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SEC Charges 18 Traders in $31 Million Stock Manipulation Scheme
FOR IMMEDIATE RELEASE
2019-216
Washington D.C., Oct. 16, 2019 —
The Securities and Exchange Commission has filed an emergency action and obtained an asset freeze against 18 traders in a scheme to manipulate more than 3,000 U.S.-listed securities for over $31 million in illicit profits.
The SEC alleges that the traders, who are primarily based in China, manipulated the prices of thousands of thinly traded securities by creating the false appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices. For example, according to the SEC's complaint, the traders used multiple accounts to place several small sell orders to drive down a stock’s price before using a different set of accounts to buy larger amounts of the stock at the artificially low prices. After accumulating their position, the traders then flipped the script and placed several small buy orders to push up prices so they could then sell their stock at artificially high prices.
"We allege that defendants engaged in an extensive manipulation scheme and went to great lengths to evade detection, placing trades in over one hundred separate accounts at several different brokerage firms and submitting falsified documents to open new accounts in the names of others," said Joseph G. Sansone, Chief of the SEC's Market Abuse Unit. "Despite their efforts, the SEC staff was able to uncover the connections between these seemingly unrelated accounts and expose the defendants' coordinated pattern of illicit trading."
In a parallel action, the U.S. Attorney's Office for the District of Massachusetts announced criminal charges against two of the traders, Jiali Wang and Xiaosong Wang.
The SEC's complaint filed in federal court in Boston and unsealed today, charges the traders with violating and aiding and abetting violations of the antifraud provisions of the securities laws. In addition to the asset freeze and other emergency relief obtained, the SEC seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.
The SEC's investigation was conducted by Andrew Palid and Michele T. Perillo of the SEC's Market Abuse Unit in the Boston Regional Office with assistance from John Marino of the Market Abuse Unit, and was supervised by Mr. Sansone. The litigation will be led by Eric Forni of the Boston Regional Office and Mr. Palid. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of Massachusetts, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.
https://www.sec.gov/news/press-release/2019-216
original link courtesy of thepennyguru
SmithOnStocks (currently) 9 PART SERIES on STOCK MANIPULATION
Part 1 in a Series of Reports on Blatant, Widespread Stock Manipulation that is Enabled by Illegal, Naked Shorting
POSTED by LARRY SMITH on MAR 27, 2019
I am convinced that price manipulation by Wall Street bad actors is endemic in the capital markets and swindles legitimate investors out of billions of dollars each year. This criminal enterprise is particularly directed against the stocks of emerging growth companies that are at the cutting edge of technological innovation and jobs creation and are so critical to solving humanity’s greatest challenges. Because my research deals with biotechnology, I am most aware of innumerable, vicious attacks on biotechnology companies, but the scheme is perpetrated on all types of companies, primarily small but also large.
I wrote an extensive report in 2015 that focused on the central role that illegal naked shorting plays in this sophisticated, criminal enterprise. At that time, I was aware of several determined efforts to try to expose and end the scheme which focused on trying to first shed light on the manipulation, get the SEC to step in and/or to bring lawsuits. They went nowhere. Indeed the stock manipulation has actually intensified and the perpetrators have grown ever more brazen over the last four years. I had grown despondent because it seemed that there was no entity that could take on and stop these abusive bad actors.
PART 1 Read more...
Part 2 in Series on Illegal Naked Shorting’s Role in Stock Manipulation- Conventional Wisdom on How Short Sales are Executed
POSTED by LARRY SMITH on APR 4, 2019
The current conventional wisdom on how a short sale is transacted is that a short seller borrows stock from a specific investor who is long the stock, then at some later point buys back the stock in the open market. They then return the stock to that “same specific investor” from whom it was borrowed. Before I met ShareIntel, this is what I thought happened, but as I began to work with them and to do more research on my own, I was jolted when I realized that this is not what goes on in the real world of Wall Street and in later reports I will address how the actual process facilitates widespread naked shorting that enables stock manipulation by some hedge funds..
I am writing this to describe to you my original thought process which I believe reflects current, incorrect conventional wisdom. In later reports, I will describe how I changed to a new perspective on how shares actually are handled in a short sale. This led me to an entirely different understanding on how shorting and in particular naked shorting is actually done in the real world. There is some complexity in explaining this and as I mentioned previously, I prefer to write a series of reports dealing with narrow issues rather than penning one huge, complex report that no one will read in its entirety. In the end, I will attempt to bring it all together. As I teased in part 1 of this series, the answer to combating naked shorting lies with the “borrow rate”, but it is too early to go into this.
PART 2 Read more...
Part 3 in Series on Illegal Naked Shorting’s Role in Stock Manipulation – Prime Brokers and the DTCC Have a Troubling Monopoly on Clearing and Settling Stock Trades
POSTED by LARRY SMITH on APR 11, 2019
Clearing and Settling of Stock Trades
Most of us when we enter a buy or sell order for a stock give almost no thought to how key aspects of the trade are carried out. We have great confidence that the trade will be handled in accordance with our instructions and accurately reflected in our brokerage account. To do so, there are three components involved in each stock transaction.
Clearing is the process of updating the accounts of the parties involved on the two sides of the trade to arrange for the transfer of securities and money. This is done through Prime Brokers and the Depository Trust & Clearing Corporation (DTCC), which is a company privately owned by Prime Brokers. A Prime Broker (aka broker dealer) can sometimes clear their own transactions by moving shares from one of their customer accounts. If the transaction cannot be completed within the account base of the Prime Broker, they turn to another Prime Broker and clear through the DTCC. Only member Prime Brokers may directly use these clearing services of the DTCC. Investors and non-member brokerages gain access through having accounts with member firms. It is the responsibility of Prime Brokers to ensure that the securities are available for transfer and that the counter party has adequate funds to pay for the transaction.
Settlement follows clearing and is the simultaneous process in which securities are delivered in exchange for payment, usually money.
Central Certificate Depository There is a centralized depository for securities operated by DTCC which holds the paper stock certificates and allows ownership to be electronically transferred through a book entry rather than the physical transfer of stock certificates. This allows brokers and financial companies to hold their securities at one location where they are immediately available for clearing and settlement. This is where your brokerage account is lodged.
For one trade, execution of these three components is no big deal, but think about the staggering number of trades that are made each day. Stock trading in the US results in the clearing and settling at the end of each day of somewhere around 6 billion shares which are involved in perhaps 1 million trades (obviously day to day trading activity can vary significantly). This trading is done in something around 1.5 million securities issued by companies that have a combined value of over $30 trillion. The current US system is all automated and has to be able to cope with the volume spikes and market volatility that we are all too familiar with.
PART 3 Read more...
Part 4 in Series on Illegal Naked Shorting’s Role in Stock Manipulation: Who are the Key Players?
POSTED by LARRY SMITH on APR 17, 2019
I worked on Wall Street as an analyst for nearly 40 years and was involved in the stock market on a day to day basis. Throughout this time, I was focused on fundamental developments that would give an insight into the potential for a company to grow its sales and profits and then trying to translate that into future stock performance. Like many investors, I believed that this was the overarching factor in predicting future stock performance. I had no inkling and I would have been shocked if someone had told me ten years ago what the experience of the past decade has taught, i.e., in many, many cases (particularly for small companies) fundamentals are not the most important factor determining the stock price.
I left Wall Street some time ago and after a while started my blog SmithOnStocks, with a strategy of focusing on small, under covered biopharma companies. I proceeded to make recommendations based on the belief that if a company achieved an important milestone as in a clinical trial or regulatory development that the stock price would go up, but this seemingly irrefutable approach just wasn’t working. I saw in case after case that stocks were going down on unquestionably good news and were being obliterated on disappointing news. It just wasn’t one or two stocks. It was the case with many small stocks that I was following both closely and from afar. An exciting new development would paradoxically lead to a stock price decline. I have come to believe that this is the result of a routine business practice on Wall Street perpetrated by hedge funds and aided and abetted by household name financial institutions who enable illegal naked shorting.
PART 4 Read more...
Part 5 in Series on Illegal Naked Shorting’s Role in Stock Manipulation: Traditional Shorting Compared to Naked Shorting (Both Legal and Illegal)
POSTED by LARRY SMITH on APR 29, 2019
This is the fifth blog in the series that I am writing to describe how illegal naked shorting is used broadly and massively to manipulate the stock prices of (primarily small) companies. I have been studying illegal naked shorting for nearly five years and I have found it to be incredibly complex and disturbingly it is widely practiced on Wall Street. My earlier blogs were intended to build a foundation needed to understand future blogs.
I am moving on in this blog to describe how illegal naked shorting is done and why securities laws and regulations have been almost totally unable to stop it. In this and upcoming blogs, I will be trying to interpret complex legal issues and it is necessary to issue a few precautionary warnings:
The securities laws are very complex and obviously I am not a trained lawyer. The SEC and the financial industry hire legions of lawyers to write and interpret these laws. As a layman with no training in the law, there is much that I do not know or understand.
The hedge funds and market makers who engage in widespread illegal naked shorting have been perpetrating this scheme for nearly three decades and have honed their skills to the point that they make Swiss cheese out of laws on illegal naked shorting by sculpting incredibly sophisticated strategies to avoid detection.
The data that is needed to determine the extent of illegal naked shorting is held in non-transparent, proprietary data bases lodged with the Prime Brokers and DTCC (owned by Prime Brokers) who tightly guard and block access to this data.
The illegal trades are done in a Wall Street that is now dominated by high frequency and algorithmic directed computer trading and is conducted often in dark pools in which trades are not reported publicly. Much illegality can be and is conducted in this shady environment. We outsiders can have no idea as to what is going on, nor apparently does the SEC.
PART 5 Read more...
Part 6 Illegal Naked Shorting: The SEC’s Regulation SHO is Intended to Prevent Illegal Naked Shorting, But is Ineffective
POSTED by LARRY SMITH on MAY 22, 2019
Overview
In previous blogs I traced the history of stock trading from the 1960s when stock certificates and cash were physically exchanged to settle trades to the paper free, totally electronic system that exists today. Instead of owning stock certificates, we now own digital entries located somewhere in the vaults of the inscrutable Depository Trust and Clearing Corporation (DTCC). This electronic system is absolutely critical to the functioning of our capital markets and our strong economic system. However, the DTCC and the prime brokers who own it have made the clearing and settlement system virtually non-transparent. This enables the routine manipulation of primarily but not exclusively, small stocks through illegal naked shorting.
The Securities and Exchange Corporation (SEC) is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation. It enforces legislation that was first passed in 1938 to address short selling. There was no further legislation until 2005 when Regulation SHO was implemented specifically to address naked shorting issues that were a result of the move to the electronic clearing and settlement system. In my opinion, Reg SHO is riddled with loopholes that render it ineffective in protecting investors from stock manipulation schemes enabled by illegal naked shorting. Also, the SEC seems strangely unconcerned about controlling illegal naked shorting and stock manipulation that results.
This blog goes into some of the key rules of Reg SHO which are routinely circumvented by Prime Brokers, the DTCC (owned by Prime Brokers) and aggressive, short selling hedge funds who routinely execute stock manipulation schemes enabled by illegal naked shorting. Before reading this blog, you might want to review my five prior blogs on illegal naked shorting that provide important background information.
PART 6 Read more...
Part 7: Illegal Naked Shorting: DTCC Continuous Net Settlement and Stock Borrowing Programs Have Loopholes That Facilitate Illegal Naked Shorting
POSTED by LARRY SMITH on MAY 31, 2019
Acronyms Used Frequently in This Report
DTCC: The Depository Trust & Clearing Corporation (DTCC) provides clearing and settlement services to the US financial markets that handle the exchange of nearly all securities and cash on behalf of buyers and sellers. It is also a central securities depository providing central custody of almost all US securities.
DTC: The Depository Trust Corporation is a subsidiary of the DTCC. It is the depository for almost all US securities and keeps records of transfers through electronic record-keeping of securities balances.
NSCC: The National Securities Clearing Corporation (NSCC) is a DTCC subsidiary that provides clearing and settlement for almost all securities transactions in the US two days after a transaction (T+2). It also guarantees completion of certain broker-to-broker securities transactions.
There is an integral relationship between the DTCC and hedge funds. The DTCC is owned by Prime Brokers; these are Goldman Sachs, Morgan Stanley, Merrell Lynch and other household name investment banks. Prime Brokers provide basic services to hedge funds that allow them to trade with multiple brokerage houses while maintaining a centralized master account at their prime broker containing cash and securities. The prime broker offers stock loan services, portfolio reporting, consolidated cash management and other services. Hedge fund support is a very meaningful percentage of the net income of Prime Brokers.
PART 7 Read more...
Part 8: Illegal Naked Shorting Series: Who or What is Cede and What Role Does Cede Play in the Trading of Stocks?
POSTED by LARRY SMITH on JUL 1, 2019
You Really Don’t Own the Shares that Appear in Your Brokerage Account; They Belong to Cede
Most investors when they buy a publicly traded stock believe that they own a part of some company. They think that somewhere there is a stock certificate or some indication of ownership that has their name on it, but this is not the case. When you buy a “stock” you are actually purchasing a security that affords certain entitlement rights related to registered stock which actual owners hold. The registered shares of a private company are directly owned by shareholders. In contrast, the registered shares of nearly all publicly traded equities are owned by Cede & Co., which is the nominee of the Depository Trust Company (DTC). (A nominee is a company whose name is given as having title to a stock, but does not receive the financial benefits of ownership.) Cede is a subsidiary of the Depository Trust Company (DTC) which is a subsidiary of the Depository Trust and Clearing Corporation (DTCC) and the DTCC is a private company owned by elite Wall Street firms and money center banks. If you need background or a refresher on DTC and DTCC, click on this link. Effectively, elite Wall Street firms and money center banks, not institutions and individual investors, own almost all of the registered shares of publicly traded companies in the US.
The DTC is a depository that holds securities of publicly traded stocks in street name (not to be confused with registered stock) for some 600 broker-dealers and banks who have accounts with it. Bear with me, I will explain what street name securities are shortly, but be clear that they are not the registered securities held by Cede & Co. which never leave its vault. It is street name securities that are held in inventories of brokers and are traded from broker to broker in the public markets. These street name securities have contractual rights to the financial benefits of the registered shares owned by Cede and also convey voting rights on corporate governance matters.
Brokers in the aggregate hold inventories of street name securities located in accounts at the DTC. Investor accounts lodged with brokers are also held at the DTC. When we investors buy a stock through a broker it is noted as a digital entry in the DTC’s electronic bookkeeping system so that the broker becomes our nominee. The upshot is that almost all U.S. investors are beneficial rather than registered owners of a stock. This entitles us to receive financial benefits such as dividends and to vote on corporate governance issues. While you may think you are buying registered stock, you are actually buying a financial derivative related to that stock. Effectively, you are buying a financial derivative from brokers of a financial derivative they hold from Cede that is just a digital entry in your DTC account.
Cede is at the center of the current, paperless electronic trading system that enables lightning fast trading of large blocks of stock by institutional investors and computers. Unfortunately, the intention in designing it was to provide liquidity and reduce settlement risk. There is virtually no transparency in the system. Disturbingly, there are loopholes which allow for the counterfeiting of shares by market makers on a massive scale through illegal naked shorting and other measures. At present, there is no way for an outsider or even the securities industry’s regulator, the SEC, to meaningfully detect and track these counterfeit shares. Once created counterfeit shares go on to be treated the same as legitimate street name shares. I discussed how this is done in series 7 of my illegal naked shorting series.
PART 8 Read more...
Part 9 of Illegal Naked Shorting Series: The Risk/ Reward of Shorting Versus Buying Stocks is Extremely Unfavorable
POSTED by LARRY SMITH on JUL 11, 2019
Investment Overview
Selling something you don’t own seems a pretty alien concept to me. I struggle to find any business models for which this is a key strategy. The exception is shorting of stocks and other securities which is a huge business on Wall Street that is carried on by many hedge funds and aided and supported by household name investment banks who execute trades and through prime brokerage services provide extensive logistical and financial support to hedge funds. And in point of fact, most of the household name investment banks operate huge hedge funds internally which they euphemistically refer to as proprietary trading.
In this report, I contrast the risk and reward of shorting versus buying stocks. When you unravel the economics and risk/ reward of shorting, it is clear to me that this is a highly risky, low return strategy. As argued in this report, I see shorting as a losers game if employed consistently over time as opposed to buying stocks which is a winners game. I see shorting as a niche strategy that is applicable on a short term trading basis for a very limited number of stock trades. I think you will agree with me as I go through the major risk and reward elements of shorting.
Why then is this such a big business? I think that it is because the perpetrators have evolved a widely employed strategy that uses shorting and illegal naked shorting to actually control prices of many stocks, moving them down in a predictable way. This converts short selling of stocks into a predictable business with extremely high returns and low risk. In prior blogs, I have laid out the role of the Depository Trust and Clearing Corporation which is responsible for clearing and settlement of essentially all stock trades in the US and is also the depository for all traded shares. DTCC is a private company owned by the same Prime Brokers who are so prominent in shorting. My prior blogs have shown how the DTCC allows the creation of counterfeit shares through illegal naked shorting. In essence then, the Prime Brokers are the key players and referees in the short selling business.
PART 9 Read more...
=============================================
imo and as i've noted for years now .. the last aspect NR (non retail) wants is an educated retail investor
or an aware (targeted) management .. nor imo can the SEC allow for total true RT (real time) transparency
without imploding U.S. Equities in total .. not too difficult to see the appeal of Tzero
4kids
OTC M weighs in on shorting.....
https://blog.otcmarkets.com/2018/11/13/understanding-short-sale-activity/
Great post! Thanks..
FINRA fines Interactive Brokers $5.5 million for short selling violations
Reuters Staff
BUSINESS NEWSAUGUST 20, 2018 / 5:48 PM / UPDATED 3 HOURS AGO
(Reuters) - The Financial Industry Regulatory Authority (FINRA) has fined a unit of Interactive Brokers Group Inc (IBKR.O) $5.5 million for violating several naked short selling rules over a period of at least three years.
The unit, Interactive Brokers LLC’s, supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with the federal requirements from July 2012 through June 2015, said FINRA.
FINRA, Wall Street’s self-regulator, also said the company repeatedly ignored “red flags,” including internal audit findings and multiple internal warnings from its staff.
The regulator said Interactive neither admitted nor denied the charges while settling the matter.
Interactive Brokers was not immediately available for comment.
https://www.reuters.com/article/us-interactiv...SKCN1L525H
just a bit .. NR (non retail) splits the month in half .. so it's not unusual to see volume go off per se .. here or at the end of the month or very early into the new month .. what was *odd* imo about today .. was mostly fed to a jumped bid of 028c .. some of which didn't adjust .. then it did adjust and then it looked like the prior bid size came back into play .. for the rinse and repeat .. curious to see how *marked* for both PTOI and IPIX (YOY both - 38%)
regardless any way it's sliced .. PTOI *volume* avgs just went *up*
20180515|PTOI|182403|0|382053|O 47.74%
Detailed Quote:PTOI
PLASTIC2OIL INC
0.028Up 0.001 (3.70 %)AS OF 3:38:41PM ET 05/15/2018
Last Trade 0.028
Trade Time 3:38:41pm ET
Change 0.001
% Change 3.70%
Open 0.026
Day High 0.028
Day Low 0.026
Previous Close
05/14/2018 0.027
52-Week High
01/03/2018 0.05
52-Week Low
08/28/2017 0.006
Price Performance (Last 52 Weeks)
05/14/2018 -38.20%
Volume 382,053
Volume (10 day Average) 22,999
Volume (90 day Average) 35,907
Last Trade 0.59005
Trade Time 3:59:48pm ET
Change 0.15405
% Change 35.33%
Bid 0.5801
Bid Size 1000
Ask 0.6175
Ask Size 1000
Open 0.44615 * hidden
Day High 0.68 ** 27c *range* re: *liquidity*
Day Low 0.41
Previous Close
05/14/2018 0.436
52-Week High
12/06/2017 1.17
52-Week Low
05/09/2018 0.35
Price Performance (Last 52 Weeks)
05/14/2018 -38.59%
Volume 384,483
Volume (10 day Average) 335,770
Volume (90 day Average) 218,697
Interesting vol. day on PTOI...?
Interesting vol. day on PTOI...?
NP MBOT
and you are not alone in holding those shares
lots of company out there holding .. including moi .. :)
best of luck with your trades/investments
4kids
Wow, a lot of info to digest. Thank you for your input, I suppose time will expose what games are being played. btw still holding every share of PT-OI Hope it comes back some day, lol
Thank you again, MBOT
Wow, a lot of info to digest. Thank you for your input, I suppose time will expose what games are being played. btw still holding every share of PT-OI Hope it comes back some day, lol
Thank you again, MBOT
MBOT ..
re: GWON
i wish it was that simple .. but NR (non retail) executes layers upon layers .. so usually i look at very specific aspects
re: *reported* data .. to ascertain where in the money cycle .. NR (non retail) currently is
this is a little unusual (and again time constraints on my end make aspects' viewed rather cursory in this response)
but usually what i look for:
the first thing i look at are volume avgs .. courtesy of Fido (Fidelity) .. data below
and the second being .. is when NR (non retail) set 52 week low in correlation to 52 week high
GWON
Previous Close
05/04/2018 0.69
52-Week High
11/02/2017 6.60
52-Week Low
01/02/2018 0.06
Price Performance (Last 52 Weeks)
-- --%
Volume (10 day Average) 1,457
Volume (90 day Average) 262
realize 10 day volume is far easier for NR (non retail) to manipulate than the 90 day avg .. but notice the time line from a 6c 52 week low on 11.2.17 .. to exactly 2 months later on 1.2.18 .. 52 week high is set @ 6.60
usually this is classic NR (non retail) working cycles of money on any company .. regardless of where *traded* ..
exact same pattern played out (approx same time frame on WATT) .. disclosure invested in WATT .. not invested
in GWON
but here the issue is seemingly with Fido's (high/low) .. per Yahoo Financial there is nothing showing on GWON re: historical trading volume pre 2.15.18
so not knowing the specifics of this company's history (time frame)
i'm looking specifically @ this data below from 2.15.18 to EO last week ..
GWON's PPS of $1.20 was taken to 36c to $1.00 to $1.75 to $1.25 to $1.00 to 5.1.18's *efforts*
notice up until 5.1.18 .. there is no volume in play to speak of on GWON.. so imo an *entity*
wanted the attention that *THEIR* volume usually engenders (scans)
Date Open High Low Close* Adj Close** Volume
May 04, 2018 0.25 0.69 0.25 0.69 0.69 206
May 03, 2018 0.74 0.74 0.74 0.74 0.74 -
May 02, 2018 0.74 0.74 0.74 0.74 0.74 100
May 01, 2018 0.55 0.60 0.22 0.51 0.51 14,260
Apr 30, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 27, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 26, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 25, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 24, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 23, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 20, 2018 1.00 1.00 1.00 1.00 1.00 -
Apr 19, 2018 1.00 1.00 1.00 1.00 1.00 200
Apr 18, 2018 1.25 1.25 1.25 1.25 1.25 400
Apr 17, 2018 1.25 1.25 1.25 1.25 1.25 -
Apr 16, 2018 1.30 1.30 1.25 1.25 1.25 300
Apr 13, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 12, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 11, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 10, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 09, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 06, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 05, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 04, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 03, 2018 1.75 1.75 1.75 1.75 1.75 -
Apr 02, 2018 1.75 1.75 1.75 1.75 1.75 125
Mar 29, 2018 1.00 1.00 1.00 1.00 1.00 -
Mar 28, 2018 1.00 1.00 1.00 1.00 1.00 800
Mar 27, 2018 0.36 0.36 0.36 0.36 0.36 -
Mar 26, 2018 0.36 0.36 0.36 0.36 0.36 200
Mar 23, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 22, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 21, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 20, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 19, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 16, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 15, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 14, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 13, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 12, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 09, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 08, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 07, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 06, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 05, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 02, 2018 1.20 1.20 1.20 1.20 1.20 -
Mar 01, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 28, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 27, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 26, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 23, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 22, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 21, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 20, 2018 1.20 1.20 1.20 1.20 1.20 -
Feb 16, 2018 1.20 1.20 1.20 1.20 1.20 224
Feb 15, 2018 1.20 1.20 1.20 1.20 1.20 -
Historical Short Volume Data for GWON
Date Close High Low Volume Sht Vol % of Vol Shtd
May 01 NA NA NA 14,260 7,500 52.59%
Apr 19 NA NA NA 200 100 50.00%
Apr 18 NA NA NA 400 100 25.00
12:36:07 0.51 1000 OTO
12:32:42 0.55 100 OTO
12:04:45 0.22 1660 OTO
12:03:47 0.27 2154 OTO .. 2154 + 346 = 2500
12:03:47 0.401 346 OTO .. 346 + 2154 = 2500
12:02:39 0.27 2500 OTO .. 2500 mirrored trade of 846/1654
12:02:36 0.401 1654 OTO
12:02:36 0.601 846 OTO .. 846 + 1654 = 2500
11:56:26 0.55 1000 OTO .. so 4000 goes off @ 55c in 5 minutes (always note pattern change outs)
11:56:14 0.55 1000 OTO
11:55:15 0.55 1000 OTO
11:51:42 0.55 1000 OTO
GWON Grandwon Corp. 360 47,308 47,668 CSTI CANACCORD GENUITY INC. 225 1 62.5%
GWON Grandwon Corp. 360 47,308 47,668 NITE VIRTU AMERICAS LLC 135 2 37.5%
Hi 4k, long time,no see. I had a question for you on this stock i'm on.
what would you think if half the volume was short?
I'm not sure what to make of it, pretty sure it was only one trader though.
Date|Symbol|ShortVolume|ShortExemptVolume|TotalVolume|Market
20180501|GWON|7500|0|14260|O
http://regsho.finra.org/FORFshvol20180501.txt
where do multis' past their sell by date toddle off to .. ;)
4kids
Yet, the ENSSFM do not appear to be on the threat list...
SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors
FOR IMMEDIATE RELEASE
2017-176
Washington D.C., Sept. 25, 2017—
The Securities and Exchange Commission today announced two new initiatives that will build on its Enforcement Division’s ongoing efforts to address cyber-based threats and protect retail investors. The creation of a Cyber Unit that will focus on targeting cyber-related misconduct and the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors reflect SEC Chairman Jay Clayton’s priorities in these important areas.
Cyber Unit
The Cyber Unit will focus the Enforcement Division’s substantial cyber-related expertise on targeting cyber-related misconduct, such as:
Market manipulation schemes involving false information spread through electronic and social media
Hacking to obtain material nonpublic information
Violations involving distributed ledger technology and initial coin offerings
Misconduct perpetrated using the dark web
Intrusions into retail brokerage accounts
Cyber-related threats to trading platforms and other critical market infrastructure
The unit, which has been in the planning stages for months, complements the Chairman’s initiatives to implement an internal cybersecurity risk profile and create a cybersecurity working group to coordinate information sharing, risk monitoring, and incident response efforts throughout the agency.
“Cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “The Cyber Unit will enhance our ability to detect and investigate cyber threats through increasing expertise in an area of critical national importance.”
Over the past several years, the Enforcement Division has developed substantial expertise in the detection and pursuit of fraudulent conduct in an increasingly technological and data-driven landscape. The Cyber Unit will consolidate and advance these efforts, and include staff from across the Enforcement Division.
Robert A. Cohen has been appointed Chief of the Cyber Unit. Since 2015, he and Joseph Sansone have been Co-Chiefs of the Market Abuse Unit. Mr. Sansone will continue to lead the Market Abuse Unit as its Chief.
Retail Strategy Task Force
The Retail Strategy Task Force will develop proactive, targeted initiatives to identify misconduct impacting retail investors. The Enforcement Division has a long and successful history of bringing cases involving fraud targeting retail investors, from everything involving the sale of unsuitable structured products to microcap pump-and-dump schemes.
This task force will apply the lessons learned from those cases and leverage data analytics and technology to identify large-scale misconduct affecting retail investors. The task force will include enforcement personnel from around the country and will work with staff across the SEC, including from the SEC’s National Exam Program and the Office of Investor Education and Advocacy.
“Protecting the welfare of the Main Street investor has long been a priority for the Commission,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “By dedicating additional resources and expertise to developing strategies to address misconduct that victimizes retail investors, the division will better protect our most vulnerable market participants.”
Statement from Chairman Clayton
“When Stephanie and Steve approached me with these initiatives, I endorsed them wholeheartedly. They reflect the division’s continual efforts to pursue new forms of misconduct while keeping a watchful eye out for our Main Street investors,” said SEC Chairman Jay Clayton.
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original link courtesy of alanc
https://www.sec.gov/news/press-release/2017-176
Fixing the Stock Market’s ‘Clogged Toilet’ Starts in Delaware
By Matthew Leising , Annie Massa , and Jef Feeley
September 12, 2017, 5:00 AM EDT
Blockchain pitched as solution to antiquated recordkeeping
Firms incorporated in Delaware can now issue digital shares
Patrick Byrne may finally get his vindication.
The chief executive officer of Overstock.com Inc. has fought for a dozen years against a market abuse called naked short selling, where investors bet a stock will drop without first taking the required step of borrowing shares. He says it was used back in 2005 to drive down his company’s stock, an episode that spurred a Securities and Exchange Commission probe and set Byrne on a crusade to improve accountability in the system that underlies U.S. stock ownership.
Finally an answer is near, thanks to Delaware. Last month, the home state for most incorporated companies in the U.S. made it legal for corporations to offer digital shares that would be recorded and tracked on a blockchain, the ledger that powers cryptocurrencies like bitcoin. Delaware officials hope the move will increase ownership accountability and clarity. The new law, more than a year in the making, is also a shot across the bow for the Depository Trust & Clearing Corp. and its little-known partner Cede & Co., the legal holder of the vast majority of U.S. stocks.
“It eliminates naked short selling completely as well as other forms of mischief,” Byrne said of Delaware’s overhaul in an interview. “If this had come along 10 years ago, I would’ve recognized it as the solution.” (While defendants in lawsuits filed by Byrne eventually settled, no one was ever held liable for naked short selling Overstock’s shares.) Overstock lawyers are currently working to convert the company’s shares to digital, he said. “If we get to a world of digital securities, then there isn’t a need for DTC and Cede & Co. any more,” Byrne said. “It’s a really huge step in returning to clean capital markets.”
Paperwork Crisis
The effect digital shares could have on the $27 trillion U.S. stock market goes far beyond stopping naked shorting. What was bugging Byrne had a lot to do with the U.S. system of stock-certificate ownership that he says is toxic to corporate governance. The system dates to the late 1960s “paperwork crisis,” when Wall Street brokerages were drowning in securities certificates, leading to routine shutdowns of the stock market so they could catch up. Before the advent of electronic trading, the shares investors bought and sold had to be hand-delivered by messengers.
To modernize the system, DTCC was created as an industrywide clearinghouse to track and settle ownership. Its unit Cede & Co. became the registered owner of all U.S. shares, which dealt only with large brokerages. Investors who don’t opt out of this arrangement only have a claim to stock through their brokerage, which in turn has a claim to what is held in Cede & Co.’s name. This is referred to as owning shares “in street name,” while average investors are considered to be “beneficial owners.”
Takeover Confusion
While these changes added convenience and security to how the U.S. stock market operates, they put in place a system that can’t sort out who owns which stock in real time. This can make it difficult to track ownership, especially during mergers and buyouts, when hundreds of millions of shares switch accounts in seconds, according to Larry Hamermesh, a Widener University law professor who specializes in Delaware corporate law issues.
“The whole idea of blockchain is to allow trades to be cleared immediately and be tagged with who the buyer and seller are,” Hamermesh said. “That solves the M&A problem.”
The Delaware Blockchain Initiative aims to change all that. The plan, which got its start under former Governor Jack Markell, is designed to weave distributed ledger technology through the fabric of the state’s business and legal systems. A critical point in the plan, which he detailed at a conference in May 2016, is the ability for companies to issue shares on a blockchain, making them easier to track. If companies take advantage of the new system, the state can gain tax revenue from maintaining an accurate count of how many shares are outstanding and ease the burden on its court system.
The Delaware initiative would change nothing about how shares are traded on the New York Stock Exchange, Nasdaq Stock Market or other U.S. markets. It would allow investors to have direct ownership of their shares for the first time since the early 1970s.
Billions Saved
The cost savings could be huge: $100 billion is spent on annual post-trade and securities servicing fees, according to estimates from Oliver Wyman and affiliates of Santander Bank.
Cede & Co. is, perhaps predictably, not the No. 1 fan of the Delaware game plan. By creating alternative systems to track stock ownership, you risk fragmenting and needlessly complicating the market, Dan Thieke, managing director of DTCC, said in a phone interview.
“We would be concerned by any development that would ultimately create a greater level of fragmentation,” Thieke said.
Delaware and Overstock are working on the digital share plan with Symbiont, a blockchain startup that created smart contracts to manage events in equity ownership like dividends, additional share sales and franchise tax payments. Smart contracts interact with a blockchain, in this case a version of the distributed ledger modeled on the ethereum system.
Hidden Shares
Corporations must get permission from Delaware to issue a certain number of authorized shares, say 1 million, said Symbiont Chief Executive Officer Mark Smith. The state collects filing fees and other revenue based on the authorized number of shares, but sometimes companies issue additional shares that Delaware is unaware of, he said. A smart contract eliminates that possibility.
“The smart contract manages the authorized and issued shares,” Smith said. “It’s impossible to issue more than 1 million shares on the blockchain because the smart contract has that as a limitation.” Overstock recently invested in Symbiont with this project in mind, Smith said. He expects companies to go public using the so-called “distributed ledger shares” or to convert to them within the next six months.
The DTCC isn’t sticking its head in the sand when it comes to blockchain’s potential to transform central parts of the financial world. It’s a member of the Enterprise Ethereum Alliance and Hyperledger, industry groups creating standards for blockchain systems. It also offers investors the opportunity to take direct ownership of their shares through its direct registration service.
“It’s an electronic way for an asset to move in and out of Cede & Co.,” DTCC’s Thieke said.
Dole Foods
Still, the current system appears to have lost the confidence of important Delaware officials. As the corporate home to more than half of the U.S.’s publicly traded companies and 63 percent of Fortune 500 firms, Delaware had more than 1 million legal entities incorporated in the 900,000-resident state as of 2012. That means the majority of corporate disputes wind up in the Delaware legal system and are often stymied by simple questions of stock ownership and voting rights. The 2013 take-private buyout of Dole Food Co. highlighted the difficulties in identifying who owns what shares at what time.
Investors sued company founder and CEO David Murdock in Delaware, accusing him of shortchanging shareholders in his acquisition of the portion of the fresh-food producer he didn’t already own. Murdock agreed to pay $148 million plus interest to settle the suit after Delaware Chancery Court Judge Travis Laster concluded the billionaire improperly drove down the value of the company’s stock to acquire it on the cheap.
When it came time to divvy up the nearly $170 million recovery in the Dole case, however, shareholders’ lawyers were left scratching their heads. Dole investors proffered more than 49 million shares as qualifying for settlement payments even though the company only had 36 million authorized shares.
After reviewing the discrepancy, Laster, who declined to be interviewed for this story, said short sales and trades in the days before the Dole deal closed, along with some DTCC procedural issues, made it difficult for the DTCC system to accurately identify who held settlement-qualified shares.
Read more about the Dole snafu
The Dole case and other similarly nightmarish legal sagas apparently left Laster at the end of his tether. Speaking in September 2016 at a meeting of the Council of Institutional Investors in Chicago, Laster compared the Cede & Co.-based stock ownership system to a clogged toilet.
“You need to fix the proxy plumbing,” Laster said. “The current system works poorly and harms stockholders. But the current plumbers -- financial intermediaries -- do not have an incentive to fix it.” He said one solution would be intervention by the SEC, but said top down change is hard to accomplish and takes a lot of time.
“Someone is going to do this. If a judge can see it, the opportunity is pretty obvious,” Laster said. “The good news is that you have a plunger that you can use to clean up the plumbing. That plunger is distributed ledger technologies.”
https://www.bloomberg.com/news/articles/2017-09-12/fixing-the-stock-market-s-clogged-toilet-starts-in-delaware
original courtesy of alanc
Resources:
http://www.shareintel.com/resources.cfm
original link/post courtesy of alanc
4kids
VHC/VirnetX Class Accuses Big Brokers of Naked Short Sales
by Chris Fry - December 19, 2016
HACKENSACK, N.J. (CN) – Investors claim in a federal class action that Goldman Sachs and other banking giants suppressed the share price of VirnetX, “a leader in mobile security technology.”
In addition to Goldman Sachs, the Dec. 14 complaint in Bergen County Superior Court takes aim at Merrill Lynch, Credit Suisse, TD Ameritrade, Charles Schwab and the Bank of New York Mellon. The case is the Top Download for Courthouse News on Monday.
As they have with countless other stocks, according to the complaint, the brokerages schemed to execute naked short sales for shares of VirnetX, with no intention of delivering stock to settle the short sales.
“Instead, these prime brokers have intentionally failed to deliver VirnetX stock to settle the short positions so as to reap huge profits and ingratiate themselves to their hedge fund and corporate clients,” the complaint says.
Typical short sales involve the sale of securities an investor does not actually own, but instead borrowed for delivery with the anticipation that the price of the stock would decline, netting a profit. Though this practice is legal, the sale becomes an illegal naked short sale if the brokerage fails to deliver sales of the shorted stock by the settlement date.
Two New Jersey-based investors, Lisa Karoon and Manickam Ganesh, say the brokers have been naked short selling shares of VirnetX since at least Feb. 1, 2013.
VirnetX vice president Greg Wood has complained about this illegal activity several times to the Securities and Exchange Commission, according to the complaint, which specifies that Wood sent several emails in March this year to SEC officials about the conduct.
Part of what has allowed the brokers to disguise much of their naked short selling, the class says, is their relationship with the Depository Trust and Clearing Corporation, or DTCC. “The DTCC is a powerful unregulated corporate institution that monopolizes the clearance and settlement of all United States securities transactions,” the complaint states.
This is contributing to, but is not the sole cause of, VirnetX’s stock losses, shareholders say.
“In addition, these prime brokers have ‘painted the tape,’” the complaint states. “They have manipulated the market and fixed the price of VirnetX stock through massive ‘dumping’ of VirnetX shares at key moments, all so as to create negative market sentiment, a ‘piling’ of short sales, and depression of the price of the stock so as to further their own short sale strategies and those of their hedge fund and corporate clients.”
Wood, the VirnetX VP, is said to have noted this practice as well. In a February email to the SEC, Wood supposedly noted that 160,000 shares of VirnetX were dumped in the last 10 minutes of trading, which represented over 10 percent volume for the full trading day.
The class says such manipulations dramatically distorted the VirnetX stock price.
A drastic drop from some $35 a share to $3 occurred, according to the complaint, “despite the market’s upward movement; despite what had been an expected rise of the VirnetX shares to a projected $60 range; and despite the fact that VirnetX has been awarded $302.4 million by a jury in patent litigation against Apple.”
The banks have faced millions of dollars worth of fines for this very conduct, according to the complaint, but “federal regulations and laws have not diminished Defendants’ insatiable appetite for illicit profits.”
“Apart from large fees, commissions and interest that they charged, the ability and willingness of defendants to engage in naked short selling enhanced their competitiveness with hedge fund and corporate clients, who wanted to manipulate the market and depress the price of VirnetX stock,” the complaint states.
The class also accuses the brokers of having concealed their illegal tactics by taking affirmative steps to keep the VirnetX stock off of an SEC list of naked short sales and delivery failures called Regulation SHO.
“Discovery will certainly reveal that the Defendants circulated and marketed data concerning VirnetX and other highly shorted stocks to clients by distributing lists of top shorted stocks, knowing that they had the ability to offer its artificial supply,” the complaint states.
Alleging violations of federal anti-racketeering law, fraud and conspiracy, among other claims, the class seeks $9.72 billion in damages – three times the lost value of $3.24 billion.
They are represented by Philip Guarino in Montclair, N.J.
The investors seek to represent a class of about 5,000 people or entities who owned shares of VirnetX stock at any point between Feb. 1, 2013 and the filing of the complaint.
Representatives for Merrill Lynch, Charles Schwab and TD Ameritrade all declined to comment. Goldman Sachs and the other defendants have not returned requests for comment.
courthousenews.com/virnetx-class-accuses-big-brokers-of-naked-short-sales/
original link courtesy of alanc
Two traders arrested over alleged manipulation of more than 2,000 stocks
Published: Dec 13, 2016 4:24 a.m. ET
Joseph Taub and Elazar Shmalo allegedly used dozens of accounts at several brokerage firms in bouts of manipulative trading activity
Carl Court/Getty Images
An employee views trading screens at a brokerage firm in London, England.
By
FRANCINE
MCKENNA
REPORTER
Two New Jersey-based traders were arrested on Monday for allegedly manipulating prices of more than 2,000 New York Stock Exchange- and Nasdaq-listed shares resulting in more than $26 million in illegal profits over a two-year period.
Regulators, law enforcement, and the exchanges use technology to see, and track, manipulative trading that, in this case happened more than 23,000 times and often lasted just a few minutes. Joseph Taub, 37, of Clifton, New Jersey, and Elazar Shmalo, 21, of Passaic, New Jersey sometimes controlled at least 80% of the volume of a targeted stock and traded in several accounts simultaneously, the regulators said.
Read: How Nasdaq watches for insider trading
The scheme, says the Securities and Exchange Commission and the U.S. Attorney’s office in New Jersey, was sophisticated. Taub, a registered broker, and Shmalo, who is unemployed, allegedly coordinated trading in more than $10 billion worth of securities in dozens of brokerage accounts.
The complaint filed against Taub and Shmalo by the U.S. Attorney says they looked for companies with low trading volumes and then entered numerous trades using “helper” accounts that signaled false information to the market, artificially inflating their prices. Later they sold the shares in “winner” accounts at the artificially inflated prices after accumulating positions at lower prices.
Taub and Shmalo, and additional unnamed conspirators, relied on pre-arranged and coordinated trading among dozens of brokerage accounts they controlled, according to the SEC and DOJ. Taub, according to the SEC and DOJ, was the ring leader, funding many of the accounts that were not in his name and using two companies he controlled , EAC Capital LLC and LNW Direct LLC, to make some of the trades. Some accounts were held in the Taub and Shmalo names while others were in the names of family members. Many of the accounts were “straw” accounts, opened in the names of individuals who neither controlled the accounts nor traded the securities in an attempt to conceal the scheme from regulators and law enforcement.
Read: SEC using high tech to connect illegal insider trading to sources
The trading allegedly was carefully coordinated, using the “helper” account to place multiple small orders in a stock to create upward or downward pressure on the stock price. The “winner” account was primarily used to purchase and sell larger quantities of stocks at prices that had been affected by the manipulative orders in the helper account. The helper and winner accounts were almost always held at different brokerage firms.
Brokerage firms frequently questioned Taub and Shmalo about apparently manipulative trading patterns in the accounts such as wash trades, spoofing, and/or layering and sometimes closed the accounts. Layering is when a trader places non-bona fide orders to buy or sell securities in order to move the price of a security up or down and then quickly cancels them before they are executed. A wash trade allows the trader to create the illusion of volume by simultaneously selling and buying the same stock. Spoofing is when a non-bona fide orders are entered to encourage other traders to place orders that the original trader can exploit after canceling the fake order and entering an order on the opposite side of the market.
When brokerage firms closed the accounts after suspecting illegal manipulation, Taub and Shmalo simply switched to new firms and opened new accounts in other “straw” names. They also put off the inquiries by pretending to be unaware of the violations, in one case apologizing and saying “I’ll make sure it doesn’t happen again.”
Taub and Shmalo are each is charged with one criminal count of conspiracy to commit securities fraud which carries a maximum potential penalty of five years in prison and a fine the greater of $250,000 or twice the gain derived from the offense or twice the loss caused by the offense. The two men are scheduled to appear before U.S. Magistrate Judge Steven C. Mannion in Newark federal court.
The SEC did not identify an attorney yet for either man. The SEC charges Taub and Shmalo with violating and aiding and abetting federal securities laws and sought a return of the illegal profits plus interest and penalties.
http://www.marketwatch.com/story/two-traders-arrested-over-alleged-manipulation-of-more-than-2000-stocks-2016-12-12
original link courtesy of another P2O/PTOI investor
Short sellers and naked shorting
We will give a primer with a couple of useful links.
Basically, to short a share is to borrow it, sell it on the markets with the intention to buy it back at a lower price. Naked shorting is basically selling the share, but not really borrowing it (or at least, failing to deliver the shares when they are due).
General information
An extremely nice, concise bullet point oversight of manipulation and regulation is a very good place to start.
Here are a series of bullet points that highlight everything you need to know about the current crisis, in “elevator pitch” format:
Wall Street has a colorful history of institutionally-condoned stock manipulation and fraud.
Stock manipulation was not illegal until the introduction of the SEC in 1934.
Joe Kennedy, the first SEC Chairman (and father of JFK) made his fortune running stock manipulation “pools” on Wall Street.
The head of the NYSE, who argued successfully against any meaningful regulation and oversight of Wall Street participants (brokers) by the SEC (due to their integrity and high moral fiber), and introduced the notion of self-regulation on the “honor” system (still in place today), was subsequently sentenced to 10 years in Sing-Sing for embezzling client accounts – including a fund in his care set up for orphans.
The SEC originally was envisioned to have prosecution power.
The final bill giving birth to the SEC was so anaemic and watered-down that it was chastised as nonsense when it was passed, and it severely constrained the new Commission, and limited the SEC’s power to filing civil suits. Virtually all the rules with Congressional teeth were stripped out of the bill, at Wall Street’s behest. That state of affairs continues to this day.
The SEC was never intended to police Wall Street and ensure a level and fair playing field – Roosevelt created it to, “Restore investor confidence in the market” after the 1929 and 1932 crashes – not to ensure there was any good reason to have confidence.
The SEC’s track record of action against Wall Street players is worse than abysmal.
Broker/dealers have transitioned from owing their clients a fiduciary obligation of safekeeping, to a “customer” relationship, that is essentially adversarial – caveat emptor being the rule for customers.
As commissions have dwindled to nothing (due to the advent of discount brokers, following deregulation) Wall Street is now beholden to the large money movers for their income, and stock lending is one of their biggest profit centers.
Stock lending is exclusively an activity used by short sellers, who must borrow stock before selling it.
Short selling is a bet on stock price declines. The short seller borrows stock, and then sells that borrowed stock, hoping to buy it back at a lower price later, when he returns it to the lender.
Illegal “naked short selling” involves placing a sales transaction, but not borrowing the stock, and simply failing to deliver it on delivery day. It is also called “failing to deliver” or FTD – or delivery failure.
