TORONTO -- U.S.-based short-seller Muddy Waters has taken aim at Manulife Financial Corp., warning that an impending trial verdict could lead to "billions of dollars of losses" at the Canadian insurer.

Carson Block, the firm's head of research, wrote in a report published Thursday that Manulife's life insurance subsidiary has just concluded a trial that could "significantly damage its earnings, capital, creditworthiness, business, and solvency -- per its own expert's sworn affidavit."

"We believe a verdict is likely by the end of this year," he wrote in the report announcing Muddy Waters' short position in the firm. "There are therefore material risks to the financial well-being of MFC. We do not believe investors are aware of these risks, nor do we believe they have been priced into MFC shares."

Shares of Manulife were down roughly three per cent on the Toronto Stock Exchange in early afternoon trading to $22.50.

Short selling is a trading technique that can produce a profit if a stock's market value falls below a predetermined price.

Manulife, which has more than 13,000 staff in Canada and a global workforce of roughly 35,000, defended its actions. Manulife also operates as John Hancock in the United States.

"The Muddy Waters report is a short seller's attempt to profit at the expense of our shareholders, and we disagree with its conclusions," it said in a statement.

The company said consumers and issuers of universal life policies never intended to have the policies function as deposit or securities contracts.

"We expect we will prevail with respect to this matter and that it will not affect our business operations or our ability to meet obligations to our customers, vendors and other key stakeholders."

Block -- whose 2011 report into timber company Sino-Forest triggered an investigation by regulators into what became one of Canada's largest corporate fraud cases -- wrote that the trial involves one of Manulife's insurance contracts purchased in 1997 by a hedge fund called Mosten Investment LP.

The report says that Mosten argues that it can deposit an unlimited amount of money with Manulife through the universal life insurance policy and receive an annualized guaranteed return of at least four per cent with one-month liquidity.

If Mosten prevails with its argument, the hedge fund could sell an unlimited amount of partnership interests backed by the Manulife insurance contract and "likely become the most lucrative money market fund in the developed world!" wrote Block.

"These terms alone could financially cripple Manulife," he said.