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The Truth About Naked Shorts
By Alex Dumortier, CFA September 22, 2008
There's been a lot of information and misinformation about short selling recently. Please allow me to bring you up to speed and bust some myths along the way.
Myth No. 1: Shorts should be shot
Many investors love to hate short-sellers because they see them as people who are rooting for others (companies and investors) to fail. What they're missing is that short selling is an integral part of a well-functioning market, since it allows market participants to express their view that a stock is overpriced. Without short sellers, the market would be inherently positively biased, and stocks would be priced less efficiently.
On top of that, some short sellers are outstanding stock analysts who have a good eye for fraud, mismanagement, or aggressive accounting. Take Jim Chanos of Kynikos Associates, for example, who was one of the first (and only) investors to call Enron out for its fuzzy accounting. If only more investors had listened to his arguments instead of those of Ken Lay and Jeff Skilling.
With that out of the way, now we can make progress.
Naked Short Selling 101
If you read a finance textbook, it will tell you that in order to sell a stock short, you borrow shares and sell them on, with the understanding that you must replace the loaned shares by purchase in the open market at a later date (hopefully, at a lower price).
That's the theory.
In practice, things are a little more fluid. Investors are not required to borrow the shares first before selling them, but they must have a reasonable expectation that they will able to locate shares they can borrow in order to be able to deliver on them to the buyer on settlement. Investment banks (remember those institutions?) have stock loan desks that specialize in going out into the market and locating shares for investors that want to go short. In fact, lending shares to hedge funds is a very big, very lucrative activity for the banks.
Selling shares that you haven't borrowed is known as a "naked short selling." You might have heard the term being bandied about in the press, since the practice has elicited much controversy and disinformation during the current crisis.
Myth No. 2: All naked short selling is illegal
This myth is unfortunately widespread, but it's simply false.
Nonetheless, critics argue the tactic allows hedge funds to launch speculative "attacks" on a stock, unfairly manipulating prices downward to profit from their drop. According to this line of thought, short sellers were instrumental in bringing down Bear Stearns (acquired by JPMorgan Chase (NYSE: JPM) in March) and Lehman Brothers (NYSE: LEH) (filing forbankruptcy).
What the critics are actually referring to is what the SEC describes as "abusive naked short selling," in which (a) short sellers sell shares they have not borrowed, and (b) are unable to deliver those shares on the settlement date of their sale. The SEC wants to eliminate abusive naked short selling through a series of measures that took effect on Thursday, which penalize failures to deliver borrowed shares at settlement. In addition, on Friday, the SEC banned all short sales of 799 financial stocks until Oct. 2, and increased the reporting burden for short sellers.
George Soros' principle of reflexivity and financial stocks
Why the comprehensive ban with respect to financials? Because those stocks may be particularly vulnerable to short selling. Why? George Soros' principle of reflexivity is at work here; Soros argues that a feedback loop enables investors' perception of a financial stock's intrinsic value to ultimately affect that intrinsic value. That might sound a bit "loopy," so I'll explain.
For companies outside the financial-services industry, a sharp and sustained drop in share price may reflect the market's negative outlook regarding a company's future prospects, but it is doesn't threaten the viability of the company in and of itself.
The same can't be said for many financial institutions, because they are highly leveraged and -- in the case of investment banks, for example -- they rely on short-term funding to do business. Under those circumstances, a massive drop in share price can irreparably damage the confidence of a firm's lenders and its customers, eventually producing a run on the bank.
We have watched that phenomenon raze the financial landscape in dramatic fashion. The most recent victims were Merrill Lynch (NYSE: MER), which fell into the arms of Bank of America (NYSE: BAC) last weekend, and Fannie Mae, Freddie Mac and AIG (NYSE: AIG), all three of which were nationalized to avoid failure. Finally, the fear of a run on the bank pushed Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) to become bank holding companies.
