Blogonomics: Market Manipulation?

For the past week, anybody going to this page at Seeking Alpha has found a blog entry that isn't there. There are 42 comments, untouched. But the actual blog entry, we're told, "has been removed, pending investigation of claims of material inaccuracies". Joseph Tartakoff has the story: the blog entry was written by one Liam Mulcahy, a purported hedge fund manager who was short the stock of Microvision (MVIS). After it appeared, Microvision stock fell by as much as 20%, and closed down 10%. It was all very scandalous, with accusations of market manipulation being thrown around willy-nilly.

Here's Michelle Leder:

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...

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.

The reason I've held off writing about this until now was that I was waiting to see whether Seeking Alpha would reinstate the post. They certainly wanted to, as Seeking Alpha founder David Jackson wrote to me on Friday:

We're aware that Seeking Alpha moves stocks. Despite the criticism of the lack of information about the author, we were happy with the transparency: there was a clear disclosure that the author's fund is short the stock, there were no misleading claims about the author, and readers were free to provide an alternative viewpoint in comments below the article (which they did).

Seeking Alpha is widely read (over 3MM unique visitors a month) because we're prepared to publish articles that are opinionated, by people with "skin in the game". We work to ensure that articles do not contain factual inaccuracies, that authors disclose positions clearly, and that authors aren't using us to create movement in stocks to trade off. But we're not in the business of censoring authors' opinions.

We love that we publish articles on the short side; they help investors to avoid potholes, generate real discussion of companies and their businesses, and are a fresh change from the bland rehashes of press releases that are too frequent in financial media. In this case, the article made points that are of great importance to anyone who owns or is considering owning Microvision's stock. We temporarily pulled the article because we received two disputes (via our article dispute process) that the article contained material factual inaccuracies. In looking into them, neither was sufficiently convincing. However, Microvision's management has told us that the article contains factual inaccuracies, so we've given the company until the end of today to provide this information to us before we republish the article.

It's also worth putting Mulcahy's alleged market manipulation in perspective. Here's a year-to-date chart of the stock, with an arrow pointing out the Mulcahy-induced move, in case you would otherwise have missed it:

 

What's more, there was enormous volume of over 6 million shares on Friday (three times the Mulcahy-induced volume) when Microvision got included in the Russell 2000 index. Yet even with huge numbers of index funds all having to buy the small-cap stock at the same time, the stock still contrived to close down quite substantially on the day; it fell yesterday, too. In fact, the stock has been going steadily downwards for a couple of weeks now, and Mulcahy's post is looking more prescient than manipulative. If MVIS can't get a bounce even on getting included in an important index and even after traders scramble to cover shorts put on too hastily as a result of a blog entry, how can it rise?

Microvision is a small-cap stock trading in the low single digits: by their nature, such stocks are likely to move around quite a lot. Yes, there was a swing of 18% from intraday high to intraday low on the Monday after the blog entry was published - but that was mainly a function of the fact that the stock was trading at a mere $3.30 to begin with: the actual drop in share price was only 60 cents per share, which is very common on the Nasdaq. Besides, back on January 16, the intraday swing was 84 cents, or 26%: such moves are hardly unprecedented, and they have to be expected by anybody holding such a volatile stock.

Michelle Leder told me that she's upset about Seeking Alpha publishing the blog entry because it can "hurt small investors"; I, on the other hand, would think that such investors would welcome Mulcahy's post. The only good reason for them to be invested in Microvision is that they believe in the company's fundamentals, and think it's undervalued on the stok market. If Mulcahy's post is factually incorrect, then all it does is put the stock on sale, and create a fabulous buying opportunity. On the other hand, if Mulcahy has a point, then they learn about the company and can adjust their analysis of it accordingly.

My feeling is that it's very hard for a blog entry from an unknown writer to move the market unless it touches some kind of a nerve and has at least an element of truth to it. Companies whose stocks fall, and their apologists, love to blame market manipulators for their falling market cap; sometimes, such accusations even make it into Vanity Fair. But 90% of the time, there's no manipulation going on, just markets working as they should, with people buying stocks they think are cheap and selling stocks they think are overvalued. Seeking Alpha is a great way to bring those people together and have them debate each other in blog format; it's silly to try to shoot the messenger.

