Penny stock manipulation:
info on how pump n dumps are done..
George Chelekis' HOT STOCKS REVIEW ## Copyright 1996
HOT STOCKS
CONFIDENTIAL ESSAY
By George Chelekis * April 21, 1996
TEL: (813) 251-0030 * FAX: (813) 254-4677
NOTE: I believe this may be one of the most important essays
on the financial markets which you will ever read. This essay will be
the lead article in Hot Stocks Review, Spring 1996 (Part Two). Up
until recently, I knew that I was missing something, but I could not
quite put my finger on it. Now I know what it is. The data which
follows is only as good as you can actually use it. These are the cold,
savage and ruthless facts of market manipulation. I have not made
these up, but have dug them up out of out-dated, generally
unavailable books on Canadian market manipulations, and pieced
the
rest together from observations, personal experiences and
conversations with market professionals and insiders. While the
books are out of date, the manipulations have been passed down
from one generation to another. The only thing missing was someone
to supply you with what those tricks were so you can become a more
educated speculator. Many thanks to Robert Shore and Vern
Flannery, of Market News Publishing, for finding and sending me a
copy of the book, "The Story Behind Canadian Mining Speculation"
by
T. H. Mitchell, first published in 1957 by George J. McLeod Limited;
also Ivan Shaffer's book, "The Stock Promotion Game." I have been
told that many of these tricks are now illegal. If so, would someone
please tell that to the market manipulators.
THE DEADLY ART OF STOCK MANIPULATION....
In every profession, there are probably a dozen or two major
rules. Knowing them cold is what separates the professional from the
amateur. Not knowing them at all? Well, let's put it this way: How
safe would you feel if you suddenly found yourself piloting (solo) a
Boeing 747 as it were landing on an airstrip? Unless you are a
professional pilot, you would probably be frightened out of your wits
and would soil your underwear. Hold that thought as you read this
essay because I will explain to you how market manipulation works.
In order to successfully speculate, one should presume the
following: THE SMALL CAP STOCK MARKETS PRIMARILY EXIST
TO
FLEECE YOU! I'm talking about Vancouver, Alberta, the Canadian
Dealing Network and the US Over-the Counter markets (Pink
Sheets,
Bulletin Board, etc.). One could also stretch this, with many stocks, to
include the world's senior stock markets, including Toronto, New
York, NASDAQ, London, etc. The average investor or speculator is
not
very likely to have much success in the small cap crapshoots. I guess
that is what attracted ME to these markets. I have been trying, for
quite some time, to answer this question, "How come?" Now, I know.
And you should, too!
By the way, the premise of these books is uniformly: "While
these speculative companies do not actually make any money, one
can profit by speculating in these companies." THAT is the premise
on how these markets are run, by both the stock promoters, insiders,
brokers, analysts and others in this industry. That logic is flawed in
that it presumes "someone else" is going to end up holding the dirty
bag. Follow this premise all the way through and you will realize the
insane conclusion: For these markets to continue along that route,
new suckers have to continue coming into the marketplace. The
conclusion is insane in that such mad activity can only be short-lived.
I disagree with this premise and propose another solution (see my
earlier essay: A Modest Proposal) at the end of this essay.
What the professionals and the securities regulators know and
understand, which the rest of us do not, is this.
"RULE NUMBER ONE: ALL SHARP PRICE MOVEMENTS --
WHETHER UP OR DOWN -- ARE THE RESULT OF ONE OR
MORE
(USUALLY A GROUP OF) PROFESSIONALS MANIPULATING
THE SHARE
PRICE."
This should explain why a mining company finds something
good and "nothing happens" or the stock goes down. At the same
time, for NO apparent reason, a stock suddenly takes off for the sky!
On little volume! Someone is manipulating that stock, often with an
unfounded rumor.
In order to make these market manipulations work, the
professionals assume: (a) The Public is STUPID and (b) The Public
will mainly buy at the HIGH and (c) The Public will sell at the LOW.
Therefore, as long as the market manipulator can run crowd control,
he can be successful.
