters appears in the error of yin and yang in this way.

Carlson Bullock, a lawyer, is rigorous in his work. In order to investigate Oriental Paper, he set up a special investigation team with diverse backgrounds, covering people with legal, financial and manufacturing backgrounds. The results of the survey surprised Bullock, and under all circumstances, Oriental Paper is not worth investing at all.

Carlson Bullock magnified the results of the survey to the extreme. He founded Muddy Waters on June 28, 2010, and released a 39-page short report by Oriental Paper on the same day. Oriental Paper became a "sacrifice" to Muddy Waters' fame, with its shares plunging 50 per cent in the week of the report. Carson Bullock and Muddy Waters became famous in the first World War.

The second prey appears more randomly. In August 2010, an article in Barron Weekly mentioned that Rino had replaced three auditors and four CFO in the past four years. Generally speaking, frequent changes of auditors are often a sign of financial fraud. On November 10, 2010, Muddy Waters hit hard, and Rino's share price halved in six trading days, a classic battle that established Muddy Waters as the king of shorting Chinese stocks.

Since then, Carlson Bullock has repeatedly succeeded with the help of God. On February 3, 2011, Muddy Waters released an investigation report on China Express Channel, causing its share price to plunge 33% on the day.

Intriguingly, Carlson Bullock picked China Express Channel in the first place only because the company's audit firm was Deloitte.

The "three battles" of muddy waters

In the past 11 years since its establishment, Muddy Waters has frequently attacked Chinese stocks. By far, the three most influential shorts have been Rino, 06863.HK (delisted) and LUCKN COFFEE DRC.

The Battle of Oriental Paper made muddy waters a hit, but the allegations of shorting the report did not materialize. After reviewing, some industry insiders believe that Carlson Bullock's "China hand" identity makes investors naturally believe in the authenticity of the report, superimposing the response mistakes of the companies concerned, and thus achieving muddy waters.

Rino Technology is Muddy Waters' first big victory. The clue came from Barron Weekly, but it was muddy water that dealt the fatal blow. Muddy Waters issued a report questioning Rino's falsification of customer relationships, exaggeration of revenue and misappropriation of funds raised by the listing. Eight days after the release of the report, Rino was suspended and delisted on the 23rd day after the release of the report.

Although it is for profit, the report of Muddy Waters objectively cracked down on the fraud of listed companies and won a lot of good reputation in the market. Rino, on the other hand, has made little resistance except for a few accusations of falsification of the report.

The early short sellers of Muddy Waters were mostly US-listed Chinese stocks. In 2014, Muddy Waters set its sights on the Hong Kong Stock Exchange, shorting 01228.HK, but did not make as many waves as before. After two years of silence, Muddy Waters once again shorted Huishan Dairy, which is listed in Hong Kong, and once again won the attention of the capital market.

On December 16 and December 19, 2016, Muddy Waters issued two short-selling reports against Huishan Dairy. After the launch of the report, Huishan Dairy's stock price reaction was lukewarm. However, three months later, it was revealed that Huishan Dairy's major shareholders had misappropriated funds to invest in real estate, which could not be recovered, involving as many as 23 creditor banks, and the share price fell off a cliff, plunging 91% at one point.

Since then, members of Huishan Dairy's board of directors have left, the concerted actors have disappeared, the bank has recovered debts, the Hong Kong Stock Exchange has ordered a suspension of trading, and finally entered a temporary liquidation, and two important subsidiaries have also been filed for bankruptcy by debtors. Huishan Dairy was disqualified from listing after a long-term suspension, and Muddy Waters was once again "sealed".

The last sensational short selling by Muddy Waters was against LUCKN COFFEE DRC, who is known as "Starbucks Corp of China". On January 31, 2020, Muddy Waters released an anonymous report confirming that LUCKN COFFEE DRC was a company that went bankrupt.

Compared with the previous two classic cases, LUCKN COFFEE DRC, as a short seller, is obviously bigger and produces a greater impact. However, the relationship between LUCKN COFFEE DRC's awkward situation and muddy waters shorting is still talked about with relish. Some people believe that LUCKN COFFEE DRC only plummeted on April 2, directly because he self-reported that he had 2.2 billion false income. In addition, Muddy Waters claimed that the report was sent by an anonymous person through Twitter, not its website, and that the truth of the "intellectual property" report was unknown.

