Attention Bill Ackman: Perhaps you need to study the techniques of Carson Block. He knows how to short sell stocks that do, in fact, go to zero.

Carson Block announces 500.com short this past September

As previously reported in ValueWalk on September 9, 2014, Block, who founded the famed short selling research firm Muddy Waters, went short 500.com (NYSE listed as WBAI), a Chinese sports lottery web site.

Shares of the stock were halted Monday pending news, coming off a Friday when the company reached an agreement with the Chinese government that essentially suspended its business, Julia La Roche of Business Insider is reporting.

“The Company plans to voluntarily and temporarily suspend all of its online lottery sales services starting from April 4, 2015. During this temporary suspension period the Company expects that it will not generate any revenue,” the statement said.

Is fraud involved at 500.com closure? Carson Block hasn’t said

While the statement did not outline the exact problems the company was having, it did hint at “unauthorized” behavior:

The Public Announcement mandates, among other things, that (i) all institutions, online entities, or individuals which provide unauthorized online lottery sales services, either directly or through agents, shall immediately cease such services and all provincial governmental authorities of finance, civil affairs and sports shall investigate and sanction unauthorized online lottery sales in their respective jurisdictions according to relevant laws and regulations; (ii) local government authorities of public security and industry & commerce shall investigate any sales of illegal lottery products within their respective jurisdictions

The exact issues for the company’s closing remain unknown, and in his September presentation to the Value Investing Congress, Block was said to have included two slides regarding the 500.com short idea, reported to have said that he had identified “red flags.” The stock has moved down 64 percent from that point.

Carson Block / Muddy Waters found fame in China

Muddy Waters found fame and fortune following its research on Sino-Forest Corp., a China-based forestry company listed on the Toronto Exchange.

Shortly after Muddy Waters’ report in June 2011, Sino-Forest lost nearly $6 billion in market capitalization, its auditor resigned and regulators halted its shares.  Muddy Waters and its research were credited with exposing the issue. The company filed for bankruptcy and in June 2012, the Ontario Securities Commission filed formal fraud charges against Sino-Forest and its senior management for overstating its timber assets and misleading investigators. In total, Muddy Waters has issued eight “strong sell” recommendations resulting more than $8 billion of downward market cap adjustments, four de-listings and six or more regulatory investigations. Prior to forming Muddy Waters, Mr. Block was an entrepreneur in China and worked as a lawyer in Shanghai.