Delivery failure is a significant problem nowadays, as it can be used to run stock prices down in a manipulative manner. Delivery failure in any other industry is called fraud. Hedge funds are the biggest culprits in this illegal trading strategy, with broker/dealers right behind them in the culpability queue.
Hedge funds are now the largest players in the US equities markets, representing the majority of trading, with almost $2 trillion under management.
Hedge funds are large, virtually unregulated pools of anonymous money, used to invest in any way the operator sees fit.
Prime brokers allow their hedge fund customers leverage on their assets, meaning that for every dollar of asset, they could easily hold $10 of short positions.
This over-leverage presents a systemic risk should positions in several larger funds go the wrong way, as there isn’t enough collateral to cover the domino effect of multiple positions being forced to cover.
This over-leverage creates an environment where the brokers are now pregnant with their hedge fund customers’ liabilities, and have a vested interest in seeing depressed stock prices remain depressed – if the stocks go up, the hedge funds could easily fail, and the brokers are on the hook to buy-in and deliver the stock owed by the funds – resulting in brokerage failures.
The DTCC is ultimately at risk for this domino effect, as brokerages fail.
The DTCC is owned by the brokers, thus is the brokers.
The DTCC processes over $1.2 quadrillion (million trillion) every year, and owns most of the stock American investors hold in their accounts – but most of the country has never heard of the company. The total GNP of the planet is about $20 trillion per year.
1% of all trades in dollar volume fail to settle (be delivered) every day, per the SEC.
$130 billion to $150 billion of equities trade every day.
$2 trillion of total trades are processed by the DTCC every day, including bonds.
The SEC does not qualify whether they refer to total trades, or total equities, when referring to 1% failing to settle.
The SEC keeps the total dollar value of trades that have failed to be delivered secret.
The Securities Industry Association publishes a spreadsheet that tallies the financial position of all NYSE member firms, and that spreadsheet shows $63 billion plus delivery and receipt failures as of the final day of Q2, 2006, just for those firms. Lines 69 and 103.
The DTCC claims delivery and receipt failures are a rolling $6 billion per day.
The disconnect in the numbers is CNS netting, wherein all fails are netted against all shares held long by the brokers, effectively concealing 90+% of the problem once netting is through.
The $63 billion number doesn’t include any of the massive international clearing firms. And that number is after pre-CNS netting, where the day’s buys are used to offset the day’s sells (even naked sells) at the broker and clearing house level, before reporting to the SIA, and before going into the CNS netting system.
Of the $130 to $160 billion per day that trades in stock, per the DTCC, 96% is handled by CNS netting. This is consistent with the disconnect in the $6 billion and the $63+ billion numbers. 96% is handled by netting, which means 4% isn’t. 4% of $130 billion is $5.2 billion not handled by CNS netting. Of that $5.2 billion, $2.1 billion fails. $1.1 billion of the fails are accommodated by the stock borrow program. $1 billion isn’t, and goes onto the $6 billion post netting failure pile.
$5.2 billion per day aren’t handled by CNS netting. $2.1 billion fail. That is 40% of the trades, fail. $130 billion to $160 billion stock trades daily. $63 billion fails just in NYSE firms. That is around 40%.
The SEC insists that the failure issue isn’t a big problem. So does the DTCC. So does Wall Street. None of these entities have commented on the SIA spreadsheet, nor has the NY financial press. Not one comment. None.
$63 billion is a big problem. That is a mark-to-market number, where yesterday’s $20 stock is today $1, thus yesterday’s $20 billion problem is now valued as a $1 billion problem. That means the actual true value of the problem is likely 10-20 times larger.
$630 billion to $1.2 trillion is a very big problem. Even by NY standards.
The SEC “grandfathered” all failed to deliver trades prior to January, 2005, effectively pardoning all those trades (for which money was paid but no stock ever delivered), from ever being required to deliver. This amounts to allowing those that violated delivery rules to keep the money from their illegal conduct.
The SEC keeps the number of shares grandfathered, as well as the dollar amount, secret, for fear of creating market disrupting “volatility”.
The above numbers do not take into account the large number of undelivered trades that are handled “Ex-Clearing” – a way of handling delivery outside the system. Nor do they take into account pre-CNS netting, nor international clearing house fails.
Many securities scholars believe the “Ex-Clearing” failure problem is 10 times larger than the in-system problem the above numbers represent.
Many investors that think they have “shares” in their brokerage accounts, don’t. They have “markers” that have no underlying share to validate them. Some call these “counterfeit shares”, with good reason. The technical term is “Securities Entitlement.”
UCC8 mandates that all Securities Entitlements have a genuine share on deposit at the DTC, or in the broker’s possession, for each Securities Entitlement. That rule is ignored by the SEC and Wall Street.
The DTCC, via Cede & Co., is the registered owner of all shares held in “Street Name,” which are all shares in margin accounts.
Margin accounts represent the bulk of independent investor account types.
Registered owners are free to use their “property” as collateral for loans or debt.
It is unknown what, if any, loans or debts are collateralized by the stock “owned” by the DTCC.
The DTCC’s “Stock Borrow Program” lends shares to be delivered to buyers, if sellers fail to deliver.
The Stock Borrow Program is operated on the honor system, and is anonymous.
It allows one genuine share to be lent multiple times, leaving a string of markers/IOUs in the share’s wake.
This creates a systemic risk for the stock market, as more markers are in investor accounts, falsely represented as shares, than shares actually authorized by the companies.
These markers are freely traded and treated by the system as real, resulting in a large secondary market of counterfeit shares – resulting in depressed stock prices.
With paper certificates being eliminated – by the DTCC – there is no way to confirm that a share is genuine, versus a bogus marker.
There is nothing to stop your broker from taking your money, and merely representing to you that you bought shares, without ever actually buying them. You have no way of knowing the difference, barring demanding paper certificates for your property.
Only a handful of people on the planet understand all this.
In the end, it is simple – Wall Street is printing shares electronically, investors are paying real money for those bogus shares, and the whole thing is predicated on the idea that few will ever understand what is being done, or bother to check.
This represents a hidden tax on investors and the economy.
It is, for the most part, illegal.
It is being kept secret by the DTCC and the SEC, who are terrified of systemic collapse, and a complete loss of investor confidence, should all the facts become known.
All the facts are becoming known.
A more detailed, but very good description can be found here
And here is another description from one of naked shorters most famous victims here
Organized short attacks
Here is a story that describes the total game plan, you can find it here
The Anatomy of a Short Attack — Abusive shorting are not random acts of a renegade hedge funds, but rather a coordinated business plan that is carried out by a collusive consortium of hedge funds and prime brokers, with help from their friends at the DTC and major clearinghouses. Potential target companies are identified, analyzed and prioritized. The attack is planned to its most minute detail.
The plan consists of taking a large short position, then crushing the stock price, and, if possible, putting the company into bankruptcy. Bankrupting the company is a short homerun because they never have to buy real shares to cover and they don’t pay taxes on the ill-gotten gain.
When it is time to drive the stock price down, a blitzkrieg is unleashed against the company by a cabal of short hedge funds and prime brokers. The playbook is very similar from attack to attack, and the participating prime brokers and lead shorts are fairly consistent as well.
Typical tactics include the following:
1. Flooding the offer side of the board — Ultimately the price of a stock is found at the balance point where supply (offer) and demand (bid) for the shares find equilibrium. This equation happens every day for every stock traded. On days when more people want to buy than want to sell, the price goes up, and, conversely, when shares offered for sale exceed the demand, the price goes down.
The shorts manipulate the laws of supply and demand by flooding the offer side with counterfeit shares. They will do what has been called a short down ladder. It works as follows: Short A will sell a counterfeit share at $10. Short B will purchase that counterfeit share covering a previously open position. Short B will then offer a short (counterfeit) share at $9. Short A will hit that offer, or short B will come down and hit Short A’s $9 bid. Short A buys the share for $9, covering his open $10 short and booking a $1 profit.
By repeating this process the shorts can put the stock price in a downward spiral. If there happens to be significant long buying, then the shorts draw from their reserve of “strategic fails-to-deliver” and flood the market with an avalanche of counterfeit shares that overwhelm the buy side demand. Attack days routinely see eighty percent or more of the shares offered for sale as counterfeit. Company news days are frequently attack days since the news will “mask” the extraordinary high volume. It doesn’t matter whether it is good news or bad news.
Flooding the market with shares requires foot soldiers to swamp the market with counterfeit shares. An off-shore hedge fund devised a remarkably effective incentive program to motivate the traders at certain broker dealers
messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_F/threadview?m=tm&bn=43655&tid=118293&mid=122647&tof=4&rt=1&frt=2&off=1
2. Media assault — The shorts, in order to realize their profit, must ultimately purchase real shares at a price much cheaper than what they shorted at. These real shares come from the investing public who panics and sells into the manipulation. Panic is induced with assistance from the financial media.
The shorts have “friendly” reporters with the Dow Jones News Agency, the Wall Street Journal, Barrons, the New York Times, Gannett Publications (USA Today and the Arizona Republic), CNBC and others. The common thread: A number of the “friendly” reporters worked for The Street.com, an Internet advisory service that hedge-fund managers David Rocker and Jim Cramer owned. This alumni association supported the short attack by producing slanted, libelous, innuendo laden stories that disparaged the company, as it was being crashed.
One of the more outrageous stories was a front-page story in USA Today during a short crash of TASER’s stock price in June 2005. The story was almost a full page and the reporter concluded that TASER’s electrical jolt was the same as an electric chair — proof positive that TASERs did indeed kill innocent people.
To reach that conclusion the reporter over estimated the TASER’s amperage by a factor of one million times. This “mistake” was made despite a detailed technical briefing by TASER to seven USA Today editors two weeks prior to the story. The explanation “Due to a mathematical error” appeared three days later — after the damage was done to the stock price.
Jim Cramer, in a video-taped interview with The Street.com, best described the media function:
When (shorting) … The hedge fund mode is to not do anything remotely truthful, because the truth is so against your view, (so the hedge funds) create a new ‘truth’ that is development of the fictionâ€| you hit the brokerage houses with a series of orders (a short down ladder that pushes the price down), then we go to the press. You have a vicious cycle down — it’s a pretty good game.
This interview, which is more like a confession, was never supposed to get on the air, however, it somehow ended up on YouTube. Cramer and The Street.com have made repeated efforts, with some success, to get it taken off of YouTube.
3. Analyst Reports — Some alleged independent analysts were actually paid by the shorts to write slanted negative ratings reports. The reports, which were represented as being independent, were ghost written by the shorts and disseminated to coincide with a short attack. There is congressional testimony in the matter of Gradiant Analytic and Rocker Partners that expands upon this. These libelous reports would then become a story in the aforementioned “friendly” media. All were designed to panic small investors into selling their stock into the manipulation.
They even do it to whole countries!
Finally, Washington is starting to notice
Editorial in a newspaper against naked short selling
Grant Thornton also against
And other lawmakers, like the chairman of the U.S. House Financial Services Committee
Shorts and IOC
IOC short information from buyins.com
IOC the longest on the SHO naked short-list
This is not something new. Dancy had to say this a couple of years ago already (here):
The company is on the SEC’s regulation SHO list, and has been on of the list for 180 days. The SHO list is a listing of companies whose shares have been sold short but shares have not been delivered as required by regulation. Of the 340 companies listed, IOC has been on the list longer than all but 10 of the companies. (Dancy)
This points to the following:
1) The shorts were shorting IOC massively before Elk1 was discovered. This is not terribly surprising: mix an exotic country, a loss-making small refinery, an unknown company with large concessions but no resource find.
2) But then, Elk1 was discovered, and the shorts were caught offguard. An awkward dilemma loomed as the stockprice zoomed higher on that news. Covering would be very expensive, but not covering was also risky. They chose the latter.
3) There is something to be said for that, it gave them time, and to properly assess a resource find like Elk with a single rig to drill would take another couple of wells at least, and a couple of years. Time enough to come up with some game plan.
4) This is when the dirty stuff started, things like
Stocklemon started to write about IOC, crying ‘stranded gas’ because a pipeline to Australia (that never made any sense anyway) was cancelled and predicting instant gloom and doom two years ago
an small engineering company (Ross Energy) was hired to write a negative report on Elk (they had to make a rather embarrassing backtrack considering the flowrates for Elk1)
a negative page-long article was written by a free-lance journalist in the New York Times
paid bashers showed up on message boards
and off course, the shorts started to take control of the price for most of the time
We will give a few examples of those tactics in another write-up
links can be accessed via
http://shareholdersunite.com/the-ioc-files-useful-background-material/short-sellers-and-naked-shorting/
original link courtesy of alanc
4kids
THE HALF BILLION DOLLAR GLITCH
David Dayen
Sep. 28 2016, 11:36 a.m.
The Penny Stock Chronicles
Part 7
Knight Capital made headlines around the world when one of its computers went on a shopping spree that ended up costing the company $440 million. So surely its secrets would come out now.
ON AUGUST 1, 2012, the Dow Jones Industrial Average opened the day at 13,007.47.
Business headlines that morning included conservative opponents of gay marriage celebrating “Chick-fil-A Appreciation Day,” the continued reluctance of Fannie Mae and Freddie Mac to offer debt relief to their borrowers, and profit declines at the video game company Electronic Arts.
And then the Glitch happened.
Knight Capital, the company Chris DiIorio had insisted to the SEC for a year was engaged in a monumental fraud, opened the day by inadvertently buying millions of shares in 154 different stocks. The company blamed an untested software installation that triggered the rapid-fire trades.
In an environment where milliseconds can mean millions, it took Knight Capital 45 minutes to turn the software off.
Stock values surged from the high demand, and when Knight sold back the shares it had bought by mistake, it was left with a net loss of around $468 million. The New York Stock Exchange canceled trades in six of the 154 stocks involved but deemed itself “hamstrung” by SEC rules that prevented it from breaking all of them.
Knight could have used the assets on its balance sheet to absorb the loss, but DiIorio had maintained for years that many of those assets were inflated or even fictional — ghost receivables intended to balance out the massive liabilities Knight had accrued by selling stocks it didn’t really have.
And DiIorio alleged that Knight’s immediate efforts to raise the full amount of its Glitch losses, instead of offsetting them with existing assets, proved that something was amiss on its balance sheet.
In one of those attempts, Knight sent 7,000 securities to JPMorgan Chase as collateral for a tri-party loan, but the Wall Street Journal reported that JPMorgan deemed 4,000 of them “unreadable through databases used to reach valuations,” and refused to accept them.
DiIorio saw this as consistent with shares in companies whose CUSIP, or unique identifying symbol, had changed after a reverse merger or split — just what he had been warning about for years. Such stocks would be unredeemable for any real value.
“Those were the stocks that no longer traded!” DiIorio says. “They were pledging worthless collateral.”
The proposed loan collapsed.
The funding Knight did receive, from a consortium of investors that took 73 percent of the company without a shareholder proxy vote, was not collateral-based. In late 2012, Knight announced a merger with rival market maker Getco.
DiIorio filed a new “tip, complaint or referral” form to the SEC — this one vetted by the law firm Berger & Montague — highlighting Knight’s post-Glitch funding issues and how they pointed to evidence of a naked short selling scheme. DiIorio’s “findings — the product of thousands of hours of careful study — can protect others from falling victim to these same frauds,” the TCR concluded.
Berger & Montague eventually parted ways with DiIorio. The lead attorney on the complaint, Daniel Miller, did not respond to requests for comment.
The SEC did not respond to the new TCR, nor did it prevent the Knight/Getco merger. It did fine Knight Capital $12 million related to violations of the market access rule when it committed the Glitch. But compared to DiIorio’s claims, that was miniscule.
DiIorio even tried to collect a whistleblower award for a 2011 enforcement against UBS for violations of Regulation SHO. He wanted to force the SEC to look at his claims again, and hopefully open a new investigation. The SEC denied DiIorio’s application to collect the award. While he is not privy to undisclosed SEC investigations, DiIorio does not believe the agency has investigated Knight’s or UBS’s involvement in penny stocks.
DiIorio thinks the agency could audit Knight’s profit and loss statements to understand its concentration in penny stocks. Or officials could deny the numerous penny stock reverse mergers and reverse splits that DiIorio says drive the scheme. Or they could investigate why the splits proliferate.
SEC spokesperson Ryan White declined to comment. SEC Chief of the Office of the Whistleblower Sean McKessy and Chief of Enforcement Andrew Ceresney did not respond to requests for comment. The agency did recently tout its whistleblower program as “a gamechanger … in its short time in existence.”
In July, McKessy announced his exit from the agency after five years running the Office of the Whistleblower. In September, he became a partner at the law firm Phillips & Cohen, which has won for clients one-third of the total whistleblower awards granted by the SEC.
Meanwhile, the Justice Department is reportedly investigating Knight, now known after the merger as KCG, over allegedly executing stock trades to shortchange its clients. KCG’s most recent quarterly report acknowledges that “the Company is currently the subject of various regulatory reviews and investigations,” including by the SEC and the Justice Department.
But there’s been no public acknowledgment of any investigation into penny stock activity.
KCG declined to comment, through its spokesperson Sophie Sohn. UBS only responded to multiple requests by saying, “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Knight’s own trading data confirms that it never stopped selling penny stocks. It boasted in its 2013 annual report of being “the clear market leader in over-the-counter (OTC) traded stocks.” And it increased its volume in 2014, trading 19.1 billion shares of OTC and Pink Sheet stocks per day in February of that year, up from a little over 4 billion a day in the previous quarter. While those volumes have lessened somewhat, to this day between 73 and 80 percent of Knight’s share volumes are in OTC and Pink Sheet stocks.
“The activity continues today and the investing public remains at risk,” DiIorio says.
DiIorio is highly skeptical of the SEC’s intentions at this point. He believes the agency has all the information it needs to move on the scheme. But prosecuting Knight and UBS would raise questions about the SEC’s silence before and during the Glitch, and its decision to dismiss criminal charges against UBS in 2010 on the grounds that UBS had changed its ways.
“How are they going to say that [UBS] did penny stock money laundering?” DiIorio asks.
The charge is explosive. It’s hard for a member of the public, lacking access to the SEC’s data and analytics, to fully vet DiIorio’s claims. This rankles even securities regulators. “I have no authority to look at a reverse split unless someone alleges fraud on the markets,” said Joseph Borg, director of the Alabama Securities Commission. “Enforcement is after you burn down the forest. I can’t blow out the match because I can’t even ask what you’re doing in the forest to begin with!”
Since the Bernie Madoff scandal, the SEC’s Office of the Whistleblower has professed a greater desire to fully investigate cases. Part of the post-Madoff recommendations mandated that the SEC’s Office of Compliance Inspections and Examinations vet all whistleblower information. But last year, when DiIorio contacted Kevin Goodman, director of OCIE for broker-dealers, Goodman responded, “Thank you for your recent emails. I wanted to acknowledge them and let you know I have received and will consider the information you have provided.” To DiIorio, that suggested Goodman had not seen the claims before. The SEC would not make Goodman available for comment.
Frustrated with the SEC, DiIorio reached out to the Financial Industry Regulatory Agency, the security industry’s self-regulatory organization. DiIorio had a two-hour conference call in August 2012 with a team leader at Finra’s whistleblower office shortly after the Glitch. He had another meeting later with FBI agents. And this April, he met with IRS officials.
Since he first contacted Finra, the agency has issued several complaints against brokers other than Knight over failing to comply with anti-money laundering regulations. Some of them cited penny stocks DiIorio highlighted in his claims.
In particular, Finra fined Brown Brothers Harriman $8 million for violating money-laundering rules by turning a blind eye to “suspicious penny stock transactions,” executed “on behalf of undisclosed customers of foreign banks in known bank secrecy havens.” But none of those foreign banks or their customers were named.
“Who does that protect?” DiIorio asked.
Richard Best, the lead enforcement official at Finra on the Brown Brothers Harriman case, now runs the Salt Lake City regional office for the SEC. The agency declined to make him available for comment.
Five years after alerting the SEC to his allegations, DiIorio has never been brought in for a meeting. He’s going public now because he’s fed up with the inaction. “I’ve always said to the SEC, ‘I’ll be there tomorrow, I’ll come without an attorney,’” DiIorio says. “They won’t even pick up the phone.”
DiIorio doesn’t do much investing anymore. But he never sold off his original investment in Best Rate Travel, now known as Yora International, which has traded at a fraction of a penny for several years. It’s still sitting in his IRA account, the shares having been reduced through more reverse splits to 3,299.
Under market value, it just says, “$NP,” or “no price.”
This is the last installment of The Penny Stock Chronicles for now, although the series will resume if and when new information comes to light.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/28/the-half-billion-dollar-glitch/
=========================
WERE PAPER LOSSES THE GOAL ALL ALONG?
David Dayen
Sep. 27 2016, 12:23 p.m.
The Penny Stock Chronicles
Part 6
If your goal is to launder money through a brokerage account, paper losses are worth serious money. Buying imaginary shares of a stock guaranteed to lose value is an awesome way to do that. You just need someone to set it up.
SAY YOU’RE A Swiss bank and you want to launder some money for high-net-worth clients.
Here’s one way: Start by placing large quantities of the funds into a brokerage account at the bank under the name of a shell corporation.
Then, conduct multiple financial transactions with the funds, confusing the true source of the money. Once the transactions “wash” the money, it can be spent out of the brokerage account as simply as writing a check or using a credit card.
Wealthy clients will pay handsomely for this activity. Not only do they get access to funds laundered through the banking system, but by placing the money offshore in a shell corporation, they can avoid taxation in their host country. “Money laundering is tax evasion in process,” said John Cassara, a 26-year intelligence and law enforcement official and former special agent for the Treasury Department. “Shell companies make it more complicated to figure out who that money belongs to and where it’s going.”
UBS, the giant Swiss bank that self-appointed investigator Chris DiIorio suspected was part of the kind of penny-stock manipulation that wiped out his penny-stock investment in 2006, has a checkered history with these types of activities.
The bank entered into a deferred prosecution agreement with the Justice Department over cross-border activities for its clients in February 2009, paying a $780 million fine. UBS admitted that it established secret accounts for roughly 17,000 wealthy American clients “in the name of offshore companies, allowing United States taxpayers to evade reporting requirements and trade in securities as well as other financial transactions (including … using credit or debit cards linked to the offshore company accounts).”
The government dismissed criminal charges against UBS in 2010, claiming the bank had fully dismantled its cross-border tax evasion activity.
DiIorio believes UBS never stopped. Years of digging through public records and connecting dots led him to that conclusion.
But this is also where DiIorio’s accusations get considerably harder to substantiate, and his theories start to multiply, sometimes even contradicting one another.
His suppositions up to this point come with swaths of data that bolster them. From this point onward, DiIorio’s main argument is the absence of alternate explanations.
Here, however, is the way DiIorio thinks it worked — and continues to work: UBS clients use their brokerage accounts to invest in penny stocks issued by companies that appear to conduct no business activity and have no revenue potential — all they do is issue billions of shares of stock. These stocks, he figures, are the same ones Knight Capital is naked shorting: selling shares it doesn’t really have.
UBS’s clients, according to DiIorio, purchase the penny stocks because they know they will drop in price. That way, they can use capital losses to offset any capital gains in the brokerage account, “resulting in a reduction in their reported income-tax liability and the underpayment of millions in taxes,” according to DiIorio’s 2013 complaint to the SEC.
That happens at the same time that the money placed in the brokerage account is being commingled with the various trades, he argues — effectively laundering it.
The IRS rarely suspects trading in equity markets is a vehicle for money laundering or tax evasion, because it assumes stock investors are trying to make money. “It’s a lot more efficient than stuffing diamonds into toothpaste,” DiIorio says.
In fact, illicit financial flows through brokerage accounts are rarely scrutinized at all. “In federal law enforcement, we have skilled people, but we have a whole lot of people in there, they don’t get the securities markets,” said Cassara, the former Treasury agent. “They don’t get trade-based money laundering. The bad guys know this so they pile on the layering.”
He cited statistics from Raymond Baker, president of the research group Global Financial Integrity, that indicate money-laundering enforcement fails 99.9 percent of the time. “I use his line, total failure is only a [decimal] point away.”
DiIorio argues that client losses from the drops in value of the penny stocks are a small price to pay for the layering activity and tax avoidance. That’s if they’re even losses at all. Because if the stock shares never really existed, maybe the payments never happened either.
In fact, DiIorio also alleges that many of the transactions go through outside hedge funds, which convert promissory notes from the penny stock companies into equity, in private stock offerings. (The CEO of E Mobile tried to sell DiIorio a private placement back in 2006, you may recall.)
Normally, a company issues a promissory note in return for cash — the note representing a promise to pay it back later, plus interest. But some notes, called convertible promissory notes, are also convertible to stock.
DiIorio claims that in some cases, penny stock issuing companies were simply creating convertible promissory notes as a way of issuing more stock. The funds from these investments never appeared on the balance sheet of the companies — suggesting that no money changed hands for the purchase of the note, which was then converted to stock. That would make the losses merely on-paper losses: a classic tax evasion play.
One example DiIorio provides comes from FreeSeas, the shipping company referenced earlier (see The Penny Stock Chronicles, Part 3). It engaged in four convertible promissory note sales with stated values of between $500,000 and $600,000 in five months in 2015, with Alderbrook Ship Finance Ltd. (April), Casern Holdings Ltd. (June), the AMVS Value Fund (July), and Casern again (September). Alderbrook Ship Finance didn’t exist until two days before the sale; AMVS had a lifespan of four days before it purchased FreeSeas’s promissory note. The two companies share the same Toronto address and the same director, Justine Kerrivan of Ber Tov Capital. And despite all the cash flow, FreeSeas only had $20,000 cash on hand at the end of 2015, per its annual SEC filing.
“FreeSeas is a structured tax evasion/money laundering scam being perpetrated on the investing public as we speak,” DiIorio wrote in an email to SEC officials last September.
A contact for Casern, a company incorporated in the British Virgin Islands (a location notorious for shell corporations), did not respond to a request for comment. Ber Tov Capital, the company that apparently set up Alderbrook and AMVS, also declined to comment.
DiIorio jumps back and forth in his claims. Sometimes he says there’s no money changing hands, just a bunch of paper losses. Sometimes he says there are some losses, but less than the tax liability avoided. And sometimes he says the losses are real, but worth the cost in exchange for laundering large sums of money. To DiIorio, it’s all variations on the same basic scheme: using sham companies and stock manipulation to generate losses on purpose, tailored to clients’ individual needs.
The Intercept asked UBS about all of these allegations. The only response, from Director of Media Relations Peter Stack, came in a single line: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Collateral Damage
DiIorio’s initial investment in 2006 — where the on-paper value dropped from $1.3 million to next to nothing in a matter of months — was a fluke, he now believes. Sure, naked shorting rips off investors, but that’s not the true aim. In his view, penny stocks like FreeSeas or NewLead or Colorado Goldfields were structured tax evasion vehicles for the benefit of unknown people with money looking to hide their activities.
He was unlucky enough to be collateral damage.
The theory has an internal logic to it but is based on a fair bit of speculation. While trading activity can be used to launder money, some experts argue there are far simpler ways to do so instead of actually losing a share of the money to throw regulators off the trail.
For example, Jack Blum, a former U.S. Senate investigator and white-collar crime expert, suggests that launderers can more easily wire money through international markets, use bogus tax shelters, or even lend themselves money to buy property while falsifying the records of the transfer. (“Each case requires a small book to explain,” he said.)
And none of those tactics involves actually losing money intentionally. Even in his complaint to the SEC, DiIorio acknowledged that he was “alleging a massive and nefarious conspiracy based, at least in part, on circumstantial evidence.” And in a separate complaint, he admitted that he does not have the taxpayer records that would be critical to pinpointing the scheme.
But John Cassara found the theory relatively plausible. “People do what they know,” he said. “If you’re talking about financiers that work in a world I can’t relate to, for them it may be, let’s construct this financial instrument, this trade, I’ll work with my guy, a wink and a nod and it’s done.”
Furthermore, many of the facts DiIorio based the alleged conspiracy on checked out. There was an array of penny stocks that kept undergoing reverse splits. Knight and UBS did trade in them. Knight’s balance sheet appeared to expand strangely, including an increase in the “sold not yet purchased” liability. And UBS had a history of helping its clients evade taxes, often through shell corporations.
UBS’s admission and fine in 2009 came only after whistleblower Bradley Birkenfeld, a former UBS banker, divulged the schemes that the bank used to encourage American citizens to dodge their taxes. But Birkenfeld’s information exposed the undeclared bank accounts. “How did the cash get there, and how do they get the cash back?” DiIorio said. “I explained how.”
DiIorio added UBS to his list of claims with the SEC. The list would grow over the years to take in several of the microcap stocks the bank traded, such as FreeSeas and NewLead. DiIorio amended his initial complaint in November 2011 and continued to send dozens of emails directly to SEC officials, including Chief of the Office of the Whistleblower Sean McKessy and even Chair Mary Schapiro. But the SEC remained mute.
The SEC wouldn’t answer our questions, either. And through spokesperson Sophie Sohn, Knight also declined to comment for this story.
And then something happened that changed DiIorio’s entire perception of how the securities regulators were dealing with his claims. He went from thinking that the SEC and its counterparts just didn’t understand the sophisticated scheme — to believing they were waving it through.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/27/were-paper-losses-the-goal-all-along/
==========================
TURNING UP LIKE A BAD PENNY
David Dayen
Sep. 26 2016, 11:53 a.m.
The Penny Stock Chronicles
Part 5
The penny stock Chris DiIorio invested in that crashed and burned was one of many stocks with similar trajectories traded by the same two giant companies. But if one was the buyer and the other the seller, how could this be in both of their interests?
ONE SUMMER DAY in 2012, Chris DiIorio pulled up outside a home that Colorado Goldfields Inc., a mining company in Littleton, Colorado, listed as the home address of its chief financial officer, Stephen Guyer.
DiIorio — whose investigations into the penny stock market dated back six years, to when his own investment swelled up before losing $1 million in value in two months — had already determined through property records that Guyer didn’t own it.
As he approached the front door, he found the shades drawn and no sign of life in the house. “It looked like the only thing active was the mailbox,” DiIorio said.
Colorado Goldfields, originally listed on the over-the-counter market as CGFIA, has traded at or below $0.01 since September 2013, making it a quintessential penny stock, one of the many DiIorio researched for years before making a formal Securities and Exchange Commission complaint about a potential wide-ranging fraud scheme.
(In an interview with The Intercept this month, Guyer said that he rented the property DiIorio visited because his association with the company wiped him out financially. “The company is in a total neutral situation,” Guyer said, citing active litigation with the former leadership.)
Like many of the penny stocks DiIorio had determined that the giant New Jersey-based financial firm Knight Capital actively traded, Colorado Goldfields stock had been placed on the Depository Trust Company’s “chill list.” Public records indicate that Knight traded 8.5 billion shares of CGFIA stock in 2012 — 31 percent of the total share volume — after the stock was placed on the list in May 2011.
The chill is given to stocks for various reasons, including displaying suspicious activity.
Guyer criticized the DTC for “acting arbitrarily” in chilling Colorado Goldfields. But the chill may have been issued because the company appears never to have mined any gold or other precious metal. Indeed, its most recent annual SEC filing, in 2013, states, “We have not generated revenue from mining operations.”
Guyer acknowledged that the company was always pre-revenue, claiming that project-level funding that would allow mining to commence would always fall through right before the transactions completed.
Along with this run of bad luck, Colorado Goldfields’s main activity seems to be generating press releases, announcing the acquisition of mines or approval to begin work at an existing mine. DiIorio found several of these press releases, which the company began issuing in 2007; in at least one instance, the company announced the same acquisition in separate press releases more than a year apart. (Guyer explained that “in those cases, we were announcing contracts that were entered into and weren’t closed.”) Yet the press releases would lure investors into the stock and the stock price would fall, to the benefit of the stock’s manipulators — and Knight Capital, according to DiIorio.
It’s not uncommon for new companies, even ones publicly traded over the counter, to show no revenue for several years. After all, the majority of startup businesses fail. But not all of them embark on a frenzy of stock issuance.
Between 2008 and 2012, Colorado Goldfields authorized the issuance of an amazing 35 billion shares of stock, while the stock price moved from $3 a share on June 15, 2007, to $0.01 on April 2, 2009, staying at or below a penny for three years, despite enormous trading volumes (over 1.4 billion shares moved in just four days of trading in August 2012).
Asked about the massive stock issuance, Guyer said, “There was significant trading. A lot of that came from conversion of debt.” In other words, Colorado Goldfields would pay off creditors with IOUs that they could convert into stock — and Guyer claimed a lot of the stock issued came from them. “Once put in place, those conversions go out of the company’s control. As it converts, it does put downward pressure on [the stock] price.”
That’s exactly the kind of behavior DiIorio suspected was taking place with Best Rate Travel, the stock whose collapse launched his personal investigation.
In August 2012, Colorado Goldfields announced a reverse split of its common shares at 1-to-5,000, just the sort of activity DiIorio had noticed in other stocks. After the reverse split, the company was issued a new nine-digit identification code, or CUSIP, and began trading as CGFI.
That aligned with another of DiIorio’s claims: He suspected that Knight was “naked shorting” — or selling shares of stock it didn’t have — and then once the stocks changed ID codes, Knight had no way of actually completing the transaction. As a result of the new CUSIP, Knight would as a result accumulate what are known as “aged fails” on its balance sheet.
Colorado Goldfields had a particular distinction, which is what aroused DiIorio’s interest in the first place: Two of its top traders were Knight Capital and UBS, the massive Swiss bank. Knight traded 31 percent of its shares in 2012; UBS traded around 5 percent. (Guyer said he didn’t recall the trading volumes of Knight or UBS.)
This correlation between Knight and UBS was not an anomaly. According to DiIorio’s research, Knight and UBS were also the top two traders in 2012 in Universal Detection Technology (UNDT) (totaling 69 percent of all shares), and the top two traders in Sungro Minerals (SUGO) (totaling 51 percent). Like Colorado Goldfields, both of these companies appeared on the DTC chill list, and admitted in SEC filings that they’ve never generated significant revenue — but they’ve issued billions of shares of stock.
The Canadian B.C. Securities Commission began investigating Sungro for a suspected stock scam in 2009. Canadian authorities fined three of the men involved and banned them from future trading, and the company is now defunct. The phone number listed on UNDT’s annual report is no longer in service.
Knight and UBS even traded a stock called Videolocity (VCTY), though the Pink Sheets website refuses to list information about it, showing only a skull and crossbones. Videolocity, a consulting firm whose website is in Japanese (and mostly discusses cat food) despite being incorporated in Nevada, did not return a request for comment.
“It strains credulity for these two large market players [Knight and UBS] to coincidentally find themselves in bed together this many times,” DiIorio wrote to the SEC in 2013.
Knight declined to comment on its penny stock share volume. UBS spokesperson Peter Stack would only say, “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Several penny stocks Knight and UBS traded shared similar fates: rapid drops in value, followed by reverse splits that brought the stock price back up, and then more drops in value. The only thing left was to figure out how both Knight and UBS could prosper while seemingly being on opposite sides of the same trade. How could this possibly be in both of their interests?
This yo-yo would crush the investment of whichever company was on the side of the trade betting the price would go up.
DiIorio came up with a hypothesis after he read the text of an enforcement action against UBS in October 2011 taken by the Financial Industry Regulatory Authority, or Finra, which is the security industry’s self-regulatory organization. Finra had fined UBS $12 million for violations of regulations prohibiting abusive naked shorting and “failing to properly supervise short sales of securities.”
This was precisely what DiIorio had accused Knight Capital of doing. Finra discovered that UBS placed “millions” of short sale orders without locating the securities.
The SEC, in a separate action, merely called it “faulty record-keeping” and fined UBS just $8 million in a civil settlement without going to court. “They basically punted,” DiIorio said.
But finding out that UBS had been accused of the same issues with short sales that he saw in Knight gave DiIorio an idea for a theory that could explain everything.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/26/turning-up-like-a-bad-penny/
============================
CALLING THE SEC
David Dayen
Sep. 25 2016, 1:00 p.m.
The Penny Stock Chronicles
Part 4
Penny stock gadfly Chris DiIorio tells the SEC about his suspicion that Knight Capital is tanking penny stocks on purpose and racking up unsustainable balance-sheet liabilities. But that leads to another mystery: Why don't they seem to care?
CHRIS DIIORIO SUSPECTED major broker-dealer Knight Capital of tanking penny stocks on purpose and racking up massive, unsustainable balance-sheet liabilities based on all the stocks it “sold” that it never really had.
It had taken him five years to reach these conclusions — five years of digging through reams of financial data in search of answers to how and why his particular penny stock investment was so brutally crushed. Knight never answered DiIorio’s questions, nor, during the reporting of this story, any of The Intercept’s.
“The core business at Knight has always been naked shorting penny stocks,” DiIorio asserted.
Shorting a stock is betting it will drop in price: You borrow a share, sell it, hope the stock price drops, then buy another share to pay back your loan, hopefully for less than you borrowed it for.
In naked shorting, you sell a share that doesn’t exist and cash the proceeds. Do that enough and you bet the price will drop. Set it up so that it looks like you really sold the share to everyone except an obscure middleman, and the only toxic byproduct is a liability on your balance sheet representing shares you have sold but not yet purchased.
DiIorio believed this represented the secret of Knight’s success. “I told the SEC, ‘If you don’t believe me, ask Knight!’ If their penny stock volumes went to zero, what would happen to their trading profits?”
photo4 Photo: Richard Drew/AP
DiIorio filed a TCR (tip, complaint, or referral) form. Under Section 922 of the Dodd-Frank Act, the SEC has the authority to provide substantial monetary awards to eligible whistleblowers who inform the agency of securities law violations, if the subsequent enforcement actions exceed $1 million. But DiIorio says he wasn’t trying to win back his losses by filing a whistleblower complaint; he just wanted to see the ongoing fraud of investors like him put to a stop.
He also pointed to the threat to the markets from Knight’s thinning capital compared to the billion-dollar-plus “sold not yet purchased” liability. “I said, ‘Knight is insolvent, and this is how I know.’”
Indeed, the firm’s own second-quarter 2011 report to the SEC clearly showed $1.9 billion in “sold, not yet purchased” liabilities — up from $1.3 billion just six months earlier. By contrast, it reported “net current assets, which consist of net assets readily convertible into cash less current liabilities, of $105.1 million.”
Other than a perfunctory acknowledgement of receipt, the SEC did not respond to the TCR. DiIorio sent personal emails to top officials at the agency. One still exists on the SEC’s website, an October 2011 letter to Robert Khuzami, then the SEC’s head of enforcement. “Why won’t [then-Knight CEO Thomas] Joyce disclose to the investing public the nearly [$2 billion] sold not yet purchased liability is where he moves aged fails,” DiIorio wrote. “It is a structural liability and does not in fact ‘fluctuate with volumes’ as [Joyce] has said in several public filings.”
In this case, aged fails are the obligation left over when the stock whose shares the seller was supposed to actually hand over no longer exists because of a merger or split.
SEC spokesperson Ryan White declined to comment on the matter. As a matter of policy, the SEC never confirms nor denies the existence of an investigation until it reaches the public record in a court action or administrative proceeding, and it usually doesn’t inform whistleblowers about the status of their cases unless it grants them an enforcement award.
But DiIorio grew frustrated with the lack of response. “I was baffled why the SEC was not acting on what appeared to be blatant securities violations,” he said.
What About UBS?
He used the delay, however, to clear up another nagging question: What about the other major trader in these penny stocks, the Swiss bank UBS, one of the largest private banks in the world?
Time after time, DiIorio would isolate individual penny stocks and find UBS and Knight as major traders in them. While it wasn’t possible to know for sure, the correlation suggested that UBS was repeatedly on the other side of Knight’s trades; its clients would go long while Knight’s would go short. If true, that meant UBS, or its clients, were taking on multitudes of losses by design.
Why was UBS so involved with penny stocks, which had little upside potential for a global megabank? Why was it so intertwined with Knight? Who was it purchasing these penny stocks for?
And why didn’t the bank seem to care that its clients were being sold stock that kept going down in value?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/25/calling-the-sec/
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NAKED SHORTS CAN’T STAY NAKED FOREVER
David Dayen
Sep. 24 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 3
Who engages in massive trades in penny stocks on the industry’s own “chill list”? And what happens when you sell a stock you don’t have? Victimized investor Chris DiIorio finds the answers in plain sight and wonders why no one else seems to care.
A FEW YEARS into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them.
Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients.
As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it.
DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.
His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.”
The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock.
But when the DTC senses trouble, it will stop clearing trades on a stock temporarily.
A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.”
That doesn’t stop Knight from buying and selling them, though. Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks.
“I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.”
He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.”
Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.
Naked Manipulation
The thing about naked short sales is they can’t stay naked forever.
Even if you don’t have the stock when you sell it, at some point it is expected that you hand it over.
And even with its market-maker exemption, Knight is required by SEC rules to eventually deliver the shares in a naked short transaction to the buyer and close out the trade.
Not doing so results in a “fail to deliver,” which DiIorio describes as the securities version of an IOU. And that IOU comes with rules: Under the SEC’s Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail. Routine failures to deliver can lead to fines by the SEC, or even a ban from the securities markets.
Instead of complying with the rule, however, DiIorio alleges that Knight circumvented it by manipulating an obscure process within the machinery of the nation’s clearing system known as the “Obligation Warehouse.”
This service facilitates the matching of self-cleared trades (often known as “ex-clearing”) that don’t go through the DTC — for instance if the stock was chilled.
The Obligation Warehouse instead simply asks the buyer and seller of these ex-cleared trades if they “know” the transaction. If they both agree, the trade gets confirmed with a journal entry — and the buyer receives their stock purchase. It actually shows up in the buyer’s brokerage account.
The trades still have active IOUs, but according to DiIorio’s theory, buyers wouldn’t clamor for the trades to be closed because they would’ve already received their purchase.
If true, this would allow Knight to bury its naked short trades.
“They set up a shadow clearing system,” DiIorio said.
Furthermore, DiIorio recognized what he considered a persistent cycle in the stocks Knight traded. After being beaten down through what he suspected was naked shorting, they would often engage in a reverse stock split or reverse merger, like E Mobile did with Best Rate Travel in the trade that ended up losing DiIorio over $1 million.
This, he observed, could enable Knight to rerun the scheme over and over again, pummeling the stock price and then letting it move back up like a yo-yo.
Laura Posner of the New Jersey Securities Commission said constant reverse splits would require a coordinated relationship between the penny stock issuer and the broker-dealer. “I know that there are situations in which fraudsters will take advantage of a stock split to commit fraud,” Posner said. “But it’s different than a typical pump-and-dump, where you don’t have to have a personal relationship.”
Alternately, the cycle could be a cat-and-mouse game playing out between the short sellers and the stock issuers. Hawk Associates, a consulting firm to small companies, recommends that penny stock issuers victimized by naked shorting engage in reverse mergers and/or reverse splits to stop the rapid degradation of their stock price. “It may be useful as part of a larger strategy to deter naked shorting,” the firm writes on its website. “This may be more trouble than it’s worth, however. Once the new shares are in circulation, there’s nothing to stop a new round of naked shorting by determined parties.”
Knight’s involvement with suspicious stocks following this same pattern kept cropping up.
For example, NewLead Holdings (NEWL) — a shipping company with a mining concern on the side that was accused in federal court of having “no coal mines, no coal, and no ability whatsoever to engage in the coal business” — engaged in 1-1,125,000 worth of reverse splits over nine months in 2013 and 2014, meaning that 1,000 shares prior to the splits were equivalent to 0.0008 shares afterward. NewLead did another 1-300 stock split just this spring; it now trades as NEWLF, at 0.00030 as of August 23. Its 2015 annual report admits, “There is substantial doubt about our ability to continue as a going concern.”
FreeSeas (FREE), another penny stock, did a 1-60 reverse split on January 15 of this year, and then another 1-200 split on April 13, changing its stock symbol to FREEF. The company has engaged in seven reverse splits in the last five years; someone with 900 million shares five years ago would have one share today, trading at less than a penny. The company’s annual report says it currently has no employees. Private equity firm Havensight Capital made an alleged bid to purchase FreeSeas in June at $0.43 a share, about 80 times its price at the time of this writing, which FreeSeas called “false and misleading.”
While one might think this cycle of splits and price declines would trigger red flags with federal regulators, Joseph Borg of the Alabama Securities Commission doubted they would pay attention. “It’s like asking the SEC, of all the 35,000 private placements issued, you look at how many? And if they were telling the truth they would say we’re putting them in a drawer,” Borg said. “Anything like that on miniscule levels, they just get filed away.”
Furthermore, while there are “circuit breaker” rules preventing short sales when a stock loses more than 10 percent of its value in a day, these swings were more gradual. Knight made a lot of money on these plays, not just from the spread in trading profits, but because it often traded on its own account rather than on behalf of customers, DiIorio concluded. When the stock dropped, Knight got rich from the short. And it could rerun this repeatedly.
“He’s got a theory that, without studying it, I see theoretically where he’s going with it,” concluded Borg. “It’s an interesting idea.”
Knight is now known as KCG. Its spokesperson Sophie Sohn declined to comment when asked about this and other matters.
Attempts to reach spokespeople at FreeSeas have proven unsuccessful. Elisa Gerouki, corporate communications manager at NewLead, asked me to prove he wrote for The Intercept; after I did so, Gerouki failed to respond to questions.
Where Naked Shorts Go to Die
DiIorio also spotted a significant, seemingly toxic byproduct of this sort of activity.
The Intercept.Reverse mergers and reverse splits typically result in a change in the CUSIP, the nine-digit identification symbol assigned to a public stock.
Once that CUSIP changes, the naked shorter has no apparent way to close out the naked short position. No stock under the old CUSIP number exists anymore; it all automatically converts to the new CUSIP.
Those trades can sit in the Obligation Warehouse forever, in theory. But the “aged fails” — essentially orphaned naked short transactions — remain on the naked shorter’s balance sheet as a liability to be paid later.
By DiIorio’s reckoning, then, the cycle of naked shorting and reverse splits would inevitably result in an ever-increasing number of aged fails. And if that was happening, and those liabilities grew bigger and bigger, then federal regulators could see the outlines of the scheme on any financial statement.
DiIorio believed Knight accounted for its aged fails in the “sold not yet purchased” liability on its balance sheet. That’s supposed to be an inventory of stocks for use in future market making, which goes up and down as orders are filled. But DiIorio says it was a hiding place for a billowing structural liability.
And consider this: According to its own financial reports, Knight’s “sold not yet purchased” liability jumped from $385 million at the beginning of 2008 to $1.9 billion by mid-2011.