Abusive naked short selling should be eliminated, but…
Abusive naked short selling is not a normal or healthy part of a properly functioning market. Still, I'm a little uneasy with the ban of all short sales of financial stocks, which looks a bit heavy-handed. More importantly, regulators (and investors) shouldn't let the issue of short selling blind them to the fact that the massive credit problems that banks, broker-dealers and mortgage companies are dealing with are self-inflicted. Short-sellers didn't cause the credit crisis.
yaaaaaaaaaaaawwwwwwwwwwwwwnnnnnnnnnnnnnnnnnnnn
xero let's talk about the slew of Garr Winters scams out there passing assets to each other then?
There you go again, continually trying to reference the broader markets when discussing penny and subpenny stocks.
OTC and Pinks do not, and never have moved with the broader markets. As a matter of fact penny and subpenny stocks generally see an increase in volume when the broader market is performing badly.
Over the years the higest volume for pennies comes when the general market is declining which would mean the volume in pennies should be up. Oh, wait, while the market was tanking ANVH volume was through the roof was it not?
You sure were happy to post that over and over but now youseem to want to say that overall market snetiment is down therefore people who used to believe in nondisclosing, unreporting companies think differently now?
gentleman and ladies, let us get back to talking about such things as bashers, P&Ds and NSS.
I think we know where righty and others sit at the table. So far, no one is touting a certain
stock over here and I have the feeling most here are experienced penny traders – i.e. no
newbies to save.
Let’s try to stay on topic.
SCAM: A fraudulent business scheme; a swindle.
Swindle: To cheat or defraud of money or property.
Anytime a company refuses to disclose material events while they continue to sell stock they are cheating people out of money. Share increases, misleading PR's, overpromise and underdeliver are all elements to a scam. If 1 is going on you can bet more than one is going on.
For example, rapidfire PR's about "potential" aquisitions, contracts or agreements is normally a sign of share increases. The hiring of stock promoters is a signal that either the company or an associated third party will be selling a large block of shares and needs the volume to do so.
It isn't rocket science it is common sense. And inaccurate forward thinking is what causes investors to lose money on the pinks. The fact that they can't distinguish between what is real and what is contrived makes them perfect targets for the scammers and the scalpers who know how to trade the pennies.
Bottom line is there has to be a group of dumbed down suckers to buy at the top. I believe what we do is try to limit that pool tho those who have accepted their role in the pump and dump cycle and who vigorously defend their right to be victimized. It's the unknowing folks we try to reach with a little dose of common sense. The ones who, even they were lucky to get in at the bottom would be convinced to hold it all the way back to zero. Some you can help and some you have to let go.
"readily available information"
bull!...you are very quick to resort to supposition and toss out the scam word, when you have no material.
type all you want the truth is out there, in black and white
honestly is the best you have to address a market wide situation to continually hammer on what righty does?
You hammered eruc for 3 years pal...i was on the job of awareness for 1 month?
so if posters words cannot affect a stock as you so valiantly point out numerous times...then what the hell are you on about?
righty do you understand that when exposing scams we use readily available information? You also realize that calling a scam and trying to determien the path it takes is not an exact science.
The fact that we can expose a scam and are willing to take the criticism from those who want to believe in scams is quite honorable.
We don't get paid to do it. We od it because it is actually the right thing to do. To many people migrate to the penny market because they have no investing experience, little money to invest and are very, very, very gullible. Many are in need of some money for some reason and do not understand the risk or the odds.
But have no fear, there are plenty of compensated individuals telling these folks that the "contrarians" are just wrong and want to bash a stock into the ground so they can get in cheaper"
LMAO!!!!
I haven been right on the money when calling a scam out. Beent hat way for over 7 years. You can check my RB alias if you doubt me. You choose to look for something to try and discredit what it is we bring because it interferes with your compensated agenda.
I'm not always 100% nailed down on what will happen next with the scams but I generally have a pretty good idea as it unfolds where it will go.
Funny how you continually try to accent snapshots in time where you can try and sway others into believing we are wrong but you hide from your own results.
