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Dallas Mavericks owner Mark Cuban has earned a reputation for bashing NBA referees. Now the brash billionaire says he wants to shine a light on the mistakes of Corporate America.
He's launched a Web site, Sharesleuth.com, and hired a financial journalist with the goal of rooting out unsavory business practices and misleading accounting by public companies.
Good idea, right? After all, the existing financial media and Wall Street's best and brightest analysts were all duped by the likes of Enron and WorldCom.
Maybe not. The big problem: Cuban is tilting the game in his own favor in a way that some of his allegedly corrupt target companies would have to admire. "All Mark Cuban has done is figure out a way to screw people legally, and that is what Wall Street is all about," says Gary Weiss, author of "Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments."
Sell first, report later
Cuban makes no bones about the fact that a chief goal of the site is to make him money. Already a billionaire from his sale of Broadcast.com to Yahoo! (YHOO, news, msgs) in 1999, Cuban plans to profit by taking short positions in stocks that Sharesleuth.com attacks. In short selling, investors borrow stock and then sell it to someone else, hoping the stock will decline so they can return it later at a cheaper price.
Ideally (for Cuban), he sells a stock short, Sharesleuth publishes an article, the stock's price goes down and Cuban reaps a profit. Even if Sharesleuth gets it wrong, Cuban's investment benefits from the negative publicity.
In its premiere on Aug. 7, for example, Sharesleuth.com attacked Xethanol (XNL, news, msgs), questioning everything from management credentials to the viability of the company's plan to turn biomass into ethanol. The stock traded above $7 just before publication. It sank 40% to $4.21 two days after the Sharesleuth.com attack. By his own admission, Cuban shorted 10,000 shares of the stock before his site posted the attack.
All of this is legal because of a loophole in the insider trading rules covering journalists. Most journalists can't trade stocks once they know an article about those stocks is coming out because that knowledge is considered the property of the publication. "Stealing" that knowledge by trading on it is a form of fraud barred by securities law.
But since Cuban owns the Web site, market cops can't make the case that he "stole" knowledge of publication from himself, says David Marder, a former Securities and Exchange Commission attorney who now works at the law firm Robins, Kaplan, Miller & Ciresi in Boston.
It may be legal, but is it ethical? After all, Cuban is using the mantle of respectability that comes from positioning his Web site as part of the financial press. But all the while he will be using it to profit personally, Weiss says. "Cuban wants to combine short selling with some derivation of journalism and exploit journalism for his own private purposes," Weiss complains.
Everybody's doing it
Cuban, via e-mail, says he doesn't intend to profit from any short-term declines in stocks caused by Sharesleuth.com coverage prepared by Christopher Carey, a former St. Louis Post-Dispatch journalist hired by Cuban. Instead, Cuban says he is shorting stocks for the long term, hoping they go to zero and he never has to cover.
Even if he did trade on short-term moves caused by Sharesleuth.com, asks Cuban, how is that any different from short-selling money managers who bash stocks while appearing on CNBC and then cover their short positions for a profit the next day in the resulting decline?
"Your position is moronic because EVERY buyer or seller has an undisclosed reason they are buying or selling," Cuban says. "But in our case it's not relevant because the timing of when I go long or short has nothing to do with the publication of the article. Chris publishes it when he is done and gets it right."
Cuban points out he shorted Xethanol in May, after Carey suggested it might make a good target for the first article at Sharesleuth.com, which didn't appear until August. "In that time period, the company actually could have done something right," says Cuban.
Cuban's right. He's taking some risk. And yes, CNBC is rife with the sort of behavior he describes (although it has, in recent years, improved its guests' disclosure). Like some of the money managers CNBC puts on air, Cuban is using his advantages -- wealth, fame and a Web site -- to turn a profit. But it's an advantage most investors don't have, and one that tilts the field in his favor.
Can others profit?
There are practical reasons why Cuban's Web site, so far at least, is of little use to the average investor. When Sharesleuth.com attacked Xethanol, it was tough for the average investor to find shares to short on the day the commentary was published. This is typical of smaller, more thinly traded stocks.
Cuban and Carey declined to say whether they would make an effort to uncover wrongdoing at companies that would be easier for smaller investors to short. Carey said Cuban does plan to plow his short-selling profits back into the research of more shady companies.
Still, there is value for investors in what Sharesleuth.com uncovers. Even if the average investor can't make money by shorting Sharesleuth.com stocks, the Web site may help people avoid losses by steering them clear of lemons.
And stock declines caused by Sharesleuth.com articles can help bulls get in at lower prices. Tobin Smith, author of the ChangeWaves investing newsletter, recommended readers buy shares of Xethanol in the downdraft following the attack by Sharesleuth.com. Smith thinks Xethanol may eventually trade as high as $30.
Valuation?
But is Cuban's research any good? Or is he just knocking stocks down with bad PR? While it's hard to tell based on his one pick to date, Cuban does a disservice to investors by encouraging them to ignore at least one time-tested tool of investing. Cuban describes valuation analysis -- the process of trying to figure out what a company's really worth -- as "laughable filler."
"We're not trying to assess whether a company is undervalued or overvalued in the market," responds Carey. "We're trying to determine whether management or employees are engaged in systematic fraud or deception. That's an entirely different field of analysis."
It's one that may better serve investors than following Cuban. "Warren Buffett looks at valuation exclusively and he has done extraordinarily well," observes Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School. And it's not just Buffett. From 1928 through 2005 the Fama-French Value Index has posted an average annual return of 12.7% compared to returns for the S&P 500 Index ($INX) of 10%, according to Ibbotson Associates.
