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Conspiracy Theorists Come Up Short

News and Commentary

August 2 2006

Oliver Stone, please answer the courtesy phone. Conspiracy theorists may soon be mourning the demise of one of their pet plots – the notion that short sellers have been targeting, and destroying, dozens of obscure, penniless and nearly penniless companies that trade on the over-the-counter market. NASD is beginning to publish short interest information for OTC stocks, and the numbers suggest that the short-selling boogeyman is just Sasquatch in a pin-striped suit.

In recent years, promoters and proponents of these marginal companies have been trying to convince the public and potential investors that these tiny OTC companies have suffered at the hands of naked short-sellers who have conspired to drive share prices into the ground. For the uninitiated – short-sellers borrow shares of stock, then sell them, hoping that stock prices will sink and they can “repay” the borrowed shares by buying stock at a later date and a lower price.

Some OTC Bulletin Board and Pink Sheet companies have charged that illegal “naked” short sales are depressing the market. A short-sale is “naked” when the seller and has not arranged to borrow the shares. For the most part, only legitimate market-makers are permitted to engage in naked short sales.

While some companies may have been adversely affected by crooked short sellers, or fallen victim to aggressive, but legitimate, short selling, other factors are far more likely to damage OTC businesses. Unscrupulous promoters, greedy insiders, pump and dump schemes and shady secondary market trading tactics all have contributed to the dire state of these companies, most of which are under-capitalized and have minimal or no revenues. For those entities, the specter of naked short selling is a handy scapegoat – but it is hardly their biggest problem.

The impact of short selling on OTC companies should soon become evident. Effective July 2006, NASD expanded short interest reporting requirements to include OTC equity securities- including the OTC Bulletin Board and Pink Sheets. The initial report, for July 2006, reflects a far more modest level of short-selling than some conspiracy theorists may have anticipated. Take Nexia Holdings, Inc., (OTCBB: NEXH) whose CEO Richard Surber recently expressed his view that Nexia had been victimized by “abusive shorting practices.” According to NASD’s July report, the short position in Nexia was a mere 37 shares – an insignificant fraction of the almost 4 billion Nexia shares currently outstanding.

StockPatrol.com readers are already familiar with Surber, a penny stock promoter with connection to a series of troubled OTC companies. See Dark Dynamite Inc — Dancing In The Dark; Update: Dark Dynamite, Inc. - No Escape; Vinoble, Inc. - Trick or Treat in This Treasure Chest? ; and Update: Vector Holdings - Room at the Top.

NASD’s reports are unlikely to silence the conspiracy theorists, but investors will now have the ability to do their own research and verify claims of improper trading. And perhaps struggling OTC companies will focus on the source of their problems and stop handing out shares to unscrupulous promoters and shady financiers.

Remember, before you invest, investigate.