Friday, June 10, 2011

Hit Piece Research: How does it work?

I am studying and learning more about hit piece research.
I found some information at a website called: Hit Piece Research and Seeking Alpha 
"committing fraud just because someone else commits fraud is not a valid excuse to break the law".
Short Sellers Profiting From Privileged Inside Information in the U.S. Listed Chinese Market Place
The actions of "hit piece research" providers is astonishing. They are no worse than the actual companies that are committing fraud, if their claims are correct in the first place. Regardless, they do not care if they are correct as they have found a niche environment that has yet to be monitored by the SEC. They know they are breaking the law, but direct quotes from two such sources is that "we are finally providing the information to the retail investor that the large investor has had for years" and "I believe the authorities will look the other way on what I do as I am a cop of the wild wild west".
One would believe that such manipulation and use of non-public information would cause fear in the eyes of these hit piece authors, yet jail time does not appear to be a deterrent that is strong enough to keep them away from the hopes of riches. We hear about firms utilizing their “expert witnesses” (e.g. IFRA, etc) to basically stalk, steal and acquire any piece of information they can get their hands on with the sole intention of creating the next major short position for their portfolio. Without a doubt, it appears to be working very well for these short sellers in a few cases, but we would have to assume (at least hopefully) the integrity of such traders and “hit piece” authors will eventually be questioned within the investment community.
Let me be very clear, we are not defending these fraudulent companies or believe that they shouldn’t be exposed, as it appears some at least are not honoring the requirements and regulations of the U.S. public markets, similar to that of Enron and many other U.S. companies in the past. However, the major question we are asking is this: Is it not illegal to trade on information that is privileged (or “inside”) prior to divulging such information to the authorities (irrespective of whether or not the information is positive or negative)? The simple definition of insider trading is below:
“the illegal buying and selling of securities by persons acting on privileged information.”
It would appear that at least some of the pejorative information regarding a few of these companies seems to have been privileged and clearly not “publicly available” prior to some of these short sellers executing their trades. Also if the information is not privileged then wouldn’t that mean it is not factual and it has been conjured purely to drive market movements.

We have laid it out below, but effectively by distributing "market moving" information pieces with the intent to move the market hedge funds and sophisticated traders are able to profit at the expense of the retail and smaller investors.


  1. Hit piece authors and their cronies put together a “hit piece” “research” piece based on due diligence they claim they have done referencing public, non public, unconfirmed and unproven damning information about a company.
  2. Hit piece authors and cronies distribute such information to their friends, subscribers, partners, etc.
  3. They all trade in the security based on the direction the report is intended to move the stock price of such securities. To build a position to benefit from the market moving report they intend to release they:

a. Short sell securities to other investors that are then positioned to be harmed from the information they plant o release.

b. They sell call options to collect premiums to investors that are then positioned to be harmed from the information they plant o release.

c. They acquire put options from investors that are then positioned to be harmed from the information they plant o release.

  1. They wait a few days to fully load up on such positions they are seeking to profit from.
  2. They release the “market moving” information to the market – including public, non public, unsubstantiated and unproven malicious and damning information for the sole purpose of manipulating the share price in violation of SEC Rule 10b-5, which causes the security plummet in value.
  3. They then either:

a. Cover their short position shortly after report is out locking in hefty profits.

b. They let the call options expire that they sold collecting healthy premiums.

c. They exercise the puts and lock in healthy gains or sell the puts at a hefty premium to what they paid profiting healthily.

  1. Then they go long the security as when the company responds with the facts the security is almost likely to recover around 70% of its value in the market – profiting again from the average shareholder.
  2. After stealing money from shareholders as a result of their “market moving” information they disperse the market they move on to the next security.

This is a great model, only if it was legal.

We believe that the practices of these “hit piece research” firms have significantly damaged the integrity of the public markets, the effectiveness of the SEC and FINRA, and have ignored the laws and regulations that a public company must follow and the standards and ethics that an individual acting as a “research” analyst must adhere to. We have followed the actions of such individuals and companies and have seen a continual and significant degradation of the effectiveness of the regulations that are meant to govern and orderly and fair public marketplace. To that end, we will take the time to briefly compare the actions that are taking place and why we believe it’s illegal, of low integrity and very damning to the integrity of the US public markets.

Bona fide research analysts are held to certain standards and requirements that are monitored by FINRA, SEC and various other regulatory authorities for a reason. Ultimately, they are an individual that performs significant research on companies, their environment, their filings, etc. They have to speak to management teams, determine the integrity of their statements, potentially dig deeper to discover the truth, and then translate all their due diligence data points and information into a report that is disseminated through public means.

