Chapter 39: The Ethics of Short Selling: The Case of Muddy Waters Research LLC

Short selling, in short, is legal betting against the continued growth of a publicly traded firm. It predicts that, for one reason or another, the stock price of a given firm will decrease, thus benefitting the investor holding the short position. The company Muddy Waters was founded by a short selling expert named Carson Block, who made a name for himself and his firm by allegedly discovering fraud at a number of publicly listed Chinese companies through investigative research. Once discovered, Muddy Waters would publish a research report summarizing their findings. The case describes two cases in which the company applied this business model to Chinese companies and asks whether it is ethical to profit from another’s losses and whether investors should be allowed to invest in the failure of a firm.