Legal Fraud vs. Intellectual Fraud: The Growing Challenges Activist Short Sellers Face

Published on
February 4th, 2021
45 minutes

The Mayor of Miami on Blockchain and Ben Hunt on COVID-19, the Fed, and How “Not To Be The Sucker At The Table”

Legal Fraud vs. Intellectual Fraud: The Growing Challenges Activist Short Sellers Face

Daily Briefing ·
Featuring Carson Block and Ed Harrison

Published on: February 4th, 2021 • Duration: 45 minutes

Carson Block, CIO of Muddy Waters Capital LLC, joins Real Vision managing editor Ed Harrison to discuss the different forms that financial fraud can take in the corporate world, what happened with GameStop last week, and how changing market structure makes activist short selling increasingly more difficult. Block distinguishes between two types of fraud that corporations can commit—legal fraud and intellectual fraud—and explains how insidious and corrosive the latter type is for companies. Harrison and Block then consider why these companies committing intellectual fraud are not being held accountable and how that leads to decaying faith in public institutions. Block also provides his perspective on the short squeeze in GameStop from last week, exploring how initially a smart retail trade morphed into a different sort of animal. He touches on the financial plumbing occurring behind the scenes and whether it truly is efficient or not, and he shares how he sizes positions for shorts, the growing challenges activist short-sellers face, and his experience while investigating American Tower in 2013.



