Charles F Knight (left), chairman and chief executive officer of Emmerson Electric Co., shows Home Depot Chairman Bernie Marcus one of the new power tools being developed for sale in The Home Depot stores. Emerson Electric Co. and The Home Depot today celebrated a new partnership that will result in a full line of RIDGID power tools being available to professionals, do-it-yourselfers and woodworking enthusiasts. ‘This partnership benefits everyone,’ said Bernard Marcus, chairman of The Home Depot. ‘Emmerson gets a distribution channel for its tools through the world’s leading home-improvment retailer and our customers get a new line of high-quality power tools.’ (PR NewsFoto)
PR NewsFoto/HOME DEPOT
Carson Block, CEO of Muddy Waters Capital, is an activist short seller with a laundry list of corporate takedowns. Now he’s in federal court in Austin being called part of a scheme.
Courtesy Muddy Waters Capital
Your power tools want vengeance.
Techtronic Industries Co. Ltd., the Hong Kong-based manufacturer of Ryobi, RIDGID and Milwaukee brand tools, has launched a multilawsuit campaign against short-selling critics it says libeled it and cost it billions in stock value.
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In Austin, its target is Carson Block, an outspoken and often profane activist short seller, and his company Muddy Waters Capital, which manages more than $500 million in assets.
The power tool purveyor said Muddy Waters orchestrated a scheme in 2023 with another short-selling researcher to drive down the price of the company’s stock, reaping millions in profits at its expense.
Short sellers profit by betting that a company’s stock price will drop.
Muddy Waters has called the work it does rooting out corporate fraud valuable and says its research has been cited by courts and regulators.
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The case, which was back in court Wednesday over questions of conflicts of interest for Techtronic’s attorneys, could test the limits of free speech and profit-driven corporate investigations.
What is Muddy Waters?
Muddy Waters designated Austin as its primary office in 2021 after operating in cities including San Francisco.
It and other activist short sellers seek out companies they say are overvalued, take out bets against them in so-called short positions, publish their research showing the companies’ alleged faults — then collect on the short positions as stock values fall.
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For Muddy Waters — and short sellers in general — a lawsuit from an angry target company is part of the cost of doing business. It has been sued numerous times.
Block and other short sellers argue they are the good guys, privately doing what public regulators aren’t and that they are, in some respects, fraud-busting vigilantes.
His company has taken on Chinese TV manufacturers, French retailers and United Arab Emirates-based health care companies, at times accusing them of fraudulently manipulating balance sheets. Delistings from stock exchanges, bankruptcy and collapse have followed some of its reports.
The reputation of the short-selling industry has been increasingly scrutinized by regulators, derided by corporate titans like Tesla Inc. and SpaceX CEO Elon Musk and vilified in popular media through movies like “Dumb Money” — a film about the battle over GameStop stock that depicts short sellers as bullies trying to kill a viable business.
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Block was the subject of a Justice Department investigation into market manipulation that began in 2021. No charges were filed against him and the investigation has reportedly closed. Other short sellers have not fared as well.
Whether he is speaking on his podcast, YouTube channel or commenting to Bloomberg, the 49-year-old Block has a large megaphone to push out his opinions and research, one that has vexed companies in the past.
The company also contracts with other short sellers who it says produce independent research Muddy Waters can use to sell short and push to its audiences.
The case
That is the relationship it has with Victor Bonilla. The company’s role as his partner, republisher or just an interested party with a dovetailing interest in exposing corporate malfeasance could determine whether a court says it is liable for the losses Techtronic says it suffered.
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Techtronic sued Bonilla, who published two reports in 2023 anonymously under his company, Jehoshaphat Research. The first claimed Techtronic had been inflating its profits for a decade by reclassifying expenses as assets on its balance sheets.
The stock dropped so fast the day the report was published that the Hong Kong Stock Exchange halted trading in it. The company said it lost $3.5 billion in value.
