Repost
Mac originally gave the url of this posting from Raging Bull,
I think it that important it bears posting on this thread in it's entirety. Thanks Mac
for drawing it to our attention it.
If you ever wondered about peoples motive, after reading this, you will have a
better understanding. Look at the date of the article
it would appear not much has changed....except maybe the internet gives the
opportunity for wider distribution to a much more savvy investor. I note the press
mocks us for our faith in this investment, another part of the ruse maybe?
If this still applies it certainly gives added meaning to the phrase mad as hell and
not going to take it anymore.
From Raging Bull post number 8304:
OCTOBER 4, 1996
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
Next
Previous
|
