Carson Block Sues Ex-Researcher Over SEC Whistle-Blower Claims

Carson Block hit back at a former researcher suing him for a share of a $14 million Securities and Exchange Commission whistle-blower award, calling Kevin Barnes’s claims “meritless” in his own lawsuit.

The short seller on Thursday sued Barnes for defamation in federal court in Texas, saying the latter had lied to reporters and in legal filings about his role in a 2011 report alleging financial fraud at China-based Focus Media that led to an SEC enforcement action. Block said Barnes’s claims have delayed payment of the award.

Barnes “has conducted a concerted media defamation campaign against Mr. Block in a further attempt to coerce Mr. Block into paying a portion of the whistle-blower award to Mr. Barnes,” the Muddy Waters LLC founder said in his suit.

In a statement, Barnes accused Block of “attempting to utilize spurious defamation claims to distract from his own behavior.”

The SEC’s March 11 order issuing the whistle-blower award noted there were two claimants but said only the one who reported the alleged fraud directly to the regulator, was eligible. Barnes has challenged the award along with suing Block.

Read more: SEC Enriches Fraudsters, Lawyers as Secrecy Shrouds Tips Program

Block accused Barnes of exaggerating his role in the Focus Media report and lying about the two men having a deal to split any whistle-blower award.

According to Block, Barnes was one of five researchers who worked on the report and played a relatively minor role due to his inability to speak Mandarin Chinese. He also said Barnes violated a non-disclosure agreement by tipping off another hedge fund to the report before it was published.

The dueling allegations have become fodder for critics of the SEC’s whistle-blower program, which intentionally operates with little transparency in order to offer a path for tipsters to alert the regulator to frauds confidentially. Barnes in his challenge to the award accused the SEC of improperly favoring insiders represented by former officials now working as private lawyers -- he claims higher-level officials overruled staff in awarding $14 million to Block.

Block claims he declined an offer by Barnes to “quarterback” the submission to the SEC, telling the researcher a lawyer would handle it. According to Block, Barnes subsequently filed his own application claiming to have been Block’s “partner” on the Focus Media report.

To contact the reporter on this story:
Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editors responsible for this story:
Ben Bain at bbain2@bloomberg.net

Anthony Lin

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