Great Reading... Posted by Mo_Tze
How share price manipulation works-just one example
Picture this: You are a small-time investor who stumbles onto a start-
up company that has just developed an innovative new product, a
cutting edge technology, or maybe a medical breakthrough that could
very well be "the next big thing". In the back of your mind, you
can't help but think, "This could be the next Microsoft", and you
have a chance to get in on the ground floor of a hidden gem that the
big investors and analysts haven't even heard of yet. You do your
homework, research the outstanding shares, study the recent press
releases and filings, and read about the company on the stock message
boards. Finally, you take the plunge, and decide to buy 500,000
shares at a nickel a share. That's right, you now own 1% of (there's
that thought again) the next Microsoft, for a paltry $25,000. Sure
it's a bit of a risk, but you know the saying, "no risk, no reward".
You hit the buy button, turn off your computer, and wait for the
money to roll in. A couple of weeks later, the company announces that
they have secured a major financing deal, and now have the money to
take their product to market, and you know you made the right
decision. The volume picks up, the message boards are buzzing, and
all is right with the world.
But then, something goes terribly wrong. For no apparent reason at
all, the stock price begins to tank, and before you even have time to
react, your 500,000 shares are down 80%, and you've just lost $20,000
of your hard-earned money. What the hell happened?
The Set-up
This same scenario is being played out time and again in every corner
of America, and although there are many reasons for the failure of
small, struggling, publicly-traded businesses, including
mismanagement and outright corporate fraud, another, more sinister,
plot is carried out every day, robbing investors of their money,
businesses of their chance to achieve the American Dream of success,
and hard working, dedicated employees of their dreams and even their
livelihood. And worst of all, up to now, this fraud has been ignored
(and in many cases even condoned) by the SEC and our very own
government.
This is how it works. Remember that great news that the company just
released about securing financing to allow them to take their product
to market? It's nothing more than an elaborate scheme perpetuated
against the company, its employees, and the shareholders by a network
of skilled con artists. It begins with the financial institution
(usually an offshore "lending institution" based somewhere like
Bermuda or the Cayman Islands), who approaches the company with
promises of funding to "help" the company get their product off the
drawing board and into the market. The company, who is usually
strapped for cash and desperate for some financial support, considers
the terms of the offer. The lender promises them say, five million
dollars in exchange for company stock at a 20% discount to the market
price at the time they are converted into shares (although some deals
are much worse, and the lender gets their shares at as much as a half
price discount from the current market price). The company does the
math: five million dollars converted to shares at 80% of the current
price of around a nickle a share, not too bad a deal. Plus, once the
news of the financing is released, investors will swoop down in a
stock-buying frenzy, the trading volume will go through the roof, and
the share price will soar, meaning the company will give up even
fewer shares for the money they receive. The lender makes a nice
profit, the company gets their product to market, their employees are
finally rewarded for their years of dedication, and the loyal
shareholders hit the jackpot. Everyone is happy.
Except that none of that actually happens. Before the ink on the
contracts has even had time to dry, the lender is on the phone,
calling his co-conspirators.
The Con:
What happens next is complex, and involves the offshore lender, US
Brokerage firms, and Canadian Brokers. The lender calls his broker,
who is instructed to short sell the company's stock into the ground.
Short selling involves the selling of imaginary shares into the
market in the hope that the price will drop, and the short seller can
then "buy back" the shares (that they never actually owned in the
first place) at a cheaper price, and pocket the difference. Once a
stock is sold short, a seller (or their broker) must cover their
position by "borrowing" shares from other stockholders (usually those
shares that are held in a brokerage house, such as ETrade,
Ameritrade, etc.), and sell them into the market. Sound unethical,
and bit confusing as well? Maybe, but it is a legal practice that has
flourished unchecked for years. The real problem arises when the
short sellers dump so many "imaginary" shares into the market that
the selling overwhelms any buying pressure, and artificially causes
the stock price to crash. And this is exactly what the lender and
their cohorts do.
Canada: Co-Conspirators From The North
In order to sell short enough shares to truly cause the stock to tank
in price, the broker often has to sell more shares than they can
"borrow" from legitimate stockholders. This practice is known as
naked short-selling (meaning the short sellers never intended to
cover their position by borrowing real shares from legitimate
stockholders). There is only one problem. Short selling is illegal in
over-the-counter stocks (known as OTC, or penny stocks), and naked
short selling any stock is illegal. That's where the Canadian
connection comes in. While American brokers have to follow the
National Association of Securities Dealers (NASD) rules, Canadian
brokers don't. Canadian investors and brokers are allowed to sell
short as many shares as they want, and never have to borrow the
shares from legitimate stockholders, effectively flooding the market
with counterfeit shares. In fact, they can legally sell more shares
into the market than even exist in the entire float. So, to
circumvent the rules, the American brokers funnel their short selling
activities through their Canadian connections. If there are buyers
for a million shares, they short sell three million into the market,
and on and on, until the stock price eventually collapses under the
weight of millions and millions (or billions and billions, if
necessary) of fake shares flooding the market.
The Payoff:
So, in simple terms, our lender loans the company a small part of the
money they promised them and then immediately calls their co-
conspirators in America and Canada, who then flood the market with
hundreds of millions of counterfeit shares, causing the share price
to collapse. Often, as an insurance policy, bashers are hired to
discredit the company on stock message boards such as RagingBull, in
effect creating an even darker picture of the company. Then, the
lender converts the loaned money into shares of company stock, not at
80% of the nickel stock price that the company envisioned, but at 80%
of the market price after they've effectively manipulated the stock
price down to almost zero. Instead of the few million shares that the
company expected to give the lender, they are forced to give them
hundreds of millions (and sometimes even billions) of shares. The
lender turns around and dumps those shares into the market, and the
price is driven even lower, and they collect their next payment in
shares at an even cheaper price. This type of arrangement has become
known as "death-spiral financing", because the company is often
driven into bankruptcy by the lenders, their American brokers, and
their Canadian cohorts.
The Damage:
In the end, this practice amounts to financial terrorism against the
United States. Legitimate companies are forced out of business,
dedicated employees (who often received stock as part of their
compensation) lose their jobs and their stock investments,
communities lose out on the opportunity to earn substantial revenues
and the employee base that a successful growing business can provide,
and the stockholders lose their hard-earned money. Even more, they
lose their faith in the stock market as a whole, and vow to never
take a risk on a small, unproven, start-up company again. Legitimate
lenders stop loaning money to small businesses (which appear to be a
much higher risk), and eventually, the entire entrepreneurial spirit
of America is put at risk. Make no mistake, lives are literally
destroyed by this insidious practice.
What Can Be Done About It?
Both the SEC and the NASD have known about this practice for years,
yet have stood idly by while Canadian brokers, offshore financial
institutions, and their American co-conspirators have systematically
financially raped and pillaged our small businesses, their employees,
and small investors. Recently, numerous lawsuits have been filed by
victim companies naming dozens of brokerage firms as defendants.
Individuals and small independent organizations such as
www.investigatethesec.com have attempted to draw attention to the
problems, and finally, a few small publications such as
www.faulkingtruth.com have begun to provide some coverage of the
situation.
Proposed NASD and SEC rules don't go far enough to prevent this
practice. Until Congress steps in and forces everyone to play by the
same rules, and makes those rules tougher in regards to short selling
in general (and naked short selling in particular), the OTC market
will continue to be a rigged game, and the well being of America will
continue to be threatened by unscrupulous foreign (and yes, domestic)
interests.
AI
