The Ethics of Bashing Stocks

My last post reminded me of Gary Weiss’ criticism of Mark Cuban’s website Sharesleuth. Cuban pays a reporter to dish up dirt on public companies, and to fund the venture he shorts the stock of those companies before the articles are published. Cuban calls it a new business model for investigative journalism, Weiss calls it unethical, and I think it is a good thing.

I have in the past been criticized by anonymous message board posters for writing critically about several companies in which I held short positions. I was even called “the scum of the earth” by one poster in response to my criticisms of Document Security Systems [[dmc]]. The coincidental and fitting end to the story of my involvement with Document Security Systems is that while I closed my short position at a loss, the stock later dropped 30%. So was it ethical because I lost money and would it have been unethical if I had made money?

But what is so bad about writing about stocks in which I have an interest? I always disclose a position, as does Sharesleuth. A similar website is CitronResearch.com, run by Andrew Left, who has a blanket statement on his website that he may short any of the companies about which he writes. Is this any different from a mutual fund manager who appears in the pages to talk up stocks in his portfolio? And yet such mutual fund managers get superstar treatment and short sellers like myself earn nothing but the enmity of a bunch of anonymous hooligans.

Is it Unethical to Withhold Information?

While I know that many people frown on writing about stocks in which the writer has a financial interest (at least if that interest is short), what about the opposite situation–someone shorting a stock and unwilling to write about what they know because they are attempting to build up a big short position at a high price or just because they don’t have the time? I have blogged about only a fraction of the companies whose stock I have sold short. I would argue that it is far more unethical for me to withhold my information about unknown companies that I have sold short from the public than it is for me to write about such companies. What do you think?

I think investors in Skins (OTC BB: SKNN) would have wanted to hear a critical view of the company back before the stock dropped by 2/3. Even if they did not want to hear such negative information it probably would have done them some good. The same goes for YTB International (Pink: YTBLA), Hepalife (OTC BB: HPLF), Parkervision [[prkr]], and NNRF (Pink: NNRI). All of these companies I sold short over the last few months and yet I did not publish my analyses. In all cases these stocks have fallen very far since I chose not to write about them. So again I ask the question: which is worse, not writing about these companies or writing about them at the same time I was short?

If a critic says that I should have written about them without being short at all, then that critic misunderstands this blog. I am a trader. I make a portion of my living in the stock market. Nobody pays me to write this blog. Since I have started this blog I have put in hundreds of hours and I have received only about $7 in revenues from my Google Ads. If anyone wishes to pay me to investigate penny stocks, that is fine–I’ll adopt any code of ethics my employer wishes me to adopt. But the reality is that my choice is between me publishing information on some of these stocks (and being potentially biased) and no one but the hype-loving CEOs and shareholders publishing information on these stocks. I do not have the choice of doing this work just for the fun of it.

Is it the Order that Matters?

If it is unethical to write about a stock that I hold, would it be ethical for me to write about it and then after some delay follow my published advice? This is exactly what happened to me with Sun Cal Energy (OTC BB: SCEY). I wrote a negative article about the company and only later I found out that I could short sell the stock. I then sold it short and profited. I cannot imagine that anyone would find this to be unethical. And yet the only difference between this and taking the position before my article is how much profit I make from my work. So is it unethical to make money? Or is it only unethical to do so if I am not paid by a newspaper or financial magazine?

Is the world better off after I expose horrid penny stocks? The obvious answer is yes because I only write the truth and that is usually sorely lacking in the coverage of penny stocks. The good act of publishing the truth and countering untruth is not prevented or stopped just because I profit from it. And the act of profiting is not wrong in and of itself. So I see nothing wrong with profiting in my way from the information I promulgate.

Disclosure: I have no interest in any stock mentioned above. I have a strict disclosure policy. Please note that the last paragraph of this article was replaced after I published it because my first attempt at a closing paragraph was rather bad.

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