Comments

[anastos]

People pumping stocks on SA? I'm stunned.

[fireball]

seeking alpha should at least be able to identify the author before publishing whether it is a one cent stock or google. i like the site but you do not get away with yelling fire in a crowded theatre unless there is a fire. perhaps it should be published as a tag on comment instead of an article if you do not know who wrote it.

[Lilguy]

Could the comments made by Mr. Mulcahy (if he exists) have been any more materially misleading--and intentionally so--than those we have received from the nation's major banks, ratings agencies, etc. this year?

Apparently the only potential misstatements allowed are from those in positions of authority.

[rf_lab]

Dear David Jackson,

Why are we still waiting for Liam's biography? If SA can't do a simple biography in six months, then why should we bother with anything published on the site?

I know. SA pays your bills and that's all that's really required. Integrity doesn't keep you warm and dry.

[fatwollit]

It seems as though Seeking Alpha wants to republish the offending article. I hope that Seeking Alpha publishes Mulcahy's biography with the same alacrity. In fact, if Seeking Alpha want to maintain any credibility, Mulcahy's biography should be published first. What's it been, six months at least?

[Michael]

Felix - As always, a great piece. This is why i keep you in my watchlist here. In response to Fatwolit above, i am not sure it really matters who Mulcahy is. What matters is whether the article is accurate or not. Let's say for example that his bio said he is a hedge fund manager in Ireland who does extensive research. Would that change your mind about the post. The web allows for pseudonyms and annonymity. After all, what is Fatwollit? So a one or two line bio on the bio page changes nothing.

What i want to know with full transparency is does this guy have a position in the stock. He answered that in the original post. I also want to know like Jackson said above if the article is factually correct. I assume Seeking Alpha can figure that out with their process. I would also love to see MVIS respond in writing on Seeking Alpha. I am sure they will allow that. How come MVIS has not responded. could there be more than a kernel of truth here in Felix's words?

[squashnut]

Wall Street professionals must be free to manipulate the market without competition from the masses. They're losing so much money their 5th houses are facing foreclosure.

[homeTon]

you need to do a bit more research on the stock trading on the day of the Russell inclusion - I would like your opinion on how it all works - but on that Friday, all of the volume was done after the close and the 'small investor' is left wondering if there really is a market that is not rigged. We 'small investors' who have followed Microvision's stock have no doubt that there was some relation to the article and the stock price going down - I am not sure if it was the article only or some manipulation of the pps too in anticipation of the Russell inclusion. That coupled with the huge volume after the bell on Friday has me wondering how this whole game really does work...

[bob thelover]

The man LIED in order to illegally manipulate the stock price.
There is no excuse for this.

Pump and Dump
Short and distort
Trash and cash
Whatever you call it- it is illegal!

Either way and always it is blatantly illegally to yell fire in a crowed theater- and it is illegal to (fabricate facts and) flat out lie about a company- in the hopes that it will help your stock position be it long OR short.

Felix- shame on you!
There is NO excuse for you to try to exonerate someone that was trying to manipulate a stock through illegal means.

I have just lost a ton of respect for you- I question your ethics- and i wonder if you should even be writing about equities since you cannot see that this is clear cut case of illegal market manipulation.

[EarthKarma]

I think factual inaccuracies is a kind description: as anyone familiar with Microvision, or the technology, would understand. Mulcahy purposely made inflammatory remarks which were obverse to facts.

He could not have seen the two competing technologies displayed together, as they have never been displayed side-by-side...that is not an innacuracy, it is an untruth.

The comment regarding the requirement for a focus wheel on the proposed TI product is ridiculous. It is akin to a statement like, "some will tell you that the requirement for a third wheel on this motorcycle is problematic, when in fact it is a major enhancement!"

This article was designed as a short term stock price mover, as anyone even passingly familiar with the technology recognizes it absurdity. So it is the innocent, the less sophisticated investor, who is injured here...that is certainly good reason for the SEC to take a look at this article and its author, and if sanctioned, as indicated by the editor, then SA perhaps could use some scrutiny as well.
EK- I hold a position in Microvision, and added to it as a result of the Mulcahy article (My benefit is someone's loss).

