Trash and Cash! The Market Value of Financial Blogging.

On February 2, 2014, Bloomberg News reported, in an article entitled “Investors Bet Against Stock in Harvard Professor’s Blog,” by John Hechinger and Jesse Westbrook, that at least five investors successfully shorted the stock of a media advertising company, Blinkx, after the company received a scathing review (if not a flat out allegation of fraud) by a Harvard professor, Benjamin Edelman on his blog post: “The Darker Side of Blinkx.” Two US based investors who did not want to have their identity revealed commissioned Professor Edelman’s research into the company’s practices. The stock of the company fell by a third of its value in the days following publication of the blog on January 28, 2014. Five large investors took a short position on Blinkx stock just before the release of professor Edelman’s blog. The obvious implication is that anonymous investors commissioned a “hit piece” on a company that they were planning to short.

Is the Harvard professor’s blog a case of “trash and cash?” The answer to that would hinge on when the investors that commissioned this research took a short position on the stocks and whether they knew that the piece would be published. Professor Edelman claims in the amended disclosures on his blog that he was not hired to publish his results after giving them to the clients, but he did have a clause in the contract that conditioned the research on his ability to publish. Would investors not have a reason to know that the results would be published by a prolific blogger who, as a professor at Harvard Business School, has serious readership and credibility? Would the investors not know the piece would be published soon, so as to assure its relevance?

Another problem is with the possibility that the information on which the professor relied could be “insider” information or incorrect misleading information. The question is whether all the information that professor Edelman used was publically available or whether he may have used information and sources that a journalist would be allowed to use, but an investor would be prohibited. Bloggers and publishers are now considered journalists and can not only protect their sources but also can engage (and the assumption is that they would) in the type of investigative reporting that would uncover things not known to the public. Do regulatory agencies have a way of connecting these “hit pieces” with deliberate market manipulation? Do SEC and FINDRA need to read all influential business blogs that have impact on market prices and must the reporters disclose who received the information before it was published?

In his blog post, the professor actually goes so far as to recommend shorting the stock. This seems to take his analysis of “historic and current practices” one step further than reporting and into the territory of dolling out investment advice (or a self-fulfilling prophecy). Could the professor be found complicit in the market manipulation not as a blogger or a journalist, but as a financial advisor? The rise of social media has certainly created new challenges for securities regulators.

 

Should Blogs Enjoy the Same Defamation Immunity as Newspapers?

Blog posts are not entitled to the same immunity from libel as are newspapers or other periodicals… at least in Texas.  The issue was resolved in a district court case steming from posts made by a former patient of the University Behavioral Health of Denton (UBH), “a free standing psychiatric hospital specializing in mental health and chemical dependancy care.”    Brenda Wells, a former patient of the hospital, among other things maintained a blog on which she posted defamatory comments that accused hospital staff of unprofessional and even criminal conduct. Wells tried to defend the claim arguing, that not only were the blogs not defamatory, but  that her blogs were protected under a Texas Law, which prohibits libel claims against newspapers and periodicals.  Wells argued that her blogs, which were published, were akin to the type of media receiving defamation immunity and therefore should be protected under the law.  The U.S. Discrtice Court for the Eastern District of North Carolina disagreed, finding that because ” “[p]ostings on the blog are not published at regular intervals. They are not composed of articles, news items, or the like.”

The decision in the case, Ascend Health Corp. v. Wells (here), may make sense in this particular instances, but I can think of a lot of blogs that have the sophisticated and regular type of content of which many newspapers and periodicals boast.   What about blogs that are maintained by newspaper reporters?  Such blogs would not receive immunity under this case.  This is one decision that I think should be revisited.  Thoughts?