By Brian Nelson, CFA
We’re writing this piece to make you aware of some troubling developments in this industry.
The investment business, as we’ve highlighted many times in the past, is based on trust. During the past several years, there’s been an explosion of information overload on the worldwide web, and a lot of the financial and investment information is written by anonymous authors without analyst credentials and with unknown motives. We hold the belief that, if a writer cannot stand behind his work in his own name, then there’s something wrong. Not only are a lot of the articles on other financial websites written by biased and anonymous authors, but now at least one anonymous author has been dealing with and releasing material, non-public information. This is a big no-no.
In mid-February, the information overload and the excessive anonymous blogosphere came to head when hedge fund manager David Einhorn, of Greenlight Capital, sued an anonymous author writing for Seeking Alpha. Here’s the Bloomberg report:
Hedge-fund manager David Einhorn’s Greenlight Capital Inc. asked a court to order the website Seeking Alpha to identify a contributor who allegedly disclosed the fund’s stake in Micron Technology Inc. (MU) before it was made public.
A frequent contributor to the site, identified only as “Valuable Insights,” revealed the investment in a post on Nov. 14, before Greenlight disclosed its position to the SEC, the investment manager said in a petition filed yesterday in New York State Supreme Court in Manhattan. The hedge fund said in the petition that the website post drove up its costs.
“Upon information and belief, Valuable Insights owned shares in Micron at the time of the postings,” Greenlight said in the petition. “The trading price for Micron’s shares rose immediately after Valuable Insight’s posting. Because this was the very time frame in which Greenlight was in the process of building its Micron position, it was forced to pay higher prices for its Micron securities.” …
…Greenlight said it disclosed its position in Micron to people who had a duty to keep it confidential, including employees, lawyers, brokers and fund administrators, and that “Valuable Insights” had to be one of those people or obtained the information from one of them…
…Greenlight said in the petition it intends to sue “Valuable Insights,” identified on the site as a fund manager with more than 20 years of experience in the securities industry.
According to recent reports, Seeking Alpha is not giving up the contributor’s “real” name. We find it unsettling that fund managers are allegedly distributing material, non-public information on blogs (and potentially getting away with it?). We don’t think that fund managers with fiduciary responsibilities should be acting under anonymity for personal gain or other unknown motivations. If “Valuable Insights” is not a fund manager, falsifying credentials to gain a following may be equally as troublesome. We’re also disturbed by the possibility that some analysts working at sell-side or buy-side firms (and have a duty to their own companies) may be writing and disseminating information under anonymous names on free blogs. The possibility of anonymous buy-side bloggers even signaling trades of their funds to followers in advance is just troubling (a published article in any form on any topic is all that would be needed to signal a trade). And of course, employees with trade secrets belonging to their company writing as anonymous bloggers can’t possibly be ethical. All of this is questionable ground. At worst, it seems illegal. At best, it seems unethical, even if not all anonymous authors are dishonest.
Where do we stand? You can rest assured that Valuentum is completely independent and that our company pursues the mosaic method in uncovering our best ideas. We do not have access to any material, non-public information and the buck stops with Brian. Our interests are completely tied to yours, and we encourage you to question the motives behind anonymous authors. What are they trying to hide? Maybe it is something completely benign like a doctor writing as a hobby on Saturdays about a stock he or she likes (or wants to talk about), but we’ll never know. In any case, we strongly encourage financial advisors and individual investors alike to stick with a brand, Valuentum (our firm), and a name, Brian Nelson (me), that you trust. We’ve built our business on independence, transparency, and integrity.