Ugly Is As Ugly Does
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:
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.
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.