Over the last several months, someone using the pseudonym “Art Doyle” released online reports — I use the word “reports” loosely — to attack several biotech stocks. Art Doyle, no doubt a truncation of Arthur Conan Doyle, the British author behind the fictional detective Sherlock Holmes, issued a short thesis around several biotech companies on a third-party blogging website. It was an effort to undermine investor confidence in those companies and profit from an ensuing drop in their stock prices.
The first time I saw something like that was when Martin Shkreli was being wrongfully celebrated as a stock trading wunderkind. His key ability was to use an internet connection and social media to cause selloffs in thinly traded biotech stocks. Today, Shkreli is on trial for eight counts of wire and securities fraud. He is more infamously known for raising the price of old drugs for life-threatening diseases by 2,000 to 5,000 percent at Retrophin and Turing Pharmaceuticals, two biotech companies he founded after the implosion of his second “hedge fund,” MSMB Capital Management.
But Shkreli’s rise to infamy began much earlier, in 2011, and it was his use of social media that allowed it.
While at MSMB, he started writing on a stock blogging website, Seeking Alpha. (Art Doyle uses Scribd.) Shkreli wrote reports similar to Doyle’s, citing half-truths and innuendo calling for a company’s stock to drop from, say, $10 to $1. This would allow stock speculators who were shorting the company’s stock to profit if a decline took place. Shkreli often stated that he could or would short a company that he was exposing, and often bragged on Twitter about making money this way.
It took a while for Shkreli to gain a following, but when the market began to react to his screeds, the internet began to notice. In a matter of a few years, Shkreli had attacked several biotech companies and gained the confidence of investors, biotech pundits, and the media, who marveled at his investment acumen, which boiled down to his ability to beat up on defenseless stocks.
His reports lacked rigor and accountability. None of the journalists covering him actually knew his trading strategies and whether or not he had structured profitable positions in the companies he attacked. And yet he was glorified in media coverage as biotech’s boy wonder.
Curiously, Shkreli’s posts about short-selling and his own short-selling activity, which resulted in his hedge fund blow-up, didn’t land him in hot water with regulators. Instead, he is facing charges of wire and securities fraud.
What Shkreli was doing has become all too familiar in biotech: a small, publicly traded company focused on developing a promising technology — usually one that is not well-anchored by institutional investors like Fidelity, Wellington, or T. Rowe Price — is suddenly assailed by a blogger like Art Doyle or a supposed hedge fund activist like Shkreli with no discernible position in the actual stock. The blogger publishes a report that minces corporate documents and conference call records, and misstates otherwise material facts.
Eventually, the author pins a ridiculous stock price to the company. Panicked selling ensues, placing downward pressure on the stock. Its value plummets. With the prevalence of algorithmic trading, it may be even easier for traders to wreak havoc and take advantage of volatility around a name.
This is stock activism gone wrong. Stock activists have an interest in the company they criticize, ostensibly to improve shareholder value. Unlike stock activists, anonymous bloggers are interested in destroying value for short-term gain.
There are times when a company’s value can be questioned and there can be legitimate reasons to short a stock, especially in biotech. For instance, perceived changes in the competitive landscape could provide the basis of a short-selling strategy. But just like it’s illegal to pump a stock for illicit short-term gain, there are certain strategies around short selling that are also immoral and legally questionable. The last thing a struggling biotech with promising technology needs is a spurious distraction that could have lasting consequences for patients. An entire organization could become caught up in the defense of its business, derailing important operations and disrupting its ability to obtain financing and delaying a drug’s approval.
Shkreli and others like him can flourish because the internet and social media make it so easy to spread false information and take advantage of the current state of trading. And, with the Securities and Exchange Commission trying to keep up with 20th-century schemes to beat the market, there’s no sheriff in town to stop them from doing this.
It’s easy to point a finger at social media and blame it for releasing all sorts of ills onto society, like a 21st-century Pandora’s box. But social media and its many consequences are here to stay. The question is, how do we mitigate the challenges the digital age presents to the capital markets?
So far, companies are beginning to respond directly to the likes of Shkreli and Art Doyle. The regulators at SEC are swamped investigating traditional insider trading schemes, and as such have been measured in bringing their regulations into the 21st century. The SEC must be given resources dedicated to dealing with those who use social media to manipulate stocks.
Meanwhile, Shkreli isn’t on trial for what he did online, and anonymous players like Art Doyle prove that there are plenty who are still up to these antics, in some ways improving on Shkreli’s playbook for short-term gain. Companies and our capital markets will be vulnerable until regulators issue a mandate to pursue malicious behavior on social media and make an example of would-be stock manipulators.
Steve Brozak is the managing partner and president of WBB Securities. WBB Securities has advised some of the companies that bloggers like Shkreli and Doyle have written about. It has no current financial relationships with any of these companies.