There's a reason people tend not to trust the testimony of paid experts. Why? Because they're paid, of course.
This week, we have witnessed the same kind of bias in traditionally-trusted news pundit Tobin Smith. Now an ex-business news contributor, Smith was fired from the Fox Business Network show Bulls & Bears, because he was paid $50,000 dollars to promote and aggressively sell the stock of Petrosonic Energy in his "Next Big Thing Investor Newsletter," even though evidence suggested it may have not had such a successful future.
Fox has explicitly forbid this kind of activity particularly because it not only degrades the image of the show host, but also that of the reliability of the network in general. Fox's network contributor policy states "no contributor to FBN, nor his/her firm, and/or family members are allowed to accept financial consideration of any kind whatsoever to issue research, advertisements, or to otherwise promote individual stocks or securities."
And what did Tobin Smith do? He had his firm, NBT Equities Research, pocket the $50 grand from Petrosonic. Ultimately, this was a line Smith outright crossed, and thus we see no large kickback to fight for his position once more.
According to MarketWatch's Chuck Jaffe's Tuesday report, some people considered buying the stock "entirely based on Smith's say-so, and the credibility he exudes in his Fox appearances." And with a simple tout, there goes nearly all credibility Smith may have spent years developing out the window.
Smith argued that rather than challenging the policy of Fox Business News, it was actually better to have his company — rather than a third party with a big wad of shares — to back his touting campaign because it's more "like public venture capital" rather than something involving unrelated parties to simply play to pump the stock. Either way, Smith's commentary in his newsletter aided the Petrosonic blitz last week helped the stock gain roughly 20%.
Unfortunately, since many people didn't stop to read the disclaimer in the newsletter stating that Smith was compensated for his research, many in the hype overlooked Petrosonic's rising losses, negative cash flow and the "going-concern letter" from auditors who think there is "substantial doubt" in Petrosonic's ability to survive. In its regulatory filings, Petrosonic admits its slow income and that the business will fail if it can't generate adequate financing. It was these readily available information concerns that Smith neglected to mention in his "special report."
Ultimately, there is a strong argument to be made saying that Smith broke a level of journalistic ethics. Most investors can't tell the difference between "sponsored investment research" and independent analysis without taking the time to research the research itself, and that's exactly what the "sponsors" — typically small companies paying for a marketing campaign that will inflate their stock activity and value — are counting on.
The fine line to gathering unbiased information is even tougher to walk when the sponsor hires someone who is known for giving independent commentary colored only by his own feelings and research.
Basically, Smith created an enormous commercial with his own celebrity endorsement. And it is this kind of activity that will likely blacklist him from any other major news pundit positions.