26 April 2006

The Putrid Stench of Capitalist Infighting

I don't mean to defend or in any way support companies like the one's named in this article, but the Washington Post has a good piece today explaining the sordid way in which fake-money front companies, called hedge funds, conspire to enrich themselves - often in quite nefarious ways at the expense of other capitalists. Here are some excerpts:
Are Biovail Corp. and Overstock.com Inc. promising companies victimized by unscrupulous investors illegally conspiring with stock analysts and journalists? Or are they troubled firms whose executives have turned to wild conspiracy theories to divert attention from underlying business problems?

That question is at the heart of two lawsuits and a couple of Securities and Exchange Commission investigations into whether there is an improper link between negative reports issued by Gradient Analytics, a Scottsdale, Ariz., research firm, and short-selling investors who have bet that Biovail and Overstock share prices will go down....

Eight of nine analysts who cover Biovail have "hold" ratings, and one calls it an "underperform," according to Zacks Investment Research. Of 10 analysts who follow Overstock, six recommend holding and four recommend selling the stock. Representatives of both companies say they can live with most of the negative coverage by analysts.

But Overstock and Biovail executives argue that Gradient's coverage of their companies crossed a legal line.

In independent lawsuits filed in New Jersey by Biovail and in California by Overstock, both companies accuse Gradient and a predecessor company called Camelback of conspiring with hedge funds to produce negative research reports containing misleading or false information. The lawsuits further allege that Gradient then held off releasing the reports for several days to give the hedge funds a window in which to establish their short positions.

Each lawsuit draws heavily on affidavits from former Gradient employees who say they witnessed fellow employees allowing hedge fund clients to order negative reports, to ghostwrite the content, to add false or misleading information and to then arrange delayed release dates to give the hedge funds time to establish short positions. Overstock's lawsuit alleges that Gradient's principals also were shorting the stock themselves through hedge funds they controlled...

Outside legal analysts agree that, if the allegations are true, falsely billing research as independent and including misleading information could add up to a securities-fraud violation, and trading ahead of research reports could qualify as insider trading.
In other words, hedge fund managers want a stock to tank, so they order a 'custom' report from places like Gradient to issue negative reports. The stock tanks, the hedge fund managers reap profits, and the CEOs whine to the SEC.

Such is the beauty of capitalism.

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