Short-seller Carson Block: a fugitive CEO, Libyan spies, and $50B fraud

Carson Block is the founder of Muddy Waters Research, one of the defining activist short-selling firms of the last decade and a half. Since 2010, Muddy Waters has published forensic research exposing accounting fraud at publicly traded companies across China, Europe, and the US and has been right enough times that 11 companies have been delisted as a result. In this episode of Summation, Carson and Auren discuss: why outright fraud is only 20-25% of Muddy Waters' focusthe Wirecard sagaw...

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Auren Hoffman?

  Hello fellow data bears. My guest today is Carson Block. Carson is the founder of Muddy Waters Research, the defining activist short selling firms in the last decade and a half. Since 2010, Muddy Waters has published forensic research exposing accounting fraud at publicly traded companies across China, Europe, US, and has been right enough times that 11 companies have been delisted as a result, which is a pretty awesome accomplishment, actually. Carson, welcome to Summation.

• 0:29Speaker 01

  Yeah, thanks, Orin. Good to see you. And yeah, glad to be here.

• 0:32Auren Hoffman?

  There's a point where you first smell something is wrong about a company. You have some sort of inkling, maybe you don't have proof yet or whatever, but you have some sort of inkling. From like there to like when you actually publish something, like walk us through how that works. Like, is it, are you guys like, I feel like you're kind of like Sherlock Holmes, where you're wearing like the Sherlock Holmes hat, you've got the monocle and the pipe and you're going through all the clues and everything, or walk us through how it works.

• 1:02Speaker 01

  In general, it's, I think the process is a lot less sexy than people think from the outside. I do also want to clarify that, you know, today, I think companies that we believe are committing fraud, right? And that's really a legal question. That's maybe only 20 to 25% of what we, of what we write on or what we, you know, what we deal with. You know, I think the world's much bigger problem is gray zone conduct, where probably from a legal perspective, or, you know, let's talk about the letter of the law, these companies are within the letter of the law, or it's a close call.

• 1:43Auren Hoffman?

  Just could be like round tripping, or like, or categorizing expenses slightly differently, or?

• 1:49Speaker 01

  Right, capitalizing expenses where, you know, but within, but in terms of the spirit of the law, they're massively violating. And so, you know, to me, like, I know that from perspective of an activist short seller.

• 2:04Speaker 01

  You know, if we can use the F word, fraud, people pay more attention, but in reality, you don't have to be across that line legally to massively manipulate your financial statements. And so it's kind of one of my frustrations with the world is that, you know, people in their minds have this, you know, this hard barrier. Well, it's not a fraud, therefore, you know, I don't care. But anyway, but the process ends up being similar. So the first thing is to understand is that if we were a typical, you know, we, we are a hedge fund management company. So Muddy Waters LLC, which owns Muddy Waters Research, has an affiliate, Muddy Waters Capital that manages outside funds.

• 2:48Speaker 01

  So, so if we were typical hedge funds that was going long short and we're trying to short dodgy companies, you know, say the, the bar to get, you know, if you're a group of reasonably skeptical people sitting around the table, trying to decide whether a company is, you know, like decent short because it's scammy, which we could later go into this if you want, but those are often the worst shorts, unless you are going to publish on them. But, you know, in the old days, you know, pre-global financial crisis, those were companies you would want to short. So if that were, if that were basically what we're trying to do, we can usually get there in two to three weeks, you know, which I think is probably the same as, you know, one of your tiger cubs

• 3:32Speaker 01

  that, you know, actually I think still short companies like these for some reason, or, you know, or some of the other funds. For us though, to bring something to market, the bar is a lot higher because we're not trying to talk to other short sellers. I mean, if anything, we don't want other people shorting the stock. We're trying to communicate to the long holders. And so the bar that you have to clear as a long short hedge fund manager to determine, to decide to short something because you think it's problematic company with dodgy financials, the bar to, the bar you have to clear to convince long holders that there's a problem.

• 4:15Speaker 01

  I mean, that bar would be at least 30 feet if we're, you know, if we're going to try to think of this in terms of distances. And the problem there, you know, there's always a psychological problem with this, right? Which is when you're telling some, see, we have to avoid.

• 4:32Speaker 01

  Trying to make people on the other end, the long holders feel stupid, right? Because what we're basically saying is like, look, in a normal environment, you're fine, right? You're you're you make your investment decisions based on the information that the company presents. And in the world that we're in which we're supposed to live, the company is not trying to hide the ball from you. But in this case, they are hiding the ball. And here's what's really going on. And we want to, you know, we want to avoid this coming off to the long holders as, you know, haha, you're stupid. We're smart as opposed to you're not to blame, right? Like, these guys have been hiding the ball.

• 5:15Speaker 01

  Our specialty, you know, like, don't come to me if you want, you know, like, to ask me like, what the best, you know, stock to own in XYZ is all right? Because that's not what I do. What I do is I look at what companies really managements are doing. And I look to see whether they're manipulating information. Now, you've asked about indicia.

• 5:35Auren Hoffman?

  So what does indicia mean? I'm not, I'm maybe not smart enough to know what it, what is that? What is that? I've never heard that word. Yeah.

• 5:40Speaker 01

  So it's, I guess, the Latin form of indicators. Yeah, or at least a Latin ending. I only took one year of Latin, but I, you know, like, people think I studied it to, you know, to the present day. So, OK, we're looking for, we're looking for indicators. Now, maybe, maybe my highest level of I, you know, there's something to do here is when I can say, these are our kind of guys. OK, so like, our kind of guys level, that's often related party transactions, right? Where they're like buying and selling assets, you know, from to the public company. And then they'll, you know, oh, we've got independent valuations performed and like, you know, those are always just total bull, right? Like these quote independent valuations.

• 6:24Speaker 01

  The my kind of guys indicators are often related party transactions. But then, you know, I'd say lower, lower levels. You also have to think about what is the company trying to accomplish. Okay, so in a way, this is a pretty, you know, this is, this is an iterative process. So if you're looking at a company that has a significant debt load and its, its credit rating is triple B minus, that's the bottom rung of investment grade. Okay, there's a big difference to a lot of these companies if they were to get downgraded and be high-yield, high-yield credit issuers.

• 7:05Auren Hoffman?

  So they're going to do everything possible to stay above that line. And sometimes they might be doing things that are a little bit questionable.

• 7:12Speaker 01

  Right, but you have to look at what metrics they would be most likely to manipulate at that point. So the key credit metric is usually the leverage ratio. So that's your net debt, you know, so debt minus cash divided by EBITDA. So are they messing with EBITDA, right? Like, what could they be doing to play around with that? So we really want to try to deconstruct that and find out if there are any ambiguities into how they're booking things. So a great example of that, you know, French company, I mean, this was a huge fight. I mean, the French government launched an investigation, you know, cost us, you know, a few million dollars to deal with this. They ultimately walked away.

• 7:53Speaker 01

  They ultimately indicted and convicted the CEO on the other side. But what this company was doing, it was, it was like a Walmart or a Carrefour. It's called Group Casino. And it owned a bunch of its real estate. And so what it decided to do when it got into trouble, it decided to sell its real estate and lease it back. And so this is, so this is the type of, this doesn't rise necessarily to our kind of guys' level, but this is something that's a really interesting type of transaction that goes on all over the world in different industries, like the cell phone tower industry, for example, with companies that are especially at that triple B minus tier where they say, "Okay, you're a financial buyer. You will buy this real estate from me. I will lease it back to you." And

• 8:39Speaker 01

  If I'm going to pay a higher lease rate to you, you'll pay me more to buy it. Right. So it's basically this, you know, it's this recursive or perfectly correlated relationship. And so what Casino was doing was Casino was agreeing to pay really high lease rates and they would get, they would get high purchase prices and they would book the gain on sale of this property as operating income and boost the EBITDA.