Jim Angel, the business professor, said there could be other explanations — such as Knight’s growth as a company during that period — for why the “sold not yet purchased” liability ballooned. But, he said, market makers are typically “in the moving, not storing, business, and like to keep their inventories as small as possible.”
DiIorio had no such doubts. He saw the fact that Knight was blowing a hole in its own balance sheet as undeniable evidence of the naked shorting play.
KCG spokesperson Sophie Sohn was asked specifically about that claim and declined to comment.
If DiIorio was correct, Knight was driving penny stocks down over and over again with naked shorting, then not actually closing the trades, and racking up enormous paper liabilities.
This was even more complicated than he thought. It was time to call the cops.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/24/naked-shorts-cant-stay-naked-forever/
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BIG PLAYERS, LITTLE STOCKS, AND NAKED SHORTS
David Dayen
Sep. 23 2016, 12:16 p.m.
The Penny Stock Chronicles
Part 2
A self-appointed stock sleuth finds financial giants trading extensively in little penny stocks like the one he owned that tanked. And he learns something amazing: Some brokers can sell shares that don’t actually exist.
CHRIS DIIORIO HAD lost a million dollars when the penny stock he was betting on shed 98 percent of its value in a matter of weeks. But when he looked deeper, he found this wasn’t a typical penny stock pump-and-dump scheme. He was determined to get to the bottom of it.
For one thing, there were two huge companies involved.
UBS, one of the world’s largest private banks, seemed to have no business trading in penny stocks. “This was a $50 billion-plus bank, it didn’t seem like penny stocks would move the needle,” DiIorio said. But just in December 2011, UBS’s trades in 32 penny stocks represented over half of the firm’s total share volume, according to his calculations.
In a one-line response to a series of detailed questions from The Intercept, UBS media relations director Peter Stack wrote in an email: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
After some research, DiIorio became even more disturbed by the presence of the other company, Knight Capital, which has traded an average of more than 2 billion shares of penny stocks daily for the past three years.
Based in Jersey City, N.J., Knight is what is called a “market maker,” a dealer that facilitates trading by actually holding shares itself, if ever so briefly, so investors can buy and sell without any delay. “They’re selling the service of convenience to investors, like a car dealer makes it easier to buy or sell a car quickly,” said Jim Angel, an associate professor specializing in market structure at Georgetown University.
Knight Capital is a giant in the field; it alone was responsible for 11 percent of all trading in U.S. stocks by volume as of 2012. It’s known in particular for speed. The ability to jump in and out of stocks quickly through electronic markets is attractive to customers and enables Knight to trade nearly $30 billion every single day. “Market making is a business where the spreads are small but the volumes are large,” Angel said. The spread is the difference between the buy price and the sell price, and it’s how Knight makes money.
DiIorio looked closely at how Knight operated. He determined that between 80 and 90 percent of its share volumes came from penny and fractional penny stocks. According to DiIorio’s calculations, Knight traded over 10 trillion shares of OTC and Pink Sheets securities from 2004 to 2012.
This level of volume persists — the most recent statistics show that 73 percent of the company’s equity share volumes in August 2016 came from penny stocks, and 81 percent as recently as May.
A share in a penny stock is worth magnitudes less than a share in Google or Apple. But the spreads — where the market makers cash in — are proportionately bigger on a penny stock. For example, if the market maker earns a penny per share of a $50 stock, that’s only a spread of .02 percent. But a stock worth 25 cents where a market maker sees even a tenth of a penny in profit represents a spread of 2 percent — a 100-fold increase.
Still, DiIorio wondered how much volume a broker would need to make any money through penny stock trading. “You would have to move hundreds of millions of shares per trade,” he said.
And, because his personal investigation had started after his shares in a company called Best Rate Travel tanked precipitously, he also wondered: Why was Knight so involved with them in particular?
While DiIorio was mulling that, he started talking to his fellow traders and reading rumors online from owners of dozens of small companies who blamed the rapid destruction of their penny stocks on a practice known as naked short selling.
Let’s take that step by step. A short sale, generally speaking, is a bet that a stock price will drop over time. Typically, short sellers borrow shares of a stock from a broker and sell them on the open market, hoping to buy them back at a cheaper price in the future and make money on the exchange. This can become a self-fulfilling prophecy, if done right. Short selling can cause a market panic, and the prices drop in the frenzy.
But in naked short selling, you don’t even borrow the stock. You sell additional, phantom shares. This is even more likely to drive down the price than regular shorting, because suddenly the supply is larger but the demand is the same. “I can think of a number of stocks where the shares on the short exceeded the shares ever issued by the company,” said Alabama Securities Commission Director Joseph Borg. “You can’t do that unless it’s naked.”
Naked short selling is, not surprisingly, illegal in most circumstances.
But market makers like Knight have an exemption from naked short selling restrictions, on the grounds that they use the practice to maintain liquidity in markets. For example, if there’s high demand for a stock, the market maker can fill orders even if it doesn’t have the shares available.
As the Securities and Exchange Commission explains, “A market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.” This often occurs in thinly traded stocks, like penny stocks.
DiIorio reasoned that naked short selling would explain where all the trades were coming from on Best Rate Travel; while he and his counterparts were locked into their investments for a year after the company’s merger, maybe someone was flooding the market with shares and battering the stock with ease.
At this point, DiIorio had no evidence that Knight did anything but facilitate trades. But he began to suspect that Knight somehow used naked short selling for its own devices. DiIorio’s attempts to get some explanations from Knight were brushed off — as were The Intercept’s during the reporting of this series.
Did Knight manipulate the stock price of Best Rate Travel, costing DiIorio and other investors millions? If so, why? Who benefited? Who needed this obscure, tiny penny stock to tank?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/23/big-players-little-stocks-and-naked-shorts/
======================
THE MONEY IS GONE
David Dayen
Sep. 22 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 1
After a stock analyst lost $1 million on one penny stock, he set off to find out how — and soon discovered signs of a far bigger scheme than he had ever imagined.
CHRIS DIIORIO HAD just lost a million dollars.
This was back in 2006. DiIorio, who was 39 at the time, had recently moved with his new wife from Boston to Castle Pines, Colorado, a leafy suburb of Denver, and was toiling in finance as a market researcher, analyzing the financial statements of public companies and giving recommendations to portfolio managers.
He had previously worked on Wall Street as an institutional equity trader and research analyst for a subsidiary of the now-defunct investment bank Donaldson, Lufkin, and Jenrette. He had 13 years experience executing massive trades for large mutual fund clients like Fidelity and Putnam.
But in his new life, DiIorio happened upon a technology company called E Mobile (symbol: EMTK), a small computer chipmaker that claimed to hold patents on an antenna-type Wi-Fi router and other products. He reviewed company press releases, as well as investor chatter online claiming that E Mobile’s chips were provoking interest from Chinese content companies.
E Mobile didn’t trade on the New York Stock Exchange or Nasdaq, however. It was an over-the-counter stock, traded on an electronic exchange called the Pink Sheets that is home to what are commonly called “penny stocks.”
A penny stock is actually any equity that trades for $5 a share or less. But many shares can be had for a literal penny, or even a fraction of one. They are purchased on the Pink Sheets and the over-the-counter Bulletin Board market, through your regular brokerage account.
Not every penny stock is suspect; some are simply startup companies working their way to larger exchanges. But they do lurk on the dark edges of the financial markets, with sudden volumes and massive volatility. Regulation and reporting vary from light to nonexistent.
“They don’t have the same standards,” said Joseph Borg, director of the Alabama Securities Commission, who achieved fame by investigating Jordan “The Wolf of Wall Street” Belfort’s company Stratton Oakmont for penny stock fraud in the 1990s. “Willie Sutton said he robbed banks because that’s where the money is. This is the easiest place to manipulate something.”
The Pink Sheets’ own website warns that it “offers trading in a wide spectrum of securities” and that “With no minimum financial standards, this market includes foreign companies that limit their disclosure, penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide adequate information to investors. As Pink requires the least in terms of company disclosure, investors are strongly advised to proceed with caution and thoroughly research companies before making any investment decisions.”
But DiIorio didn’t know that at the time.
On Wall Street, he had executed multimillion share trades, usually of blue chip companies that make up the Dow Jones Industrial Average, like IBM or General Electric.
“I had never invested in a penny stock before,” DiIorio said. “I was not super sophisticated in this world.” But he decided to take a flyer on E Mobile, based on its promising news. “I bought this company on hype.”
Between February and May 2005, DiIorio bought over 3.7 million shares of E Mobile, mostly through his rollover IRA account with TD Ameritrade. The total cost: $100,000, or a little over 3 cents a share. It was a big position, but this was retirement money he was trying to grow, and if it paid off, the payday would be tremendous.
E Mobile bounced around for a year, not doing much. The CEO, Nan Hu, personally called DiIorio, asking him to invest more through a “private placement”: an off-market offering of stock to select investors.
DiIorio declined. “I was already up to my eyeballs. I said, ‘I’m good with my position.’” Attempts to reach Hu for comment were unsuccessful.
Then, in March 2006, E Mobile announced a “reverse merger” with Best Rate Travel, a private company specializing in online vacation booking. Adrian Stone replaced Hu as CEO. To DiIorio, it was a puzzling maneuver for a chipmaker. “They announced a merger with a travel company?” he said. “What the fuck?”
As part of the merger, E Mobile changed its name to Best Rate Travel, altered its stock ticker symbol to BTVL, and did a 1-1,000 “reverse stock split.”
You’ve probably heard of a stock split; it can happen when a company’s share price gets unmanageably high. So when a stock hits, say, $200, investors who owned one share receive two, each priced at $100.
Well, the opposite can happen, too. Best Rate Travel’s reverse split gave existing investors like DiIorio way fewer shares — at a way higher price.
As a major shareholder, DiIorio was offered a slightly better deal: a conversion to preferred shares of E Mobile at a lower reverse split rate of 1-to-30, and then a conversion at 3-to-1 to Best Rate Travel. After all that, he was left with 373,599 BTVL shares.
The merger hype, repeated in a feedback loop of positive press releases, moved the stock. DiIorio recalls it peaking at $3.50 by September 2006, giving his holdings a value of around $1.3 million.
“I thought this was the exception to everything I knew about the markets,” DiIorio said. “Cheap stocks are cheap for a reason.” But the success fed DiIorio’s ego. He felt like he beat the odds, vindicating his stock-picking acumen.
There was a problem, however. Best Rate Travel structured the conversion with a “lock-up” agreement, restricting shareholders like DiIorio from selling the stock for a year. This is common for newly public companies.
But it left DiIorio helpless when the stock plummeted from $3.50 to $0.06 a share within two months.
DiIorio initially saw it as a classic “pump-and-dump” scheme, where major investors in a company lure in other investors with overhyped claims, raising the stock price, and then sell their shares, leading to a drop. Pump-and-dumps have proliferated with the rise of internet message boards. “It’s not just promoters calling you on the phone anymore,” said Laura Posner, bureau chief of the New Jersey Bureau of Securities. “People pretend to be other people, pretend to have inside information.”
But to DiIorio, BTVL’s drop didn’t make sense, because prior shareholders were prohibited from trading the stock. “I called the CEO regularly and said: ‘Who’s selling the stock? How is this happening? The stock is not for sale.’ He told me that he was locked up too.” Phone numbers and email addresses listed for CEO Adrian Stone no longer function, so he could not be reached for comment.
By the end, DiIorio took a loss from the peak stock value of well over $1 million. “I never saw such devastation in a stock before,” he said.
A Real Head-Scratcher
DiIorio prided himself on being a savvy trader.
And the implosion of Best Rate Travel, given the lock-up period, shouldn’t have occurred. DiIorio wanted to understand what really happened to crush his investment so completely. And he had the background in financial market analysis to see it through.
So DiIorio started learning what firms traded Best Rate Travel. The biggest two by far were the giant Swiss bank UBS and a massive New Jersey-based company named Knight Capital.
He thought these were very big names to be involved in such an obscure penny stock.
Something fishy was going on, but DiIorio had no idea what. “I just thought, what the hell, I’m going to figure this out.”
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/22/the-money-is-gone/
original link courtesy of basserdan
====
4kids
WERE PAPER LOSSES THE GOAL ALL ALONG?
David Dayen
Sep. 27 2016, 12:23 p.m.
The Penny Stock Chronicles
Part 6
If your goal is to launder money through a brokerage account, paper losses are worth serious money. Buying imaginary shares of a stock guaranteed to lose value is an awesome way to do that. You just need someone to set it up.
SAY YOU’RE A Swiss bank and you want to launder some money for high-net-worth clients.
Here’s one way: Start by placing large quantities of the funds into a brokerage account at the bank under the name of a shell corporation.
Then, conduct multiple financial transactions with the funds, confusing the true source of the money. Once the transactions “wash” the money, it can be spent out of the brokerage account as simply as writing a check or using a credit card.
Wealthy clients will pay handsomely for this activity. Not only do they get access to funds laundered through the banking system, but by placing the money offshore in a shell corporation, they can avoid taxation in their host country. “Money laundering is tax evasion in process,” said John Cassara, a 26-year intelligence and law enforcement official and former special agent for the Treasury Department. “Shell companies make it more complicated to figure out who that money belongs to and where it’s going.”
UBS, the giant Swiss bank that self-appointed investigator Chris DiIorio suspected was part of the kind of penny-stock manipulation that wiped out his penny-stock investment in 2006, has a checkered history with these types of activities.
The bank entered into a deferred prosecution agreement with the Justice Department over cross-border activities for its clients in February 2009, paying a $780 million fine. UBS admitted that it established secret accounts for roughly 17,000 wealthy American clients “in the name of offshore companies, allowing United States taxpayers to evade reporting requirements and trade in securities as well as other financial transactions (including … using credit or debit cards linked to the offshore company accounts).”
The government dismissed criminal charges against UBS in 2010, claiming the bank had fully dismantled its cross-border tax evasion activity.
DiIorio believes UBS never stopped. Years of digging through public records and connecting dots led him to that conclusion.
But this is also where DiIorio’s accusations get considerably harder to substantiate, and his theories start to multiply, sometimes even contradicting one another.
His suppositions up to this point come with swaths of data that bolster them. From this point onward, DiIorio’s main argument is the absence of alternate explanations.
Here, however, is the way DiIorio thinks it worked — and continues to work: UBS clients use their brokerage accounts to invest in penny stocks issued by companies that appear to conduct no business activity and have no revenue potential — all they do is issue billions of shares of stock. These stocks, he figures, are the same ones Knight Capital is naked shorting: selling shares it doesn’t really have.
UBS’s clients, according to DiIorio, purchase the penny stocks because they know they will drop in price. That way, they can use capital losses to offset any capital gains in the brokerage account, “resulting in a reduction in their reported income-tax liability and the underpayment of millions in taxes,” according to DiIorio’s 2013 complaint to the SEC.
That happens at the same time that the money placed in the brokerage account is being commingled with the various trades, he argues — effectively laundering it.
The IRS rarely suspects trading in equity markets is a vehicle for money laundering or tax evasion, because it assumes stock investors are trying to make money. “It’s a lot more efficient than stuffing diamonds into toothpaste,” DiIorio says.
In fact, illicit financial flows through brokerage accounts are rarely scrutinized at all. “In federal law enforcement, we have skilled people, but we have a whole lot of people in there, they don’t get the securities markets,” said Cassara, the former Treasury agent. “They don’t get trade-based money laundering. The bad guys know this so they pile on the layering.”
He cited statistics from Raymond Baker, president of the research group Global Financial Integrity, that indicate money-laundering enforcement fails 99.9 percent of the time. “I use his line, total failure is only a [decimal] point away.”
DiIorio argues that client losses from the drops in value of the penny stocks are a small price to pay for the layering activity and tax avoidance. That’s if they’re even losses at all. Because if the stock shares never really existed, maybe the payments never happened either.
In fact, DiIorio also alleges that many of the transactions go through outside hedge funds, which convert promissory notes from the penny stock companies into equity, in private stock offerings. (The CEO of E Mobile tried to sell DiIorio a private placement back in 2006, you may recall.)
Normally, a company issues a promissory note in return for cash — the note representing a promise to pay it back later, plus interest. But some notes, called convertible promissory notes, are also convertible to stock.
DiIorio claims that in some cases, penny stock issuing companies were simply creating convertible promissory notes as a way of issuing more stock. The funds from these investments never appeared on the balance sheet of the companies — suggesting that no money changed hands for the purchase of the note, which was then converted to stock. That would make the losses merely on-paper losses: a classic tax evasion play.
One example DiIorio provides comes from FreeSeas, the shipping company referenced earlier (see The Penny Stock Chronicles, Part 3). It engaged in four convertible promissory note sales with stated values of between $500,000 and $600,000 in five months in 2015, with Alderbrook Ship Finance Ltd. (April), Casern Holdings Ltd. (June), the AMVS Value Fund (July), and Casern again (September). Alderbrook Ship Finance didn’t exist until two days before the sale; AMVS had a lifespan of four days before it purchased FreeSeas’s promissory note. The two companies share the same Toronto address and the same director, Justine Kerrivan of Ber Tov Capital. And despite all the cash flow, FreeSeas only had $20,000 cash on hand at the end of 2015, per its annual SEC filing.
“FreeSeas is a structured tax evasion/money laundering scam being perpetrated on the investing public as we speak,” DiIorio wrote in an email to SEC officials last September.
A contact for Casern, a company incorporated in the British Virgin Islands (a location notorious for shell corporations), did not respond to a request for comment. Ber Tov Capital, the company that apparently set up Alderbrook and AMVS, also declined to comment.
DiIorio jumps back and forth in his claims. Sometimes he says there’s no money changing hands, just a bunch of paper losses. Sometimes he says there are some losses, but less than the tax liability avoided. And sometimes he says the losses are real, but worth the cost in exchange for laundering large sums of money. To DiIorio, it’s all variations on the same basic scheme: using sham companies and stock manipulation to generate losses on purpose, tailored to clients’ individual needs.
The Intercept asked UBS about all of these allegations. The only response, from Director of Media Relations Peter Stack, came in a single line: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Collateral Damage
DiIorio’s initial investment in 2006 — where the on-paper value dropped from $1.3 million to next to nothing in a matter of months — was a fluke, he now believes. Sure, naked shorting rips off investors, but that’s not the true aim. In his view, penny stocks like FreeSeas or NewLead or Colorado Goldfields were structured tax evasion vehicles for the benefit of unknown people with money looking to hide their activities.
He was unlucky enough to be collateral damage.
The theory has an internal logic to it but is based on a fair bit of speculation. While trading activity can be used to launder money, some experts argue there are far simpler ways to do so instead of actually losing a share of the money to throw regulators off the trail.
For example, Jack Blum, a former U.S. Senate investigator and white-collar crime expert, suggests that launderers can more easily wire money through international markets, use bogus tax shelters, or even lend themselves money to buy property while falsifying the records of the transfer. (“Each case requires a small book to explain,” he said.)
And none of those tactics involves actually losing money intentionally. Even in his complaint to the SEC, DiIorio acknowledged that he was “alleging a massive and nefarious conspiracy based, at least in part, on circumstantial evidence.” And in a separate complaint, he admitted that he does not have the taxpayer records that would be critical to pinpointing the scheme.
But John Cassara found the theory relatively plausible. “People do what they know,” he said. “If you’re talking about financiers that work in a world I can’t relate to, for them it may be, let’s construct this financial instrument, this trade, I’ll work with my guy, a wink and a nod and it’s done.”
Furthermore, many of the facts DiIorio based the alleged conspiracy on checked out. There was an array of penny stocks that kept undergoing reverse splits. Knight and UBS did trade in them. Knight’s balance sheet appeared to expand strangely, including an increase in the “sold not yet purchased” liability. And UBS had a history of helping its clients evade taxes, often through shell corporations.
UBS’s admission and fine in 2009 came only after whistleblower Bradley Birkenfeld, a former UBS banker, divulged the schemes that the bank used to encourage American citizens to dodge their taxes. But Birkenfeld’s information exposed the undeclared bank accounts. “How did the cash get there, and how do they get the cash back?” DiIorio said. “I explained how.”
DiIorio added UBS to his list of claims with the SEC. The list would grow over the years to take in several of the microcap stocks the bank traded, such as FreeSeas and NewLead. DiIorio amended his initial complaint in November 2011 and continued to send dozens of emails directly to SEC officials, including Chief of the Office of the Whistleblower Sean McKessy and even Chair Mary Schapiro. But the SEC remained mute.
The SEC wouldn’t answer our questions, either. And through spokesperson Sophie Sohn, Knight also declined to comment for this story.
And then something happened that changed DiIorio’s entire perception of how the securities regulators were dealing with his claims. He went from thinking that the SEC and its counterparts just didn’t understand the sophisticated scheme — to believing they were waving it through.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/27/were-paper-losses-the-goal-all-along/
==========================
TURNING UP LIKE A BAD PENNY
David Dayen
Sep. 26 2016, 11:53 a.m.
The Penny Stock Chronicles
Part 5
The penny stock Chris DiIorio invested in that crashed and burned was one of many stocks with similar trajectories traded by the same two giant companies. But if one was the buyer and the other the seller, how could this be in both of their interests?
ONE SUMMER DAY in 2012, Chris DiIorio pulled up outside a home that Colorado Goldfields Inc., a mining company in Littleton, Colorado, listed as the home address of its chief financial officer, Stephen Guyer.
DiIorio — whose investigations into the penny stock market dated back six years, to when his own investment swelled up before losing $1 million in value in two months — had already determined through property records that Guyer didn’t own it.
As he approached the front door, he found the shades drawn and no sign of life in the house. “It looked like the only thing active was the mailbox,” DiIorio said.
Colorado Goldfields, originally listed on the over-the-counter market as CGFIA, has traded at or below $0.01 since September 2013, making it a quintessential penny stock, one of the many DiIorio researched for years before making a formal Securities and Exchange Commission complaint about a potential wide-ranging fraud scheme.
(In an interview with The Intercept this month, Guyer said that he rented the property DiIorio visited because his association with the company wiped him out financially. “The company is in a total neutral situation,” Guyer said, citing active litigation with the former leadership.)
Like many of the penny stocks DiIorio had determined that the giant New Jersey-based financial firm Knight Capital actively traded, Colorado Goldfields stock had been placed on the Depository Trust Company’s “chill list.” Public records indicate that Knight traded 8.5 billion shares of CGFIA stock in 2012 — 31 percent of the total share volume — after the stock was placed on the list in May 2011.
The chill is given to stocks for various reasons, including displaying suspicious activity.
Guyer criticized the DTC for “acting arbitrarily” in chilling Colorado Goldfields. But the chill may have been issued because the company appears never to have mined any gold or other precious metal. Indeed, its most recent annual SEC filing, in 2013, states, “We have not generated revenue from mining operations.”
Guyer acknowledged that the company was always pre-revenue, claiming that project-level funding that would allow mining to commence would always fall through right before the transactions completed.
Along with this run of bad luck, Colorado Goldfields’s main activity seems to be generating press releases, announcing the acquisition of mines or approval to begin work at an existing mine. DiIorio found several of these press releases, which the company began issuing in 2007; in at least one instance, the company announced the same acquisition in separate press releases more than a year apart. (Guyer explained that “in those cases, we were announcing contracts that were entered into and weren’t closed.”) Yet the press releases would lure investors into the stock and the stock price would fall, to the benefit of the stock’s manipulators — and Knight Capital, according to DiIorio.
It’s not uncommon for new companies, even ones publicly traded over the counter, to show no revenue for several years. After all, the majority of startup businesses fail. But not all of them embark on a frenzy of stock issuance.
Between 2008 and 2012, Colorado Goldfields authorized the issuance of an amazing 35 billion shares of stock, while the stock price moved from $3 a share on June 15, 2007, to $0.01 on April 2, 2009, staying at or below a penny for three years, despite enormous trading volumes (over 1.4 billion shares moved in just four days of trading in August 2012).
Asked about the massive stock issuance, Guyer said, “There was significant trading. A lot of that came from conversion of debt.” In other words, Colorado Goldfields would pay off creditors with IOUs that they could convert into stock — and Guyer claimed a lot of the stock issued came from them. “Once put in place, those conversions go out of the company’s control. As it converts, it does put downward pressure on [the stock] price.”
That’s exactly the kind of behavior DiIorio suspected was taking place with Best Rate Travel, the stock whose collapse launched his personal investigation.
In August 2012, Colorado Goldfields announced a reverse split of its common shares at 1-to-5,000, just the sort of activity DiIorio had noticed in other stocks. After the reverse split, the company was issued a new nine-digit identification code, or CUSIP, and began trading as CGFI.
That aligned with another of DiIorio’s claims: He suspected that Knight was “naked shorting” — or selling shares of stock it didn’t have — and then once the stocks changed ID codes, Knight had no way of actually completing the transaction. As a result of the new CUSIP, Knight would as a result accumulate what are known as “aged fails” on its balance sheet.
Colorado Goldfields had a particular distinction, which is what aroused DiIorio’s interest in the first place: Two of its top traders were Knight Capital and UBS, the massive Swiss bank. Knight traded 31 percent of its shares in 2012; UBS traded around 5 percent. (Guyer said he didn’t recall the trading volumes of Knight or UBS.)
This correlation between Knight and UBS was not an anomaly. According to DiIorio’s research, Knight and UBS were also the top two traders in 2012 in Universal Detection Technology (UNDT) (totaling 69 percent of all shares), and the top two traders in Sungro Minerals (SUGO) (totaling 51 percent). Like Colorado Goldfields, both of these companies appeared on the DTC chill list, and admitted in SEC filings that they’ve never generated significant revenue — but they’ve issued billions of shares of stock.
The Canadian B.C. Securities Commission began investigating Sungro for a suspected stock scam in 2009. Canadian authorities fined three of the men involved and banned them from future trading, and the company is now defunct. The phone number listed on UNDT’s annual report is no longer in service.
Knight and UBS even traded a stock called Videolocity (VCTY), though the Pink Sheets website refuses to list information about it, showing only a skull and crossbones. Videolocity, a consulting firm whose website is in Japanese (and mostly discusses cat food) despite being incorporated in Nevada, did not return a request for comment.
“It strains credulity for these two large market players [Knight and UBS] to coincidentally find themselves in bed together this many times,” DiIorio wrote to the SEC in 2013.
Knight declined to comment on its penny stock share volume. UBS spokesperson Peter Stack would only say, “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Several penny stocks Knight and UBS traded shared similar fates: rapid drops in value, followed by reverse splits that brought the stock price back up, and then more drops in value. The only thing left was to figure out how both Knight and UBS could prosper while seemingly being on opposite sides of the same trade. How could this possibly be in both of their interests?
This yo-yo would crush the investment of whichever company was on the side of the trade betting the price would go up.
DiIorio came up with a hypothesis after he read the text of an enforcement action against UBS in October 2011 taken by the Financial Industry Regulatory Authority, or Finra, which is the security industry’s self-regulatory organization. Finra had fined UBS $12 million for violations of regulations prohibiting abusive naked shorting and “failing to properly supervise short sales of securities.”
This was precisely what DiIorio had accused Knight Capital of doing. Finra discovered that UBS placed “millions” of short sale orders without locating the securities.
The SEC, in a separate action, merely called it “faulty record-keeping” and fined UBS just $8 million in a civil settlement without going to court. “They basically punted,” DiIorio said.
But finding out that UBS had been accused of the same issues with short sales that he saw in Knight gave DiIorio an idea for a theory that could explain everything.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/26/turning-up-like-a-bad-penny/
============================
CALLING THE SEC
David Dayen
Sep. 25 2016, 1:00 p.m.
The Penny Stock Chronicles
Part 4
Penny stock gadfly Chris DiIorio tells the SEC about his suspicion that Knight Capital is tanking penny stocks on purpose and racking up unsustainable balance-sheet liabilities. But that leads to another mystery: Why don't they seem to care?
CHRIS DIIORIO SUSPECTED major broker-dealer Knight Capital of tanking penny stocks on purpose and racking up massive, unsustainable balance-sheet liabilities based on all the stocks it “sold” that it never really had.
It had taken him five years to reach these conclusions — five years of digging through reams of financial data in search of answers to how and why his particular penny stock investment was so brutally crushed. Knight never answered DiIorio’s questions, nor, during the reporting of this story, any of The Intercept’s.
“The core business at Knight has always been naked shorting penny stocks,” DiIorio asserted.
Shorting a stock is betting it will drop in price: You borrow a share, sell it, hope the stock price drops, then buy another share to pay back your loan, hopefully for less than you borrowed it for.
In naked shorting, you sell a share that doesn’t exist and cash the proceeds. Do that enough and you bet the price will drop. Set it up so that it looks like you really sold the share to everyone except an obscure middleman, and the only toxic byproduct is a liability on your balance sheet representing shares you have sold but not yet purchased.
DiIorio believed this represented the secret of Knight’s success. “I told the SEC, ‘If you don’t believe me, ask Knight!’ If their penny stock volumes went to zero, what would happen to their trading profits?”
photo4 Photo: Richard Drew/AP
DiIorio filed a TCR (tip, complaint, or referral) form. Under Section 922 of the Dodd-Frank Act, the SEC has the authority to provide substantial monetary awards to eligible whistleblowers who inform the agency of securities law violations, if the subsequent enforcement actions exceed $1 million. But DiIorio says he wasn’t trying to win back his losses by filing a whistleblower complaint; he just wanted to see the ongoing fraud of investors like him put to a stop.
He also pointed to the threat to the markets from Knight’s thinning capital compared to the billion-dollar-plus “sold not yet purchased” liability. “I said, ‘Knight is insolvent, and this is how I know.’”
Indeed, the firm’s own second-quarter 2011 report to the SEC clearly showed $1.9 billion in “sold, not yet purchased” liabilities — up from $1.3 billion just six months earlier. By contrast, it reported “net current assets, which consist of net assets readily convertible into cash less current liabilities, of $105.1 million.”
Other than a perfunctory acknowledgement of receipt, the SEC did not respond to the TCR. DiIorio sent personal emails to top officials at the agency. One still exists on the SEC’s website, an October 2011 letter to Robert Khuzami, then the SEC’s head of enforcement. “Why won’t [then-Knight CEO Thomas] Joyce disclose to the investing public the nearly [$2 billion] sold not yet purchased liability is where he moves aged fails,” DiIorio wrote. “It is a structural liability and does not in fact ‘fluctuate with volumes’ as [Joyce] has said in several public filings.”
In this case, aged fails are the obligation left over when the stock whose shares the seller was supposed to actually hand over no longer exists because of a merger or split.
SEC spokesperson Ryan White declined to comment on the matter. As a matter of policy, the SEC never confirms nor denies the existence of an investigation until it reaches the public record in a court action or administrative proceeding, and it usually doesn’t inform whistleblowers about the status of their cases unless it grants them an enforcement award.
But DiIorio grew frustrated with the lack of response. “I was baffled why the SEC was not acting on what appeared to be blatant securities violations,” he said.
What About UBS?
He used the delay, however, to clear up another nagging question: What about the other major trader in these penny stocks, the Swiss bank UBS, one of the largest private banks in the world?
Time after time, DiIorio would isolate individual penny stocks and find UBS and Knight as major traders in them. While it wasn’t possible to know for sure, the correlation suggested that UBS was repeatedly on the other side of Knight’s trades; its clients would go long while Knight’s would go short. If true, that meant UBS, or its clients, were taking on multitudes of losses by design.
Why was UBS so involved with penny stocks, which had little upside potential for a global megabank? Why was it so intertwined with Knight? Who was it purchasing these penny stocks for?
And why didn’t the bank seem to care that its clients were being sold stock that kept going down in value?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/25/calling-the-sec/
====================
NAKED SHORTS CAN’T STAY NAKED FOREVER
David Dayen
Sep. 24 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 3
Who engages in massive trades in penny stocks on the industry’s own “chill list”? And what happens when you sell a stock you don’t have? Victimized investor Chris DiIorio finds the answers in plain sight and wonders why no one else seems to care.
A FEW YEARS into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them.
Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients.
As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it.
DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.
His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.”
The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock.
But when the DTC senses trouble, it will stop clearing trades on a stock temporarily.
A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.”
That doesn’t stop Knight from buying and selling them, though. Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks.
“I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.”
He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.”
Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.
Naked Manipulation
The thing about naked short sales is they can’t stay naked forever.
Even if you don’t have the stock when you sell it, at some point it is expected that you hand it over.
And even with its market-maker exemption, Knight is required by SEC rules to eventually deliver the shares in a naked short transaction to the buyer and close out the trade.
Not doing so results in a “fail to deliver,” which DiIorio describes as the securities version of an IOU. And that IOU comes with rules: Under the SEC’s Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail. Routine failures to deliver can lead to fines by the SEC, or even a ban from the securities markets.
Instead of complying with the rule, however, DiIorio alleges that Knight circumvented it by manipulating an obscure process within the machinery of the nation’s clearing system known as the “Obligation Warehouse.”
This service facilitates the matching of self-cleared trades (often known as “ex-clearing”) that don’t go through the DTC — for instance if the stock was chilled.
The Obligation Warehouse instead simply asks the buyer and seller of these ex-cleared trades if they “know” the transaction. If they both agree, the trade gets confirmed with a journal entry — and the buyer receives their stock purchase. It actually shows up in the buyer’s brokerage account.
The trades still have active IOUs, but according to DiIorio’s theory, buyers wouldn’t clamor for the trades to be closed because they would’ve already received their purchase.
If true, this would allow Knight to bury its naked short trades.
“They set up a shadow clearing system,” DiIorio said.
Furthermore, DiIorio recognized what he considered a persistent cycle in the stocks Knight traded. After being beaten down through what he suspected was naked shorting, they would often engage in a reverse stock split or reverse merger, like E Mobile did with Best Rate Travel in the trade that ended up losing DiIorio over $1 million.
This, he observed, could enable Knight to rerun the scheme over and over again, pummeling the stock price and then letting it move back up like a yo-yo.
Laura Posner of the New Jersey Securities Commission said constant reverse splits would require a coordinated relationship between the penny stock issuer and the broker-dealer. “I know that there are situations in which fraudsters will take advantage of a stock split to commit fraud,” Posner said. “But it’s different than a typical pump-and-dump, where you don’t have to have a personal relationship.”
Alternately, the cycle could be a cat-and-mouse game playing out between the short sellers and the stock issuers. Hawk Associates, a consulting firm to small companies, recommends that penny stock issuers victimized by naked shorting engage in reverse mergers and/or reverse splits to stop the rapid degradation of their stock price. “It may be useful as part of a larger strategy to deter naked shorting,” the firm writes on its website. “This may be more trouble than it’s worth, however. Once the new shares are in circulation, there’s nothing to stop a new round of naked shorting by determined parties.”
Knight’s involvement with suspicious stocks following this same pattern kept cropping up.
For example, NewLead Holdings (NEWL) — a shipping company with a mining concern on the side that was accused in federal court of having “no coal mines, no coal, and no ability whatsoever to engage in the coal business” — engaged in 1-1,125,000 worth of reverse splits over nine months in 2013 and 2014, meaning that 1,000 shares prior to the splits were equivalent to 0.0008 shares afterward. NewLead did another 1-300 stock split just this spring; it now trades as NEWLF, at 0.00030 as of August 23. Its 2015 annual report admits, “There is substantial doubt about our ability to continue as a going concern.”
FreeSeas (FREE), another penny stock, did a 1-60 reverse split on January 15 of this year, and then another 1-200 split on April 13, changing its stock symbol to FREEF. The company has engaged in seven reverse splits in the last five years; someone with 900 million shares five years ago would have one share today, trading at less than a penny. The company’s annual report says it currently has no employees. Private equity firm Havensight Capital made an alleged bid to purchase FreeSeas in June at $0.43 a share, about 80 times its price at the time of this writing, which FreeSeas called “false and misleading.”
While one might think this cycle of splits and price declines would trigger red flags with federal regulators, Joseph Borg of the Alabama Securities Commission doubted they would pay attention. “It’s like asking the SEC, of all the 35,000 private placements issued, you look at how many? And if they were telling the truth they would say we’re putting them in a drawer,” Borg said. “Anything like that on miniscule levels, they just get filed away.”
Furthermore, while there are “circuit breaker” rules preventing short sales when a stock loses more than 10 percent of its value in a day, these swings were more gradual. Knight made a lot of money on these plays, not just from the spread in trading profits, but because it often traded on its own account rather than on behalf of customers, DiIorio concluded. When the stock dropped, Knight got rich from the short. And it could rerun this repeatedly.
“He’s got a theory that, without studying it, I see theoretically where he’s going with it,” concluded Borg. “It’s an interesting idea.”
Knight is now known as KCG. Its spokesperson Sophie Sohn declined to comment when asked about this and other matters.
Attempts to reach spokespeople at FreeSeas have proven unsuccessful. Elisa Gerouki, corporate communications manager at NewLead, asked me to prove he wrote for The Intercept; after I did so, Gerouki failed to respond to questions.
Where Naked Shorts Go to Die
DiIorio also spotted a significant, seemingly toxic byproduct of this sort of activity.
The Intercept.Reverse mergers and reverse splits typically result in a change in the CUSIP, the nine-digit identification symbol assigned to a public stock.
Once that CUSIP changes, the naked shorter has no apparent way to close out the naked short position. No stock under the old CUSIP number exists anymore; it all automatically converts to the new CUSIP.
Those trades can sit in the Obligation Warehouse forever, in theory. But the “aged fails” — essentially orphaned naked short transactions — remain on the naked shorter’s balance sheet as a liability to be paid later.
By DiIorio’s reckoning, then, the cycle of naked shorting and reverse splits would inevitably result in an ever-increasing number of aged fails. And if that was happening, and those liabilities grew bigger and bigger, then federal regulators could see the outlines of the scheme on any financial statement.
DiIorio believed Knight accounted for its aged fails in the “sold not yet purchased” liability on its balance sheet. That’s supposed to be an inventory of stocks for use in future market making, which goes up and down as orders are filled. But DiIorio says it was a hiding place for a billowing structural liability.
And consider this: According to its own financial reports, Knight’s “sold not yet purchased” liability jumped from $385 million at the beginning of 2008 to $1.9 billion by mid-2011.
Jim Angel, the business professor, said there could be other explanations — such as Knight’s growth as a company during that period — for why the “sold not yet purchased” liability ballooned. But, he said, market makers are typically “in the moving, not storing, business, and like to keep their inventories as small as possible.”
DiIorio had no such doubts. He saw the fact that Knight was blowing a hole in its own balance sheet as undeniable evidence of the naked shorting play.
KCG spokesperson Sophie Sohn was asked specifically about that claim and declined to comment.
If DiIorio was correct, Knight was driving penny stocks down over and over again with naked shorting, then not actually closing the trades, and racking up enormous paper liabilities.
This was even more complicated than he thought. It was time to call the cops.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/24/naked-shorts-cant-stay-naked-forever/
=====================
BIG PLAYERS, LITTLE STOCKS, AND NAKED SHORTS
David Dayen
Sep. 23 2016, 12:16 p.m.
The Penny Stock Chronicles
Part 2
A self-appointed stock sleuth finds financial giants trading extensively in little penny stocks like the one he owned that tanked. And he learns something amazing: Some brokers can sell shares that don’t actually exist.
CHRIS DIIORIO HAD lost a million dollars when the penny stock he was betting on shed 98 percent of its value in a matter of weeks. But when he looked deeper, he found this wasn’t a typical penny stock pump-and-dump scheme. He was determined to get to the bottom of it.
For one thing, there were two huge companies involved.
UBS, one of the world’s largest private banks, seemed to have no business trading in penny stocks. “This was a $50 billion-plus bank, it didn’t seem like penny stocks would move the needle,” DiIorio said. But just in December 2011, UBS’s trades in 32 penny stocks represented over half of the firm’s total share volume, according to his calculations.
In a one-line response to a series of detailed questions from The Intercept, UBS media relations director Peter Stack wrote in an email: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
After some research, DiIorio became even more disturbed by the presence of the other company, Knight Capital, which has traded an average of more than 2 billion shares of penny stocks daily for the past three years.
Based in Jersey City, N.J., Knight is what is called a “market maker,” a dealer that facilitates trading by actually holding shares itself, if ever so briefly, so investors can buy and sell without any delay. “They’re selling the service of convenience to investors, like a car dealer makes it easier to buy or sell a car quickly,” said Jim Angel, an associate professor specializing in market structure at Georgetown University.
Knight Capital is a giant in the field; it alone was responsible for 11 percent of all trading in U.S. stocks by volume as of 2012. It’s known in particular for speed. The ability to jump in and out of stocks quickly through electronic markets is attractive to customers and enables Knight to trade nearly $30 billion every single day. “Market making is a business where the spreads are small but the volumes are large,” Angel said. The spread is the difference between the buy price and the sell price, and it’s how Knight makes money.
DiIorio looked closely at how Knight operated. He determined that between 80 and 90 percent of its share volumes came from penny and fractional penny stocks. According to DiIorio’s calculations, Knight traded over 10 trillion shares of OTC and Pink Sheets securities from 2004 to 2012.
This level of volume persists — the most recent statistics show that 73 percent of the company’s equity share volumes in August 2016 came from penny stocks, and 81 percent as recently as May.
A share in a penny stock is worth magnitudes less than a share in Google or Apple. But the spreads — where the market makers cash in — are proportionately bigger on a penny stock. For example, if the market maker earns a penny per share of a $50 stock, that’s only a spread of .02 percent. But a stock worth 25 cents where a market maker sees even a tenth of a penny in profit represents a spread of 2 percent — a 100-fold increase.
Still, DiIorio wondered how much volume a broker would need to make any money through penny stock trading. “You would have to move hundreds of millions of shares per trade,” he said.
And, because his personal investigation had started after his shares in a company called Best Rate Travel tanked precipitously, he also wondered: Why was Knight so involved with them in particular?
While DiIorio was mulling that, he started talking to his fellow traders and reading rumors online from owners of dozens of small companies who blamed the rapid destruction of their penny stocks on a practice known as naked short selling.
Let’s take that step by step. A short sale, generally speaking, is a bet that a stock price will drop over time. Typically, short sellers borrow shares of a stock from a broker and sell them on the open market, hoping to buy them back at a cheaper price in the future and make money on the exchange. This can become a self-fulfilling prophecy, if done right. Short selling can cause a market panic, and the prices drop in the frenzy.
But in naked short selling, you don’t even borrow the stock. You sell additional, phantom shares. This is even more likely to drive down the price than regular shorting, because suddenly the supply is larger but the demand is the same. “I can think of a number of stocks where the shares on the short exceeded the shares ever issued by the company,” said Alabama Securities Commission Director Joseph Borg. “You can’t do that unless it’s naked.”
Naked short selling is, not surprisingly, illegal in most circumstances.
But market makers like Knight have an exemption from naked short selling restrictions, on the grounds that they use the practice to maintain liquidity in markets. For example, if there’s high demand for a stock, the market maker can fill orders even if it doesn’t have the shares available.
As the Securities and Exchange Commission explains, “A market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.” This often occurs in thinly traded stocks, like penny stocks.
DiIorio reasoned that naked short selling would explain where all the trades were coming from on Best Rate Travel; while he and his counterparts were locked into their investments for a year after the company’s merger, maybe someone was flooding the market with shares and battering the stock with ease.
At this point, DiIorio had no evidence that Knight did anything but facilitate trades. But he began to suspect that Knight somehow used naked short selling for its own devices. DiIorio’s attempts to get some explanations from Knight were brushed off — as were The Intercept’s during the reporting of this series.
Did Knight manipulate the stock price of Best Rate Travel, costing DiIorio and other investors millions? If so, why? Who benefited? Who needed this obscure, tiny penny stock to tank?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/23/big-players-little-stocks-and-naked-shorts/
======================
THE MONEY IS GONE
David Dayen
Sep. 22 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 1
After a stock analyst lost $1 million on one penny stock, he set off to find out how — and soon discovered signs of a far bigger scheme than he had ever imagined.
CHRIS DIIORIO HAD just lost a million dollars.
This was back in 2006. DiIorio, who was 39 at the time, had recently moved with his new wife from Boston to Castle Pines, Colorado, a leafy suburb of Denver, and was toiling in finance as a market researcher, analyzing the financial statements of public companies and giving recommendations to portfolio managers.
He had previously worked on Wall Street as an institutional equity trader and research analyst for a subsidiary of the now-defunct investment bank Donaldson, Lufkin, and Jenrette. He had 13 years experience executing massive trades for large mutual fund clients like Fidelity and Putnam.
But in his new life, DiIorio happened upon a technology company called E Mobile (symbol: EMTK), a small computer chipmaker that claimed to hold patents on an antenna-type Wi-Fi router and other products. He reviewed company press releases, as well as investor chatter online claiming that E Mobile’s chips were provoking interest from Chinese content companies.
E Mobile didn’t trade on the New York Stock Exchange or Nasdaq, however. It was an over-the-counter stock, traded on an electronic exchange called the Pink Sheets that is home to what are commonly called “penny stocks.”
A penny stock is actually any equity that trades for $5 a share or less. But many shares can be had for a literal penny, or even a fraction of one. They are purchased on the Pink Sheets and the over-the-counter Bulletin Board market, through your regular brokerage account.
Not every penny stock is suspect; some are simply startup companies working their way to larger exchanges. But they do lurk on the dark edges of the financial markets, with sudden volumes and massive volatility. Regulation and reporting vary from light to nonexistent.
“They don’t have the same standards,” said Joseph Borg, director of the Alabama Securities Commission, who achieved fame by investigating Jordan “The Wolf of Wall Street” Belfort’s company Stratton Oakmont for penny stock fraud in the 1990s. “Willie Sutton said he robbed banks because that’s where the money is. This is the easiest place to manipulate something.”
The Pink Sheets’ own website warns that it “offers trading in a wide spectrum of securities” and that “With no minimum financial standards, this market includes foreign companies that limit their disclosure, penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide adequate information to investors. As Pink requires the least in terms of company disclosure, investors are strongly advised to proceed with caution and thoroughly research companies before making any investment decisions.”
But DiIorio didn’t know that at the time.
On Wall Street, he had executed multimillion share trades, usually of blue chip companies that make up the Dow Jones Industrial Average, like IBM or General Electric.
“I had never invested in a penny stock before,” DiIorio said. “I was not super sophisticated in this world.” But he decided to take a flyer on E Mobile, based on its promising news. “I bought this company on hype.”
Between February and May 2005, DiIorio bought over 3.7 million shares of E Mobile, mostly through his rollover IRA account with TD Ameritrade. The total cost: $100,000, or a little over 3 cents a share. It was a big position, but this was retirement money he was trying to grow, and if it paid off, the payday would be tremendous.
E Mobile bounced around for a year, not doing much. The CEO, Nan Hu, personally called DiIorio, asking him to invest more through a “private placement”: an off-market offering of stock to select investors.