The second report said the company was defrauding its largest customer, Home Depot, by going around its exclusive deal with the retailer to sell its power tools, instead selling them directly to consumers through factory direct stores with different labels.
The court has dismissed claims against Bonilla for his first report, saying the challenged statements were either not false or constitutionally protected opinions. The second report did not receive the same treatment. The judge found that there were errors in the report and said Bonilla had acknowledged them.
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“By Bonilla’s own concession, the facts contained in the Second Report regarding factory outlet inventory value, sales, and profits were false, and therefore, (Techtronic) is entitled to partial summary judgment as to the falsity of these statements,” the judge said.
The lawsuit has since been administratively paused while outstanding legal questions are answered.
Last year, Techtronic sued Muddy Waters and MW Domino Management LLC, alleging the companies conspired with Bonilla to defame it. Techtronic argues that Muddy Waters’ business model is geared to pushing out lies about companies to tank stock prices and collect the profits. In the case of Bonilla, it said, Muddy Waters is hiding behind a network of third-party researchers to do it.
The original complaint was dismissed because Techtronic failed to show the companies intended to defame it. When Techtronic amended its lawsuit in January, it broadened its allegations from conspiracy to libel to partnership and joint venture liability as well as defamation based on vicarious liability.
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The redacted complaint filed with the federal court says the relationship with Bonilla and Jehoshaphat is actually a partnership: Bonilla gets a percentage of short sale profits, the company can edit the reports Jehoshaphat produces and Muddy Waters knew that the second report was materially false when it was published because it had contradictory research in its possession.
Techtronic called Muddy Waters “willfully blind” in court filings.
Muddy Waters has denied it has a partnership with Bonilla, citing its contract with him that says the opposite. It acknowledges paying him a percentage of profits resulting from his research but says the arrangement is lawful. It also denies that it would knowingly put up false information and points to clauses in its contract requiring Bonilla to provide truthful analysis and information.
Muddy Waters maintains Bonilla, not Muddy Waters, controls what is in his reports. Muddy Waters controls how much money is invested in its short positions.
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Wednesday’s hearing
After U.S. District Judge David Ezra denied Muddy Waters’ motion to dismiss, it filed a challenge to allowing Techtronic’s attorneys to continue in the case, a move that could upend the proceeding. It called for their removal, alleging the firm Quinn Emanuel Urquhart & Sullivan LLP had a conflict of interest.
That’s because Muddy Waters earlier hired Quinn Emanuel, one of the largest firms devoted to corporate litigation, when it was investigated by the Justice Department and had given the firm wide-ranging access to company data, Muddy Waters lawyers argued in court Wednesday. The government was alleging the company’s business model was built on lies, attorney Peter Kennedy said.
“Quinn Emanuel then turned around and is trying to prove the exact opposite” in the current case, he said.
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Quinn Emanuel did not respond to requests for comment but initially said in filings it represented only Block, not the company, in the Justice Department investigation and should not be barred from the current proceeding.
The law firm backed off that assertion after Muddy Waters filed the contract showing the law firm had represented both the company and individual employees.
Quinn Emanuel attorney John Franklin Bash apologized to Magistrate Judge Susan Hightower, who oversaw Wednesday’s proceeding, for its erroneous filing. He argued that the firm’s involvement was limited to a single lawyer who four years ago exchanged 560 emails and gave 19.5 hours of advice over six months. He said the lawyer had not shared information with other attorneys in the firm and only had general information about Muddy Waters’ business.
Hightower wanted to know why the firm accepted a case suing a former client on an issue that seemed similar to that of the federal investigation.
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“It sounds like they are talking about the same thing,” she said.
Bash argued the federal regulators were investigating potential crimes, not defamation, and that they had no confidential information on the relationship between Bonilla and Muddy Waters.
A recent notification to Muddy Waters that the law firm had been hacked also promised to complicate the proceedings.
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Muddy Waters’ attorneys said its data had been targeted. It wasn’t immediately clear whether the issue would affect the attempt to have the firm removed.
No rulings were made Wednesday.