Olam Sues Muddy Waters, Block After Accounting Questions

Muddy Waters Research Director Carson Block
A war of words between Olam and Block began when the Muddy Waters’s research director Carson Block accused the Singapore-based company of booking profits on transactions before it’s clear how they would work out over time. Photographer: David Paul Morris/Bloomberg

Olam International Ltd., the world’s second-largest rice trader, sued investment firm Muddy Waters LLC and its founder Carson Block for defamation after they questioned the commodity supplier’s accounting methods.

Block’s comments in London at a hedge fund conference on Nov. 19 were malicious falsehoods, Olam said in a lawsuit filed in the Singapore High Court yesterday. The company sought unspecified damages, costs, and an injunction against republication of the comments.

A war of words between Olam and Block began when the Muddy Waters research director accused the Singapore-based company of booking profits on transactions before it’s clear how they would work out over time. Olam Chief Executive Officer Sunny Verghese said on Nov. 20 the statements were designed to panic shareholders of the company, which is also one of the top three coffee traders globally.

“Whatever that has happened, it had some serious impact on Olam, its share price, and investors,” Leng Seng Choon, an analyst at DMG & Partners Securities in Singapore, said by phone.

Muddy Waters doesn’t yet have a copy of the complaint, Zach Kouwe, an external spokesman, said by phone today. Olam’s spokesman Aditya Renjen declined yesterday to comment on the size of the damages sought.

“The happenings over the past few days in terms of the media reports, as well as the statements made, give us, based on the legal advice we’ve received, a claim for filing against Muddy Waters and Carson Block,” Renjen said yesterday in a phone interview, after Olam announced the suit in a regulatory filing. “We’ve proceeded with that.” The suit was filed in Singapore because Olam shares are listed there, he said.

Share Reaction

The shares dropped 0.6 percent to S$1.685 at the close of trade in Singapore, while the benchmark Straits Times Index advanced 0.9 percent. The stock is down 3.2 percent since Block’s initial comments on Nov. 19. The lawsuit was announced yesterday after the market closed.

Olam, whose second-biggest shareholder is Singapore’s state-investment company Temasek Holdings Pte, according to data compiled by Bloomberg, said the company was the victim of a concerted short-selling attack.

“We’ve been told several hedge funds had gone and talked to our key investors about why they feel uncomfortable about the company,” Verghese said Nov. 20 on a conference call. Block “is not acting alone” and the company believes he visited Olam’s Singapore office on Nov. 1 in disguise, Verghese said. “We had to extract his credentials after much frustration. He gave us a false name.”

Successful Bets

Short-selling in Olam reached a record on Nov. 15 before Block made his initial comments at the London conference. Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before filing for bankruptcy protection in March.

The company has increased its debt load by about S$900 million ($735 million) since February 2011, Muddy Waters said in an open letter posted on its website to Olam before the start of legal action yesterday. It has also increased its cumulative investment cash burn by about S$2 billion and cumulative operating cash burn by about S$500 million, according to Muddy Waters.

“Olam’s disproportionate reaction is extraordinary in our experience,” Muddy Waters said in the letter. “Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege.”

Exhaustive Research

Muddy Waters research into Olam has been “exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us,” according to the letter. The investment firm has yet to publish a report.

Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.

Shanghai-based Focus Media’s American depositary receipts have gained 25 percent in New York trading this year, notwithstanding Block’s allegations. The company is now the subject of a $3.5 billion buyout offer by a group of private equity firms including Carlyle Group LP. The deal, if completed, would be China’s largest leveraged buyout.

Accounting Concerns

This isn’t the first time concerns over Olam’s accounting have been raised. CLSA Asia Pacific Markets queried the commodity supplier’s accounting and its subsidies from Nigeria in a February 2011 report, prompting a 9.3 percent slump in its shares. Olam dismissed the brokerage report and denied the discrepancies raised.

The supplier of 21 goods from cocoa to rubber said its finances have been audited by Ernst & Young LLP and are in compliance with the Companies Act and Singapore Financial Reporting Standards.

Olam is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, Block told the Ira Sohn Investment Conference in London.

Olam will fail and recoveries for investors will be “negligible,” Block said.

Short Position

Block profited from taking a short position in Hong Kong-and Mississauga, Ontario-based Sino-Forest by borrowing and selling the stock, then repaying the borrowed shares at a lower price. The timber company plunged in Toronto trading before being suspended in August last year after Muddy Waters accused it of fraud in a June 2011 report.

Sino-Forest said in March it filed a suit in the Ontario Superior Court against Muddy Waters, Block and others relating to the allegations, which it says were defamatory. The company said at that time it’s seeking damages and the recovery of profits made by the named defendants.

Block said at the time that the lawsuit filed by Sino-Forest is “entirely without merit” and that he stands behind the Muddy Waters report.

The case is Olam International Ltd. v Muddy Waters LLC, Carson Block. S987/2012. Singapore High Court.

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