Here is an article that is 6 months old or so. It is quite long and I apologize for that but it gives some excellent insight as to how the Canadian media and other power brokers can virtually destroy a good company based on trading techniques and tainted news.
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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