GC,
Perhaps the following article is of some interest to you. It tells of why some stocks get thrashed etc..... To be sure, GMD was shorted bigtime by people in the know of things before it descended to present levels. But watch out when GMD goes back up to between $0.50 and $1.00 ................
Best,
RN
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HOT STOCKS CONFIDENTIAL
By George Chelekis * November 15, 1995
SHORTSELLERS, SECURITIES REGULATORS
AND THE MEDIA...
Those who have read my earlier essays may have come to realize, as I have, that the professionals make
their money by selling their cheap stock... to you. That is only half of the story.
The rest of the story is the woof and warp of the financial markets: shortselling. There is an insidious
relationship between three distinct, authoritative bodies which can turn an investor's dreams into a financial
nightmare. These three parties are: (a) Securities Regulators, including everyone from the stock exchange's
surveillance department to a securities commission's enforcement branch; (b) The Media, which is holier
than thou, and includes primarily business news desks and their reporters, although it would not be
far-fetched to include even the publisher or holding company in any far-flung conspiracy theory; (c)
Short-sellers, especially the broker-dealers of US and Canadian brokerage firms.
HOW SHORTSELLING WORKS.....
Many subscribers still don't know what shortselling is. So, let me broadly define this term. Shortselling is
the activity of selling a stock which one doesn't own. Sounds odd, doesn't it? Take a tangible example, like
being a homeowner. How could you sell off your house, if you didn't own it? You'd probably be arrested
for fraud if you tried. Could you sell a car without owning it? It's been done and is done routinely at car
auctions throughout the US and overseas. Yet few have probably ever heard of this activity before. Quite
popular, in fact, just like shortselling. This is a rather hard concept for many to understand, as most
investors are decent and honest people, unlike those in the shortselling game. That is also why shortselling
is a "pro's game." Anyone can play it, but it's easier for the professional to do so, because of various
restrictions.
Success in shortselling depends entirely on KNOWING that a company is overvalued. For, if you don't
own shares in a company and sell it, you MUST someday buy back the stock. If the stock goes up, you
lose. If the stock goes down, you win. For example, Vancouver traders, have as a rule of thumb, to short
virtually any company that spurts into the KILL ZONE. The Kill zone is C$1.85 to C$2.25. Any time any
company shoots into that level, the professionals short it. Them's their orders.
There are nuances of which I have only recently been apprised. A friendly Canadian stockbroker
forwarded to me three different examples of how this game is played at his brokerage firm. I'll substitute
"fake" company symbols and a fabricated brokerage firm so he doesn't get into trouble.
Example #1: XYZ Corp is a Toronto listed stock. CanYork brokerage firm's client has a debit in that stock.
Thus, CanYork uses those shares for shorting or to secure one of CanYork's loans.
Example #2: XYZ Corp. shares were left unsegregated in the client's account and can be used by the firm
to short the stock.
Example #3: CanYork's client has 1500 shares of XYZ Corp. stock but only 1060 are segregated. The
remaining 440 shares can be used for shorting.
There are many other tactics a trader can and will use to short stock. One of my old personal favorites is
the daytrade. Very high casualty rate in this business, even for brokerage firm traders, but extremely
profitable if you know the trading basics.
Daytrading can actually be done without laying out a penny! One can short a stock (or even go long) and
then cover his trade at the end of the day, paying up or raking in the difference... depending on one's
failure or success. Let's say a stock has just had a monumentous run, with huge volume -- up 100% in a
few days with huge volume. (Huge volume tends to indicate insider trading activity; the runup shows a
"promoter" is pushing that stock.) All a pro trader has to watch is for the stock to enter the KILL ZONE
and then falter on its climb. (The "kill zone" even be at lower levels; C$0.65-1.05 is another favorite one.)
As it inevitably does, the shorts hit the stock on the uptick and take a free ride down on the bloodbath. All
fun and games at your local trading floor. While you are sweating bullets, they are popping champagne
corks or slapping high fives.
The insidious bit starts when the stock breaks THROUGH a kill zone and is climbing ever upward. Shorts
may not have covered. Or they continue to short the stock silly, expecting it to collapse. Or they RIG THE
STOCK's COLLAPSE!
To understand this, one must understand the basics of marketing a commodity, service or product.
