NEW YORK ( TheStreet) -- I don't know the reason -- the full moon, the tsunami? -- but this has been a pretty lousy couple of weeks for the cause of skeptical research into small-cap companies.
This is an area that has been almost totally neglected by the Securities and Exchange Commission, which has taken the position, by doing nothing, that it doesn't matter if companies threaten, bully and sue their critics. So investors need to sit up straight and pay attention.
This week, a Chinese small-appliance manufacturer called Deer Consumer Products (DEER) filed suit against one of its most vociferous critics, a blogger by the name of Alfred Little. Meanwhile, in a totally unrelated incident, an ex-con by the name of Barry Minkow, who masterminded the ZZZ Best securities fraud scheme years ago, was charged with market manipulation and his lawyer has said he will plead guilty.
Minkow, who allegedly got religion while serving time for the ZZZ Best fraud, admitted that he conspired to manipulate the share price of Lennar Corp. (LEN) He ran the Fraud Discovery Institute, which produced negative research on a host of companies, large and small.It's hard to decide which of these -- Minkow's criminality or the Deer lawsuit -- is a worse blow to the cause of exposing fraud. I'd say it's a tie. Now, I'm not familiar with the Deer lawsuit or Little's research, but I do know that suing critics is an effective way of sticking a gag in the throats of critics, whether they be operators of independent research firms, bloggers like Little or small investors mouthing off on Internet message boards. But whatever the target, the affect of such suits is to stifle the free flow of information. And a free flow of information is crucial for Chinese stocks such as China MediaExpress Holdings (CCME), Orient Paper (ONP) and China Education Alliance (CEU). Such suits have been around since before there even was an Internet. In 1994, a brokerage executive named Daniel M. Porush of Stratton Oakmont, a Long Island firm, sued the Prodigy online service after an anonymous person said nasty stuff about Porush and Stratton on a Prodigy message board. Porush was called a "soon to be proven criminal" and Stratton "a cult of brokers who either lie for a living or get fired." These were accurate descriptions, but that only emerged five years later, when Porush went to the slammer and Stratton was shut down as the notorious boiler room that it was. But while they still had a scintilla of credibility, they used it to force an apology out of Prodigy. I call this the Porush Syndrome: It doesn't matter if you're guilty as hell. Sue!
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