  • BB
    Benjamin B.
    12 February 2021 @ 17:27
    RV should give Carson his own series and title it, 'Real Talk with Carson Block'
  • DL
    Dan L.
    8 February 2021 @ 18:05
    This guy is the best - should have him on every single day...
  • TE
    Tom E.
    8 February 2021 @ 09:13
    That was great. Ed is becoming masterful at interviewing and Carson’s up front no BS delivery is wonderful.
  • CP
    Chamil P.
    7 February 2021 @ 22:36
    Great interview. Not sure about his confidence in the settlement system though. Technology is advanced enough to have real time settlement. That seems extremely important given the proliferation of leverage, derivatives, available info to the little guy vs the big guy etc.
  • DD
    David D.
    7 February 2021 @ 19:06
    I watched this one on my TV. It was really great. Carson is one of the more authentic voices on the street.
  • AW
    Austin W.
    6 February 2021 @ 18:31
    Awesome interview!
  • JJ
    John J.
    6 February 2021 @ 17:29
    Fabulous interview and discussion. I learned a lot and Carson did a great job of explaining a complex issue in terms everyone can understand. Would love to see more interviews like this.
  • GH
    Glen H.
    4 February 2021 @ 23:57
    Question for the crew. I bought Puts on TQQQ last week (2% of my portfolio). Should I... 1) Hold ‘em 2) Wait and sell on market dip 3) Dump now & stop fighting trend 4) If I’m not smart enough to know, then you’re not going to tell me Thanks!
    • CK
      C K.
      5 February 2021 @ 11:27
      It depends on the expiry and strike. I can tell you what I'm thinking if it helps... I don't know your level of experience so apologies if this is all really obvious. I bought March 19 3500 puts on S&P futures (1% of the portfolio) the day the market stopped puking and turned up so I lost about 2/3rds of the premium so far. I still wouldn't sell because I didn't buy mid-March puts with the expectation that a crash was imminent, otherwise I would've have just shorted the futures. That would have so far cost me 3-4x more than my premium and would have certainly hit a stop loss by now. The lower maximum loss of the option gives the thesis more time to play out. Also, I'm prepared to lose the premium. If I had gone short instead, I wouldn't close my position before it hit my stop loss unless there's fundamental change in the market. I know the market has gone up since I bought the option, but so has the USD and yields and that's normally not supportive of equity valuations. If these turn down sharply and S&P continues rising then I might consider closing the position to save any remaining premium. The market has been steadily rising while volatility has been dropping - that's doubly bad for put options. If vol spikes however, option premiums should increase, even if the Nasdaq doesn't significantly drop. We're at ATH territory now, so I wouldn't be surprised if some some people start getting nervous, which might show in the vol. If you did however buy more than one put option and they start rising in value because the market starts trending lower (and/or vol increases), you can start selling on the way down before you reach the strike so long as the options still have some time value left in them, such that you at least monetise some of them before expiry. If for instance you bought 3 x 12500 puts when Nasdaq was trading at 13000 (or whatever the TQQQ equivalent was) you could sell one at 12850 and a second at 12750, or whatever levels make sense based on fundamentals and technicals and let the 3rd run its course. So for me it's a combination of 1) hold 'em for now, 2) start monetising if the market turns / vol goes up, and 4) I'm not smart enough to know.
    • GH
      Glen H.
      5 February 2021 @ 16:33
      @ C.K... really appreciate you taking the time to share your thoughts. That is helpful. I’m not sure if you’ll check back again, but I wanted to follow up. I have 15 Mar 19 contracts at 100 strike for TQQQ and 15 Jun 18 contracts... same strike. Combining your thoughts with mine, I think I’ll start selling off the Mar contracts and hold the Jun ones. This market seems to want to rise in the near term due to upcoming stimulus, short squeeze settling and continued reopening optimism. I think it’s a bit telling that the market went up on a Friday with a crappy jobs report. Thanks again!
    • CK
      C K.
      5 February 2021 @ 20:20
      Sadly, so long as RV doesn't implement notifications for the comments section, we have to keep checking to keep the conversation flowing... I would agree (but would also welcome a confirmation from others / any option experts) that you don't need both March and June contracts (unless you were trading calendar spreads but I think that would be long short). Given that the market is going up, I would also keep June if I were in your position and sell March. If the market does drop sharply in March, the June contracts should also increase in value. Best of luck!
  • KD
    Kelley D.
    5 February 2021 @ 12:42
    I realize RV has a huge macro crowd, but I personally find the most value in guest's like Carson, who dig deep into the weeds on individual securities...
  • PB
    Patrick B.
    5 February 2021 @ 11:50
    Interesting to hear Carson's work on AMT. Had no idea there were historic allegations. It's certainly well-loved these days
  • CK
    C K.
    5 February 2021 @ 10:14
    Great interview (although it should've been a standalone one rather than an RVDB). A couple of questions / observations: 1) Given that the increased vol and settlement risk in GME caused a dislocation in the system, why didn't NYSE halt trading for a few hours / days? Wouldn't a centralised halt be fairer for all participants on both sides of the order book? Disabling buy orders on some platforms benefits the sellers as it shifts the distribution of possible outcomes the downside and turns most buyers into forced sellers. It then possibly benefits institutional buyers who can go long in anticipation of retail platforms re-enabling buy orders. All in all, retail gets screwed. 2) I share Carson's frustration with passive, which is rendering good fundamental analysis obsolete. It was a good vehicle for cheaply following the active market, but it's now become the tail that wags the dog. However, passive vehicles are dumb and aren't going anywhere, so there's no point wasting energy on them. It's the index providers' methodology that needs to be reviewed. The measures that determine investability (free float, size, liquidity) are no longer adequate on their own and the methodologies need expanding to reflect the increased power that indices have over the markets. Buying any liquid crap with sufficient free float doesn't cut it anymore.
  • CA
    Chris A.
    5 February 2021 @ 01:48
    So you are no longer doing actual daily briefings. This is just a short interview. I miss the market wrap segment.
    • PB
      Patrick B.
      5 February 2021 @ 10:13
      Can't you get that from BBG?
  • EG
    Ed G.
    5 February 2021 @ 06:14
    This was great. Bonus points if RV can get Michael Burry on in the near future.
  • DG
    David G.
    5 February 2021 @ 06:07
    it was refreshing to hear some well placed, well used F-Bombs. This market is too crazy keep them in the bay.
  • NI
    Nate I.
    5 February 2021 @ 05:22
