The Most Dangerous Trade

Chapter 5Block: Playing the China Hand

The white van careened along a narrow, two-lane road deep in the snow-covered He Bei province, 150 miles southwest of Beijing. In the back, Carson Block, attorney, entrepreneur, and capitalist adventurer, bumped along at 35 miles an hour on his way to visit Orient Paper and its upgraded factory, which, the company claimed, would allow it to sharply increase production of high-quality cardboard and other paper product lines. Beside him sat Sean Regan, a manufacturing expert and Asia hand with a specialty in supply chain management and quality control.

Both Block and Regan lived in Shanghai, graduates of the University of Southern California who had become close friends after bonding over USC football. On this blustery day in January 2010, they were on their way to visit a small, New York Stock Exchange–listed company, Orient Paper, at the behest of Block's father, William Block, who ran his own Los Angeles investment firm, WAB Capital. The older Block analyzed microcap companies and, if he liked them, published bullish research reports for a clientele of hedge funds and other money managers. The rub was that WAB got paid by the company—not investors—with warrants or restricted stock for the research and for introducing management to his investor clients. Some called him a stock promoter.

The previous night, the pair had scoured Orient Paper's U.S. Securities & Exchange Commission (SEC) filings—and grew skeptical of the company's claims to ...