A footnoted soapbox…
We interrupt our regular trawl through the filings to talk about something that’s been on my mind all week: what happens when someone uses a popular Internet site to bash a company and basically games the market. I’ve been interested in this ever since I first wrote about online message boards for the NY Times back in 1999 and 9 years later, the boards are still rife with trash-talking.
But what happened this week with Microvision (MVIS) and the popular stock market aggregator Seeking Alpha is totally different. As Barron’s Eric Savitz reported on Monday, Microvision’s stock fell nearly 20% after this very negative article was posted on Seeking Alpha by someone named Liam Mulcahy who claimed to work for a hedge fund that was shorting the stock. The article (but not the headline) was removed from the site on Tuesday after a Microvision spokesman contacted the site. This Seattle PI story has more details.
Now I have no opinion on Microvision. I haven’t looked at their filings and I neither own (nor short) their shares. But as someone who writes about publicly traded companies based on the facts that are in the filings, it’s deeply disturbing that virtually anyone — or perhaps the word is no one since it’s not clear that Mulcahy actually exists — can go on to a major site like Seeking Alpha and post whatever they want about a publicly traded company with little or no consequence and make money in the process.
Granted, people who make their investment decisions based on some commentary that they read on the Internet probably get what they deserve. And given Microvision’s size, it’s a much easier target than, say, a company like Motorola (MOT). And to be fair, Mulcahy clearly stated that he was shorting the stock. I should also note that I’ve had my own issues with Seeking Alpha and left them over a year ago for a variety of reasons.
Still, for all of us who write about publicly traded companies online — and there’s a lot more now compared to when I started nearly 5 years ago — this will hopefully serve as a wake-up call. Let’s hope that the SEC is also paying attention to the Microvision/SeekingAlpha mess. While the Internet gives people access to information that was never readily available before, it also makes it a lot easier for someone with questionable goals to game the system. In the meantime, caveat emptor!
RSS
June 27th, 2008 at 10:28 am
So what is wrong with this situation? First, even though his information wasn’t publicly available, SeekingAlpha has phone and email contact info for all its contributors.
As a former contributor to SeekingAlpha, I have written negative articles on companies, sometimes when I was short those same companies. If it is okay for people long the stock to talk it up, why is it wrong for someone short the stock to talk it down? Selling into the resultant stock drop would of course be unethical and possibly illegal, though. I should also mention that there is nothing special about SA taking down the article while the author rebuts claims of inaccuracies. The same thing happened to me less than a month ago when I wrote negatively about a stock (I was not short). In that case, the editors were satisfied with my article (after minor changes) and it went back up.
If we want efficient markets it would be well to not allow companies to silence critics.
June 27th, 2008 at 10:33 am
By the way, a quick look at the MVIS 10Q shows that the company is not running short on cash and should have enough for the next year at least (contrary to the SA article’s author). If any ‘investors’ in the company saw the article and did not double check the facts than they should get out of investing in individual stocks and buy some index funds instead.
June 27th, 2008 at 10:44 am
I realize I probably should have been clearer: I don’t have a problem with anyone posting negative information. That should be abundantly clear from this site and the more the merrier as long as it’s based on actual facts.
What I have a problem with is someone who pretended to be someone else and used what appears to be a fictional name to advance their own position. My experience has been that folks who work for reputable funds don’t go on Seeking Alpha to talk their book under an assumed name. Of course, nobody knew this was probably a fake until the damage had been done and the stock had fallen so sharply!
June 27th, 2008 at 11:00 am
@Michael - I think your 2nd comment shows exactly what was wrong with the piece. There’s nothing wrong with writing a sharp stinging article, but when someone makes up facts and SA publishes them, it reduces the credibility of everyone involved with the site (whether they work at SA or are writing for them.) I think that part of the problem is that there isn’t very good quality control at SA. They produce a ton of articles and don’t always discriminate.
Because they tend to focus on so many small companies, it can be hard to verify all of the research, but there should be some minimal fact checking going on. It would have been one thing if Mr. Mulcahy had been blogging for a few months and had developed a reputation of accurate articles, but for someone to be able to just make things up about a micro/small cap company without any type of legitimate posting history is a little scary. While I would like to see SA do a better job of being more selective about the articles they include (including my own posts that don’t always deserve to be on the site) , I can also sympathize with the difficulty of managing so much content about obscure companies. I’m not sure that there are any easy solutions to this problem, but I’d rather deal with having to read an occasional bogus post, then to lose the option of being able to hear from “regular” individuals. The silver lining for this whole experience is that at least people spoke up and corrected the misinformation so quickly.
June 27th, 2008 at 11:01 am
The real issue is why so many people listened to Liam Mulcahy after his article was posted, and sold off the stock. He had no bio on Seeking Alpha, and therefore no credibility as to what he was talking about. Why are investors so gullible and so unable to do his or her own research? A quick check with Texas Instruments and Optoma would have confirmed the already public info that that its projector will be available only “in limited distribution” in Europe and Asia later this year and will have a “worldwide launch” in 2009.
