Mark Cuban Should Be Better Than This

We consider Mark Cuban a friend of the Fool. He's a passionate businessman and basketball team owner, a fiery commentator, and a generally interesting guy. But he's also prone to making bad decisions (see the Mavericks late-season trade for Jason Kidd) and even engaging in some questionable behavior.

July 23 provided an example of that latter point. His investigative financial blog Sharesleuth.com -- one that's dedicated to "exposing securities fraud and corporate chicanery" -- perhaps revealed that it's engaged in some chicanery of its own.

But let's begin at the beginning.

How it all went down
Back on March 10, Sharesleuth editor Chris Carey published an article impugning the management of China Fire & Security (Nasdaq: CFSG  ) -- a micro-cap company that makes fire detection and extinguishing systems for use in Chinese power and industrial plants. Carey documented a byzantine ownership structure at the company and called into question the propriety of China Fire's reverse-merger IPO as well as its ongoing transparency and disclosure practices.

The crux of Carey's argument was that China Fire CEO Brian Lin had linked up with stock promoter Martin Sumichrast (a character with an indisputably checkered past) and was thus guilty by association. That guilt was confirmed, in the eyes of Sharesleuth, by a series of less-than-forthright disclosures by Lin and China Fire about the qualifications of a company director and the ownership interests in the company.

After the article was published, the stock promptly dropped more than 65%.

Mr. Carey also disclosed that Mr. Cuban had taken a short position in China Fire stock prior to the publication of Mr. Carey's research (as is the policy of Sharesleuth).

That, in and of itself, is questionable
Though we frown on that kind of advance trading here at The Motley Fool, we don't necessarily begrudge Mr. Cuban for shorting the stocks Sharesleuth uncovers. The proceeds are ostensibly used to fund the website's operations, which advance individual investor education and help build a more reliable marketplace.

But our understanding of the website's strategy was that Mr. Cuban would short these stocks to zero or until resolution of the problems that prompted the Sharesleuth report. For example, according to Sharesleuth, Mr. Cuban remains short Xethanol and has profited as that stock has dropped from $12.65 per share to just $0.47 today.

In the case of China Fire, however, an updated post of Sharesleuth reveals that Mr. Cuban "has no position in any of the stocks mentioned in this story." In other words, he's already covered his short … a mere four months after Mr. Carey's attack on the company was published. The stock certainly hasn't gone to zero and Brian Lin remains the company's CEO.

Why do we care?
We've taken particular interest in this story because we visited China Fire's headquarters and met with management in Beijing during the summer of 2007. We eventually recommended the stock to thousands of subscribers to our Motley Fool Global Gains service.

We believed that China Fire had the potential to capitalize on an enormous growth opportunity as its home country enforces broader safety standards in the workplace. We also liked that the stock was trading for a compelling price.

What's more, we believed that CEO Brian Lin was looking to build his company for the long term and that -- though Chinese transparency and disclosure policies need to be upgraded -- he would prove to be a shareholder-friendly manager despite the questionable guidance he received during the reverse-merger process. Indeed, Mr. Carey qualified China Fire in his own article as "an established business with substantial revenue and several sizable customers." That customer list includes PetroChina (NYSE: PTR  ) and China Petroleum & Chemical (NYSE: SNP  ) . China Fire is no operational fraud.

The good news for us and for our subscribers is that we were able to advise them to take advantage of the irrational drop in China Fire's stock apparently caused by the Sharesleuth article to open (or build out) a position in the security. Those who did so have been rewarded. The stock quickly rebounded and today trades for more than $9 per share.

Though it still hasn't fully recovered from where it traded in early March, we expect that it will in time -- and go on to reward shareholders for many years to come. From the disclosure that Mr. Cuban has since covered his short position, it would appear that he no longer disagrees.

Despite that
By covering his short position in just a few months' time, Mr. Cuban likely made good money on this trade. Since China Fire has seen only a string of good news, including new contracts, positive earnings surprises, raised guidance, and share buybacks -- both before and after Sharesleuth's article ran -- it appears that Mr. Cuban's profits were earned solely from his website's attack on the stock. That, to us, smacks precisely of the kind of manipulation and executive enrichment at the expense of public shareholders that Sharesleuth itself was supposed to root out. And we have a real problem with that.

While Sharesleuth could call itself a blog that should largely go unregulated, its opinions, as well as those of Mr. Carey, carry significant influence in the investor community. All of the publicly traded stocks Sharesleuth has profiled, for example, dropped significantly on the day Sharesleuth published its article. We believe Sharesleuth should hold itself to higher standards of accountability and transparency.