    Best RV piece so far on the Robinhood/GME fiasco. If DTCC demanded astronomical amounts of collateral, that would explain why even brokers like Interactive restricted GME. However, it doesn't explain why DTCC did this. Are the brokers not sufficient audited and regulated such that they can be trusted to have the money to pay for the trades they place? If DTCC doesn't trust the brokers, why should we as their customers trust them? I think there is still more to know about what happened. I hope Ed & Ash will have the tenacity of a Rottweiler with steak bone to find out what really went on and why DTCC essentially panicked.
  • KL
    Kevin L.
    5 February 2021 @ 05:05
    I love this guy, even if he is in an orange hoody........
  • PL
    Paul L.
    5 February 2021 @ 04:24
    Fascinating... please invite Carson back.
  • DS
    David S.
    5 February 2021 @ 04:14
    A proper DB,,,,finally
  • JA
    John A.
    5 February 2021 @ 04:08
    "The system works" Well, - DTCC couldn't manage the risk, so they jacked up the margin. - Brokers couldn't manage the risk, and instead of jacking up the margin on retail they just stopped allowing trading to the buy-side while allowing the sell-side to escape their self-designed noose. - Short sellers were sitting in naked short positions with failure to delivers all over the place, again allowed by the same clearing corporations which is illegal. - This at one point was looking like a systemic risk liquidity event if the DTCC didn't put a stop to it. So, what the fuck worked exactly? Come on man, I don't have an ax to grind specifically with you and I actually like the work you put out, but the manipulation in the system is why the trade got out of hand in the first place. If the system was working, we wouldn't be talking about this bullshit. GME should never have been trading where it was, the short float should have never been above 100%, and retail should have been forced to post collateral instead of not being given the choice to continue to trade. There was plenty of failures to go around here without even looking to blame or lynch anyone.
  • IM
    Indranath M.
    5 February 2021 @ 03:54
    Interview with Carson was great. Where is the briefing on day's happenings?
  • SS
    Sanu S.
    5 February 2021 @ 03:16
    Game stop is not even a major aspect in the market anymore. By the way wall street bets is not the same group anymore it is not correct to consider them as the same actors in your conversations. All the major millennial investors are not using the group for any meaningful conversation.
  • JC
    John C.
    5 February 2021 @ 03:05
    Awesome session. It is hard to come off that smart in a hoodie but Carson did it. Very informative.
  • CL
    Chuck L.
    5 February 2021 @ 02:55
    The King. Carson should be president of Earth.
  • ZM
    Zane M.
    5 February 2021 @ 02:43
    Superb coverage!!!
  • MH
    Michael H.
    5 February 2021 @ 02:42
    What a treat. I first came across Carson's work with SinoForest. I was covering the biggest West Coast Fund complex when I saw the Muddy Water report of SinoForest. I called up the lead analyst and I heard "We spoke to the mgmt. and we are comfortable" The same guys that were lying through their teeth. Needless to say, they lost hundreds of millions of dollars of shareholder's money. This was a company that prides itself on having analysts on the ground doing in-depth due diligence...Blah, Blah, Blah... The analyst didn't even get fired. Good times.
  • BC
    Bill C.
    5 February 2021 @ 02:38
    If after the 2008-9 debacle there were private sector banking officials, and just bank employees, prosecuted federal regulators and even politicians would have had to be prosecuted, too. The political system was part-and-parcel of the that society wide Ponzi. Keep in mind, too, lying on a mortgage loan application is a federal crime. How many individuals, many of whom ended up listed in the the "victims" column, could or should have been prosecuted? Just as an example, the stripper in "The Big Short" who had mortgages on 4-5 houses. Should the likes of her be prosecuted? Or the regular guy that had lied on his mortgage application?
  • WC
    WAI C.
    5 February 2021 @ 02:35
    Great interview, valuable insight from an experienced practitioner.
  • SB
    Samuel B.
    5 February 2021 @ 02:21
    I can listen to Carson for hours.
  • TW
    Todd W.
    5 February 2021 @ 02:21
    I work in telecom. I will confirm that what he is describing is industry wide. I know that Crown Castle over charges the big wireline providers then just pay off executives to look the other way. These wireline companies funnel significantly more of their revenue through 3rd parties for backroom deals than anyone would believe. IT Vendors / Consultants are actually a scam as well. They sell every provider and move your business to who ever pays them the most. I've seen people paying 4k for one office with 5 people for 10 years because their IT vendor made month checks from TPX. This applies to software, managed services, data, voice everything.Be safe out there. Theres no way to see who is paying who for SAAS etc
  • MR
    Michael R.
    5 February 2021 @ 02:18
    The FED does not require truth to control where their printed money ends up. They cannot.
  • MC
    Mark C.
    5 February 2021 @ 01:57
    Very interesting insights. Thanks. Great interview
  • DC
    Dominic C.
    5 February 2021 @ 01:56
    I don't look at short seller for inspiration
  • DS
    David S.
    5 February 2021 @ 01:36
    I think corporations follow what other's do because they will probably get away with it also. It is the new normal, what I get away with is legal. DLS
  • AW
    Abhijit W.
    5 February 2021 @ 01:21
    Short sellers always sound angry
  • SS
    Scott S.
    5 February 2021 @ 00:52 clear frauds like NKLA are being held up by passive funds like Vanguard, Fidelity, and Blackrock. Now it makes sense to me. The current market is clearly dysfunctional.
  • BK
    Brian K.
    5 February 2021 @ 00:41
    Need to watch it again. Looking forward to the close caption version. Very inciteful.
  • PV
    Paul V.
    5 February 2021 @ 00:37
    Really enjoyed this interview. I'm a big fan of Carson and what he does. He does valuable work and may he continue to be allowed to do so and thrive.
  • OA
    Oliver A.
    5 February 2021 @ 00:35
    One thing Ed said that I love: we’re taking away the complexity of reporting on issues at a time when thing have never been MORE complicated.
  • AK
    Andrew K.
    5 February 2021 @ 00:35
    Jeez, this guy was thoroughly unimpressive. 1) AMT turned out to be a real compounder... 2) Carson "feels like he wins" most of the time...what are his returns?
  • RT
    Richard T.
    5 February 2021 @ 00:25
    Carson is a delight.
  • BK
    Binyam K.
    5 February 2021 @ 00:15
    great discussion but the system does not work! Decentralized market is the ultimate solution.
  • MD
    Matt D.
    5 February 2021 @ 00:13
    Great interview Ed - thanks Carson. Sounds like you aren't a fan of bio-tech. Ha.
  • RM
    Russell M.
    5 February 2021 @ 00:02
    Very interesting. My experience as a retail investor with short sellers was with the type that pay bashers to spread false information to create FUD among retail investors to drive the stock down. However, it was an OTCBB biotech stock with few institutional investors and was vulnerable despite having a killer product in development with great scientific trial results.
  • NL
    Nikola L.
    4 February 2021 @ 23:44
    great brief. thank you both.