Seems like Mike Sloan is right about media manipulation
Read on!
VOL. 15, NO. 10 (Formerly North American Gold Mining Stocks)
OCTOBER 4, 1996
The following is the first half of the October 1996 issue of J. Taylor's Gold & Gold stocks
newsletter.
Investor Perils from Canadian Short Sales & Media
Disinformation
According to one unsubstantiated rumor, the short sale position for Naxos, prior to the stock being
halted from trading, was between 5 million and 7 million shares. But according to the Alberta Stock
Exchange there were only around 80,000 shares of Naxos sold short. Discrepancies between the
"official" short sales and rumored shorts sales is nothing new in the Canadian equities markets. Since
I began publishing this newsletter fifteen years ago this month, I have learned that most smaller public
companies in Canada that have some success in Canadian equities markets, believe that actual short
sales almost always exceed "officially acknowledged" short sales by a very large margin.
For many years I naively shrugged my shoulders at these constant concerns. I reasoned that the
intrinsic value of a company vis-a-vis its share price is what really mattered. If the price of the stock
is considerably below its value, then I want to own it. If it is overpriced, I want to sell. I always
believed that it did not matter why the stock was undervalued. While my thinking may have been
correct in a text book sense, the fact of the matter is that extensive short selling can and has often
ruined good, legitimate Canadian companies by depriving them of the ability to raise funds to see the
light of the next day. The recent unfair treatment of Naxos Resources in the press (and also I believe
by the Alberta Exchange) was one reason that I recently began to get very interested in apparent
unethical if not illicit behavior on the part of the Canadian securities establishment.
Over the past several months, I have spoken to a number of Canadians with respect to how the
Canadian short selling system works. What I found absolutely shocking was the unanimous belief
that in Canada, a very large number of short sales (perhaps most of them) are never reported. The
only kinds of short sales that are reported in Canada are what the Canadians call "uncovered"
shorts. All other shorts sales (most likely the vast majority of them) are simply not reported in
Canada.
Since most of us do not participate in the mysterious world of short selling, some definitions may be
in order. Short Sales are sales of stock that are borrowed, not owned. The short seller receives the
proceeds of the short sales just like he does when he sells stock he owns. However, at some time in
the future (i.e., when the rightful owner of the shares wishes to sell them) the short seller is forced to
return those shares to the owner. When the short seller originally sells the stock, he believes the price
of the stock will decline.
If he is right, he can buy the stock back on the market at a lower price than he received when he
sold the shares short. Then he returns those shares to the person from which he borrowed them. In
Canada, "Covered" Short Sales are simply short sales in which the brokerage firm doing the short
selling continues to hold at least twice as many shares as it sells short.
Thus, if Canacord held 5 million shares of Naxos on its books in the names of your account and
mine, it could sell 2.5 million shares of stock short and never report a single share of short sold
stock! And you will never know that these shares were sold short because Canacord is not required
to report it nor are they about to volunteer that information to anyone! According to the rules of the
various exchanges, the only way that Canacord would be required to report any short sales would
be if it sold more shares short than it held on its books for its clients. This is what the Canadians refer
to as "Uncovered Short Sales".
Thus, if under these circumstances, Canacord sold 2,580,000 shares short while only holding
5,000,000 shares on its books for its clients accounts, under Canadian regulation the broker would
be required to report only 80,000 shares of short sales because the 80,000 shares the broker could
not replace from his own books, when the rightful owner of those shares wishes to sell. If I am
correct in my understanding of all this, it is clear that Canadian regulation of short selling is
enormously misleading to investors and these reports are worse than useless because they create the
false appearance of honesty when in fact very sinister behavior may be taking place.
After several Canadians confirmed that my understanding of how short selling is reported in Canada
is correct, I received still additional confirmation from VSE Short Position Reports as they appear
on the Bloomberg system. I looked up every stock listed on the back page of this newsletter that is
traded on the Vancouver Stock Exchange.
Exactly ten stocks (Columbia Gold, Crystallex International, GMD Resources, International
Freegold, Jersey Goldfields, Navarre Resource, Northern Crown, Paramount Ventures, Stellar
Gold, and Silver Eagle) had VSE Short Position reports. The form of the report is typified by the
example of GMD Resources shown to the right. The important thing to note is that under the
"covered" column, not a single value appears for GMD, nor are there any values placed in the
covered column for any of the ten above named stocks for any three month period we reviewed.
The reason, I fear, is very simple. In Canada, so called covered shorts are simply not reported! I
believe this explains why a very large level of Naxos short sales may be a reality even though the
Alberta Exchange acknowledges only approximately 80,000 shorted shares and why over the years
persistent claims of foul play from the "Vancouver" establishment has been heard from many
Canadian listed companies and U.S. brokers.
So What?
Why are covered shorts not reported in Canada? Why should you care? My close tracking of
Naxos may provide a clue to the answers to both questions. I have followed the unfolding story of
Naxos during the past 6 years and I have learned to know the management fairly well. Therefore,
when certain things were published about this company I knew they were phoney. I believe that it
was no co-incidence that a barrage of unflattering articles about Naxos were published as the price
of Naxos peaked at around Can$10 this year.
In fact I believe the evidence points toward an unholy alliance between a major Vancouver based
investment bank and its use of major Canadian media to create false stories and impressions to drive
the price of Naxos lower so that these unsavory characters could cover their short positions at the
expense of the investors. The motives of those writing the unflattering articles about Naxos were
called into question by yours truly not only because one after another they false, but also because the
writers never bothered to spend any time trying to understand anything about Naxos, or the validity
(or lack thereof) of its process. They automatically tabbed it a fraud!
