Sharesleuth takes business reporting to ethical edge
Questions raised about the proprietary of the business model behind Mark Cuban's investigative publication

By Mark Glaser

Billionaire entrepreneur Mark Cuban has one of the best named weblogs, Blog Maverick, because he is nothing if not a maverick in the technology, sports and online worlds. He shepherded his Broadcast.com streaming multimedia company through a successful initial public offering in 1998 and sold it to Yahoo in 1999 for more than $5 billion. Cuban used the proceeds to start high-definition TV networks, HDNet, buy Landmark Movie theaters and buy the Dallas Mavericks NBA team. He’s probably the only major team owner who asks fans to email him feedback.

Lately, Cuban (pictured here) has shown an interest in shaking up the media world, hiring former CBS anchor Dan Rather for HDNet, helping to fund Jason Calacanis’ Weblogs Inc. (later sold to AOL) and founding Sharesleuth.com, to provide “independent Web-based reporting aimed at exposing securities fraud and corporate chicanery.” Cuban hired St. Louis Post-Dispatch investigative business reporter Christopher Carey to be editor of Sharesleuth.

Carey’s first report was an exhaustive look at Xethanol, an ethanol company that purported to make alternative fuel from materials such as wood chips—but Carey could find no evidence it had found that Holy Grail of fuel.

But while Carey will not own any individual stocks, Cuban has decided to make investments based on the companies Carey is investigating. These investments are the sole source of income for the new site, which has no advertising and is free of charge to read. But there’s a Catch 22 in the business plan of Sharesleuth: If the site predictably produces journalism that hurts companies’ stock prices—and Cuban trades on that by shorting the stock (betting it will go down)—then he might be investigated for securities fraud by the SEC. But if company stocks fluctuate without predictability after being the subject of Sharesleuth reports, then there will be no fraud—but Cuban won’t make as much money.

In my lengthy email debates with Cuban, he told me that he wasn’t out to manipulate the market and wasn’t looking for short-term gains after publication of the investigative reports on Sharesleuth. So if he keeps his short position in a company such as Xethanol for the long term, how can Sharesleuth make money now?

“It doesn’t, but that’s OK,” Cuban said. “Hopefully I never have to cover [my short trades], if the quality of work is good and we uncover more companies and situations like Xethanol, the return can be lucrative. It just doesn’t have to be fast. We don’t have a staff of 900. I can afford to be patient.”

On the day that the Xethanol report was published on Sharesleuth, its stock went down 14% to $5.95—and that’s way down from the price of $12.65 when Cuban shorted 10,000 shares of Xethanol stock back in May. Yesterday, the stock was at $5.09. Sharesleuth promises to be a strange journalistic venture, where the site’s owner will profit on information he gets ahead of publication. Various bloggers and journalists already are calling it an ethical mess (see “The ugly” section below).

The good

But before we pass summary judgment on the site after it’s barely even started, let’s consider some of its better qualities. Sharesleuth is one of the rare breed of independent investigative websites that lives outside of the commercial business-journalism world. As Sharesleuth editor Chris Carey pointed out to me, the type of work he’s doing investigating scam-type companies has been in decline at major magazines and business sites.

Carey can now stretch out, take his time with investigations, and not worry that his investigative budget will be cut because he’s not producing sexy work. Without advertising or subscription fees, there’s also less chance for outside pressure on his work from advertisers or paid subscribers.

“I’m free to pursue stories without concern for beat, geography or anything else that tends to limit your worldview when working for a local or regional news organization,” Carey said via email. “There’s no bureaucracy to navigate, so I can move more quickly. And my audience is not only national but global. I also have more resources than I did in my previous job [at the Post-Dispatch]—more money for travel, more money for online information services, more money for other tools of the trade. The only thing that could remotely be considered bad is that, as a one-man operation, there’s no way I can get to all the promising stories that our readers have suggested to us.”

Being basically a one-man editorial operation, Carey did end up having to hire an outside fact-checker to make sure he got everything right in the Xethanol story. He told me he relies on an ad hoc group of “amateur stock detectives” who he could convert into a citizen journalism crew to help his cause—and there are plans to expand and add more reporters in the future.

“I’ve been swapping information for more than five years with a global network of amateur stock detectives,” Carey said. “They’re great at sifting through SEC filings, digging up documents, connecting dots and developing timelines to explain the trajectories of particular companies. I’m convinced that many of them could produce journalism-quality pieces with the help of a strong editor. I think ‘citizen journalism’ that is based on documents or irrefutable visual evidence stands the best chance of winning public acceptance.”

The bad

But first Sharesleuth has to convince skeptics and regulators that it’s not manipulating the markets and profiting off of that. The SEC would not comment about the site’s unusual business model, but one source with intimate knowledge of SEC operations told me the government enforcement agency was aware of Sharesleuth, but wouldn’t act until the site establishes a track record.

The source noted that Sharesleuth isn’t breaking insider trading laws because they don’t work inside the companies in question, and are being transparent about their trading. However, transparency alone won’t save Cuban from possible prosecution, according to the source.

“There are anti-fraud statutes that say you can’t manipulate people,” the source told me by phone. “You can’t manipulate stock prices to your benefit. If you wrote scathing reports, and the stock continued to go up, and you were losing money, it would be hard to say you were defrauding somebody. On the other hand, if consistently and predictably, your reports caused stocks to go down, even if you told people that, ‘by the way I shorted this yesterday,’ that could get into
fraudulent behavior.”