• 9:03Auren Hoffman?

  They were selling an asset. So you have an asset that they bought for a million dollars, they're selling it for 2 million and they're booking that as income?

• 9:12Speaker 01

  Yeah. Well, and even better, even better, they depreciated it over the years. And look, this is one of these things where this is gray zone, right? Like their auditor was well aware, but they were audited by Deloitte. Now, when we, you know, when we talked to each other in the office, we said, look, this, we think this is fraud, but there will never be a conviction based on fraud because they've got the auditor who's like, look, this is a big audit client, they're paying us fees and we certainly don't want to ever position ourselves to France Inc. as unreasonable auditors, you know, the kind who argue with management. So, you know, we can, we can let this one go. Our lawyers talk to their lawyers and, you know, the whatever. So basically that's, you know, so that, that's a typical kind of gray zone.

• 9:57Auren Hoffman?

  But in that case, they were, the CEO was convicted of something else or of that?

• 10:01Speaker 01

  He was convicted of stock manipulation. Yeah, that had to do with engineering a short squeeze later on. So.

• 10:06Auren Hoffman?

  Cause when you guys, like when you're going short on a company, like the company has a lot of reasons to go after you specifically, right? You, Carson, and also Muddy Waters and say, okay, these are the bad guys. They're trying to deflect. So obviously you might be wrong. So you might be saying something that isn't true and then, then maybe it's legitimate to go after you, but you also might be right. They might know that you're right. And then they want to try to deflect the, the, the press to go after you as like the bad guy, the villain, right?

• 10:40Speaker 01

  Yeah. So the template used to, it's kind of funny because you've seen the evolution of what the crisis communication firms are selling to these companies over the years. So initially it was kind of like this Mad Lib, right? Where, you know, blank is a short seller. They are trying to drive the stock price into the ground. You know, we are audited by, you know, blank, you know, big four. And our financial statements are, you know, comport with all laws. And, you know, and then what they would do is they would basically take, you know, they, they would, they would take questions they wish they'd been asked. Well, I mean, actually, questions that weren't asked, they would create them out of thin air. So, I mean, this is an exaggeration here, but, you know, for example, if you said, you know, oh, we observed the company's blue delivery van.

• 11:25Speaker 01

  They'd say, you know, Money Waters accuses us of having a blue delivery van. Wrong. Our delivery van is purple and, you know, and it's like, that wasn't the point. But, you know, the reality is, most people are too lazy to actually read our report. So, you know, they can, these companies have this advantage of being able to reframe what you're saying in ways that they think are advantageous. So, that's, that's the way they used to do it. But the problem that created for them was when they did have to answer something substantive. So, of course, if they avoided answering anything substantive. Then the short activist says, these are the, you know, these are the, you know, eight questions that they did not answer.

• 12:10Speaker 01

  And you, you frame them very crisply. You explain, you know, what possible answers they could give and why each answer matters to investors. And at this point, you really want investors to read this. So, you're trying to write this, you know, like, no more than three pages, basically. So, then if the company feels backed into the corner, maybe they try to answer one of these questions. And that's often where they screw up. So, they'll mislead or they'll lie. And then, you know, we use the short activist would hang them out to dry.

• 12:39Auren Hoffman?

  They try to do too hand wavy and people see through it or, right? Whenever, this is true for anyone trying to, you know, when they get a hard question, a politician or other types of things as well. You either have to like attack the question or attack the questioner or you're faced with the hard question and then sometimes people can answer and sometimes they can't.

• 13:00Speaker 01

  I guess one of the things that's changed over the years is, you know, and look, I, I really blame policy response to the GFC, you know, being way too long, you know? I mean, we're in, a lot of people like me lament that, you know, right now in the market, in policymakers try to define the outcomes as opposed to letting markets, you know, have losers as well as winners. And the, you know, and so the, the net effect of this, or one of the effects of this is that People don't want truthful information anymore. You know, it used to be that on the long side, you were remunerated as an investor in part for trying to assess risk and risk of management's,

• 13:43Speaker 01

  you know, you know, management kind of bamboozling you as an investor. And that's gone out the window. I mean, it's really this lie to me culture. Like investors don't care in many cases on the long side about the quality of information. They want the information to be positive. And so, you know, look, I, this business, you know, that I'm in has changed a lot over the years and it doesn't mean that it's, you know, an impossible business because the flip side of that is that these behaviors that were really egregious and that had pretty much been confined to the micro cap world. Well, with the inflation of market caps, you know, you find my kind of guys, you know, like having some companies that are, you know, like, or, you know, running companies that are much larger

• 14:27Speaker 01

  in market cap and more liquid. So our universe of, our universe grows, but also the, I guess, the degree to which people are inured to being messed with by managements, that increases, you know, more or less every year as well. So in the push pull of these dynamics, maybe this business is somewhat harder than it used to be when I started doing it, but I wouldn't say it's infinitely harder.

• 14:54Auren Hoffman?

  We have scenarios where you see these things, but companies maybe have good margins. There's maybe an AI narrative. Like, how does that change the, the, the, the game?

• 15:06Speaker 01

  When, when a company is clearly unmoored from reality in terms of, you know, in terms of valuations and there's, and it's caught up in hype, we generally try to stay away from it.

• 15:19Auren Hoffman?

  If it's a meme stock, like you can't, it doesn't matter. You can't short it, right? So.

• 15:23Speaker 01

  You know, like for a lot of these things, I mean, even the less sophisticated market participants understand, you know, some extent, like there's this circular financing and AI and they don't care. Right? Like that's, I mean, what are you going to tell them? That they can't know. I think there's occasionally, I think there is ultimately space. For or there's opportunity for going in and saying, look, this is not a real, you know, AI or EV or whatever company, but you have to, there's a supply and demands dynamic that you have to be attuned to, right? So when the supply of, you know, me too companies gets to be a certain level, that's when you pull the trigger. So we go back to early

• 16:06Speaker 01

  2021. All right. So, starting in the, you know, November, December of 2020, if you look at the most like Goldman Sachs' most shorted companies index, that ripped, I think it was up like something like 50, 70% in December 2020. End of January 21, GameStop come, you know, happens and that squeeze. And, you know, at that moment in time, like early February, you know, all these people are asking me like, oh, Carson, are you going out of business? And, you know, I didn't think so, but I didn't really have any proof. But it turns out that we had just passed that moment, like that was the tipping point.

• 16:45Speaker 01

  So, um, another short activist firm, Hindenburg Research, ended up publishing, I think on Clover Health. And it was weird because they actually weren't shorted. So I think they were so concerned about the dynamics in the market. I don't know what the real reason they didn't actually have any risk on was, but they published a short report saying we're not actually short, but otherwise this reads exactly like a short report on Clover Health, which had been a SPAC. And it was really effective. And so that was the signal that like, okay, activist short sellers, like it's okay to get back in the water now. We published a few weeks later on a fake EV company called XL Fleet. And, you

• 17:30Speaker 01

  know, so then, and then 2021 for activist short sellers was a great year. And so if you were looking, you know, people who look just at the S and P 500 index, I mean, the S and P was up in 21, but it, you know, cracked in 22 on the rate hikes. That's not really our universe as activist short sellers. So 21 ended up being a great year. So. You know, now might be a little too early to say this is a fake AI company and that's a fake AI company, but that that's coming very soon.

• 18:00Auren Hoffman?