Let's face it: The reason you speculate in such markets is that
you are greedy AND optimistic. You believe in a better tomorrow and
NEED to make money quickly. It is this sentiment which is exploited
by the market manipulator. He controls YOUR greed and fear about a
particular stock. If he wants you to buy, the company's prospects
look like the next Microsoft. If the manipulator wants you to desert
the sinking ship, he suddenly becomes very guarded in his remarks
about the company, isn't around to glowingly answer questions about
the company and/or GETS issued very bad news about the
company.
Which brings us to the next important rule.
"RULE NUMBER TWO: IF THE MARKET MANIPULATOR WANTS
TO DISTRIBUTE (DUMP) HIS SHARES, HE WILL START A GOOD
NEWS
PROMOTIONAL CAMPAIGN."
Ever wonder why a particular company is made to look like the
greatest thing since sliced bread? That sentiment is manufactured.
Newsletter writers are hired -- either secretly or not -- to cheerlead
a stock. PR firms are hired and let loose upon an unsuspecting
public.
Contracts to appear on radio talk shows are signed and
implemented.
Stockbrokers get "cheap" stock to recommend the company to their
"book" (that means YOU, the client in his book). An advertising
campaign is rolled out (television ads, newspaper ads, card deck
mailings). The company signs up to exhibit at "investment
conferences" and "gold shows" (mainly so they can get a little
"podium time" to hype you on their stock and tell you how "their
company is really different" and "not a stock promotion.") Funny
little "hype" messages are posted on Internet newsgroups by the
same cast of usual suspects. The more, the merrier. And a little
"juice" can go a long way toward running up the stock price.
The HYPE is on. The more clever a stock promoter, the better
his knowledge of the advertising business. Little gimmicks like
"positioning" are used. Example: Make a completely unknown
company look warm and fuzzy and appealing to you by comparing it
to a recent success story, Diamond Fields or Bre-X Minerals. That is
the POSITIONING gospel, authored by Ries and Trout (famous for
"Avis: We Want To Be #1" and "We Try Harder" and other such
slogans). These advertising/PR executives must have stumbled onto
this formula after losing their shirts speculating in a few Canadian
stock promotions! The only reason you have been invited to this
seemingly incredible banquet is that YOU are the main course. After
the market manipulator has suckered you into "his investment,"
exchanging HIS paper for YOUR cash, the walls begin to close in on
you. Why is that?
"RULE NUMBER THREE: AS SOON AS THE MARKET
MANIPULATOR HAS COMPLETED HIS DISTRIBUTION
(DUMPING) OF
SHARES, HE WILL START A BAD NEWS OR NO NEWS
CAMPAIGN."
Your favorite home-run stock has just stalled or retreated a bit
from its high. Suddenly, there is a news VACUUM. Either NO news
or
BAD rumors. I discovered this with quite a few stocks. I would get
LOADS of information and "hot tips." All of a sudden, my pipeline
was
shut-off. Some companies would even issue a news release
CONDEMNING me ("We don't need 'that kind of hype' referring to
me!). Cute, huh? When the company wanted fantastic hype circulated
hither and yon, there would be someone there to spoon-feed me. The
second the distribution phase was DONE....ooops! Sorry, no more
news. Or, "I'm sorry. He's not in the office." Or, "He won't be back
until Monday."
The really slick market manipulators would even seed the
Internet news groups or other journalists to plant negative stories
about that company. Or start a propaganda campaign of negative
rumors on all available communication vehicles. Even hiring a
"contrarian" or "special PR firm" to drive down the price. Even hiring
someone to attack the guy who had earlier written glowingly about
the company. (This is not a game for the faint-hearted!)
You'll also see the stock drifting endlessly. You may even
experience a helpless feeling, as if you were floating in outer space
without a lifeline. That is exactly HOW the market manipulator wants
you to feel. See Rule Number Five below. He may also be doing this
to
avoid the severe disappointment of a "dry hole" or a "failed deal."
You'll hear that oft-cried refrain, "Oh well, that's the junior minerals
exploration business... very risky!" Or the oft-quoted statistic, "Nine
out of 10 businesses fail each year and this IS a Venture Capital
Startup stock exchange." Don't think it wasn't contrived. If a geologist
at a junior mining company wasn't optimistic and rosy in his promise
of exploration success, he would be replaced by someone who was!
Ditto for the high-tech deal, in a world awash with PhD's.
