Tuesday, August 08, 2006

Mark Cuban's Excellent Trade

I've been wary of Mark Cuban's "investigative reporting"/short-selling effort Sharesleuth.com, because of his plan to trade in advance on the stuff gathered by his staff. Well, turns out I owe Cuban an apology. It wasn't a bonehead idea at all -- from the trading perspective, that is. I'd say it was brilliant.

Brilliant as a trade. Troubling as hell from a journalism perspective. In my book I skewer the media from pulling back from tough coverage. But Cuban's approach is precisely the wrong way to go about filling that gap.

The first article in Sharesleuth came out yesterday. It describes the shortcomings of a company called Xethanol. It's a good article, a Barron's-style piece mainly based on the public record. It's not especially nasty, but was serious enough to draw a shot across the bow from Xethanol managment.

But here's the interesting part, which is not Cuban's self-righteous disclosure of his short position at the end but this paragraph, in italics, tucked in the middle of the piece:

(Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, sold short 10,000 shares of Xethanol’s stock at a time when the price was around $12.65. Cuban also has sold short about 25,000 shares of UTEK Corp.(UTK: AMEX), a Florida company that is a large Xethanol shareholder.)

Now that's a great trade when you look at the historical prices. In the month before the story came out, Xethanol (now priced at about $7) was trading at no higher than $9.90. In fact, you have to go all the way back to May 12th before you find the share price reaching the neighborhood of $12.65!

Sharesleuth was established on July 1, and it was first announced by Cuban in a post on his blog on May 31. This means that the target of the first story was already in the cross-hairs at the getgo, as was Cuban's position.

If that trade was placed on or before May 12, which seems pretty darn likely, it was wonderfully prescient. Share prices have been on the decline ever since then, and were hurt still further by the Sharesleuth article.

Cuban's "Afterword" at the bottom of the article indicates that he's expecting the stock to fall to zero ("My goal is to never have to cover.") Whether he's right or wrong, we do know this: for Mark Cuban this has been an excellent trade. And legal. Trading-while-shorting may be the last thing tough financial journalism needs, at a time it is under attack by Patrick Byrne and other conspiracy-mongers, but it is totally in compliance with the securities laws, if disclosed.

Makes you wonder how much of the rest of Cuban's short porfolio is under examination by Sharesleuth at this very moment.

This may be a pretty shoddy way of practicing "investigative journalism" -- a real blot on the profession, as a matter of fact -- but it certainly is going to make a billionaire richer. And as Cuban once put it, it is the "right" thing to do. Profitable too. The shares nosedised after the Sharesleuth piece.

POSTSCRIPT: Mark Cuban says: "I had zero position in the company till [Sharesleuth editor] chris [Carey] told me about it." See comments.

So let's see.... Cuban heard from Carey about this rotten stock Carey might want to write about. A responsible publisher or would-be publisher would say, "Gee what a great story idea -- go to it." Mark Cuban, being an innovative guy, says "Gee what a great story idea -- let's make my profiteering on your ideas part of the business model!"

Hey, what's the point of running a straight-up news operation when you can sacrifice basic journalism standards for a few bucks?

UPDATE 8/10: Last night I was interviewed by CNBC for an On the Money segment on the foregoing. One point I didn't make but should emphasize -- particularly since I've been cited by some message boards -- is that the Sharesleuth article itself was a good piece of work. I wouldn't touch Xethanol with a fifty-foot pole.

Also... Mark Cuban yells at me and I yell back at him!

And....R. Foster Winans -- yup, that R. Foster Winans -- weighs in.

© 2006 Gary Weiss. All rights reserved.


Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

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