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Why there are so many scams out there

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June 08, 2007 – Comments (0)

It's simple. It's because there's so little journalism and analysis covering the scams. Gary Weiss has a good post (describing another article) touching on investigative journalism and the multitude of ways that hard-nosed pieces are killed. (Note, Gary could also have referred to the example of Chris Byron, who, it seems, was forced out of a Murdoch-run paper, The New York Post, for looking too hard at the unseemly.) I figured I could use this space to add a little color to why we don't see much coverage of stock fraud.

Ready for it?

It doesn't pay the bills. In fact, it costs money. So, we don't do much of it, not even guys like me who enjoy outing the charlatans and saving Joe Sixpack's beer money for people who deserve it, like Joe Sixpack and the guy at the corner store who sells him beer.

When you really take a company to task, you take up days of a writer's time, many extra hours with editors and fact checkers, as well as hours from the folks in the legal department. Then you run an article that, by measurements commonly employed by media companies and relied on by management, earns you close to nothing. After COGS, the net is negative.

After that, you need to hope you're not sued by some underperforming, loudmouth CEO, with more lawyers than cash flow, because even though you know you'll win in court, you know it will costs hundreds of thousands in legal bills. Against a bottom-line focused culture, that you find at all of today's media companies, all of this looks like a distinct waste of resources.

Contrast that with a regular, PR-regurgitation+analyst-quotation article, or the "everything is awesome" article. People who hold the stock love to read these. People who don't hold the stock love reading these, because they can imagine what it would like to get that next 10 bagger. Heck, with these articles, you can even get your facts wrong! So long as they're wrong to the optimistic side of things, you won't hear a peep. Readers are happy. The economics work for the publisher. Happy CEOs and PR reps call in with their petty bribes and interview offers, so now the writer gets to feel like a player. Everything is grand, and the tone of coverage shifts one more tick toward where the money is.

Even if no one ever says "Hey, stop writing that mean stuff!" writers and editors can read the writing on the wall. They can read the writing on their pay stubs and bonus checks even better. Coverage follows the money trail, like anything else, and when everyone is rewarded for one kind of thing, that's what everyone will produce.

Don't get me wrong. Sometimes, everything IS awesome, but how many times do we need to read that? For me, the mark of very sharp analysis and journalism has always resides on the fringe, where people are willing to dig in and take unpopular positions. Alas, you find fewer and fewer people who are willing to take the time and spend the resources to tell the tales that don't make the cash register ring.

That's one reason I think Cuban's Sharesleuth is an interesting idea. The only way to get writers, investigators, and analysts to take a hard look at companies is to give them a financial incentive to do so. And direct shorting is one way of establishing that financial incentive.

Are there others? What do you all think?

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