Also funny how you manipulate all information out there to work for you regardless. For instance when the price is down you copy and paste a snapshot of the tape and say it can't be trusted because the buys show up as sells and the sells show up as buys. You say the ? trades are questionable...LMAO!!! Then the next morning when the price is up you copy and paste the tape and start trumpeting the "look it's all buys" agenda....LMAO!!!!! One day you tell people the tape is not to be trusted and you point out every reason why, the next morning you say "look at the tape it's all buys".
We expose scams and we warn on companies where shady practices push the pps down. Any company that won't disclose pertinent information to shareholders as they sell shares out from under them is defrauding those investors in my book and they deserve the word "Scam" attached to them.
Again you misuse the word "contrarian". Is that your favorite word?
In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.
You continually use that name to describe anybody who says anything bad about the stocks you promote. Funny thing is, the concensus opinion of the stocks you support is to sell the junk.
ERUC down 60% on your watch means the popular opinion was negative. The share price shows the concensus opinion. If the opinion is good the pps creeps up steadily. If the concensus opinion is negative it trends downward.
ANVH down about 45%. Overall concensus for the 60 days is negative.
The contrarian opinion on the stocks you promote come from those who believe the company will actually amount to anything.
ERUC is now .0001 and ANVH is now .018 which represents huge declines. 2 years ago ERUC was .20, went to .03, reverse split 1:13 and now sits at .0001 so the contrarian opine as you like to say rests on those who thought it was going to actually do well.
ANVH reversed in May. Was $7.01 but has fallen all the way to .018 which represents a massice loss. The contrarian opine there also belongs to the people who thought it would do well. Even if you want to say the $7.01 was artificial there would have tobe an area in there somewhere that this would have caught a bottom. That one is going down, still is.
So why do you try and make those who listen to your twisted appraoch out to be the "popular opinion" when, in fact they are actually subscribing to the "contrarian opine" which you attempt to label those who are pointing out what a POS the company is?
good looking chart - unless you held
I first started "bashing" LGOV and AENG on SI in the late 90's.
LGOV went as high as $3.00, now it's $0.002
AENG went into the low $20.s(dollars), now it's $0.06
Both were actively pumped by known pumper clowns. hollen was one of them.
Phil
I find it hard to understand why they don't realize that also.
Phil
GRYF... went to the grey! PRGL dead duck Scam! DTGP dead duck Scam ACMG dead duck Scam and one other I don't even remember the symbol as it went to the greys!
Good riddens is all I can say about PINK SHEETS!
FREE AT LAST!
-Sands
fair enough...which ones?
Never! I have half a dozen worthless pink certificates hanging on my wall currently...
No need for anymore. I have already paid for my Pink Street Academy of Wallstreet.. Learned and studied my lessons well!
-Sands
by the way sandi...did you ever take an entry on nvmg?
you avoided the question nicely.
NO righty I don't bash I tell the truth about the SCAM stocks on their stock talk boards! It's you and all the others that call me a basher..
For arguments sake I just go with the flow to ruffle the feathers when people accuse me of things I don't do!
I get accused of bashing and shorting the stocks all the time!
SO I use the term basher in the context of sarcasm! You just don't seem to get it dude!
were suppose to have fun too righty... You take all of this way to seriously. I have learned to enjoy exposing SCAMS.
It was not my intent when I first played with pinks but as I quickly learned they are nothing more than a legal means to counterfeit for the company insiders for their own means.
NOT FOR THE COMMON SHAREHOLDER!
regards
Rhubarb... how did Native American Energy Group, Inc. (NVMG) work out for you?
Remember when I started to post there and my post were being deleted and every one was calling me a paid basher and accused me of shorting the stock?
Wasn't that stock recently suspended causing it to land on the GREYS!
Another notch in the belt for Sandi!
regards
Tell me something sandi...both you and greedy come in here admitting you have bashed.
So for acknowledging that admission...I am left to endure the likes of being called a pumper clown, liar, manipulator, bla bla bla....that's fine but where in all of this, did I say I would not back up any claims I have made!
