Wired Magazine featured an article on Mark Cuban and his Sharesleuth.com website. In theory, it kind of sounds like a good idea. Mark and company think that the media has given up critically examining public companies. They think there are many red flags with companies, but that the press never reports a lot of them. They believe positive press has taken over.

So Mark Cuban started Sharesleuth to “investigate” public companies. In its first year, negative reports on two companies were posted: Xethanol and Utek. Indeed, four weeks after the reports were published, each company’s stock was down 39% and 36%, respectively.

The report on Xethanol was posted on the site on August 7, 2006 and message boards went crazy. There was a 14% drop in the stock price within a day. Within three months, the company’s shareholders had lost $100 million in value. Class action lawsuits on behalf of shareholders were filed.

Sharesleuth insiders report that the site gets over 40,000 unique viewers a day when a new story is posted.

Yolanda Holtzee, a Seattle money manager is quoted:

Sharesleuth provides some of the checks and balances that are missing in the market these days. Companies can — and do — hire promoters to boost their stocks all the time, but there are fewer and fewer journalists and regulators who dig deep to find out if these companies are delivering on all their promises.

But here’s the catch with Sharesleuth: Mark Cuban openly admits that he is trading ahead of the published reports. Essentially, if the company finds a company with many red flags, he will short the stock prior to publishing the negative report. If the stock price goes down, Cuban profits.

People have trouble with such a business model. Accusations have been made that the company may purposely issue negative reports in order that Cuban can profit. (Similar allegations have been made in the Usana case.)

Gary Weiss criticizes Cuban for “…getting market-sensitive info unavailable to the public, extracted by his reporters from sources who may not be aware that they’re helping some billionaire get even richer. ” I see some validity in that statement.

But the article offers Cuban’s argument:

He says that business journalists are either blind or naive to the role they play in boosting the stocks of the companies they cover, which employ legions of public relations staffers to influence media coverage. “You just leave all the gain to the interviewee using you to move the price of a stock in a profitable direction for them,” he writes. “You pay for the newsprint and postage by selling ads for products that you know nothing about and hope they work. How is that working out for your industry these days?”

You do have to admit that there is some validity to this statement as well.

Who complains when a positive report is put out about a public company, and the share price goes up as a result? Stockholders with long positions stand to benefit, but I don’t see the shortsellers asking for their heads on platters or crying that there is a conspiracy to make stock prices go up!

Well, the company hasn’t done a whole lot yet anyway. They’ve only written about a few companies, so who knows what’s next. Cuban says he wants to hire four more researchers. We’ll see if they turn out anything of substance.