The War Over Chinese Stocks in North America

Chinese stocks trading in the U.S. and Canada have become a prime target for short sellers who sniff out suspicious financial statements--and hope to profit from declines in the companies' stock prices. Investors including John Paulson and Hank Greenberg have lost money on Chinese stocks that fell after questions were raised about them.

Carson C. Block, 35, who says he passed his broker's exam when he was 19 and moved to Shanghai after graduating from the University of Southern California in 1998, founded Muddy Waters Research to scrutinize Chinese companies. He made a splash with a Feb. 3 report claiming that China MediaExpress Holdings (CCME), a Hong Kong-based provider of advertising on buses in China, manipulated financial statements. The company denies the allegations. C.V. Starr, run by former AIG (AIG) Chairman Greenberg, owned 8 percent of China MediaExpress shares, which slid 88 percent from Feb. 2 through June 14 and have been delisted from Nasdaq (NDAQ). C.V. Starr did not respond to requests for comment. Sino-Forest, an operator of timber plantations, plunged 71 percent after Muddy Waters called the company a "Ponzi scheme" in a June 2 report and said it was betting against the shares, which trade in Toronto. Hedge fund Paulson & Co. owns about 24.4 million Sino-Forest shares, according to Bloomberg calculations based on information from a June 3 Paulson investor letter and a person familiar with the fund. That means Paulson may have lost about $300 million on Sino-Forest from June 1, the day before the Muddy Waters report was released, to June 14. In the letter, Paulson & Co., which made $15 billion in 2007 betting against subprime mortgages, said it was investigating the charges.