  At some point, like bubbles, bubbles pop in general. And when bubbles pop, they, I would assume that the fake companies will pop faster. But maybe that's not true. I don't know. Yeah. I mean, in the world we're living in, it's hard to know.

• 18:12Speaker 01

  So normally that's true. The only thing that could be different in this case is just because of, and this is entirely different direction, but it's how passive has warped the capital markets. So you have this virtuous cycle within the S and P 500 index and the NASDAQ 100, but where the largest companies in that index just benefit from these flows. And those flows shrink the floats, you know, shrink constrain the supply. And if they turbocharge that with stock buybacks, then you just get this virtuous cycle. But the day those flows go neutral or go in reverse, boom, you know, so I mean, Google has a long way to fall on that day, even though it's a real company, clearly. So.

• 18:56Auren Hoffman?

  Probably one of my favorite books I read over the last few years was Money Men on Wirecard by Damocles. And I just, I just love the book because it was like both like a cool mystery and a spy thriller and all the other kind of things like, but how, how does it come out like that? I mean, the fraud apparently went on for like 20 years. Like that seems like a long time. And it also seems like so stressful for the fraudsters. Like they have to complete, they have to have all these plates spinning all the time. Like, how were they able to do something like that for that long?

• 19:29Speaker 01

  Some portion of this is particular to Germany, or, or maybe we'd say other European countries.

• 19:36Auren Hoffman?

  And the Germany SEC did seem like they were doing everything possible to, to do the opposite of what you would think the, an SEC should do, which is they seem like they were trying to cover up for them and not look into it and all these other types of things.

• 19:51Speaker 01

  Yeah. So that was, that's that organization, the acronym is BAFIN, B A F I N. And, um, look, around the same time, and this received much less publicity because Wirecard was going on, but, you know, we were, I was actually apparently close to being indicted in Germany in 2017 criminally because we had published in 2016 on a.

• 20:16Speaker 01

  Media company called Strohler. So Strohler had been a billboard company. And then they realized like, hey, if we start buying a bunch of quote digital companies, you know, we can, you know, we'll get this growth narrative and, you know, people get excited. And, and look, I mean, there was definitely a lot of gray zone stuff there. There were things that we again suspected could legally be called fraud. But, you know, we didn't have the proof of that. But anyway, you know, Germany was, Germany hates public critics of its companies. And so just like it actually went after the short sellers and Wirecard and the journalists with the FT.

• 20:58Speaker 01

  Again, this was more below the radar because the stuff started going on with, you know, with Wirecard that was really high profile. But yeah, the prosecutor was going to apparently indict me over our disclaimer. And the irony is we had that disclaimer lawyered by these excellent lawyers in Germany. I mean, I remember saying before all this happened, like, these are probably the most thorough but non-useless lawyers I've ever dealt with. I mean, I used to be a lawyer myself, so, and I'm a professional litigant, you know, effectively now, so I can appreciate that. But they were just so desperate, right, to try to persecute critics. And that was held open, you know, I mean, I think the guy was trying to shake me down

• 21:40Speaker 01

  at the end of the day for 25, 50,000 euro settlement. Like, I think I could have made this thing go away years earlier. But that guy kept it open until 2022 before formally closing it.

• 21:51Auren Hoffman?

  By the way, good thing no one vacations in Germany, so you don't have to, you know, go there. Though, was there a red notice on you? Like, were you, did you have to not even go to France or something?

• 22:01Speaker 01

  So the prosecutor kept holding open that possibility. Every time my lawyers talked to him. He'd say something like, "Well, you know, I assume you've advised your client not to travel to Europe," or what have you. And so I did not leave the United States for five years. And when this started, there was that situation with those Volkswagen executives who'd been pulled off that flight. They were changing planes in Miami, coming back from South America. You know, this was over the diesel emissions cheating scam. So they were pulled off the plane and prosecuted here. So that was going on in the background. You know, and but I kept thinking to myself, "Well, you know what? If I got to be bottled up in a country, I'd much rather be an American than a German." Because, you know, Germany,

• 22:46Speaker 01

  it's just not the many places, you know? I mean, I could be in Hawaii in the US or the mountains. So that persisted till '22. So with Wirecard, I mean, the state was really protecting Wirecard because it had grown nominally into this large bank.

• 23:01Auren Hoffman?

  For a while, it was the number two tech company in Germany after SAP in terms of market cap. I think they got to like a $50 billion market cap at one point.

• 23:09Speaker 01

  Yeah, there was that. And look, they'd actually proposed, you know, Angela Merkel, when she was chancellor, went over to China and actually lobbied, you know, I don't know, it was the Foreign Ministry, or Xi Jinping himself, but, you know, actually lobbied to have one of the large Chinese policy banks acquire Wirecard. But the denouement that I don't think was in the book Money Man, which is incredible. So the CEO of Wirecard, Jan Marschek, he fled to, I think Belarus and then to Russia. But this guy was actually, it sounds like, a GRU, maybe even officer. I mean, if not, he was definitely an asset.

• 23:51Speaker 01

  But he had this plan where he wanted, you know, while he was at Wirecard, he was trying to control the flow of refugees from Africa into Europe. Literally. Like, you cannot make this up. You're like, "Wow, I thought you were just pulling this stock scam, and you were processing payments for, you know, money launderers?" And

• 24:11Auren Hoffman?

  I'm so excited for the movie. Like, it's gonna be such a good movie when they make a great movie about Wirecard.

• 24:17Speaker 01

  I think they did make a movie about it. But the problem is, like, this happened in Europe. It was reported by the FT. So in America, there's not a lot of knowledge. That this thing called Wirecard happens.

• 24:29Auren Hoffman?

  I mean, didn't they like pay people like beat up some of the short sellers? Like, didn't they like punch somebody in the face at some point?

• 24:35Speaker 01

  One of the early activist short sellers who was out there on this, that guy has a problem with the truth himself, you know? So like there, he told multiple versions of the same story and I think probably none of them are true. But there, but then, but one thing that Wirecard did was it did hire. So ultimately, like, there, there's just so many layers of this that are amazing. But what happens to spur the investigation, the manipulation investigation into the Financial Times journalists, was that the FT started running this series on it in, on Wirecard and like showing that it was, it was a fraud in early 2019.

• 25:17Speaker 01

  And in the aftermath of the GFC, the authority had been created for European countries, for their, for their market regulator to suspend trading in a stock. Now, they'd suspend, they would suspend trading in, you know, in various countries, but suspend short selling, sorry, to suspend short selling in stocks. This power had never been exercised once since the GFC with respect to a particular stock.

• 25:43Auren Hoffman?

  Oh, so it was like, I was gonna say like a basket, like you can't short sell like the, the, the, the top basket of something because they're worried about that, not a, not a specific stock.

• 25:52Speaker 01

  It had never been exercised with respect to a single stock. But then in 2019, BaFin said, okay, we're suspending all short selling of Wirecard. And, you know, we're investigating this for manipulation and we're investigating the reporters. And what, what had happened was Jan Marzlik, you know, they'd been getting these questions from the FT. You know, these are the questions, you know, you have, you know, like, please send us your responses within like two days or whatever. So he knows the article is coming out. He knows he can't stop it. So he ended up calling some hedge fund managers in London and saying like, yeah, you know, this FT article is coming out, they're going to allege we're a fraud.