So, how do you know when you are being taken? Look again at
Rule #1. Inside that rule, a few other rules unfold which explain how
a stock price is manipulated.
"RULE NUMBER FOUR: ANY STOCK THAT TRADES HUGE
VOLUME
AT HIGHER PRICES SIGNALS THE DISTRIBUTION PHASE."
When there was less volume, the price was lower. Professionals
were accumulating. After the price runs, the volume increases. The
professionals bought low and sold high. The amateurs bought high
(and will soon enough sell low). In older books about market
manipulation and stock promotion, which I've recently studied, the
markup price referred to THREE times higher than the floor. The
floor is the launchpad for the stock. For example, if one looks at the
stock price and finds a steady flatline on the stock's chart of around
10 cents, then that range is the FLOOR. Basically, the markup phase
can go as high as the market manipulator is capable of taking it.
From my observations, a good markup should be able to run about
five to ten times higher than the floor, with six to seven being
common. The market manipulator will do everything in his power to
keep you OUT OF THE STOCK until the share price has been
marked
up by at least two-three times, sometimes resorting to "shaking you
out" until after he has accumulated enough shares. Once the markup
has begun, the stock chart will show you one or more spikes in the
volume -- all at much higher prices (marked up by the manipulator,
of course). That is DISTRIBUTION and nothing else.
Example: Look at Software Control Systems (Alberta:XVN), in
which I purchased shares after it had been marked up five times.
There were eight days of 500,000 (plus) shares trading hands, with
one day of 750,000 shares trading hands. Market manipulator(s)
dumping shares into the volume at higher prices. WHENEVER you
see
HUGE volume after the stock has risen on a 75 degree angle, the
distribution phase has started and you are likely to be buying in --
at or near the stock's peak price.
Example: Look at Diamond Fields (TSE:DFR), which never
increased at a 75 degree angle and did not have abnormal volume
spikes, yet in less than two years ran from C$4 to C$160/share.
Example: Look at Bre-X Minerals (Alberta:BXM), which did not
experience its first 75 degree angle, with huge volume until July
14th, 1995. The next two trading days, BXM went down and stayed
around C$12/share for two weeks. The volume had been 60% higher
nearly a month earlier, with only a slight price increase. Each high
volume and spectacular increase in BXM's share price was met with
a
price retreat and leveling off. "Suddenly," BXM wasn't trading at
C$2/share; it was at C$170/share.... up 8500% in less than a year!
In both of the above cases, major Canadian newspapers ran
extremely negative stories about both companies, at one time or
another. In each instance, just before another share price run up,
retail investors fled the stock! Just before both began yet another
run up! Successful short-term speculators generally exit any stock run
up
when the volume soars; amateurs get greedy and buy at those
points.
"RULE NUMBER FIVE: THE MARKET MANIPULATOR WILL
ALWAYS TRY TO GET YOU TO BUY AT THE HIGHEST, AND SELL
AT THE LOWEST PRICE
POSSIBLE."
Just as the manipulator will use every available means to
invite you to "the party," he will savagely and brutally drive you
away from "his stock" when he has fleeced you. The first falsehood
you assume is that the stock promoter WANTS you to make a bundle
by investing in his company. So begins a string of lies that run for as
long as your stomach can take it.
You will get the first clue that "you have been had" when the
stock stalls at the higher level. Somehow, it ran out of steam and you
are not sure why. Well, it ran out of steam because the market
manipulator stopped running it up. It's over inflated and he can't
convince more people to buy. The volume dries up while the share
price seems to stall. LOOK AT THE TRADING VOLUME, NOT THE
SHARE
PRICE! When earlier, there may have been 500,000 shares trading
each day for eight out of 12 trading days (as in the case of Software
Control Systems), now the volume has slipped to 100,000 shares (or
so) daily. There are some buyers there, enough for the manipulator
to continue dumping his paper, but only so long as he can enlist one
or more individuals/services to bang his drum.
He may continue feeding the promo guys a string of "promises"
and "good news down the road." (Believe me, this HAS happened to
me!) But, when the news finally arrives, the stock price goes THUD!