DiIorio declined. “I was already up to my eyeballs. I said, ‘I’m good with my position.’” Attempts to reach Hu for comment were unsuccessful.
Then, in March 2006, E Mobile announced a “reverse merger” with Best Rate Travel, a private company specializing in online vacation booking. Adrian Stone replaced Hu as CEO. To DiIorio, it was a puzzling maneuver for a chipmaker. “They announced a merger with a travel company?” he said. “What the fuck?”
As part of the merger, E Mobile changed its name to Best Rate Travel, altered its stock ticker symbol to BTVL, and did a 1-1,000 “reverse stock split.”
You’ve probably heard of a stock split; it can happen when a company’s share price gets unmanageably high. So when a stock hits, say, $200, investors who owned one share receive two, each priced at $100.
Well, the opposite can happen, too. Best Rate Travel’s reverse split gave existing investors like DiIorio way fewer shares — at a way higher price.
As a major shareholder, DiIorio was offered a slightly better deal: a conversion to preferred shares of E Mobile at a lower reverse split rate of 1-to-30, and then a conversion at 3-to-1 to Best Rate Travel. After all that, he was left with 373,599 BTVL shares.
The merger hype, repeated in a feedback loop of positive press releases, moved the stock. DiIorio recalls it peaking at $3.50 by September 2006, giving his holdings a value of around $1.3 million.
“I thought this was the exception to everything I knew about the markets,” DiIorio said. “Cheap stocks are cheap for a reason.” But the success fed DiIorio’s ego. He felt like he beat the odds, vindicating his stock-picking acumen.
There was a problem, however. Best Rate Travel structured the conversion with a “lock-up” agreement, restricting shareholders like DiIorio from selling the stock for a year. This is common for newly public companies.
But it left DiIorio helpless when the stock plummeted from $3.50 to $0.06 a share within two months.
DiIorio initially saw it as a classic “pump-and-dump” scheme, where major investors in a company lure in other investors with overhyped claims, raising the stock price, and then sell their shares, leading to a drop. Pump-and-dumps have proliferated with the rise of internet message boards. “It’s not just promoters calling you on the phone anymore,” said Laura Posner, bureau chief of the New Jersey Bureau of Securities. “People pretend to be other people, pretend to have inside information.”
But to DiIorio, BTVL’s drop didn’t make sense, because prior shareholders were prohibited from trading the stock. “I called the CEO regularly and said: ‘Who’s selling the stock? How is this happening? The stock is not for sale.’ He told me that he was locked up too.” Phone numbers and email addresses listed for CEO Adrian Stone no longer function, so he could not be reached for comment.
By the end, DiIorio took a loss from the peak stock value of well over $1 million. “I never saw such devastation in a stock before,” he said.
A Real Head-Scratcher
DiIorio prided himself on being a savvy trader.
And the implosion of Best Rate Travel, given the lock-up period, shouldn’t have occurred. DiIorio wanted to understand what really happened to crush his investment so completely. And he had the background in financial market analysis to see it through.
So DiIorio started learning what firms traded Best Rate Travel. The biggest two by far were the giant Swiss bank UBS and a massive New Jersey-based company named Knight Capital.
He thought these were very big names to be involved in such an obscure penny stock.
Something fishy was going on, but DiIorio had no idea what. “I just thought, what the hell, I’m going to figure this out.”
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/22/the-money-is-gone/
original link courtesy of basserdan
====
4kids
TURNING UP LIKE A BAD PENNY
David Dayen
Sep. 26 2016, 11:53 a.m.
The Penny Stock Chronicles
Part 5
The penny stock Chris DiIorio invested in that crashed and burned was one of many stocks with similar trajectories traded by the same two giant companies. But if one was the buyer and the other the seller, how could this be in both of their interests?
ONE SUMMER DAY in 2012, Chris DiIorio pulled up outside a home that Colorado Goldfields Inc., a mining company in Littleton, Colorado, listed as the home address of its chief financial officer, Stephen Guyer.
DiIorio — whose investigations into the penny stock market dated back six years, to when his own investment swelled up before losing $1 million in value in two months — had already determined through property records that Guyer didn’t own it.
As he approached the front door, he found the shades drawn and no sign of life in the house. “It looked like the only thing active was the mailbox,” DiIorio said.
Colorado Goldfields, originally listed on the over-the-counter market as CGFIA, has traded at or below $0.01 since September 2013, making it a quintessential penny stock, one of the many DiIorio researched for years before making a formal Securities and Exchange Commission complaint about a potential wide-ranging fraud scheme.
(In an interview with The Intercept this month, Guyer said that he rented the property DiIorio visited because his association with the company wiped him out financially. “The company is in a total neutral situation,” Guyer said, citing active litigation with the former leadership.)
Like many of the penny stocks DiIorio had determined that the giant New Jersey-based financial firm Knight Capital actively traded, Colorado Goldfields stock had been placed on the Depository Trust Company’s “chill list.” Public records indicate that Knight traded 8.5 billion shares of CGFIA stock in 2012 — 31 percent of the total share volume — after the stock was placed on the list in May 2011.
The chill is given to stocks for various reasons, including displaying suspicious activity.
Guyer criticized the DTC for “acting arbitrarily” in chilling Colorado Goldfields. But the chill may have been issued because the company appears never to have mined any gold or other precious metal. Indeed, its most recent annual SEC filing, in 2013, states, “We have not generated revenue from mining operations.”
Guyer acknowledged that the company was always pre-revenue, claiming that project-level funding that would allow mining to commence would always fall through right before the transactions completed.
Along with this run of bad luck, Colorado Goldfields’s main activity seems to be generating press releases, announcing the acquisition of mines or approval to begin work at an existing mine. DiIorio found several of these press releases, which the company began issuing in 2007; in at least one instance, the company announced the same acquisition in separate press releases more than a year apart. (Guyer explained that “in those cases, we were announcing contracts that were entered into and weren’t closed.”) Yet the press releases would lure investors into the stock and the stock price would fall, to the benefit of the stock’s manipulators — and Knight Capital, according to DiIorio.
It’s not uncommon for new companies, even ones publicly traded over the counter, to show no revenue for several years. After all, the majority of startup businesses fail. But not all of them embark on a frenzy of stock issuance.
Between 2008 and 2012, Colorado Goldfields authorized the issuance of an amazing 35 billion shares of stock, while the stock price moved from $3 a share on June 15, 2007, to $0.01 on April 2, 2009, staying at or below a penny for three years, despite enormous trading volumes (over 1.4 billion shares moved in just four days of trading in August 2012).
Asked about the massive stock issuance, Guyer said, “There was significant trading. A lot of that came from conversion of debt.” In other words, Colorado Goldfields would pay off creditors with IOUs that they could convert into stock — and Guyer claimed a lot of the stock issued came from them. “Once put in place, those conversions go out of the company’s control. As it converts, it does put downward pressure on [the stock] price.”
That’s exactly the kind of behavior DiIorio suspected was taking place with Best Rate Travel, the stock whose collapse launched his personal investigation.
In August 2012, Colorado Goldfields announced a reverse split of its common shares at 1-to-5,000, just the sort of activity DiIorio had noticed in other stocks. After the reverse split, the company was issued a new nine-digit identification code, or CUSIP, and began trading as CGFI.
That aligned with another of DiIorio’s claims: He suspected that Knight was “naked shorting” — or selling shares of stock it didn’t have — and then once the stocks changed ID codes, Knight had no way of actually completing the transaction. As a result of the new CUSIP, Knight would as a result accumulate what are known as “aged fails” on its balance sheet.
Colorado Goldfields had a particular distinction, which is what aroused DiIorio’s interest in the first place: Two of its top traders were Knight Capital and UBS, the massive Swiss bank. Knight traded 31 percent of its shares in 2012; UBS traded around 5 percent. (Guyer said he didn’t recall the trading volumes of Knight or UBS.)
This correlation between Knight and UBS was not an anomaly. According to DiIorio’s research, Knight and UBS were also the top two traders in 2012 in Universal Detection Technology (UNDT) (totaling 69 percent of all shares), and the top two traders in Sungro Minerals (SUGO) (totaling 51 percent). Like Colorado Goldfields, both of these companies appeared on the DTC chill list, and admitted in SEC filings that they’ve never generated significant revenue — but they’ve issued billions of shares of stock.
The Canadian B.C. Securities Commission began investigating Sungro for a suspected stock scam in 2009. Canadian authorities fined three of the men involved and banned them from future trading, and the company is now defunct. The phone number listed on UNDT’s annual report is no longer in service.
Knight and UBS even traded a stock called Videolocity (VCTY), though the Pink Sheets website refuses to list information about it, showing only a skull and crossbones. Videolocity, a consulting firm whose website is in Japanese (and mostly discusses cat food) despite being incorporated in Nevada, did not return a request for comment.
“It strains credulity for these two large market players [Knight and UBS] to coincidentally find themselves in bed together this many times,” DiIorio wrote to the SEC in 2013.
Knight declined to comment on its penny stock share volume. UBS spokesperson Peter Stack would only say, “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
Several penny stocks Knight and UBS traded shared similar fates: rapid drops in value, followed by reverse splits that brought the stock price back up, and then more drops in value. The only thing left was to figure out how both Knight and UBS could prosper while seemingly being on opposite sides of the same trade. How could this possibly be in both of their interests?
This yo-yo would crush the investment of whichever company was on the side of the trade betting the price would go up.
DiIorio came up with a hypothesis after he read the text of an enforcement action against UBS in October 2011 taken by the Financial Industry Regulatory Authority, or Finra, which is the security industry’s self-regulatory organization. Finra had fined UBS $12 million for violations of regulations prohibiting abusive naked shorting and “failing to properly supervise short sales of securities.”
This was precisely what DiIorio had accused Knight Capital of doing. Finra discovered that UBS placed “millions” of short sale orders without locating the securities.
The SEC, in a separate action, merely called it “faulty record-keeping” and fined UBS just $8 million in a civil settlement without going to court. “They basically punted,” DiIorio said.
But finding out that UBS had been accused of the same issues with short sales that he saw in Knight gave DiIorio an idea for a theory that could explain everything.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/26/turning-up-like-a-bad-penny/
============================
CALLING THE SEC
David Dayen
Sep. 25 2016, 1:00 p.m.
The Penny Stock Chronicles
Part 4
Penny stock gadfly Chris DiIorio tells the SEC about his suspicion that Knight Capital is tanking penny stocks on purpose and racking up unsustainable balance-sheet liabilities. But that leads to another mystery: Why don't they seem to care?
CHRIS DIIORIO SUSPECTED major broker-dealer Knight Capital of tanking penny stocks on purpose and racking up massive, unsustainable balance-sheet liabilities based on all the stocks it “sold” that it never really had.
It had taken him five years to reach these conclusions — five years of digging through reams of financial data in search of answers to how and why his particular penny stock investment was so brutally crushed. Knight never answered DiIorio’s questions, nor, during the reporting of this story, any of The Intercept’s.
“The core business at Knight has always been naked shorting penny stocks,” DiIorio asserted.
Shorting a stock is betting it will drop in price: You borrow a share, sell it, hope the stock price drops, then buy another share to pay back your loan, hopefully for less than you borrowed it for.
In naked shorting, you sell a share that doesn’t exist and cash the proceeds. Do that enough and you bet the price will drop. Set it up so that it looks like you really sold the share to everyone except an obscure middleman, and the only toxic byproduct is a liability on your balance sheet representing shares you have sold but not yet purchased.
DiIorio believed this represented the secret of Knight’s success. “I told the SEC, ‘If you don’t believe me, ask Knight!’ If their penny stock volumes went to zero, what would happen to their trading profits?”
photo4 Photo: Richard Drew/AP
DiIorio filed a TCR (tip, complaint, or referral) form. Under Section 922 of the Dodd-Frank Act, the SEC has the authority to provide substantial monetary awards to eligible whistleblowers who inform the agency of securities law violations, if the subsequent enforcement actions exceed $1 million. But DiIorio says he wasn’t trying to win back his losses by filing a whistleblower complaint; he just wanted to see the ongoing fraud of investors like him put to a stop.
He also pointed to the threat to the markets from Knight’s thinning capital compared to the billion-dollar-plus “sold not yet purchased” liability. “I said, ‘Knight is insolvent, and this is how I know.’”
Indeed, the firm’s own second-quarter 2011 report to the SEC clearly showed $1.9 billion in “sold, not yet purchased” liabilities — up from $1.3 billion just six months earlier. By contrast, it reported “net current assets, which consist of net assets readily convertible into cash less current liabilities, of $105.1 million.”
Other than a perfunctory acknowledgement of receipt, the SEC did not respond to the TCR. DiIorio sent personal emails to top officials at the agency. One still exists on the SEC’s website, an October 2011 letter to Robert Khuzami, then the SEC’s head of enforcement. “Why won’t [then-Knight CEO Thomas] Joyce disclose to the investing public the nearly [$2 billion] sold not yet purchased liability is where he moves aged fails,” DiIorio wrote. “It is a structural liability and does not in fact ‘fluctuate with volumes’ as [Joyce] has said in several public filings.”
In this case, aged fails are the obligation left over when the stock whose shares the seller was supposed to actually hand over no longer exists because of a merger or split.
SEC spokesperson Ryan White declined to comment on the matter. As a matter of policy, the SEC never confirms nor denies the existence of an investigation until it reaches the public record in a court action or administrative proceeding, and it usually doesn’t inform whistleblowers about the status of their cases unless it grants them an enforcement award.
But DiIorio grew frustrated with the lack of response. “I was baffled why the SEC was not acting on what appeared to be blatant securities violations,” he said.
What About UBS?
He used the delay, however, to clear up another nagging question: What about the other major trader in these penny stocks, the Swiss bank UBS, one of the largest private banks in the world?
Time after time, DiIorio would isolate individual penny stocks and find UBS and Knight as major traders in them. While it wasn’t possible to know for sure, the correlation suggested that UBS was repeatedly on the other side of Knight’s trades; its clients would go long while Knight’s would go short. If true, that meant UBS, or its clients, were taking on multitudes of losses by design.
Why was UBS so involved with penny stocks, which had little upside potential for a global megabank? Why was it so intertwined with Knight? Who was it purchasing these penny stocks for?
And why didn’t the bank seem to care that its clients were being sold stock that kept going down in value?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/25/calling-the-sec/
====================
NAKED SHORTS CAN’T STAY NAKED FOREVER
David Dayen
Sep. 24 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 3
Who engages in massive trades in penny stocks on the industry’s own “chill list”? And what happens when you sell a stock you don’t have? Victimized investor Chris DiIorio finds the answers in plain sight and wonders why no one else seems to care.
A FEW YEARS into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them.
Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients.
As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it.
DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.
His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.”
The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock.
But when the DTC senses trouble, it will stop clearing trades on a stock temporarily.
A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.”
That doesn’t stop Knight from buying and selling them, though. Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks.
“I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.”
He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.”
Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.
Naked Manipulation
The thing about naked short sales is they can’t stay naked forever.
Even if you don’t have the stock when you sell it, at some point it is expected that you hand it over.
And even with its market-maker exemption, Knight is required by SEC rules to eventually deliver the shares in a naked short transaction to the buyer and close out the trade.
Not doing so results in a “fail to deliver,” which DiIorio describes as the securities version of an IOU. And that IOU comes with rules: Under the SEC’s Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail. Routine failures to deliver can lead to fines by the SEC, or even a ban from the securities markets.
Instead of complying with the rule, however, DiIorio alleges that Knight circumvented it by manipulating an obscure process within the machinery of the nation’s clearing system known as the “Obligation Warehouse.”
This service facilitates the matching of self-cleared trades (often known as “ex-clearing”) that don’t go through the DTC — for instance if the stock was chilled.
The Obligation Warehouse instead simply asks the buyer and seller of these ex-cleared trades if they “know” the transaction. If they both agree, the trade gets confirmed with a journal entry — and the buyer receives their stock purchase. It actually shows up in the buyer’s brokerage account.
The trades still have active IOUs, but according to DiIorio’s theory, buyers wouldn’t clamor for the trades to be closed because they would’ve already received their purchase.
If true, this would allow Knight to bury its naked short trades.
“They set up a shadow clearing system,” DiIorio said.
Furthermore, DiIorio recognized what he considered a persistent cycle in the stocks Knight traded. After being beaten down through what he suspected was naked shorting, they would often engage in a reverse stock split or reverse merger, like E Mobile did with Best Rate Travel in the trade that ended up losing DiIorio over $1 million.
This, he observed, could enable Knight to rerun the scheme over and over again, pummeling the stock price and then letting it move back up like a yo-yo.
Laura Posner of the New Jersey Securities Commission said constant reverse splits would require a coordinated relationship between the penny stock issuer and the broker-dealer. “I know that there are situations in which fraudsters will take advantage of a stock split to commit fraud,” Posner said. “But it’s different than a typical pump-and-dump, where you don’t have to have a personal relationship.”
Alternately, the cycle could be a cat-and-mouse game playing out between the short sellers and the stock issuers. Hawk Associates, a consulting firm to small companies, recommends that penny stock issuers victimized by naked shorting engage in reverse mergers and/or reverse splits to stop the rapid degradation of their stock price. “It may be useful as part of a larger strategy to deter naked shorting,” the firm writes on its website. “This may be more trouble than it’s worth, however. Once the new shares are in circulation, there’s nothing to stop a new round of naked shorting by determined parties.”
Knight’s involvement with suspicious stocks following this same pattern kept cropping up.
For example, NewLead Holdings (NEWL) — a shipping company with a mining concern on the side that was accused in federal court of having “no coal mines, no coal, and no ability whatsoever to engage in the coal business” — engaged in 1-1,125,000 worth of reverse splits over nine months in 2013 and 2014, meaning that 1,000 shares prior to the splits were equivalent to 0.0008 shares afterward. NewLead did another 1-300 stock split just this spring; it now trades as NEWLF, at 0.00030 as of August 23. Its 2015 annual report admits, “There is substantial doubt about our ability to continue as a going concern.”
FreeSeas (FREE), another penny stock, did a 1-60 reverse split on January 15 of this year, and then another 1-200 split on April 13, changing its stock symbol to FREEF. The company has engaged in seven reverse splits in the last five years; someone with 900 million shares five years ago would have one share today, trading at less than a penny. The company’s annual report says it currently has no employees. Private equity firm Havensight Capital made an alleged bid to purchase FreeSeas in June at $0.43 a share, about 80 times its price at the time of this writing, which FreeSeas called “false and misleading.”
While one might think this cycle of splits and price declines would trigger red flags with federal regulators, Joseph Borg of the Alabama Securities Commission doubted they would pay attention. “It’s like asking the SEC, of all the 35,000 private placements issued, you look at how many? And if they were telling the truth they would say we’re putting them in a drawer,” Borg said. “Anything like that on miniscule levels, they just get filed away.”
Furthermore, while there are “circuit breaker” rules preventing short sales when a stock loses more than 10 percent of its value in a day, these swings were more gradual. Knight made a lot of money on these plays, not just from the spread in trading profits, but because it often traded on its own account rather than on behalf of customers, DiIorio concluded. When the stock dropped, Knight got rich from the short. And it could rerun this repeatedly.
“He’s got a theory that, without studying it, I see theoretically where he’s going with it,” concluded Borg. “It’s an interesting idea.”
Knight is now known as KCG. Its spokesperson Sophie Sohn declined to comment when asked about this and other matters.
Attempts to reach spokespeople at FreeSeas have proven unsuccessful. Elisa Gerouki, corporate communications manager at NewLead, asked me to prove he wrote for The Intercept; after I did so, Gerouki failed to respond to questions.
Where Naked Shorts Go to Die
DiIorio also spotted a significant, seemingly toxic byproduct of this sort of activity.
The Intercept.Reverse mergers and reverse splits typically result in a change in the CUSIP, the nine-digit identification symbol assigned to a public stock.
Once that CUSIP changes, the naked shorter has no apparent way to close out the naked short position. No stock under the old CUSIP number exists anymore; it all automatically converts to the new CUSIP.
Those trades can sit in the Obligation Warehouse forever, in theory. But the “aged fails” — essentially orphaned naked short transactions — remain on the naked shorter’s balance sheet as a liability to be paid later.
By DiIorio’s reckoning, then, the cycle of naked shorting and reverse splits would inevitably result in an ever-increasing number of aged fails. And if that was happening, and those liabilities grew bigger and bigger, then federal regulators could see the outlines of the scheme on any financial statement.
DiIorio believed Knight accounted for its aged fails in the “sold not yet purchased” liability on its balance sheet. That’s supposed to be an inventory of stocks for use in future market making, which goes up and down as orders are filled. But DiIorio says it was a hiding place for a billowing structural liability.
And consider this: According to its own financial reports, Knight’s “sold not yet purchased” liability jumped from $385 million at the beginning of 2008 to $1.9 billion by mid-2011.
Jim Angel, the business professor, said there could be other explanations — such as Knight’s growth as a company during that period — for why the “sold not yet purchased” liability ballooned. But, he said, market makers are typically “in the moving, not storing, business, and like to keep their inventories as small as possible.”
DiIorio had no such doubts. He saw the fact that Knight was blowing a hole in its own balance sheet as undeniable evidence of the naked shorting play.
KCG spokesperson Sophie Sohn was asked specifically about that claim and declined to comment.
If DiIorio was correct, Knight was driving penny stocks down over and over again with naked shorting, then not actually closing the trades, and racking up enormous paper liabilities.
This was even more complicated than he thought. It was time to call the cops.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/24/naked-shorts-cant-stay-naked-forever/
=====================
BIG PLAYERS, LITTLE STOCKS, AND NAKED SHORTS
David Dayen
Sep. 23 2016, 12:16 p.m.
The Penny Stock Chronicles
Part 2
A self-appointed stock sleuth finds financial giants trading extensively in little penny stocks like the one he owned that tanked. And he learns something amazing: Some brokers can sell shares that don’t actually exist.
CHRIS DIIORIO HAD lost a million dollars when the penny stock he was betting on shed 98 percent of its value in a matter of weeks. But when he looked deeper, he found this wasn’t a typical penny stock pump-and-dump scheme. He was determined to get to the bottom of it.
For one thing, there were two huge companies involved.
UBS, one of the world’s largest private banks, seemed to have no business trading in penny stocks. “This was a $50 billion-plus bank, it didn’t seem like penny stocks would move the needle,” DiIorio said. But just in December 2011, UBS’s trades in 32 penny stocks represented over half of the firm’s total share volume, according to his calculations.
In a one-line response to a series of detailed questions from The Intercept, UBS media relations director Peter Stack wrote in an email: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
After some research, DiIorio became even more disturbed by the presence of the other company, Knight Capital, which has traded an average of more than 2 billion shares of penny stocks daily for the past three years.
Based in Jersey City, N.J., Knight is what is called a “market maker,” a dealer that facilitates trading by actually holding shares itself, if ever so briefly, so investors can buy and sell without any delay. “They’re selling the service of convenience to investors, like a car dealer makes it easier to buy or sell a car quickly,” said Jim Angel, an associate professor specializing in market structure at Georgetown University.
Knight Capital is a giant in the field; it alone was responsible for 11 percent of all trading in U.S. stocks by volume as of 2012. It’s known in particular for speed. The ability to jump in and out of stocks quickly through electronic markets is attractive to customers and enables Knight to trade nearly $30 billion every single day. “Market making is a business where the spreads are small but the volumes are large,” Angel said. The spread is the difference between the buy price and the sell price, and it’s how Knight makes money.
DiIorio looked closely at how Knight operated. He determined that between 80 and 90 percent of its share volumes came from penny and fractional penny stocks. According to DiIorio’s calculations, Knight traded over 10 trillion shares of OTC and Pink Sheets securities from 2004 to 2012.
This level of volume persists — the most recent statistics show that 73 percent of the company’s equity share volumes in August 2016 came from penny stocks, and 81 percent as recently as May.
A share in a penny stock is worth magnitudes less than a share in Google or Apple. But the spreads — where the market makers cash in — are proportionately bigger on a penny stock. For example, if the market maker earns a penny per share of a $50 stock, that’s only a spread of .02 percent. But a stock worth 25 cents where a market maker sees even a tenth of a penny in profit represents a spread of 2 percent — a 100-fold increase.
Still, DiIorio wondered how much volume a broker would need to make any money through penny stock trading. “You would have to move hundreds of millions of shares per trade,” he said.
And, because his personal investigation had started after his shares in a company called Best Rate Travel tanked precipitously, he also wondered: Why was Knight so involved with them in particular?
While DiIorio was mulling that, he started talking to his fellow traders and reading rumors online from owners of dozens of small companies who blamed the rapid destruction of their penny stocks on a practice known as naked short selling.
Let’s take that step by step. A short sale, generally speaking, is a bet that a stock price will drop over time. Typically, short sellers borrow shares of a stock from a broker and sell them on the open market, hoping to buy them back at a cheaper price in the future and make money on the exchange. This can become a self-fulfilling prophecy, if done right. Short selling can cause a market panic, and the prices drop in the frenzy.
But in naked short selling, you don’t even borrow the stock. You sell additional, phantom shares. This is even more likely to drive down the price than regular shorting, because suddenly the supply is larger but the demand is the same. “I can think of a number of stocks where the shares on the short exceeded the shares ever issued by the company,” said Alabama Securities Commission Director Joseph Borg. “You can’t do that unless it’s naked.”
Naked short selling is, not surprisingly, illegal in most circumstances.
But market makers like Knight have an exemption from naked short selling restrictions, on the grounds that they use the practice to maintain liquidity in markets. For example, if there’s high demand for a stock, the market maker can fill orders even if it doesn’t have the shares available.
As the Securities and Exchange Commission explains, “A market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.” This often occurs in thinly traded stocks, like penny stocks.
DiIorio reasoned that naked short selling would explain where all the trades were coming from on Best Rate Travel; while he and his counterparts were locked into their investments for a year after the company’s merger, maybe someone was flooding the market with shares and battering the stock with ease.
At this point, DiIorio had no evidence that Knight did anything but facilitate trades. But he began to suspect that Knight somehow used naked short selling for its own devices. DiIorio’s attempts to get some explanations from Knight were brushed off — as were The Intercept’s during the reporting of this series.
Did Knight manipulate the stock price of Best Rate Travel, costing DiIorio and other investors millions? If so, why? Who benefited? Who needed this obscure, tiny penny stock to tank?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/23/big-players-little-stocks-and-naked-shorts/
======================
THE MONEY IS GONE
David Dayen
Sep. 22 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 1
After a stock analyst lost $1 million on one penny stock, he set off to find out how — and soon discovered signs of a far bigger scheme than he had ever imagined.
CHRIS DIIORIO HAD just lost a million dollars.
This was back in 2006. DiIorio, who was 39 at the time, had recently moved with his new wife from Boston to Castle Pines, Colorado, a leafy suburb of Denver, and was toiling in finance as a market researcher, analyzing the financial statements of public companies and giving recommendations to portfolio managers.
He had previously worked on Wall Street as an institutional equity trader and research analyst for a subsidiary of the now-defunct investment bank Donaldson, Lufkin, and Jenrette. He had 13 years experience executing massive trades for large mutual fund clients like Fidelity and Putnam.
But in his new life, DiIorio happened upon a technology company called E Mobile (symbol: EMTK), a small computer chipmaker that claimed to hold patents on an antenna-type Wi-Fi router and other products. He reviewed company press releases, as well as investor chatter online claiming that E Mobile’s chips were provoking interest from Chinese content companies.
E Mobile didn’t trade on the New York Stock Exchange or Nasdaq, however. It was an over-the-counter stock, traded on an electronic exchange called the Pink Sheets that is home to what are commonly called “penny stocks.”
A penny stock is actually any equity that trades for $5 a share or less. But many shares can be had for a literal penny, or even a fraction of one. They are purchased on the Pink Sheets and the over-the-counter Bulletin Board market, through your regular brokerage account.
Not every penny stock is suspect; some are simply startup companies working their way to larger exchanges. But they do lurk on the dark edges of the financial markets, with sudden volumes and massive volatility. Regulation and reporting vary from light to nonexistent.
“They don’t have the same standards,” said Joseph Borg, director of the Alabama Securities Commission, who achieved fame by investigating Jordan “The Wolf of Wall Street” Belfort’s company Stratton Oakmont for penny stock fraud in the 1990s. “Willie Sutton said he robbed banks because that’s where the money is. This is the easiest place to manipulate something.”
The Pink Sheets’ own website warns that it “offers trading in a wide spectrum of securities” and that “With no minimum financial standards, this market includes foreign companies that limit their disclosure, penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide adequate information to investors. As Pink requires the least in terms of company disclosure, investors are strongly advised to proceed with caution and thoroughly research companies before making any investment decisions.”
But DiIorio didn’t know that at the time.
On Wall Street, he had executed multimillion share trades, usually of blue chip companies that make up the Dow Jones Industrial Average, like IBM or General Electric.
“I had never invested in a penny stock before,” DiIorio said. “I was not super sophisticated in this world.” But he decided to take a flyer on E Mobile, based on its promising news. “I bought this company on hype.”
Between February and May 2005, DiIorio bought over 3.7 million shares of E Mobile, mostly through his rollover IRA account with TD Ameritrade. The total cost: $100,000, or a little over 3 cents a share. It was a big position, but this was retirement money he was trying to grow, and if it paid off, the payday would be tremendous.
E Mobile bounced around for a year, not doing much. The CEO, Nan Hu, personally called DiIorio, asking him to invest more through a “private placement”: an off-market offering of stock to select investors.
DiIorio declined. “I was already up to my eyeballs. I said, ‘I’m good with my position.’” Attempts to reach Hu for comment were unsuccessful.
Then, in March 2006, E Mobile announced a “reverse merger” with Best Rate Travel, a private company specializing in online vacation booking. Adrian Stone replaced Hu as CEO. To DiIorio, it was a puzzling maneuver for a chipmaker. “They announced a merger with a travel company?” he said. “What the fuck?”
As part of the merger, E Mobile changed its name to Best Rate Travel, altered its stock ticker symbol to BTVL, and did a 1-1,000 “reverse stock split.”
You’ve probably heard of a stock split; it can happen when a company’s share price gets unmanageably high. So when a stock hits, say, $200, investors who owned one share receive two, each priced at $100.
Well, the opposite can happen, too. Best Rate Travel’s reverse split gave existing investors like DiIorio way fewer shares — at a way higher price.
As a major shareholder, DiIorio was offered a slightly better deal: a conversion to preferred shares of E Mobile at a lower reverse split rate of 1-to-30, and then a conversion at 3-to-1 to Best Rate Travel. After all that, he was left with 373,599 BTVL shares.
The merger hype, repeated in a feedback loop of positive press releases, moved the stock. DiIorio recalls it peaking at $3.50 by September 2006, giving his holdings a value of around $1.3 million.
“I thought this was the exception to everything I knew about the markets,” DiIorio said. “Cheap stocks are cheap for a reason.” But the success fed DiIorio’s ego. He felt like he beat the odds, vindicating his stock-picking acumen.
There was a problem, however. Best Rate Travel structured the conversion with a “lock-up” agreement, restricting shareholders like DiIorio from selling the stock for a year. This is common for newly public companies.
But it left DiIorio helpless when the stock plummeted from $3.50 to $0.06 a share within two months.
DiIorio initially saw it as a classic “pump-and-dump” scheme, where major investors in a company lure in other investors with overhyped claims, raising the stock price, and then sell their shares, leading to a drop. Pump-and-dumps have proliferated with the rise of internet message boards. “It’s not just promoters calling you on the phone anymore,” said Laura Posner, bureau chief of the New Jersey Bureau of Securities. “People pretend to be other people, pretend to have inside information.”
But to DiIorio, BTVL’s drop didn’t make sense, because prior shareholders were prohibited from trading the stock. “I called the CEO regularly and said: ‘Who’s selling the stock? How is this happening? The stock is not for sale.’ He told me that he was locked up too.” Phone numbers and email addresses listed for CEO Adrian Stone no longer function, so he could not be reached for comment.
By the end, DiIorio took a loss from the peak stock value of well over $1 million. “I never saw such devastation in a stock before,” he said.
A Real Head-Scratcher
DiIorio prided himself on being a savvy trader.
And the implosion of Best Rate Travel, given the lock-up period, shouldn’t have occurred. DiIorio wanted to understand what really happened to crush his investment so completely. And he had the background in financial market analysis to see it through.
So DiIorio started learning what firms traded Best Rate Travel. The biggest two by far were the giant Swiss bank UBS and a massive New Jersey-based company named Knight Capital.
He thought these were very big names to be involved in such an obscure penny stock.
Something fishy was going on, but DiIorio had no idea what. “I just thought, what the hell, I’m going to figure this out.”
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/22/the-money-is-gone/
original link courtesy of basserdan
====
4kids
CALLING THE SEC
David Dayen
Sep. 25 2016, 1:00 p.m.
The Penny Stock Chronicles
Part 4
Penny stock gadfly Chris DiIorio tells the SEC about his suspicion that Knight Capital is tanking penny stocks on purpose and racking up unsustainable balance-sheet liabilities. But that leads to another mystery: Why don't they seem to care?
CHRIS DIIORIO SUSPECTED major broker-dealer Knight Capital of tanking penny stocks on purpose and racking up massive, unsustainable balance-sheet liabilities based on all the stocks it “sold” that it never really had.
It had taken him five years to reach these conclusions — five years of digging through reams of financial data in search of answers to how and why his particular penny stock investment was so brutally crushed. Knight never answered DiIorio’s questions, nor, during the reporting of this story, any of The Intercept’s.
“The core business at Knight has always been naked shorting penny stocks,” DiIorio asserted.
Shorting a stock is betting it will drop in price: You borrow a share, sell it, hope the stock price drops, then buy another share to pay back your loan, hopefully for less than you borrowed it for.
In naked shorting, you sell a share that doesn’t exist and cash the proceeds. Do that enough and you bet the price will drop. Set it up so that it looks like you really sold the share to everyone except an obscure middleman, and the only toxic byproduct is a liability on your balance sheet representing shares you have sold but not yet purchased.
DiIorio believed this represented the secret of Knight’s success. “I told the SEC, ‘If you don’t believe me, ask Knight!’ If their penny stock volumes went to zero, what would happen to their trading profits?”
DiIorio filed a TCR (tip, complaint, or referral) form. Under Section 922 of the Dodd-Frank Act, the SEC has the authority to provide substantial monetary awards to eligible whistleblowers who inform the agency of securities law violations, if the subsequent enforcement actions exceed $1 million. But DiIorio says he wasn’t trying to win back his losses by filing a whistleblower complaint; he just wanted to see the ongoing fraud of investors like him put to a stop.
He also pointed to the threat to the markets from Knight’s thinning capital compared to the billion-dollar-plus “sold not yet purchased” liability. “I said, ‘Knight is insolvent, and this is how I know.’”
Indeed, the firm’s own second-quarter 2011 report to the SEC clearly showed $1.9 billion in “sold, not yet purchased” liabilities — up from $1.3 billion just six months earlier. By contrast, it reported “net current assets, which consist of net assets readily convertible into cash less current liabilities, of $105.1 million.”
Other than a perfunctory acknowledgement of receipt, the SEC did not respond to the TCR. DiIorio sent personal emails to top officials at the agency. One still exists on the SEC’s website, an October 2011 letter to Robert Khuzami, then the SEC’s head of enforcement. “Why won’t [then-Knight CEO Thomas] Joyce disclose to the investing public the nearly [$2 billion] sold not yet purchased liability is where he moves aged fails,” DiIorio wrote. “It is a structural liability and does not in fact ‘fluctuate with volumes’ as [Joyce] has said in several public filings.”
In this case, aged fails are the obligation left over when the stock whose shares the seller was supposed to actually hand over no longer exists because of a merger or split.
SEC spokesperson Ryan White declined to comment on the matter. As a matter of policy, the SEC never confirms nor denies the existence of an investigation until it reaches the public record in a court action or administrative proceeding, and it usually doesn’t inform whistleblowers about the status of their cases unless it grants them an enforcement award.
But DiIorio grew frustrated with the lack of response. “I was baffled why the SEC was not acting on what appeared to be blatant securities violations,” he said.
What About UBS?
He used the delay, however, to clear up another nagging question: What about the other major trader in these penny stocks, the Swiss bank UBS, one of the largest private banks in the world?
Time after time, DiIorio would isolate individual penny stocks and find UBS and Knight as major traders in them. While it wasn’t possible to know for sure, the correlation suggested that UBS was repeatedly on the other side of Knight’s trades; its clients would go long while Knight’s would go short. If true, that meant UBS, or its clients, were taking on multitudes of losses by design.
Why was UBS so involved with penny stocks, which had little upside potential for a global megabank? Why was it so intertwined with Knight? Who was it purchasing these penny stocks for?
And why didn’t the bank seem to care that its clients were being sold stock that kept going down in value?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/25/calling-the-sec/
====================
NAKED SHORTS CAN’T STAY NAKED FOREVER
David Dayen
Sep. 24 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 3
Who engages in massive trades in penny stocks on the industry’s own “chill list”? And what happens when you sell a stock you don’t have? Victimized investor Chris DiIorio finds the answers in plain sight and wonders why no one else seems to care.
A FEW YEARS into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them.
Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients.
As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it.
DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.
His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.”
The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock.
But when the DTC senses trouble, it will stop clearing trades on a stock temporarily.
A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.”
That doesn’t stop Knight from buying and selling them, though. Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks.
“I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.”
He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.”
Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.
Naked Manipulation
The thing about naked short sales is they can’t stay naked forever.
Even if you don’t have the stock when you sell it, at some point it is expected that you hand it over.
And even with its market-maker exemption, Knight is required by SEC rules to eventually deliver the shares in a naked short transaction to the buyer and close out the trade.
Not doing so results in a “fail to deliver,” which DiIorio describes as the securities version of an IOU. And that IOU comes with rules: Under the SEC’s Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail. Routine failures to deliver can lead to fines by the SEC, or even a ban from the securities markets.
Instead of complying with the rule, however, DiIorio alleges that Knight circumvented it by manipulating an obscure process within the machinery of the nation’s clearing system known as the “Obligation Warehouse.”
This service facilitates the matching of self-cleared trades (often known as “ex-clearing”) that don’t go through the DTC — for instance if the stock was chilled.
The Obligation Warehouse instead simply asks the buyer and seller of these ex-cleared trades if they “know” the transaction. If they both agree, the trade gets confirmed with a journal entry — and the buyer receives their stock purchase. It actually shows up in the buyer’s brokerage account.
The trades still have active IOUs, but according to DiIorio’s theory, buyers wouldn’t clamor for the trades to be closed because they would’ve already received their purchase.
If true, this would allow Knight to bury its naked short trades.
“They set up a shadow clearing system,” DiIorio said.
Furthermore, DiIorio recognized what he considered a persistent cycle in the stocks Knight traded. After being beaten down through what he suspected was naked shorting, they would often engage in a reverse stock split or reverse merger, like E Mobile did with Best Rate Travel in the trade that ended up losing DiIorio over $1 million.
This, he observed, could enable Knight to rerun the scheme over and over again, pummeling the stock price and then letting it move back up like a yo-yo.
Laura Posner of the New Jersey Securities Commission said constant reverse splits would require a coordinated relationship between the penny stock issuer and the broker-dealer. “I know that there are situations in which fraudsters will take advantage of a stock split to commit fraud,” Posner said. “But it’s different than a typical pump-and-dump, where you don’t have to have a personal relationship.”
Alternately, the cycle could be a cat-and-mouse game playing out between the short sellers and the stock issuers. Hawk Associates, a consulting firm to small companies, recommends that penny stock issuers victimized by naked shorting engage in reverse mergers and/or reverse splits to stop the rapid degradation of their stock price. “It may be useful as part of a larger strategy to deter naked shorting,” the firm writes on its website. “This may be more trouble than it’s worth, however. Once the new shares are in circulation, there’s nothing to stop a new round of naked shorting by determined parties.”
Knight’s involvement with suspicious stocks following this same pattern kept cropping up.
For example, NewLead Holdings (NEWL) — a shipping company with a mining concern on the side that was accused in federal court of having “no coal mines, no coal, and no ability whatsoever to engage in the coal business” — engaged in 1-1,125,000 worth of reverse splits over nine months in 2013 and 2014, meaning that 1,000 shares prior to the splits were equivalent to 0.0008 shares afterward. NewLead did another 1-300 stock split just this spring; it now trades as NEWLF, at 0.00030 as of August 23. Its 2015 annual report admits, “There is substantial doubt about our ability to continue as a going concern.”
FreeSeas (FREE), another penny stock, did a 1-60 reverse split on January 15 of this year, and then another 1-200 split on April 13, changing its stock symbol to FREEF. The company has engaged in seven reverse splits in the last five years; someone with 900 million shares five years ago would have one share today, trading at less than a penny. The company’s annual report says it currently has no employees. Private equity firm Havensight Capital made an alleged bid to purchase FreeSeas in June at $0.43 a share, about 80 times its price at the time of this writing, which FreeSeas called “false and misleading.”
While one might think this cycle of splits and price declines would trigger red flags with federal regulators, Joseph Borg of the Alabama Securities Commission doubted they would pay attention. “It’s like asking the SEC, of all the 35,000 private placements issued, you look at how many? And if they were telling the truth they would say we’re putting them in a drawer,” Borg said. “Anything like that on miniscule levels, they just get filed away.”
Furthermore, while there are “circuit breaker” rules preventing short sales when a stock loses more than 10 percent of its value in a day, these swings were more gradual. Knight made a lot of money on these plays, not just from the spread in trading profits, but because it often traded on its own account rather than on behalf of customers, DiIorio concluded. When the stock dropped, Knight got rich from the short. And it could rerun this repeatedly.
“He’s got a theory that, without studying it, I see theoretically where he’s going with it,” concluded Borg. “It’s an interesting idea.”
Knight is now known as KCG. Its spokesperson Sophie Sohn declined to comment when asked about this and other matters.
Attempts to reach spokespeople at FreeSeas have proven unsuccessful. Elisa Gerouki, corporate communications manager at NewLead, asked me to prove he wrote for The Intercept; after I did so, Gerouki failed to respond to questions.
Where Naked Shorts Go to Die
DiIorio also spotted a significant, seemingly toxic byproduct of this sort of activity.
The Intercept.Reverse mergers and reverse splits typically result in a change in the CUSIP, the nine-digit identification symbol assigned to a public stock.
Once that CUSIP changes, the naked shorter has no apparent way to close out the naked short position. No stock under the old CUSIP number exists anymore; it all automatically converts to the new CUSIP.
Those trades can sit in the Obligation Warehouse forever, in theory. But the “aged fails” — essentially orphaned naked short transactions — remain on the naked shorter’s balance sheet as a liability to be paid later.
By DiIorio’s reckoning, then, the cycle of naked shorting and reverse splits would inevitably result in an ever-increasing number of aged fails. And if that was happening, and those liabilities grew bigger and bigger, then federal regulators could see the outlines of the scheme on any financial statement.
DiIorio believed Knight accounted for its aged fails in the “sold not yet purchased” liability on its balance sheet. That’s supposed to be an inventory of stocks for use in future market making, which goes up and down as orders are filled. But DiIorio says it was a hiding place for a billowing structural liability.
And consider this: According to its own financial reports, Knight’s “sold not yet purchased” liability jumped from $385 million at the beginning of 2008 to $1.9 billion by mid-2011.
Jim Angel, the business professor, said there could be other explanations — such as Knight’s growth as a company during that period — for why the “sold not yet purchased” liability ballooned. But, he said, market makers are typically “in the moving, not storing, business, and like to keep their inventories as small as possible.”
DiIorio had no such doubts. He saw the fact that Knight was blowing a hole in its own balance sheet as undeniable evidence of the naked shorting play.
KCG spokesperson Sophie Sohn was asked specifically about that claim and declined to comment.
If DiIorio was correct, Knight was driving penny stocks down over and over again with naked shorting, then not actually closing the trades, and racking up enormous paper liabilities.
This was even more complicated than he thought. It was time to call the cops.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/24/naked-shorts-cant-stay-naked-forever/
=====================
BIG PLAYERS, LITTLE STOCKS, AND NAKED SHORTS
David Dayen
Sep. 23 2016, 12:16 p.m.
The Penny Stock Chronicles
Part 2
A self-appointed stock sleuth finds financial giants trading extensively in little penny stocks like the one he owned that tanked. And he learns something amazing: Some brokers can sell shares that don’t actually exist.
CHRIS DIIORIO HAD lost a million dollars when the penny stock he was betting on shed 98 percent of its value in a matter of weeks. But when he looked deeper, he found this wasn’t a typical penny stock pump-and-dump scheme. He was determined to get to the bottom of it.
For one thing, there were two huge companies involved.
UBS, one of the world’s largest private banks, seemed to have no business trading in penny stocks. “This was a $50 billion-plus bank, it didn’t seem like penny stocks would move the needle,” DiIorio said. But just in December 2011, UBS’s trades in 32 penny stocks represented over half of the firm’s total share volume, according to his calculations.
In a one-line response to a series of detailed questions from The Intercept, UBS media relations director Peter Stack wrote in an email: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
After some research, DiIorio became even more disturbed by the presence of the other company, Knight Capital, which has traded an average of more than 2 billion shares of penny stocks daily for the past three years.
Based in Jersey City, N.J., Knight is what is called a “market maker,” a dealer that facilitates trading by actually holding shares itself, if ever so briefly, so investors can buy and sell without any delay. “They’re selling the service of convenience to investors, like a car dealer makes it easier to buy or sell a car quickly,” said Jim Angel, an associate professor specializing in market structure at Georgetown University.
Knight Capital is a giant in the field; it alone was responsible for 11 percent of all trading in U.S. stocks by volume as of 2012. It’s known in particular for speed. The ability to jump in and out of stocks quickly through electronic markets is attractive to customers and enables Knight to trade nearly $30 billion every single day. “Market making is a business where the spreads are small but the volumes are large,” Angel said. The spread is the difference between the buy price and the sell price, and it’s how Knight makes money.
DiIorio looked closely at how Knight operated. He determined that between 80 and 90 percent of its share volumes came from penny and fractional penny stocks. According to DiIorio’s calculations, Knight traded over 10 trillion shares of OTC and Pink Sheets securities from 2004 to 2012.
This level of volume persists — the most recent statistics show that 73 percent of the company’s equity share volumes in August 2016 came from penny stocks, and 81 percent as recently as May.
A share in a penny stock is worth magnitudes less than a share in Google or Apple. But the spreads — where the market makers cash in — are proportionately bigger on a penny stock. For example, if the market maker earns a penny per share of a $50 stock, that’s only a spread of .02 percent. But a stock worth 25 cents where a market maker sees even a tenth of a penny in profit represents a spread of 2 percent — a 100-fold increase.