• 26:36Speaker 01

  Da da da. So these hedge fund managers hang up the phone and like, I'm gonna go short the stock. And so they short the stock, the articles come out, then Jan Marselik goes to BaFin and says, "Look at the short interest increasing before the articles were published." And so the other thing that they had done was they had hired the former number two, person at the Libyan intelligence organization, you know, post-fall of Gaddafi, like during that period in between Gaddafi and whatever exists today. They hired that person to, to conduct espionage operations in London. And so they've got pictures of like, you know, Dan McCrum that they're showing BaFin and like,

• 27:20Speaker 01

  "Yes, you know, we heard our operative there, you know, tells us that, Dan McCrum received 1 million euros from hedge funds to put these, to put these reports out." So that's why BaFin, I mean, they are so stupid. And, and look, what, what ended up happening, well, I'll tell you a little bit more in just a second on that. But so BaFin ends up suspending short selling and they criminally investigate for manipulation, the, the journalists. Now, it came out later with BaFin, that there were employees at BaFin who had owned Wirecard in their accounts, who had actively traded it.

• 27:54Auren Hoffman?

  Are those people still there? Are they still employed or were they fired at least?

• 27:57Speaker 01

  The top guy. So the top guy who had, the person who had headed BaFin, his name is Felix Hufeld, I think. So the person who was his boss was the finance minister, who I think is now the, the chancellor of Germany.

• 28:12Speaker 01

  That dude couldn't, like initially, he couldn't throw Hufeld under the bus because he's trying to become chancellor. So that would make him look bad. So he like publicly gives Hufeld an attaboy, right? So it totally reminds me of that, you know, George W. Bush, you know, with FEMA fiasco, where Bush is like, "You're doing a heck of a job, Brownie." Like, you know, this, this guy comes out like, "You're doing a heck of a job, Hubie." And, um, and actually proposes BaFin getting more market regulatory powers in the wake of Wirecard. Cause it's like, "Oh, oh, is that why they didn't have enough authority?" Is that why this whole thing happened? So anyway, when it came out then subsequently that all these people had been trading, you know, all these BaFin employees have been trading Wirecard.

• 28:57Speaker 01

  Then all of a sudden, he couldn't hold the brake in the dam and he had to throw Hugh Feld under the bus. So that dude got fired. I think some other people at BaFin got fired. And, you know, and I think that, I think the, you know, Finance Minister became the Chancellor.

• 29:10Auren Hoffman?

  It does seem like there are way more bribery scandals in Germany. You know, if you look at like, whether it's, you know, all these different companies and way more kind of like huge companies having like massive scandals. It seemed like in the US, like there were a lot of those in like the 99, 2000. But it doesn't seem like, if I look at the top 50 companies today in the US, it, they seem to be run much better than the top 50 in Germany. Why is that the case? At first, am I right? And then if so, why is that?

• 29:42Speaker 01

  You are correct, and it points to a really interesting dynamic. And so that is, so Germany is what we would call, you know, it's maybe the exemplar of a high trust environment. The average German citizen is more honest and more forthright than the average American citizen. But smart criminals understand that in those high trust environments, they take advantage, so they flock to those environments. So you can look at a place like Russia or China, which these are very low trust environments. And you'd say, well, yeah, everybody's scamming and like, yeah, a lot of people are scamming over there. But at least you're expecting it. When I published on my first activist short, it was Chinese, it was Chinese fraud.

• 30:26Speaker 01

  It's funny, I was explaining to my, my maid in China, you know, who had no college education. I just started explaining what was going on. Like, I'm not even close to done with my explanation and she just starts laughing. She's like, oh yeah, I get it. Da, da, da, da, da. You know, he owns the customers, he owns the suppliers. It's all fake, right? Like the Chinese people, like Chinese people, because they're in a low trust environment, you know, they understand this and they know you can't take anything for granted. But when, but when you're in Germany, which is, you know, maybe one of the ultimate high trust environments. I mean, you could put Singapore up there as well.

• 31:01Auren Hoffman?

  I hear about it in Germany. I don't hear about that in the Nordics as much.

• 31:05Speaker 01

  Taliya Company, that's a company that we published on. 2015, I think, they had bribed everybody in the stands. I mean, they paid, literally, like, there have been convictions. They settled, they paid a settlement to the Department of, or to the United States for an FCPA prosecution, just under $1 billion is how much they settled for. I mean, they paid billions of dollars in bribes to the stands. That is documented. And they tried to, and this is actually, this was, the largest single shareholder was the Swedish government at the time. So they tried to sweep all this under the rug. Some of it had come out by the time we, we shorted it, but our whole point was like, hey, this, this is Operation Rug Sweeping.

• 31:50Speaker 01

  This is a lot bigger than you guys are letting on. So, look, these high trust environments are where you can have the most egregious crimes because they take advantage of those environments.

• 32:03Auren Hoffman?

  Okay, that makes sense because like, when I think of Germany, I don't think like, okay, this is like, I, I don't even, I would, I would imagine most police officers would be upstanding citizens. They would, they wouldn't even accept a bribe, or most government officials wouldn't accept a bribe. But you're right, I guess, I guess it's like, the one bad apple could be way more successful there because of the high trust thing.

• 32:23Speaker 01

  During this whole time, we, we were, we were going to actually circulate a slide deck, you know, sort of anonymously, but send it out to all of our, you know, venture friends like, like you and, you know, other people who I'm sure we both know, you know, proposing just a startup in Germany, the purpose of which was to cede a multinational crime ring and, you know, really, and just extolling the virtues of Germany as a base from which to commit multinational crimes. And, and look, there's also, there's also one other really interesting thing here about the European Union. So, part of the problem, like, we've seen, you know, I mean, even outside of Germany, we've seen companies that are really corrupt. And the problem you have in Europe is that

• 33:09Speaker 01

  Money and people flow freely throughout the block. You know, and business can be conducted almost frictionlessly.

• 33:17Auren Hoffman?

  It's very easy to move things around. Money, people, information, goods.

• 33:22Speaker 01

  There is no supranational regulator or enforcement body. Every country has their own enforcement bodies.

• 33:29Auren Hoffman?

  So it's easy to like, like hide things and say, oh, this is happens to be in this. This is in Slovakia now, and it just, it would just be like a lot of bureaucracy to go figure that out if you're a regulator in Luxembourg or something.

• 33:41Speaker 01

  Well, if you're in Luxembourg, I mean, in the business of Luxembourg is to not care, but let's say you did care. You know, you've got to call up a counterpart in Slovakia. Counterpart in Slovakia, I mean, look, you're, you know, you're familiar with the public sector, you know, right? So overworked, underpaid, right? So they're going to have a stack of case files and like, okay. Why am I going to help you? Because at the end of the day, if I help you, am I going to get the credit? No, you in Luxembourg, you're going to get the credit. So why do I care about your problem? And so I think that's, you know, so at the end of the day, the European Union is really well set up for money laundering and financial crime for that reason.

• 34:23Auren Hoffman?

  In the US, there's lots of fronts and, but in Europe, the fronts can be like much bigger, much more impactful because of all this stuff. It's just like a lot harder to, to, to, to find all those things.

• 34:36Speaker 01

  Then you layer on top of this world, the existence, the continued existence of Dubai and how everybody pretends that that's like a normal financial center. So when you combine like Dubai and of course Malta is part of the EU, like when you get these places, you know, Luxembourg does its part. It's just, it's just such a joke. And so I got to tell you, man, like one of my rants is every time I want to open up just a piddling little bank account. I've got to fill out like, you know, 30 pages of stuff and provide all these IDs, you know, in the name of like anti-money laundering. And I can point to work that we've done where we're finding hundreds of millions of dollars being laundered in real estate transactions through shell companies in broad daylight.

• 35:19Speaker 01

  And nobody does anything about it because it's usually in Europe.