Here at the Fool, for example, we have especially strict disclosure requirements and trading restrictions for those of us who write premium research. We're restricted from trading in a stock as soon as we know we will be writing about it.

Thus, we call on Mark Cuban and Sharesleuth to disclose the dates and prices at which they opened and then covered their China Fire short position, as well as their reasons for doing so in such a short period of time. We also request that they revise their trading policy so as to prevent the appearance of future stock price manipulation. Doing so would benefit the editorial integrity of the site -- something we know Mr. Carey works hard to maintain.

A broader point
Short-sellers have come under fire recently. Overstock.com (Nasdaq: OSTK  ) founder Patrick Byrne famously attacked them a few years ago; David Einhorn became a target of Allied Capital (NYSE: ALD  ) for presenting his short case for that stock; and we've recently seen the SEC enact a 30-day rule to prevent "improper short selling" in financial stocks such as Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) .

But let us be clear: We are not against short-selling. It is an absolutely crucial part of healthy and functioning markets.

Rather, we're against individuals benefiting -- on either the long or short side -- from action that they caused through a published report, a lack of disclosure, or any other means. Mark Cuban and Chris Carey are better than that.

Bill Mann is the advisor of Motley Fool Hidden Gems and Motley Fool Global Gains. Tim Hanson is an analyst on both of those services. Bill does not own shares of any company mentioned; Tim owns shares of China Fire & Security. Chris Paul may also own shares of China Fire (we don't know, but it would be in character). China Fire is a Motley Fool Global Gains recommendation. The Motley Fool has a disclosure and trading policy that Sharesleuth should consider emulating.


Read/Post Comments (27) | Recommend This Article (169)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2008, at 12:55 PM, Checkyourfacts wrote:

    The disclosures are linked in the side bar of every single page.

  • Report this Comment On July 29, 2008, at 12:59 PM, GunnarVagotis wrote:

    I know you're trying to be diplomatic, but what do we know about Mark Cuban that should make us think he's "better than that"? He's an opportunist that stumbled into money during the internet boom. The CFSG story does not merely have the appearance of manipulation, it is manipulation, plain and simple.

  • Report this Comment On July 29, 2008, at 1:50 PM, Yourwiseman wrote:

    I thank Sharesleuth for exposing true frauds like Signalife/Recom, HOTJ and the others. Sumichrast and the other questionable players mentioned in last week's articles are deserving of the bad press that they received and it is a travesty that the Feds have not moved in and shut them down as their fraudulent P&D schemes have been repeated across a number of companies over several years.

  • Report this Comment On July 29, 2008, at 1:52 PM, drakulla wrote:

    Chris carey wrote a very interesting article based on facts. Hope more facts are to follow...

  • Report this Comment On July 29, 2008, at 2:13 PM, Checkyourfacts wrote:

    Maybe Bill should talk about how he recommended a company without mentioning any of the facts Sharesleuth.com uncovered in its articles?

    Facts are facts, and pointing people away from your own mistakes Bill, makes you seem a bit disingenuous.

  • Report this Comment On July 29, 2008, at 2:21 PM, TMFDiogenes wrote:

    Checkyourfacts-

    Tim and Bill requested that Sharesleuth "disclose the dates and prices at which they opened and then covered their China Fire short position, as well as their reasons for doing so in such a short period of time."

    Sharesleuth does indeed disclose the prices, number of shares sold short, and vaguely the date transactions occurred in the cases of Xethanol and UTEK.

    For one reason or another they declined to do so for China Fire.

  • Report this Comment On July 29, 2008, at 3:06 PM, qroger wrote:

    I would be interested to know if the short in this or any case, was naked. Were the shares sold short, ever in hand?

  • Report this Comment On July 29, 2008, at 3:12 PM, TMFOtter wrote:

    Dear Checkyourfacts-

    (You're going to love the irony of your chosen screen name in just a second...)

    If you read closely, you will find that we recommended China Fire and Security *after* the Sharesleuth article came out. So I'm not sure how it was that we made a mistake when we had not actually recommended the shares.

    We questioned the validity of focusing on China Fire when the corporate structure there is common throughout China. We have (I have) warned about this over, and over, and over, and have done so for years in various forums wherever the topic of investing in China has come up. In other words, even in a general sense, we are quite covered.

    http://www.fool.com/investing/small-cap/2006/05/09/the-great...

    http://www.fool.com/investing/general/2003/12/15/help-feed-c...

    http://www.fool.com/news/foth/2000/foth000920.htm?source=EDA...

    We have actually talked about the risks of the typical Chinese corporate structure a lot, as well as the fact that most of these companies are brought public through reverse merger, which we oppose.