Still, DiIorio wondered how much volume a broker would need to make any money through penny stock trading. “You would have to move hundreds of millions of shares per trade,” he said.
And, because his personal investigation had started after his shares in a company called Best Rate Travel tanked precipitously, he also wondered: Why was Knight so involved with them in particular?
While DiIorio was mulling that, he started talking to his fellow traders and reading rumors online from owners of dozens of small companies who blamed the rapid destruction of their penny stocks on a practice known as naked short selling.
Let’s take that step by step. A short sale, generally speaking, is a bet that a stock price will drop over time. Typically, short sellers borrow shares of a stock from a broker and sell them on the open market, hoping to buy them back at a cheaper price in the future and make money on the exchange. This can become a self-fulfilling prophecy, if done right. Short selling can cause a market panic, and the prices drop in the frenzy.
But in naked short selling, you don’t even borrow the stock. You sell additional, phantom shares. This is even more likely to drive down the price than regular shorting, because suddenly the supply is larger but the demand is the same. “I can think of a number of stocks where the shares on the short exceeded the shares ever issued by the company,” said Alabama Securities Commission Director Joseph Borg. “You can’t do that unless it’s naked.”
Naked short selling is, not surprisingly, illegal in most circumstances.
But market makers like Knight have an exemption from naked short selling restrictions, on the grounds that they use the practice to maintain liquidity in markets. For example, if there’s high demand for a stock, the market maker can fill orders even if it doesn’t have the shares available.
As the Securities and Exchange Commission explains, “A market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.” This often occurs in thinly traded stocks, like penny stocks.
DiIorio reasoned that naked short selling would explain where all the trades were coming from on Best Rate Travel; while he and his counterparts were locked into their investments for a year after the company’s merger, maybe someone was flooding the market with shares and battering the stock with ease.
At this point, DiIorio had no evidence that Knight did anything but facilitate trades. But he began to suspect that Knight somehow used naked short selling for its own devices. DiIorio’s attempts to get some explanations from Knight were brushed off — as were The Intercept’s during the reporting of this series.
Did Knight manipulate the stock price of Best Rate Travel, costing DiIorio and other investors millions? If so, why? Who benefited? Who needed this obscure, tiny penny stock to tank?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/23/big-players-little-stocks-and-naked-shorts/
======================
THE MONEY IS GONE
David Dayen
Sep. 22 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 1
After a stock analyst lost $1 million on one penny stock, he set off to find out how — and soon discovered signs of a far bigger scheme than he had ever imagined.
CHRIS DIIORIO HAD just lost a million dollars.
This was back in 2006. DiIorio, who was 39 at the time, had recently moved with his new wife from Boston to Castle Pines, Colorado, a leafy suburb of Denver, and was toiling in finance as a market researcher, analyzing the financial statements of public companies and giving recommendations to portfolio managers.
He had previously worked on Wall Street as an institutional equity trader and research analyst for a subsidiary of the now-defunct investment bank Donaldson, Lufkin, and Jenrette. He had 13 years experience executing massive trades for large mutual fund clients like Fidelity and Putnam.
But in his new life, DiIorio happened upon a technology company called E Mobile (symbol: EMTK), a small computer chipmaker that claimed to hold patents on an antenna-type Wi-Fi router and other products. He reviewed company press releases, as well as investor chatter online claiming that E Mobile’s chips were provoking interest from Chinese content companies.
E Mobile didn’t trade on the New York Stock Exchange or Nasdaq, however. It was an over-the-counter stock, traded on an electronic exchange called the Pink Sheets that is home to what are commonly called “penny stocks.”
A penny stock is actually any equity that trades for $5 a share or less. But many shares can be had for a literal penny, or even a fraction of one. They are purchased on the Pink Sheets and the over-the-counter Bulletin Board market, through your regular brokerage account.
Not every penny stock is suspect; some are simply startup companies working their way to larger exchanges. But they do lurk on the dark edges of the financial markets, with sudden volumes and massive volatility. Regulation and reporting vary from light to nonexistent.
“They don’t have the same standards,” said Joseph Borg, director of the Alabama Securities Commission, who achieved fame by investigating Jordan “The Wolf of Wall Street” Belfort’s company Stratton Oakmont for penny stock fraud in the 1990s. “Willie Sutton said he robbed banks because that’s where the money is. This is the easiest place to manipulate something.”
The Pink Sheets’ own website warns that it “offers trading in a wide spectrum of securities” and that “With no minimum financial standards, this market includes foreign companies that limit their disclosure, penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide adequate information to investors. As Pink requires the least in terms of company disclosure, investors are strongly advised to proceed with caution and thoroughly research companies before making any investment decisions.”
But DiIorio didn’t know that at the time.
On Wall Street, he had executed multimillion share trades, usually of blue chip companies that make up the Dow Jones Industrial Average, like IBM or General Electric.
“I had never invested in a penny stock before,” DiIorio said. “I was not super sophisticated in this world.” But he decided to take a flyer on E Mobile, based on its promising news. “I bought this company on hype.”
Between February and May 2005, DiIorio bought over 3.7 million shares of E Mobile, mostly through his rollover IRA account with TD Ameritrade. The total cost: $100,000, or a little over 3 cents a share. It was a big position, but this was retirement money he was trying to grow, and if it paid off, the payday would be tremendous.
E Mobile bounced around for a year, not doing much. The CEO, Nan Hu, personally called DiIorio, asking him to invest more through a “private placement”: an off-market offering of stock to select investors.
DiIorio declined. “I was already up to my eyeballs. I said, ‘I’m good with my position.’” Attempts to reach Hu for comment were unsuccessful.
Then, in March 2006, E Mobile announced a “reverse merger” with Best Rate Travel, a private company specializing in online vacation booking. Adrian Stone replaced Hu as CEO. To DiIorio, it was a puzzling maneuver for a chipmaker. “They announced a merger with a travel company?” he said. “What the fuck?”
As part of the merger, E Mobile changed its name to Best Rate Travel, altered its stock ticker symbol to BTVL, and did a 1-1,000 “reverse stock split.”
You’ve probably heard of a stock split; it can happen when a company’s share price gets unmanageably high. So when a stock hits, say, $200, investors who owned one share receive two, each priced at $100.
Well, the opposite can happen, too. Best Rate Travel’s reverse split gave existing investors like DiIorio way fewer shares — at a way higher price.
As a major shareholder, DiIorio was offered a slightly better deal: a conversion to preferred shares of E Mobile at a lower reverse split rate of 1-to-30, and then a conversion at 3-to-1 to Best Rate Travel. After all that, he was left with 373,599 BTVL shares.
The merger hype, repeated in a feedback loop of positive press releases, moved the stock. DiIorio recalls it peaking at $3.50 by September 2006, giving his holdings a value of around $1.3 million.
“I thought this was the exception to everything I knew about the markets,” DiIorio said. “Cheap stocks are cheap for a reason.” But the success fed DiIorio’s ego. He felt like he beat the odds, vindicating his stock-picking acumen.
There was a problem, however. Best Rate Travel structured the conversion with a “lock-up” agreement, restricting shareholders like DiIorio from selling the stock for a year. This is common for newly public companies.
But it left DiIorio helpless when the stock plummeted from $3.50 to $0.06 a share within two months.
DiIorio initially saw it as a classic “pump-and-dump” scheme, where major investors in a company lure in other investors with overhyped claims, raising the stock price, and then sell their shares, leading to a drop. Pump-and-dumps have proliferated with the rise of internet message boards. “It’s not just promoters calling you on the phone anymore,” said Laura Posner, bureau chief of the New Jersey Bureau of Securities. “People pretend to be other people, pretend to have inside information.”
But to DiIorio, BTVL’s drop didn’t make sense, because prior shareholders were prohibited from trading the stock. “I called the CEO regularly and said: ‘Who’s selling the stock? How is this happening? The stock is not for sale.’ He told me that he was locked up too.” Phone numbers and email addresses listed for CEO Adrian Stone no longer function, so he could not be reached for comment.
By the end, DiIorio took a loss from the peak stock value of well over $1 million. “I never saw such devastation in a stock before,” he said.
A Real Head-Scratcher
DiIorio prided himself on being a savvy trader.
And the implosion of Best Rate Travel, given the lock-up period, shouldn’t have occurred. DiIorio wanted to understand what really happened to crush his investment so completely. And he had the background in financial market analysis to see it through.
So DiIorio started learning what firms traded Best Rate Travel. The biggest two by far were the giant Swiss bank UBS and a massive New Jersey-based company named Knight Capital.
He thought these were very big names to be involved in such an obscure penny stock.
Something fishy was going on, but DiIorio had no idea what. “I just thought, what the hell, I’m going to figure this out.”
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/22/the-money-is-gone/
original link courtesy of basserdan
====
4kids
THE MONEY IS GONE
David Dayen
Sep. 22 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 1
After a stock analyst lost $1 million on one penny stock, he set off to find out how — and soon discovered signs of a far bigger scheme than he had ever imagined.
CHRIS DIIORIO HAD just lost a million dollars.
This was back in 2006. DiIorio, who was 39 at the time, had recently moved with his new wife from Boston to Castle Pines, Colorado, a leafy suburb of Denver, and was toiling in finance as a market researcher, analyzing the financial statements of public companies and giving recommendations to portfolio managers.
He had previously worked on Wall Street as an institutional equity trader and research analyst for a subsidiary of the now-defunct investment bank Donaldson, Lufkin, and Jenrette. He had 13 years experience executing massive trades for large mutual fund clients like Fidelity and Putnam.
But in his new life, DiIorio happened upon a technology company called E Mobile (symbol: EMTK), a small computer chipmaker that claimed to hold patents on an antenna-type Wi-Fi router and other products. He reviewed company press releases, as well as investor chatter online claiming that E Mobile’s chips were provoking interest from Chinese content companies.
E Mobile didn’t trade on the New York Stock Exchange or Nasdaq, however. It was an over-the-counter stock, traded on an electronic exchange called the Pink Sheets that is home to what are commonly called “penny stocks.”
A penny stock is actually any equity that trades for $5 a share or less. But many shares can be had for a literal penny, or even a fraction of one. They are purchased on the Pink Sheets and the over-the-counter Bulletin Board market, through your regular brokerage account.
Not every penny stock is suspect; some are simply startup companies working their way to larger exchanges. But they do lurk on the dark edges of the financial markets, with sudden volumes and massive volatility. Regulation and reporting vary from light to nonexistent.
“They don’t have the same standards,” said Joseph Borg, director of the Alabama Securities Commission, who achieved fame by investigating Jordan “The Wolf of Wall Street” Belfort’s company Stratton Oakmont for penny stock fraud in the 1990s. “Willie Sutton said he robbed banks because that’s where the money is. This is the easiest place to manipulate something.”
The Pink Sheets’ own website warns that it “offers trading in a wide spectrum of securities” and that “With no minimum financial standards, this market includes foreign companies that limit their disclosure, penny stocks and shells, as well as distressed, delinquent, and dark companies not willing or able to provide adequate information to investors. As Pink requires the least in terms of company disclosure, investors are strongly advised to proceed with caution and thoroughly research companies before making any investment decisions.”
But DiIorio didn’t know that at the time.
On Wall Street, he had executed multimillion share trades, usually of blue chip companies that make up the Dow Jones Industrial Average, like IBM or General Electric.
“I had never invested in a penny stock before,” DiIorio said. “I was not super sophisticated in this world.” But he decided to take a flyer on E Mobile, based on its promising news. “I bought this company on hype.”
Between February and May 2005, DiIorio bought over 3.7 million shares of E Mobile, mostly through his rollover IRA account with TD Ameritrade. The total cost: $100,000, or a little over 3 cents a share. It was a big position, but this was retirement money he was trying to grow, and if it paid off, the payday would be tremendous.
E Mobile bounced around for a year, not doing much. The CEO, Nan Hu, personally called DiIorio, asking him to invest more through a “private placement”: an off-market offering of stock to select investors.
DiIorio declined. “I was already up to my eyeballs. I said, ‘I’m good with my position.’” Attempts to reach Hu for comment were unsuccessful.
Then, in March 2006, E Mobile announced a “reverse merger” with Best Rate Travel, a private company specializing in online vacation booking. Adrian Stone replaced Hu as CEO. To DiIorio, it was a puzzling maneuver for a chipmaker. “They announced a merger with a travel company?” he said. “What the fuck?”
As part of the merger, E Mobile changed its name to Best Rate Travel, altered its stock ticker symbol to BTVL, and did a 1-1,000 “reverse stock split.”
You’ve probably heard of a stock split; it can happen when a company’s share price gets unmanageably high. So when a stock hits, say, $200, investors who owned one share receive two, each priced at $100.
Well, the opposite can happen, too. Best Rate Travel’s reverse split gave existing investors like DiIorio way fewer shares — at a way higher price.
As a major shareholder, DiIorio was offered a slightly better deal: a conversion to preferred shares of E Mobile at a lower reverse split rate of 1-to-30, and then a conversion at 3-to-1 to Best Rate Travel. After all that, he was left with 373,599 BTVL shares.
The merger hype, repeated in a feedback loop of positive press releases, moved the stock. DiIorio recalls it peaking at $3.50 by September 2006, giving his holdings a value of around $1.3 million.
“I thought this was the exception to everything I knew about the markets,” DiIorio said. “Cheap stocks are cheap for a reason.” But the success fed DiIorio’s ego. He felt like he beat the odds, vindicating his stock-picking acumen.
There was a problem, however. Best Rate Travel structured the conversion with a “lock-up” agreement, restricting shareholders like DiIorio from selling the stock for a year. This is common for newly public companies.
But it left DiIorio helpless when the stock plummeted from $3.50 to $0.06 a share within two months.
DiIorio initially saw it as a classic “pump-and-dump” scheme, where major investors in a company lure in other investors with overhyped claims, raising the stock price, and then sell their shares, leading to a drop. Pump-and-dumps have proliferated with the rise of internet message boards. “It’s not just promoters calling you on the phone anymore,” said Laura Posner, bureau chief of the New Jersey Bureau of Securities. “People pretend to be other people, pretend to have inside information.”
But to DiIorio, BTVL’s drop didn’t make sense, because prior shareholders were prohibited from trading the stock. “I called the CEO regularly and said: ‘Who’s selling the stock? How is this happening? The stock is not for sale.’ He told me that he was locked up too.” Phone numbers and email addresses listed for CEO Adrian Stone no longer function, so he could not be reached for comment.
By the end, DiIorio took a loss from the peak stock value of well over $1 million. “I never saw such devastation in a stock before,” he said.
A Real Head-Scratcher
DiIorio prided himself on being a savvy trader.
And the implosion of Best Rate Travel, given the lock-up period, shouldn’t have occurred. DiIorio wanted to understand what really happened to crush his investment so completely. And he had the background in financial market analysis to see it through.
So DiIorio started learning what firms traded Best Rate Travel. The biggest two by far were the giant Swiss bank UBS and a massive New Jersey-based company named Knight Capital.
He thought these were very big names to be involved in such an obscure penny stock.
Something fishy was going on, but DiIorio had no idea what. “I just thought, what the hell, I’m going to figure this out.”
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/22/the-money-is-gone/
===================
BIG PLAYERS, LITTLE STOCKS, AND NAKED SHORTS
David Dayen
Sep. 23 2016, 12:16 p.m.
The Penny Stock Chronicles
Part 2
A self-appointed stock sleuth finds financial giants trading extensively in little penny stocks like the one he owned that tanked. And he learns something amazing: Some brokers can sell shares that don’t actually exist.
CHRIS DIIORIO HAD lost a million dollars when the penny stock he was betting on shed 98 percent of its value in a matter of weeks. But when he looked deeper, he found this wasn’t a typical penny stock pump-and-dump scheme. He was determined to get to the bottom of it.
For one thing, there were two huge companies involved.
UBS, one of the world’s largest private banks, seemed to have no business trading in penny stocks. “This was a $50 billion-plus bank, it didn’t seem like penny stocks would move the needle,” DiIorio said. But just in December 2011, UBS’s trades in 32 penny stocks represented over half of the firm’s total share volume, according to his calculations.
In a one-line response to a series of detailed questions from The Intercept, UBS media relations director Peter Stack wrote in an email: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”
After some research, DiIorio became even more disturbed by the presence of the other company, Knight Capital, which has traded an average of more than 2 billion shares of penny stocks daily for the past three years.
Based in Jersey City, N.J., Knight is what is called a “market maker,” a dealer that facilitates trading by actually holding shares itself, if ever so briefly, so investors can buy and sell without any delay. “They’re selling the service of convenience to investors, like a car dealer makes it easier to buy or sell a car quickly,” said Jim Angel, an associate professor specializing in market structure at Georgetown University.
Knight Capital is a giant in the field; it alone was responsible for 11 percent of all trading in U.S. stocks by volume as of 2012. It’s known in particular for speed. The ability to jump in and out of stocks quickly through electronic markets is attractive to customers and enables Knight to trade nearly $30 billion every single day. “Market making is a business where the spreads are small but the volumes are large,” Angel said. The spread is the difference between the buy price and the sell price, and it’s how Knight makes money.
DiIorio looked closely at how Knight operated. He determined that between 80 and 90 percent of its share volumes came from penny and fractional penny stocks. According to DiIorio’s calculations, Knight traded over 10 trillion shares of OTC and Pink Sheets securities from 2004 to 2012.
This level of volume persists — the most recent statistics show that 73 percent of the company’s equity share volumes in August 2016 came from penny stocks, and 81 percent as recently as May.
A share in a penny stock is worth magnitudes less than a share in Google or Apple. But the spreads — where the market makers cash in — are proportionately bigger on a penny stock. For example, if the market maker earns a penny per share of a $50 stock, that’s only a spread of .02 percent. But a stock worth 25 cents where a market maker sees even a tenth of a penny in profit represents a spread of 2 percent — a 100-fold increase.
Still, DiIorio wondered how much volume a broker would need to make any money through penny stock trading. “You would have to move hundreds of millions of shares per trade,” he said.
And, because his personal investigation had started after his shares in a company called Best Rate Travel tanked precipitously, he also wondered: Why was Knight so involved with them in particular?
While DiIorio was mulling that, he started talking to his fellow traders and reading rumors online from owners of dozens of small companies who blamed the rapid destruction of their penny stocks on a practice known as naked short selling.
Let’s take that step by step. A short sale, generally speaking, is a bet that a stock price will drop over time. Typically, short sellers borrow shares of a stock from a broker and sell them on the open market, hoping to buy them back at a cheaper price in the future and make money on the exchange. This can become a self-fulfilling prophecy, if done right. Short selling can cause a market panic, and the prices drop in the frenzy.
But in naked short selling, you don’t even borrow the stock. You sell additional, phantom shares. This is even more likely to drive down the price than regular shorting, because suddenly the supply is larger but the demand is the same. “I can think of a number of stocks where the shares on the short exceeded the shares ever issued by the company,” said Alabama Securities Commission Director Joseph Borg. “You can’t do that unless it’s naked.”
Naked short selling is, not surprisingly, illegal in most circumstances.
But market makers like Knight have an exemption from naked short selling restrictions, on the grounds that they use the practice to maintain liquidity in markets. For example, if there’s high demand for a stock, the market maker can fill orders even if it doesn’t have the shares available.
As the Securities and Exchange Commission explains, “A market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares.” This often occurs in thinly traded stocks, like penny stocks.
DiIorio reasoned that naked short selling would explain where all the trades were coming from on Best Rate Travel; while he and his counterparts were locked into their investments for a year after the company’s merger, maybe someone was flooding the market with shares and battering the stock with ease.
At this point, DiIorio had no evidence that Knight did anything but facilitate trades. But he began to suspect that Knight somehow used naked short selling for its own devices. DiIorio’s attempts to get some explanations from Knight were brushed off — as were The Intercept’s during the reporting of this series.
Did Knight manipulate the stock price of Best Rate Travel, costing DiIorio and other investors millions? If so, why? Who benefited? Who needed this obscure, tiny penny stock to tank?
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/23/big-players-little-stocks-and-naked-shorts/
===========================
NAKED SHORTS CAN’T STAY NAKED FOREVER
David Dayen
Sep. 24 2016, 12:49 p.m.
The Penny Stock Chronicles
Part 3
Who engages in massive trades in penny stocks on the industry’s own “chill list”? And what happens when you sell a stock you don’t have? Victimized investor Chris DiIorio finds the answers in plain sight and wonders why no one else seems to care.
A FEW YEARS into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them.
Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients.
As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it.
DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.
His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.”
The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock.
But when the DTC senses trouble, it will stop clearing trades on a stock temporarily.
A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.”
That doesn’t stop Knight from buying and selling them, though. Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks.
“I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.”
He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.”
Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.
Naked Manipulation
The thing about naked short sales is they can’t stay naked forever.
Even if you don’t have the stock when you sell it, at some point it is expected that you hand it over.
And even with its market-maker exemption, Knight is required by SEC rules to eventually deliver the shares in a naked short transaction to the buyer and close out the trade.
Not doing so results in a “fail to deliver,” which DiIorio describes as the securities version of an IOU. And that IOU comes with rules: Under the SEC’s Regulation SHO, short sellers have to cough up the stock within one day of incurring the fail. Routine failures to deliver can lead to fines by the SEC, or even a ban from the securities markets.
Instead of complying with the rule, however, DiIorio alleges that Knight circumvented it by manipulating an obscure process within the machinery of the nation’s clearing system known as the “Obligation Warehouse.”
This service facilitates the matching of self-cleared trades (often known as “ex-clearing”) that don’t go through the DTC — for instance if the stock was chilled.
The Obligation Warehouse instead simply asks the buyer and seller of these ex-cleared trades if they “know” the transaction. If they both agree, the trade gets confirmed with a journal entry — and the buyer receives their stock purchase. It actually shows up in the buyer’s brokerage account.
The trades still have active IOUs, but according to DiIorio’s theory, buyers wouldn’t clamor for the trades to be closed because they would’ve already received their purchase.
If true, this would allow Knight to bury its naked short trades.
“They set up a shadow clearing system,” DiIorio said.
Furthermore, DiIorio recognized what he considered a persistent cycle in the stocks Knight traded. After being beaten down through what he suspected was naked shorting, they would often engage in a reverse stock split or reverse merger, like E Mobile did with Best Rate Travel in the trade that ended up losing DiIorio over $1 million.
This, he observed, could enable Knight to rerun the scheme over and over again, pummeling the stock price and then letting it move back up like a yo-yo.
Laura Posner of the New Jersey Securities Commission said constant reverse splits would require a coordinated relationship between the penny stock issuer and the broker-dealer. “I know that there are situations in which fraudsters will take advantage of a stock split to commit fraud,” Posner said. “But it’s different than a typical pump-and-dump, where you don’t have to have a personal relationship.”
Alternately, the cycle could be a cat-and-mouse game playing out between the short sellers and the stock issuers. Hawk Associates, a consulting firm to small companies, recommends that penny stock issuers victimized by naked shorting engage in reverse mergers and/or reverse splits to stop the rapid degradation of their stock price. “It may be useful as part of a larger strategy to deter naked shorting,” the firm writes on its website. “This may be more trouble than it’s worth, however. Once the new shares are in circulation, there’s nothing to stop a new round of naked shorting by determined parties.”
Knight’s involvement with suspicious stocks following this same pattern kept cropping up.
For example, NewLead Holdings (NEWL) — a shipping company with a mining concern on the side that was accused in federal court of having “no coal mines, no coal, and no ability whatsoever to engage in the coal business” — engaged in 1-1,125,000 worth of reverse splits over nine months in 2013 and 2014, meaning that 1,000 shares prior to the splits were equivalent to 0.0008 shares afterward. NewLead did another 1-300 stock split just this spring; it now trades as NEWLF, at 0.00030 as of August 23. Its 2015 annual report admits, “There is substantial doubt about our ability to continue as a going concern.”
FreeSeas (FREE), another penny stock, did a 1-60 reverse split on January 15 of this year, and then another 1-200 split on April 13, changing its stock symbol to FREEF. The company has engaged in seven reverse splits in the last five years; someone with 900 million shares five years ago would have one share today, trading at less than a penny. The company’s annual report says it currently has no employees. Private equity firm Havensight Capital made an alleged bid to purchase FreeSeas in June at $0.43 a share, about 80 times its price at the time of this writing, which FreeSeas called “false and misleading.”
While one might think this cycle of splits and price declines would trigger red flags with federal regulators, Joseph Borg of the Alabama Securities Commission doubted they would pay attention. “It’s like asking the SEC, of all the 35,000 private placements issued, you look at how many? And if they were telling the truth they would say we’re putting them in a drawer,” Borg said. “Anything like that on miniscule levels, they just get filed away.”
Furthermore, while there are “circuit breaker” rules preventing short sales when a stock loses more than 10 percent of its value in a day, these swings were more gradual. Knight made a lot of money on these plays, not just from the spread in trading profits, but because it often traded on its own account rather than on behalf of customers, DiIorio concluded. When the stock dropped, Knight got rich from the short. And it could rerun this repeatedly.
“He’s got a theory that, without studying it, I see theoretically where he’s going with it,” concluded Borg. “It’s an interesting idea.”
Knight is now known as KCG. Its spokesperson Sophie Sohn declined to comment when asked about this and other matters.
Attempts to reach spokespeople at FreeSeas have proven unsuccessful. Elisa Gerouki, corporate communications manager at NewLead, asked me to prove he wrote for The Intercept; after I did so, Gerouki failed to respond to questions.
Where Naked Shorts Go to Die
DiIorio also spotted a significant, seemingly toxic byproduct of this sort of activity.
The Intercept.Reverse mergers and reverse splits typically result in a change in the CUSIP, the nine-digit identification symbol assigned to a public stock.
Once that CUSIP changes, the naked shorter has no apparent way to close out the naked short position. No stock under the old CUSIP number exists anymore; it all automatically converts to the new CUSIP.
Those trades can sit in the Obligation Warehouse forever, in theory. But the “aged fails” — essentially orphaned naked short transactions — remain on the naked shorter’s balance sheet as a liability to be paid later.
By DiIorio’s reckoning, then, the cycle of naked shorting and reverse splits would inevitably result in an ever-increasing number of aged fails. And if that was happening, and those liabilities grew bigger and bigger, then federal regulators could see the outlines of the scheme on any financial statement.
DiIorio believed Knight accounted for its aged fails in the “sold not yet purchased” liability on its balance sheet. That’s supposed to be an inventory of stocks for use in future market making, which goes up and down as orders are filled. But DiIorio says it was a hiding place for a billowing structural liability.
And consider this: According to its own financial reports, Knight’s “sold not yet purchased” liability jumped from $385 million at the beginning of 2008 to $1.9 billion by mid-2011.
Jim Angel, the business professor, said there could be other explanations — such as Knight’s growth as a company during that period — for why the “sold not yet purchased” liability ballooned. But, he said, market makers are typically “in the moving, not storing, business, and like to keep their inventories as small as possible.”
DiIorio had no such doubts. He saw the fact that Knight was blowing a hole in its own balance sheet as undeniable evidence of the naked shorting play.
KCG spokesperson Sophie Sohn was asked specifically about that claim and declined to comment.
If DiIorio was correct, Knight was driving penny stocks down over and over again with naked shorting, then not actually closing the trades, and racking up enormous paper liabilities.
This was even more complicated than he thought. It was time to call the cops.
The Penny Stock Chronicles
David Dayen, a persistent chronicler of how oligarchs exploit the financial system to enrich themselves at the expense of others, writes about Chris DiIorio, a stock analyst who for 10 years has obsessively investigated how exactly he came to lose $1 million on one penny stock. A remarkable story ensues.
https://theintercept.com/2016/09/24/naked-shorts-cant-stay-naked-forever/
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original link courtesy of basserdan
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4kids
DEUTSCHE BANK’S $10-BILLION SCANDAL
AUGUST 29, 2016 ISSUE
How a scheme to help Russians secretly funnel money offshore unravelled.
By Ed Caesar
Almost every weekday between the fall of 2011 and early 2015, a Russian broker named Igor Volkov called the equities desk of Deutsche Bank’s Moscow headquarters. Volkov would speak to a sales trader—often, a young woman named Dina Maksutova—and ask her to place two trades simultaneously. In one, he would use Russian rubles to buy a blue-chip Russian stock, such as Lukoil, for a Russian company that he represented. Usually, the order was for about ten million dollars’ worth of the stock. In the second trade, Volkov—acting on behalf of a different company, which typically was registered in an offshore territory, such as the British Virgin Islands—would sell the same Russian stock, in the same quantity, in London, in exchange for dollars, pounds, or euros. Both the Russian company and the offshore company had the same owner. Deutsche Bank was helping the client to buy and sell to himself.
At first glance, the trades appeared banal, even pointless. Deutsche Bank earned a small commission for executing the buy and sell orders, but in financial terms the clients finished roughly where they began. To inspect the trades individually, however, was like standing too close to an Impressionist painting—you saw the brushstrokes and missed the lilies. These transactions had nothing to do with pursuing profit. They were a way to expatriate money. Because the Russian company and the offshore company both belonged to the same owner, these ordinary-seeming trades had an alchemical purpose: to turn rubles that were stuck in Russia into dollars stashed outside Russia. On the Moscow markets, this sleight of hand had a nickname: konvert, which means “envelope” and echoes the English verb “convert.” In the English-language media, the scheme has become known as “mirror trading.”
Mirror trades are not inherently illegal. The purpose of an equities desk at an investment bank is to help approved clients buy and sell stock, and there could be legitimate reasons for making a simultaneous trade. A client might want to benefit, say, from the difference between the local and the foreign price of a stock. Indeed, because the individual transactions involved in mirror trades did not directly contravene any regulations, some employees who worked at Deutsche Bank’s Russian headquarters at the time deny that such activity was improper. (Fourteen former and current employees of Deutsche Bank in Moscow spoke to me about the mirror trades, as did several people involved with the clients. Most of them asked not to be named, either because they had signed nondisclosure agreements or because they still work in banking.)
Viewed with detachment, however, repeated mirror trades suggest a sustained plot to shift and hide money of possibly dubious origin. Deutsche Bank’s actions are now under investigation by the U.S. Department of Justice, the New York State Department of Financial Services, and financial regulators in the U.K. and in Germany. In an internal report, Deutsche Bank has admitted that, until April, 2015, when three members of its Russian equities desk were suspended for their role in the mirror trades, about ten billion dollars was spirited out of Russia through the scheme. The lingering question is whose money was moved, and why.
Deutsche Bank is an unwieldy institution with headquarters in Frankfurt and about a hundred thousand employees in seventy countries. When it was founded, in 1870, its stated purpose was to facilitate trade between Germany and other countries. It soon established footholds in Shanghai, London, and Buenos Aires. In 1881, the bank arrived in Russia, financing railways commissioned by Alexander III. It has operated there ever since.
During the Nazi era, Deutsche Bank sullied its reputation by financing Hitler’s regime and purchasing stolen Jewish gold. After the war, the bank concentrated on its domestic market, playing a significant role in Germany’s so-called economic miracle, in which the country regained its position as the most potent state in Europe. After the deregulation of the U.S. and U.K. financial markets, in the nineteen-eighties, Deutsche Bank refreshed its overseas ambitions, acquiring prominent investment banks: the London firm Morgan Grenfell, in 1989, and the American firm Bankers Trust, in 1998. By the new millennium, Deutsche Bank had become one of the world’s ten largest banks. In October, 2001, it débuted on the New York Stock Exchange.
Although the bank’s headquarters remained in Germany, power migrated from conservative Frankfurt to London, the investment-banking hub where the most lavish profits were generated. The assimilation of different banking cultures was not always successful. In the nineties, when hundreds of Americans went to work for Deutsche Bank in London, German managers had to place a sign in the entrance hall spelling out “Deutsche” phonetically, because many Americans called their employer “Douche Bank.”
In 2007, the bank’s share price hit an all-time peak: a hundred and fifty-nine dollars. But as it grew fast it also grew loose. Before the housing market collapsed in the United States, in 2008, sparking a global financial crisis, Deutsche Bank created about thirty-two billion dollars’ worth of collateralized debt obligations, which helped to inflate the housing bubble. In 2010, Deutsche Bank’s own staff accused it of having masked twelve billion dollars’ worth of losses. Eric Ben-Artzi, a former risk analyst, was one of three whistle-blowers. He told the Securities and Exchange Commission that, had the bank’s true financial health been known in 2008, it might have folded, as Lehman Brothers had. Last year, Deutsche Bank paid the S.E.C. a fifty-five-million-dollar fine but admitted no wrongdoing. Ben-Artzi told me that bank executives had incurred a tiny penalty for a huge crime. “There was cultural criminality,” he said. “Deutsche Bank was structurally designed by management to allow corrupt individuals to commit fraud.”
Scandals have proliferated at Deutsche Bank. Since 2008, it has paid more than nine billion dollars in fines and settlements for such improprieties as conspiring to manipulate the price of gold and silver, defrauding mortgage companies, and violating U.S. sanctions by trading in Iran, Syria, Libya, Myanmar, and Sudan. Last year, Deutsche Bank was ordered to pay regulators in the U.S. and the U.K. two and a half billion dollars, and to dismiss seven employees, for its role in manipulating the London Interbank Offered Rate, or libor, which is the interest rate banks charge one another. The Financial Conduct Authority, in Britain, chastised Deutsche Bank not only for its manipulation of libor but also for its subsequent lack of candor. “Deutsche Bank’s failings were compounded by them repeatedly misleading us,” Georgina Philippou, of the F.C.A., declared. “The bank took far too long to produce vital documents and it moved far too slowly to fix relevant systems.”
In April, 2015, the mirror-trades scheme unravelled. After a two-month internal investigation, the three Deutsche Bank employees were suspended. One was Tim Wiswell, a thirty-seven-year-old American who was then the head of Russian equities at the bank. The others were Russian sales traders on the equities desk: Dina Maksutova and Georgiy Buznik. Afterward, Bloomberg News suggested that some of the money diverted through mirror trades belonged to Igor Putin, a cousin of the Russian President, and to Arkady and Boris Rotenberg. The Rotenberg brothers own Russia’s largest construction company, S.G.M., and are old friends of Vladimir Putin. They are on the U.S. government’s list of sanctioned Russians, which was compiled in response to Putin’s aggression in Ukraine. According to the U.S. Treasury, the Rotenbergs have “made billions of dollars in contracts” that were awarded to their company by the Russian state, often without a transparent bidding process. (Last year, S.G.M. was awarded a contract worth $5.8 billion to build a twelve-mile bridge between Russia and Crimea.)
In June, 2015, with pressure from shareholders intensifying over the mirror trades and other scandals, the co-C.E.O.s of Deutsche Bank, Anshu Jain and Jürgen Fitschen, announced that they would resign. They were replaced by John Cryan, whose remit was to clean up the bank. That September, he announced the impending close of all investment-banking activity in Russia. When the Moscow investment bank shut down, in March, the remaining employees threw a “going out of business” dinner at a restaurant near the office. By the end of the evening, bankers were dancing on the bar.
Many current and former employees of Deutsche Bank cannot quite comprehend how the equities desk in a minor financial outpost came to taint the entire institution. The ostensible function of the Moscow desk was straightforward: it bought and sold stock for approved corporate clients—mutual funds, brokerages, hedge funds, and the like. The desk had about twenty employees, and included researchers, who analyzed financial data; sales traders, who took calls from clients about buy and sell orders; and traders, who executed the orders.
According to a former employee, before the crash of 2008 the desk’s yearly profit was nearly three hundred million dollars. In the years after the crash, profits plunged by more than half. In this environment of diminishing returns on normal stock-market activity, the Moscow equities desk was looking to find fresh revenue streams.
Many businesses in the Russian Federation avoid taxes by using offshore jurisdictions, such as Cyprus, for their headquarters. Rich Russians, meanwhile, often funnel their private fortunes offshore, in an effort to hide their assets from the capricious and predatory Russian state. Frequently, this fugitive money is invested in assets such as property: on Park Lane in London, or Park Avenue in New York. (Boris Rotenberg’s wife, Karina, told the Russian edition of Tatler that the family has three main houses: one in Moscow, one in Monaco, and a “dacha” in Provence, where she keeps her horses.)
The impact of this capital flight is felt at both ends of its journey. Research published last year by Deutsche Bank’s own analysts suggested that unrecorded capital inflows from Russia into the U.K. correlated strongly with increases in U.K. house prices and, to a lesser extent, with a strengthening of the pound sterling. Capital flight also has weakened Russia’s tax base and its currency. In 2012, Putin began a “de-offshorization” program, urging businesses and oligarchs to keep their headquarters and their fortunes at home. Two years later, after Russia’s incursion into Crimea led to sanctions from the European Union and the U.S., Putin declared that offshorization was illegal. But as the ruble and the economy foundered many Russians felt even more eager to remove their money. Mirror trading was an ideal escape tunnel.
According to people with knowledge of how mirror trades worked at Deutsche Bank, the main clients who were engaged in the scheme came to the bank in 2011 through Sergey Suverov, a sales researcher. Suverov left the bank soon afterward. (He has not been charged with wrongdoing.) Igor Volkov, the Russian broker, became the clients’ primary representative. Initially, the accounts that Volkov handled—funds based in Russia and overseas, with such bland names as Westminster, Chadborg, Cherryfield, Financial Bridge, and Lotus—placed conventional stock-market orders. But Volkov soon made it clear to his contacts at Deutsche Bank that he wanted to make a large volume of simultaneous trades. (He could not be reached for comment.)
What did Deutsche Bank know about the companies that Volkov represented? Each new fund that wished to trade with Deutsche Bank, known as a “counterparty,” was subjected to a “double check” by compliance departments in London and Moscow, to insure that papers were in order. Evidently, all the counterparties passed both internal reviews. The bank was also required to complete a “know your client,” or “K.Y.C.,” assessment, and determine if the client had any taint of criminality. Deutsche Bank did little to interrogate the source of funds—including those behind Westminster and other Volkov clients. According to people who worked on the desk in 2011, the K.Y.C. procedure consisted of not much more than sales traders asking counterparties to fill in a paragraph stating the source of their funds. “Nobody asked any further questions,” a former employee recalls.
The Russian equities desk generally had four sales traders who took calls from clients. Two were American, and two—Maksutova and Buznik—were Russian. The sales traders reported to Tim Wiswell, the American in charge of the Russian equities team, and to Carl Hayes, an executive in London. Two other managers—Batubay Ozkan, in Moscow, and Max Koep, in London—oversaw the desk.
Maksutova and Buznik were allocated the equities desk’s Russian clients. Maksutova was assigned the clients represented by Volkov. Colleagues say that she knew few personal details about Volkov. (A former trading colleague of Volkov’s said that Volkov is about forty years old and heavyset, adding, “He likes beer.” Another former colleague said that Volkov “wasn’t a great trader, but he was a good fisherman.”) Volkov previously had worked at Antanta Kapital, a brokerage owned by Arcadi Gaydamak, a Russian-Israeli billionaire. Antanta Kapital ceased trading in 2008, and Gaydamak was later indicted in Israel for fraud and money laundering. (He received probation, but he recently spent three months in prison, in France, for illegal arms trading.)
In 2009, top managers at Antanta Kapital formed Westminster Capital Management, which became one of the first major mirror-trade clients. As a Deutsche Bank employee put it, Volkov was Westminster’s “execution guy.” Volkov also began executing mirror trades for several other companies.
Four employees at Deutsche Bank in Moscow recall that nobody tried to hide the scheme. Wiswell, Buznik, and Maksutova all met with Volkov, and his orders were discussed openly on the desk. Colleagues also remember that Hayes asked both Buznik and Wiswell about the mirror trades. Few conversations relating to the trades, however, were likely retained by Deutsche Bank’s internal monitoring systems. Within the office, conversations about the trades typically occurred face to face, and videoconferences with colleagues in London were not recorded.
Several Deutsche Bank employees in London knew about the mirror trades, even though the orders were taken in Moscow. The London office executed half the transactions. The trades were also documented by a computer system, called DB Cat, which catalogued every trade made by the bank. Hayes and Koep, the supervisors in London, could call up trading receipts on their computers.
Although many people at Deutsche Bank knew about the mirror trades, not everybody was happy about them. In late 2012, Maksutova, the sales trader, went on maternity leave, and Buznik temporarily worked with Volkov. Buznik became uneasy that Volkov was executing identical buy and sell orders, and twice asked to meet with Wiswell to discuss the propriety of mirror trading. Wiswell, colleagues say, looked after Volkov’s accounts personally. Wiswell assured Buznik that the trades were legitimate, and Buznik did not share his concerns with other managers. (Neither Wiswell nor his attorney responded to dozens of requests for comment.)
One day in 2011, the Russian side of a mirror trade, for about ten million dollars, could not be completed: the counterparty, Westminster Capital Management, had just lost its trading license. The Federal Financial Markets Service in Russia had barred two mirror-trade counterparties, Westminster and Financial Bridge, for improperly using the stock market to send money overseas. The failed trade was a problem for Deutsche Bank. It had paid several million dollars for stock without receiving a cent from Westminster. Employees at all levels of a financial institution notice when a trading desk abruptly falls short by a few million dollars. The episode should have raised serious suspicions—especially given the revoking of Westminster’s license—but apparently it did not.
[u]Employees recall that the failed trade was resolved in November, 2012, when Westminster repaid Deutsche Bank. Volkov resumed calling in mirror trades, on behalf of other counterparties. These companies were supposedly subjected to a rigorous “client review” process, and all of them were deemed satisfactory by a Deutsche Bank compliance team. But there was a pattern suggesting malfeasance. Clients of the scheme consistently lost small amounts of money: the differences between Moscow and London prices of a stock often worked against them, and clients had to pay Deutsche Bank a commission for every transaction—between ten hundredths and fifteen hundredths of a percentage point per trade. The apparent willingness of counterparties to lose money again and again, a former manager at Deutsche Bank told me, should have “sounded an air-raid alarm” that the true purpose of the mirror trades was to facilitate capital flight.
Wiswell, Buznik, and Maksutova also knew that there was a common interest among the counterparties, because many of them were represented by Volkov. But even Deutsche Bank employees who did not work on the desk could have concluded, after a cursory examination, how closely aligned the funds were. According to public documents, Chadborg Trade LLP, which was based in the U.K., wholly owned Lotus Capital, which was based in Russia. Another British mirror-trades entity, ErgoInvest, was registered in the same office in Hertfordshire where Chadborg was registered. Westminster Capital Management, meanwhile, was bought in 2010 by a man named Andrey Gorbatov. In 2014, Gorbatov bought another Russian brokerage implicated in mirror trades: Rye, Man & Gor. Clients of mirror trades told me that the same people who established Westminster also established one of the other counterparties: Cherryfield Management, in the British Virgin Islands.
The counterparties were not owned by Russian oligarchs. They were brokerages run by Russian middlemen who took commissions for initiating mirror trades on behalf of rich people and businesses eager to send their money offshore. A businessman who wanted to expatriate money in this way would invest in a Russian fund like Westminster, which would then use mirror trades to move that money into an offshore fund like Cherryfield. The offshore fund then wired the money, in dollars, into the businessman’s private offshore account. A middleman who formed one of the Russian counterparty funds told me that the cost of his services depended upon the Russian authorities’ desire to stop the export of capital. In 2011, when controls were lax, the fee was 0.2 per cent. In 2015, when sanctions were strong, and Putin was determined to retain as much wealth as he could in Russia, the fee rose to more than five per cent.
Crucially, the footprint of individual mirror trades was small. One Deutsche Bank employee recalls that, in 2014, the Moscow equities desk traded seventy to ninety million dollars’ worth of stock daily. Mirror trades never exceeded twenty million dollars a day, and were normally in the region of ten million dollars. (Deutsche Bank claims that some of the suspicious trades were “one-way,” meaning that another bank picked up the mirror order—a more laborious but less traceable transaction.)
Whose fortunes were being hidden? In April, I met a broker in Moscow who had worked with clients of the Deutsche Bank mirror trades. He told me that mirror trading was not a new scheme. It was invented, in the late aughts, by other banks in Russia, to help importers avoid heavy taxes on their products. The scam was ingeniously simple. A Russian importer would claim on his invoices that he had bought, say, ten rubber ducks rather than the true figure of ten thousand rubber ducks, in order to pay tax on only ten rubber ducks. Of course, the importer still needed to pay his supplier overseas for the remaining rubber ducks. He did this by expatriating money using mirror trades. Instead of paying a large tax to the Russian treasury, the importer paid a much smaller fee to money launderers.
The broker found it hard to believe that the wealthiest Russians, such as the Rotenberg brothers, would have used mirror trades. After all, there were so many ways for Putin’s friends to send their money offshore, including through Russian government-owned banks, like Gazprombank, which have branches overseas. Other people I spoke with disputed the broker’s assessment: U.S. and E.U. sanctions have made it increasingly difficult for Russian billionaires to expatriate money, and mirror trades had the advantage of being a quiet method, because of the relatively small amounts involved in each transaction.
Another Russian banker, who helped to set up the mirror-trade scheme, told me that much of the money belonged to Chechens with connections to the Kremlin. Chechnya, the semi-autonomous region in the North Caucasus, is ruled by the exuberantly barbarous Ramzan Kadyrov, who is close with Putin. Chechnya receives huge subsidies from Russia, and much of the money has ended up in the pockets of figures close to Kadyrov.
The Deutsche Bank mirror-trades operation appears to be linked to an even bigger attempt to expatriate money: the so-called Moldovan scheme. Starting in 2010, fake loans and debt agreements involving U.K. companies helped funnel about twenty billion dollars out of Russia to a Latvian bank, by way of Moldova. When the Moldovan scheme unravelled, in late 2015, several people were arrested. One was Alexander Grigoriev, a Russian financier who controlled Promsberbank—a now defunct institution, based in a Russian backwater called Podolsk, which counted Igor Putin as a board member. Two of Promsberbank’s major shareholders—including Financial Bridge—have been accused of making mirror trades. The Russian news agency RBC has reported that “the criminal dealings of Promsberbank” and the mirror trades at Deutsche Bank are connected.
Deutsche Bank has not commented on whose money was expatriated through the mirror trades, although John Cryan, the C.E.O., has said that the bank has not knowingly assisted Russians on the sanctions list. In the deadening argot of finance, Deutsche Bank’s Russian fiasco has frequently been called a “failure of controls.” In an interview in March, 2016, Cryan said, “To our knowledge, the individual transaction steps in themselves were innocuous. However, the case raises questions about how effective our systems and controls were, especially with regard to the onboarding of new clients, an area where we experienced difficulties in collecting sufficient information.”
This passive language is hard to square with the blatant nature of the scheme. Roman Borisovich, a former investment banker at Deutsche Bank in London, who focussed on Russian businesses, told me, “ ‘Fucking Obvious’ is the middle name of Russian corruption.”