He also claims a cash crisis is at hand at the company. Did he give any evidence of this? Any projections to back it up? Since the article was pulled I cannot say.
It is possible that there was another reason that the stock sold off that day?
June 27th, 2008 at 11:54 am
I agree, Davis, that it’s a fine line and I certainly don’t want to limit opinions to those who are so-called legitimate because who’s really conferring that designation? But at the same time, there needs to be a way to prevent someone from gaming the system like this. Yes — the blogging community led by Eric Savitz outed Liam Mulcahy and did it pretty quickly. But not before he made his money.
June 27th, 2008 at 2:57 pm
Davis - there is no way that SA could fact check articles. They lose enough money as it is. I agree with the quality argument–there were some of my articles that they posted that I wish they hadn’t.
I think what this whole incident is indicative of something much broader that few people understand … in the next few decades we will likely see the breakdown of copyright law, defamation law, and a further decline of main stream media. People will learn that all that reputation means little and it will become easier to check facts (for example, it took me 40 seconds to check MVIS’s balance sheet and cash flow). I could go on an on about how the paid media messes up their facts all the time (and I know y’all would probably agree) … for example, has 60 Minutes issued a retraction of their Biovail story yet?
The fact that those who left comments on the blog post quickly pointed out the article’s flaws and the fact that the article got pulled shows that the system works. Those who were dumb enough to sell the stock because of a random internet article shouldn’t have owned the stock in the first place, because they obviously did not due diligence.
June 27th, 2008 at 4:29 pm
@Michael - I somehow doubt that SA is losing money. They charge companies a boatload of money in order to run the conference call transcripts, but there isn’t any way for me to know for sure what they are or aren’t making. If SA didn’t want to screen the articles themselves, they could always tap into the community to vet them before they are released to the wider public. I’m sure that there would be traders or community members who would be happy to do some legwork if it gave them early access to the articles. Of course this would raise some even more problematic issues, but my point is that an inexpensive solution could be possible. Ideally, I’d be happy if they just fact checked the non-blogger articles. If someone is submitting something for the first time, there is no accountability. If someone has published for a couple of years, then you can go back and see what their posting history looks like. After even a little bit of deception people will get called to the carpet pretty quick. This helps to get more people honest.
While I do agree with you that the internet is transforming media and raising some interesting issues, I also feel that reputation is going to become even more important not less. Ten years ago, I used to read newspapers, but couldn’t tell you who the writer was. Now with RSS, I pay attention to individual writers, but couldn’t tell you which publication(s) they work with. I think Michelle’s site is a great example. Because she has such a strong track record of uncovering scuzbuckets and (attempted) buried information, I know that when she publishes something that I don’t have to fact check her because she has always stuck to the facts in her articles. When it comes to a random blogger or message board commenter, I always try and verify what’s being posted before blogging about it or telling people. All of this caos may end up distracting the mainstream media, but it also enhances the value of the great journalists.
June 28th, 2008 at 8:33 pm
First of all, while I do go the SeekingAlpha site, and I do receive a daily e-mail from them, I am not familiar with this company or the events being discussed. So when I read Michelle’s newsletter I was initially intrigued.
The first thing I did was to try and see what type of damage this person’s post did to the company’s stock price, and it appears, at least to me, it did little damage. Over the past 5 trading sessions, the stock has traded between $2.87 and $3.13, with $3.13 coming on Monday 06.24.08.
The next thing I did was take a look at the company’s resistance and support numbers. Based on current levels of $2.87, the stock has first resistance at $3.27, a 14% increase from current levels, $3.47, a 21% increase from current levels, and support at $1.82, a 37% decline from current levels. Looking at these numbers tells me if the mystery person’s intent was to make money shorting the stock, he left one helluva lot of money on the table.
Lastly I looked at the company’s financials from their last SEC 10-K filing of December 2007. I have to ask. How could a company with financials as poor as this company’s, ever manage to end up with 56.7 million shares of stock outstanding? No offense, and I realize we all start somewhere, but I have a real hard time believing that anyone would intentionally buy shares of stock in this company.
Based on my back of the napkin math, the company has Net Operating Profit After Taxes of (251.4%)! In addition, Shareholder Equity is $0.58, the same as Tangible Book Value, and the company had a Return on Invested Capital of (107%). Lastly, the company has an Enterprise Value of $2.64, an Equity Value of $3.10, and a PE of (6.2).
So what does all of this mean? To be honest I have no idea. But it makes me wonder if the company is going to remain a going concern, which further makes me wonder if perhaps an insider attempted to short the stock because they knew the stock options they held were soon going to be worthless. I’m not saying that’s what has happened, I’m just saying were I the SEC, I would certainly be looking in that direction.
Wax
June 28th, 2008 at 9:56 pm
Thanks. Quick kill Bandits everywhere.