Marketing involves distribution of inventory into a marketplace; that includes stocks. Public relations and
advertising involves using the media to facilitate the distribution process and create a demand. Just as the
marketing guru relies on "pricing points," to determine at what price the consumer will buy a product or
not, the shortseller knows the "price points" where investors start to sweat on a stock's upward climb.
Remember the old "Brill Cream" hair paste commercial (pre-hair mousse days), "a little dab will do ya." A
wee bit of shorting, at the propitious time, can collapse a stock's price by engendering a selling avalanche.
Here is how the RIGGED GAME works when the garden variety shortselling runs into stumbling blocks.
Shortselling often involves a relationship with the media that the Nazis mastered, called "Black
Propaganda." Television in this decade has taught us that anyone's career or reputation can be utterly
ruined. It has been conclusively proven that, with modern television, anyone's reputation can be destroyed,
be he a presidential candidate, former football star or a talk show host. Today's "gotcha journalism" is a
perfect marriage for the professional shortseller. When a journalist's guillotine fails, the securities regulators
are summoned.
NONE DARE CALL IT INCEST!!!!
Interestingly, there is an undisclosed, secret alliance between the professional shortsellers (the really high
rollers), the media and the securities regulators. One can more readily see this in Vancouver or Calgary,
where a handful of powerful brokerage house "personalities" run their respective exchanges (or step on
each other's toes, the rest of the time). As there are the quarter slot machines, as opposed to the
$10,000/card baccarat table, by way of comparing the financial markets to a casino, uncovering the major
players at the more established stock exchanges is a more rigorous exercise.
One has to understand motivations to see through this alliance. How are they paid? A business reporter
"breaks" the story and wins intramural praise. If he does this long enough, and enough corporate lives are
destroyed (having a few principals or others commit suicide is even juicier), then he/she wins awards.
Those all lead to a better job, recognition, a book deal, etc. (What drives reporters absolutely nuts about
me, by the way, is that I have published numerous books. Motivating virtually every reporter is the dream
of graduating to "published author" status or better yet, publishing a novel, hopefully a best-seller, so they
don't have to spew doom & death crap every day.)
There is even collusion in the world of journalism. For example, when XYZ publishing conglomerate has
newspapers they own in various cities, it is not uncommon for "The National Banner" to do the dirty work
of "The Daily Sun." Or to further the earlier work done by the latter. Or to pass along another slant on "the
story" from one publishing conglomerate's paper to another's magazine. Etc. This is even done internally.
For example, it might raise eyebrows if John Jones wrote a nasty article about me, since both he and his
newspaper are suing me. However, it would look arm's length and "independent" to have Mike Smith write
a hatchet job on me. (By the way, this cross-pollination was actually used on me last November and it
withered on the vine!) From there, you can even watch a whole campaign unfold. The newspaper breaks
the story, the radio morning DJ nonchalantly jokes about it on the air, the evening news runs with it, etc.
Then, it goes national. A wire service runs with it and so on. At the end of the day, the score looks like
this: Media: 29, Subject: 0. Make that a BIG ZERO. Even one's own family may fail to recognize the
person featured in that "story."
When the media fails with the company or the individual behind that company, they'll go after someone
close to the company. The old "guilty by association" method of character assassination. (This, by the
way, has been used with me.) When that fails and the company continues to survive and (gasp) prosper,
the shortselling syndicate pounds away at the securities regulators. They usually have an established line
into one of the "captains" of the US Securities and Exchange and Commission. To add credibility to their
story, the syndicate will also forward their accusations to one or more state securities regulatory bodies.
While those in Connecticut, Massachusetts and North Carolina are increasingly the receipt points for such
stories, THE most favored, of all, is the state of Missouri (do they actually have investors in Missouri??).
Missouri doles out $500,000 annually and maintains a staff of 20 to protect their investors in "The SHOW
ME State." (Actually, it appears more and more like a front group for the US Securities and Exchange
Commission.) For instance, if you were to read the website, containing an interview with the head of
Missouri Securities Regulatory Commission, it would look like nothing more than a re- hash of the "party
line" sourced by an individual who was recently condemned by a former Canadian Supreme Court judge.
Website: gnn.com
How do the securities regulators gain? No, they are not paid off, although some have been rumored to have
taken secret payments to "back off" or "nail a competitor." That is peanuts compared to the big picture.
