Olam International Ltd., whose accounting methods were questioned by Muddy Waters LLC founder Carson Block, said it has enough liquidity to withstand “stress” and its auditor stands by its opinion on the company’s accounts.
Olam, the world’s second-largest rice trader, “is in a sound financial position,” the Singapore-based commodities trader said today in a statement. “The company has sufficient liquidity in place to meet its financial obligations and those that might arise from stress in the capital markets.”
Olam also said its auditors, Ernst & Young LLP, affirmed in a letter to the company’s board that its financial statements were prepared in accordance with Singapore’s reporting standards. The Ernst & Young letter was issued yesterday, according to a copy of the letter seen by Bloomberg News.
“We stand by our audit opinions on the consolidated financial statements of Olam,” Ernst & Young said in the letter.
A war of words between Olam and Muddy Waters began after Block questioned Olam’s finances at a hedge fund conference in London on Nov. 19. Olam filed a lawsuit in Singapore High Court on Nov. 21 and is seeking unspecified damages, costs and an injunction against republication of Block’s comments.
“It was appropriate for them to file the lawsuit as soon as possible,” Tito Isaac, managing partner of law firm Tito Isaac & Co LLP, said in an interview with Bloomberg Television in Singapore. “The allegations were flying very fast and furious.”
Block, Muddy Waters’ research director, accused Olam 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 that Block’s statements were intended to panic shareholders of the company, which is a supplier of 20 commodities from cocoa to rubber.
Olam shares dropped 1.8 percent to S$1.665 as of 9:45 a.m. in Singapore, while the benchmark Straits Times Index was unchanged. The stock slumped 7.5 percent on Nov. 20, the day after Block spoke in London.
Block 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 eventually filing for bankruptcy protection in March.
“In the two and one-half years Muddy Waters LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours -- not even from Sino-Forest,” Muddy Waters said in an open letter to Verghese and Olam’s directors posted on its website before the start of legal action.
Muddy Waters has also targeted companies including New Oriental Education & Technology Group Inc., Fushi Copperweld Inc., and Focus Media Holding Ltd. Beijing-based Fushi Copperweld, a maker of copper-clad metal wire accused of fraud by Block in April, has gained 23 percent in New York trading this year after China Development Bank Corp. offered funding for the company to buy back its shares from the public.
Shanghai-based Focus Media, the Chinese advertising company which Block claims overstated its network, posted a 25 percent gain in its American depositary receipts this year, notwithstanding the 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.
“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.”
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.
Olam, one of the top six cotton traders, is “heavily indebted,” Block said at the conference in London.
The company has emphasized before that its strategy “would involve significant upfront fixed capital investments in projects with longer gestation periods than those of the past” as well as working capital in the short term, Olam said today in the statement.
Olam plans to achieve $1 billion of annual profit after tax by 2016. Its total debt outstanding is $5.7 billion and the company has announced at least 20 acquisitions totaling $920 million in the past two years, according to data compiled by Bloomberg.
The case is Olam International Ltd. v Muddy Waters LLC, Carson Block. S987/2012. Singapore High Court.