June 28th, 2008 at 10:08 pm
Michelle:
First, I agree with the comments made by Davis. Although I do not question the integrity of the folks working over at SA, the plethora of “fluff” content being published over at their shop these days hurts the SA Brand. David Jackson faces a difficult issue–how to grow SA traffic. This road taken–the more content published, the more traffic stopping by his site. Sadly, as pointed out by your readers, too few editors trying to follow too many postings. Albeit I left SA on good terms, Davis is correct in pointing out that reputation is everything. I did not want my 10Q Detective brand associated with a site known for neophyte ‘would-be’ analysts. [that said, many an irrate bull has called me a hack when they disagreed w. my posited opinions!]
Second, the entire SA fiasco reminds me of the stunt 15-year old high-schooler Jonathan Lebed pulled back in 2000, spamming Yahoo! Inc’s message boards with hundreds of ‘pumped-up’ stories, heralding certain penny stocks as buys–as he was selling into the volume expansion & stock price jumps.
In the end, however, is SA any different from buying a stock based on a brokerage-pumped buy recommendation?
As you succinctly said: “buyer beware!”
My Best,
David J Phillips, editor
10Q Detective
June 30th, 2008 at 8:42 am
@ Wax: If you look at the way the stock traded on Monday — here’s a link, you can see that it opened at $3.40 and closed at $3. That’s a lot of movement for one day, though a longer view of this stock clearly shows a lot of volatility.
As for who was behind the post, there’s been a few theories in addition to underwater executives. One I read over the weekend suggested it was folks from either the Motley Fool or Street.com — two competitors in terms of financial content — who were seeking to make SA look bad.
As to SA’s Quality Control, which my friend David Phillips brings up, SA Founder David Jackson says they have 1,300 contributors. There is simply no way to manage that number of contributors without an extensive (and expensive) staff whose job it is to vet pieces before they are posted. Just something to keep in mind the next time you read something on SA. My own experience with SA was that the editing was limited to changing my headline for SEO-purposes to maximize Google ad revenue as opposed to editorial purposes.
Folks from the SEC (and the DOJ) read this site regularly, judging by my logs, so let’s hope they can get to the bottom of this.
July 2nd, 2008 at 11:44 am
Michelle, thanks for bringing up a really interesting topic. First, Michael, SeekingAlpha makes plenty of money. Their syndication deal with Yahoo! Finance alone probably gives them substantial cash flow. David Jackson relocated it to Israel to get favorable tax treatment on all of the money he makes off of it. Second, the more interesting thing about Seeking Alpha is that David Jackson gets to make money off of other people’s content. “Prosumer” investors are so desperate to be validated by being “published” by Seeking Alpha that they contribute the majority of the content which is what, in turn, drives viewers and creates the value! Michelle is right, the only reason why a hedge fund would post to that venue is to affect the value of a stock it already owns. SeekingAlpha will become ground zero for the “newsletter crowd”. The Microvision scenario is now the playbook:
1. Find a microcap company
2. Put on a large short position
3. Publish a bear thesis on SA under a pseudonym
4. Liquidate the position
The real issue that Michelle brings up is that the information flow around stocks is becoming increasingly influenced by online sources such as SeekingAlpha. The question is how can they be monitored or regulated so that we prevent unfair influence that hurts individual investors? Maybe there should be some sort of registration process of online publishers and writers that author content about publicly traded companies. You can create a materiality threshhold so that people just mentioning companies or stocks within a larger, non-investment related context are excluded from the requirement. However, to become an investment-oriented blog, you should have to register with the authorities, disclose your positions and provide proof that you are who you say you are. Anonymity doesn’t really provide any benefits as people should be able to stand behind their negative thesis.
July 2nd, 2008 at 12:40 pm
Thanks, Thomas, for the comment and I agree with most of what you say up until the registration issue, which seems a bit over-the-top. Then again, maybe it’s naiive of me to think that everyone else out there producing financial content online is as open about their intentions and positions as I try to be: if I own something, I disclose that and if I have a short position, I’ll state that too. Oh, and I’m a real person with various ways to contact me and a body of work that enables others to assess whether I’m a BS artist or not.
I guess my biggest problem comes with a distinction in the type of content being produced. Everyone knows that you can read online message boards for individual stocks and get all sorts of stock advice — long, short and everything in between. But when a SeekingAlpha article appears under the headline section of Yahoo and is mixed in with content from the WSJ, NYTimes, and other media outlets, it appears to be more credible than a message board post, especially when someone notes that they’re a fund manager. In this particular case, I seriously doubt the guy was a hedge fund manager, but Seeking Alpha allowed him to identify himself that way without doing their homework to make sure he was who he said he was. Remember: on the internet, even my dog can be a hedge fund manager!
July 2nd, 2008 at 5:29 pm
The registration thing will seem over the top until swindlers start using the Microvision book en masse. Then everyone will throw their hands up in the air and holler, “Where were the authorities?!”. Regulations are by definition onerous until they thwart the worst case scenario.
July 3rd, 2008 at 6:10 pm
Michelle,
Thanks for bringing this to light. You are always on top of everything.
Best,
Patrick