Enormous pressures were placed on the Alberta Stock Exchange (ASE) as a result of the regular
pattern of untruthful and reckless reporting by the establishment press in Canada. That pressure led
to the shares of Naxos being halted since mid May. If I am correct about how professional short
sellers work in Canada and about how they use the establishment press to pocket enormous
amounts of money, I believe the rotten reputation the Canadian equities markets have among U.S.
investors and investment professionals can be explained and is largely justified. The victims of this
Canadian scam are not only companies that have legitimate businesses that could enrich society, but
also investors who have worked hard to understand the fundamentals of the companies they invest
in. The following two fictitious short selling scenarios involving XYZ Exploration Co. and Dishonest
Brokers Ltd. illustrates some of the underlying dynamics that I believe may be to blame for the grief
suffered by Naxos Resources and its shareholders over the past several months.
SCENARIO I - "IF XYZ TRIES TO GET UP, HIT HIM AGAIN AND AGAIN AND AGAIN !"
XYZ Exploration Co. (XYZ Corp.) a junior mining company with several good gold exploration
targets in Africa, approaches a Canadian investment bank named Dishonest Brokers Ltd in quest of
venture capital. Dishonest Brokers responds to the company's needs by taking the company public
by way of an IPO of 5 million shares at $0.50. XYZ Co. nets $2.25 million (Dishonest Brokers
pockets $250,000 in underwriting fees) and uses most of the net proceeds of its IPO to explore for
gold. XYZ's efforts are successful so its shares rise to $5.00.
Investors, especially those in the U.S. who may have bought the stock near its IPO low, are very
happy about this turn of events so they vow to hold the stock for "the long haul". Many investors
believe XYZ has a chance to be the next BRE-X. With the stock now priced at $5.00, the mining
company is able to raise equity via private placements, or list on NASDAQ or elsewhere to raise its
money, so Dishonest Brokers becomes of less value to XYZ Co.
However, Dishonest Brokers Ltd. does not like the idea of XYZ Co. gaining its independence
because that would mean that it would no longer be able to make future profits off of this good
mining prospect. So Dishonest Brokers proceeds to force XYZ to once again depend on it by
selling say, 2,020,000 shares of XYZ short. Dishonest Brokers holds a total of only 4 million shares
of the company's stock on its books for its clients, so therefore, reports only 20,000 uncovered
shorts sales even though the actual number of short sales was 101 times more! The enormous and
sudden supply of XYZ stock hitting the market in a short period of time overwhelmed the market for
XYZ stock, so its price plunges back to $0.50. With XYZ's shares now "in the basement where
they belong" the company is forced to return to Dishonest Brokers with hat in hand, begging for
them to do another public offering. Again Dishonest Brokers issues another 2 million shares and nets
themselves a cool $250,000 plus some well priced warrants which it also pockets a windfall from
when the next Phase of the company's exploration project is reported to be favorable which again
leads to a rise in the shares to over $5.00. That sets the table for yet another round of foul play and
dilution of shareholders' interests. A series of unproven adverse articles in the press appears to make
XYZ's price drop seem very reasonable and everyone except the company itself reasons that if its
printed, it must be true.
SCENARIO II - A Short Sale "Killing" Gone Terribly Wrong!
What do you suppose happens if Dishonest Brokers' short sales of XYZ does not bring about the
destructive results it hopes for. Suppose that despite massive short sales, the stock refuses to fall,
but instead rises because optimistic investors have solid reasons to believe XYZ holds the promise
to become the next BRE-X or Diamond Fields? Let's say that Dishonest Brokers Ltd. sells 2 million
shares of XYZ short when the stock is at $5.00. It borrows these shares from yours and my account
held on its books and sells them short at the market price of $5.00. Dishonest Brokers pockets $10
million dollars from this sale. Now lets suppose XYZ, like BRE-X, discovers a gold ore body of
upward to 75 million to 150 million ounces of gold and the price of XYZ rises to $250. Dishonest
Brokers is now in Big trouble as investors call the firm to sell say 500,000 shares of the total 2
million shares Dishonest is supposed to hold for them. Dishonest Brokers is now forced to go into
the market and buy those 500,000 shares at a cost of $125 million! Having received only $2.5
million ($5 x 500,000 shares) for the short sale of these shares, Dishonest Brokers would be left
with a staggering loss of $122.5 million which represents a sizeable portion of its total net worth.
And guess what! At some time in the future, Dishonest still has to buy an additional 1.5 million
shares. At the current price of $250, XYZ's success may wipe out all Dishonest Brokers equity!
Finding itself deep in the hole, Dishonest Brokers would have yet another alternative to buying these
shares on the market. It could borrow the 500,000 shares of XYZ that exists on its books. But if it
did that, it would now need to report an uncovered short position of 500,000 shares. That could
backfire even more because the market would now know that eventually Dishonest Brokers would
have to buy 500,000 shares which would cause the shares to rise even more. No matter what it
does, Dishonest Brokers is in deep do do... unless it can get some help.
A Little Help From the Vancouver News?
If Dishonest Brokers were managed by honest God fearing people, it would admit to its error, suffer
the financial cost of its actions and possibly pay criminal penalties for hiding its position to deceive
and manipulate the market for its own gain. For sure, if this were a morally just firm, Dishonest
Brokers would avoid market manipulation in the future. It would stop the indiscriminate short selling
of companies as soon as they rise in
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