Friday, August 05, 2005

Ugly Is As Ugly Does

Sometimes I feel like Karnak the Magnificent, holding an envelope up to my head and guessing the contents.

On the January Ovestock.com conference call I made a series of predictions associated with a coordinated manipulation of their share price. I also outlined the anatomy of a manipulation, and broke it down into its components. As a refresher, here are the central elements:

Part One

1) Short position established in target company, price run up for best short prices, some money made on Call options, which are sold, and Put options are bought.

2) Once established, media blitz of ugly articles unleashed from usual suspects.

3) Pet analysts issue negative reports.

4) Message boards are blitzed with panic-inducing posts.

5) Related party trading from ECN’s dominates down days, creating huge volatility, scaring off most retail investors.

6) Rinse and repeat.

Part Two

1) Company is listed on Foreign exchanges to facilitate offshore naked shorting via arbitrage and foreign market-maker loopholes.

2) Naked short selling commences in earnest, as legitimate borrow either too thin or too expensive.

3) Company appears on Reg SHO list as a result of 1 and 2.

4) Bogus regulatory investigation starts, driven by short seller complaints.

5) Alarming slam article in Barrons or WSJ-level paper.

6) Class actions suit commenced.

7) Massive down days with 50% or more of all outstanding shares traded to trigger stop losses and panic selling.

8) CNBC, TSCM, Lapdog, Cramer all take jabs, playing pile on.

So where are we with OSTK? Well, we are in Part Two, between step 3 and step 4. So here are my predictions for what the short fund network has in store. Follow along.

1) There will be a regulatory probe initiated, alleging accounting impropriety, or trading impropriety, or failure to make adequate disclosures – whatever, the actual investigation is meaningless. It is the headline value that is important, as that can be used to trumpet that the company is clearly bad, or up to no good. Doesn’t matter if any of it is true, as by the time the investigation is completed, the damage will have been done and the shorts will be long gone.

2) A major publication, like the Wall Street Journal C section or Barron’s, will publish an innuendo-laden piece, usually written by one of a roster of known hedge fund-friendly “journalists”. It will allege many things, skirting a line of libel, and make it appear that the company is engaged in everything from white slavery, to making furniture out of baby skin. Management will be accused through leading questions of being larcenous, inept, compromised, etc. The company’s future will be painted as one filled with doom, and any positives will be spun as lies, delusions, or meaningless. The message will be to sell immediately, before you find yourself holding the next Enron.

3) A class action suit will be brought, usually citing the article as its basis, or simply the massive selling that accompanies the article. This will further depress the stock price.

All of the above are part of a calculated manipulation to destroy shareholder value by depressing the stock price, creating forced selling via margin calls, and causing panic selling. Once it is suitably depressed, it will be churned at the bottom via related party trading, and the short position will be unwound, the Put option profits taken, the short sale profits taken, and the gang will move on to the next target.

In rare instances this will not work as planned. OSTK will likely be one of those cases, as there is no way the Byrnes will sell as they will know it is all BS. So that means that the goal will be to convince the institutions to sell, and the retail longs to follow suit. But there is a problem here as well – the institutions are mostly composed of folks who understand this game, and are unlikely to play along.

This is known as an impasse.

Dr. Byrne let the shorts know that this was a stalemate in the CC, when he spelled out that there were essentially no legitimate shares left with which to cover any shorts.

Be that as it may, I would expect the bad guys to try anyway – they have to, as there is no alternative.

If you are concerned, email this column to the SEC and to the Senate Banking Committee, who oversees the SEC, as well as to the State Securities Regulator in your state. That way, they can’t claim that they weren’t warned, or that this all comes as a complete surprise. In a perfect world the Senate Banking Committee would get an accounting of the Fail To Delivers for OSTK, and be able to act as an interested spectator watching the SEC do its job. Forewarned is forearmed.

