The financial news web site SeekingAlpha.com has itself, quite unusually, been the subject of news for some rather significant issues recently.

The site was subject of an academic study that touted the success of its contributing writers in determining the direction of stock prices.  Great news, except in the following days Seeking Alpha was included as one of the targets in a Fortune magazine article that questioned authors on the site who were paid to write articles by those seeking to promote certain stocks. Seeking Alpha, in an interview with ValueWalk, addressed the problem, noting they are implementing more sophisticated IP address tracking along with strengthened measures to independently verify contributor identification. Other financial web sites, however, avoid articles on the category of small cap stocks at the center of controversy.

Seeking Alpha

 

This occurs as Seeking Alpha is a respondent in a lawsuit brought by activist hedge fund investor David Einhorn of Greenlight Capital, previously reported in ValueWalk.  Greenlight is seeking to expose an anonymous contributor who wrote an article about one of Einhorn’s previously secretive stock holdings.  In this regard, Seeking Alpha is officially silent but sources note the significance of the issue for freedom of the press and question if Einhorn’s tactics aren’t similar to the pressure activist investors utilize with a board of directors during an acquisition battle.

Study praises Seeking Alpha followed by Fortune Magazine slam

A new academic study, first reported in the Wall Street Journal, highlighted the finding that articles written by contributors to SeekingAlpha, when averaged, had a “wisdom of crowds” effect that led to accurate stock predictions.

The study, from researchers from City University of Hong Kong, Purdue University and Georgia Institute of Technology, considered the fraction of negative words written in all articles on a particular stock on a particular date, which generated a score. Stocks that had a high fraction of negative words in the blog post and subsequent comments were more likely to perform negatively.  The researchers transformed the method into actual buy and sell trades, producing a 40% multi-year return, according to the study.

How can the site be so successful?  “It speaks to the power of the crowd-sourced model,” said Colin Lokey, director of contributor success at Seeking Alpha. “When you have many thousands of contributors and commenters that come together in a moderated forum to discuss anything, whether that’s equities, fixed income, or anything else, the wisdom of the crowd will likely be superior to any one individual.” 

Fortune Magazine story

The day following the laudatory March 19 Wall Street Journal  article, Seeking Alpha found itself in the crosshairs of Fortune Magazine, which disclosed that certain contributors to Seeking Alpha as well as contributors to Forbes, Wall Street Cheat Sheet and others, were actually paid by a PR firm to promote stocks.

In a “pump-and-dump” scheme for the digital age, an Indianapolis-based PR firm, DreamTeam, would charge companies seeking to promote their stock anywhere from $15,000 to over $600,000.  DreamTeam would then hire writers to plant articles on various financial web sites.

On the Seeking Alpha web site, contributors are required to sign a statement that they have not received compensation for writing an article, yet this appears to have been ignored by some contributors. It is unclear if Seeking Alpha has any legal recourse against contributors who turn out to have received payment from a company to write about its stock.  Seeking Alpha, Forbes and Wall Street Cheat Sheet are all in the process of removing posts believed to be paid to promote a particular stock.

Seeking Alpha’s Editor-In-Chief Eli Hoffman addressed the measures the site takes to ensure contributors to the site are properly vetted:  “Specifically, we take a number of measures to ensure contributor identity integrity, including IP tracking, independent validation of contributor details via a third-party data provider, photo ID, and in most cases banking information and we’re constantly improving our due-diligence process,” he wrote in a blog post.

Addressing changes in light of the recent controversy, Seeking Alpha’s Lokey said, “We’re implementing more sophisticated IP address tracking along with a few other measures — we’re also working to have independent verification of contributor IDs.”  With nearly 9,000 contributors, Seeking Alpha has a daunting task.  While some sites focus on the contributor, others look at the problem from the standpoint of the type of stocks the web site covers.

Seeking Alpha’s small cap stock articles are central to the problem

An issue not raised in the Fortune article is that most of these “pump-and-dump” schemes involve lightly traded small cap stocks where an article can move the stock price.  For instance, Forbes.com published an article titled “The race to develop a brain cancer treatment takes an interesting turn,” which touted a small cap stock, CytRx, claiming the company had “remarkable results” in a recent drug trial.  The stock “appears poised for a significant run in the months and years ahead as the company’s platform continues to be validated by science,” the article lauded.  Days later, CytRx Corporation (NASDAQ:CYTR)’s stock rose nearly 50% to $6.90. Last week, the article notes, a class action suit was filed against CytRx, its CEO Steven Kriegsman, and an investor relations firm The DreamTeam Group claiming the group were involved in a scheme to write articles pumping the stock price. The article was later removed by Forbes.

Small cap stocks being the issue, various sites have different policies.  Seeking Alpha’s policy for an article about a stock trading at less than $1 or with a market cap below $100 million is that such an article “will see extra scrutiny but is still eligible for publication.”

Writing articles about small cap stocks seems to be a high risk, low reward strategy for financial web sites.  They don’t generate large traffic numbers like articles on larger stocks do, and they expose the site to the potential for stock promotion schemes.  To avoid this, some web sites shun articles on small cap stocks entirely.

Motley Fool, for instance, is a web site with a mix of contributors and journalists, and pays its contributors. The site, which has largely avoided the scandal, has a specific policy against running articles on smaller capitalization stocks and engages in a detailed due diligence process in regards to their contributors.  

“Our guidelines keep writers from covering small caps — any stock under a $200 million market cap and some other minimums sets off a red flag in our content management system,” said Roger Friedman, President, of The Motley Fool Freelance Network.

When asked by ValueWalk why Seeking Alpha would publish articles about small cap stocks that typically don’t generate much traffic (or financial reward) for a web site, Lokey said: “One of the advantages of being a crowd-sourced equity research platform is that we can provide research and analysis on stocks that typically receive little to no sell-side coverage.”

“Our mission is to help the world invest better, not move markets,” said Motley Fool’s Friedman.

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