By Dominic Jones
A SMALL-CAP company at the center of an expose by a new investigative journalism blog that is financed by short-selling profits has seen its stock tank dramatically in the days since the story broke.
Shares of AMEX-listed Xethanol Corporation have lost around 40% of their value since Monday Aug. 7. – the day that Sharesleuth.com published an in-depth report casting doubt on the company’s viability and revealing the shadowy pasts of several of the company’s key shareholders.
The incident has also sparked a storm of controversy over the ethics of Sharesleuth.com’s business model. The blog is financed by billionaire Mark Cuban, who shorts the stock of companies that the blog investigates prior to publication of its reports. The practice is apparently legal because Cuban has publicly disclosed his intentions.
In the expose on Xethanol, which revealed that eight of the company’s recent shareholders have in the past been subjects of disciplinary actions by regulators, Sharesleuth.com disclosed that Cuban had shorted 10,000 shares of the company in May at around $12.65. Cuban also sold short about 25,000 shares of UTEK Corp.(UTK: AMEX), a Florida company that is a large Xethanol shareholder.
Sharesleuth.com editor, former St. Louis Post-Dispatch business reporter Christopher Carey, does not trade in the shares of the companies he investigates.
The site’s funding model has drawn criticism from mainstream journalists. Author and former Business Week reporter Gary Weiss, who writes books about Wall Street corruption, has labeled the site’s practices a “real blot on the profession” that is just going to make Cuban richer. See Mark Cuban’s Excellent Trade
For his part, Cuban has hit back on his blog calling detractors hypocrites for not being transparent about the financial motives behind their publications or blogs or how they make decisions on what to publish. “We are transparent,” he writes of Sharesleuth.com. “You know exactly how we are paying for the stories and we make no apologies for it.”
From an investor relations perspective, the Sharesleuth.com initiative should be a warning that blogs are here to stay and cannot and should not be ignored.
It is likely that others will move to start similar sites. With many mainstream newsroom budgets being scaled back, there is less scope for experienced investigative reporters to do the kind of expensive journalism they have a passion for. If the Sharesleuth.com model succeeds, others may be drawn to seek out backers like Cuban willing to pay them to do what they love.
As a former investigative journalist myself, I would have sold my stories to anyone willing to pay my bills, be it a mainstream publisher that stood to profit from increased circulation and ad revenues derived from my scoops, or a patron who used my work to earn a profit in some other manner, including short selling.
What mattered was being able to do the work that was important to me and which I believed was for the common good.
And just like Sharesleuth.com’s Carey, I would never have personally traded on the information I dug up. For the true investigative journalist, the payoff is never about the money. It is about fulfilling a deep desire to make a difference in society. To right wrongs and skewer the bastards who don’t play by the rules and who exploit the little guy.
Barring some regulatory action to stop it, this idealistic passion to do good is ultimately what makes the Sharesleuth.com model one that is likely to be around for a long time to come.
To staunch some of the bad PR that Sharesleuth.com has attracted, Cuban might consider setting aside some or all of his proceeds in a trust fund to help compensate legitimate retail investors who have lost money as a result of investing in the crooked companies he is profiting from.
Last time I checked, he doesn’t really need the money.