What Happens When Someone Abuses the Internet to Game the Market

Originally posted at footnoted.org.

We interrupt our regular trawl through the filings to talk about something that's been on my mind all week: what happens when someone uses a popular Internet site to bash a company and basically games the market. I've been interested in this ever since I first wrote about online message boards for the NY Times back in 1999 and 9 years later, the boards are still rife with trash-talking.

But what happened this week with Microvision (MVIS) and the popular stock market aggregator Seeking Alpha is totally different. As Barron's Eric Savitz reported on Monday, Microvision's stock fell nearly 20%  after this very negative article was posted on Seeking Alpha by someone named Liam Mulcahy who claimed to work for a hedge fund that was shorting the stock. The article (but not the headline) was removed from the site on Tuesday after a Microvision spokesman contacted the site. This Seattle PI story has more details.

Now I have no opinion on Microvision. I haven't looked at their filings and I neither own (nor short) their shares. But as someone who writes about publicly traded companies based on the facts that are in the filings, 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.

Granted, people who make their investment decisions based on some commentary that they read on the Internet probably get what they deserve. And given Microvision's size, it's a much easier target than, say, a company like Motorola (MOT). And to be fair, Mulcahy clearly stated that he was shorting the stock. I should also note that I've had my own issues with Seeking Alpha and left them over a year ago for a variety of reasons.

Still, 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. In the meantime, caveat emptor!

Comments

[KillTheMessenger]

There is an easy way to escape from Wall Street madness: stay private. No filings except for your tax returns and those are between you and the IRS. No soothing of analysts, no stocks to plummet on good news or bad news alike. No profits to share. It all goes into your own pocket.

There is an enormous world out there with privately held companies who are very happy about their virtual invisibility.

[joebaggadonuts]

There's a reason we still use the Latin form of Buyer Beware - Caveat Emptor. Human nature changes slowly. It is not really a surprise that the new communications media - the internet - is now a home to the same cause which gave rise to that phrase so long ago. If we retain a well funded SEC and good anti-fraud laws it is that other not quite so well known phrase - Cave Canum - which should be morphed into Beware my Lawyer - that should help us out here.

[Mrrar]

For someone who sure dislikes bloggers, and internet-based information, don't you think it's ironic to.. post that opinion on the internet?

It's easy to game the system *before* the internet, too. It's just that the pool of people who had that ability was much smaller. Just because now *anyone* can manipulate the markets instead of tycoons, why should I feel less, or more, comfortable?

[Michelle Leder - Huffpost Blogger]

See Michelle Leder's Profile

@ mrrar: Not quite sure where you get the impression that I dislike bloggers and internet-based information since a cursory view of my profile would show you that I've been blogging for nearly 5 years now. My problem isn't with bloggers. It's with people posting false information under false pretenses in an effort to move the market.

Is this the first case in the history of the markets? Obviously not. But it's still problematic for those of us who care about open, honest markets and that should include most investors, including the so-called tycoons.

[justhefacts]

I would be interested in what you think about people posting true information in an effort to move the market. If the problem is that the information was or may have been "false," would it have been okay in your opinion for the poster to publish true negative information if the purpose of posting was to move the market?

Also, you say "people who make their investment decisions based on some commentary that they read on the Internet probably get what they deserve." Well, maybe they do, but what about the rest of us who are affected by what they do? How should the market deal with irrational (or manipulative) buyers and sellers? Can a good company be destroyed by stock manipulation? If not, then who cares who publishes what or when.

The conventional wisdom is that public companies are valued based on hard numbers such that any short term undervaluing of the stock of a solid company will soon be corrected in a rational system by buyers who come in for bargains. In that kind of market, one blogger posting a rumor--true or false--should not be a concern.