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David rocking Goliath's world. The 1980 U.S. Olympic ice hockey team stunning the Soviet Union. Little Mac knocking out Mike Tyson.
In the annals of underdog victories, is short-side research firm Muddy Waters about to get an entry?
It's being reported today that John Paulson's Paulson & Co. hedge fund has dumped its entire stake in Sino-Forest (TSX: TRE), a Chinese forestry company that was the latest target of Muddy Waters. In a statement, Paulson said: "Due to the uncertainty over Sino-Forest's public disclosures and financial statements, we have sold our stock and await the results of the independent committee's investigation."
This isn't the first time that a big-name investor has been caught in the crosshairs of a Muddy Waters takedown. Back in February, the firm released research on China MediaExpress (OTC: CCME), saying in no uncertain terms that the company was "engaging in a massive 'pump and dump' scheme." C.V. Starr, the investment vehicle of former AIG chief Hank Greenberg, was a major holder of China MediaExpress shares. Though the company hasn't admitted wrongdoing, shares have been delisted from the Nasdaq and have lost more than 90% of their value since January.
Orient Paper, RINO International, and Duoyuan Global Water (NYSE: DGW ) have also been among Muddy Waters' targets. Only Orient Paper has thus far managed to fend off the attacks to some extent. The company just announced that a four-month investigation found no evidence of Muddy Waters' claims against it -- though it remains to be seen how much that will help the ailing stock. Meanwhile, RINO has been delisted and trades for less than $1, while Duoyuan's stock has been halted since April.
The China MediaExpress hit put Muddy Waters in the spotlight, and if Sino-Forest is unable to clear its name, this latest volley could add even more market-moving power to the research firm. For the 12 months ending in March, Sino-Forest reported nearly $2 billion in revenue. The Wall Street Journal suggested that Paulson's paper losses on the stock were in the $500 million range.
For investors on the long side of the small-cap China trade, there is now more reason than ever to fear the Muddy Waters cannon being trained on their stock. While it remains to be seen whether the Orient Paper findings will ding Muddy Waters' credibility at all, it's a virtual guarantee that any stock that the short seller writes about will lose a considerable amount almost immediately.
And it doesn't seem as if there is any shortage of targets out there. Harbin Electric (Nasdaq: HRBN ) has been in a tug-of-war with short-seller Citron Research as it tries to convince investors of the veracity of a buyout offer from its chairman, while last week China-Biotics (Nasdaq: CHBT ) became yet another Chinese stock whose shares have been halted.
Of course, if you just can't quit China, then you can at least get a view from the ground. Click here to sign up for free dispatches from the Motley Fool Global Gains team as it treks through China looking for the best investments it has to offer.