Indicted Traders Once Played a Key Role at Muddy Waters

A pair of Israelis accused in the U.S. of being involved in a sprawling international insider trading ring were once close associates of Muddy Waters LLC founder Carson Block before they split amid an acrimonious dispute.

Block said he was first approached by Tomer Feingold and then separately by Dov Malnik in 2010 after publishing a short-selling report on a Chinese company called Orient Paper Inc. Malnik and Feingold claimed to only have passing familiarity with one another at the time, when in fact, he said he later discovered, they were close friends.

Indicted Traders Once Played a Key Role at Muddy Waters

Malnik and Feingold played significant roles in the field research and trading for some of Muddy Waters’ most successful early short-selling reports starting in 2010, Block said in an interview. Their work included contributions to reports on Sino-Forest Corp., the one-time Chinese forestry giant that Block and his team helped expose as one of the biggest frauds in Canadian stock market history.

However, Block’s professional relationship with Feingold and Malnik ended in early 2014 when he said he began to suspect and gather what he says was evidence that the duo were selling information from Muddy Waters reports to outsiders before publication.

‘Massive betrayal’

It was a discovery that amounted to what Block said was a “massive betrayal of my trust.” They were never co-founders of the Muddy Waters brand, but “through significant deceit, they integrated themselves into my business and personal life,” he said.

Malnik and Feingold told a different tale in a lawsuit they brought against Block and Muddy Waters, claiming Block denied them their rightful share of the Muddy Waters’ brand, which they said they’d played a critical role in building.

Block and his company “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,’” according to their 2014 lawsuit in New York.

Block made the allegations in a private legal arbitration case, which was referenced in the New York lawsuit.

Feingold and Malnik argued they met Block on several occasions in which they agreed to publish research reports under the name Muddy Waters but then Block “wrongfully asserted control over the jointly-developed brand and have excluded plaintiffs” from working together.”

Block said in the interview he ceased professional contact with Malnik and Feingold and halted any shared trading activities after he began suspecting they were selling information in Muddy Waters reports to outsiders.

A New York judge dismissed the case in early 2015 after being informed by lawyers on both sides that it had been, or was about to be, settled.

Block wouldn’t comment on whether a settlement had been reached or provide any details on the matter. The New York lawyer who represented Malnik in that dispute declined to comment and Feingold’s lawyer in the case didn’t return messages seeking comment.

Geneva Office

Around the time the relationship began to sour, Feingold and Malnik set up a trading business in Geneva completely independent of Muddy Waters, according to U.S. prosecutors. It was there that between 2013 and 2017, Feingold and Malnik allegedly received confidential information about health care acquisitions and potential deals from an unnamed local securities trader allowing them to reap millions of dollars in illegal profits, according to a U.S. federal indictment unsealed in June.

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, the prosecutors alleged.

During his trial in the U.S. last year, former Geneva trader Marc Demane Debih said the pair were both part of an international insider-trading ring that U.S., French and U.K. prosecutors have been investigating since at least 2014.

Malnik was extradited from Switzerland to the U.S earlier this month. After pleading not guilty on June 11 upon his arrival in New York to 14 charges of securities fraud and wire fraud, and one charge of concealment of a money-laundering conspiracy, Malnik changed his mind.

Under an agreement with prosecutors, Malnik, 43, pleaded guilty to a reduced charge of one count of securities fraud, for trading in the stock of Omnicare Inc. based on confidential information he received in the summer of 2015. He will forfeit $1.5 million and faces 37 to 46 months in prison under federal sentencing guidelines and a fine of between $7,500 and $5 million as part of the agreement.

“I will forever regret my conduct and the impact it has had on my family and friends,” Malnik said before a federal magistrate judge in Manhattan.

A lawyer for Feingold, whose current whereabouts are unknown, declined to comment.

Post-Block

After severing relations with Malnik and Feingold in 2014, Block said he was approached by FBI agents and U.S. Department of Justice officials. They asked whether large trades ahead of Muddy Waters reports made from offshore accounts allegedly linked to Malnik and Feingold were authorized, according to Block.

A spokesperson for the DOJ declined to comment. An email sent to the FBI’s main press office was not immediately returned.

Block says he told the agents he had no knowledge of the trades and that they were not approved by Muddy Waters. The scope of the unauthorized trading ahead of its research reports went beyond accounts controlled by Malnik and Feingold, says Block. He said he learned of this after FBI agents showed him the trades.

“While I have no window into their outside activities, the fact that they have been charged with crimes does not surprise me,” said Block.

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