• 35:23Auren Hoffman?

  After you've seen all these frauds over the years, all these issues and stuff like that. Is there some sort of like, could you personality type the fraudster? Is there something about those types of people? Like, sometimes I feel like it's like they're like, I've seen many different types of fraudsters. It's like the the up and coming poser. It's the someone who comes from like a lot of money, but just not enough. And they're trying to like overly impress everybody. They have some sort of title like they were. They have a, you know, some sort of zoo title in in Germany or something like that, or some sort of duh title in, you know, whatever country. Right? So but they they're like, what's the tell like ahead of like, you know, ahead of time?

• 36:07Speaker 01

  The most common, so the most egregious frauds are the ones that are committed by people who start out saying, hey, you know, we can scam it, you know, like in China offered, China, Chinese companies going public in the US offered an amazing, you know, once in a, I mean, once in many generations, opportunity for the type of person to say like, look, I wanna, you know, I wanna make real money. I'm gonna do it through, you know, just cheating people out of their money. I would say that's a minority of fraudsters.

• 36:38Auren Hoffman?

  So it's like they start out and like, things aren't going well. And maybe they have to like, okay, well, just this one time we'll change the books a little bit, and then it's a plate spinning thing?

• 36:49Speaker 01

  And I would add another layer to that. So I think that, you know, let's, let's say, you know, let's say you've got a business. It's it's been doing well. It's attracting attention, you know, as I often put it. They put you on the cover Business Genius Monthly. And when that happens to you, you know, I think that it's pretty natural that in a way you feel a little bit like a fraud.

• 37:13Auren Hoffman?

  Because you're like, I don't, I'm not, I don't know if I'm that smarter than all the other people or something or whatever.

• 37:17Speaker 01

  And look, I, you know, like, I went to a little bit of a version of this myself. And, you know, like, I went from zero to, you know, in 2010 to, you know, 2011, Bloomberg naming one of 50 most influential in global finance with like, you know, Warren Buffett and Ben Bernanke. And, you know, so suddenly everybody comes up to me and is like, Carson, you know, what do you think of, you know, the Eurozone situation and this and that? And, you know?

• 37:41Speaker 01

  And you feel kind of like a fraud. You're like, I don't, I don't know, you know, like.

• 37:46Auren Hoffman?

  Well, like if you think of like a SBF with FTX, like I doubt, I think he probably always thought he was the smartest person. Like, I don't think he ever thought he wasn't the smartest person, or do you disagree?

• 37:58Speaker 01

  So this might be different, this might be different pattern. So I guess where I'm going with this and get right over to SBF in a second, and I haven't paid a ton of attention to him. But what, you know, what I think ends up happening though is, you know, so the rocket ship starts stalling out. And for a lot of people, you know, their identity is really wrapped up in, you know, in their companies and the success of their companies. And, you know, people think they're infallible. And it's kind of like, it's a pretty addictive situation to be, to be in. And so you think, this is gets back to what you just said, you're like, well, you know what, like this quarter, yeah, you know, like let's, let's fudge this a little bit and we'll make it up next quarter.

• 38:41Auren Hoffman?

  And you think this was like what happened to Enron, like, uh, like it just started with like a little fudge? And then it just like became this like ultimate crazy fudge, like, you know?

• 38:50Speaker 01

  Well, let's talk about Enron because actually when I was talking about gray zone, Enron is the best example. What killed Enron was the accounting that was and still is legal. Okay. So I think what, so, so basically, you know, the last year that Enron was, was public, I think this was, uh, 2000. It reported about $4 billion in cash flow from operations. And of that, of that $4 billion, all $4 billion of that was really financing cash flow. It was borrowed, it was borrowings from banks that were dressed up as business transactions. Now that was legal at the time and it is still legal.

• 39:29Speaker 01

  And if you want to know how those transactions worked, one of them they called a term, one, one template, they called a total return swap. Just Google Enron Mahonia. And so you'll see how Chase Bank facilitated this. And so again, you can still do this legally. The only backstop would be if the bank cares about its reputation. And the banks care about their reputations for maybe two years after something like this happens. So Enron cratered because it had all of this.

• 39:59Speaker 01

  Off balance sheet debt. And actually, Ken Lei had an opportunity to save the company if he had pledged, if he pledged more stock. And in order to underpin the debt rating, he wouldn't do that, or issue stock, rather. And so the ratings agencies downgraded, which triggered all of these, you know, which triggered all these capital calls, and they couldn't meet them, and they imploded. So my view as to what happened was, this was such a spectacular, massive fall from grace, that, you know, the federal government came in and is like, something, you know, like, bad stuff had to have been going on. And they found some stuff that rose to the level of fraud. There were convictions, but this was the stuff that, in terms of the impact on Enron's financials, was really on the margins. And I think, and I think that that happened again because of the political imperative

• 40:44Speaker 01

  to find something.

• 40:45Auren Hoffman?

  So in some ways, the story about Enron was they were over-levered.

• 40:49Speaker 01

  Yeah, I mean, they were, they were over-levered legally, right? So they, they, they made their debt appear lower than it was, they made their EBITDA and cash flow appear much greater than it was through measures that were legal. And while some of the accounting, some, there were accounting rule changes that would require them to consolidate the debt if they tried to structure it the same way. The, the thing is that you can still, as I said, engage in those financing transactions that get dressed up as actual sales. And the funny, just the irony of all this is, that accounting rule change regarding consolidation, so that's what the, what those entities were referred to that were off-balance

• 41:30Speaker 01

  sheet, they were called variable interest entities, VIEs. It's all these Chinese companies that then came along and took advantage of that. So, you know, they've got these Chinese businesses that are operating in heavily regulated industries in China, where foreign investment is either prohibited or limited. And so they say, well, gee, you know, we can't, you know, you can't have these internet licenses owned by a foreign company. Let's set up a company that's, you know, a subsidiary of the list code, that'll have a series of contracts with this. And through this series of contracts, we're required to consolidate the operations of the company that has the license. But, you know, push came to shove, and those foreign shareholders ever wanted to take

• 42:11Speaker 01

  control of the actual, the operating entity in China, they'd be screwed. But it's just kind of funny that, you know, you close one, you know, you, you turn off one valve for abuse. And just another one like opens and it's like a flood of abuse.

• 42:27Auren Hoffman?

  So you were gonna see, you were gonna give your theory on SBF.

• 42:29Speaker 01

  I don't think he was in that mold. It sounds to me like he started off, yeah, thinking he was the smartest guy around. It sounds like, and look, I haven't read the book. I read criticisms of Michael Lewis's book on, on him, that it was too much of a hagiography and, you know, that, I don't know. So I, and normally I really like Michael Lewis's writing, but, so I didn't read that. But it seems to me like, from what I understand, the fraud started going on very early, you know, just not respecting segregation of, you know, client money, you know, keeping it apart from Alameda's, you know, his money. And I don't know that that puts him in the category of the kind of person like a Jan Marselik or, you know, Marcus Braun,

• 43:11Speaker 01

  who says, I'm gonna start out and build this total fraud and steal all this money. But I think this puts him in the, yeah, maybe, maybe, I, I, you know, I think he just felt like, look, rules are for little people. They're stupid, you know?

• 43:25Auren Hoffman?

  What you think about someone's morality? Let's say there's a company

• 43:30Auren Hoffman?

  and they are, they need to cash to survive and they illegally borrow from their pension fund or something. And then they survive and then they give the money back to the pension fund and like no one, no one, no one suffers. In fact, everyone's still employed and all this other stuff, but they like did something wrong. Clearly they did something wrong. Like what's your, how do you, how do you think about like, you know, the moral culpability of the management team? And like that type of situation?

