Anatomy of the FLD

[Ninja7]

Interesting example. Here are my thoughts on it...

In general, people go long in a stock because they think the price is going to go up (for whatever reason), and people go short in a stock because they think the price is going to go down (for whatever reason). Short squeezes naturally occur when there happen to be a lot of people that were “betting” that the stock would go down happen to be wrong (for whatever reason). That is the scenario you describe in the old folks home. That seems to be how the market should work in it’s simplest and purest form.

Now, it’s certainly possible that one reason I might think that a stock price is going to go up could be because there is a large short position. There may be all sorts of things I consider when investing in a stock.

The problem occurs when the criteria to invest in an issue becomes a “scheme to manipulate” the price of the issue. Obviously, there is some element of subjectivity in determining when criteria becomes a scheme, but the cases that have been prosecuted have been clear (at least to most people) that a scheme was taking place. There are probably numerous schemes that do, however, go undetected.

One question then is why is the FLD concept illegal if it’s just a bunch of folks buying and holding stock. I suppose is comes down to intention. Are people really just buying and holding expecting that the price will go up for whatever reason or are they buying and holding to eventually force the price up in a squeeze? The SEC has stated that the former is fine and the later is illegal. It’s interesting that the FLD stock boards have shifted (mostly) from touting the MOASS angle to touting the so-called business models of these worthless companies. Clearly the trail of evidence left behind with all of the FLD stocks leaves little doubt that the whole thing was a scheme to manipulate the price.