[FRAUDALERT]

In response to Michael's comment above "i am not sure it really matters who Mulcahy is".
I guess irresponsible, damaging, false and misleading statements can be made by anyone as long as they remain anonymous? Isn't that what the web is all about? How ludicrous is your statement? The writer stated he was a Hedge Fund Short. He has the potential to profit from his unsubstantiated statements published on a self proclaimed Hedge Fund Focused Site. I believe he is the one to demonstrate Burden of Proof, to back up his claims and accusations. If I call you a liar and a thief, do you have to prove you're not or should I be the one who needs to prove my accuracy? I'm sure the courts would address your misconceptions. They hear Libelous FRAUD arguments on a daily basis and award damages based on the outcome.

[Tmalan]

"it fell yesterday, too. In fact, the stock has been going steadily downwards for a couple of weeks now"

I guess your saying that being on the verge a bear market has nothing to do with it. Kind of like saying a man is sinking when the ship he is in is what is sinking.

[FRAUDALERT]

Same crap different day. Typical response is the stock was performing badly anyway. Nothing to do with our innuendo, misleading statements or lies.

"The New York Times
By Jenny Anderson
February 23, 2006

The Biovail Corporation, a Canadian pharmaceutical company, has sued SAC Capital Management, one of the most powerful hedge funds on Wall Street, accusing it of colluding with independent research providers to issue misleading reports to drive down the price of Biovail's stock.

The lawsuit, filed yesterday in New Jersey Superior Court in Newark, lays out a scheme by several hedge funds to send "ghost written" research reports — all negative — to Camelback, an independent investment research firm based in Arizona now known as Gradient Analytics. Camelback would wait for the hedge funds to accumulate a short position on the stock — a technique that allows traders to make money if the stock price falls — and then Camelback would release the report, the suit says. As a result of the reports of Camelback, as well as subsequent reports by David W. Maris, an analyst with Banc of America Securities, shares of Biovail stock fell more than 50 percent between 2003 and the spring of 2004, resulting in its business reputation being "devastated" and curtailing its ability to access capital, the lawsuit says.

"This action arises from a massive, illegal and continuing stock market manipulation scheme, which has targeted and severely harmed Biovail, among other companies, and which has resulted in immense ill-gotten profits for SAC Capital and other extremely powerful hedge funds," the lawsuit says.

Ed Tagliaferri, a spokesman for SAC, said: "The allegations of the complaint against SAC are outrageous and defamatory and SAC will defend itself and its investment practices vigorously. Biovail's true issue is the valuation that the public markets place on their common stock. That disagreement should be resolved in the public markets, not in litigation, especially not in litigation dressed up with false allegations."

The litigation is another battle in a larger war that is often waged between companies and short sellers. Last year, for example, the chief executive of Overstock.com, an Internet retailer, blamed short sellers for "manipulating&quo... his company's stock and sending it down.

Yet in cases when a company has problems — and when short sellers aggressively highlight those problems — it may be unclear whether the stock price is falling because of fundamental problems with a company or because short sellers have simply persuaded other investors that the price is headed down.

In late October 2003, Biovail reported quarterly earnings that were weaker than expected and its stock fall sharply. The company, whose American operations are based in Bridgewater, N.J., is currently being investigated by the Securities and Exchange Commission and the Federal Trade Commission. Biovail, however, sees another force behind the decline in the stock: it accuses the hedge funds of conspiring with proclaimed "independent"... research providers to create reports with the express purpose of battering its stock price.

The complaint, which seeks damages of $4.6 billion, lists 22 defendants, including Steven A. Cohen, the founder of SAC (the initials are his); various of his affiliate funds and their employees; Gradient, which was formerly Camelback; James Carr Bettis, founder and chief executive of Gradient and Donn Vickrey, founder and co-owner of Gradient, Mr. Maris of Banc of America Securities, the investment banking arm of Bank of America; and the Gerson Lehrman Group, a company based in New York that connects investors with experts in fields like pharmaceuticals.

A Bank of America spokesman said it had not received a copy of the lawsuit but added that "we have the highest degree of confidence in the integrity of David Maris's research."

A lawyer for Gerson Lehrman declined to comment.

According to the complaint, analysts at Camelback Research regurgitated reports from hedge funds, including SAC, reports that Camelback employees referred to as "hatchet jobs."

