Thursday, September 27, 2007

Should the Justice Department Investigate Sharesleuth?

A detailed article on Mark Cuban's Sharesleuth insider trading project, appearing in Wired magazine, has prompted an interesting item in a Reason Magazine blog. The title is "A New Business Model for Financial Journalism; Should the Justice Department Investigate?"

I had always assumed that Sharesleuth was merely unethical but not illegal, and that it falls under some kind of loophole in the insider trading laws. Blogger Brian Doherty suggests otherwise:

After all, he's making money using knowledge he received through connections (with Carey, his employee) that the typical trader couldn't easily know. And it's just possible that some of Carey's information may have come from some Samuel Waksal-like company insider, directly or indirectly, saying something to someone he isn't legally allowed to say about his company. So I do wonder if insider-trading law mavens think a Justice Department investigation of Cuban is in order, and why or why not.
This is a valid concern and needs to be explored, I think. The Reason item points up, once again, why it is a bad idea for would-be publishers to trade in advance of things they publish. Sharesleuth has only gone after two public companies, and if it continues to push against the envelope I suspect that it is going to fall under regulatory scrutiny.

One thing I find objectionable about Sharesleuth is the canard that what this outfit does in any way benefits investors. It does not. It is purely a money-making operation, and it is not clear to me if it is effective even as that.

© 2007 Gary Weiss. All rights reserved.

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