Cuban was defensive about this scenario, and says he isn’t out to manipulate the markets. He mentioned that many other stock traders and hedge fund managers go on cable TV every day to tout their positions, and no one raises a stink about them.

“We aren’t writing reports to move stocks,” Cuban said. “We are writing reports to report the facts. Chris [Carey] hears that from me all the time. If I traded on price movements, then there might be an issue. I don’t. I don’t pump and dump [tout the stock, then sell it], and we don’t skunk and dump. I put on a position and stay with it till there is a material change in operations of the company. I don’t cover or sell my position based on reaction to this or any article in the media.

“The price of Xethanol could go down further, it could go up further. It won’t matter. What matters is whether the management shows they have changed their stripes from their past and whether they can produce ethanol from biomass cost effectively and do so before they run out of money. Nothing we wrote changes those base facts. I was short months before the article came out, I’m still short and plan on staying short.”

Bruce Carton

Bruce Carton, a former lawyer with the SEC, wrote on his Securities Litigation Watch blog that Cuban was exploiting a loophole of sorts with insider trading laws. Carton wrote that the Achilles’ Heel of the law is that it excuses trading on material, non-public information if there is no legal “duty” not to trade. “Prior to Sharesleuth.com, there has not been, to my knowledge, a ‘replicable-on-demand’ model that avoids the insider trading laws while permitting an investor to trade on nonpublic information,” he wrote.

Carton contends that if Sharesleuth succeeds in its business plan, then many other people will try similar sites in order to exploit this Achilles’ Heel of the law, which might lead Congress or the SEC to change security laws.

The ugly

But even if Sharesleuth’s method of betting on its subject matters’ stocks is totally legal, business journalists and prominent bloggers have said the conflict of interest undermines the site’s credibility with the public. Houston Chronicle business columnist Loren Steffy wrote that Sharesleuth isn’t about a new way to do journalism but is simply a website to tout and increase profits for Cuban’s investments.

The Fort Worth Star-Telegram wrote an editorial attacking Cuban’s venture for shoddy ethics, as well:

[The stock trade] damages Sharesleuth’s credibility, which is a big thing in journalism—in fact, it’s the whole thing. Cuban and Carey disclosed when they launched Sharesleuth on July 1 that Cuban would be doing this sort of thing. Cuban also attached a note to the end of the Xethanol story disclosing his investment dealings related to the company, and another such disclosure was embedded in the story itself. Full disclosure helps, but it doesn’t heal all wounds.

It’s too bad that Cuban couldn’t let his investment in Sharesleuth stand on its own. He had to use it as a tool in a side deal to make himself a few more bucks to add to the gigazillion that he already has. In the process, he cast doubt on Sharesleuth’s efforts.

Then came the news that the Online News Association will have Cuban as its keynote speaker at this year’s convention, setting off an apoplectic response from media blogger and former old media guy Jeff Jarvis. Jarvis notes that many Xethanol shareholders were angry at Cuban for publishing his report. The question from Jarvis is who is Cuban serving? Not the little guy who got scammed by the stock and will lose money, he contends.

“If Cuban had just started a new journalistic endeavor to show the way and shame the business press into reporting and investigating—not to mention to create jobs for reporters—he might have been welcomed with open arms,” Jarvis wrote. “I’ll bet that there are plenty of ripped-off shareholders out there who’d have gladly contributed to make this a success. And advertisers would want to talk to an audience of smart investors. But by turning this into a personal and shady profit center, by trying to play the bad boy in this arena as he does in the basketball arena, he harmed his endeavor, his reputation, and even the nascent movement in independent journalism. Just so he could make a few bucks. Now that’s what I call dumb money.”

Perhaps over time Cuban might see the error of this business model and consider something different that would take away the ethical smudge. He could make it a non-profit with foundation funding, and he’s not a stranger to foundations with his experience with the Fallen Patriot Fund for families of soldiers who were injured or killed in Iraq. Perhaps there’s a way to lose the bad and ugly aspects of Sharesleuth without throwing out the good.

Additional readings
For more reading on Sharesleuth, check out these blog posts by Cuban on the subject, as well as takes from other bloggers and media outlets:

Responsible Journalism [Mark Cuban’s Blog Maverick]

Business journalists should be thankful [Mark Cuban’s Blog Maverick]

Why Journalism Matters [Mark Cuban’s Blog Maverick]

Mark Cuban’s Excellent Trade [Gary Weiss blog]

Winans on Cuban: At Least You Know He’s Screwing You [Gary Weiss blog]

Full Disclosure: Shortchanging Financial Journalism [FindProfit.com’s Ben Silverman]

ShareSleuth Targets Ethanol Company [DealBreaker blog]

Xethanol Responds to ShareSleuth.com Posting [BusinessWire]

Cuban’s Maverick Stock Site [BusinessWeek]

Media Orchard Interviews Chris Carey of Sharesleuth.com [Media Orchard blog]
 
Mark Glaser is a veteran journalist who writes about new media at PBS’s MediaShift blog. This article originally appeared there in August 2006 and is republished with permission.