    But Sharesleuth failed to mention in this article that Sumichrast has neither appreciable ownership nor ANY management or board responsibilities in China Fire. They bought a public shell from a dirt bag. Not good. But what does that have to do with anything 2 years later? Nothing.

  • Report this Comment On July 29, 2008, at 4:39 PM, Pushkinator wrote:

    Why are all the comments defending Sharesleuth (or disagreeing with this article) from people who registered today?

    Not that there is anything wrong with that, but it just seems strange.

  • Report this Comment On July 29, 2008, at 4:51 PM, Jabotinsky wrote:

    Marc Cuban lost all his remaining reputation when he decided to back a 9/11 conspiracy movie.

    ___.

    Anyone who thinks the barely functioning US bureaucracy is capable of pulling off a 9/11-like conspiracy is an idiot at best. Even lunatic left wing congressmen don't believe Bush executed 9/11. But Marc Cuban does...

    ---

    Who knows what happened to him; but in the way, there is not time to care and sell or ignore anything Marc Cuban does.

  • Report this Comment On July 29, 2008, at 6:24 PM, TMFAleph1 wrote:

    I understand that your focus is whether or not Cuban's actions in relation to Carey's article are proper; however, you don't refute any of the points you cite from the piece -- in fact, you appear to confirm them.

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On July 30, 2008, at 1:26 AM, robbylit wrote:

    Cuban covered his short while he left the China Fire article on the front/home page at sharesleuth- essentially buying back shares while encouraging everyone who uses his site to sell? Wow. that is awesome.

  • Report this Comment On July 30, 2008, at 12:19 PM, DoubleRCFA wrote:

    Great article. Very questionable ethics by Cuban and sharesleuth.

    From now on I will enjoy watching him squirm and erupt when his "soft" basketball team can't seal the deal.

  • Report this Comment On July 30, 2008, at 1:42 PM, KWT8011 wrote:

    Good article! I'm all for disclosure as well. One thing though....

    "If you read closely, you will find that we recommended China Fire and Security *after* the Sharesleuth article came out. So I'm not sure how it was that we made a mistake when we had not actually recommended the shares. "

    I think that was CYF's point. If you recommended it after it was accused of bad business practices, why didn't you mention it? The irony there is that the accusation of shady business was quite shady in and of itself....

  • Report this Comment On July 30, 2008, at 1:57 PM, investingcents wrote:

    Great article. I've followed TMF's coverage of CFSG before and after the Sharesleuth article was published, and have found it entirely consistent and very informative. Thanks.

  • Report this Comment On July 30, 2008, at 2:16 PM, Dare2Dream2 wrote:

    KWT8011, Are you a GG subscriber? From your question, it looks like you have no idea what Bill said or did not say in his recommendation of CFSG.

  • Report this Comment On July 30, 2008, at 9:56 PM, Clint35 wrote:

    I'm a GG subscriber and I'm planning on buying shares of CFSG very soon. As far as I can tell NO ONE at GG has ever failed to mention any risks about any of the companies they've recommended. Here's my question. If you guys come here for information about stocks, why do you also go to share sleuth? You won't find better more honest information anywhere else. Especially not on the internet. The Fool's disclosure policy is the Hulk of disclosure policies. P.S. I own no shares of MVL.

  • Report this Comment On July 31, 2008, at 7:55 AM, KWT8011 wrote:

    No I'm not a GG subscriber (nor am I a fan of the ratio of pandering for services to informative articles), but the back and forth between checkyourfacts and tmfotter was unclear. So he did mention the sharesleuth article allegations in his recommendation? If he didn't, then why not?

    I read it a few times to make sure I wasn't missing anything lol

  • Report this Comment On July 31, 2008, at 8:25 AM, TMFMmbop wrote:

    KWT--

    We first visited and wrote about China Fire in 2007, but the price quickly ran away from us and it never became a formal recommendation.

    That did, however, happen in the May 2008 issue after the significant stock price drop provided a valuation at which we were comfortable owning the stock. This was after the Sharesleuth article had been published. Moreover, here's what Bill wrote in the recommendation:

    ------

    While all of this adds up to one powerhouse of an investment, there is one hitch: In March, a short-selling website called ShareSleuth.com highlighted several issues regarding China Fire's corporate structure (complicated) and its ownership (nebulous), causing shares to tumble 60%.