This is entirely orchestrated by a market manipulator. You'll see it in
the trading volume, most of which is CONTRIVED. A market
manipulator will have various brokers buying and selling the stock
to give the APPEARANCE of increasing volume and price so that
YOU
do start chasing it higher.
At some point during the stall stage, investors get fed up with
the non-performance of the stock. It drifts for a while, in a steady
retreat, with perhaps a short-lived spike in price and volume (the
final signal that the manipulator has finally offloaded ALL of his
paper). Then, the stock comes tumbling down -- having lost ALL of
the earlier share appreciation.
Sometimes, with the more cruel manipulators, they will throw
in a little false hope... giving you a little more rope so they can better
hang you. Just after a severe drop, there will be a "bottom fishing"
announcement which sends the share price up a bit on high volume,
rises a little more after that and then continues to drift. Meanwhile,
you keep getting "shaken out" through a cruel drip-drip water
torture of the share price's slow retreat. Again, virtually every
movement is completely orchestrated.
"RULE NUMBER SIX: IF THIS IS A REAL DEAL, THEN YOU ARE
LIKELY TO BE THE LAST PERSON TO BE NOTIFIED OR WILL BE
DRIVEN
OUT AT THE LOWER PRICES."
Like Jesse Livermore wrote, "If there's some easy money lying
around, no one is going to force it into your pocket." The same
concept can be more clearly understood by watching the tape. When
a market manipulator wants you into his stock, you will hear LOUD
noises of stock promotion and hype. If you are "in the loop," you will
be bombarded from many directions. Similarly, if he wants you out
of the stock, then there will be orchestrated rumors being circulated,
rapid-fired at you again from many directions. Just as good news
may come to you in waves, so will bad news.
You will see evidence of a VERY sharp drop in the share price
with HUGE volume. That is you and your buddies running for the
exits. If the deal is really for real, the market manipulator wants to
get ALL OF YOUR SHARES or as many as he can... and at the
lowest
price he can. Whereas before, he wanted you IN his market, so he
could dump his shares to you at a higher price, NOW when he sees
that this deal IS for real, he wants to pay as little as possible for
those same shares... YOUR shares which he wants to you part with,
as
quickly as possible.
The market manipulator will shake you out by DRIVING the
price as low as he can. Just as in the "accumulation" stage, he wants
to keep everything as quiet as possible so he can snap up as many
of
the shares for himself, he will NOW turn down, or even turn off, the
volume so he can repeat the accumulation phase.
In the mining business, there seems to always be another "area
play" around the corner. Just as Voisey's Bay drifted into oblivion,
during the fourth quarter of 1995 and early into 1996, the same
Voisey Bay "wannabees" began striking deals in Indonesia. Some
even used new corporate entities. Same crooks, different shingles.
The accumulation phase was TOP SECRET. The noise level was
deadingly silent. As soon as the insiders accumulated all their
shares,
they let YOU in on the secret.
"RULE NUMBER SEVEN: CONVERSELY, YOU WILL OFTEN BE
THE
LAST TO KNOW WHEN THIS DEAL SHOWS SIGNS OF
FAILURE."
Twenty-twenty hindsight will often show you that there was a
"little stumble" in the share price, just as the "assays were delayed"
or the "deal didn't go through." Manipulators were peeling off their
paper to START the downslide. And ACCELERATE it. The quick
slide
down makes it improbable for your getting out at more than what
you originally paid for the stock... and gives you a better reason for
holding onto it "a little longer" in case the price rebounds. Then, the
drifting stage begins and fear takes over. And unless you have
serves of
steel and can afford to wait out the manipulator, you will more than
likely
end up selling out at a cheap price.
For the insider, marketmaker or underwriter is obliged to buy back all
of
your paper in order to keep his company alive and maintain control of
it.
The less he has to pay for your paper, the lower his cost will be to
commence his stock promotion again... at some future date. Even if
his
company has no prospects AT ALL, his "shell" of a company has
some value
(only in that others might want to use that structure so they can run
their
own stock promotion). So, the manipulator WILL buy back his paper.
He just
wants to make sure that he pays as little for those shares as
possible.
"RULE NUMBER EIGHT: THE MARKET MANIPULATOR WILL
COMPEL YOU INTO THE STOCK SO THAT YOU DRIVE UP ITS
PRICE
SHARES."