Your offer to post a pm wherein you misread something grossly, (and that was cleared up btw...long time ago bud) is a BLATANT example of the lengths the two of you will stoop to cover all of this up.
Heres a very good question for you.
Do I have your permission to post copies of public record of posts of negative sentiment prior to entry?
Simple question.
this is a premium board righty there is more flexibility as such.. We still have to abide to the TOS but it is much more flexible in debate without deletion than a free board!
regards
Sands
nothing to understand..you made an incorrect assesment...you were never threatened...I mean really sandi give us a break...had you been, there is not a person on ihub who would believe that complaint would not get filed lol
So I don't have permission to re post your PM's to me and others then? OK thanks now I understand the situation!
regards
your trading bro!
Shorty
lol...nobody is saying anything sandi..presentation of factual record for others to ponder is a completly different story.
The names I posted are all high profile folks sandi, it does not take a lot of looking to find out who they are, just google anyone of them with the words "stock" "basher" next to it, in parenthesis...if that don't help you let me know...difference here is I will provide you with info....but your response is to toss out a generic name like stephen smith?
whatever...
I never said you did righty... See how you do the twist and shout!
I simply made a request for you to do!
Your the one going around sending out PMs claiming that I bash stocks to bring the price down and make an entry for profit! stating that this is considered a paid basher!
-Sands
"paid basher "...when did I say that? There was at one time a debate about the definition of such, but Ithought that was covered...no?....yes I do believe it was.
that was my point!
RE:theres a lot of Stephen Smith's...which one?
I will leave that up to your imagination!
Sands
"Tell them that I am out to destroy all the stocks you invest in and bring your investment down so I can make a profit."
When did I say that?
jeez guy talk about twisting..lol
righty I want you to help me out here? I want you to contact the SEC and tell them I am a paid basher without disclosing to the public.
Tell them that I am out to destroy all the stocks you invest in and bring your investment down so I can make a profit.
Here give them my contact details:
dcpotter2@yahoo.com
David C. Porter
954-775-2028
PLEASE righty do the right thing and report me today. I want to have a long talk with a SEC authority about this.
regards
Sands
Let's put it to you this way sandi, if you feel you have been threatened send it to admin, have you done so?
I seriously doubt you have sandi..because there was never any threat. You have a very fertile imagination.
theres a lot of Stephen Smith's...which one?
do a board search bud,,,the info is here
answer this..did you post negative sentiment prior to your entry? on that one?
No I don't see why greedy...all I see is a couple of self admitted contrarians trying to cover up the facts!
WITH ZERO EVIDENCE!!!
and a severe lack of the truth to boot.
Frankly it looks like the two of you are out for one thing only
to have this board deleted, just like the last one.
I expected this.
really do I have your permission to repost the PM's you sent me?
-Sands
No you don't....I have never threatened you, that is ridiculous, had I done so you would have reported it.
Just to humor you, I went back and actually looked, I have never made any threats towards you! NEVER!!
I would suggest that you make a complaint if you feel you have been threatened bud ...cuz it has never happened!
Are you even reading these? THESE FACTS GREEDY!
you said and i quote
"And then you bailed when ERUC raised the A/S to 4.5 billion. Never to be heard from again.
"
------------------------------------------------------------
"We did not leave the stock after the announced raise, that came about after the contract expired! NOT WHEN!
Our contract term was (June 16th to July 16th, 2008)
The raise was filed August 4th bud."
------------------------------------------------------------
FURTHER TO THAT GREEDY i still posted after that raise, and the only reason I did eventually stop was because of your distortion of these very facts, and your constant insinuation that I was in cahoots and knew the raise was coming!!!
all of it total bullcrap!!!!
So what sat you oh bud about Stephen Smith?
I have no idea who you're talking about!
RE:So what say you oh moderator of 'The Truth About Bashers' board. about SPYRO CONTOGOURIS?
