The giant Chinese tutoring company TAL Education is being accused of inflating its profits and misleading the public by an investment firm that is short-selling the Asian business’ stock.
The investment firm, Muddy Waters Research, was founded by short-seller Carson Block, who has become known for scouring the financial activities of publicly traded companies, particularly those based in China.
TAL, which has 42 different learning centers in China and stands for “Tomorrow Advancing Life,” has strongly denied the allegations, saying they are “based on erroneous conjectures and assumptions.”
A class-action lawsuit filed last month in federal court in New York mirrors the complaints raised by the short-seller. It cites details in a research report on TAL by Block published last month and argues that investors were harmed by a subsequent drop in the tutoring company’s stock price.
The lawsuit says that after Muddy Waters published a report on TAL Education on June 13, the company’s share price fell by $7.02 per share, or 15 percent, to $38.41.
In a pair of reports issued last month and then last week, Muddy Waters Research accuses TAL Education of making fraudulent transactions that overstate the company’s value.
Two of those deals, the research claims, inflated the company’s pre-tax profits for fiscal years 2016-2018 by $153 million, or 28 percent.
In its June report, Muddy Waters Research questions TAL’s acquisition of a professional counseling services company for Chinese students who wish to study abroad. As a result of the deal, TAL booked roughly $50 million in pre-tax profits, in what amounted to a fraudulent “asset parking” transaction, alleges Muddy Waters Research, which says the resulting profits don’t hold up to scrutiny.
In another case, Muddy Waters Research accuses TAL of making a fraudulent transaction involving a Chinese tutoring business located in the city Guangzhou. That deal inflated pre-tax profits by as much as $59.4 million from fiscal 2016-2018, alleges the investment firm.
In a video accompanying the report, Block says his organization spent thousands of hours and many months reviewing TAL Education’s documents and practices.
He faults U.S. government regulators for lax oversight of Chinese companies trading on the stock markets and says that organizations like his are providing transparency that authorities are not.
“Short-sellers, right now, are effectively the only line of defense” against deceitful practices that could undermine investors in the U.S. market, Block said in a video accompanying his report.
In a pair of statements released after Muddy Waters Research’s reports were issued, TAL Education rejected the investment group’s accusations. (TAL did not respond to follow-up requests for comment.)
“The allegations made by this short-seller contain numerous errors, unsupported speculation and malicious interpretations of events,” TAL Education said in a news release.
The company said its board of directors has been made aware of the accusations, and along with the company’s audit committee, will “review the allegations made and will consider appropriate actions to protect the interests of its stakeholders.”
Investments in U.S. Market
In a follow-up release issued last week, TAL Education officials said the company is “committed to creating long-term value for its investors. ”The company added that it “remains focused on its business strategy to continuously improve its products and services and to maintain a high level of customer satisfaction.”
Short-sellers play an active, and often controversial role in Wall Street investing. In contrast to the buoyant optimism that pervades much of the market, short sellers bet on the prices of stocks to fall when they consider them to be overvalued.
Muddy Waters Capital takes a position in a company—shorting it—prior to releasing its research to the public, as is typical for “activist” short sellers, a spokesman for the investment firm said in an e-mail.
The San Francisco-based firm takes its name from a Chinese proverb that says “muddy waters make it easier to catch fish”—a reference to the company’s work exposing what it sees as unscrupulous practices, the spokesmaaid.
In addition to the educational services it provides in pre-K through grade 12, TAL Education has made investments in many education companies, including some based in the United States. It has put money into U.S.-based providers Knewton, Wonder Workshop, ThinkCERCA, Volley Labs, and Ready4, according to Crunchbase.
Block has investigated numerous publicly traded companies, based in China and other locations, that he suspected were overvalued and deceiving investors. In 2011 one of the organization’s reports accused a Chinese company called Sino-Forest, which had attracted a flood of foreign investment, of fraudulent practices. The company’s value plummeted, and it later declared bankruptcy.
Securities officials in Canada, where Sino-Forest was listed, ruled in 2017 that a number of executives at the company had committed fraud.
He has worked as an attorney and entrepreneur in China, and he co-authored Doing Business in China for Dummies, a book offering advice to foreigners trying to crack the Asian market.