For the record, I accurately predicted the identical events with NFI, six months before they occurred, and was roundly chastised as an alarmist and a kook. And then it unfolded precisely as foretold. This is the standard operating gamebook of a network of short sellers that serial kills small and mid-sized companies for a living. It usually is unvaried, as it works every time, or at least 90+% of the time. That it happens to be racketeering is besides the point, as nobody is enforcing the laws that would deter the bad guys, so they continue to operate with impunity. This is a unique opportunity to put the regulators and the banking committee on notice as to how this works, and what is likely to occur on a going forward basis. If they don’t follow their gamebook it will be because of a catastrophic event for them, which is unlikely given their history – but we can always hope.

3 Comments:

Blogger mwillwilly2003 said...

"This is a unique opportunity to put the regulators and the banking committee on notice as to how this works, and what is likely to occur on a going forward basis."

I agree that we should complain to the regulators and banking committee, if only so that we can honestly say later that we did what we could to clean up this mess. FWIW, I'm convinced that the so-called "regulators" are venal sons of bitches who understand perfectly well "how this works," but have in effect been co-opted by the manipulating crooks. The SEC's behavior in this scandal is exactly analogous to that of a corrupt Prohibition-era police department, i.e. quick to arrest petty thieves and public drunks, while ignoring completely the Mafia-run crime syndicate operating in their precinct. I say this because the SEC has ALREADY been alerted many times to what's going on--and has simply ignored our cries. The Senate Banking Committee, too, has been virtually comatose, and seems pathetically ignorant and completely disinclined to raise the lid on this stinking cauldron of corruption.

Yet I remain in hope, thus far disappointed, that somehow one day the lid will blow off this scandal--which may be the greatest in our financial history--and that the full, awful truth will come out. If and when that happens, you can be sure that those same uninterested Senators whose duty it was to oversee the SEC will be the first to voice outrage and indignation (as human hypocriscy knows no limit). And with this little rant I'll conclude my optimistic opinion.

9:44 PM  
Blogger Jer. 9:24 said...

Bob,

You are one of the best allies we manipulation victims have, and I am very thankful you are on our "team," but I have one minor objection to your last two or three posts...you seem to imply that so called "penny stocks" are less worthy of the full protection of the securities and anti fraud (and anti-racketeering) laws than a large-cap company like OSTK.

As you know many of today's "penny stocks" were solid, viable companies before being raped nearly to death by the same type of criminals as are abusing OSTK (see, e.g., EagleTech, Nanopierce and Sedona). And a number of the large cap "darlings" of Wall Street turn out to be far bigger scams in dollar terms than any conceivable "penny stock" offering (see, e.g., WorldCom and Enron).

The "to hell with the penny stocks" mentality comports with the SEC's and NASD's attitudes toward the smallest victims of this illegal shorting/FTD scam and I respectfully request that you try not to condone it. I doubt that you do or meant to but it does "read" that way. No woman deserves to be raped, including those who live in the "poor" neighborhoods. Even if the regulatory police are prejudiced, our side can't afford to be.

9:02 AM  
Blogger bob obrien said...

Jer.

I do not think that penny stocks are less worthy. But I do recognize the prevailing mentality of the regulators, which is that many of those companies are bankruptcies waiting to happen. I make no value judgement as to the merit of that position, and in fact am working with a number and am sensitive to their situations - but the distinction I am trying to make is that the facile dismissal that the system uses on penny stocks do not apply with OSTK, thus it is a perfect test of the integrity of the system.

I have posed the rape argument myself, and if the comments seem pejorative, that is intended as a reflection of the pervasive mindset rather than my personal opinion.

It's sort of amusing in a horrible way that what started off as a mechanism to prey on small OTCBB companies or start-up phase NASDAQ companies has now worked its way up the food chain to the big board companies - just a matter of time, if you don't enforce the rules at every level of the system.

There is huge money afoot to victimize companies, and the predators have become emboldened by their successes. That will prove to be their Achilles heel, IMO, as it has brought shareholder advocates like NCANS into the picture, and created a new class of market commentator to highlight the abuses. Exposure is their enemy - sunshine is the antiseptic for bad behavior.

11:57 AM  

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