"The analyst contributed no meaningful analysis to the report but merely served as a scrivener of the client's stated position," the lawsuit says.

Biovail also accuses Camelback of holding up the release of its reports to allow clients to build meaningful positions in stocks to maximize the benefit of the negative impact from the report and contends that the research firm misrepresented to clients that it did not manage money. Mr. Bettis and Mr. Vickrey managed various hedge funds including Pinnacle, Helios and Hallmark from the same office where the independent research was being conducted, according to the lawsuit.

"These charges are completely false, malicious and they misrepresent the relationships between Gradient, its clients and owner-affiliates,"... said Karen Hinton, a spokeswoman for Gradient. "The patently false claims are made by a troubled company with a history of questionable accounting practices and book-cooking incidents that have been the subject of regulatory scrutiny in the United States and Canada and numerous class-action lawsuits."

The lawsuit accuses the Gerson Lehrman Group and other defendants of paying two doctors in 2003 to give false information to reporters suggesting Biovail had set up a program to bribe them to prescribe a Biovail drug. Camelback issued another negative report on Biovail with details of the bribes in late July.

The suit takes personal aim at Mr. Cohen, whose management fee for running his fund has "regularly" exceeded $400 million and is one of Wall Street's most powerful customers, doling out $150 million in commissions annually.

"Cohen uses his enormous financial leverage to support SAC's trading strategies by demanding access to material nonpublic information from the financial institutions with whom SAC does business, including nonpublic inside information concerning public companies and other clients to whom those institutions owe fiduciary and other duties of nondisclosure," the suit says. "

[User 217769]

So you say Jackson wrote you this?....

"We love that we publish articles on the short side; they help investors to avoid potholes, generate real discussion of companies and their businesses, and are a fresh change from the bland rehashes of press releases that are too frequent in financial media."

Apparently Jackson has a difficult time distinguishing between a legitimate short analysis and blatant lies. A legitimate short analysis provides real facts and figures to substantiate their opinion whereas an illegal fraud is one where lies are made up to manipulate the stock price. You and Jackson are evidently incapable of telling the difference so here is Webster's definition for you:

Fraud:

1 a: deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b: an act of deceiving or misrepresenting : trick


wire fraud:

fraud committed using a means of electronic communication (as a telephone or computer)


You go on to say:

"If Mulcahy's post is factually incorrect, then all it does is put the stock on sale, and create a fabulous buying opportunity. On the other hand, if Mulcahy has a point, then they learn about the company and can adjust their analysis of it accordingly."

Oh, really? This kind of fraud is used to drive the stock down making it much more difficult to raise capital for startup companies. The whole intent is so devalue a Company stock until it becomes worthless in order to maximize their short position. Long's will sleep better knowing their Company's stock is being illegally manipulated making it more difficult to raise capital. Right.

When publishing BS like Mulcahy's you should remember the old saying..."You are intitled to your own opinions but NOT your own set of facts."

[fireball]

well some time has passed now. i got screwed and it appears many other posters did too. i am sure mukcahy did well or his firm did. i am of the suspicion that he probably made out very well privately. many days when the market was dropping mvis was one of the few things that would gain or at least hold steady. maybe it would have gone down some and maybe not. i had a small position then i increased to 3400 shares on the day it first started moving up. i have watched the stock for at least a year. i fully expected it to rise on that monday from observing its behavior for so long. i emailed the investment relations office as soon as i saw your article. the response was we do not respond publicly to unfounded accusations however privately there is an investigation underway.we have complained to the proper agencies and we do hope to get to the identity of mulcahy and that appropriate actions will be taken. for them to respond on your website would lend legitamacy to seeking alpha and mulcahy. i would liken it to a man trying to defend himself from charges of sexual harassment. the more you say the worse you look. the response ended with we have a strong belief in our products and believe we and our shareholders will emerge profitably. i have paraphrased the mvis email to the best of my ability and as well as i can recall. so who is mulcahy? i still hold my full position in mvis. i would like to at least i.d. the perp.

[fireball]

this defense article makes s.a. look worse. it would be just as easy to say after a disaster on that monday the effects continue. s.a. should not try to defend mulcahy.

[fireball]

anybody else feel like a complete jackass for believing in this company in light of their move today? i notice email and phone number disappeared from my broker page.