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Muddy Waters says Sino-Forest's $4-billion defamation lawsuit against the research and investment firm is frivolous.
"Internally with the team, we were just discussing it, and really how outlandish we think certain aspects of the suit are and we started calling it 'frivo-ludicrous'," Muddy Waters founder Carson Block tells BNN.
"The $4 billion number, once you get above a certain number of millions, it's really academic. It's more for headline value."
Sino-Forest filed for bankruptcy protection last week, as well as filing a multi-billion dollar action against Muddy Waters and Block. He penned a research report last year calling the company a "Ponzi scheme" and triggering a major sell-off in its stock. At one point Sino-Forest was the largest publicly-traded forestry company in Canada. Sino-Forest has denied the allegations.
Block says Muddy Waters has not been served the suit yet, but has reviewed a copy of the complaint emailed to it by an outside source.
"We're in the process of reviewing it. So we have counsel looking at it and analyzing it, as well as analyzing possible claims that we have against Sino-Forest, any individuals responsible at Sino-Forest for bringing the suit against us."
Block would not comment on a specific allegation made by Sino-Forest that Muddy Waters was selective in the research it used, choosing to ignore a 1997 report Sino-Forest says would have indicated it wasn't a fraud from the beginning.
"We reviewed over 10,000 pages of SAIC [State Administration for Industry and Commerce] files. The body of work that we've done, I think speaks for itself," he says. "At no time during the process, once we formed our initial conclusions, at no time did we come across documents that would contradict the conclusions that we reached."
He says Muddy Waters has a mix of consultants and core members of the firm on the ground in China.
Block says his responsibility is the same as any analyst: "That is to be diligent in searching for the truth, and to make good faith conclusions based on information that we come across."
"We hear about a lot of companies that cause some investors concern. We take our time and we look at them. As always, we're diligent in how we approach these."
Block says there's a significant risk of a hard landing for China, the world's second largest economic, which could "kick in" by 2014.
"I do believe there is a fixed asset bubble in China," he says. "I do believe there is a lot of froth throughout a lot of the emerging markets in general and this will eventually come home to roost."
Sino-Forest declined to comment to BNN about Muddy Waters' remark and the lawsuit .