Summary:

• ·         Seeking Alpha (SA) is a powerful online investment research distribution platform that provides research to a wide base of investors.  Many of these investors are relatively unsophisticated individual investors rather than professionals.

 

• ·         While the bulk of Seeking Alpha’s content is both productive and educational, a small but meaningful portion of the site’s research appears to be deliberately deceptive, aiming to manipulate stock prices. 

 

• ·         Manipulative research degrades the efficiency of public markets.  This is particularly true with respect to small cap stocks which are more easily manipulated than large cap equities. 

 

• ·         Seeking Alpha provides very little protection or safeguards to its readers, some of whom experience financial loss after taking imprudent action based on false and misleading research presented on SA. 

 

• ·         Publication of manipulative research on SA is inevitable.  A criminal element will always be present in any large population where proper safeguards are not present.

 

• ·         Seeking Alpha has instituted certain rules and policies which may unintentionally encourage the publication of misleading and manipulative research on its site. 

 

• ·         It is unclear why Seeking Alpha’s editorial and compliance controls for written research should be dramatically less robust than those of Wall Street’s research platforms.  Seeking Alpha’s distribution platform is arguably larger and more influential than those of many Wall Street research brokerages, while its consumers are less sophisticated.  Why are SA’s less-knowledgeable users provided with fewer protections than Wall Street’s sophisticated institutional clientele?  

 

·         Seeking Alpha’s interests are not transparent.  SA is not compelled to furnish disclosures about its ownership in stocks under discussion, as are Wall Street research platforms.  This may lead to situations where SA arbitrages its informational advantage at the expense of its own users, and influences the publication of research to suit its own interests.  

 

• ·        We believe that certain systemic changes are warranted at Seeking Alpha to limit the publication of harmful and misleading research on the site.  We believe that SEC and ISA (Israel Securities Authority) oversight may be necessary to compel Seeking Alpha to make necessary changes to its business.

 

• ·        When signing this petition, feel free to comment about specific instances of manipulation that you've seen on SA.  

 

 

Petition Letter: 

To:  Mary Jo White, Chairwoman, Securities and Exchange Commission                        Prof. Schmuel Hauser, Chairman, Israel Securities Authority

 

Chairwoman White and Chairman Hauser:

Each person signing this petition strongly believes in the First Amendment right to free speech.  This petition is not about silencing short sellers or long pumpers who publish on Seeking Alpha’s (SA) website, as some would have you believe.  It is about bringing attention to the fact that authors are regularly abusing Seeking Alpha’s site to manipulate stocks (both higher and lower – though this letter will focus attention on short-sellers) and publish illegal and dishonest research.  We believe that a number of Seeking Alpha’s policies unintentionally encourage this behavior and that Seeking Alpha should be doing more to prevent these abuses on its site. 

The SEC and ISA’s involvement is necessary because the fraud that runs uncontested on this platform is systemic, involves large sums of money, and takes advantage of relatively unsophisticated investors.  SA has not addressed these issues adequately.  This may be due to the fact that doing so conflicts with its business interests.

Seeking Alpha has motivation to ignore the illicit behavior occurring on its site.  The more articles written on the site, the more profit for SA.  The more controversial and incendiary an article, the more impact it has on a stock price, which draws more page views, which leads to more money generated for SA.  Further, a self-reinforcing loop is created when sensationalist, deceptive, market-moving articles are published, as a violent move in a stock often triggers the publication of an article offering an opposing point-of-view on SA.  SA thrives on controversy, which generates more user-generated articles and comments, which create more page views and advertising revenue.  Manipulative and deceptive articles are always controversial, so they may provide a robust source of revenue for SA.   

While Seeking Alpha doesn’t condone the publication of illegally manipulative and deceptive research, the site has few controls to prohibit illegal research from being published on its pages.  Seeking Alpha’s editorial process is woefully inadequate, and its editors are ill-equipped to detect illegal manipulation.  SA editors exist to make sure that the author has supplied readers with proper stock tickers, and that the article has been spell-checked.  The lack of proper editorial control gives the site a “Wild West” feel where just about anything goes. 