-Sands
righty you act as though we're in some court of law here? you're the one making all the accusations and claims ..
who's suspicious here? Just who do you think is a paid basher?
here is another person that has seen the light! My batting average is still at 100% to expose Scams!
would you like my list?
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http://investorshub.advfn.com/boards/read_msg.aspx?message_id=33290723
I have learned a great many lessons from this stock. I bought into the hype and bought a sizeable stake but this long finally got fed up and bailed. Pennies cannot be investments like a house can be, only temporary vehicles of entirely intrinsic value.
I was originally in at about .008-9 and was quite excited to see it go to .025 and my account balance nearly triple in a matter of weeks. As a naive young investor, I was absolutely sure this trend would continue and we would be at 1.00 in no time.
Too bad the company really does only put out fluff PR's and hasn't done squat. They just release news painfully sparingly and leave us to wonder about the details. I see no production capabilities nor a full understanding of the ag business and stock in general.
Was happy to sell at .006 and I feel much better now.
Never marry a stock fellas, there are no pre-nups in pinkyland.
I still hold a small position in the company and do believe there is a slight chance they could come through, but I won't bank on it at all.
Flip the snot out of the pennies, take profits, and seek out the wisdom, not knowledge, of those who succeed. You cannot fail.
Losing five times the value of my car over greed and hardheadedness is a lesson learned hard and quick, but nonetheless learned.
Good night and good luck,
CF
WOW Phil... your bashing skills goes way back in time! LOL I see you posted on this thread way back in 2001! You must be a true IH IRB!
I am just a rookie compaired to your Professional Basher skills!
What ever became of those two stocks you mentioned LGOV and AENG in 2001? Did they hit the big time yet?
=====================================================
Posted by: Phil (Bullrider) Date: Wednesday, October 31, 2001 10:05:25 PM
In reply to: Corran Horn who wrote msg# 25 Post # of 472
Hey, CH,
I can fit in here.
I have been called a basher many times on the various LGOV and AENG threads.
Have fun,
Phil
The term scam is no more widely used than the term "naked shorting" or "NSS" which is used on every single stock we label a scam.
Seems funny how you support that on each and every stock you promote while vigorously defending it against the word scam.
LMAO!!!!!
You will use the most overused term in the penny market "NSS" but you have an issue with folks using the word "scam" too freely in a market where it is widely known that 99% of these companies will fail miserably?
0-2 on "awareness" but 2 for 2 bringing up shorting to try and make excuses for price declines when you say price has nothing to do with your job "BUB".
LMAO!!!!
You see why we are laughing?
basically he is a flat out liar, word twister, and manipulator! That is why we need to expose him.
BTW his awareness days right now seem to be on hold? He is an INACTIVE IRP? I guess that 95 dollar fee was just a little prohibitive for him from his successful awareness pumps?
http://investorshub.advfn.com/boards/IRP_Members.aspx?method=i
-Sands
sorry righty I don't use the word Scam unless I believe it is a SCAM.. So far my record of busting scams is right on target!
Haven't been wrong yet!
RE:One of the worst traits of the basher on ihub is the automatic resort to the use of the word scam.
-Sands
Yeah sandi so do I.
He puts on a nice charade on the public boards.
I think the record speaks for itself.
Would that be alot like your record with ERUC and ANVH?
You seem to be proud of a 2-3 day pump on ANVH but it ended 45% lower than where you started and ERUC was down 60%.
Your awareness resulted in stock sales. If not by dilution then by people who simply couldn't stomach holding onto the stock you were fluffing up and pumping on all the MOMO boards.
Is negative awareness just as good as positive awareness?
Every stock scam in existence has the opportunity for some to make a fast buck. Kind of like following a purse snatcher and hoping he drops a little loot after mugging the elderly lady in the alley.
total nonsense righty. I have Pm's from you with direct threats and name calling!
RE:At least I can say with confidence i have been straight with the readers.
and have not had to resort to name calling.
Sands
What facts am I distorting about you righty?
I see an opinion that I have formed based on yout posting style and your defense of the indefensible.
