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China Fraud Plot Thickens With Fake SEC Suit

(Updated with further detail on the fake SEC suit.)

NEW YORK ( TheStreet) -- A controversial short-seller who has made a career out of accusing Chinese companies of fraud was the victim of a hoax on Tuesday.

According to a document that rippled across the Internet, the Securities and Exchange Commission filed a civil suit against Carson Block, the short-seller who composes critical reports on Chinese companies under the name Muddy Waters, alleging stock manipulation.

The document, however, was a fake. SEC spokesman John Nester confirmed as much Tuesday morning. "We've issued no such release," he said. He declined to comment further.
Carson Block

Phony SEC press releases and other documents are nothing new, especially in the Internet age. The commission has in the past pursued enforcement actions against individuals who have created and released them.

A vibrant social-media network dedicated to Chinese stocks has developed over the last few years. The fake SEC complaint was posted and reposted by dozens of Twitter users. It also found its way to several market-focused blogs and Web sites.

The complaint was a fairly obvious fabrication. Marred by grammatical errors, it carried the litigation release number "21053." The true SEC document referred to by that number is the announcement of a permanent injunction against a Victor Ragucci in April 2010.

Block, who, by his own admission, takes short positions in the stocks he publicly accuses, has certainly made enemies. His scathing research reports have predated the implosions of Rino International and China MedieExpress. A third report, on Duoyuan Global (DGW), came days before the New York Stock Exchange halted trading in the stock.

A fourth, which accused the Toronto-listed Sino-Forest of brazen fraud, has sparked concern among investors that accounting problems exist at Chinese companies beyond the small-cap names that entered the public markets through obscure avenues, such as reverse mergers. The Sino-Forest controversy, which has drawn in even world-class investors such as hedge-fund manager John Paulson, has has helped cause the China stock-fraud phenomenon to make the front pages of the world's major newspapers, along with the high-profile troubles of Longtop Financial (LFT), an NYSE-listed stock that went public through an IPO. (Paulson has reportedly unloaded his position in Sino-Forest.)

Block got his start almost exactly a year ago, when he put out a report on Orient Paper (ONP - Get Report) that sparked a long-short battle that played out on these very Web pages.

Orient Paper has denied Block's allegations and has avoided the utter disasters that have afflicted his other targets; its stock recently traded at $3.19. (Block stands by his research on the paper company.)
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