The editorial-light bias is codified in the site’s editorial guidelines which state:

The stocks covered on Seeking Alpha, and whether articles are bullish or bearish, are determined by our contributing authors (having satisfied quality and integrity criteria), and not by our editors. Editorial changes to articles are intended to clarify the author's viewpoint and may not interfere with the substance of the author's argument or viewpoint. Our strict adherence to these editorial guidelines means that Seeking Alpha authors are genuinely independent.

The “quality and integrity criteria” called out in the above quote consist of little more than supplying a valid tax ID number and agreeing to the site’s rules.  Seeking Alpha takes a hands-off approach to editorial supervision, ostensibly to protect the independence of authors.  This leaves a gaping hole for anyone wishing to manipulate a stock using SA’s massive distribution platform.  Though manipulation is not condoned by SA, it is, nonetheless, closely tied with sensationalist headlines and claims, which drive page views for SA, aligning SA’s interests with those of rule-breaking authors.

Seeking Alpha provides an idyllic environment for the illegal manipulation of small cap securities.  Consider that it offers:

• Anonymity for authors
• Rules that unintentionally protect authors who abuse the law
• A very large distribution network
• Distribution partnerships with sites which offer access to relatively easily manipulated retail investors
• Very light editorial control
• An outlet where outrageous and inflammatory headlines are accepted
• Legitimacy conferred due to wide distribution and SA branding

Seeking Alpha’s rules make the site a relatively “safe” platform for those wishing to break the law.  This is due to the fact that SA has instituted a policy where illegal behavior cannot be called out publicly by anyone, allowing for maximum profit realization to manipulators.  SA benefits from the policy as it protects the appearance of “credibility” of the site’s authors, and allows SA to continue to extract advertising dollars without comments alleging impropriety.  SA authors who wish to illegally manipulate stocks can do so without fear of reprisal on the site.

The “one-way” nature of this system is well-suited to manipulators.  Authors are permitted to accuse companies of just about any sinister activity in the world, based on the flimsiest of evidence or outright lies.  Yet, a reader commenting on a deceitful article is not allowed to challenge the author’s behavior in making the allegations, despite having fact-based evidence to do so (a reader may challenge facts, but cannot question the author’s behavior or motivation).  This creates a free-for-all atmosphere for manipulators, and explains why SA is earning a reputation for providing a dependable and robust platform for the illegal manipulation of small-cap securities. 

SA has a mechanism for addressing these issues, but it is so riddled with problems as to be highly ineffective.  The site provides an email address where a reader can file complaints, however, this system is not timely.  A deceptive story may inflict considerable damage in real-time, and a retraction, change, or response needs to be ready almost immediately to have any impact.  Yet, SA’s policy won’t allow this.  Even if a complaint is successful and changes are made in the article, the damage has already been done.  Very few people will re-read the article and note what has been removed or amended. 

Most importantly, SA is loath to make any changes to articles at all, even when deception and manipulation is evident.  While SA sets a very low bar for authors wishing to make deceptive and illegal statements on the site, the same is not true for those who challenge these authors and request changes to the articles.  Readers who challenge an author’s deceptive statements through SA’s complaint channel are required prove that the author’s statement is factually incorrect, rather than prove that there is no evidence to support the statement.  In practice, this usually means proving that the opposite of author’s statement is true, and this often involves proving a negative, which is very difficult or impossible.  The arrangement confers the illusion of “doing the right thing” while the reality is that SA’s policy has the effect of keeping controversial published research on the site, and allowing SA to continue extracting advertising dollars from the content.

Using Seeking Alpha’s platform, executing a fraud and manipulating small cap stocks is so easy and such a dependable source of returns that the site has become an essential tool for a group of hedge fund managers.  Implementing the strategy entails finding the “right” target (eg. no cashflow, weak balance sheet, poor past execution, etc.) and then publishing an article, or a series of articles, that attack the target.  When all or most of the ingredients are present, a short-seller can almost guarantee himself a substantial return by publishing a misleading, negative article.   The veracity of that article, and the facts surrounding the story are almost completely irrelevant to the short-selling author. 

There is ample evidence to support claims of deceptive and manipulative research riding the SA platform.  The SEC has records pertaining to these articles in many cases.  Some instances may be cited in comments attached to signatures in this petition.  Many of us can specifically cite lies and material omissions that others have published, and back these assertions with facts.  What is crucial to note is that we distinguish between short-seller attacks on SA that we simply don’t like because they run contrary to our interests, versus attacks that misrepresent facts and omit material information in an attempt to manipulate share prices. 

