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.


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