• 44:00Speaker 01

  A lot of times I am really depressed about the, the state of the rule of law. And, you know, and I do think that as a society, we've become overly technical so that we're focusing on the letter, not the spirit. But, you know, that said, you either believe in the rule of law or you don't. So even if it ends up being a victimless crime and you want to argue it's therefore a non-crime, you know, I would say, well, you either have the rule of law or you don't. And if you have the rule of law, that has to be prosecuted. And, and from my experiences in China, you know, I've lived there six years. And that I, I came out with this understanding that when you have corruption at the top, be it of,

• 44:40Speaker 01

  A company, a club, or an entire country or society, the corruption cascades down and it it just corrodes everything. And so, yeah, if you let these people walk, you know, that that has that has a corrosive effect on society. And, you know, look, I think that's part of the problem that we have in America today, where it's obvious that so many of the most financially rewarded people in this country have been aggressive. You know, maybe they haven't crossed the line legally. Maybe they have crossed the line legally. Maybe it's obvious that they have at times done that. But when nothing bad happens to them and

• 45:21Speaker 01

  society just and they just continue to get rewarded. You know, look, I think the average person can be forgiven for saying, look at so and so, you know, they didn't care about the law when they did XYZ. Why should I care? Like that, you know, that seems like that's for chumps. And that's exactly how that dynamic works, where it just cascades down. So, people in the company, if they see that everybody says, well, look, you know, everybody whose job it is to care about this says, well, you know, it ended up working out. So we're just all better off pretending it didn't happen. That's going to beget more corrupt behavior and probably that'll end up ultimately having deleterious consequences.

• 46:03Auren Hoffman?

  Now, you mentioned Hindenburg earlier. They're kind of like a like a newspaper with a short selling thing on the side or something.

• 46:11Speaker 01

  You're thinking of Hunterbrook.

• 46:12Auren Hoffman?

  Sorry, Hunterbrook. Sorry.

• 46:13Speaker 01

  Hunterbrook, yeah.

• 46:14Auren Hoffman?

  Hunterbrook, yeah. What do you think of that model?

• 46:16Speaker 01

  They do good work. And, you know, just a couple of weeks ago, they they actually scooped us on something this they published a few days before we did on a company called Ensign, which operates skilled nursing facilities. It does kind of get under my skin when people, you know, ask me like, oh, you know, what do you think of this new model? It's not a new model. I've been arguing for years that what activist short sellers do is investigative financial journalism, just married to a non-traditional revenue model. Now, the difference between Hunterbrook and Muddy Waters is that Hunterbrook will publish these investigative stories.

• 46:55Speaker 01

  On topics other than companies, the hedge fund is short. And, look, they did that because they were able to raise money at the management company level, or they do that. Like, that's how they can pay for that. I like them, but I believe firmly that's a money-losing proposition. Okay? Because if you look at all these traditional media organizations, investigative journalism is, you know, it's the amount of long-form investigative journalism is just decreasing every year, especially in financial markets, because there's just not that much of a market for that. And, you know, my, I, look, I've spent, you know, many times over the years, I've asked

• 47:39Speaker 01

  myself, like, you know, because obviously what I do, we run a lot of risk, you know, we can lose real money. I mean, I've, I've had days where I've lost like eight figures, you know, on a trade, like, you know, mine and investors' money. Those are bad days, and those are days when I, you know, tend to drink a lot and, you know, do things to myself that shorten my lifespan. And it's not easy from that perspective. I've been through, you know, investigations by three different governments, you know, which I don't think would have happened if we were deemed to be a traditional media organization. Get sued all the time, you know, never, never lost one, never will. But, so I've asked myself repeatedly, like, is there a way to do this, other, you know,

• 48:24Speaker 01

  a financially viable model to do this, other than shorting stocks? And I can't come up with it, right? Like, because advertiser-led model won't work, subscription, you know, payments for, I mean, to do real in-depth, you know, there's a, there's a publication called The Bear Cave, but that's like subscription, you know, that's subscription kind of short, short ideas, but, you know, and I respect, I respect them, but they don't have the resources to do months and months of investigation on companies like they do. They can't fly in people to conferences to pretext as potential clients, you know, to understand what's going on. So, you know, if you want that work...

• 49:08Speaker 01

  I think shorting stocks is the only way that pays for. So if you're doing that, but you're also reporting on interesting things that should be reported on, you know, like about the dysfunction of the world. Unfortunately, there just isn't a model that pays for that. So, you know, and I don't feel like I'm making so much money as an activist short seller that I can divert a portion of this, you know, and kind of do this pro bono news, you know, like news stuff. So they were able to raise money at the management company level to do this news, you know. I suspect, I mean, I assume they sold this, you know, as an economic way of doing it. I mean, if they can make it work, God bless them. I mean, I'd love to see him do it.

• 49:50Speaker 01

  I'm just, I'm just skeptical that that's really economic.

• 49:54Auren Hoffman?

  What are your thoughts on the Andrew Laff conviction?

• 49:56Speaker 01

  What I've read, and so I'll tell you what I've read and what I haven't read. So it's important to understand, you know, that I can't have a fully formed opinion yet. But I've read the government's superseding indictment. I read his rule 29 motion for acquittal. The government's response to rule 29 motion for acquittal, read the jury instructions, and I've read the transcript of the closing arguments. This was poorly covered by media. So I think that, you know, based on, you know, so again, the caveat, I've given you the universe of what I've read. So based on that universe, I think this was poorly reported by the media. And so there's a misunderstanding as to what, you know, what bases Andrew was convicted.

• 50:40Speaker 01

  So Andrew would quickly de-risk positions after publication. And that's, you know, in activist short selling, that's the norm. Like you get really risked up. And if the company is going to be acquired before you publish, you might be gone, like for the rest of your life, basically, you know, then you de-risk so that you can actually, you know, try to sleep well at night. And, um, and so there was, there was this idea that came out of the trial that that was a problem. Now, what I would say is that, so, okay. My read is that Andrew was convicted of making statements of opinion that the government and then the jury felt he didn't honestly believe, and especially when it came to target

• 51:24Speaker 01

  prices. I think this is going to see, you know, I think 160 before it sees 120. And, you know, say the stock was at like, you know, 130 at the time, and then he blows out of it at 140 right after tweeting that.

• 51:36Auren Hoffman?

  This is like, there's like an Nvidia kind of thing where he's like, this is, Nvidia's gonna go bonkers. And then, obviously, it did go bonkers, but he went out of it a lot earlier than, than he had, you know, he didn't ride the trade all the way.

• 51:51Speaker 01

  So when it comes to Nvidia, there was a particularly problematic statement in that he made an electronic message. So he was communicating with somebody who appeared, I think, was an analyst at a fund. And Andrew was talking about how Nvidia was set up to move upward. And so he said, look, go through some old analyst reports, give me some bullet points there to tweet out, and let's make some money on this thing today. And so what the government argued is that Andrew worked the process in reverse for the companies for which it indicted him, rather than saying, hey, I've done this research, I have this view about this company, you know, I'm going to voice my opinion. It was, you know, they

• 52:33Speaker 01

  argued, and I think this is what the jury believed in, you know, in 13 of the, you know, the specific names, plus the overall, you know, scheme, the first indictment count, that he worked the process in reverse, where he's looking at how these stocks are trading. He says, okay, this one can move up, this one can move down. Now let me go find something to say about it, you know, throws out a price target that's, you know, as the government termed it, extreme in either direction, and then, and then closes parts of the position. Now, I do think there were some defects here, right? So when I read one of the jury instructions, jury instruction 22, it talks about, and this

• 53:14Speaker 01

  was also a factor because Andrew's, of course, being sued civilly by the SEC. It's one of the weird things with securities, right? Where you have to fight potentially, you know, the government gets two shots on you, right? You get the criminal side of the DOJ, you get the SEC side civilly. So that's weird. And the 10b5 statute and the rule, well, sorry, the Securities Act fraud on the market and the 10b5 rule are really poorly worded. I mean, really vague. Like, I don't understand how they withstood constitutional scrutiny because there's this void for vagueness doctrine, which I would think the statute and the rule would fall well within being too void to be valid. But putting that to the side, there was this half-truth doctrine that got introduced, right?

