Muddy Waters rode shorting wave on Blinkx shares

Carson Block, the investor known for betting against shares in Chinese companies, revealed on Tuesday that he had profited from heavy falls in the share price of Blinkx - the UK online video company that lost a third of its value last week, after a blog questioned its methods of generating advertising revenue.

Blinkx shares fell almost 15 per cent on Tuesday, after Mr Block said his company, Muddy Waters Research, had initiated a short position in them - selling borrowed shares, in anticipation of buying them back more cheaply.

He explained that he had done so after Benjamin Edelman, an associate professor at Harvard Business School, published a highly critical blog post about Blinkx on Tuesday last week. Mr Edelman said he had been paid to write a report on Blinkx by an unnamed client, but on Tuesday Mr Block said he had no connection with the academic's work.

"We were already in the process of researching this when we saw Edelman's blog post", said Mr Block, who is best known for his research on Sino-Forest, a Chinese timber group that subsequently collapsed.

Blinkx has been fighting to defend itself against suggestions in the blog that it used questionable tactics to inflate its revenues. Last week, Blinkx said it "strongly refutes" the allegations.

After Mr Edelman's post began circulating widely last Thursday, Blinkx's shares lost one third of their value. Muddy Waters, which had borrowed less than $5m worth of Blinkx shares, below the reporting threshold, was forced by its broker to close the short position on Friday.

On Tuesday, Blinkx said it "notes" Mr Block's comments and reiterated that it "strongly refutes the assertions made and conclusions drawn in the blog post". It added that "there has been no material change to the operational and financial performance or outlook for the business".

But analysts said the involvement of Mr Block would draw further scrutiny to Blinkx, and put additional pressure on the company to issue a detailed response to the allegations.

"Muddy Waters has built a very strong following on the back of rigorous, intellectual reporting and considered high quality," said Neil Campling, an analyst at Aviate Global, in response to the revelations about Mr Block's short position.

"His success hasn't always borne fruit but has had the impact of driving down a stock price by an average of 77 per cent, according to data."

Blinkx, until recently one of Aim's best-performing tech stocks, has in recent weeks attracted heavy interest from speculators looking to profit from a decline in its share price. Its stock has been sold short by institutions including Oxford Asset Management, Jericho Capital Holdings, and Valiant Capital Management.

Blinkx was spun out of Autonomy, the computer software company, in 2007 via an initial public offering on London's Alternative Investment Market.

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