These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.
Richard Pearson wasn’t touted by name in the materials for the Congress, but he is a private investor and former banker who specializes in unconventional due diligence — and he has spent a lot of time trying to expose grossly overvalued or scammy stocks.
He focuses on smaller companies, and he publishes in a few places — often on short selling opportunities. He had planned to break a story about a network of pay-per-article promotion scams, but much of the detail is already out.
The story came up because he was approached to be an undisclosed stock promoter by a promotion company. He enthusiastically agreed so he could find out about it, and he tried to go along to uncover who was doing the promotions. He started drafting fake articles with mistakes to the IR firms to see if he could get the company involved in “fixing” the articles, with no intention of actually publishing.
Stories started to leak out about this story, so he released his findings and got in touch with the SEC. One of the companies had already gotten SEC subpoenas.
The results have been removal of at least a few hundred articles, and many of the stocks are already down 30-40% already. Similar things are obviously still happening, and it’s not necessarily illegal to sell hope and dreams even if they’re obviously not going to work. There are hundreds of such promoted companies, and the SEC can’t get to all of them — the SEC can’t even keep up with the actual frauds, let alone the promotional and scammy stuff that may or may not be illegal.
So how do media mentions impact the valuation of small cap stocks? It’s so much easier to get a story distributed now than it was just a few years ago, and indeed the ease of retail stock trading and self-publishing was probably also partly behind the dot com boom that busted so memorably a dozen years ago.
His example of a promoted obvious short is Organovo (ONVO), which was one of the companies mentioned by the stock promoter Pearson was working with, though he was careful to say that he has ...