Short Sellers Continue to Push the Envelope
Mark Cuban, the co-founder of Broadcast.com and often-outspoken owner of the NBA's Dallas Mavericks, recently launched a controversial new web publication at Sharesleuth.com. The basic object of Sharesleuth.com is to conduct investigations and identify and report on "suspect companies." For the investigation and reporting, Cuban has hired a business reporter named Chris Carey, formerly with the St. Louis-Dispatch. Once identified, Sharesleuth.com says it will "shine a spotlight on questionable companies," and will "name names and show evidence, by linking to documents, photographs, and other information." The controversial part is that Sharesleuth.com has already disclosed that Cuban will make personal investments based upon the information discovered, prior to the publication of the information on the website.
Thus, it appears that Sharesleuth.com's business model is that Cuban will take short positions in advance of publication of the stories on the website, with the expectation that other investors will read the negative stories, sell their stock in the exposed companies, drive down the stock price in those companies, and enrich Cuban based on his short sales.
While controversial, Sharesleuth.com's business model is not a new invention. In fact, many have already compared Cuban's business model to the illegal insider-trading scheme carried out by R. Foster Winans, the former Wall Street Journal reporter, in the 1980s. Winnas traded in advance of the Wall Street Journal's Heard on the Street column and ultimately went to prison over it. The difference is that the Wall Street Journal had a confidentiality policy in place protecting its information, which Winans breached by trading on that information in advance of publication.
While Cuban's business model may be legal, there has been much debate about whether or not its ethical. For an interesting and colorful take from the former Wall Street Journal reporter R. Foster Winans, who was convicted of insider trading for trading in advance of the Wall Street's Journal's Heard on the Street column, check out Gary Weiss' blog.
