A Victory for Short-Oriented Research

Seeking Alpha, a web-based research platform, recently won a decision in the NY Supreme Court protecting the anonymity of a short-oriented contributor from the legal wrath of the targeted company.  The decision is positive for Seeking Alpha and for short-financed research providers, but does little to dampen the risks associated with the short-and-shout business model.

In February, Seeking Alpha published an article by pseudonymous contributor using the name Pump Terminator which savaged a small biotech firm, NanoViricides (NNVC).  Among other things, the article said that NNVC was “offensively similar to the China RTO frauds”, claimed that the company’s two principals had “stolen all potential value in NNVC from public US shareholders” and that NNVC was a “worthless shell where shareholders own virtually nothing.”

NNVC sued to compel Seeking Alpha to reveal the identity of Pump Terminator so that it could bring a libel claim against the author.  The NY Supreme Court dismissed NNVC’s petition on the grounds that the article was the author’s opinion and therefore protected as free speech.

For its part, Pump Terminator disclosed in its Seeking Alpha profile that it was a hedge fund manager and likely had a short position in NNVC: “Please assume PT currently has a short position in any common stock mentioned.”  However, because the action involved libel, disclosure was not at issue.

Libel is one of the vehicles available to vindictive companies spurned by short-oriented researchers.  In 2005, Overstock.com sued Gradient Analytics, a forensic research firm, for libel.  Gradient was not as successful as Seeking Alpha in getting the suit dismissed and ultimately had to settle. Andrew Left, the principal behind Citron Research, has been sued multiple times for libel and defamation.

Securities fraud and stock manipulation are the other legal weapons.  Gradient Analytics had the misfortune of being sued for stock manipulation by Biovail and both parties ultimately settled.  Canadian regulators have accused Muddy Waters contributor Jon Carnes of producing a fraudulent report on Silvercorp Metals Inc. (SVM), an action which is still pending.

After the negative report on NNVC was released, NNVC’s share price dropped from $4.60 to around $3.  Presumably, the short seller authoring the report was able to cover its short position at a profit.  NNVC’s share price has recovered to around $4.

As we have noted previously, the short-and-shout business model can be lucrative, albeit fraught with legal risks.  Seeking Alpha won a victory in this case, but it is a sure bet there will be more cases to come for short-oriented research.

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