The big picture is two fold: (a) For the agency, it means a bigger budget, more staff, better offices, etc.;
(b) For the individual regulator, it means a promotion, more pay, etc. For those running the state agency, it
could lead to a more prestigious job, i.e. judgeship, senator or even governor of that state. For those
running the SEC, it could mean a great job at Bear, Stearns or some other prime Wall Street brokerage
firm. (Yes, I do happen to know of a former SEC head who later went onto Bear, Stearns. I happen to
know his daughter very well.) Bureaucrats, especially US Attorneys and District Attorneys, have their own
dreams, too, you know: To become politicians, for instance (that's where the REAL money is).
Here is the problem faced by both the media and the securities regulators. They both need a story. The
juicier and more criminal, the better. The best is a high profile story, e.g. Sonny Bloch with his radio
network and Dan Dorfman (CNBC-TV, Money magazine, etc.). Internal betrayal is what may likely bring
those men down. Those on the inside are a government's or media's best informants, but that is another
story for another time.
"The story," as any journalist or securities regulator comes to realize, is not easy to come by. For those
who DO understand the media, as completely as I do, one must often rely upon sources to get that story.
Usually, someone with an "ax to grind" is the reporter's best source. A vested interest is an even better
source. He usually uses a lackey (a PR man specializing in the black arts) to contact a reporter, get a story
going and bring it to the attention of the "regulators." Yep, just like advertising salesmen who cull sales
leads from their competitor's magazines and newspapers, the securities regulators "find" companies and
individuals to investigate by reading the "leading" financial journals. (Amazing how many companies strive
to get mainstream publicity and all they are doing is waving a flag at the securities regulators! They stop
that practice once they discover their legal expenses are running wild!)
Let me explain an actual example of how the media and shortsellers work hand in hand. This is a TRUE
example. Here are the intimate details of how one shortselling outfit operated in the United States on one
short "deal." That the stock went down was NOT an accident. An independent, down and out
broker-dealer (a one-man show really), researched very hard and found a "loser." Through a chain of
events, the shortselling outfit cut a deal with a HUGE money management fund and shorted this
NYSE-listed stock from the mid- teens to under $5/share (to around $1/share, I think). They reaped
millions in profits. The independent was paid $4,000 for his discovery. A private investigator was paid
about that to "research" the dirt, come up with the grimy details and present a package to a major
journalist. That individual ran the story in his weekly column in a highly respected national magazine... after
the shortsellers and money men had gone short. The stock collapsed and the company disintegrated. Poof!
And the best thing? It was all 100% legal!
YOU ARE BEING PROTECTED???????
You see, the securities regulators, while they appear to be "concerned" for the small investor, take
ABSOLUTELY NO REAL MEASURES against the destruction of a company by shortsellers. Funny, the
small investors makes money by going long; the professional rakes in millions going short! The Securities
Regulators "protect" the big money and look the other way at the small investor getting soaked. They are
"too busy" looking at all the stocks that get hyped (and those hyping those stocks) and never see the foxes
raiding the henhouses... on schedule every day, every week, every month, etc.
I particularly noticed this with the Canadian mining issues, especially those trading on the western
Canadian stock exchanges (Vancouver and Alberta), toward which federal and state securities regulators
and the US media maintain a cold, hostile, antagonistic and vindictive attitude. Stock brokerage firms
which specialize in such stocks are harassed. Individual brokers considered pariahs. Non- traditional media
who write about them undergo the kind scrutiny a child molester would get. (Many can't afford, nor have
the willingness to go to the Supreme Court to assert their First Amendment rights!) In fact, when it comes
to covering Canadian stocks, especially mining issues, even US journalists make it look like the First
Amendment was canceled! (Bailing out Wall Street's fat cats who were losing their shirts on the Mexican
stock market, however, is politically correct!)
HOWEVER, it is very interesting to note this observation: When the Canadian mining issue becomes "legit,"
all of the harassment subsides. No one questions American Barrick, a cheap penny stock a while back,
which is now one of the blue chip Dow Jones 30 Industrials. Few question Diamond Fields (TSE:DFR) as
it prepares for a NYSE listing. Or Dia Met. Or Royal Oak. Or Placer Developments (now Placer Dome).
