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The Alpha and The Omega: Seeking Alpha, Micron and David Einhorn

March 4, 2014
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Back in November of 2013, an anonymous contributor to Seeking Alpha posted a not-so-cryptic tip about a major hedge fund planning to buying shares of Micron Technology (NASDAQ: MU). In the comments, one reader guessed Greenlight Capital, LLC, which the anonymous contributor replied to and verified. Shares of Micron started flying like hotcakes and prices went up, which meant when Greenlight actually purchased the shares, they paid more for them.

But of course, there’s a lot more to it than that. Read on below for the ins and outs of Einhorn vs. Valuable Insights.

So What’s the Deal? David Einhorn Is Suing People Left and Right?

For starters, Greenlight Capital, LLC, is not suing Seeking Alpha itself, nor are they suing a blogger. They have petitioned Seeking Alpha for the identity of an individual contributor, so that they may subsequently sue the individual. Who is not a blogger. If that makes sense.

Greenlight alleges that the post on Seeking Alpha caused Micron share prices to rise, costing them tens of thousands of dollars, and further alleges that an insider legally bound by a confidentiality agreement intentionally leaked the information.

Einhorn’s stance and Greenlight Capital’s subsequent legal actions have  been met with skepticism, which is understandable. The outspoken pariah of the hedge fund industry (and New York Times bestselling author) doesn’t exactly shy away from the spotlight. To complicate matters, Einhorn’s investment strategy is generally characterized as activist, which means it can be a little hard to accurately determine his motivation behind highly publicized moves.

A few news outlets have mentioned the First Amendment, but this really isn’t a freedom of speech issue. It’s not about saying something a rich guy disagrees with. It’s ultimately about insider trading.

Um . . . So Who Knew About This Micron Thing?

Hedge funds list their investment holdings in a prospectus, made available to potential and current investors in the fund. But those are typically published quarterly or biannually, not as soon as a buy or sell happens. In this instance, Greenlight argues that the only persons with knowledge of the Micron shares were legally bound to keep quiet about it.

According to the Petition for Pre-Action Disclosure filed by Greenlight on February 13, 2014, in the Supreme Court of New York:

“. . . the only persons who lawfully possessed information regarding Greenlight’s position in Micron were persons with a contractual, fiduciary, or other duty to maintain the confidentiality of Greenlight’s position: Greenlight’s employees, counsel, prime and executing brokers and other agents.”

Basically, Einhorn has a legit point. Hedge fund managers are a savvy bunch, and sophisticated investors understand the power of PR when it comes to the stock market. Seeking Alpha accepts articles from a largely unvetted stable of “contributors”, making it entirely possible that a savvy Micron stakeholder decided to submit a post for personal gain.

So it’s a bit inflammatory to overly simplify the issue as suing a blogger. This isn’t a blogger in the way the majority of people think of the term, but what Seeking Alpha calls a “contributor.” Which basically means anyone can submit and publish an article — you, your grandmother, or your stockbroker — provided they register with the site. Listen to your grandma, she probably has some good tips.

Wait. Who Wrote This Scandalous Post, Exactly?

The controversial contributor in question, “Valuable Insights”, states that they’re a fund manager with over twenty years of experience. If that’s the case, arguably such a veteran of the industry would know that revealing such information about Micron would drive up the share price.

Investor opinions, accurate or not, are a driving force on the financial industry. The past decade, for example, has shown the power of psychology on the stock market, real estate industry, and investment firms. So posting something like this on a site where the readers largely consist of retail investors would almost certainly have some sort of impact.

Basically, if an unscrupulous character attempted to influence market prices before information became public, it would amount to insider trading.  And sadly, valuable insights might not be so valuable after being sued by a prominent hedge fund.

Okay, So This Is Some Random Dude Leaking Confidential Micron Information?

Yeah, basically. It’s not a member of the press and it’s not like some high-level consumer rights activist. In this case, it’s an individual humble enough to use the pseudonym “Valuable Insights” who chose to share his news with the world, using Seeking Alpha as a springboard. But interestingly, while he (or she) was quite eager to share this information with the masses, they were only comfortable doing so under a fake name.

According to Greenlight Capital’s legal filings, the only people with knowledge of this event were legally obligated not to talk about it. So using a pseudonym would make a lot of sense, if the allegations are correct.

What’s Seeking Alpha’s Policy on Contributors?

Seeking Alpha’s official policy on authors using pseudonyms is as follows:

“While Seeking Alpha editors greatly prefer that our authors use their real names, we recognize that is not always possible. Due to regulations at their workplace or other factors, some contributors are not able to reveal their real names. In addition, many well-known, veteran stock market bloggers (some of the finest, in fact) write under a pseudonym.”

The policy goes on to state that the site requires contributors to provide their real name, contact information and stock holdings when registering. But this information is self-disclosed, reliant on the honesty of the applicant.

The leaderboard page for contributors lists a plethora of interesting Seeking Alpha bylines, from “Quoth the Raven” to a more direct approach, e.g. “Blackstone Equity Research.” The articles published aren’t coming from journalists or professional bloggers. They’re coming from anyone registered as a Seeking Alpha contributor. There’s virtually no vetting process, so while the information may sound authoritative, there’s really no way of telling where it actually came from.

This sort of advertorial tit-for-tat blogging has been going on for years. For the most part, it’s relatively harmless — a local real estate agent doing an article on home prices to bolster their public image, for example, or a doctor does an article on the flu season. They provide the article or content for cheap, but get some decent marketing out of it, and everyone goes home happy. Unless the information is wrong or illegal, of course. Then the levee starts to break.

Anything I Should Know From Greenlight for My Investment Strategy?

If you’re looking to get a few valuable insights for your own portfolio, here are a few highlights from Greenlight’s recent 13F Filing.

There were two notable additions:

  • Just over 1.4 million shares were added from Biofuel Energy Corp (NASDAQ: BIOF), a company which produces ethanol based fuel and other alternative biofuel products.
  • Added 1.37 million shares in Vodafone (NASDAQ: VOD) a London-based telecom company. Vodafone recently announced plans to acquire Spain’s largest cable operator, ONO.

The Micron stock, which initially appeared in the November 2013 13F, remains untouched. Einhorn has said previously his strategy is to go long with Micron, so while they aren’t as good a deal as they were in November, the stock still has a lot going for it.

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