Deutsche Bank’s myopia has been noticed by regulators. In March, the Financial Conduct Authority of the U.K. sent a letter to Deutsche Bank, saying that the company’s U.K. branch had “serious A.M.L. (anti-money laundering), terrorist financing and sanctions failings which were systemic in nature.” A month later, Georg Thoma, a lawyer who sat on Deutsche Bank’s integrity committee, and who was brought to the bank specifically to improve controls and analyze the bank’s former misconduct, was forced out. He had just argued with executives at a board meeting. The deputy chairman of the board, Alfred Herling, told the Frankfurter Allgemeine Sonntagszeitung that Thoma had been “overzealous” in probing links between senior executives and misconduct at the bank.
Reports of Deutsche Bank’s internal investigation into mirror trades do not inspire confidence. Mirror trades occurred for at least two years before anyone raised any concerns, and when red flags appeared it was months before anyone acted on them. According to Bloomberg News, the internal report notes that, in early 2014, a series of inquiries about the propriety of mirror trades had been logged by multiple parties, including Hellenic Bank, in Cyprus, the Russian Central Bank, and back-office staff members at Deutsche Bank itself. When Hellenic Bank executives contacted Deutsche Bank and asked about the unusual trades, they did not hear back from the compliance department. Instead, their inquiry was fielded by the equities desk that was performing the mirror trades. Deutsche Bank in Moscow reassured Hellenic Bank that everything was in order.
Tim Wiswell, the head of the equities desk, was known to his colleagues as Wiz. He grew up in Essex, Connecticut. He has strong connections to Russia. His father, George C. Wiswell III, worked for many years in the oil-and-gas sector in Moscow. Tim spent a year of high school there.
Wiswell graduated from Colby College, in Maine, in 2001. In his mid-twenties, he arrived in Moscow. He already spoke Russian. His first job was at Alfa-Bank, the private bank of Mikhail Fridman, the second-wealthiest man in Russia. When a salaried position did not materialize, he moved to a junior position in equities at United Financial Group, the Russian investment bank co-founded by Charlie Ryan, an American pioneer in post-Soviet Russian finance. In 2006, U.F.G. was bought by Deutsche Bank. Within a few years, Wiswell had become the head of the Russian equities desk.
Colleagues at U.F.G. remember Wiswell as an all-American type who loved sailing and skiing. His boss there, Martin Skelly, told me that Wiswell was an industrious, well-liked employee, and compared him to Matt Damon’s character in the Jason Bourne films—“the same kind of rugged, good-looking, composed, thoughtful guy.” In 2010, Wiswell and Natalia Makosiy, an art historian from Moscow, got married in Newport, Rhode Island; photographs of the event, which featured a samovar filled with Russian moonshine, appeared in a wedding magazine.
Many young Americans were drawn to Moscow banks in the aughts. Will Hammond, an American who worked with Wiswell at U.F.G., has been writing a memoir of his time on the trading floors—and dance floors—of Moscow. He remembers Russia at the time as “the wild, wild East”: “If you wanted to be competitive, you had to do a lot of things that were not done in the developed world, because it was Russia. It was a very aggressive sales mentality, which was going on across the board across all the Russian banks.” Others recall that it was common to engage in “front running”—using knowledge of a pending trade from a client to make money on a personal account. In America, the tactic would be considered insider trading. (Insider trading did not become illegal in Russia until 2011.)
A former colleague of Wiswell’s at Deutsche Bank says that, even before the mirror trades, some of Wiswell’s activity as head of the equities desk was questionable. In the late aughts, a fund called Lanturno sometimes traded with Deutsche Bank “over the counter.” Such trades do not pass through a stock exchange; a broker sets the price based on the market value. (Many mirror trades were also over-the-counter.) The former colleague recalls occasions in which Lanturno lost money on a trade, either by buying too high or selling too low. The next morning, however, bank records would indicate that Lanturno had not lost money on the trade. When challenged by colleagues, Wiswell would say that he had altered the entries for Lanturno to rectify an error made on his part. The sums involved were small and easily ignored—the reversed losses were between ten and twenty thousand dollars. The former colleague, however, noted that Wiswell was later flown to Mauritius on a private jet by Lanturno’s owner, Dmitry Perevalov, to celebrate Perevalov’s fortieth birthday. Two photographs on Facebook show that the men also went skiing together. (Perevalov denied that any trades were amended on his behalf, and said that it was “impossible” to change an order once it had been entered into Deutsche Bank’s systems. Former employees recall trades being amended regularly.)
Recently, I received a photocopied trade blotter from a source within Deutsche Bank. It showed that, between October 13, 2009, and October 27, 2009, Wiswell made a series of curious over-the-counter trades on behalf of a counterparty called Gigalogic Holdings, which, according to former Deutsche Bank employees, was the personal investment fund of Stephen Lynch, an American investor in Russia—and a friend of Wiswell’s. Because a trader sets the price for over-the-counter trades based on a spread of a few decimal points around a stock’s market value, there is scope to create a margin. The blotter showed that Wiswell had repeatedly bought low and sold high on Gigalogic’s behalf, effectively paying Lynch nearly half a million dollars of Deutsche Bank’s money. According to colleagues, when Wiswell was confronted about the transactions he said that they had been approved by superiors. Lynch, Wiswell said, had been helpful in a bankruptcy auction that Deutsche Bank had participated in, and paying him through over-the-counter trades was “easier than writing him a check.” (A lawyer representing Lynch denied that Lynch had been paid by Wiswell, and also denied any connection between Lynch and Gigalogic. When presented with company documents from Cyprus showing that Lynch owned all the shares in Gigalogic between 2007 and 2012, the representative declined further comment.)
When the mirror trades began at Deutsche Bank, in 2011, revenues on Wiswell’s desk were falling sharply, and Wiswell likely felt pressure to improve performance. For Maksutova and Buznik, at least, there was no obvious financial benefit to performing mirror trades: the extra volume did not affect their bonuses. Many at Deutsche Bank, however, believe that Wiswell profited personally from the scheme.
In August, 2015, shortly after Wiswell was suspended from Deutsche Bank, he was fired. He initiated a wrongful-dismissal suit. The court hearings, in Moscow, were open to the press. On February 1, 2016, a lawyer for Deutsche Bank called Wiswell “the mastermind of the scheme for the withdrawal of billions of dollars from the country.” The lawyer also said that Wiswell’s wife had received a quarter-million-dollar payment, for “financial services,” into the bank account of a corporation that is registered under her name. Wiswell lost the suit.
Deutsche Bank refused to say whether it believes that Wiswell took bribes, and declined to discuss the case further for this article, perhaps because of the ongoing investigations into its Moscow office. According to people within Deutsche Bank, however, senior executives have told colleagues that Wiswell received bribes far in excess of the quarter-million-dollar payment cited by the company’s lawyer.
Will Hammond, Wiswell’s colleague at U.F.G., suggested to me that the bribery allegations were part of an effort to place the blame solely on Wiswell and save the jobs of Deutsche Bank supervisors. One of the executives who oversaw the desk, Batubay Ozkan, plans to leave the bank this year, by mutual agreement; Hayes and Koep—the supervisors who could monitor the trades made by Wiswell’s desk—still work for Deutsche Bank in London. (None of the three have been charged with wrongdoing.) “Someone is going to an awful lot of trouble to make Wiz look guilty,” Hammond said.
On an April evening in Moscow, I met with a broker who had intimate knowledge of the structure of the mirror trades. The city was emerging from the choking cold of winter, and young people flirted outside Paveletskaya Station as if it were high summer. As the broker and I walked across the square, he characterized mirror trades as just one of a thousand ruses employed by smart businessmen. But why, I asked him, would somebody with a prominent position at a major bank get involved in such a scheme? Wiswell’s annual compensation was in the region of a million and a half dollars. The broker laughed. He said that Wiswell had been paid handsomely by clients of the mirror trades. For the architects of the scheme, the broker explained, it was worth it to bribe someone inside the bank: “Guys always pay something. They think it will hook you, so you are not going to do unexpected things.” In the estimation of the broker, Wiswell was a useful functionary but hardly a criminal genius. Sometimes, the broker said, money was transferred into an offshore account maintained by Wiswell’s wife, and sometimes cash was delivered to Wiswell in a bag.
Wiswell’s current whereabouts are unclear. He recently launched a craft-beer business, Barbell Brewery, in Moscow, but some months ago he left the country with his wife and their two children for a trip to Southeast Asia. In March, his wife posted a request on Facebook for a nanny, noting that her family was on an extended stay in Bali, in the resort town of Seminyak. She later told a Balinese dance instructor that the family planned to remain on the island for a year. (Wiswell’s wife declined, through a lawyer, requests for an interview.)
Former colleagues expect Wiswell to return to Moscow, where he owns an apartment. Russia is likely to be a friendly jurisdiction to him. When Moscow regulators looked into the mirror trades, they found little to trouble them. They said simply that Deutsche Bank had fallen victim to an illegal scheme, and levied a token punishment—about five thousand dollars. American and European regulators are likely to be much more punitive. Indeed, Wiswell probably will not return to America anytime soon, given the Department of Justice’s investigation of Deutsche Bank. One of Wiswell’s friends, now in America, called him “finance’s Edward Snowden.”
On March 9, 2015, less than a month before the mirror-trades scandal became public, Oliver Harvey and Robin Winkler, two strategists in the research department of Deutsche Bank in London, published a report, “Dark Matter,” which described the vast unrecorded transfer of money among nations. Most economic papers are politely ignored by the world at large, but “Dark Matter” attracted wide interest. Several newspapers ran articles about it, and Harvey appeared on both CNN and the BBC to discuss his research.
The report’s conclusions confirmed long-held suspicions. In any national economy, the authors explained, there are capital flows that do not appear on what is called “the balance of payments.” Errors and accidental omissions should be random, and therefore reveal no pattern. The authors found that in the United Kingdom the pattern was anything but random. Britain had “large positive net errors” that suggested significant “unrecorded capital inflows.” Analyzing data from other countries, Harvey and Winkler deduced where the vast majority of unrecorded capital flowing into the U.K. was coming from. Since 2010, they wrote, about a billion and a half dollars had arrived, unrecorded, in London every month; “a good chunk” of it was from Russia. “At its most extreme,” the authors explained, the unrecorded capital flight from Moscow included “criminal activity such as tax evasion and money laundering.”
In a connected and digitized financial system, how could such capital flight happen? Bank transfers leave a footprint. Imports and exports are accounted for. How could money disappear in one place and show up in another? The two strategists did not have to wait long, or look far, to learn the shameful answer: of the eighteen billion dollars that the researchers had estimated was flowing into the U.K. each year, about twenty per cent had arrived there as the result of trades made at their own bank. Half the trades were settled at Deutsche Bank’s City of London headquarters, which is a short walk from the office, in Pinners Hall, where Harvey and Winkler worked.
John Cryan, the Deutsche Bank C.E.O., has little time to think about such embarrassments. Whatever the outcome of the various investigations into mirror trades, the bank is in trouble. It lost seven and a half billion dollars last year. Cryan has called the 2015 result “sobering.” Britain’s recent decision to leave the E.U. has imperilled Deutsche Bank even further. So far in 2016, the bank has lost half its market valuation, and in early August its stock price dipped to an all-time low, of $12.58. The only investors who now like the bank are short-sellers. The financier George Soros took a short position in Deutsche Bank before the Brexit referendum, effectively betting against the share price, and is estimated to have made more than a hundred million dollars as the stock nose-dived. Meanwhile, unlike many other Wall Street lenders, Deutsche Bank continues to loan millions of dollars to businesses associated with Donald Trump. When the Times questioned Trump recently about his credentials on Wall Street, he said that a private wealth manager at Deutsche Bank, Rosemary Vrablic, could vouch for him.
The mood within the bank is bleak, not least because Cryan has announced that job cuts are forthcoming. A recent survey found that less than half of Deutsche Bank employees are proud to work there. (Cryan also called this news “sobering.”) The mood among shareholders is, if anything, worse. Ingo Speich, a fund manager at Union Investment, a German company that is one of Deutsche Bank’s biggest shareholders, told me that in 2015 there were catcalls at the bank’s annual general meeting. This year, Speich stood up and inveighed against “a decade of mismanagement.” Meanwhile, the market capitalization of Deutsche Bank has become a grim Wall Street joke. This summer, Deutsche Bank, which is a hundred and forty-six years old, has been valued at about eighteen billion dollars—the same as Snapchat.
Since 2011, the Federal Reserve has performed a yearly “stress test” of U.S. lenders, assessing whether banks would have enough capital to withstand the shock of an economic downturn. Deutsche Bank failed the test in 2015, and failed again this June, when “broad and substantial weaknesses” were uncovered. Soon after the Federal Reserve’s latest report was released, the International Monetary Fund issued a dire warning. Deutsche Bank, it said, was not only “one of the most important net contributors to systemic risks in the global banking system”; it was also a contagious agent, because of heavy financial “spillover” between Deutsche Bank and other lenders and insurers. Any kind of failure at Deutsche Bank, the I.M.F. suggested, would be extremely bad news for everybody.
Given Deutsche Bank’s fragility, the mirror-trading scandal could not have come at a worse time. Cryan has promised to settle the Russian case by the end of this year, and the bank recently set aside about a billion dollars for legal costs. This may not be enough. Last year, Deutsche Bank was fined the relatively small sum of two hundred and fifty-eight million dollars for its circumvention of sanctions against Iran, Sudan, and elsewhere. In 2014, however, BNP Paribas agreed to pay nearly nine billion dollars to settle with regulators over sanctions violations. And the mirror trades may exact a heavy fine from U.S. regulators, who take a dim view of activity that looks like money laundering. A payment as vast as the one levied at BNP Paribas could require Deutsche Bank to raise capital to survive. A German government bailout might become a necessity. A capital shortfall at Germany’s largest bank might provoke a banking crisis across Europe. The shock to the global economy would be profound.
Deutsche Bank’s Web site includes a statement of values. The document was written in 2013, when Deutsche Bank created a new code of ethics to help it “conduct business with the utmost integrity.” In the wake of the mirror-trades scandal, one section of the text stands out. “We enable our clients’ success by constantly seeking suitable solutions to their problems,” it reads. “We will do what is right—not just what is allowed.” ?
Ed Caesar is the author of “Two Hours: The Quest to Run the Impossible Marathon” (Simon & Schuster).
This article appears in other versions of the August 29, 2016, issue, with the headline “The Moscow Laundromat.”
http://www.newyorker.com/magazine/2016/08/29/deutsche-banks-10-billion-scandal
GeckoSystems (GOSY) Praises Recent U.S. Supreme Court Decision Re: Spoofing OTC Stocks
CONYERS, GA -- August 17, 2016 -- InvestorsHub NewsWire -- GeckoSystems Intl. Corp. (Pink Sheets: GOSY | www.GeckoSystems.com/) announced today that the benefits from a recent Supreme Court of the United States (SCOTUS) ruling that expands States Rights is of particular relevance and potentially dramatic benefit to the Companys 1300+ shareholders. For over nineteen years GeckoSystems has dedicated itself to development of "AI Mobile Robot Solutions for Safety, Security and Service(tm)."
This SCOTUS decision is the most significant for companies that are small and technology driven such as GeckoSystems by enabling state courts to have jurisdiction in other states to lower litigation costs for plaintiffs seeking damages for naked shorting, propagating false rumors to depress the company stock price and receive unjust enrichment to garner significant monies. Many of those companies have suffered for years while they have seen their stock manipulated by naked shorting and false rumors, all done to drive the stock price down for excessive and illegal profits to brokerages, such as Merrill-Lynch. On July 10, 2015, GeckoSystems senior management and majority stockholders filed a Georgia Racketeer Influence and Corrupt Organizations (RICO) Act suit in the Rockdale County Superior Court in Conyers, GA. http://tinyurl.com/qhl3uzu
For some years, all of our shareholders and the tens of thousands that hold stock in other stock manipulated (such as spoofing or refusing to sell at Ask to preclude being forced to cover naked short positions) companies have suffered losses due to ongoing stock price manipulation by brokerages large and small. These predatory brokerages, intent on making more money as they false rumor the price down to cover their naked shorts to achieve unjust enrichment, have hidden behind the now pierced veil of only being sued in Federal courts. No doubt, it is readily apparent that this new States Rights affirmation by SCOTUS will be welcomed by the thousands of publicly traded companies preyed upon since they could not afford to initiate and consummate litigation successfully in Federal courts.
Presently we are of information and belief that one on the Defendants in our RICO suit, Neil T. Wallace, in concert with George I. MacLeod, have exploited several market makers possible, but not probable, ignorance of the far reaching impact of this recent SCOTUS decision.
For example:
KCG Americas, LLC (NITE)
http://tinyurl.com/zhqcycf
http://tinyurl.com/jnlpf3y
Ascendiant Capital Group, LLC (ASCM)
http://tinyurl.com/zksk25e
http://tinyurl.com/z9xqaby
Citadel Securities, LLC (CDEL)
http://tinyurl.com/zhqcycf
http://tinyurl.com/jnlpf3y
At this time, we are not 100% sure as to whether these brokerages are knowingly working with these Defendants or not, summarized Martin Spencer, Founder/CEO, GeckoSystems Intl. Corp.
Naked short sellers squeezed by Supreme Court
Published by AMI Newswire May 16, 2016
In a sweeping blow to Wall Street investment giants, the U.S. Supreme Court today unanimously allowed lawsuits against "naked" short sellers in state courts to proceed.
The high court ruled unanimously that shareholders are not confined to federal court when seeking recourse for securities violations. Granting due deference to the important role of state courts, the Court reinforced federalist principles while clarifying congressional intentions to limit the federal governments role.
The ruling, which could give a new boost to startups and small companies targeted by short sellers, showed a rare moment of ideological agreement in the court. Justice Elena Kagan authored the Courts opinion, and Justice Clarence Thomas, joined by Justice Sonia Sotomayor, issued a concurrence.
In 2012, businessman Greg Manning sued Merrill Lynch and other financial institutions in New Jersey state court for purposefully devaluing his company through systematic naked short-selling a term used to describe selling a stock a seller does not own and has not borrowed. In standard short sales, traders either borrow a stock or make sure that it can be borrowed prior to selling it short in the hope that its value will fall before the transaction must be covered.
The practice has come under increasing scrutiny and has been banned in Germany and other major economies.
Read more: http://tinyurl.com/jgz257w
The complete SCOTUS opinions are here: http://www.supremecourt.gov/opinions/15pdf/14-1132_4g15.pdf
Continuing from the article Naked short sellers squeezed by Supreme Court: (Underlines added below for emphasis.)
While legitimate short-selling remains an accepted financial practice, manipulation by false rumors and naked short-selling has taken a serious toll on emerging industries. Biotechnology industry insiders have for years pleaded with the SEC to block the illegal short selling and false whisper campaigns that plague the industry. Smaller technology-driven companies frequently lack the resources to deal with attacks that drive down stock prices, crippling research and development budgets.
Read more: http://tinyurl.com/jgz257w
Heres some excerpts from our most recent GA RICO filing:
FACTS
6. Neil T. Wallace is an associate of Mr. George I. MacLeod who, upon information and belief, has vigorously orchestrated naked short selling of the Plaintiffs stock for many years. Mr. MacLeod resides in the UK at an unknown location from the U.S. Securities authorities. It is believed that he and Bette Wallaces son, Reed Wallace, were involved in similar stock manipulation schemes regarding Sushi Trend. Reed Wallace was sued by Sushi Trend for illegal use of their restricted stock and they received a Default Judgment against him. (U.S. District Court District of Nevada case #07CV1129.)
7. Neil Wallace, brother of Reed Wallace, has spread false information about the Plaintiffs company on the internet, to the courts, its attorneys and in numerous correspondences at times using his parents and family to assist in these efforts directly and indirectly. His public disparagement of the company has put false rumors, and therefore doubts, in the minds of the Plaintiffs business associates, potential customers, attorneys, and stock investors.
The complete filing and all exhibits are here: http://tinyurl.com/gou7bcf
This recent Supreme Court ruling has occurred at a very propitious time for us. As one can read in the foregoing, our company has been subjected to adverse stock price manipulation for some years. We are of the belief that this Wallace group has committed many predicate acts constituting RICO and cost our shareholders several millions of dollars in ROI due, in part, to the literally thousands of false rumors they have posted on several stock message boards to drive the share price down. In the last few years we believe they have successfully caused a panic on our stock, pushing us below a penny a share.
Since our stock price moved up last week, from $.008 to over $.02, those holding the massive GOSY short position are particularly motivated to continue their naked shorting practice or face covering costs that could cause them to fail to cover and flirt with financial insolvency, if not outright bankruptcy. On another note, while we are waiting for movement from our NYC and Japanese JVs, we nonetheless remain completely committed to providing our 1300+ shareholders the ROI they so richly deserve. They can continue to be confident that we expect to be signing numerous multi-million-dollar licensing agreements to further substantiate and delineate the reality that GeckoSystems will further increase shareholder value as has occurred this past week," concluded Spencer.
About GeckoSystems:
GeckoSystems has been developing innovative robotic technologies for nineteen years. It is CEO Martin Spencer's dream to make people's lives better through AI robotic technologies.
The safety requirement for human quick WCET reflex time in all forms of mobile robots:
In order to understand the importance of GeckoSystems' breakthrough, proprietary, and exclusive AI software and why another Japanese robotics company desires a business relationship with GeckoSystems, its key to acknowledge some basic realities for all forms of automatic, non-human intervention, vehicular locomotion and steering.
1. Laws of Physics such as Conservation of Energy, inertia, and momentum, limit a vehicles ability to stop or maneuver. If, for instance, a cars braking system design cannot generate enough friction for a given road surface to stop the car in 100 feet after brake application, thats a real limitation. If a car cannot corner at more than .9g due to a combination of suspension design and road conditions, that, also, is reality. Regardless how talented a NASCAR driver may be, if his race car is inadequate, hes not going to win races.
2. At the same time, if a car driver (or pilot) is tired, drugged, distracted, etc. their reflex time becomes too slow to react in a timely fashion to unexpected direction changes of moving obstacles, or the sudden appearance of fixed obstacles. Many car "accidents" result from drunk driving due to reflex time and/or judgment impairment. Average reflex time takes between 150 & 300ms. http://tinyurl.com/nsrx75n
3. In robotic systems, "human reflex time" is known as Worst Case Execution Time (WCET). Historically, in computer systems engineering, WCET of a computational task is the maximum length of time the task could take to execute on a specific hardware platform. In big data, this is the time to load up the data to be processed, processed, and then outputted into useful distillations, summaries, or common sense insights. GeckoSystems' basic AI self-guidance navigation system processes 147 megabytes of data per second using low cost, Commercial Off The Shelf (COTS) Single Board Computers (SBC's).
4. Highly trained and skilled jet fighter pilots have a reflex time (WCET) of less than 120ms. Their "eye to hand" coordination time is a fundamental criterion for them to be successful jet fighter pilots. The same holds true for all high performance forms of transportation that are sufficiently pushing the limits of the Laws of Physics to require the quickest possible reaction time for safe human control and/or usage.
5. GeckoSystems' WCET is less than 100ms, or as quick, or quicker than most gifted jet fighter pilots, NASCAR race car drivers, etc. while using low cost COTS and SBC's
6. In mobile robotic guidance systems, WCET has 3 fundamental components.
a. Sufficient Field of View (FOV) with appropriate granularity, accuracy, and update rate.
b. Rapid processing of that contextual data such that common sense responses are generated.
c. Timely physical execution of those common sense responses.
-------------------------------------------------------------------------------------------
In order for any companion robot to be utilitarian for family care, it must be a "three legged milk stool."
(1) Human quick reflex time to avoid moving and/or unmapped obstacles, (GeckoNav(tm): http://tinyurl.com/le8a39r)
(2) Verbal interaction (GeckoChat(tm): http://tinyurl.com/nnupuw7) with a sense of date and time (GeckoScheduler(tm): http://tinyurl.com/kojzgbx), and
(3) Ability to automatically find and follow designated parties (GeckoTrak(tm): http://tinyurl.com/mton9uh) such that verbal interaction can occur routinely with video and audio monitoring of the care receiver is uninterrupted.
An earlier third party verification of GeckoSystems AI centric, human quick sense and avoidance of moving and/or unmapped obstacles by one of their mobile robots can be viewed here: http://t.co/NqqM22TbKN
An overview of GeckoSystems' progress containing over 700 pictures and 120 videos can be found at http://www.geckosystems.com/timeline/.
These videos illustrate the development of the technology that makes GeckoSystems a world leader in Service Robotics development. Early CareBot prototypes were slower and frequently pivoted in order to avoid a static or dynamic obstacle; later prototypes avoided obstacles without pivoting. Current CareBots avoid obstacles with a graceful bicycle smooth motion. The latest videos also depict the CareBot's ability to automatically go faster or slower depending on the amount of clutter (number of obstacles) within its field of view. This is especially important when avoiding moving obstacles in loose crowd situations like a mall or an exhibit area.
In addition to the timeline videos, GeckoSystems has numerous YouTube videos. The most popular of which are the ones showing room-to-room automatic self-navigation of the CareBot through narrow doorways and a hallway of an old 1954 home. You will see the CareBot slow down when going through the doorways because of their narrow width and then speed up as it goes across the relatively open kitchen area. There are also videos of the SafePath(tm) wheelchair, which is a migration of the CareBot AI centric navigation system to a standard power wheelchair, and recently developed cost effective depth cameras were used in this recent configuration. SafePath(tm) navigation is now available to OEM licensees and these videos show the versatility of GeckoSystems' fully autonomous navigation solution.
GeckoSystems, Star Wars Technology
http://www.youtube.com/watch?v=VYwQBUXXc3g
The company has successfully completed an Alpha trial of its CareBot personal assistance robot for the elderly. It was tested in a home care setting and received enthusiastic support from both caregivers and care receivers. The company believes that the CareBot will increase the safety and well being of its elderly charges while decreasing stress on the caregiver and the family.
GeckoSystems is preparing for Beta testing of the CareBot prior to full-scale production and marketing. CareBot has recently incorporated Microsoft Kinect depth cameras that result in a significant cost reduction.
Kinect Enabled Personal Robot video:
http://www.youtube.com/watch?v=kn93BS44Das
Above, the CareBot demonstrates static and dynamic obstacle avoidance as it backs in and out of a narrow and cluttered alley. There is no joystick control or programmed path; movements are smoother that those achieved using a joystick control. GeckoNav creates three low levels of obstacle avoidance: reactive, proactive, and contemplative. Subsumptive AI behavior within GeckoNav enables the CareBot to reach its target destination after engaging in obstacle avoidance.
More information on the CareBot personal assistance robot:
http://www.geckosystems.com/markets/CareBot.php
GeckoSystems stock is quoted in the U.S. over-the-counter (OTC) markets under the ticker symbol GOSY. http://www.otcmarkets.com/stock/GOSY/quote
GeckoSystems uses http://www.LinkedIn.com as its primary social media site for investor updates. Here is Spencer's LinkedIn.com profile:
http://www.linkedin.com/pub/martin-spencer/11/b2a/580
Telephone:
Main number: +1 678-413-9236
Fax: +1 678-413-9247
Website: http://www.geckosystems.com/
Source: GeckoSystems Intl. Corp.
Safe Harbor:
Statements regarding financial matters in this press release other than historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that such statements about the Company's future expectations, including future revenues and earnings, technology efficacy and all other forward-looking statements be subject to the Safe Harbors created thereby. The Company is a development stage firm that continues to be dependent upon outside capital to sustain its existence. Since these statements (future operational results and sales) involve risks and uncertainties and are subject to change at any time, the Company's actual results may differ materially from expected results.
http://ih.advfn.com/p.php?pid=nmona&article=72237658
yep 15 years of a *glitch* .. not corrected/caught by anyone
of course back in 1999 .. SMBs weren't quite the .. er .. social media presence as they were by 2014
don't strain that cyber stalking brain .. dilemmas abound for all sorts of *entities* .. ;)
4kids
Conspiracy can be put to rest...
New details on the Citigroup bug that resulted in the omission of blue-sheet data for 15 years:
The glitch resided in new alphanumeric branch codes that the bank had introduced in the mid-1990s. The program code filtered out any transactions that were given three-digit branch codes from 089 to 100 and used those prefixes for testing purposes. The report adds, "But in 1998, the company started using alphanumeric branch codes as it expanded its business. Among them were the codes 10B, 10C and so on, which the system treated as being within the excluded range, and so their transactions were removed from any reports sent to the SEC."
DEFINITION of 'Blue Sheets'
Requests for information sent out by the Securities and Exchange Commission to market makers, brokers and/or clearinghouses. Blue sheets ask for information related to specific securities or transactions and are often requested in order to determine if there has been any illegal activity or to determine why, for example, a certain security experienced a large level of volatility
Read more: Blue Sheets Definition | Investopedia http://www.investopedia.com/terms/b/bluesheets.asp#ixzz4EOmVj1Hn
Follow us: Investopedia on Facebook
4kids
SEC: Citigroup/C Provided Incomplete Blue Sheet Data for 15 Years
FOR IMMEDIATE RELEASE
2016-138
SEC order
www.sec.gov/litigation/admin/2016/34-78291.pdf
Washington D.C., July 12, 2016 — The Securities and Exchange Commission today announced that Citigroup Global Markets has agreed to pay a $7 million penalty and admit wrongdoing to settle charges that a computer coding error caused the firm to provide the agency with incomplete “blue sheet” information about trades it executed.
According to the SEC’s order instituting a settled administrative proceeding, the coding error occurred in the software that Citigroup used from May 1999 to April 2014 to process SEC requests for blue sheet data, including the time of trades, types of trades, volume traded, prices, and other customer identifying information. During that 15-year period, Citigroup consequently omitted 26,810 securities transactions from its responses to more than 2,300 blue sheet requests. After discovering the coding error, Citigroup failed to report the incident to the SEC or take any steps to produce the omitted data until nine months later.
“Broker-dealers have a core responsibility to promptly provide the SEC with accurate and complete trading data for us to analyze during enforcement investigations,” said Robert A. Cohen, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit. “Citigroup did not live up to that responsibility for an inexcusably long period of time, and it must pay the largest penalty to date for blue sheet violations.”
The SEC’s investigation was conducted by Martin Zerwitz, Michael C. Baker, and Deborah A. Tarasevich of the Market Abuse Unit, and the case was supervised by Mr. Cohen.
Other SEC cases involving failures to provide complete blue sheet data:
Credit Suisse Securities (USA) LLC paid a $4.25 million penalty in September 2015, admitting that technological and human errors resulted in the omission of more than 553,400 reportable trades from blue sheet responses to the SEC for more than two years.
OZ Management LP paid a $4.25 million penalty in July 2015, admitting that it provided inaccurate trade data to four of its prime brokers and caused blue sheet violations for nearly six years.
Scottrade paid a $2.5 million penalty in January 2014, admitting that a computer coding error resulted in the omission of trades from blue sheet responses to the SEC for more than six years.
###
http://www.sec.gov/news/pressrelease/2016-138.html
===
i know this comes as no surprise .. funny how the *cartels* (pun intended)
are being exposed so quickly .. ;)
that would be *sarcasm* ..
4kids
Podcast: ShareIntel CEO David Wenger on how public company executives can track short sellers
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James West, MidasLetter | April 12, 2016 | Last Updated: Apr 12 1:30 PM ET
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ShareIntel makes software to help public company executives track who is buying and selling their stock.
FotoliaShareIntel makes software to help public company executives track who is buying and selling their stock.
David Wenger is the CEO of ShareIntel, a company that makes software to help public company executives track who is buying and selling their stock with a level of accuracy that has not been available until now.
Midas-Letter-financial-radio-podcast-thumbListen to the podcast interview with David Wenger: Audio Player
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James West is an investor and the author of the Midas Letter, an investing research report focused on small cap stocks. The views expressed on this podcast are his own and are presented for general informational purposes only — they should not be construed as advice to invest in any securities mentioned.
James West: David, thanks for joining us today.
David Wenger: Thank you for having me.
James West: David, can you tell us what is ShareIntel, and what is it that ShareIntel does?
David Wenger: ShareIntel, in very simple terms, is a software as a service designed to provide transparency into who’s buying, who’s selling, who’s friend, who’s foe. It’s designed to tell a CEO, a CFO, a fiduciary of a public company who’s buying and selling his shares.
James West: Okay. So you basically can look at the owners’ list, the non-objecting beneficial owners’ list, the objecting beneficial owners’ list, and other sources of data, to determine who’s holding what?
David Wenger: Yes, exactly. There are multiple data providers, multiple sources for data; most of these are quasi-governmental reporting entities. Much of the data is controlled by the banks, broker-dealers and clearing firms. The data I’m referring to is shareholder information. It’s private in nature. So we aggregate data from disparate sources, and we assign common identifiers, which is part of data management process, enabling us to compare it. So we piece together, if you will, pieces of a puzzle that enable us to create transparency into, in one unique, archival, historic, easy to access and understand and follow, database.
James West: Okay. So then what is it that you’re doing that a public company can’t do for itself already?
David Wenger: Well, as I said, much of the information on shareholders and share holdings, and the ability to track critical broker-dealer and shareholder information, is controlled by the banks, broker-dealers and clearing firms responsible for trade executions in its stock. Knowing how to access this data is where ShareIntel can help.
James West: So this would be a useful tool to combat, for example, naked short selling?
David Wenger: Oh, for sure.
James West: Okay. And is naked short selling a major problem in North American markets?
David Wenger: I would argue that it is, and probably more so today than at any point in history. As you know, trades are processed today, trades are going off, they’re processed by computers and trades are going off in gigaseconds. What’s a gigasecond? While the stock borrow process is still very much a people-driven, largely manual process.
Andrew Krystal: Can you give us an example of how your drill-down software has been deployed successfully?
David Wenger: Well, in very simple terms, to sort of pick up on that last comment, when stock is not located or borrowed prior to a trade, it results in settlement fails, in essentially the creation of phantom or counterfeit shares in the marketplace. This in turn creates stock dilution, which decreases the value of a company’s market cap by pushing the share price down. And what we do is simply provide a window into this sort of activity. You can’t manage what you can’t see, is what I’m often quoted as saying. If you can’t see this data, if you don’t know that this is happening, you can’t begin to manage the process.
So we have multiple examples of where we’ve been able to help companies, but a large part of that is confidential.
James West: Okay, so let’s just back it up for a sec there, David. What is the product that ShareIntel offers that facilitates the drilling down into the data that reveals who’s holding what and who’s selling what?
David Wenger: Well, it begins with understanding who your shareholders are. You have to be able to DrilDown behind street name, down to individual names and addresses, to identify who’s buying, who’s selling, you know, to identify who, for example, is a real investor, a true anchor investor. Who are your friends, and who are your foes? There’s a whole host of information that’s available out there, but it’s very hard to access and it’s in disparate form. So comparing it becomes very difficult.
James West: And so you have a product that specifically performs that function?
David Wenger: Correct.
James West: And what’s that product called?
David Wenger: DrilDown.
James West: Okay. So your DrilDown software program is something that a public company can license in order to track who’s holding what and when they’re selling, what they’re selling, as you say, to know who your friends are?
David Wenger: Correct. Absolutely.
Andrew Krystal: How would you then use that information to target anchor investors?
David Wenger: Well, think about it this way: in the world that I grew up in, 25 years ago, I’m dating myself; there were arguably let’s say roughly 200 regional investment banks and armies of brokers. And those brokers performed a very meaningful function for, in particular, development phased companies, companies that were new to the marketplace, recently IPOd. They would essentially reach out to investors, actually identify the investors, find these investors, maintain relationships with these investors, and keep them apprised of the company’s development.
That no longer exists. Those brokers are gone, the regional investment banks are gone, and I think we’re down to less than 30 now. So many of these companies have been orphaned. In fact, a lot of them have been shorted out of businesses because it’s been easier to make money in the last 20 years forcing companies out of business, shorting their stocks, in some cases illegally, pushing the share price down, and capturing profits that way rather than invest in companies.
So it really becomes – it’s incumbent upon companies today to recognize that they have to know who their investors are. It starts with a database of knowing who their current investors are, knowing who their key anchor investors are, and reaching out, developing those relationships and maintaining those relationships. For example, if there’s a seller in the marketplace, you can use this software to help cross a block of stock. It’s all geared to managing a company’s market cap effectively. The onus, unfortunately, is on the individual issuer, client issuer or company, to fill the gap, to fill the void that the traditional retail broker used to perform.
James West: Right. So then how does a public company president use the information generated by the DrilDown software, how do they actually use that to prevent naked short selling or even just opportunistic short selling that might even be legal? How can they prevent that?
David Wenger: Well, you first have to understand if it’s happening. And I think there’s an overwhelming body of evidence out there to suggest or verify that it is in fact happening. The next question becomes, is it happening to you? And you’ve got to ask yourself, has your share price decreased in value for the last several months in a row for no apparent reason? Does your stock come under selling pressure any time there’s a press release, regardless of how positive the news is? Are people making negative, slanderous posts on message boards? And so on.
We can tell a company if this is happening, and we can identify parties to a transaction which are resulting in fails in the settlement process. This DrilDown software that we’ve created tracks settlements. It tracks long positions. And where we can see anomalies in the data, and identify party to the transactions, we can begin to see who and what and why and how this is happening and advise the client issuer company on meaningful action steps. This is actionable data.
Andrew Krystal: Do you believe that if companies were to use your software to display graphic evidence that they do on their website, that short sellers would be thwarted from targeting them?
David Wenger: That’s the idea. But it’s more than just — there’s two aspects to the power of this software, if you will. There’s the reactive and the proactive, the offensive or the defensive. We talked a little bit about the surveillance side or the reactive side, the protection mode, if you will, that a company needs to be in to effectively identify and go after those that would be nefarious — trading the stock in an abusive manner, perhaps violating the rules, illegally naked short selling. But the other thing that the company can do, as we talked about a little bit earlier, is go on the offensive, or the proactive, to be sure to reach out, to communicate their story very effectively to their existing shareholder base, to use this software to target likely investors, and again, investors: underscore the word investors, as opposed to those who would just trade in and out of the stock and attempt to manipulate the stock to drive it down to capture quick profits. Does that make sense?
Andrew Krystal: Oh yeah.
James West: You bet. So what are the privacy issues surrounding the use of your software?
David Wenger: Well, they’re meaningful. ShareIntel becomes an authorized third party agent on behalf of the issuer company when they become a client; we go about the business of aggregating data that is private in nature, it belongs to the company. We do not repurpose this data. So essentially what we’re doing is using our expertise to piece together — if you were to use a jigsaw puzzle analogy, if you were to piece together 75 pieces of a 100-piece jigsaw puzzle, could you see the image?
James West: I see. Interesting.
Andrew Krystal: I wanted to ask about your company’s output; could you actually, in terms of retribution, use that in court in terms of pursuing illegal naked shorts?
David Wenger: We do and have been involved in litigation support. So we are more than simply a software company, we are a team of seasoned experts with probably collectively 100+ years of experience on Wall Street. So the answer is Yes.
James West: Wow. And so why do so few companies pursue short sellers?
David Wenger: Well, I think a lot of the smaller companies which are the logical easier targets, they simply don’t have the resources. They don’t have the money, and nobody wants to ever talk about having to litigate, and again, this software is designed to avoid that sort of thing. But at the end of the day, to a large extent, we’re collecting data. We’re in effect gathering evidence, the kind of evidence that attorneys would normally have to spend a small fortune on in a discovery process. So if a company gets to a point, unfortunately, if they get to a point where they need to rely on this data to litigate, well, guess what? They have it.
Andrew Krystal: David, what’s going on with government regulators? Shouldn’t they be doing some of the heavy lifting here in terms of going after naked shorts?
David Wenger: In an ideal world, absolutely. I think that the regulators are simply understaffed, and I think to a large extent, if you look at the average age of somebody at the SCC is a kid out of college, two years out of college. Never worked at a trading desk, never worked in the operations department, and doesn’t really have a really good understanding of this problem. It’s a complex problem, and I think that they’re aware of it and they’re trying to do what they can.
Some would argue that we’re still in a ‘too big to fail’ environment. So the question becomes, if this is really prevalent, which we think it is, how do you unwind it in a responsible manner? And my suspicion is, behind the scenes they’re trying to solve some of those issues, but for now, if you’re a company and you’re public, you’d better be aware of the fact that you need to get in the fight. You need to fight for yourself.
James West: You bet. So could you see this becoming a standard feature of the public company toolbox in the future, where fund managers are going to say, I’m not going to invest in your company unless you know exactly what’s going on with your shareholder base, and I highly recommend you use DrilDown to accomplish that. Can you see that becoming an eventual possible reality?
David Wenger: Well, I think that would be a strong possibility, we would hope. You know, we’re out there trying to level the playing field. We’re out there trying to create transparency where very little exists. And I think that the investing public would be a lot more comfortable, and the fund managers would be a lot more comfortable knowing that these tools are being deployed.
Andrew Krystal: David, how does a public company CEO go about arranging a trial of your program and software?
David Wenger: Well, they would simply need to contact us. They can go to our website at www.shareintel.com, or I can be contacted directly via email. My number is 203-838-5471. The email and co-ordinates are also on the website. We’d be delighted to talk about helping any and all companies out there that feel like they could benefit from our services, which I will add is the vast majority of them.
James West: Now you know what I want to do, I’m just wondering, David, a question like ‘so how much does this cost a public company a year to run’, do you think that would be something where guys who are listening, who are public companies, would say ‘oh, that’s it?!’ or whether they’d say ‘oh, wow, that’s too expensive for me, I’m not even going to look at it’.
David Wenger: Here’s how that conversation should go. A), we’re not interested in talking to any CEO or CFO that doesn’t see this as a critical need to have. If you don’t see this as a critical need to have in today’s world, you’re not educated. You’re either not educated or you’re sticking your head in the sand, and for whatever reason, you don’t want to get in the fight.
I would argue – and you can think about this for a minute, because this is really the truth. We’re out there, we’re on the side of the angels. We’re providing a very meaningful and, I would argue, critically valuable service. It’s not a like to have, it’s a need to have. So what I would ask the audience or the average CEO is, what is it costing you not to have a service like this in place? In other words, if ShareIntel could put a nickel, a dime, a quarter back in your share price, what did that translate to? I would argue there’s a meaningful and significant cost not deploying a service like this, and we’re the only game in town, and we’ve got two patents on this.
So yes, companies will see this as a budget item. The CFO’s job is always to push back; he’s the guy watching the pennies. But if you start thinking about how quickly the pennies add up, I go back to what I’m often told I repeat too frequently: you can’t manage what you can’t see. And if you’re not deploying a service like this, you’re flying blind. You simply don’t have a lot of alternatives. Those armies of brokers that I referred to don’t exist in today’s world.
James West: Right.
David Wenger: There’s not a lot of support for small companies out there. It all begins and ends with the data. You have to leverage this data, and I think we’re out there, I think we’re creating the new paradigm. I’m told by many that that’s what we’re doing.
Andrew Krystal: And you can add to the share price.
David Wenger: Absolutely. Absolutely.
James West: All right, David, that’s a fascinating interview. We’re going to catch up with you in a couple quarters’ time and see how it is going. Thank you so much for your time today.
David Wenger: Thank you.
Andrew Krystal: Thank you, David.
===
original link courtesy of 7/10/11
http://business.financialpost.com/midas-letter/podcast-shareintel-ceo-david-wenger-on-how-public-company-executives-can-track-short-sellers
4kids
Nobilis Sues Anson Funds and Anson Analyst Sunny Puri for $300 Million
Marketwired
November 5, 2015
HOUSTON, TX--(Marketwired - Nov 5, 2015) - Nobilis Health Corp. ( NYSE MKT : HLTH ) ( TSX : NHC ) ("Nobilis" or the "Company") announced today that it has filed suit in the Ontario Superior Court of Justice against Sunny Puri, Anson Canada, Anson LP, Anson Capital, Anson Investment Fund, and Anson Catalyst Fund, along with John Does 1 through 20. The claim alleges that these individuals perpetrated a scheme to damage Nobilis' reputation and business relationships in order to profit through short-selling of Nobilis stock. Nobilis is seeking monetary damages in excess of $300,000,000 along with punitive damages. Nobilis expects to add more Anson affiliates and other participants in the scheme as defendants.
The complaint specifically alleges that the Anson family of hedge funds and associated-individuals devised and participated in a "short attack" scheme against the Plaintiff, Nobilis Health Corp., in which the defendants broadcast false and defamatory information about Nobilis in order to drive down the price of Nobilis' publicly traded stock (the "Nobilis Common Stock") so that the defendants could profit from short positions they had taken in Nobilis Common Stock and derivative securities thereof. The key to the scheme was the written attack (the "Article") on Nobilis' business which the defendants prepared and anonymously posted under the pseudonym "The Emperor Has No Clothes" to the website "Seeking Alpha" (www.seekingalpha.com) ("Seeking Alpha"). The Article made numerous statements of purported "fact" about Nobilis' business that were false and defamatory, including allegations that the Company's auditors resigned amid controversy (untrue), CFOs had been shuffled to hide impropriety (untrue), insiders had sold all of their Nobilis Common Stock (untrue), that the Company was hiding poor performance behind acquisitions (untrue), that major insurers would not pay for certain medical procedures billed by Nobilis (untrue), and several other false, defamatory and misleading statements.
Nobilis Common Stock traded at $6.81 at the open of trading on Toronto Stock Exchange on October 9, 2015 -- the day the Article was broadcast. At close that day the price was $4.93. Over the next two weeks Nobilis Common Stock continued trading downward to a low of $2.83, a drop of approximately 60% from price at the open of trading on October 9, 2015. That decline translates to a loss of over $300,000,000 million in market capitalization.
Nobilis believes it is entitled to damages for reputational harm, disruption of its business and affairs, loss of corporate opportunities, costs of investigating and correcting the false and defamatory statements, costs of defending against investor litigation initiated as a result of the false and defamatory information, and other consequential damages resulting from the defendants' scheme and market manipulation.
The case is Nobilis Health Corp. v. Sunny Puri, M5V Advisors, Inc (c.o.b. as Anson Group Canada), Admiralty Advisors, LLC, Frigate Ventures, LP, Anson Investments LP, Anson Capital, LC, Anson Investments Master Fund, LP, AIMF, GP, Anson Catalyst Master Fund, LP, ACF GP, and John Does 1 through 20, Court File No. CV-15-11162-0000, Ontario Superior Court of Justice. Nobilis management is in discussions with US-based counsel regarding the Company's legal recourse against parties located in the United States.
About Nobilis Health Corp.