Those who were mistakenly killed

Short sellers are often called vultures overseas. Vultures eat carrion for a living. Muddy water is famous for exposing the fraud of listed companies, and there are many successful cases, but this does not mean that it has never made mistakes or omissions. Muddy water has shorted many Chinese stocks, and not a few of them have been mistakenly killed.

As the first short target of Muddy Waters, Oriental Paper ended badly. Similar to TRE.US (delisted), it has paid a huge price after being questioned by Muddy Waters, but it has not been proved to be fraudulent, which has also caused a lot of controversy.

As a matter of fact, many enterprises have finally proved their innocence.

On June 28, 2011, Muddy Waters shorted Spreadtrum Communications (SPRD.US, acquired) and questioned 15 issues, including the company's sales. After the short news, Spreadtrum's share price fell by more than 30% on the day.

Spreadtrum immediately fought back and won support from Samsung and Needham, a US investment bank. Two days after the report was released, the founder of Muddy Waters admitted to misreading Spreadtrum's financial report. The case of Spreadtrum Communications has made a demonstration for the group of Chinese stocks, breaking the myth of short selling in muddy waters.

NQ.US (delisted) is also an extreme case. On October 24, 2013, as soon as the muddy water company shorted NetQin's report, NetQin's market value halved within an hour.

Muddy Waters has been severely accused of fraud in its market share, product safety, balance sheet, acquisition business, and so on. A week later, in the early morning of October 30, NetQin released a 97-page clarification report, responding to the command of Muddy Waters one by one.

In June 2014, the independent investigation report of the Independent Special Commission was officially released and found no evidence that NetQin had engaged in the alleged fraud in muddy waters.

The logic of shorting is indefensible and does not equate with failure of shorting. For short sellers, share price volatility is a profitable opportunity. For the "prey" that has been shorted, even if there is no flaw in itself, the short report triggers a fall in share prices, which is still unbearable for listed companies.

On November 21, 2011, Muddy Waters shorted focus Media (FMCN.US, back to A), and the two sides confronted each other five times. Focus Media's share price rebounded gradually from the highest decline of 39.49% in a single day of short selling. However, focus, which repelled muddy waters, announced the completion of privatization in May 2012 and stopped trading on the Nasdaq market.

In addition to the above-mentioned Chinese stocks, New Oriental Education & Technology Group (EDU.US), TAL Education Group (TAL.US), ANTA Sports Products (02020.HK), iQIYI, Inc. (IQ.US), GSX.US (GSX.US) and YY (JOYY Inc era, YY.US) have all been attacked by muddy waters, but Muddy Waters did not win.

The "routine" of muddy water

Carlson Bullock understands the current business situation of Chinese enterprises and has a deep understanding of the US securities market.

Muddy Waters Research labels itself in great detail. It has claimed on its website that the company's focus is on finding the "true value" of Chinese companies through research, and that Carlson Bullock, who has legal and working experience in Chinese companies, wants to reveal "exactly how to do business in China".

Although Muddy Waters has not seriously served as a seller's research institution, its reports tend to be more eye-catching. The types of muddy water research reports can be divided into three types: commercial fraud, financial fraud and negative corporate fundamentals.

The Muddy Waters report has always been clear-cut and unfrightening, but all its skills are not limited to making amazing words. Muddy Waters's first report was powerful, showing on-the-spot pictures in addition to the data, such as Oriental Paper's antiquated production line, smoke-filled workshops and raw materials like garbage dumps. This tradition continues into the recent short-selling report.

Muddy Waters tends to "judge" a company at the beginning of a report. So much so that some management practitioners once laughed that Carlson Bullock was the Mimon of the capital market.

The research of muddy water has also been affirmed by many professionals. In 2012, Caixin Weekly summarized the research methods of Muddy Waters as follows: access to data, survey related parties, company field research, survey suppliers, research customers, listen to competitors, and consult industry experts.

When LUCKN COFFEE DRC's short-selling report was released, a senior executive of an asset management agency in Shanghai said that researchers should take a good look at the report, which is a textbook sample of grass-roots research.

Judging from the K-line of Muddy Waters shorting companies, the release of Muddy Waters report is just a signal, often attracting several times the usual amount of money to sell stocks.

But it is clear that this has nothing to do with whether the conclusion is correct.