Or Hemlo (which was once but a joint venture of two VSE-listed companies) Etc. The common
denominator is that they were all once PENNY STOCKS. True, very few of these ever emerge to become
legit mining companies. There are tremendous odds in the mining exploration game, just as in high tech or
bio med... because of the long runway before the stock takes off. There is tremendous hype in this area
and a trail of investor corpses left behind. But, what the last thing a small, emerging mining issue needs is
even more obstacles. Good Geology is tough enough, as it is, to translate into a producing mine. Having
the media and securities regulators running interference on the company actually hinders the company's job
and harm's the small investor. Get the picture: HINDERS THE SMALL INVESTOR!
It is into this arena I entered and discovered this significant observation: The Canadian/US media and the
US federal/state regulators have actually created an atmosphere to DENY the US investor from
successfully investing in these penny stocks. It is THEIR handiwork which has probably cost more
investors to lose money than all of the earlier VSE frauds, PRIOR to their involvement. Because of these
strict regulations, MOST US investors did not come into Diamond Fields (TSE:DFR) until it had nearly
peaked at C$80/share. They could have made a 2000% profit (or more), had there not been such
regulations STOPPING the US investor from profiting from, and sharing in, this company's discovery.
There are many, many smaller, less obvious, successes. I've covered many of them. Some have become
runaway successes; others failures. For example, it may not be until Yogen Fruz (TSE:YF) is listed as a
NASDAQ Small Cap stock that many US investors hear about the world's FOURTH largest frozen dessert
chain! By then, the stock may trade around C$5-10/share. Before I first reported on YF, it was
C$1.30/share and the company's president hung his head for months. Again, the US investor was denied
access to these markets. Only after the "play" has ended and the stock has flattened out, and then gotten
listed on a "legit" US stock exchange (not the OTC BB), is the US investor given the SEC's blessing. While
the SEC has been so fraught with protecting a US investor's downside, it has practically removed ALL of
the upside on these securities!
SUMMARY
So, it is this I have learned. When you hear a bad story about a company or individual or read about it in
your local newspaper (or elsewhere in other media), that story has been generated by a vested interest with
their own agenda. You can always find out the source of it by following the trail -- just look for the
individual who is profiting by the company's demise. Far too many people ask "Why?" The pro's sneer at
such questions. Like hired assassins, they never ask "why," but instead ask "when," "who" and "how
much."
The securities regulators? They have their own agenda -- protecting the "public" (from themselves?) If that
is so, then ask this "why" question: Why does the small investor always end up getting the short end of the
stick while the big money always ends up laughing all the way to the bank? Some protection!
The real racket is not in stock promotion. It's in shortselling. The small guy goes long; the pro goes short.
Securities regulators go after any high-profile individual or brokerage firm which furthers the small stock's
rise. They have NEVER gone after any shortselling syndicate or professional which shorts stocks. In fact,
a high publicity case, this past winter, involving a penny stock boutique in the NYC metropolitan area,
created a major scandal. The US Bankruptcy Trustee had to let the stock rise, and thus helped the
shortsellers, because there were more shares short on the companies this firm had backed, than there were
outstanding! The media downplayed this; the regulators walked away from it. The shortsellers benefited;
the small investors got wiped.
It is no wonder that the average Joe distrusts the media and complains about his own government. They
are just tools in the wealthy man's candybox. No wonder that the truly wealthy men are more frequently
shortsellers than not. Is it any wonder that President Franklin Delano Roosevelt handpicked one of Wall
Street's most notorious shortsellers to be the first head of the U.S. Securities and Exchange Commission?
His name was Joseph Kennedy, father of the man who later because a US president.
COPYRIGHT (c) 1995 by George Chelekis. ALL RIGHTS RESERVED. Copyright violation will be
prosecuted to the fullest extent of the law. The information presented in George Chelekis' Hot Stocks Flash
or Confidential is not an offer to buy or sell securities referred to herein. This is an irregular financial
gossip column, strictly for information purposes, possibly reliable but not guaranteed as to accuracy or
completeness. Investors are urged to obtain complete financial and other information directly from the
company as George Chelekis is not liable for any investment decision made. While he is not an investment
advisor, George Chelekis, from time to time, invests in North American securities, and provides
information about selected companies which catch his eye. Stocks featured in this column are extremely
speculative investments, laden with considerable risk and plenty of volatility. Past performance does not
guarantee future results. Investors should take profits to cover their initial investments because these
stocks are extremely volatile. George Chelekis is not responsible for the timing of anyone's investments
should information be delayed between the time it is written and when it is actually received and/or acted
upon. Hot Stocks Confidential and Flash are not subsidized by featured companies. |