Nobilis utilizes innovative direct-to-patient marketing focused on a specified set of procedures that are performed at our centers by local physicians. Currently, Nobilis owns and manages four surgical hospitals and five ASCs, partners with an additional 28 facilities throughout the country, and markets six independent brands.
Forward Looking Statements
This news release may contain forward-looking statements (within the meaning of applicable securities laws) and financial outlooks relating to the business of Nobilis Health Corp. (the "Company") and the environment in which it operates. Forward-looking statements are identified by words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may" and other similar expressions and may discuss future expectations, contain projections of future results of operations or of financial condition, or state other forward-looking information. These statements are based on the Company's expectations, estimates, forecasts and projections and while the Company considers these to be reasonable based on information currently available, they may prove to be incorrect. They are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. These risks and uncertainties are discussed in the Company's regulatory filings available on the Company's web site at www.NobilisHealth.com, www.Sedar.com, and www.sec.gov in the risk factors described in the Company's Form 10-K for the fiscal year ended December 31, 2014, filed on April 2, 2015. There can be no assurance that forward-looking statements will prove to be accurate as actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. Other than as required by law, the Company undertakes no obligation to publicly update any such statement or to reflect new inform
https://beta.finance.yahoo.com/news/nobilis-sues-anson-funds-anson-162403898.html?soc_src=mediacontentstory&so=
original link courtesy of alan c
4kids
SEC Charges: False Tweets Sent Two Stocks Reeling in Market Manipulation
Criminal Charges Also Filed
FOR IMMEDIATE RELEASE
2015-254
Washington D.C., Nov. 5, 2015 — The Securities and Exchange Commission today filed securities fraud charges against a Scottish trader whose false tweets caused sharp drops in the stock prices of two companies and triggered a trading halt in one of them.
According to the SEC’s complaint filed in federal court in the Northern District of California, James Alan Craig of Dunragit, Scotland, tweeted multiple false statements about the two companies on Twitter accounts that he deceptively created to look like the real Twitter accounts of well-known securities research firms.
The U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Craig.
The SEC’s complaint alleges that Craig’s first false tweets caused one company’s share price to fall 28 percent before Nasdaq temporarily halted trading. The next day, Craig’s false tweets about a different company caused a 16 percent decline in that company’s share price. On each occasion, Craig bought and sold shares of the target companies in a largely unsuccessful effort to profit from the sharp price swings.
The SEC’s investigation also determined that Craig later used aliases to tweet that it would be difficult for the SEC to determine who sent the false tweets because real names weren’t used.
“As alleged in our complaint, Craig’s fraudulent tweets disrupted the markets for two public companies and caused significant financial losses for their investors,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. “Craig also said in later tweets that the SEC would have a hard time catching the perpetrator. As today’s enforcement action demonstrates, those tweets turned out to be false as well.”
According to the SEC’s complaint:
On Jan. 29, 2013, Craig used a Twitter account he created to send a series of tweets that falsely said Audience Inc. was under investigation. Craig purposely made the account look like it belonged to the securities research firm Muddy Waters by using the actual firm’s logo and a similar Twitter handle. Audience’s share price plunged and trading was halted before the fraud was revealed and the company’s stock price recovered.
On Jan. 30, 2013, Craig used another Twitter account he created to send tweets that falsely said Sarepta Therapeutics Inc. was under investigation. In this case Craig deliberately made the Twitter account seem like it belonged to the securities research firm Citron Research, again using the real firm’s logo and a similar Twitter handle. Sarepta’s share price dropped 16 percent before recovering when the fraud was exposed.
The SEC’s complaint charges that Craig committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a permanent injunction against future violations, disgorgement, and a monetary penalty from Craig.
The SEC has issued an Investor Alert titled Social Media and Investing – Stock Rumors prepared by the Office of Investor Education and Advocacy. The alert aims to warn investors about fraudsters who may attempt to manipulate share prices by using social media to spread false or misleading information about stocks, and provides tips for checking for red flags of investment fraud.
The SEC’s investigation was conducted by staff in the Market Abuse Unit including Elena Ro, John Rymas, and Steven D. Buchholz. The case was supervised by Joseph G. Sansone, Co-Chief of the Market Abuse Unit. The SEC’s litigation will be led by Ms. Ro and John S. Yun of the San Francisco Regional Office. The SEC appreciates the assistance of the U.S. Department of Justice and the Federal Bureau of Investigation.
###
http://www.sec.gov/news/pressrelease/2015-254.html
High-Frequency Trader Convicted of Disrupting Commodity Futures Market in First Federal Prosecution of Spoofing
U.S. Attorney’s Office
November 03, 2015
Northern District of Illinois
(312) 353-5300
CHICAGO, IL—In the first federal prosecution of its kind, a high-frequency trader was convicted today of disrupting commodity futures prices in a $1.4 million fraud scheme.
MICHAEL COSCIA, 53, used an automated trading technique to commit a crime known as “spoofing” to earn illegal profits from orders he placed through Chicago-based CME Group and London-based ICE Futures Europe. Coscia commissioned the design of two computer programs, known as algorithms, to implement his fraudulent strategy at his New Jersey trading firm.
The jury in federal court in Chicago deliberated for approximately one hour before convicting Coscia on all 12 counts, including 6 counts of commodities fraud and 6 counts of spoofing. Each count of commodities fraud carries a maximum sentence of 25 years in prison and a $250,000 fine, while each count of spoofing carries a maximum sentence of ten years in prison and a $1 million fine. U.S. District Judge Harry D. Leinenweber scheduled a sentencing hearing for March 17, 2016, at 9:45 a.m.
The indictment against Coscia, of Rumson, N.J., marked the first federal prosecution nationwide under the anti-spoofing provision that was added to the Commodity Exchange Act by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The case was prosecuted by Assistant United States Attorneys Renato Mariotti and Sunil Harjani of the Securities and Commodities Fraud Section of the U.S. Attorney’s Office in Chicago. The section, which was created in 2014, is dedicated to protecting markets and preserving investors’ confidence.
“The defendant’s trading activities disrupted the markets in his favor and against legitimate traders and investors,” said Zachary T. Fardon, United States Attorney for the Northern District of Illinois. “We have to have fairness and integrity in our markets. And enforcement, including federal criminal prosecutions, is an important tool to protecting those values. The jury’s verdict exemplifies the reason we created the Securities and Commodities Fraud Section in Chicago, which will continue to criminally prosecute these types of violations.”
Mr. Fardon announced the conviction along with Michael J. Anderson, Special Agent-in-Charge of the Chicago Office of the Federal Bureau of Investigation.
High-frequency trading is a form of automated trading that uses computer algorithms for placing a high volume of trading orders in milliseconds. It is illegal for traders to engage in spoofing, which involves placing “bids” to buy or “offers” to sell a futures contract with the intent to cancel the bid or the offer before execution.
Evidence at the seven-day trial showed that Coscia engaged in spoofing in the markets of various commodities, including gold, soybean meal, soybean oil, high-grade copper, Euro FX and Pounds FX currency futures. In less than three months in 2011, Coscia illegally profited nearly $1.4 million.
Coscia has been a registered commodities trader since 1988. In 2007, he formed Panther Energy Trading LLC in Red Bank, N.J.
This content has been reproduced from its original source.
https://www.fbi.gov/chicago/press-releases/2015/high-frequency-trader-convicted-of-disrupting-commodity-futures-market-in-first-federal-prosecution-of-spoofing
CTIX >> nice to see *awareness* .. :)
Vice President Joe Biden
View it in your browser.
I was requested by a caring CTIX investor to have the following call to action shared with our mailing list. I agree that it is appropriate that we, not only as Cellceutix shareholders, but as members of the broad investment community, advocate for change. Capitol Hill needs to be aware of the dangers companies and investors face with blatant market manipulation, such as what Cellceutix has recently faced, and the subsequent negative effects it creates on resources to meet VP Biden’s initiative to develop new drugs to cure cancer.
Take Action Now!
Demand investigation of stock manipulation that is hurting cancer research
I’m certain you are as disgusted as I am about the recent lies and market manipulation to target Cellceutix. Whether you are a Democrat or Republican, we must galvanize every resource available to educate Vice President Joe Biden and others in Washington about the tremendous potential there already exists to fight cancer. It’s imperative that you act now to help put a stop to this illegal market manipulation.
Tell the Vice President money for cancer research is being taken away from right under his nose.
Vice President Joe Biden has spearheaded efforts on many critical issues during his more than four decades in Washington and we need to call upon him. In his recent statement in the White House Rose Garden, Biden made a point to speak of his son, Beau, who passed in May from cancer at the age of 46, and the importance of a “moon shot” to find a cure for cancer. Biden said that he and President Obama have been working to increase funding for cancer research and development “because there are so many breakthroughs just on the horizon” and that he will be spending the rest of his term to push as hard as possible to make it happen as there is bipartisan support to silence the deadly disease.
Biden is looking to increase funding for research, which is fantastic, but as Congress works the budget on that front, they are overlooking that money is being taken away from research by the greed of organizations that use illegal market manipulations to maliciously attack biotechnology companies for their own profit and ruin the confidence of people investing in the stock market.
Tell the Vice President where the money is going.
The letter below explains how these unethical characters strip money from investors for their own profit, while simultaneously damaging the reputation of biotechnology companies and crumbling their market valuations. This causes the slowing of drug development for people in great need.
The VP will surely be interested to know that money is being taken from the government as well. In fact, it costs the government and taxpayers more than one may first think because the reasons can be two-fold. One, every company that receives federal grant money for research that suffers damages resulting from an unsubstantiated attack inevitably costs the government money. Two, if a lawsuit ensues predicated upon the attack, which often happens, it is a drain on the legal system and more costs are incurred by the government. This is money that can be used for cancer research.
Tell the Vice President the Justice Department must look into this.
We are at a point where many major pharmas are cutting R&D expenses to meet market expectations and looking to smaller companies for innovative new cancer drugs. While large firms are not immune to fraudulent attacks, it is the small companies that are the lifeblood of drug development that are often the most easily manipulated and targeted. Such recently was the case with Cellceutix Corp., who has seen its valuation chopped by more than a quarter of a billion dollars following a fraudulent and manipulative article published on the financial website Seeking Alpha by an author with the pseudonym “Mako Research” and a subsequent lawsuit by the Rosen Law Firm. Cellceutix is but one of many companies targeted by this illegal market activity and allowance of this to go unchecked will have a detrimental impact on medical research.
The following is a letter that I urge all shareholders to send to Vice President Biden. Show your support for your company and cancer research by demanding the Justice Department investigate this situation. Please be involved. Have your family and friends involved as well. I urge you to send your message using both the electronic (copy and paste) and first class mail.
Sincerely,
CTIX Shareholder
Relevant links to VP Biden’s mission to fight cancer:
www.cbsnews.com/news/vice-president-joe-biden-60-minutes/
http://www.usatoday.com/media/cinematic/video/74339192/biden-end-divisive-politics-find-cancer-cure/
http://www.usnews.com/news/articles/2015/10/21/transcript-joe-biden-will-not-run-for-president-in-2016
On the following White House website, you are limited to 2500 characters so the following Electronic letter is abbreviated.
Electronic: https://www.whitehouse.gov/contact/submit-questions-and-comments
I applaud you and recent speech in the Rose Garden committing to increase funding for cancer research. I assure you that I stand shoulder-to-shoulder with you in making it personal to find a cure. I write to inform you of a travesty of justice that is taking countless funds away from cancer research and I seek your help for a full investigation on the matter of stock market manipulation that is damaging biotech companies, investors and cancer patients that so desperately need new treatments.
The glaring problem of market manipulation came to me as an investor in Cellceutix, a company developing promising compounds for cancer and other indications. Cellceutix currently has two completely unique compounds in active clinical trials, including a cancer drug for solid tumors and another compound for treating oral mucositis in head and neck cancer patients. Cellceutix was awarded in 2010 approximately $730,000 in total grants under the Qualifying Therapeutic Discovery Project program, money that was used to advance drugs to clinical trials.
Unfortunately, Cellceutix has been the victim of manipulative market activity that is becoming increasingly prevalent in the biotech industry. In a nutshell, “shorters” (traders/funds that profit by a stock price dropping) publish false and disparaging articles on the target company, attempting to scare shareholders into selling their position, thus driving the stock price lower for their gain. Understand that there is nothing illegal about shorting, but “naked” shorting (where there actually aren’t any shares available to short) is, as are market manipulation and publishing knowingly false articles to cause panic.
The people responsible for this type of activity have no concern for the damage they are causing to portfolios or lives; no regard they can be hampering drug development; and no respect for the fact that funding may have come from the government. Lawsuits often ensue, draining resources of the judiciary system. Cellceutix is fighting this (http://cellceutix.com/cellceutix-responds-to-rosen-law-firm/#sthash.D7PK6gCv.dpbs) as an advocate for the industry, investors and patients in need.
Many companies have been damaged by this immoral activity. This illegal practice is detrimental to medical research and it must be stopped.
------------------------------
Letter to be sent by first class US mail. You may wish to add your personal experience:
Your Name:
Address:
City, State:
The Vice President
1600 Pennsylvania Avenue NW,
Washington DC 20500
Dear Mr. Vice President Biden,
I applaud you and recent speech in the Rose Garden in which you committed to work with President Obama to expend all efforts to increase funding for cancer research. With cancer being the culprit in 25% of all American deaths, I assure you that many people stand shoulder-to-shoulder with you in making it personal to find a cure. I write to inform you of a travesty of justice that is taking countless funds away from cancer research and I seek your help for a full investigation on the matter of stock market manipulation that is damaging especially biotech companies, investors, the scientific community and all the cancer patients that so desperately need new treatments.
The glaring problem of market manipulation by those looking to drive down the price of a stock came to me as an investor in Cellceutix Corp., a clinical stage biotechnology company developing promising novel compounds for cancer and other indications. Cellceutix currently has two unique compounds that have never been seen before in medicine now in three active clinical trials, including a study of a cancer drug for solid tumors at Dana-Farber Cancer Institute and a separate multi-center trial for treating oral mucositis in head and neck cancer patients. The company was awarded in 2010 approximately $730,000 in total grants under the Qualifying Therapeutic Discovery Project program when Cellceutix was a pre-clinical fledgling company and this money was used to advance its drugs to clinical trials. To that point, thank you for your research funding efforts.
Unfortunately, Cellceutix has been the victim of fraudulent and manipulative market activity that is becoming more and more prevalent, which is damaging and a growing threat to the biotechnology industry. There is no real secret recipe to the activity; “shorters” (traders/funds that profit by a stock price dropping) publish false and disparaging articles on the target company, attempting to scare shareholders into selling their position, thus driving the stock price lower for their gain. Understand that there is nothing illegal about shorting, but “naked” shorting (where there actually aren’t any shares available to short) is, as are market manipulation and publishing knowingly false articles to cause panic.
The people responsible for this type of activity have no concern for the damage they are causing to peoples’ portfolios or lives. Moreover, they seem to have no regard that they can be hampering drug development or respect for the fact that part of the funding may have come from the U.S. government. In the Cellceutix case, the article published by an anonymous author (pseudonym “Mako Research”) on the investment website Seeking Alpha was one of the most egregious attacks filled with unsubstantiated claims, unlearned scientific statements and misrepresentations I have ever seen. Perhaps even more amazingly, the Rosen Law Firm filed a lawsuit against Cellceutix citing the Mako article as the foundation of the claim, even though Cellceutix publicly debunked the article with facts. I am compelled to make you aware of the drain on the judicial system for what I consider a frivolous lawsuit. Following the defamatory article and lawsuit, the value of Cellceutix has been reduced by more than a quarter of a billion dollars. Further, Cellceutix is by no means the only company in this situation. Cellceutix is aggressively fighting the lawsuit and says it will be pursuing sanctions if the case is not dropped. (The Rosen Law Firm press releases on the numerous companies they have targeted; http://www.businesswire.com/portal/site/home/search/?searchType=all&searchTerm=rosen%20law%20firm&searchPage=1).
I support Cellceutix in championing an effort to advocate for change for the good of its shareholders, the biotechnology industry and the patients whose lives depend on the development of new drugs for cancer and other diseases. Cellceutix has hired the Ashcroft Law Firm, led by former US Attorney General John Ashcroft and Michael J. Sullivan, former United States Attorney for the District of Massachusetts. (http://cellceutix.com/cellceutix-responds-to-rosen-law-firm/#sthash.D7PK6gCv.dpbs). The road of companies damaged by these immoral characters runs long and the impact on drug development is immeasurable. You don’t have to look hard to find companies that have been falsely attacked by bloggers with a short position that has shaken away investors. Many companies have been damaged by this immoral activity. This illegal practice is detrimental to medical research and it must be stopped.
Most respectfully,
The following is the letter I sent on October 28, 2015
Dear Vice President Biden,
I applaud you and recent speech in the Rose Garden in which you committed to work with President Obama to expend all efforts to increase funding for cancer research. As a son who helplessly watched my mother and father suffer through painful chemotherapy before finally succumbing to the terrible disease, I assure you that I stand shoulder-to-shoulder with you in making it personal to find a cure. The dedication is the reason that I started Cellceutix; I am committed to finding new solutions to treat deadly diseases and conditions. I write to inform you of a travesty of justice that is taking countless funds away from cancer research and I seek your help for a full investigation on the matter of stock market manipulation that is damaging especially biotech companies, investors, the scientific community and all the cancer patients that so desperately need new treatments.
To my knowledge, there is no other clinical-stage biopharmaceutical company of our size that has accomplished so much in only eight years since inception. We currently have two unique compounds that have never been seen before in medicine now in three active clinical trials, including a study of a cancer drug for solid tumors at Dana-Farber Cancer Institute and a separate multi-center trial for treating oral mucositis in head and neck cancer patients. We were awarded in 2010 approximately $730,000 in total grants under the Qualifying Therapeutic Discovery Project program when we were a pre-clinical fledgling company and this money was used to advance our drugs to clinical trials. To that point, thank you for your research funding efforts.
Unfortunately, Cellceutix has been the victim of fraudulent and manipulative market activity that is becoming more and more prevalent, which is damaging and a growing threat to the biotechnology industry. There is no real secret recipe to the activity; “shorters” (traders/funds that profit by a stock price dropping) publish false and disparaging articles on the target company, attempting to scare shareholders into selling their position thus driving the stock price lower for their gain. Understand that there is nothing illegal about shorting, but “naked” shorting (where there actually aren’t any shares available to short) is, as are market manipulation and publishing articles that could be proven as libel by the definition of the law.
The people responsible for this type of activity have no concern for the damage they are causing to peoples’ portfolios or lives. Moreover, they seem to have no regard that they can be hampering drug development or respect for the fact that part of the funding may have come from the U.S. government. In our case, the article published by an anonymous author (pseudonym “Mako Research”) on the investment website Seeking Alpha was one of the most egregious attacks filled with unsubstantiated claims, unlearned scientific statements and misrepresentations I have ever seen. Perhaps even more amazingly, the Rosen Law Firm filed a lawsuit against Cellceutix citing the Mako article as the foundation of the claim, even though we have publicly debunked the article with facts. I am compelled to make you aware of the drain on the judicial system for what we consider a frivolous lawsuit. Following the defamatory article and lawsuit, the value of Cellceutix has been reduced by more than a quarter of a billion dollars. We are by no means the only company in this situation. We are aggressively fighting the lawsuit and will be pursuing sanctions if the case is not dropped. (The Rosen Law Firm press releases on the numerous companies they have targeted; http://www.businesswire.com/portal/site/home/search/?searchType=all&searchTerm=rosen%20law%20firm&searchPage=1).
That is not enough, though. I have a fiduciary and ethical responsibility to advocate for change for the good of our shareholders, the biotechnology industry and the patients whose lives depend on the development of new drugs for cancer and other diseases.
We have hired the law firm Ashcroft Law Firm, led by former US Attorney General John Ashcroft and Michael J. Sullivan, former United States Attorney for the District of Massachusetts, to not only defend us in this matter, but also to assist us in taking a stand as an advocate against similar attacks and subsequent meritless lawsuits that are becoming all too common in our industry (http://cellceutix.com/cellceutix-responds-to-rosen-law-firm/#sthash.D7PK6gCv.dpbs). The road of companies damaged by these immoral characters runs long and the impact on drug development is immeasurable. You don’t have to look hard to find companies that have struggled to raise capital or complete drug development after they have been unjustifiably attacked by bloggers with a short position that has shaken away investors. Many companies have been damaged by this immoral activity. This illegal practice is detrimental to medical research and it must be stopped.
Most respectfully,
Leo Ehrlich, CEO
Copyright © 2015 Cellceutix Corporation, All rights reserved.
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Cellceutix Corporation
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Beverly, MA 01915
SEC Charges 6 Firms for Short Selling Violations in Advance Stock Offerings
FOR IMMEDIATE RELEASE
2015-239
Washington D.C., Oct. 14, 2015 — The Securities and Exchange Commission today announced enforcement actions against six firms, including more than $2.5 million in monetary sanctions and, in the case of one previously sanctioned firm, an order barring the firm from participating in stock offerings for a period of one year as part of its ongoing enforcement initiative focused on violations of Rule 105 of Regulation M.
Intended to preserve the independent pricing mechanisms of the securities markets and prevent stock price manipulation, Rule 105 prohibits firms from participating in public stock offerings after selling short those same stocks.
Through its Rule 105 Initiative, which was first announced in 2013 as an effort to address violations of the rule in an expedited and streamlined way, the Division of Enforcement has taken action on every Rule 105 violation over a de minimis amount that has come to its attention—promoting a message of zero tolerance for these offenses. As a result, based on available information, the SEC has seen a dramatic decrease in Rule 105 violations since the Initiative began. In the first fiscal year after the Initiative was announced, Rule 105 violations, detected through various means available to the SEC, decreased by approximately 90 percent over the previous six years. Rule 105 violations in fiscal year 2015 were similarly lower than before the Initiative.
“This highly successful program of streamlined investigations and resolutions of Rule 105 violations has clearly had an important deterrent impact on the market while expending a fraction of the resources that we have dedicated in the past,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “We will continue to target important violations that we see repeatedly with multiple actions that send important messages of deterrence.”
Rule 105 typically prohibits short selling a stock within five business days of participating in an offering for that same stock. Such dual activity typically results in illicit profits for the trader while reducing the offering proceeds for a company by artificially depressing the market price shortly before the company prices the stock. The SEC’s investigations in the current round found that 6 firms engaged in short selling of particular stocks shortly before they bought shares from an underwriter, broker, or dealer participating in a follow-on public offering. Each firm has agreed to settle the SEC’s charges and pay a combined total of more than $2.5 million in disgorgement, interest, and penalties.
The six settlements announced today involved the following entities:
* Auriga Global Investors, Sociedad de Valores, S.A. – The Spain-based firm agreed to pay disgorgement of $436,940.52, prejudgment interest of $2,184.70, and a penalty of $179,277.28.
* Harvest Capital Strategies LLC – The California-based firm agreed to pay disgorgement of $18,835, prejudgment interest of $619.28, and a penalty of $65,000.
* J.P. Morgan Investment Management Inc. – The New York-based firm agreed to pay disgorgement of $662,763, prejudgment interest of $56,758.40, and a penalty of $364,689.
* Omega Advisors, Inc. – The New York-based firm agreed to pay disgorgement of $68,340, prejudgment interest of $686.58, and a penalty of $65,000.
* Sabby Management LLC – New Jersey-based firm agreed to pay disgorgement of $184,747.10, prejudgment interest of $2,331.51, and a penalty of $91,669.95.
* War Chest Capital Partners LLC – The New York-based firm agreed to pay disgorgement of $179,516, prejudgment interest of $22,302.02, and a penalty of $150,000.
In the initiative’s initial round in 2013, enforcement actions were brought against 23 firms and resulted in more than $14.4 million in monetary sanctions. In a second round of sanctions announced in 2014, enforcement actions were brought against 19 firms and one individual trader and resulted in more than $9 million in monetary sanctions.
This third round of the initiative also demonstrates the benefits of cooperation. In contrast to nearly every other firm subject to the Initiative, War Chest Capital Partners LLC, a respondent in the SEC’s first sweep in 2013, refused at that time to review its past trading to determine whether additional violations not identified by the Division of Enforcement had occurred. The division subsequently found seven additional Rule 105 violations by War Chest, and, as a result, has today brought a second action against War Chest with increased sanctions. Under today’s order against War Chest, the firm is now subject to a censure, a significant penalty, and conduct-based order prohibiting it from participating in secondary offerings for a period of one year.
The SEC’s investigations were conducted by Lauren B. Poper, Allen A. Flood, and Christina M. Adams and supervised by Anita B. Bandy. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.
http://www.sec.gov/news/pressrelease/2015-239.html
Illegal Naked Short Selling Appears to Lie at the Heart of an Extensive Stock Manipulation Scheme
POSTED by LARRY SMITH on JUN 16, 2015 • (11)
Investment Consequences of Naked Shorting
Only a motivated enforcement agency with subpoena power and an accompanying powerful enforcement infrastructure can prove that naked shorting is at the heart of an extensive stock manipulation scheme. However, I believe that the observational evidence is overwhelming that naked shorting practices are widely used to manipulate the stock prices of emerging biotechnology companies as well as many other small and large companies. Unfortunately, naked shorting is an investment variable that investors must understand if they are going to make investments in the emerging biotechnology space in particular and the equity markets in general.
Investors may decide that they just won’t invest in companies that are most subject to naked shorting, but this would eliminate many small emerging growth stocks with exciting potential. For those like me who are attracted by potentially breakthrough technologies, you will inevitably get caught up in a manipulation that leads to a suddenly plunging stock price of a company in which you are invested. Invariably the scheme starts with and is perpetuated by a flurry of blogs, tweets and message board comments which proclaim that the technology is worthless; management is a band of liars and thieves; and people with a positive view on the Company are being paid by the Company. Then come the lawsuits against the Company and management by the usual group of class action law firms. Each year this scenario is played out hundreds of times.
This carefully scripted and long used manipulation scheme by short selling hedge funds is all meant to shake and then break investors’ confidence. The result is usually a painful, steady, day by day erosion of the stock price due to naked shorting practices. Stocks can be cut in half by naked shorting on the basis of little or no change in fundamentals. If you are going to invest in this area, you must decide when this occurs whether you believe strongly in the Company and can ride out the storm or want to cut and run. However, sometimes it happens so rapidly that the latter is not an option. On the positive side, these manipulations can often lead to some excellent investment opportunities if the fundamentals remain intact, investor confidence returns and the shorts are forced to cover.
The Rationale forInvesting in Small Emerging Biotechnology Companies; Is It Worth It?
I worked for many years on Wall Street as an analyst covering large pharmaceutical and biotechnology companies and rarely dealt with small companies which I arbitrarily define as having market capitalizations under $1billion. From my experience with these large companies, I came to believe that they were excellent at drug development and commercialization and sometimes innovation, but depended extensively on small entrepreneurial companies for their pipelines. Many, indeed most, of the paradigm changing technologies are initially pursued by small companies. The big companies generally wait for proof of concept and then swoop in to either license the technology and/or the drugs stemming from it or to purchase the companies outright. This can lead to some incredible homeruns for investors in small companies so much so that one success can offset several failures.
The behavior of the big companies is understandable as the number of intriguing and promising new technology approaches in drug development seems endless. I personally have done some tracking of over 300 biotechnology companies and this is not an exhaustive list. Moreover, exciting new technologies are evolving like lava flowing over the rim of a volcano. Even big companies lack the infrastructure and financial resources needed to aggressively pursue more than a small fraction of drug development opportunities. Once committed, the development costs for a new drug can run into the hundreds of millions and even over $1 billion of costs. And of course, the failure rate in new drugs is astronomically high. I have seen estimates that for drugs that begin human phase 1 trials, perhaps only 1 in 10 will reach phase 3 and in phase 3 a significant percentage will fail. And even of those that succeed only a few become blockbusters.
With this high rate of failure, drug development is not for sissies. Research people at large companies get rewarded for successes and fired for failures. Hence there is a tendency to focus on evolutionary (me too) drug development in which there is less risk and leave the paradigm shifting efforts to entrepreneurs willing to accept the very high risk of failure for the extraordinary rewards in those few cases in which success is reached. What are those odds for success? I have no data to back this up, but the chance for moderate success is less than 1 in 10 and for home runs is in excess of 1 in 25 or 1 in 50. Take these numbers as being representative of the risk as opposed to a well-researched estimate.
Wall Street analysts have risk profiles that aren’t that different from research people at big pharma. They gain fame for being correct on a stock and can lose their jobs if they take a risk on an unproven drug or technology and get “blown up”. As a result, many early stage companies are ignored by analysts or primarily covered by analysts working for investment banks who specialize in bringing such companies public; naturally analysts employed by investment banks are always positive on the stocks their firms underwrite.
As I looked at this situation, about five years ago, I sensed an opportunity to try to bring quality research to some of the companies in this vast universe of poorly followed companies. Obviously, it is not possible to cover all possible companies so I focused on just a few in which I tried to do exhaustive research that could give me an edge. My strategy was primarily although not entirely to focus on stocks that could be homeruns. (Please refer to my earlier comments on the risks involved). Recognizing the high potential for failure, I tried to find as many opportunities as possible and never put all my eggs in one basket. In my own portfolio, I invest in a large number of early stage biotechnology stocks as I fully recognize that I am going to be wrong in a significant percentage of the stocks I deal with. I call my strategy asymmetric investing and this is explained in more depth on my website at this link.
Finding Out About Naked Shorting
I started developing my website and its content about four years ago. As I gained more experience, I was startled to find that there was another very important force at work on these companies that was apart from the fundamentals that I was focused on. One would expect a high level of volatility in the stocks in which I specialize. However, this could not always explain the demoralizing collapse of a meaningful number of stocks that I am involved with following some news event. Suddenly and without a major change in the fundamental outlook, I would see stock prices cut in half in a short period of time. During this time there was invariably a steady day by day price erosion (naked shorting at work) accompanied by an unending stream of contrived negative news flow that was demoralizing to me and other investors.
In order to give more insight into what a naked shorting attack might look like, I have put the predictable elements of a typical attack based on my experience in living through a number of them on separate companies.
Shorts like to target emerging biotechnology stocks that are engaged in high risk drug development and are not widely covered by quality research analysts.
The initial and subsequent attacks are almost always triggered by some news event. Obviously, the shorts seek out negative news or an event that creates uncertainty. However, sometimes an attack can be based on a positive news event which the shorts spin to make it appear negative.
Using the ready platform afforded by the internet and social media, a blogger associated with the shorts goes to work with a negative interpretation of an event. These are usually not sophisticated analyses and are usually limited to one or two pages of text which is invariably one-sided and unbalanced. These are meant to provide “intellectual” reasons and cover for the short attack.
The most prominent of these bloggers usually have no backgrounds in biotechnology analysis or expertise in the science. I believe that in many cases, hedge fund employees actually write the articles which are cut and pasted into the comments of these bloggers.
The heart of the naked shorting scheme involves a group of hedge fund traders conspiring to steadily knock out offers for the stock and to trigger stop loss orders (This is explained later in this report). This is called walking the stock down. The power of these conspiracies is striking and in many cases allows the shorts can largely determine the price that they want the stock to trade at.
The stock weakness gives legitimacy to the contrived negative blogs. The idea is to create fear and uncertainty among investors by making all news events appear to be negatives and to fabricate new issues that the shorts hope will demoralize investors.
The first time I came up against this, my thought was that the blogger was someone who was just more cynical about the chances for success and had an opposite point of view from mine. This is understandable and common in research analysis. I wrote a respectful rebuttal to their argument.
I thought that after their rebuttal to my rebuttal, this would end the discussion. We had expressed our opposite points of view, would respectively disagree and move on. This had mainly been my experience in my Wall Street days as an analyst when I disagreed with another analyst. I was wrong.
The situation quickly escalated. In the rebuttal, the blogger accused me of being stupid, deceitful and being paid by the Company to write positive comments.
In this case, over 20 articles were then written in a period of a year. Usually, they were timed to a press release and regardless of the news and without exception each was interpreted as a major negative. A major strategy was to argue that management was lying to investors and manipulating the stock.
The stock would go down on good news, bad news and uncertain news. One of the pillars of stock manipulation is to make good news appear to be bad.
The blogger was indifferent to truth and actually would make up information that was factually incorrect. When made aware that the information was wrong, he/she would ignore it and even repeat it in later blogs.
There are a number of bloggers who participate in these attacks. Many of these bloggers appear to work together and coordinate their negative attacks. It is striking that many of these people have connections to one another. Many of them were trained at a well-known blogging site that was founded by hedge fund people.
Sophisticated use is made of the Internet and social media. Twitter is used to signal that an attack has begun.
Shorts are well connected to mainstream media and are adept at getting them to unwittingly participate in the scheme.
Vicious attacks are launched on writers who might have an opposite but hopefully more well-reasoned and balanced view. The usual line is that they are being paid by management to write positive articles.
Seeking Alpha has become very friendly to articles supporting short selling and is used extensively by the hedge funds. The site actually promotes as one of its favorite authors a person who writes only negative attack article on companies in which he claims that managements are lying and paying authors who have a positive view on the Company. In his disclosure, he states that he shorts stocks, then publishes a negative article on Seeking Alpha and states that he may cover immediately after the article is published. This seems to meet the definition of a pump and dump scheme. He also acknowledges that he is collaborating with other short sellers. I think they contribute the information for most of his articles
Seeking Alpha allows articles to be published by anonymous authors. These articles are often extremely bearish and are almost certainly written by people at hedge funds.
Hedge fund create pseudonyms and publish on a daily basis negative comments on message boards like Yahoo and Ihub.
Law suits appear after articles and allege misconduct on the part of managements and urge investors to participate in a class action lawsuit.
Initially, I attributed these actions to people who were just more cynical than me and honestly came to their bearish views. I am also very cognizant that there is not an insignificant amount of stock manipulation that warrants shorting some stocks. There are some bad actors who pump stocks up and then dump them and this is every bit as egregious as naked shorting attacks. Interestingly, I believe that the hedge funds who short can be enthusiastic participants in these manipulation schemes as well. I also understand that managements can and usually are over enthusiastic in presenting the outlook for their companies. They have so much personal wealth and intellectual effort invested in a Company that objectivity can be difficult. I also have to admit that I have a bias toward optimism largely stemming from the belief that we are in a scientific renaissance in biotechnology that will lead to a meaningful number of breakthrough drugs and accompanying home run stocks. I recognize this personal bias and try to adjust for it, but I am only human.
The above paragraph shows that not all of the investment land mines can be attributed to naked shorting. However, it seems to me that many are. Initially I thought that what I now believe to be naked shorting stock manipulation was attributable to market forces. The catalyst for my changing my view was coming across a shocking You Tube commentary by Jim Cramer of CNBC fame. He explained in detail how as a hedge fund manager, he participated in schemes to manipulate stocks. If you haven’t seen this it is a must watch.
This was a wakeup call for me and for the last few years, I have been doing a great deal of work on naked shorting. As I talked to companies, I heard the same stories over and over about techniques used to drive down their stock prices and I came to believe that there was manipulation going on and that it was extensive. The names of hedge funds leading the attack kept coming up in situation after situation. It has been my intent to write an article on naked shorting, but this is an enormous project and while I think I understand the effect that naked shorting can have on stocks, I lack the understanding of the trading techniques used to implement what is essentially an illegal stock manipulations scheme.
Counterfeiting Stock; An Eye Opening Article
Recently, one of my subscribers sent me an article that covers the ground that I wanted to cover in an eloquent way and is much better that what I could have done, especially on the esoteric trading techniques used to cover up this illegal activity. It largely expresses what I would like to have written. He sent me a link to a website called Citizens for Securities Reform. On this website there was a link to an aticile called Counterfeiting Stock and a number of other articles on stock manipulation. This article was essentially the one I would like to have written. I have decided to reproduce the article on my website in its entirety. I certainly don’t have the information needed to prove the hypotheses presented in the Counterfeiting Stocks article. Only an organization with subpoena power and huge investigative resource can really determine if this article is correct. The author of this article has the following disclaimer and I would make his disclaimer mine.
Disclaimer — In compiling the information contained in this website, the author relied on sources — both public and private — and, for the most part, accepted the information from the source as reliable. As explained herein, considerable secrecy surrounds the activities being alleged in this report, which may result in conclusions that are speculative, inaccurate, or the opinion of the author. To the extent a source was inaccurate or provided incomplete information, the author takes no responsibility for the same and does not intend that anyone rely on any such information in order to make decisions to believe or disbelieve a particular person, point of view or alleged fact or circumstance. Under no circumstances does the author intend to cause harm to any person or entity as a result of conclusions made or information provided. Each reader is cautioned to draw his own conclusions about the provided information, and before relying on same, to perform his own due diligence and research.
Sources — Information used was obtained from public records; the SEC; the Leslie Boni Report to the SEC on shorting; evidence and testimony in court proceedings; conversations with attorneys who are involved in securities litigation; former SEC employees; conversations with management of victim companies; and first hand experience as investors in companies that have suffered short attacks. This web site is sponsored by Citizens for Securities Reform.
The sponsors of the Citizens for Securities Reform website have kept their identities anonymous or at least they have not chosen to identify themselves on their website. Hence I have not received explicit permission to reproduce their article. However, they urge all investors to pass the information on as I show in the next paragraph and I take this as permission to reproduce the article. They say:
What to Do? — Many of our elected officials at the federal and state level do not understand most of what is contained in this paper. They must come to understand this fraud, and, more importantly, understand that their constituents are angry. Pass this information to everyone you know — put it in the public conscience. Then the citizenry needs to engage in a massive letter-writing campaign. Feel free to attach this report. Make sure your elected officials, at the federal level and state level know how you feel. Ultimately, votes in the home district will trump money from the outside.
The next part of this report is the complete reproduction of the article Counterfeiting Stock which appears on the Citizens for Securities Reform website. Some of the details on trading schemes used by hedge funds to execute and cover up naked shorting are a little difficult to wade through. However, the effort is well worth it; even if you don’t understand all of the technical points, you can get the gist.
Counterfeiting Stock
Illegal naked shorting and stock manipulation are two of Wall Street’s deep, dark secrets. These practices have been around for decades and have resulted in trillions of dollars being fleeced from the American public by Wall Street. In the process, many emerging companies have been put out of business. This report will explain the magnitude of this problem, how it happens, why it has been covered up and how short sellers attack a company. It will also show how all of the participants; the short hedge funds, the prime brokers and the Depository Trust Clearing Corp. (DTCC) — make unconscionable profits while the fleecing of the small American investor continues unabated.
Why is This Important?
This problem affects the investing public. Whether invested directly in the stock market or in mutual funds, IRAs, retirement or pension plans that hold stock — it touches the majority of Americans. The participants in this fraud, which, when fully exposed, will make Enron look like child’s play, have been very successful in maintaining a veil of secrecy and impenetrability. Congress and the SEC have unknowingly (?) helped keep the closet door closed. The public rarely knows when its pocket is being picked as unexplained drops in stock price get chalked up to “market forces” when they are often market manipulations.
The stocks most frequently targeted are those of emerging companies who went to the stock market to raise start–up capital. Small business brings the vast majority of innovative new ideas and products to market and creates the majority of new jobs in the United States. Over 1000 of these emerging companies have been put into bankruptcy or had their stock driven to pennies by predatory short sellers.
It is important to understand that selling a stock short is not an investment in American enterprise. A short seller makes money when the stock price goes down and that money comes solely from investors who have purchased the company’s stock. A successful short manipulation takes money from investment in American enterprise and diverts it to feed Wall Street’s insatiable greed — the company that was attacked is worse off and the investing public has lost money. Frequently this profit is diverted to off–shore tax havens and no taxes are paid. This national disgrace is a parasite on the greatest capital market in the world.
A Glossary of Illogical Terms
The securities industry has its own jargon, laws and practices that may require explaining. Most of these concepts are the creation of the industry, and, while they are promoted as practices that ensure an orderly market, they are also exploited as manipulative tools. This glossary is limited to naked short abuse, or counterfeiting stock as it is more correctly referred to.
Broker Dealer or Prime Broker — The big stockbrokers who clear their own transactions, which is to say they move transacted shares between their customers directly, or with the DTC. Small brokers will clear through a clearing house — also known as a broker’s broker.
Hedge Funds — Hedge funds are really unregulated investment pools for rich investors. They have grown exponentially in the past decade and now number over 10,000 and manage over one trillion dollars. They don’t register with the SEC, are virtually unregulated and frequently foreign domiciled, yet they are allowed to be market makers with access to all of the naked shorting loopholes. Frequently they operate secretively and collusively. The prime brokers cater to the hedge funds and allegedly receive eight to ten billion dollars annually in fees and charges relating to stock lent to the short hedge funds.
Market Maker — A broker, broker dealer or hedge fund who makes a market in a stock. In order to be a market maker, they must always have shares available to buy and sell. Market makers get certain sweeping exemptions from SEC rules involving naked shorting.
Short Seller — An individual, hedge fund, broker or institution who sells stock short. The group of short sellers is referred to as “the shorts.”
The Securities and Exchange Commission — The SEC is the federal enforcement agency that oversees the securities markets. The top–level management is a five–person Board of Governors who are Presidential appointees. Three of the governors are usually from the securities industry, including the chairman. The SEC adopted Regulation SHO in January 2005 in an attempt to curb naked short abuse.
Depository Trust Clearing Corp — Usually known as the DTCC, this privately held company is owned by the prime brokers and it clears, transacts and holds most stock in this country. It has four subsidiaries, which include the DTC and the NCSS. The operation of this company is described in detail later.
Short Sale — Selling a stock short is a way to make a profit while the stock price declines. For example: If investor S wishes to sell short, he borrows a share from the account of investor L. Investor S immediately sells that share on the open market, so investor S now has the cash from the sale in his account, and investor L has an IOU for the share from investor S. When the stock price drops, investor S takes some of the money from his account and buys a share, called “covering”, which he returns to investor L’s account. Investor S books a profit and investor L has his share back. This relatively simple process is perfectly legal – so far. The investor lending the share most likely doesn’t even know the share left his account, since it is all electronic and occurs at the prime broker or DTC level. If shares are in a margin account, they may be loaned to a short without the consent or knowledge of the account owner. If the shares are in a cash account, IRA account or are restricted shares they are not supposed to be borrowed unless there is express consent by the account owner.
Disclosed Short — When the share has been borrowed or a suitable share has been located that can be borrowed, it is a disclosed short. Shorts are either naked or disclosed, but, in reality, some disclosed shorts are really naked shorts as a result of fraudulent stock borrowing.
Naked Short — This is an invention of the securities industry that is a license to create counterfeit shares. In the context of this document, a share created that has the effect of increasing the number of shares that are in the market place beyond the number issued by the company, is considered counterfeit. This is not a legal conclusion, since some shares we consider counterfeit are legal based upon today’s rules. The alleged justification for naked shorting is to insure an orderly and smooth market, but all too often it is used to create a virtually unlimited supply of counterfeit shares, which leads to widespread stock manipulation – the lynchpin of this massive fraud.
Returning to our example, everything is the same except the part about borrowing the share from someone else’s account: There is no borrowed share — instead a new one is created by either the broker dealer or the DTC. Without a borrowed share behind the short sale, a naked short is really a counterfeit share.
Fails–to–Deliver — The process of creating shares via naked shorting creates an obvious imbalance in the market as the sell side is artificially increased with naked short shares or more accurately, counterfeit shares. Time limits are imposed that dictate how long the sold share can be naked. For a stock market investor or trader, that time limit is three days. According to SEC rules, if the broker dealer has not located a share to borrow, they are supposed to take cash in the short account and purchase a share in the open market. This is called a “buy–in,” and it is supposed to maintain the total number of shares in the market place equal to the number of shares the company has issued.
Market makers have special exemptions from the rules: they are allowed to carry a naked short for up to twenty–one trading days before they have to borrow a share. When the share is not borrowed in the allotted time and a buy–in does not occur, and they rarely do, the naked short becomes a fail–to–deliver (of the borrowed share).
Options — The stock market also has separate, but related markets that sell options to purchase shares (a “call”) and options to sell shares (a “put”). This report is only going to deal with calls; they are an integral part of short manipulations. A call works as follows: Assume investor L has a share in his account that is worth $25. He may sell an option to purchase that share to a third party. That option will be at a specific price, say $30, and expires at a specific future date. Investor L will get some cash from selling this option. If at the expiration date, the market value of the stock is below $30 (the “strike price”), the option expires as worthless and investor L keeps the option payment. This is called “out of the money.” If the market value of the stock is above the strike price, then the buyer of the option “calls” the stock. Assume the stock has risen to $40. The option buyer tenders $30 to investor L and demands delivery of the share, which he may keep or immediately sell for a $10 profit.
Naked call — The same as above except that investor L, who sells the call, has no shares in his account. In other words, he is selling an option on something he does not own. The SEC allows this. SEC rules also allow the seller of a naked short to treat the purchase of a naked call as a borrowed share, thereby keeping their naked short off the SEC’s fails–to–deliver list.
How The System Transacts Stocks — This explanation has been greatly simplified in the interest of brevity.
Customers — These can be individuals, institutions, hedge funds and prime broker’s house accounts.
Prime Brokers — They both transact and clear stocks for their customers. Examples of prime brokers include Goldman Sachs; Merrill Lynch; Citigroup; Morgan Stanley; Bear Stearns, etc.
The DTCC — This is the holding company that owns four companies that clear and keep track of all stock transactions. This is where brokerage accounts are actually lodged. The DTC division clears over a billion shares daily. The DTCC is owned by the prime brokers, and, as a closely held private enterprise, it is impenetrable. It actively and aggressively fights all efforts to obtain information regarding naked shorting, with or without a subpoena.
Stocks clear as follows:
If customer A–1 purchases ten shares of XYZ Corp and Customer A–2 sells ten shares, then the shares are transferred electronically, all within prime broker A. Record of the transaction is sent to the DTC. Likewise, if Investor A–1 shorts ten shares of XYZ Corp and Investor A–2 has ten shares in a margin account, prime broker A borrows the shares from account A–2 and for a fee lends them to A–1.
If Customer A–1 sells shares to Customer B–2, in order to get the shares to B–2 and the money to A–1, the transaction gets completed in the DTC. The same occurs for shares that are borrowed on a short sale between prime brokers.
As a practical matter, what happens is prime broker A, at the end of the day, totals all of his shares of XYZ owned and all of the XYZ shares bought and sold, and clears the difference through the DTC. In theory, at the end of each day when all of the prime brokers have put their net positions in XYZ stock through the system, they should all cancel out and the number of shares in the DTC should equal the number of shares that XYZ has sold into the market. This almost never happens, because of the DTC stock borrow program which is discussed later.
Who are the Participants in the Fraud? The participants subscribe to the theory that it is much easier to make money tearing companies down than making money building them up, and they fall into two general categories: 1) They participate in the process of producing the counterfeit shares that are the currency of the fraud and/or 2) they actively short and tear companies down.
