The case against Carson Block is mounting, with regulators in France leading the charge. The question reverberating inside financial markets, in Europe and the US: does short seller activism amount to market manipulation, or are these dissonant traders simply making wide and unlikely wagers?

Leaning heavily on his reputation as a short seller who exposed allegedly fraudulent Chinese companies, Block has deflected criticism his entire career. His opinion and short bets have become price shapers within financial markets, only galvanising his brash and aggressive modus operandi. For example, when in August of 2018, he bet against the French national grocer, Casino, tweeting his belief that its late financial reports indicated problems, the company stock fell more than 10 percent in value in a single day.

The company, in this instance, refuted the short seller’s assertions that there were any issues. Others pointed to the fact that Casino had filed its accounts later in the year for both its previous two annual reports and that, therefore, there was no apparent anomaly. Many companies, attacked by Muddy Waters or by other short sellers, have posited that their stock value is harmed merely by the attention of the vocal activist critics. While short sellers say that they are simply making good bets relying on thorough research, the companies under attack claim that their criticism alone drives the plunges in value.

Blocks claim is that those speaking against him are companies who do not take kindly to his supposedly illuminating reports on their financial or structural problems, and as such their opinions are untrustworthy. Targeted companies have refuted his claims to varying degrees of success, however, the trend is clear: when Carson Block’s firm attacks a company, damage is done.

The premise under inspection is that short seller activists simply point out information indicating that companies are overvalued, and that therefore, their stock value will fall either way. Stock traders betting on the “short” make their profits through this fall in stock value, by borrowing, selling, and then later buying back stocks at their reduced market price.

The problem with this is that in recent years short seller activists have also taken to morally and legally grey plays, such as releasing harmful information about a company in coordination with acquiring short positions, as well as persistent corrosive commentary on social media, particularly through Twitter. The continued online pressure seems at times to manufacture an atmosphere of pessimism towards the stock.

The question is, was it the chicken or the egg that devastated your company’s market value?

In France, regulators perceive problems. Muddy Waters’ all-out assault on Casino, which is based on the claim that the company is overleveraged in debt, came under investigation by the Autorité de Marché Financiers (AMF). The regulator surprisingly came out in an open way on the side of the targeted company, and is known to have informed Block that it suspects him of full-blown market manipulation.

In particular, AMF chairman, Robert Ophèle made it clear in an interview with a French newspaper that he saw Block’s conduct to be extremely questionable and that a full report on the investigation would come out this year elucidating the issue. His emphasis was on how Muddy Waters failed to meet short selling requirements in notifying the AMF in a timely manner that it had past certain thresholds. And, furthermore, that the apparent coordination of harmful, unverified publications with short positions was a serious problem. “These types of actors are useful to the market, but spreading false information or manipulations, of course, would be unacceptable,” Ophèle said.

The chairman was adamant that Block’s claim of being an industry spotlight is not going to cut it. “A person cannot be presented as a "whistleblower" if he is paid for this purpose,” he stated. The episode has cast a lot of attention on the intelligent gambler hypothesis proposed by many short sellers. Just as in poker, when you stack the deck, it is no longer considered gambling.

Another aspect of the episode has been the contrast between European and US notions of market regulation. Casino’s parent company, Rallye, placed itself under market protection, citing “persistent and massive speculative attacks against the group’s securities.”

Naturally, Muddy Waters suggested that its claims were substantiated, with the move representing a “resounding vindication of the warnings we sounded in 2015.” The AMF seems to take a different position, pointing the finger at the short sellers.

Industry commentators have also suggested that there is lack of understanding in the US of European protectionist approaches to market regulation: regulation based on EU financial research. While US and UK finance industry players would like to see a consolidation of market philosophies, the EU is firmly against this encroachment. In many ways, the Muddy Water-Casino episode is highlighting the potential pitfalls in operating in different markets simultaneously. And, with the regulatory noose tightening, Carson Block’s firm might be about to regret playing such a risky hand.