    The ShareSleuth column is based on sound research and should be taken seriously. But there was something missing from its discussion of China Fire's foibles: any mention of the business itself. Like most Chinese businesses, China Fire needs to focus on the accuracy and transparency of its disclosures. The attack from ShareSleuth served as a harsh awakening to how critical these issues are in the U.S....This is a small-cap Chinese company that recently came public in the U.S. via a process that was, for shareholders, not ideal. Some of the questions ShareSleuth brought to the surface included items about nominee shareholders and discrepancies on a board member's resume. It is perfectly clear to me how these things can happen in the context of operating in China -- frankly, the country's legal and regulatory frameworks create the need for workarounds. But for a company reporting in the U.S., this sort of thing just can't happen. China Fire definitely has some areas in its disclosure policies that need to be improved.

    -----

    In short, we don't dispute Sharesleuth's finding. Rather, in the case of China Fire, we questioned how relevant they were to today's business and disputed the assertion that they could short the stock to zero.

    We were just surprised that they seem to have come around to our way of thinking in such a short period of time (but still likely made good money).

    Tim

  • Report this Comment On July 31, 2008, at 10:33 AM, KWT8011 wrote:

    Ah that clears it up. Thanks Tim. And to be clear I agree that ShareSleuth's activity on CFSG seems pretty dubious

  • Report this Comment On July 31, 2008, at 11:41 AM, milehighfooling wrote:

    Another instance of you do not get something for nothing. Did anyone really believe Cuban started this site out of the goodness of his heart to help investors? Apparently I'm to cynical/skeptical.

    Once Cuban gains enough credibility, he manipulates CFSG (are there more?) to his benefit. Even if he never did this before or again, I hope people realize that they should no longer trust the information provided on this site.

    Cuban just reinforced that my opinion he is a sleaze is spot on. I pray he does not buy the Cubs, because I and many other fans will stop supporting them. Then again, maybe that is the best way to return the favor.

  • Report this Comment On July 31, 2008, at 5:04 PM, metoo105 wrote:

    Hmm, you might have done more to discuss the quality of the reporting that sharesleuth did on CFSG. A close reading is in order!

    While I have nothing against persuasive writing, the degree to which sharesleuth's piece skirted and manipulated facts and delved in obviously overblown innuendo was so grotesque that it strikes me as quite obviously prosecutable.

    While managers and promoters are on the hook for mistatements (or exaggerations) of fact that move markets so too are short sellers. A high profile conviction here would do a lot to assure the markets that there is some fairness in the markets.

  • Report this Comment On August 01, 2008, at 12:33 PM, InveSkeptic wrote:

    I too would love to hear Cuban explain why he cashed out his short position. If CFSG is sooooo bad, and such a house of cards, run by close-knit gang of criminals as sharesleuth implies, then why did Cuban cash out? Why not ride the short as the stock tumbles down to zero and the executives go on a perp walk?

    Someone needs to come up with an anti-sharesleuth. A site to examine Cuban's possible manipulation of shares. A forensic examination of the broadcast.com sale would be a good place to start. Then move on to CFSG. And I'm sure there are others.

    (I'm long on CFSG)

  • Report this Comment On August 03, 2008, at 12:18 AM, ArizonaWildcats wrote:

    The last time I saw Mark Cuban in person was in a bar called Primo's in Dallas after the Mavs were eliminated from the playoffs in 2004. He was there with several players, including Steve Nash and Michael Finley. Well, they had evidently been there quite a while. They ordered a tray full of shots, and they picked them up and started throwing the full shot glasses around at each other, with Cuban as the instigator. I was actually hoping to get hit by one, for obvious financial reasons. Next, Cuban ordered a pitcher of water. He took it off the waiter's tray and dumped the whole thing over his own head.

    Going back to the title of this article...Mark Cuban is definitely not better than this, or anything else.

  • Report this Comment On August 04, 2008, at 8:09 PM, sphereme wrote:

    My head is spinning...

  • Report this Comment On November 14, 2008, at 7:46 PM, NoDoughBro wrote:

    What I'm posting has to do nothing with Mark Cuban. It has to do with the stock named Signalife. Which soon will be changed to HeartTronics,Inc. with the Co-CEO being Willie Gault from the 1985 Bears Super Bowl Team. The only reason I'm posting is that is someone stated SignalLife is a fraud. Then please explain to me why the stock has gone up over 550% in the last 2 weeks? The part that really bits for me is on September 22nd they did a HUGE reverse split: 4,500 to 1. So I now own .0222 which one was 100 shares and the stock now ON FIRE!!!

  • Report this Comment On December 23, 2008, at 5:41 PM, drakulic wrote:

    Dr Budimir Drakulic was the "key" person of signalife and his large fraud judgment was never disclosed to the public.

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