• 53:59Speaker 01

  Which is this idea that, well, if you make a statement to the market, if you are not disclosing the full truth, well, you might have had a duty to disclose that and failure to disclose the full truth is therefore it's fraud. So what they were referring to here is Andrew saying, "I'm short on long," and not disclosing that he intended to derisk the position, right, you know, soon afterward. Now, this is problematic because the line of cases that have created under 10b5 or under the Securities Act, this requirement that you make full disclosures, has to do with issuers, right?

• 54:43Speaker 01

  So the companies that are selling stock, they have fiduciary duties. Andrew was just a market commentator. He does not have a fiduciary duty to the market. So number one, applying this omnicare doctrine of, you know, half-truths being rising to the level of fraud to somebody who doesn't have fiduciary duty, I think that's a [bleep] up. That's number one. Number two, though, the jury instruction said... While commentators are not required to disclose their positions, you may consider that disclosure of positions without additional information could constitute fraud. This is also wrong, okay, because everybody,

• 55:25Speaker 01

  and again, this gets back to where the statute and the rule are so vague, but every lawyer I've ever gone to, and I used to be on the long side, I was working with my father starting in 99, we held long positions in stocks, you know, he distributed research on them. So every lawyer that I ever talked to said, listen, you must disclose that you're long this stock before you comment on it publicly, or before you tell anybody, you know, really, you know, that, you know, a potential, you know, an existing institutional client. So, you know, Andrew, everybody had gotten that same advice with respect to short positions from lawyers.

• 56:07Speaker 01

  So effectively, there is a requirement to state that you're long or short, right? Like, that's the rule of the road. So this idea that the government then turned that against him and said, well, you know, he was using that to commit fraud because he was trying to make people think that he believed in it when he said, oh, I'm long, you know, and that therefore his failure to disclose an intention to derisk the position, that could be fraud. See, that's a major, that's a major problem because that is an effective misstatement of the law. So I do intend to file an amicus brief. I mean, quite possibly, if not probably, as, you know, part of a group of investors and maybe, you know, some academics will join this too. But that's one of the things that I really, you know,

• 56:52Speaker 01

  I want the Ninth Circuit Court of Appeals to clarify is that you effectively have compelled speech when you have a position here. So clarify that it's compelled speech and therefore the failure to disclose the intention is not a half-truth, you know, and there's no duty to disclose that. And then like the one other point that I would make there, and my apologies for this getting a little bit technical, but you could say that an intention to disclose is a fact that presently exists, right? So if I tweet, you know, we're short XYZ and I'm intending to, you know, try to close out most of the position, you could say, well, that, you know, my intention is a fact. So you can disclose that, right? Just as my, the fact that I have a position already is a disclosable fact. But the problem is...

• 57:38Speaker 01

  While an intention, having an intention, you know, you can say that you either do or don't have that intention, and that's a fact. An intention is just an opinion about the future. Like, I mean, I've been in this situation numerous times, right? When you, when you release, you know, when you release your commentary, I mean, things could go very differently from how you expect. And that, that trading plan that you make, you know, it's kind of like Mike Tyson said, everybody's got a, a plan until they get punched in the mouth. And those plans, things seldom go according to your plan. So that's why disclosing that you have an opinion about the future and that opinion is that, you know, leads you to believe that you will be closing substantially or, or

• 58:22Speaker 01

  a good portion of your position. That's, I mean, that's a very dangerous grounds there because it, you know, to compel disclosure of an opinion effectively about the future, I really don't like that path.

• 58:37Auren Hoffman?

  By the way, one of the things I think is interesting is like, so Andrew Lefebvre, he's like a well-known short seller, but it seems like a lot of the things that the government went after him on were his longs, which was kind of like a, so they kept saying, oh, he's a short seller, but it's like, oh, but they're going after like, so it's a good interesting kind of narrative thing.

• 58:55Speaker 01

  Well, that's, look, that's also an important distinction because, you know, when you get into First Amendment, like, not all speech is protected the same, right? So you've got, you've, the, the strongest First Amendment speech protections are accorded to matters of public concern. So typically that's, or that includes political speech and, you know, religious speech. But, you know, when, with activist short selling, when you're pointing out that there are companies that are, that are basically in the process of destroying trust and eroding the capital markets, which are the lifeblood of the economy, you know, I would, you know, I, I think, most people would think that's a matter of public concern.

• 59:39Speaker 01

  So that's in tight, so if you were to say, well, gee, you know, if you're exercising your First Amendment protected right to speak on a matter of public concern, but immediately after you do that, you're prohibited from taking an action in the market that any other trader who, you know, is, is permitted to take, that would fly, that would fly in the face of First Amendment. Now, because Andrew was often saying, I'm long this, you know, or I'm short because I think they're going to miss earnings. That's commercial speech, I would, you know, I think. And that's not, that doesn't rise to the, the level of protection that you would accord to an expose on a company that is bilking investors and taking advantage of the capital market.

• 1:00:23Speaker 01

  So it doesn't look like, from what I can tell, it doesn't look like the First Amendment issues really were litigated here. But, you know, I, but I do think that if the government tried to apply similar theory to, in a situation which, you know, somebody would have just been commenting and exposing bad practices in the capital markets, then I think the First Amendment would have to kick in and would provide a layer, a very strong layer of protection that most cases, Andrew, didn't have because it was, like I said, I mean, I think, commercial speech in most of these instances for what she was indicted.

• 1:00:58Auren Hoffman?

  There's also two, two more personal questions before we go. First, like, what, what AI tools are you using? Like, what are you personally building in AI, personal life or in your work? Like, what are you actually hands on keyboard building?

• 1:01:11Speaker 01

  Yeah, I mean, look, I, I was using Gemini a lot, but then it did become too sycophantic, you know? So I was obviously a genius and the most fit person who ever walked the face of the earth and then I realized I'm not, so I don't use Gemini as much. Claude is amazing. Um, I mean, I do use Claude for, like, I was running Monte Carlo simulations because we did put together an AI disruption basket and, because look, I, you know, I, I think AI is going to just destroy a lot of knowledge jobs, right? And that will have profound implications for markets. So I started using Claude back in February to run Monte Carlo simulations on different trade structures. And this is the sort of thing where, you know, if I'd had somebody who graduated college

• 1:01:54Speaker 01

  a few years earlier, you know, top university and was strong in math, I would have thrown this, you know, kind of work to them to do. And to do two Monte Carlo simulations would have taken probably the entire day. And I would have said, well, you know what? Nothing good came out of this. All right, I can't keep tying up your time. And I wouldn't have been able to run these Monte Carlo simulations, but. With Claude, it's done in minutes. And so ran a lot of these simulations. So it's really helped from that perspective. It's helped with a lot of the work, you know, where I'm like, okay, there were these changes that my analysts made in this deck, like Claude, you know, do a side by side comparison and, you know, explain this. And we also have somebody, you know, we also have somebody on the team who, um,

• 1:02:38Speaker 01

  not a good communicator, you know, I think it's, you know, possibly, you know, like an Asperger's thing as well as, you know, let me a language barrier. And using ChatGPT and Claude has really bridged the communication divide at times, because otherwise it would have taken me hours because the, you know, the work they're doing is very technical, would have taken me hours to be like, that's what you're saying. Okay. And so, so yeah, it's, it's been, it's been a pretty big impact. And I'd say our decks look nicer than they ever have.