He's launched a Web site, Sharesleuth.com, and hired a financial journalist with the goal of rooting out unsavory business practices and misleading accounting by public companies.
Good idea, right? After all, the existing financial media and Wall Street's best and brightest analysts were all duped by the likes of Enron and WorldCom.
Maybe not. The big problem: Cuban is tilting the game in his own favor in a way that some of his allegedly corrupt target companies would have to admire. "All Mark Cuban has done is figure out a way to screw people legally, and that is what Wall Street is all about," says Gary Weiss, author of "Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments."
Sell first, report later
Cuban makes no bones about the fact that a chief goal of the site is to make him money. Already a billionaire from his sale of Broadcast.com to Yahoo! (YHOO, news, msgs) in 1999, Cuban plans to profit by taking short positions in stocks that Sharesleuth.com attacks. In short selling, investors borrow stock and then sell it to someone else, hoping the stock will decline so they can return it later at a cheaper price.
Ideally (for Cuban), he sells a stock short, Sharesleuth publishes an article, the stock's price goes down and Cuban reaps a profit. Even if Sharesleuth gets it wrong, Cuban's investment benefits from the negative publicity.
In its premiere on Aug. 7, for example, Sharesleuth.com attacked Xethanol (XNL, news, msgs), questioning everything from management credentials to the viability of the company's plan to turn biomass into ethanol. The stock traded above $7 just before publication. It sank 40% to $4.21 two days after the Sharesleuth.com attack. By his own admission, Cuban shorted 10,000 shares of the stock before his site posted the attack.
All of this is legal because of a loophole in the insider trading rules covering journalists. Most journalists can't trade stocks once they know an article about those stocks is coming out because that knowledge is considered the property of the publication. "Stealing" that knowledge by trading on it is a form of fraud barred by securities law.
But since Cuban owns the Web site, market cops can't make the case that he "stole" knowledge of publication from himself, says David Marder, a former Securities and Exchange Commission attorney who now works at the law firm Robins, Kaplan, Miller & Ciresi in Boston.
It may be legal, but is it ethical? After all, Cuban is using the mantle of respectability that comes from positioning his Web site as part of the financial press. But all the while he will be using it to profit personally, Weiss says. "Cuban wants to combine short selling with some derivation of journalism and exploit journalism for his own private purposes," Weiss complains.
Everybody's doing it
Cuban, via e-mail, says he doesn't intend to profit from any short-term declines in stocks caused by Sharesleuth.com coverage prepared by Christopher Carey, a former St. Louis Post-Dispatch journalist hired by Cuban. Instead, Cuban says he is shorting stocks for the long term, hoping they go to zero and he never has to cover.
Even if he did trade on short-term moves caused by Sharesleuth.com, asks Cuban, how is that any different from short-selling money managers who bash stocks while appearing on CNBC and then cover their short positions for a profit the next day in the resulting decline?
"Your position is moronic because EVERY buyer or seller has an undisclosed reason they are buying or selling," Cuban says. "But in our case it's not relevant because the timing of when I go long or short has nothing to do with the publication of the article. Chris publishes it when he is done and gets it right."
Cuban points out he shorted Xethanol in May, after Carey suggested it might make a good target for the first article at Sharesleuth.com, which didn't appear until August. "In that time period, the company actually could have done something right," says Cuban.
Cuban's right. He's taking some risk. And yes, CNBC is rife with the sort of behavior he describes (although it has, in recent years, improved its guests' disclosure). Like some of the money managers CNBC puts on air, Cuban is using his advantages -- wealth, fame and a Web site -- to turn a profit. But it's an advantage most investors don't have, and one that tilts the field in his favor.
Can others profit?
There are practical reasons why Cuban's Web site, so far at least, is of little use to the average investor. When Sharesleuth.com attacked Xethanol, it was tough for the average investor to find shares to short on the day the commentary was published. This is typical of smaller, more thinly traded stocks.
Cuban and Carey declined to say whether they would make an effort to uncover wrongdoing at companies that would be easier for smaller investors to short. Carey said Cuban does plan to plow his short-selling profits back into the research of more shady companies.
Still, there is value for investors in what Sharesleuth.com uncovers. Even if the average investor can't make money by shorting Sharesleuth.com stocks, the Web site may help people avoid losses by steering them clear of lemons.
And stock declines caused by Sharesleuth.com articles can help bulls get in at lower prices. Tobin Smith, author of the ChangeWaves investing newsletter, recommended readers buy shares of Xethanol in the downdraft following the attack by Sharesleuth.com. Smith thinks Xethanol may eventually trade as high as $30.
Valuation?
But is Cuban's research any good? Or is he just knocking stocks down with bad PR? While it's hard to tell based on his one pick to date, Cuban does a disservice to investors by encouraging them to ignore at least one time-tested tool of investing. Cuban describes valuation analysis -- the process of trying to figure out what a company's really worth -- as "laughable filler."
"We're not trying to assess whether a company is undervalued or overvalued in the market," responds Carey. "We're trying to determine whether management or employees are engaged in systematic fraud or deception. That's an entirely different field of analysis."
It's one that may better serve investors than following Cuban. "Warren Buffett looks at valuation exclusively and he has done extraordinarily well," observes Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School. And it's not just Buffett. From 1928 through 2005 the Fama-French Value Index has posted an average annual return of 12.7% compared to returns for the S&P 500 Index ($INX) of 10%, according to Ibbotson Associates.
What do you think? I like the idea.
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