Sharesleuth: Profiting from Revealing Shady Business Practices


Here’s something weird & controversial.

The Sharesleuth.com website is a collaboration of billionaire entrepreneur Mark Cuban [Wiki-Warning] and journalist Chris Carey. The site bills itself as “an independent Web-based reporting aimed at exposing securities fraud and corporate chicanery.”
From the website:

More than 13,000 companies are listed on U.S. stock exchanges. Analysts for brokerages and independent research firms track fewer than half of them. Overburdened examiners at the Securities and Exchange Commission review only a fraction of the filings that come their way.

If you’ve spent any time digging through muck and rot in the lower reaches of the stock market, you know that many investment opportunities are not what they seem, and that some companies are the creation of predators and pretenders.

Sharesleuth.com aims to create a new line of defense by using investigative journalism techniques and a worldwide network of amateur and professional stock detectives to identify suspect companies.

So far, so good, right? Sharesleuth aims to shine the light of Truth on shady companies. But there’s a catch.

In certain instances, the majority partner of Sharesleuth.com [i.e., Mark Cuban] is going to make personal investments based on information we uncover. Those investments will be fully disclosed, so that readers can evaluate any potential conflicts of interest.

What’s going on here? In the lingo of investment, Cuban plans to “short” (short sell) the stocks of companies just before they’re exposed on Sharesleuth.com. Shorting is a way to profit off of a foreseen drop in the price of a stock. It involves borrowing shares, selling them, waiting for the price to drop, and then buying them back (at a lower price) and then finally returning them to whomever you borrowed them from.
(See also Wikipedia’s entry on short selling [Wiki-Warning])

Basically, Cuban foresees that being exposed on Sharesleuth.com is likely to reduce a company’s stock value; if he short-sells the company’s stock just before the exposeé, he’ll make money. The first company exposed by Sharesleuth was Xethanol Corp. (“a biotechnology-driven ethanol company”).

…a Sharesleuth.com investigation found no evidence that Xethanol…has produced significant quantities of ethanol from those raw materials. Combine that with Xethanol’s announcement that it’s poised to become one of the first companies to commercialize that technology – a sort of Holy Grail in the renewable-energy world – and you’ve got the type of inconsistency that Sharesleuth seeks to uncover with its stories.

At Xethanol, we discovered that the shareholders whose names appeared in the company’s SEC filings over the past year and a half included no fewer than eight current or former stock brokers who have been the subjects of disciplinary actions by the Securities and Exchange Commission, the National Association of Securities Dealers or other regulatory bodies.

The day of the exposeé, Xethanol’s shares slid from about $8 a share to about $5 a share.

Sharesleuth has raised a lot of eyebrows. Since Carey is a journalist, and claims to see Sharesleuth as journalism, some people have called this a violation of journalistic ethics. Most journalists are forbidden from using knowledge gained during their investigations to profit from trading in stock (beause the information the uncover isn’t owned by them, it’s owned by their employer).

Others have wondered if what Sharesleuth is doing constitutes stock manipulation. Defenders have noted that shorting is legal in the U.S., and that — so long as the information revealed is accurate — Sharesleuth is doing a public service.

Of course, part of what’s so amazing about all of this is that it seems to work. So far, Sharesleuth has only released one exposé. If a second expos&eacute is followed by a similar slide in the target company’s share price, I’m sure the controversy will only intensify.

See also:

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