Again, how can you call yourself a promoter and then scurry to seek shelter behind the shield of the word "awareness" whenever people call you a stock promoter?
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This thread has been modified to give investors a place to post informative information about the subject of the phenomenon of "Bashers" and
about the subject of what the possible agenda of Bashing may be, that is, if you even believe that they exist in the first place.
PS: It is not our intention to support these kinds of activities. This board should be a place where a new investor or
even a savvy investor can read past posts to learn about these activities so they are aware of it or at least the possibility of its existence.
Other related topics like pump and dump schemes and naked short selling are welcome.
IHub Talk - People
http://investorshub.advfn.com/boards/boards.asp?cat_id=21
Rules of this board:
First of all, no personal attacks. Please no posts even vaguely making reference to another IHub member
as being a paid basher or engaging in this activity. All such posts will be DELETED per IHub administration request.
~BOARD DEFINITIONS~
Bashing: is a harsh, gratuitous, prejudicial attack on a person, group or subject.
Pumping Mod: is a moderator that pumps or promotes a stock and controls information flow on a particular board.
Altruistic Basher: An individual that has a true concern for the welfare of others and attempts to keep an
unknowledgeable investor away from a security by posting negative information that sheds light on the scam or the pump.
Frolic Basher: An individual that has a negative sentiment for a security and posts on a message board to play with the longs
and the scammers for pure entertainment purposes only.
Defrauded Basher: An individual who realized that "their" stock was a fraud, and partly feels the need to vent, and in addition,
wants to warn others not to make the same mistake.
Dualistic Basher: An individual which was long in a security but then decides to sell the stock. At this point the individual
will switch his or her sentiment on a message board in an attempt to devalue the same stock with the intentions of buying back at a lower price.
(Note: many believe this is a myth.)
Paid Basher: An individual, acting on the behalf of someone else, who attempts to devalue a stock by spreading
false or exaggerated claims against a public company on a message board. After the stock's price has dropped, the basher's employer
will then purchase the stock at a lower price than what he or she believes it is intrinsically worth. The basher is generally paid on the basis
of how many lies and negative rumors are spread, which can dramatically affect a stock's value.
Cybersleuth: is an individual who uses the resources available on the World Wide Web for research. Generally applied to someone who ferrets
out information about organizations, policies and procedures from the abundance of material available on-line.
Pump and dump schemes: involving use of false or misleading statements to hype stocks, which are "dumped" on the public at inflated prices.
Such schemes involve telemarketing and Internet fraud.
Chop stocks: which are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits.
Brokers are often paid "under the table" undisclosed payoffs to sell such stocks.
~POSSIBLE REASONS TO BASH~
(numbers based on the survey using 'much' and 'sometimes')
39% • Post because they feel the particular security is being pumped or that they are diluting and want to save the newbie investor.
34% • Just because it is fun to mess with the scammers. (Entertainment purposes)
19% • To prove to the scammers that “I'm” smarter.
Other miscellaneous reasons:
• Short seller.
• Long that sells a security then attempts to use bashing techniques to try to get in lower.
• Were defrauded - see "Defrauded Basher" above.
• Learning experience.
~THE SHORT LIST~
(This is for entertainment purposes only)
Top Twenty Rankings as of October 2007
# Member Stock Closing Price Date Current Price Percent Gain/Loss Comment
================================================================================================================================
01 janice shell PAIM 0.0006 10/20/2007 0.0003 -50.00%
02 BIGJOHN51 PDSS 0.03 10/20/2007 0.0002 -99.33%
(both 01 & 02 stocks above have RSed and took nose dives)
This list is for a basher or someone with a negative sentiment for a particular security that wants to show that his or her call was correct.
It will show how much of a gain or a loss one would have from that point on. PM or post if you want to add a stock to the list. The closing price will be
used unless you insist upon using the current price. It will be updated periodically. There are literally dozens, probably even hundreds
of penny scams out there. This list includes stocks picks that are currently in play.
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