• 1:03:12Auren Hoffman?

  There's no excuse to have a bad looking website or deck nowadays, right?

• 1:03:16Speaker 01

  We still have a bad looking website. We, we still do. We, we have to point Claude at that soon. So you're right, there is no excuse.

• 1:03:22Auren Hoffman?

  All right. Last question we ask all of our guests. What conventional wisdom or advice do you think is generally bad advice?

• 1:03:27Speaker 01

  You know, maybe I've just become such a positive person recently that I can tell you what I think is good advice. But so maybe there's conventional wisdom about, you know, about having kids. I don't know, like a lot of people don't want to have kids, right? You know, they think it's, you know, they, they're like, they think it's too much for a drain on resources. They don't understand the payback. I was one of those people. I was in a massive car accident in 2000 with my then girlfriend. And I was, it was just before I had LASIK. And so, and back then, I mean, my prescription was awful. So I had to wear glasses for the week beforehand. So my glasses were thrown. And I knew that we'd taken, um, two, you know, like an SUV in her door. It's 65 miles an hour on the 405 and an Acura Integra.

• 1:04:12Speaker 01

  I mean, a smaller car, you know, a car just behind that. Glass shattered, car spun, I somehow got us over the side of the road and, but I couldn't really see. And, you know, and I asked her, are you okay? And she said, yeah. And then I paused, asked with more gravity, are you okay? She took a moment. Yeah, I'm fine. And that moment changed so much for me because that crystallized how like I was so scared that something had happened to her. And so I came out of that, I'm like, man, I understand that I that I'd always viewed like marriage is just a stupid contract. You know, if two people want to cohabit, they can do that.

• 1:04:58Speaker 01

  But now I wanted to marry her. So we got married. But you know, I went along thinking like, look, we were living all over the world and why do we want kids? And you know, and she she kind of was the one who said like, I want to have kids. So, okay, well, you know, financially stable enough, you know, to do it. Um, but I used to say like, yeah, I want to kind of keep them locked away until they're like 16 or 17 and can have a can have a good conversation. But from day one, man, I mean, it was, it was just so, it was intellectually really interesting. And it gives you a whole new perspective on your existence.

• 1:05:32Auren Hoffman?

  There's a trend that's happening now where a lot of people who were having like two kids before are now having three, or a lot of people having three are having four. For people, it's it's it's still the same number of people having zero. But it does seem like the two more twos are going to three and more threes are going to four. So we're we're seeing this like weird and and maybe it's like, obviously you have to be more wealthy to have more kids to support it and everything. But there's starting to be like a bit of a baby boom of people who already have kids rather than like the zeros to one.

• 1:06:01Speaker 01

  That's interesting. I mean, look, I know at the macro level, the birth rates, you know, the overall birth rates have declined massively, especially after the GFC. And it's a factor in developing as well as developed countries. You know, I think there are real policy failures that, you know, have, you know, that have occurred, that have not been addressed. And maybe we do need to address. And if you're also thinking, no, children are not right for me, look, maybe they're not. But what I that was me and what I found is that, I mean, it's definitely the most fulfilled I've ever been. And I every now and then I stop and I think to myself, okay, what if my, you know, what if we didn't have kids? I both in my life be like, yeah, I'd be traveling more, I'd probably be making more money because I'd be working a lot harder.

• 1:06:45Speaker 01

  I would not be as happy. Like, I'm convinced I would not be nearly as content as as I have been since having kids. So. I don't know what conventional wisdom is on this now, but I I would say absolutely do it. Don't that out.

• 1:07:00Auren Hoffman?

  And would you say absolutely do it even if you haven't found a partner? Like you, you have a partner and obviously it's a lot easier to do it.

• 1:07:08Speaker 01

  I mean, one way kids do turn out messed up is when you don't have, you know, two parent household. I mean, like, you know, if you're not out there, if you're not out there taking the swings, trying to meet people, get out there and try to make, you know, try to try to meet people. If there's just something so idiosyncratic about you that there, there isn't the right person out there, which I find that hard to believe. Um, yeah, I don't know. I mean, like, I, I can't speak to that. That, that, that's individual, but people who aren't in that situation, people who can pair bond, should get out and try to pair bond, you know, it's not just life is not just one big Tinder app. I mean, I certainly went through like that phase pre Tinder, of course, in my life. And, you know, there are good things

• 1:07:51Speaker 01

  to be said about that when you're, you know, that age, but it doesn't beat this.

• 1:07:54Auren Hoffman?

  Because in the US, most married people have kids, right? Is, is in fact, they have the same, the birth rate of married people has not gone down. In fact, in the last 30 years in the US, second me even be going up. The, the bigger thing about the, the fertility rate in the US is that people are fewer people are getting married. And by the way, divorce rate's also plummeting. So divorce rate's gone down pretty dramatically in the US as well. Um, so it's, uh, it hasn't been this low in like 30, 40 years in the US divorce rate. So you have these kinds of like, the problem is just the marriage rate is, is also plummeting. So, and, and, and people are maybe smartly or not smartly, depending on how you think about just not having kids until they get married.

• 1:08:34Speaker 01

  Yeah. I mean, look, you know, there, there's obviously a societal problem with, you know, fewer people coupling and I mean, less dating and it's complex. I mean, some portion of it goes back to social media, but there's also political polarization that I mean, just so sadly is part of this, you know, as well from what I understand. But, um, but yeah, you know, like I, I think there's also Gen Z, there's also just a fear of failure. And, you know, like, I mean, it's, it's the most conventional wisdom you'll hear from successful people. And it's right. It's like you gotta be able to fail. Now, you gotta control, you gotta mitigate your potential losses. Like, you know, if we're talking business, you never want that failure to take you out of the game. And so if you go back to what

• 1:09:16Speaker 01

  I'm saying about having, you know, lost eight figures on a single trade, you know, knock wood, I've never put myself in a position, you know, hope not to, where it would be lights out if we take catastrophic loss. And so that's a general principle for life. Take risk, fail, mitigate your downside. But there's no downside to going out there and, you know, and looking to buy, buy somebody a drink, or, you know, however a girl should initiate it these days.

• 1:09:44Auren Hoffman?

  This has been amazing. By the way, I, even though I know it's terrible for you, I'm, I'm kind of glad you were in that car accident back in the day, back in 2000. It does seem like it made your life more enriching and, and, and better. So, but thank you, Carson Block, for joining us on Summation. I'm a, by the way, for those who don't know, you and I have been friends for a very long time. I'm a huge fan of yours. It has been really great. I really, I really appreciate you being on the Summation podcast.

• 1:10:09Speaker 01

  I really enjoyed it, Orin. So, great to reconnect and hope to do it in person in not-too-distant future.

• 1:10:13Auren Hoffman?

  One more thing before we go. I read a blog called Summation. It's the same as this podcast. The blog is about non-obvious idea sharing on business, talent, data, longevity, and random contrarian takes. If you like the conversations on this show, you'll probably like the blog. It's free. New content comes out twice a month. You could subscribe at orin.substack.com. That's orin.substack.com.