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In Singapore, Muddy Waters takes on bigger fish

Carson Block is going after bigger game. The short-selling investor has established a track record in recent years exposing fraud at Chinese companies through his research firm, Muddy Waters. So his decision to raise doubts about commodity trader Olam's accounts will make investors sit up. But the Singapore-based company is a much larger target. Both sides have much to lose.

Mr. Block publicly questioned Olam's accounting at a conference in London, though Muddy Waters has not yet published a detailed research report. That makes it hard for investors to judge whether he has uncovered new information – and harder for Olam to respond. Even so, Mr. Block's attention was sufficient to send Olam's U.S.-listed shares tumbling overnight, and for its shares to be suspended in Singapore.

Mr. Block made his name exposing dodgy accounting and potential fraud at Chinese companies while shorting the companies' shares. Last year, he bagged his biggest target when a report on Sino-Forest prompted the Chinese forestry group's near-collapse. But his aim has not been entirely true. Shares in Focus Media, a Chinese operator of electronic billboards, fell sharply after Muddy Waters questioned its disclosure and transactions. However, they recovered when the company's founder launched a bid backed by Carlyle, the private equity group. If the deal goes ahead, it will take the sting out of Mr. Block's analysis.

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Olam, meanwhile, is in a different league. With a market capitalisation of around $3.5-billion, it is bigger than the typical Muddy Waters target. It has been listed on the Singapore exchange for seven years. Temasek, the Singaporean sovereign wealth fund, has a 16 per cent stake.

Mr. Block is not the first to raise questions: in February, 2011, a CLSA analyst issued a "sell" note that pointed to the Olam's dependence on Nigerian export incentives and differences between its audited and unaudited accounts. Though Olam refuted the claims, its shares have never fully recovered. The experience has doubtless made Olam all the more determined to defend itself. Mr. Block, who was quoted as saying that the company will fail, needs to be proven right in order for investors to continue to take his research seriously. Only one reputation can emerge from this fight intact.

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