Carson Block, the founder of Muddy Waters Research, made headlines by announcing a new short position on Fairfax Financial Holdings Limited (OTCPK: FRFHF), targeting the company for what he described as financial manipulation akin to alchemy.
Following the publication of the short report, Fairfax Financial Holdings issued a press release that firmly disagreed with the allegations made by Block regarding its financial practices and book value.
Interviewed on CNBC’s ‘Squawk Box’ on Thursday, Block explained Fairfax overvalued its assets and income through questionable transactions, suggesting a “conservative adjustment” to the book value by approximately $4.5 billion or 18% lower than reported.
Shares of Fairfax Financial Holdings have fallen nearly 9% in response to Muddy Water’s short report, on track for the worst-performing session since March 16, 2020, when strict COVID-19 lockdowns were announced across the world.
A Dive into Fairfax’s Financial Practices
Fairfax Financial, often dubbed the “Berkshire Hathaway Inc. (NYSE:BRK) of Canada,” was under scrutiny by Block for its financial practices.
According to Block, the company, led by Indian-Canadian billionaire Prem Watsa, known as the “Canadian Warren Buffett,” failed to meet its long-term goal of a 15% compound annual growth rate (CAGR) in book value per share since the financial crisis.
“The reason why is that since its inception, it’s tried to create this mythos about it that the chairman controlling shareholder is [like a] Warren Buffett… But the reality is they haven’t been able to get anywhere near that,” Block stated.
Instead, the company resorted to value-destructive transactions and the use of off-balance sheet debt to inflate its book value falsely.
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One of the examples highlighted by Block is Fairfax’s investment in Recipe, a chain of restaurants.
He accused Fairfax of carrying this investment at a value significantly above market price before eventually taking the company private, yet continuing to overvalue it despite deteriorating financial performance.
Block didn’t shy away from criticizing the governance and auditing processes at Fairfax, especially the involvement of the CEO’s family on the board and the long-standing…
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