Who is behind the Muddy Waters campaign targeting Mota-Engil?

It was founded in 2010 but already has a long track record marked by aggressive shareholder activism and short-selling, betting on the fall in share prices of listed companies around the world. Muddy Waters, which is currently involved in a legal dispute in a Texas court against Mota-Engil and its CEO, is known for playing hardball. But, ultimately, what is this fund and what does it aim to achieve?

The company’s history began with Carson Block, a 48-year-old investor who founded Muddy Waters Research in 2010. The aim was to produce independent analysis of listed companies, rather than having to make decisions based on the usual investment and research firms. Block assumed that the standard system does not do all the necessary groundwork when analysing listed companies, so he decided to set up in-house teams to do so.

But this company does not limit itself to conducting analysis. Not only does it sell this service to anyone who wants it (and also makes various reports publicly available), but it acts on its findings, employing a strategy to capitalise on companies which, in its view, are overvalued: short-selling, seeking to profit from the fall in the value of the shares.

In 2016, it took a step forward: it established Muddy Waters Capital LCC, an investment firm that aims to actively invest and act directly on the basis of research conducted by Muddy Waters Research.

Going back a little, Muddy Waters started making waves right from the outset. The first target was Sino-Forest Corporation, a company with securities listed in North America that presented itself as one of China’s largest commercial forest owners. Carson Block crunched the numbers and concluded there was something amiss with the company, launching a campaign against the management and claiming that Sino-Forest was little more than a Ponzi scheme. After Muddy Waters published and publicised its findings regarding the company’s accounts, the shares plummeted by nearly 80%, leading to losses for many investors, including the renowned John Paulson. Sino-Forest defended the soundness of its accounts but requested an independent audit. A year after Block’s attack, it went into bankruptcy.

Over the years, the firm has focused on US and Chinese companies, but also Swedish and German ones. And here lies one of the problems: the fact that Muddy Waters, in many situations, exposes what it perceives to be accounting manipulation, for example, whilst at the same time holding a short position in the shares. In other words, it stands to gain directly if the reputation and share price of the companies in question are called into question.

This is what happened in 2016, when the German regulator stepped in to curb what it considered to be abusive behaviour by Muddy Waters. The firm had issued a scathing report on Ströer, a Cologne-based company that manages advertising space, claiming that there were accounting irregularities and discrepancies in the reporting of its organic growth. Shares fell by nearly 25%, but it was only later that it emerged the US investment firm had a short position on the shares. Under German law, the establishment of such a position should have been disclosed in advance, which it was not, leading to a formal investigation into Muddy Waters’ practices.

The company’s description on its own website is quite clear regarding its objective. “Muddy Waters LLC is a pioneer in on-the-ground investment research and free publication. Muddy Waters peels back the layers, often built by seemingly respected but sycophantic law firms, auditors and biased management teams. We pride ourselves on assessing a company’s true value and seeing through the opacity and ‘hype’ that some management teams create.”

He continues: “Our approach to research is to bring together a diverse range of talents, including forensic accountants, experienced investigators, valuation specialists and entrepreneurs, many of whom have experience in running businesses in the United States and in emerging markets.”

The firm produces three types of reports, depending on the focus: business fraud, accounting fraud and fundamental issues. Business fraud reports focus on issuers that report revenues significantly higher than actual figures, whilst accounting fraud reports cover legitimate businesses that inflate profits through fraud. Reports on fundamental issues, meanwhile, discuss opaque businesses with serious underlying problems of which the market is not yet aware.

In the case of Mota-Engil, there has not yet been a full public report from Muddy Waters, but the firm appears to believe there is scope for an attack. For now, the lawsuit filed in a Texas court relates to statements made by the Portuguese construction firm’s CEO, Carlos Mota dos Santos, in an interview with the newspaper Expresso in 2024, in which he claimed that the US firm was engaging in market manipulation.

The lawsuit seeks compensation for Muddy Waters for damage to its reputation, but the complaint – to which ECO had access – does not shy away from a harsh analysis of Mota-Engil, in order to justify its short position in the Portuguese construction firm’s shares.

“In 2024, following months of research and analysis, Muddy Waters concluded that Mota-Engil SGPS was materially misleading its investors through, among other issues, the under-reporting of its debt, and that the family controlling Mota-Engil was improperly extracting value from the company at the expense of other shareholders”, reads the statement of grounds for the complaint.

In a statement released last Saturday, Mota-Engil denies all these allegations.

According to data published on the Portuguese Securities Market Commission (CMVM) website, Muddy Waters has an open short position in Mota-Engil representing 0.57% of its share capital, but it is not alone. There are three further positions held by other investment funds, all of which are larger. Furthermore, there may well be others, but there is only a requirement to report them when the position exceeds 0.5% of the share capital.

In 2016, Carson Block explained to Business Insider what his strategy is when he sets out to analyse a company: “It’s a bit like doing a jigsaw puzzle. You’re really trying to find the pieces and figure out how they fit together to get a clear picture of what the company is doing.”

Muddy Waters has faced legal issues in the past and has not always succeeded in its strategy of profiting from the fall in share prices of companies it considers overvalued. However, it has a track record of aggressiveness that sometimes attracts other funds seeking to follow the same strategy, thereby increasing the pressure on the target company.

The eternal question remains: does it identify weaknesses in the companies in which it has a short position because they are actually overvalued, or does it claim this as a way of devaluing them and thus making money?