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Daily Distortions on InterOil no.9

August 8th, 2008 · 3 Comments

We have reported numerous articles about naked shorting. Now, would is surprise you if we tell you that there is one guy who just flatly denies it exists. Would you be surprised to know who it is?

Yes, it’s our friend again.

  • When a company or its supporters start to complain about “naked shorting”, you can be sure of one thing. Its a terrible company with serious problems. Most of the companies on the RegSHO list are companies like MSO, and KKD. Companies with more hype than actual earnings or cash-flow. Sound familiar? [Bostonkenmore]
  • Show me the counterfited shares. Being on the RegSHO list even for 400+ days does not prove that counterfit shares are being created according the SEC. [Bostonkenmore]

Small matter that he didn’t provide a source for that supposed SEC opinion, and we’ll get back to the issue of the RegSHO list below. In response to me, when I argued naked shorting in IOC exists:

  • And you are a company representitive. Hence the company is complaining about naked shorting through you. I actually once asked Herb Greenberg about naked shorting. The only people who can do it are corrupt individual brokers making trades for their own account outside of their employers perview. Like Brun I know some large hedge fund guys too, they can’t short a stock in which there are no shares available. Mark Cuban wrote a few years ago in his blog that HE can’t short a stock in which there are no shares available, and he’s a billionaire. [Bostonkenmore]

It is interesting to compare that statement with those of an academic expert:

  • One of academia’s experts on the failure to deliver is Adam Reed, a finance professor at the University of North Carolina. In an interview Monday, Reed argued that the pre-borrowing requirement probably is not that high of a hurdle for a large hedge fund to jump over. If such a fund has wanted to sell one of these 19 stocks short, it most likely has been able to find a way.
  • To be sure, as Reed went on to point out, a pre-borrowing requirement in theory could — in the case of certain stocks — prove to be a major barrier to going short. Smaller and more secondary stocks — stocks with relatively illiquid markets, for example — would fall into this category. But the 19 stocks for which there is currently a pre-borrowing requirement do not fall into this category.

So, Boston argued that even without the stringent emergency rules, hedge funds and billionaires would not be able to nakedly sell shares short (that is, sell shares before having borrowed them). What a leading expert says is that even with the stringent emergency rules in place, it would probably not be that high a hurdle.

Some more vintage Boston:

  • Naked shorting is illegal, but as stated by Burn its likely mostly a figment of your imagination. Even if it does happen, its likely a figment of your imagination. [Bostonkenmore]
  • “The hard evidence it IOC’s listing on the naked short list. That’s hard evidence.” [STPIOC]  Which doesn’t mean its being manipulated. [Bostonkenmore]

Well, the only other explanation is that it’s a settlement problem. Here is what another expert had to say about the relative likelihoods of both explanations:

  • But can unsigned or lost certificates really explain why some companies have lingered on the list for weeks, meaning that more than 10,000 shares per day or over 0.5% of the company’s entire float is subject to failed settlement on a daily basis? If that’s the root cause, it would certainly seem to point to some pretty shoddy settlement practices among broker-dealers.

Now, you have to realize that IOC is on that list not for weeks, but for almost 500 consecutive trading days. That would really indicate massive ongoing settlement problems, very unlikely to happen for weeks on end, let alone almost two years.

The next one is funny, here Boston argues that even if naked shorting existed, it wouldn’t hurt the company:

  • It certainly wouldn’t influence debt financing so I assume you are talking about equity financing. Equity financing is subject to the law of marginal profit. Since financing is not a monopoly if an equity financier were to make a deal with IOC that was better than was actually warranted due to the illegal surpression of the stock price a competitor would top that deal. This would keep happening, until IOC got the best deal that the market would bear, or the marginal profit was zero. The financing deal that a market will give the company will ultimately be a reflection of what the market believes about the value of the company’s assets. There is no way to change that. [Bostonkenmore]

Hmm, the law of marginal profit. Even though we’re economists, we’re not aware of such law. But here is a guy who, after every financing IOC does, cries “dilution!” and goes to great lengths to explain shareholders how they have been ripped off once more. At least these are legitimate shares, and, in some recent cases, were issued in exchange for debt, something which makes no impression on Boston:

  • STP when you swap debt for equity you raise the number of shares outstanding and hence dillute the shareholders. [Bostonkenmore]

But if hedge funds sell shares short that they haven’t even borrowed before, and cannot deliver on time (that’s the way you end up on that regulation SHO list), basically counterfitting shares, that’s no problemo! It wouldn’t depress the share price, it wouldn’t affect the company to attract debt or equity finance…

You might want to read the following story to see to what extreme situation this practice can lead:

  • On Feb. 3, a man named Robert Simpson filed a Schedule 13-D with the SEC describing his purchase of 1,158,209 shares of Global Links Corp. (OTCBB: GLKCE), “constituting 100 percent of the issued and outstanding common stock of the Issuer.”
  • As described in a story that ran on FinancialWire on March 4, Simpson stuck every single share of the company in his sock drawer — and then watched as 60 million shares traded hands over the next two days. In other words, every single outstanding share of the company somehow changed hands nearly 60 times in the course of two days, despite the fact that the company’s entire float was located in Simpson’s sock drawer. In fact, even as recently as last Friday, 930,872 shares of Global Links still traded hands.

Naked shorting doesn’t exist? No manipulation? Huh??

And what about the SEC instituting emergency rules for 19 financials against naked shorting, forcing shortes to pre-borrow the shares they short (it has had quite an impact, by the way). What was that all about? The SEC argues (according to Boston) that even being 400+ consecutive days on the regSHO list is no sign of naked shorting, just a sloppy settlement process, right?

This is too important an issue to leave this nonsense unanswered. For close to 500 consecutive trading days, IOC’s shares have settlement problems. This can not be explained away by ‘garden variety’ settlement problems (and IOC has 10.5M shares short, in the latest count, a staggering amount, almost half the float) There can be no doubt InterOil’s shares are being manipulated.

Tags: Daily Distortions · IOC

3 responses so far ↓

  • 1 Kurt // Aug 8, 2008 at 9:41 am

    I’m not an economist, I’m a salesguys and after having read this whole discussion, here’s my simple conclusion:

    IOC are 10.5M shares short, so demand is 50% higher than availability.

    In sales we call this a brilliant place to be in. I’m confident that once this problem is sorted out, IOC will be a great company to own shares of.

    Like I do. Bought at $17.

    Boston, keep entertaining us man!

  • 2 Jim Tate // Aug 8, 2008 at 1:10 pm

    The question of course is when will the SEC do something about all this. By the end of the year maybe..

  • 3 bob mcnichol // Apr 25, 2009 at 2:29 pm

    we can intercept missles in mid-air, catch sexual predators via on-line stings, indentify dna from dead guys etc, but we can’t enforce SEC rules on security defamation and naked short selling scams?