A Little Too Inside Research In Motion

by: Mark McQueen

At some point yesterday afternoon I noticed that Research in Motion (RIMM) was running up a couple of dollars. With the NASDAQ higher by 2%, one wouldn’t be surprised that momentum players were bidding it up. RIM is one of the great “mo” stocks that hedge funds will play when tech looks to be in favour.

It wasn’t until the stock was up $5.60 that I found out what the pros knew was driving it ever higher - a blog post on The Boy Genius Report (NYSE:BGR).

For at least the past couple of years, BGR has had an uncanny ability to break exclusive stories about exciting launches from RIM. They can be as benign as an “exclusive look” at the Desktop Manager 4.5 release (April 8/08), or the more interesting “exclusive news” about the BlackBerry 9000 (Nov. 23/07) and the national breakfast tour of the 8320 (Oct. 3/07).

These scoops aren’t carrier dependent, so it matters not whether RIM is doing something notable with AT&T, T-Mobile or Telephonica. Handset or network. Software or hardware. BGR knows all.

With five years under my belt as a political staffer in Ottawa, we spent more than a few minutes trying to determine the source of occasional leaks of confidential information to the National Press Gallery. 99% of the time, leaks can be traced based upon two criteria:

1) Who knew about the information prior to the leak?

2) Who benefits from the leak appearing in the media?

Once you have those two points of data, the investigative piece is usually quite easy. There are times that #2 will fail you, of course. Someone might be trying to impress a journalist with their “insider” status and will leak something to the press corps that generates no obvious benefit to them or their political cause whatsoever - other than their newfound leverage (or at least relationship inroad) over the journalist that is a natural byproduct of the front page story that resulted from the original leak.

In the case of BGR and their RIM exclusives, the answer to question #1 is hard for bloggers to nail with 100% confidence. Certainly, some RIM employees would know about the pending Curve / Clamshell Flip Phone that hit the stock market yesterday as a result of the BGR blog post. A few carriers might have been briefed about the design, as any launch would be dependent upon finding the right market partner(s). And there’s the production chain to consider; pricing and delivery schedules would need to be tested before any launch. RIM might also use external advertising and marketing staff to help dream up device names, advertisements and whatnot - and to do that, the creative types would need to see photos and even a prototype.

But each and every time a new product was about to hit the market, there would be little if any overlap of non-RIM staff who would have access to this information. RIM rotates their new product launches around the world, for fear that one carrier would be seen to be a favourite. Executives at Verizon, for example, would hear and see about pending designs well in advance of any official handset launch, but they certainly wouldn’t care about which Desktop Manager version will be released on which day. Moreover, why would they care to flip a brown evelope to BGR if a competing carrier would be the first to launch the 8320 or the 9000? That would be bad for their business (see rule #2 above).

BGR knows all. And the only group that truly knows all, and benefits from each and every exclusive BGR leak, is the mighty RIM itself.

Corporate use of the blogosphere isn’t a novel concept. Our team finds it helpful to our business at Wellington Financial. Sun Microsystems (JAVA) and Reuters (RTRSY) highlight their CEO blogs as avenues for employees, customers and shareholders to get inside the corporate mind of the top dog. And Miller Brewing has jumped on the bandwagon with their “Bud gotcha” site (see prior post “Miller Brewing blogs on Anheuser-Busch”).

But this BGR business, my friends, is a different kettle of fish.

RIM shares went up close to 5% on the day of the Clamshell post. That represents $3.5 billion of increased market cap. Decent money was made on the stock yesterday, particularly if you owned June or July calls in advance of the BGR blog post.

Avner Mandelbaum wrote a column for the Globe and Mail in 2007 about the benefits of independent research for retail investors. He told a story about visiting a bar in Silicon Valley to get a true sense of what was going on with the public companies in the Tech-heavy region. Who was hiring and whose employees were miserable with the performance of their employer’s business. If someone’s loading dock was particularly busy, that would warrant further research and the stock might be a buy. Proprietary research, according to Mr. Mandelbaum, is a great way for investors to get a leg up. (As an aside, I’ll never be able to parse “proprietary research” at a Silicon Valley bar from being an unknowing “Tippee” if someone tells you that Flextronics is about to go bankrupt and you sell your shares as a result.)

In the case of BGR, are the bloggers doing proprietary research or are they generating incredible traffic for their site given their potential status as the chosen outlet for RIM’s marketing department (HSBC and Much Music are BGR banner advertisers - great brands and real $ for a blog). In the former case, The Boy Genius could have made a tidy sum for his personal account yesterday (and again this morning) had he bought shares in RIM before the Clamshell Flip Phone post went up. Nothing wrong with that according to some market players.

It may well be that the BGR team doesn’t invest in stocks at all — as the lack of disclosure on the BGR blog about stock ownership positions is often taken to mean that the blogger in question doesn’t own a stake in the business he’s/she's writing about.

But if you’re RIM (or their advertising agency handling the brown envelopes), and you are actually involved in making BGR famous, how can you be sure that no one is trading on the product leaks as you pursue your guerrilla-type marketing campaign? Since yesterday’s post appeared to move the stock by $3.5 billion, one certainly can’t pretend that the rumour wasn’t “material non-public information." A specific regulatory concept.

I know it’s just a picture of a Clamshell prototype on a blog, but if Reuters and Bloomberg fall over each other to report on the BGR scoop after the stock has moved almost $6/share, this is market-moving stuff. While BGR seems to choose non-trading windows to put some of these posts up on the site, most of the time they are released during market hours. Unless BGR has been designated an “official distribution point” for material non-public information by either the SEC or the OSC (in keeping with CNW and Marketwire), there’s something about this that just doesn’t feel right.

Of course, RIM and its advertising emissaries may have nothing at all to do with BGR’s exclusive scoops. In that case, RIM executives might want to find out who is selectively leaking market-moving information. The regulators would certainly care if a leaked takeover bid moved a stock $3.5 billion. It won’t be too long before they start to get grumpy about this stuff, as well.

With the SEC, the OSC and the office of the United States Attorney for the Southern District of New York still investigating RIM in connection with the Company’s stock option granting practices (according to RIM’s most recent financial disclosure), we shareholders don’t need any other regulatory distractions.

Time to cut off the pipeline to BGR. Before someone else does.