Don't forget those undeclared shorts:
(Copied this from another thread. Search for "undeclared short" using the "full text" option and you'll find many more)
Undeclared Short Selling
Introduction
Many dynamic growth companies have been damaged by undeclared short selling.
This practice consists of creating stock that doesn't exist or borrowed (as is the legal
requirement) and subsequently sold in large amounts in the open market creating panic
selling and decimating share prices, where they hope to buy the position back at lower
levels (creating a profit for the short seller).
Declared Short Sellers
Declared (legal) short sellers are institutional money managers and fringe group market
professionals, not small capital public investors. Their positions are reported publicly
on a regular basis, and these individuals must borrow the shares before taking on a
short position. They must also typically deposit 50% of the value of the short as a
margin deposit. From whom do they borrow? Read the fine print on your margin
account agreements and you will see it is YOU! This is a perfectly acceptable, legal
and ethical investment strategy - just like in commodities you have some folks betting
on higher prices, others betting on lower prices in a controlled, disclosed, and
regulated environment.
Undeclared Short Sellers
Undeclared short sellers don't borrow the stock they are selling. They (in most cases)
don't even have to pay the margin requirements for their position. They are betting on
(and trying to create) total failure of the public company. The odds of failure in small
business are better than 98 to 2.
There are many ways a public company can confirm an undeclared short position in
their stock. One way is to use the response to the company's annual general meeting.
The company can add the issued stock (IS) and the short interest (SI). The sum is the
stock available in the company's market. Now add the known shareholder positions
(KS) and the street stock proxies (SP) If the (KS+SP) sum is greater than the (IS+SI)
sum, you have an undeclared position in your stock. Most street stock owners (held
in street name at a brokerage firm) don't even submit proxies. You can estimate the
size of the undeclared short position by multiplying the stock proxies by 1000. This
assumes 10% of the street owners submitted proxies (an estimate, by the way, which is
unusually high). When public companies do this comparison they often learn they have
3-7 million shares short and undeclared.
The limiting of access to undeclared short selling was supposed to be the Equity
Reform Movement but it hasn't limited the practice. It excludes most retail brokers,
newsletter editors, money managers and anyone on the fringes of the internal working
of the market. Undeclared short selling networks include a few powerful market
insiders, a couple of politicians, and a few financial powerhouses. Their motto: "You
can never sell too much stock." It is estimated these individuals gross over a billion
dollars annually, making it a very big business.
How Can Undeclared Short Sellers Create Nonexistent Shares?
The trading system is responsible for some of it but most nonexistent stock comes from
offshore tax havens. It is impossible to trace the beneficial owner. The nonexistent
stock trades several times and comes to rest within the control of the undeclared
short selling group. Undeclared short sellers have enough power to force the
company to issue more stock, if necessary.
It works because the trading system lacks closure. The monthly brokerage house
account statements aren't tied to specific shares issued by the public company. The
client account statement is a "claim" of sorts on shares. It does not represent actual
ownership of share certificates. You end up with an open-ended option on the stock
you buy - and no actual ownership. Nine times out of ten your brokerage firm loans
your shares to the shorts (short sellers) on settlement day!!
So, What Do I Do Now?? (Complaints to regulatory agencies)
Though it sounds good in theory, complaints to the so called "experts" who regulate
our financial markets have proven to be completely useless. The problem is simple:
Lack of knowledge on the part of the regulator. You would be hard pressed to find
anyone versed on undeclared shorting with the SEC itself let alone the NASD (who
oversees NASDAQ and the Bulletin board) who are "association police" with no real
legal power and virtually no transactional knowledge. A complaint to the NASD would
probably result in them attacking the public company and the legitimate brokers who
bought the shares for their client -- they would attack the victim rather than the culprit.
A Short Trap
The term "short trap" refers to backing the shorts into a position whereby they must
cover (buy back the short position in the open market). The only effective way is to
demand delivery of all of the shares currently held in street name. This must be done by
the shareholder. The problem is that most brokers are brainwashed to believe that if
the shares are not on account at their brokerage firm they are gone forever and the
commissions generated selling the shares will go to somebody else. One possible
solution is a large buyer (sometimes as much as 10% of the float) who will demand
delivery of his shares.
The Good News (Is there any?)
The good news is that is the trap is effectively enacted the short will HAVE to cover
the position. This can, in some cases, take a $.50 stock to $15 or $20 a share -
creating huge liquidity for the company and make the shareholders rich. (20-1 returns
are not uncommon) Some of the most successful stocks on Wall Street are a result of
an effect short trap.
Example: Presstek (PRST) -- this was a $20 stock that made shareholders a five
banger when a major promoter brought in some large players to bust the short.
The Only Real Protection
The only real protection: education of investors! Demand delivery of all shares you
buy!!!!
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