The brazenness with which some short-sellers publicly flaunt their violation of SEC regulations is startling.  Many may be under the impression that the SEC and ISA do not vigorously pursue short-sellers who violate regulations.  There is a school of thought amongst short-sellers that these regulatory bodies and shorts are on the same team, both working to stamp-out corporate corruption.  These shorts seem to think that they are somehow impervious to the SEC’s rules.  Some short-sellers rationalize their behavior as necessary to make capital markets more efficient.  Making material misstatements of fact, and omitting material information, however, does not make markets more efficient, it only serves to make short-sellers more money. 

Because SA has an early preview of published material, and because it has the ability to impact the material published on its site, the platform has the potential to anticipate and influence the market prices of certain securities.  This circumstance creates the possibility for abuse by the owners and employees of SA, at the expense of the platform’s own users. 

If an article that is likely to move a stock is submitted for editing, there is little to prevent SA’s owners or employees from positioning in that security prior to publication.  If SA holds a preexisting position in a security and an article is submitted that is likely to move a stock against SA’s interests, the platform can deny, delay, or cause change to the article to protect their interests.

While it is not illegal for SA or its agents to trade securities in this manner, it seems to border on unethical (if it is happening) and it would certainly damage the site’s reputation and popularity were its users to be made aware of its occurrence.  Yet, due to the lack of transparency and disclosure on the site, SA’s users are left in the dark.  For instance, we do not know whether or not Seeking Alpha runs its own hedge fund – trading on the informational advantages it sometimes gains over its users.  We don’t know if it sells information to third parties (outside of the SA PRO offering) such as other hedge funds.  We don’t know if an editor holds a long or short position in the subject stock of an article he or she edits.

 

Since SA may be in a position where its interests are both advantaged and contrary to many of its users, it would seem appropriate that the site be forced to become more transparent.  Sell-side Wall Street research platforms are required to provide disclosures about their ownership and other business relationships in written research for the benefit of their sophisticated institutional clientele.  Why aren’t SA’s less sophisticated, retail investors afforded the same level of disclosure and protection?  

Where does Seeking Alpha’s responsibility start and end with respect to the research it distributes?  It would seem that Seeking Alpha would bear at least some of the blame for providing a platform that supports illegal activities.  When Wall Street published irresponsible research during the dot-com bubble, the government prosecuted the platforms as well as certain researchers who published on the platforms.  The platforms enable the behavior and give it a powerful voice through their branding and wide distribution.  They need to be held responsible for the content they sponsor, especially when turning a blind eye is in their commercial interest.    

Seeking Alpha’s culpability is slightly different than Wall Street’s as it doesn’t use biased research to win greater investment banking or commercial banking business.  Nevertheless, Seeking Alpha seems to have almost as much motivation for allowing the publication of misleading, biased research as did Wall Street – the site makes money on the controversy this research evokes.  The existence of such a lightly supervised, powerful distribution network that offers protection to those who manipulate stocks appears irresponsible. 

If Wall Street was wrong in knowingly publishing misleading and biased research that would help the brokers make money indirectly, Seeking Alpha seems to be guilty of the same.  Given that SA has editorial power over content, has powerful branding and distribution, has rules that unintentionally abet stock manipulation, and has motivation to encourage sensationalism, it seems reasonable that Seeking Alpha should be held responsible for the research riding on its platform the same way that Wall Street brokerages were.  SA knows there is a problem, it hears from its users regularly on the subject, and has even removed some research in the past. 

To properly run a large-scale research platform, Seeking Alpha needs a much higher skilled, more robust editorial presence that is sophisticated enough to detect manipulation and discourage deceitful and irresponsible sensationalism.  SA also needs better crafted rules to help keep research on the site legal, and to allow quick and reasonable resolution to its readers’ complaints.  All of these changes will be contrary to SA’s business interests, so the site will oppose them, or will not move far enough to institute them.  We believe that pressure from the SEC and ISA may be necessary. 

The efficient allocation of equity capital relies on an infrastructure of rules and laws that gives markets integrity and investors confidence.  We feel that SA threatens this integrity, and this issue needs to be addressed for the benefit of global equity markets or the condition will deteriorate further.  

 

Thank You