Two Israeli traders facing insider trading charges were once "close associates" of short seller Muddy Waters, before splitting due to a dispute in 2014, according to a new report by Bloomberg. The traders split from Block in 2014 after Block said he suspected that they were selling information from Muddy Waters reports prior to the firm publishing them.
Tomer Feingold and Dov Malnik were both said to have approached Muddy Waters founder Carson Block in 2010 after Block's firm published a report on Orient Paper Inc.
Block said that even though Feingold and Malnik were "close friends", they told him that they only had "passing familiarity" with each other at the time. Block told Bloomberg that the pair played "significant roles" in both field research and trading for some of Muddy Waters' earliest reports. They contributed to the firm's blockbuster report on Sino-Forest, which Muddy Waters exposed as "one of the biggest frauds in Canadian stock market history".
When he discovered the pair was selling the firm's reports, Block said it was a “massive betrayal of my trust.”
“Through significant deceit, they integrated themselves into my business and personal life,” Block told Bloomberg.
But the Israelis claim in a lawsuit against Block that they were denied a "rightful share of the Muddy Waters’ brand," which they helped build. Their 2014 lawsuit alleged Block “wrongfully alleged that plaintiffs ‘have misappropriated information from [Mr. Block personally] and Muddy Waters LLC to engage in unauthorized trading on behalf of themselves and others.’”
Feingold and Malnik said they had agreed to publish under the Muddy Waters name, but Block then “wrongfully asserted control over the jointly-developed brand and have excluded plaintiffs” from working together.”
Block tells a different story, claiming he stopped professional contact with the duo and "halted any shared trading activities" with them after he began to have suspicions.
The case was settled in 2015.
The duo then set up their own shop in Geneva, where it is alleged they received confidential information about acquisitions and deals from an unnamed trader which allowed them to reap "millions" in illegal profits, a U.S. federal indictment revealed. Prosecutors alleged that "in or around 2011, Malnik and Feingold each set up a shell company in the British Virgin Islands and used those entities to trade in stocks on which they’d received inside information," according to Bloomberg.
Block said he was approached by FBI and Department of Justice investigators after he severed relations with the pair. They inquired as to whether "large trades" made from offshore accounts ahead of Muddy Waters reports were authorized. Block said he had no knowledge of the trades.
Malnik pleaded guilty to securities fraud for trading in stock of Omnicare based on confidential information he received in 2015. He is forfeiting $1.5 million and faces 37 to 46 months in prison.
“I will forever regret my conduct and the impact it has had on my family and friends,” he said in front of a judge.
“While I have no window into their outside activities, the fact that they have been charged with crimes does not surprise me,” Block concluded.