The counterfeiting of shares is done by participating prime brokers or the DTC, which is owned by the prime brokers. A number of lawsuits that involve naked shorting have named about ten of the prime brokers as defendants, including Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch; UBS; Morgan Stanley and others. The DTCC has also been named in a number of lawsuits that allege stock counterfeiting.
The identity of the shorts is somewhat elusive as the shorts obscure their true identity by hiding behind the prime brokers and/or hiding behind layers of offshore domiciled shell corporations. Frequently the money is laundered through banks in a number of tax haven countries before it finally reaches its ultimate beneficiary in New York, New Jersey, San Francisco, etc. Some of the hedge fund managers who are notorious shorters, such as David Rocker and Marc Cohodes, are very public about their shorting, although they frequently utilize offshore holding companies to avoid taxes and scrutiny.
Most of the prime brokers have multiple offshore subsidiaries or captive companies that actively participate in shorting. The prime brokers also front the shorting of some pretty notorious investors. According to court documents or sworn testimony, if one follows one of the short money trails at Solomon, Smith Barney, it leads to an account owned by the Gambino crime family in New York. A similar exercise with other prime brokers, who cannot be named at this time, leads to the Russian mafia, the Cali drug cartel, other New York crime families and the Hell’s Angels.
One short hedge fund that was particularly destructive was a shell company domiciled in Bermuda. Subpoenas revealed the Bermuda company was wholly owned by another shell company that was domiciled in another tax haven country. This process was five layers deep, and at the end of the subterfuge was a very well known American insurance company that cannot be disclosed because of court–ordered sealing of testimony.
Most of the large securities firms, insurance companies and multi–national companies have layers of offshore captives that avoid taxes, engage in activities that the company would not want to be publicly associated with, like stock manipulation; avoid U.S. regulatory and legal scrutiny; and become the closet for deals gone sour, like Enron.
The Creation of Counterfeit Shares — There are a variety of names that the securities industry has dreamed up that are euphemisms for counterfeit shares. Don’t be fooled : Unless the short seller has actually borrowed a real share from the account of a long investor, the short sale is counterfeit. It doesn’t matter what you call it and it may become non–counterfeit if a share is later borrowed, but until then, there are more shares in the system than the company has sold.
The magnitude of the counterfeiting is hundreds of millions of shares every day, and it may be in the billions. The real answer is locked within the prime brokers and the DTC. Incidentally, counterfeiting of securities is as illegal as counterfeiting currency, but because it is all done electronically, has other identifiers and industry rules and practices, i.e. naked shorts, fails–to–deliver, SHO exempt, etc. the industry and the regulators pretend it isn’t counterfeiting. Also, because of the regulations that govern the securities, certain counterfeiting falls within the letter of the rules. The rules, by design, are fraught with loopholes and decidedly short on allowing companies and investors access to information about manipulations of their stock.
The creation of counterfeit shares falls into three general categories. Each category has a plethora of devices that are used to create counterfeit shares.
Fails–to–Deliver — If a short seller cannot borrow a share and deliver that share to the person who purchased the (short) share within the three days allowed for settlement of the trade, it becomes a fail–to–deliver and hence a counterfeit share; however the share is transacted by the exchanges and the DTC as if it were real. Regulation SHO, implemented in January 2005 by the SEC, was supposed to end wholesale fails–to–deliver, but all it really did was cause the industry to exploit other loopholes, of which there are plenty (see 2 and 3 below).
Since forced buy–ins rarely occur, the other consequences of having a fail–to–deliver are inconsequential, so it is frequently ignored. Enough fails–to–deliver in a given stock will get that stock on the SHO list, (the SEC’s list of stocks that have excessive fails–to–deliver) – which should (but rarely does) see increased enforcement. Penalties amount to a slap on the wrist, so large fails–to–deliver positions for victim companies have remained for months and years.
A major loophole that was intentionally left in Reg SHO was the grandfathering in of all pre–SHO naked shorting. This rule is akin to telling bank robbers, “If you make it to the front door of the bank before the cops arrive, the theft is okay.”
Only the DTC knows for certain how many short shares are perpetual fails–to–deliver, but it is most likely in the billions. In 1998, REFCO, a large short hedge fund, filed bankruptcy and was unable to meet margin calls on their naked short shares. Under this scenario, the broker dealers are the next line of financial responsibility. The number of shares that allegedly should have been bought in was 400,000,000, but that probably never happened. The DTC — owned by the broker dealers — just buried 400,000,000 counterfeit shares in their system, where they allegedly remain — grandfathered into “legitimacy” by the SEC. Because they are grandfathered into “legitimacy”, the SEC, DTC and prime brokers pretend they are no longer fails–to–deliver, even though the victim companies have permanently suffered a 400 million share dilution in their stock.
Three months prior to SHO, the aggregate fails–to–deliver on the NASDAQ and the NYSE averaged about 150 million shares a day. Three months after SHO it dropped by about 20 million, as counterfeit shares found new hiding places (see 2 and 3 below). It is noteworthy that aggregate fails–to–deliver are the only indices of counterfeit shares that the DTC and the prime brokers report to the SEC. The bulk of the counterfeiting remains undisclosed, so don’t be deceived when the SEC and the industry minimize the fails–to–deliver information. It is akin to the lookout on the Titanic reporting an ice cube ahead.
Ex–clearing counterfeiting — The second tier of counterfeiting occurs at the broker dealer level. This is called ex–clearing. Multiple tricks are utilized for the purpose of disguising naked shorts that are fails–to–deliver as disclosed shorts, which means that a share has been borrowed. They also make naked shorts “invisible” to the system so they don’t become fails–to–deliver, which is the only thing the SEC tracks.
Some of the tricks are as follows:
Stock sales are either a long sale or a short sale. When a stock is transacted the broker checks the appropriate box. By mismarking the trading ticket –checking the long box when it is actually a short sale the short never shows up, unless they get caught, which doesn’t happen often. The position usually gets reconciled when the short covers.
Settlement of stock transactions is supposed to occur within three days, at which time a naked short should become a fail–to–deliver, however the SEC routinely and automatically grants a number of extensions before the naked short gets reported as a fail–to–deliver. Most of the short hedge funds and broker dealers have multiple entities, many offshore, so they sell large naked short positions from entity to entity. Position rolls, as they are called, are frequently done broker to broker, or hedge fund to hedge fund, in block trades that never appear on an exchange. Each movement resets the time clock for the naked position becoming a fail–to–deliver and is a means of quickly getting a company off of the SHO threshold list.
The prime brokers may do a buy–in of a naked short position. If they tell the short hedge fund that we are going to buy–in at 3:59 EST on Friday, the hedge fund naked shorts into their own buy–in (or has a co–conspirator do it) and rolls their position, hence circumventing Reg SHO.
Most of the large broker dealers operate internationally, so when regulators come in (they almost always “call ahead”) or compliance people come in (ditto), large naked positions are moved out of the country and returned at a later date.
The stock lend is enormously profitable for the broker dealers who charge the short sellers large fees for the “borrowed” shares, whether they are real or counterfeit. When shares are loaned to a short, they are supposed to remain with the short until he covers his position by purchasing real shares. The broker dealers do one–day lends, which enables the short to identify to the SEC the account that shares were borrowed from. As soon as the report is sent in, the shares are returned to the broker dealer to be loaned to the next short. This allows eight to ten shorts to borrow the same shares, resetting the SHO–fail–to–deliver clock each time, which makes all of the counterfeit shares look like legitimate shares. The broker dealers charge each short for the stock lend.
Margin account buyers, because of loopholes in the rules, inadvertently aid the shorts. If short A sells a naked short he has three days to deliver a borrowed share. If the counterfeit share is purchased in a margin account, it is immediately put into the stock lend and, for a fee, is available as a borrowed share to the short who counterfeited it in the first place. This process is perpetually fluid with multiple parties, but it serves to create more counterfeit shares and is an example of how a counterfeit share gets “laundered” into a legitimate borrowed share.
Margin account agreements give the broker dealers the right to lend those shares without notifying the account owner. Shares held in cash accounts, IRA accounts and any restricted shares are not supposed to be loaned without express consent from the account owner. Broker dealers have been known to change cash accounts to margin accounts without telling the owner, take shares from IRA accounts, take shares from cash accounts and lend restricted shares. One of the prime brokers recently took a million shares from cash accounts of the company’s founding investors without telling the owners or the stockbroker who represented ownership. The shares were put into the stock lend, which got the company off the SHO threshold list, and opened the door for more manipulative shorting.
This is a sample of tactics used. For a company that is under attack, the counterfeit shares that exist at this ex–clearing tier can be ten or twenty times the number of fails–to–deliver, which is the only category tracked and policed by the SEC.
Continuous Net Settlement — The third tier of counterfeiting occurs at the DTC level. The Depository Trust and Clearing Corporation (DTCC) is a holding company owned by the major broker dealers, and has four subsidiaries. The subsidiaries that are of interest are the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). The DTC has an account for each broker dealer, which is further broken down to each customer of that broker dealer. These accounts are electronic entries. Ninety seven percent of the actual stock certificates are in the vault at the DTC with the DTC nominee’s name on them. The NSCC processes transactions, provides the broker dealers with a central clearing source, and operates the stock borrow program.
When a broker dealer processes the sale of a short share, the broker dealer has three days to deliver a borrowed share to the purchaser and the purchaser has three days to deliver the money. In the old days, if the buyer did not receive his shares by settlement day, three days after the trade, he took his money back and undid the transaction. When the stock borrow program and electronic transfers were put in place in 1981, this all changed. At that point the NSCC guaranteed the performance of the buyers and sellers and would settle the transaction even though the seller was now a fail–to–deliver on the shares he sold. The buyer has a counterfeit share in his account, but the NSCC transacts it as if it were real.
At the end of each day, if a broker dealer has sold more shares of a given stock than he has in his account with the DTC, he borrows shares from the NSCC, who borrows them from the broker dealers who have a surplus of shares. So far it sounds like the whole system is in balance, and for any given stock the net number of shares in the DTC is equal to the number of shares issued by the company.
The short seller who has sold naked – he had no borrowed shares – can cure his fail–to–deliver position and avoid the required forced buy–in by borrowing the share through the NSCC stock borrow program.
Here is the hocus pocus that creates millions of counterfeit shares.
When a broker dealer has a net surplus of shares of any given company in his account with the DTC, only the net amount is deducted from his surplus position and put in the stock borrow program. However the broker dealer does not take a like number of shares from his customer’s individual accounts. The net surplus position is loaned to a second broker dealer to cover his net deficit position.
Let’s say a customer at the second broker dealer purchased shares from a naked short seller — counterfeit shares. His broker dealer “delivers” those shares to his account from the shares borrowed from the DTC. The lending broker dealer did not take the shares from any specific customers’ account, but the borrowing broker dealer put the borrowed shares in specific customer’s accounts. Now the customer at the second prime broker has “real” shares in his account. The problem is it’s the same “real” shares that are in the customer’s account at the first prime broker.
The customer account at the second prime broker now has a “real” share, which the prime broker can lend to a short who makes a short sale and delivers that share to a third party. Now there are three investors with the same counterfeit shares in their accounts.
Because the DTC stock borrow program, and the debits and credits that go back and forth between the broker dealers, only deals with the net difference, it never gets reconciled to the actual number of shares issued by the company. As long as the broker dealers don’t repay the total stock borrowed and only settle their net differences, they can “grow” a company’s issued stock.
This process is called Continuous Net Settlement (CNS) and it hides billions of counterfeit shares that never make it to the Reg. SHO radar screen, as the shares “borrowed” from the DTC are treated as a legitimate borrowed shares.
For companies that are under attack, the counterfeit shares that are created by the CNS program are thought to be ten or twenty times the disclosed fails–to–deliver, and the true CNS totals are only obtained by successfully serving the DTC with a subpoena. The SEC doesn’t even get this information. The actual process is more complex and arcane than this, but the end result is accurately depicted.
Ex–clearing and CNS counterfeiting are used to create an enormous reserve of counterfeit shares. The industry refers to these as “strategic fails–to–deliver.” Most people would refer to these as a stockpile of counterfeit shares that can be used for market manipulation. One emerging company for which we have been able to get or make reasonable estimates of the total short interest, the disclosed short interest, the available stock lend and the fails–to–deliver, has fifty “buried” counterfeit shares for every fail–to–deliver share, which is the only thing that the SEC tracks, consequently the SEC has not acted on shareholder complaints that the stock is being manipulated.
The Anatomy of a Short Attack — Abusive shorting are not random acts of a renegade hedge funds, but rather a coordinated business plan that is carried out by a collusive consortium of hedge funds and prime brokers, with help from their friends at the DTC and major clearinghouses. Potential target companies are identified, analyzed and prioritized. The attack is planned to its most minute detail.
The plan consists of taking a large short position, then crushing the stock price, and, if possible, putting the company into bankruptcy. Bankrupting the company is a short homerun because they never have to buy real shares to cover and they don’t pay taxes on the ill-gotten gain.
When it is time to drive the stock price down, a blitzkrieg is unleashed against the company by a cabal of short hedge funds and prime brokers. The playbook is very similar from attack to attack, and the participating prime brokers and lead shorts are fairly consistent as well.
Typical tactics include the following:
Flooding the offer side of the board — Ultimately the price of a stock is found at the balance point where supply (offer) and demand (bid) for the shares find equilibrium. This equation happens every day for every stock traded. On days when more people want to buy than want to sell, the price goes up, and, conversely, when shares offered for sale exceed the demand, the price goes down.
The shorts manipulate the laws of supply and demand by flooding the offer side with counterfeit shares. They will do what has been called a short down ladder. It works as follows: Short A will sell a counterfeit share at $10. Short B will purchase that counterfeit share covering a previously open position. Short B will then offer a short (counterfeit) share at $9. Short A will hit that offer, or short B will come down and hit Short A’s $9 bid. Short A buys the share for $9, covering his open $10 short and booking a $1 profit.
By repeating this process the shorts can put the stock price in a downward spiral. If there happens to be significant long buying, then the shorts draw from their reserve of “strategic fails-to-deliver” and flood the market with an avalanche of counterfeit shares that overwhelm the buy side demand. Attack days routinely see eighty percent or more of the shares offered for sale as counterfeit. Company news days are frequently attack days since the news will “mask” the extraordinary high volume. It doesn’t matter whether it is good news or bad news.
Flooding the market with shares requires foot soldiers to swamp the market with counterfeit shares. An off-shore hedge fund devised a remarkably effective incentive program to motivate the traders at certain broker dealers. Each trader was given a debit card to a bank account that only he could access. The trader’s performance was tallied, and, based upon the number of shares moved and the other “success” parameters, the hedge fund would wire money into the bank account daily. At the end of each day, the traders went to an ATM and drew out their bribe. Instant gratification.
Global Links Corporation is an example of how wholesale counterfeiting of shares will decimate a company’s stock price. Global Links is a company that provides computer services to the real estate industry. By early 2005, their stock price had dropped to a fraction of a cent. At that point, an investor, Robert Simpson, purchased 100%+ of Global Links’ 1,158,064 issued and outstanding shares. He immediately took delivery of his shares and filed the appropriate forms with the SEC, disclosing he owned all of the company’s stock. His total investment was $5205. The share price was $.00434. The day after he acquired all of the company’s shares, the volume on the over-the-counter market was 37 million shares. The following day saw 22 million shares change hands — all without Simpson trading a single share. It is possible that the SEC has been conducting a secret investigation, but that would be difficult without the company’s involvement. It is more likely the SEC has not done anything about this fraud.
Massive counterfeiting can drive the stock price down in a matter of hours on extremely high volume. This is called “crashing” the stock and a successful “crash” is a one-day drop of twenty-percent or a thirty-five percent drop in a week. In order to make the crash “stick” or make it more effective, it is done concurrently with all or most of the following:
Media assault — The shorts, in order to realize their profit, must ultimately purchase real shares at a price much cheaper than what they shorted at. These real shares come from the investing public who panics and sells into the manipulation. Panic is induced with assistance from the financial media.
The shorts have “friendly” reporters with the Dow Jones News Agency, the Wall Street Journal, Barrons, the New York Times, Gannett Publications (USA Today and the Arizona Republic), CNBC and others. The common thread: A number of the “friendly” reporters worked for The Street.com, an Internet advisory service that hedge-fund managers David Rocker and Jim Cramer owned. This alumni association supported the short attack by producing slanted, libelous, innuendo laden stories that disparaged the company, as it was being crashed.
One of the more outrageous stories was a front-page story in USA Today during a short crash of TASER’s stock price in June 2005. The story was almost a full page and the reporter concluded that TASER’s electrical jolt was the same as an electric chair — proof positive that TASERs did indeed kill innocent people. To reach that conclusion the reporter over estimated the TASER’s amperage by a factor of one million times. This “mistake” was made despite a detailed technical briefing by TASER to seven USA Today editors two weeks prior to the story. The explanation “Due to a mathematical error” appeared three days later — after the damage was done to the stock price.
Jim Cramer, in a video-taped interview with The Street.com, best described the media function: “When (shorting) … The hedge fund mode is to not do anything remotely truthful, because the truth is so against your view, (so the hedge funds) create a new ‘truth’ that is development of the fiction… you hit the brokerage houses with a series of orders (a short down ladder that pushes the price down), then we go to the press. You have a vicious cycle down — it’s a pretty good game.”
This interview, which is more like a confession, was never supposed to get on the air, however, it somehow ended up on YouTube. Cramer and The Street.com have made repeated efforts, with some success, to get it taken off of YouTube.
Analyst Reports — Some alleged independent analysts were actually paid by the shorts to write slanted negative ratings reports. The reports, which were represented as being independent, were ghost written by the shorts and disseminated to coincide with a short attack. There is congressional testimony in the matter of Gradiant Analytic and Rocker Partners that expands upon this. These libelous reports would then become a story in the aforementioned “friendly” media. All were designed to panic small investors into selling their stock into the manipulation.
Planting moles in target companies — The shorts plant “moles” inside target companies. The moles can be as high as directors or as low as janitors. They steal confidential information, which is fed to the shorts who may feed it to the friendly media. The information may not be true, may be out of context, or the stolen documents may be altered. Things that are supposed to be confidential, like SEC preliminary inquiries, end up as front-page news with the short-friendly media.
Frivolous SEC investigations — The shorts “leak” tips to the SEC about “corporate malfeasance” by the target company. The SEC, which can take months processing Freedom of Information Act requests, swoops in as the supposed “confidential inquiry” is leaked to the short media.
The plethora of corporate rules means the SEC may ultimately find minor transgressions or there may be no findings. Occasionally they do uncover an Enron, but the initial leak can be counted on to drive the stock price down by twenty-five percent. The announcement of no or little findings comes months later, but by then the damage that has been done to the stock price is irreversible. The San Francisco office of the SEC appears to be particularly close to the short community.
Class Action lawsuits — Based upon leaked stories of SEC investigations or other media exposes, a handful of law firms immediately file class-action shareholder suits. Milberg Weiss, before they were disbanded as a result of a Justice Department investigation, could be counted on to file a class-action suit against a company that was under short attack. Allegations of accounting improprieties that were made in the complaint would be reported as being the truth by the short friendly media, again causing panic among small investors.
Interfering with target company’s customers, financings, etc. — If the shorts became aware of clients, customers or financings that the target company was working on, they would call and tell lies or otherwise attempt to persuade the customer to abandon the transaction. Allegedly the shorts have gone so far as to bribe public officials to dissuade them from using a company’s product.
Pulling margin from long customers — The clearinghouses and broker dealers who finance margin accounts will suddenly pull all long margin availability, citing very transparent reasons for the abrupt change in lending policy. This causes a flood of margin selling, which further drives the stock price down and gets the shorts the cheap long shares that they need to cover.
Paid bashers — The shorts will hire paid bashers who “invade” the message boards of the company. The bashers disguise themselves as legitimate investors and try to persuade or panic small investors into selling into the manipulation
This is not every dirty trick that the shorts use when they are crashing the stock. Almost every victim company experiences most or all of these tactics.
How Pervasive Is This? —
At any given point in time more than 100 emerging companies are under attack as described above. This is not to be confused with the day-to-day shorting that occurs in virtually every stock, which is purportedly about thirty percent of the daily volume.
The success rate for short attacks is over ninety percent – a success being defined as putting the company into bankruptcy or driving the stock price to pennies. It is estimated that 1000 small companies have been put out of business by the shorts. Admittedly, not every small company deserves to succeed, but they do deserve a level playing field.
The secrecy that surrounds the shorts, the prime brokers, the DTC and the regulatory agencies makes it impossible to accurately estimate how much money has been stolen from the investing public by these predators, but the total is measured in billions of dollars. The problem is also international in scope.
Who Profits from this Illicit Activity? — The short answer is everyone who participates. Specifically:
The shorts — They win over ninety percent of the time. Their return on investment is enormous because they don’t put any capital up when they sell short — they get cash from the sale delivered to their account. As long as the stock price remains under their short sale price, it is all profit on no investment.
The prime brokers — The shorts need the prime brokers to aid in counterfeiting shares, which is the cornerstone of the fraud. Not only do the prime brokers get sales commissions and interest on margin accounts, they charge the shorts “interest” on borrowed shares. This can be as high as five percent per week. The prime brokers allegedly make eight to ten billion dollars a year from their short stock lend program. The prime brokers also actively short the victim companies, making large trading profits.
The DTC — A significant amount of the counterfeiting occurs at the DTC level. They charge the shorts “interest” on borrowed shares, whether it is a legitimate stock borrow or counterfeit shares, as is the case in a vast majority of shares of a company under attack. The amount of profit that the DTC receives is unknown because it is a private company owned by the prime brokers.
The Cover Up — The securities industry, certain “respected” members of corporate America who like the profits from illegal shorting, certain criminal elements and our federal government do not want the public to become aware of this problem.
The reason for the cover up is money.
Everyone, including our elected officials, gets lots of money. Consequently there is an active campaign to keep a lid on information. The denial about these illegal practices comes from the industry, the DTC, the SEC and certain members of Congress. They are always delivered in blanket generalities. If indeed there is no problem, as they claim, then why don’t they show us the evidence instead of actively and aggressively fighting or deflecting every attempt at obtaining information that is easily accessible for them and impossible for companies and investors? Accusers are counter attacked as being sour-grapes losers, lunatics or opportunistic lawyers trying to unjustly enrich themselves. Death threats are not an unheard of occurrence, although it doesn’t appear that anyone has been “whacked” so far.
The securities industry counters with a campaign of misinformation. For example, they proudly pointed out that only one percent of the dollar volume of listed shares are fails-to-deliver. What they don’t mention:
that the fails-to-deliver are concentrated in companies being attacked
for companies under attack, for every disclosed fail-to-deliver there may be ten to forty times that number of undisclosed counterfeit shares
companies under attack have seen their stock price depressed to a small fraction of the price of an average share, therefore the fails-to-deliver as a percentage of number of shares is considerably higher than as a percentage of dollar volume
the examples cited are limited to listed companies, but much of the abuse occurs in the over the counter market, regional exchanges and on unregulated foreign exchanges that allow naked shorting of American companies, who are not even aware they are traded on the foreign exchanges.
Why does this continue to happen? It is no accident that the most pervasive financial fraud in the history of this country continues unabated. The securities industry advances its agenda on multiple fronts:
The truth about counterfeiting remains locked away with the perpetrators of the fraud. The prime brokers, hedge funds, the SEC and the DTC are shrouded in secrecy. They actively and aggressively resist requests for the truth, be it with a subpoena or otherwise. Congressional subpoenas are treated with almost as much disdain as civil subpoenas.
The body of securities law at the federal level is so stacked in favor of the industry that it is almost impossible to successfully sue for securities fraud in federal court.
For example, in a normal fraud case, a complaint can be filed based upon “information and belief” that a fraud has been committed. The court then allows the plaintiff to subpoena evidence and depose witnesses, including the defendants. From this discovery, the plaintiff then attempts to prove his case.
Federal securities fraud cases can’t be filed based upon “information and belief”; you must have evidence first in order to not have the complaint immediately dismissed for failure to state a cause of action. This information is not available from the defendants (see above) without subpoenas, but you can’t issue a subpoena because the case gets dismissed before discovery is opened.
This is only one example of the terrible inequities that exist in federal securities law.
The SEC is supposed to protect the investing public from Wall Street predators. While the vast majority of SEC staffers are underpaid, overworked, honest civil servants, the top echelons of the SEC frequently end up in high-paying Wall Street jobs. The five-person Board of Governors, who oversee the SEC, is dominated by the industry. The governors are presidential appointees and the industry usually fills three slots, frequently including the chairmanship.
For those rare occasions when the SEC prosecutes an industry insider, the cases almost never go to a judgment or a criminal conviction. The securities company settles for a fine and no finding of guilt. The fine, which may seem like a large sum, is insignificant in the context of an industry that earned 35 billion dollars in 2006. Fines, settlements and legal expenses are just a cost of doing business for Wall Street.
The root cause of the impossibly skewed federal laws and the ineffectiveness of the SEC and other regulatory bodies rests squarely with our elected officials. The securities industry contributes heavily to both parties at the presidential and congressional levels. As long as the public is passive about securities reform, our elected officials are happy to take the money, which at the federal level was 65 million dollars in 2006.
The Democrats swept into power with a promise of ethics reform. Their majority in congress allowed Christopher Dodd (D-CT) to ascend to the chairmanship of the Senate Banking Committee, which regulates the securities industry. His largest single contributor ($175,400) in the first quarter of 2007 was (employees of) SAC Capital, a very aggressive short hedge fund. Are we surprised that Dodd has opposed additional regulation of hedge funds. They are virtually unregulated.
Some states have their own securities laws and their own enforcement arm. Certain states including Connecticut, Illinois, Utah, Louisiana and others, have begun active enforcement of their own laws. The state laws are not nearly as pro industry as federal laws and plaintiffs are having success.
To thwart this, the industry with the support of the SEC, is attempting to have the federal court system and federal agencies, be the sole venue for securities matters. The SEC is working hand in hand with the industry to advance this theory of federal preemption, which would put all securities matters under federal law, all litigation in federal courts, and all enforcement with the SEC.
The following are recent examples of how the SEC is advancing the industry agenda:
The San Francisco office of the SEC issued subpoenas to various short friendly media outlets after congressional hearings about David Rocker and Gradient Analytic. This investigation into the media involvement with the shorts was ended by the chairman of the SEC, Christopher Cox, who withdrew the subpoenas, apparently concluding that the First Amendment right to free speech protected participants in an alleged stock manipulation. Jim Cramer ripped up his subpoena on his television show, thumbing his nose at the SEC.
In early 2007, the SEC completely exonerated Gradient, citing Gradient’s First Amendment rights.
The Nevada Supreme court heard a case captioned Nanopierce vs. DTCC. Nanopierce is an emerging company that was attacked by the shorts and subjected to massive counterfeiting of their stock by the DTCC. This state court case is close to opening discovery against the DTCC, so the industry is attempting to kill the lawsuit by arguing it should be in federal court — where it will be DOA. The SEC showed up as a friend of the defendant DTCC, and filed a brief in support of the DTCC efforts to remove the case to the federal court system.
Both houses of the Utah legislature passed a bill that required daily disclosure of fails-to-deliver, including identifying specific companies and the specific broker dealer positions in that company. The bill also outlawed naked shorting of companies domiciled in Utah. The industry threatened litigation based upon federal preemption and backed the state down. The bill was not signed into law.
A bill was introduced to the Arizona legislature that required disclosure similar to the Utah bill, but without the illegal naked shorting provision. This is the same information that the DTC confidentially provides to the SEC. Certain prime broker’s lobbying effort allegedly managed to get the bill killed in committee. The industries efforts to curtail state authority, is an effort to draw all securities matters under the federal umbrella, where small investors don’t have a chance of obtaining justice.
In February 2007 the SEC determined that the hedge fund industry did not require any additional regulation — they are virtually unregulated. This may be the height of arrogance.
Sources — Information used was obtained from public records; the SEC; the Leslie Boni Report to the SEC on shorting; evidence and testimony in court proceedings; conversations with attorneys who are involved in securities litigation; former SEC employees; conversations with management of victim companies; and first hand experience as investors in companies that have suffered short attacks. This web site is sponsored by Citizens for Securities Reform.
What to Do? — Many of our elected officials at the federal and state level do not understand most of what is contained in this paper. They must come to understand this fraud, and, more importantly, understand that their constituents are angry.
Pass this information to everyone you know — put it in the public conscience. Then the citizenry needs to engage in a massive letter-writing campaign. Feel free to attach this report. Make sure your elected officials, at the federal level and state level know how you feel. Ultimately, votes in the home district will trump money from the outside.
http://smithonstocks.com/illegal-naked-short-selling-appears-to-lie-at-the-heart-of-an-extensive-stock-manipulation-scheme/
link courtesy of a friend
4kids
all jmo
Finra in their infinite wisdom
changed the platform out *mid* November 2014
new link takes a few times to learn
http://otce.finra.org/MonthlyShareVolume
info reported used to be available on the first business day of the new month
takes a little longer for them with new platform .. i tend to check about 4 business days into the new month
so hopefully March 2015 will be ready by mid next week ..
4kids
all jmo
ThePennyGuru do you have an updated link for the OTC monthly Market Maker Volume Report. The links below no longer provide free access to that report. Is there one? Thanks in advance and member mark 105 for you for your help 
ThePennyGuru Tuesday, 02/23/10 01:13:11 PM
Re: None
The shorting of OTCBB/OTC stocks due diligence:
The OTCBB/OTC markets do not allow US Citizens to short these stocks: That leaves only Market Makers and off shore Hedge funds the ability to short these stocks.
Link for checking daily short volumes on Finra's regsho tracking site:
http://regsho.finra.org/regsho-Index.html
This data first became available to the public last Thursday as best I can tell.
Link for tracking monthly Market Maker volume for each stock:
http://www.otcbb.com/dynamic/tradeact.htm
Link to the OTCBB Bi- Monthly short interest report:
http://www.otcbb.com/asp/OTCE_Short_Interest.asp
Based on daily shorts volume, you would think that many short positions will last for an extended time. By looking at the Bi-weekly report, you see that most of the shorts have covered. This tells us that the short and covering is done every day. This is called shorting and covering for profit.
Link for tracking Knight Securities(NITE) monthly volume on every stock:
http://www.otcbb.com/asp/tradeact_mv.asp?SearchBy=mp&Issue=nite&SortBy=volume&Month=12-1-2009&IMAGE1.x=11&IMAGE1.y=10
As you can see Knight Securities(NITE) owns 80% of the OTCBB/OTC market
They traded 102 billion shares in the month of December.
Knight Securities (NITE) most recent 10k-
http://yahoo.brand.edgar-online.com/DisplayFiling.aspx?dcn=0001193125-09-042277
Excerpts from Knight’s(NITE) 10k:
The majority of our Global Markets revenue is derived from trade executions, making markets and providing market access services in U.S. equities. Generally, market-makers display the prices at which they are willing to bid, meaning buy, or offer, meaning sell, securities and adjust their bid and offer prices in response to the forces of supply and demand for each security. As a market-maker operating in Nasdaq, the over-the-counter (“OTC”) market for New York Stock Exchange (“NYSE”), NYSE Alternext and NYSE Arca listed securities, the OTC Bulletin Board, and the Pink Sheets, we provide trade executions by offering to buy securities from, or sell securities to, institutions and broker-dealers. When acting as principal, we commit our own capital and derive revenues from the difference between the price paid when securities are bought and the price received when those securities are sold. We conduct the vast majority of market making activity as principal, through the use of automated quantitative models. Our traders offer execution services for complex trades and a variety of order types. We also provide trade executions for institutions on an agency or riskless principal basis, generating commissions or commission equivalents, respectively. Also, our trading strategy employs the use of high velocity algorithmic trading models which interact with street flow.
Net trading revenue 43.2 %
Net trading revenue (millions) 446.7
As you can see Knight Securities(NITE) derives 43.2% of their net revenue or 446 million dollars trading stock.
There has been continued scrutiny of market-makers, specialists and hedge funds by the regulatory and legislative authorities. New legislation or modifications to existing regulations and rules could occur in the future and could materially impact the Company’s revenues and profitability. For example, in November 2008, FINRA enacted rules regarding the OTC Bulletin Board markets which required that all non-Nasdaq securities be subject to limit order protection. Also, further amendments to Regulation SHO and related short sale rules, could make it much more difficult for market makers to sell securities short.
Knight Securities(NITE) trading as a principal and not as a market maker would have to physically locate the shares of over 2500 companies that they short daily. That would require over half their manpower daily on the phones making calls to borrow shares. There is no way this is being done
Employees
At December 31, 2008, our headcount was 1,045 full-time employees, compared to 868 full-time employees at December 31, 2007. The increase in headcount is primarily related to the acquisitions of Knight Libertas and EdgeTrade, as well as the overall expansion of our Global Markets offerings in 2008. Of our 1,045 full-time employees at December 31, 2008, 924 were employed in the U.S. and 121
I would venture to say that Knight(NITE) is using their Market Maker exemption and lack of need to locate shares and are actually naked shorting and covering daily to make money and a lot of it.
A check of Knight Securities(NITE) from Finra’s site:
http://brokercheck.finra.org/Support/ReportViewer.aspx?FirmCRD=38599
As anyone can see, there are numerous violations for illegal trading practices.
In summation- Knight Securites has used it's market maker exemption to illegally short the entire OTCBB/OTC market for profit. They have destroyed 1000"s of startup companies for profit. In a time when 10% of the US is unemployed how can we let this happen?
i've been convinced for a few years now
that if the total *rot* was fully exposed
the entire US equities market would implode
suspect we'll see another version re: *regrandfathering* re: reg sho
but this time if the dolts (sec) do so without *tracking*
cycle of hard locates for *shares* shorted and >> snicker >>
*returned* >> even retail won't buy their bull sh*t this round
that said .. i'm very curious to see how those heavily manipulated OTC co.s
that have been abusively shorted to hell and back for 5 to 15 years
that can actually *SURVIVE*
are handled
the cynic in me (after documenting various data for 5 years)
says the dolts won't *favor* >> retail
we shall see
4kids
all jmo
good ?
maybe one of those bought and paid atty firms on the hedgies' speed dial
can be siphoned off ..
4kids
all jmo
Again companies and shareholders were the victims are they entitled to these fines and disgorgement?
4kids why are there not class action lawsuits on behalf of companies and shareholders going after UBS or Penson executives who have been caught by finra and the sec violating reg sho and naked short selling?
The naked short sales by UBS were "in the tens of millions," according to FINRA, and had the potential to undermine the integrity of the capital markets. The Credit Suisse violations of Reg SHO, according to FINRA were in the same ballpark, with approximately 10 million violations.
Journalist Sues SEC to Get Naked Short Selling Files
Lawsuit Filed in Chicago Seeks to Tear Down SEC's Veil of Secrecy
CHICAGO, IL, May 29, 2014 (Marketwired via COMTEX) -- A lawsuit has been filed under the Freedom of Information Act against the Securities and Exchange Commission (SEC) to obtain the agency's investigative files relating to more than a dozen aborted investigations and cases involving naked short selling. The complaint was filed on behalf of Mark Mitchell, an investigative journalist who publishes on www.deepcapture.com , a website that offers in-depth reports on the extent to which naked short selling pervades the US capital markets.
According to the complaint, naked short selling has flourished over the past decade because of regulatory loopholes designed by Wall Street and embedded into law by the SEC. Although the SEC created a regulation in 2005 -- Regulation SHO -- that was supposed to stop the practice, Mitchell claims the SEC's Enforcement Division rarely enforced the regulation.
"The SEC has opened multiple investigations and filed a few administrative cases focusing on naked short selling, but has released little information regarding its findings in those investigations," says Mitchell. "The few cases which the SEC has filed for naked short selling involve minor market participants or trivial violations by major financial institutions."
Regulators assumed that Reg SHO had contained naked short selling until the financial crisis fully blossomed in 2008. As the stock prices of the nation's biggest investment banks, such as Lehman Brothers and Morgan Stanley, collapsed, their CEOs claimed that naked short selling -- which had flooded the market with counterfeit stock -- was to blame. Mitchell's complaint tells how the SEC then frantically issued a half a dozen emergency orders and revisions to Reg SHO in 2008 and 2009 to stop naked short selling.
Mitchell says the SEC has never made public the results of its investigations of the naked short selling of Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley or Goldman Sachs, the big banks that collapsed or nearly collapsed during the financial crisis. The complaint also points to the massive violations of Reg SHO committed by UBS Securities and Credit Suisse Securities, which became public in 2011 when the Financial Industry Regulatory Authority (FINRA) released its settlements with those two banks.
The naked short sales by UBS were "in the tens of millions," according to FINRA, and had the potential to undermine the integrity of the capital markets. The Credit Suisse violations of Reg SHO, according to FINRA were in the same ballpark, with approximately 10 million violations.
Although the releases of FINRA's settlements confirmed that hundreds of other market participants were involved in these violations, none were identified. Nor did FINRA identify any of the public companies that were victimized by the naked short selling. FINRA also did not identify any executives or employees of the banks that participated in these violations.
"The complaint seeks the SEC investigative files relating to more than a dozen of its investigations or filed cases involving naked short selling," say Mitchell. "I intend to cut through the veil of secrecy that surrounds naked short selling and to enable the public to understand just how great a risk this form of market manipulation poses to our capital markets."
Mitchell is represented by Gary Aguirre, a former Senior Counsel in the SEC's Enforcement Division. In 2006, Aguirre testified before the Senate Judiciary Committee that naked short selling was one of the types of market abuse plaguing the capital markets that the SEC was ignoring. Mr. Aguirre is being assisted by Hal Wood of Horwood Marcus & Berk Chartered in Chicago.
http://www.marketwatch.com/story/journalist-sues-sec-to-get-naked-short-selling-files-2014-05-29
The High Frequency Trading Lawsuit That Has Wall Street Running Scared
By Pam Martens
May 13, 2014
Variety reports that Sony Pictures is close to snagging the movie rights to the new book by Michael Lewis, “Flash Boys,” which builds the case that high frequency trading firms and Wall Street mega banks are conspiring with U.S. stock exchanges to rig the market against the average investor and the pension funds holding their meager retirement benefits.
If Sony is smart, it will delay release of the film until it can replicate some real-life courtroom drama from the epic battle that is likely to ensue from a class-action lawsuit in the matter that was filed last month on April 18 in Federal Court in the Southern District of New York.
The plaintiff in the lawsuit has elicited snickers from the moneyed crowd on Wall Street. It was filed on behalf of the city of Providence, Rhode Island, an area founded in 1636 that became one of the original thirteen colonies, and is not typically known for hobnobbing with the hedge funds of Greenwich, Connecticut or the Wall Street suspender crowd in New York.
A more careful look at the lawsuit, however, is sending shivers across Wall Street. The law firm that made the filing is Robbins Geller Rudman & Dowd LLP – a firm staffed with former prosecutors from the U.S. Justice Department and a legal powerhouse whose bread and butter is securities fraud.
Robbins Geller played a pivotal role in the securities class action against Enron, securing a $7.3 billion recovery; $5.7 billion in the Visa/MasterCard antitrust class action; $2.46 billlion in a Household International class action judgment; $925 million in the UnitedHealth Group stock option backdating case; and $657 million in a securities action involving WorldCom – to name just a few.
The firm’s biggest threat to Wall Street is that it actually knows how to define securities fraud to a court, what to ask for in discovery, and it prepares its cases on the basis that they may go to trial – producing deep archives of smoking gun documents.
The complaint by Robbins Geller in the current high frequency matter names every major stock exchange in the U.S. (including the New York Stock Exchange, Nasdaq, Bats, Direct Edge, etc.) as well as major Wall Street firms (Goldman Sachs, Citigroup, JPMorgan, Bank of America, etc.) along with high frequency trading firms and hedge funds. The lawsuit actually references page numbers in the Michael Lewis book, “Flash Boys.” One section reads:
“Notwithstanding their legal obligations and duties to provide for orderly and honest trading and to match the bids and orders placed on behalf of investors at the best available price, the Exchange Defendants and those Defendants that controlled alternate trading venues demanded and received substantial kickback payments in exchange for providing the HFT (high frequency trading) Defendants access to material trading data via preferred access to exchange floors and/or through proprietary trading products. Likewise, in exchange for kickback payments, the Brokerage Firm Defendants provided access to their customers’ bids and offers, and directed their customers’ trades to stock exchanges and alternate trading venues that the Brokerage Firm Defendants knew had been rigged and were subject to informational asymmetries as a result of Defendants’ scheme and wrongful course of business, all of which operated to the detriment of Plaintiff and the Class.
“Defendants’ predatory practices included the Brokerage Firm Defendants selling ‘special access’ to material data, including orders made by Plaintiff and the Plaintiff Class so that the HFT Defendants could then trade against them using the informational asymmetries and other market manipulation detailed herein. Flash Boys at 168-72 and 242-43.” (See High Frequency Trading Lawsuit Filed by City of Providence, Rhode Island (Full Text) ) http://tiny.cc/hgxtfx
Filing a Federal lawsuit based on allegations in a book might appear at first blush a bit frivolous. But the Robbins Geller law firm is dead serious about what it does and Michael Lewis is not just any book author.
Lewis holds a degree in economics from the London School of Economics and has first-hand experience working on the trading floor of the iconic Salomon Brothers as a bond salesman situated right next to the traders. He chronicled that experience in the bestselling classic “Liar’s Poker,” and has been documenting Wall Street crimes for the past quarter century in books and articles.
Robbins Geller is no slouch either and here’s where their case gets dicey for Wall Street. They have taken the allegations that have been made by Lewis and a raft of other insiders on Wall Street; dissected the fraud into digestible bites for the court; and provided the correct names and descriptions for the various types of manipulation that have been taking place for the past five years under the nose of the SEC:
The lawsuit explains:
“For at least the last five years, the Defendants routinely engaged in at least the following manipulative, self-dealing and deceptive conduct:
“electronic front-running – where, in exchange for kickback payments, the HFT Defendants are provided early notice of investors’ intentions to transact by being shown initial bids and offers placed on exchanges and other trading venues by their brokers, and then race those bona fide securities investors to the other securities exchanges, transact in the desired securities at better prices, and then go back and transact with the unwitting initial investors to the their financial detriment;
"rebate arbitrage – where the HFT and Brokerage Firm Defendants obtain kickback payments from the securities exchanges without providing the liquidity that the kickback scheme was purportedly designed to entice;
“slow-market (or latency) arbitrage – where the HFT Defendants are shown changes in the price of a stock on one exchange, and pick off orders sitting on other exchanges, before those exchanges are able to react and replace their own bid/offer quotes accordingly, which practices are repeated to generate billions of dollars more a year in illicit profits than front-running and rebate arbitrage combined;
“spoofing – where the HFT Defendants send out orders with corresponding cancellations, often at the opening or closing of the stock market, in order to manipulate the market price of a security and/or induce a particular market reaction;
“layering – where the HFT Defendants send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep in order to take advantage of the market’s reaction to the layering of orders; and
“contemporaneous trading – whereby obtaining material, non-public information concerning the trading intentions of Plaintiff and the Plaintiff Class and then transacting against them, Defendants violate the federal securities laws, including §20A of the Exchange Act.”
The Civil Docket for the case is #: 1:14-cv-02811 and has been assigned to Judge Kimba Wood.
http://wallstreetonparade.com/2014/05/the-high-frequency-trading-lawsuit-that-has-wall-street-running-scared/
original link courtesy of basserdan
4kids
all jmo
Stock market rigged, says Michael Lewis in new book (60 minutes.)
Michael Lewis' "Flash Boys" reveals how a group of unlikely characters discovered how some high-speed traders work the stock market to their advantage
The U.S. stock market is rigged in favor of high-frequency traders, stock exchanges and large Wall Street banks who have found a way to use computer-based speed trading to gain a decisive edge over everyone else, from the smallest retail investors to the biggest hedge funds, says Michael Lewis in a new blockbuster book, "Flash Boys."
The insiders' methods are legal but cost the rest of the market's players tens of billions of dollars a year, according to Lewis, who speaks to Steve Kroft in his first interview about the book.
Kroft's report will be broadcast on 60 Minutes, Sunday, March 30 at 7 p.m. ET/PT.High-frequency traders have found ways to use their speed to gain an advantage that few understand, says Lewis. "They're able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price," says Lewis. "The speed advantage that the faster traders have is milliseconds...fractions of milliseconds."
Lewis says a former trader at the Royal Bank of Canada in New York, Brad Katsuyama, figured this out after he consistently failed to have his entire order filled at the price he wanted. Katsuyama, who speaks to Kroft, put together a team of experts to figure out how to defeat the problem and started a new exchange, IEX, that he believes will level the playing field. Katsuyama launched IEX in October and investors, large and small, can route their trades through IEX without fear of predators lurking. IEX has accomplished this by creating a unique speed bump. "They slowed down high-frequency traders' ability to trade on their market," says Lewis.
While many on Wall Street are trying to starve IEX because it has upset the status quo, large institutional investors are onboard. Hedge fund manager David Einhorn of Greenlight Capital, has invested in the new exchange and tells Kroft that he believes IEX is "going to succeed in a very big way."
© 2014 CBS Interactive Inc. All Rights Reserved.
cbsnews.com
A Tale of Two Frauds: Part II Naked Shorting Since
the Financial Crisis: Regulators’ Little Secret
http://aguirrelawapc.com/global_pictures/A_Tale_of_Two_Frauds__Part_II.pdf
a great read courtesy of CBStock67
==
4kids
all jmo
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Welcome to The Shorts Exposed Board
Link for checking daily short volumes on Finra's regsho tracking site:
http://regsho.finra.org/regsho-Index.html
Check under ORF for OTCBB/OTC stocks
Link to track short volume by percentages:
Explanation of this rule by the SEC/Finra:
http://www.sec.gov/rules/sro/finra/2009/34-60807.pdf
SEC FAQ on REGHO Rule 200
http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm
University of CinCinnati Law explanation of REGSHO rule 200:
http://www.law.uc.edu/CCL/regSHO/rule200.html
OTCBB Bi- Monthy short interest:
http://www.otcbb.com/asp/OTCE_Short_Interest.asp
Link for tracking Monthly Share Volume in your stock:
http://www.otcbb.com/dynamic/tradeact.htm
Link for tracking Nite's volume in every stock monthly:
Regulation SHO threshold security list:
http://www.nasdaqtrader.com/Trader.aspx?id=RegSHOThreshold
Anybody who can post a spreadsheet on their favorite stock is welcome:
| Volume | |
| Day Range: | |
| Bid Price | |
| Ask Price | |
| Last Trade Time: |