On the other hand, recently another type of “research” has surfaced that has been coined (even by the authors themselves) as a “Hit Piece”. This type of “research” report has garnered this name because the author has intent of “hitting” (or substantially decreasing) the share price of the company with their report. What is the difference, one may ask, of a “hit piece” author and a research analyst?

Discussion Topic Research Analyst Hit Piece Author
Interaction with company management to understand the business model. Speaks to management to understand the full details of the business. Interacts with all levels of the company and its service providers, customers, and stakeholders of the company to understand their business model and follows-up with management or the appropriate person to get their questions answered, if needed. They can believe or question such statements, but they certainly run their questions through the company prior to forming their opinion on the company via their report. Does not make an attempt to speak to management, either initially, or as follow-up. Many of these authors have actually stated publicly they prefer not to speak to management prior to releasing their reports. While initially this may seem unusual, this is very consistent with the purpose of a “hit piece”, as it would typically lessen their ability to publish negative statements and potentially lessen the damage to a company’s share price if management clarified their questions in a conversation exchange prior to the “hit piece” release.
Ability to trade on inside information. Research analysts are restricted from trading in such securities prior to releasing the report and still post releasing the report. Not only are they restricted, but the entire research department and employees of their firm are restricted as well. Hit piece authors aggressively short sell securities or buy substantial quantities of puts immediately prior to putting out their reports. Furthermore they typically sell such reports to their colleagues and enable them to front run such reports prior as well. Only after they have their short positions or puts does the author post their reports with the sole intent of manipulating the share price. In addition to this manipulative report, they further create the illusion of share price collapse through trading programs that aggressively overstate downward volume. All of this is to create fear and selling in the share price, enabling them and their colleagues to immediately cover their shorts or sell or cover their puts.
Access to non-public information and means of obtaining such information. Research analysts are restricted to public information and are not able to utilize unscrupulous methods (such as bribes) to obtain information that deemed privileged and not public to the investing public. Hit piece authors will commonly use corrupt methods and lie to companies or bribe and lie to other providers of information (such as clerks at local tax offices, government officials, etc.) to obtain any information they can to either prove their point or further enable them to manipulate the stock price of the security that they referencing.
Integrity If a research analyst uncovered what they believe to be fraudulent activities within a company, they are required to immediately report such activities to the company for clarification, their compliance department, and/or the authorities to ensure that investors do not get harmed more than they should, and so that the authorities can take the necessary actions to ensure that the losses and damages incurred by the investing public is minimized. If a “hit piece” author uncovers what they believe to be fraud, or even something that is minimally unclear to them (without requesting clarification from the company), they immediately utilize such information to trade on the security, draft a report, internally share their findings for a fee to their colleagues, then disseminate such report in the most extremes of damning manners that one can imagine, use trading techniques to increase volume and drive down the stock price to a maximum point and cover their trades to lock in their profits, while causing immeasurable harm to the investing public in the process.

We believe based on the points above that these authors are not “research analysts”, but individuals that are that are getting away with crimes that are egregious, disturbing and increasingly damaging to the investing public. The most disturbing thing of all is that they are doing it in broad daylight, right in front of the authorities as almost a sign of defiance, and claim that they are invincible to, or above, the law.

Some may argue that they should be viewed as “journalists” versus a research analyst and should not be regulated; despite the fact they claim they are a research analyst themselves. If this is the case then this still does not preclude these authors from abiding by the laws and regulations established by the SEC and FINRA. If they want to use “yellow journalism” to profit at the expense of the investing public than we believe that is still just damaging to the average public and should be monitored, regulated and controlled.

We PLEAD that the actions of these individuals and companies are monitored, investigated and tracked and that all means are used to ensure that they are acting in accordance with the laws and regulations that were established to protect ALL investors, large and small. If these actions are not stopped we believe that millions of dollars will be taken from the pockets of hard working Americans, and global investors, that have put the faith and trust in US securities regulations to monitor and stop such unscrupulous actions.

The only problem I have with hit piece research is that the company in question cannot defend themselves beforehand, only when the damage already is done and the stock price is carnaged. Leaving a lot of investors with big losses.

In that sense I think hit pieces are brutal for long investors.

I would plea for:

1) The need for transparency.  Hit piece authors want transparency so do the average citizens investing in the markets. Each hit piece "research" author should have to sign a disclaimer with proof of identity saying they are not trading within 30 days pre and post such issuance of an article. 

2) The need for verification.  Authors claim they are helping investors then it should be that they can not put a research report with 15 items in the report without at least questioning management prior to such release as often 14 of the items appear to be pure interpretation or easily explainable issues. If there is an issue with the company and the company will not address themselves than the authors should feel free to discuss publicly, but if material they should know its illegal to trade on it.

3) The use of front running and definition of market moving research.  Everyone needs an education on such information.  A lot of firms continually violate the law. 

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