One can avoid market manipulation by not buying during the
huge price spikes and abnormal trading volumes, also known as
chasing the stock to a higher price.
"RULE NUMBER NINE: THE MARKET MANIPULATOR IS WELL
AWARE OF THE EMOTIONS YOU ARE EXPERIENCING DURING
A RUN
UP AND A COLLAPSE AND WILL PLAY YOUR EMOTIONS LIKE A
PIANO."
During the run up, you WILL have a rush of greed which
compels you to run into the stock. During the collapse, you WILL
have a fear that you will lose everything... so you will rush to exit.
See how simple it is and how clear a bell it strikes? Don't think this
formula isn't tattooed inside the mind of every manipulator. The
market manipulator will play you on the way up and play you on the
way down. If he does it very well, he will make it look like someone
else's fault that you lost money! Promise to fill up your wallet? You'll
rush into the stock. Scare you into losing every penny you have in
that stock? You'll run away screaming with horror! And vow to
NEVER, ever speculate in such stocks again. But many of you still
do.... The manipulator even knows how to bring you back for yet
another play.
What actors! No wonder Vancouver is sometimes called
"Hollywood North."
"FINAL RULE: A NEW BATCH OF SUCKERS ARE BORN WITH
EVERY NEW PLAY."
The Financial Markets are a Cruel, Unkind and Dangerous
Playing Field, one place where the newest amateurs are generally
fleeced the most brutally.... usually by those who KNOW the above
rules.
Just as I have a duty to ensure that each of you understand
how this game is played, YOU now have that same duty to guarantee
that your fellow speculator understands these rules. Just as I would
be a criminal for not making this data known to you, YOU would be
just as criminal to keep it a secret. There will always be an
unsuspecting, trusting fool whom the rabid dogs will tear to shreds,
but it does NOT have to be this way.
IF every subscriber made this essay broadly known to his
friends, acquaintances and family, and they passed it on to their
friends, word of mouth could cause many of these market
manipulators to pause. IF this effort were done strenuously by many,
then perhaps the financial markets could weed out the crooked
manipulators and the promoters could bring us more legitimate
plays.
The stock markets are a financing tool. The companies BORROW
money from you, when you invest or speculate in their companies.
They want their share price going higher so they can finance their
deal with less dilution of their shares... if they are good guys. But,
how would you feel about a friend or family member who kept
borrowing money from you and never repaid it? That would be theft,
plain and simple. So, a market manipulator is STEALING your
money.
Don't let him do it anymore. Insist that the company in which you
invest be honest or straight... or find another company in which to
speculate. Your money talks in LOUDER volumes than any stock
promotion scheme. ALWAYS refuse any deal which smells wrong.
Refuse to tolerate the scams prevalent in the financial markets.
This can ONLY be accomplished by KNOWING and USING the
above
rules. Thoroughly COMPLETE your due diligence on a company
before
risking a dime. Dig up the Insider Reports to find out who is blowing
out their paper, how often they are blowing out their paper and
whatever happened to their "last play."
Begin to use this as YOUR rule of thumb: If the insider's paper
is really worthless, then avoid it. Find another's whose paper DOES
hold promise and honest possibilities. In these small cap stock
markets, you are investing more in the INDIVIDUAL behind the play,
than the "possibility" of the play itself. Ask yourself before
speculating: Could I lend this person $5,000 for a year and hope to
get it back? If not, then don't! Do it for your own good and the good
of everyone else who is so foolish as to speculate in these financial
markets!
The truly sane and only somewhat safe solution to all of this:
FIND GOOD COMPANIES IN WHICH TO SPECULATE AND GET
INTO
THEM AT THE GROUND FLOOR LEVEL. Anything else is criminal
or
stupid. This is a case where there really isn't a gray area. It's either
Black or it's White. The company and its management are scamsters
or they really intend to bring value to their shareholders.
COPYRIGHT (c) 1996 by George Chelekis. ALL RIGHTS
RESERVED.
George Chelekis is not an investment advisor, money manager or
stockbroker (past or present). George Chelekis holds a substantial
position in Software Control Systems, prior to going to press and may
sell part or all of his position without advance notice.
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