SEC’s Spamalot; More of the Same - March 8, 2007
ALERT! SEC to hold an important press conference to discuss critical enforcement action
That was the news that came out late Wednesday night. The press conference scheduled for Thursday at 11:00
But after listening in on the press conference it was more a yawn than an alert. It appears the SEC has raced to yet another house fire and started put all the fire nozzles on the match instead of the house ablaze.
The SEC has apparently cracked a major conspiracy ring operating on the micro-cap markets. The conspiracy ring scheme was centered on spam e-mails boasting of micro-cap explosions that could make the average investor rich. All you had to do, these e-mails would claim, is buy into the investments they were selling.
The enforcement action the SEC undertook was to halt the trading of 35 micro-cap companies trading on the Pink Sheets. Since none of the companies have directly been charged, one CEO asked why their stock was being halted when they were not the ones that were sending out these spam mailings.
Did the SEC shoot the messenger? It appears that way.
And if shooting the messenger was not bad enough, the SEC press release of the details was.
According data provided by the SEC in the news release, we are not talking about a major ring that has been stealing tens or hundreds of millions in this "pump and dump" scheme (yes the SEC gets giddy when they can say pump and dump). No, we are talking about the SEC going after the local candy store thief running out with a Snickers Bar while the Jewelry store next door is under full armed robbery attack.
According to the SEC complaint, Apparel Manufacturing Associates, Inc. for example climbed from $0.06 to $0.19 on 484,000 shares when in reality the stock climbed as high as $0.30 before collapsing back down. The volatility in this stock is exactly what market makers create and day traders trade on. The total investment dollars we speak of was maybe $100,000 over the 484,000 shares. The stock spent the next two days trading similar volumes with similar volatility but again, trivial dollars.
But on no volume the stock collapsed and with a week the stock was trading back at it’s original levels. The great “pump and dump” was maybe a $100,000 scam. And as for that collapse, the SEC should be inspecting carefully all the market making activities for this event to make sure there was nothing fishy happening there as well.
The SEC likewise presented similar details for Healthuniverse, Inc., and for Goldmark Industries. Each time the SEC looked at a spike in trading that followed the spam e-mails and attributed each to the fraud never willing identifying the magnitude of the monies actually defrauded.
Okay, so lets caveat this piece. Fraud is fraud and the fact that the SEC took action is commendable. Nobody should lose an investment to fraud.
My concern is not over this action so much as the pomp and circumstance the SEC made of it. Calling this a major “pump and dump” scandal is like calling the Martha Stewart lie an act of treason.
In this same week that the SEC posturing for accolades on a job well done, CNBC’s Jim Cramer was chronicling live real fraud, the house fire, live on TV and in his daily blog on RealMoney.com.
Cramer was not chronicling about 35 Microcap companies with a combined market cap of less than $100 Million. No way, Cramer was addressing fraud of tens of millions of dollars involving a company with a market cap of over $400 Million.
On March 2, while reporting on CNBC Cramer stated that “When you are a bear you try and knock the stock down, you pick up the phone and make calls and say blah blah blah, Star is going out of business, and blah blah blah, Mack is filing for bankruptcy. It is very easy to spread those rumors. Is it illegal? When your firm is on the line you tend to do questionable things.” The caption to this report was Cramer sees Bear Raid.
And on March 6 Cramer followed up his commentary by chronicling the “bear raid” on Accredited Home Lending (LEND).
Cramer started out the day by blogging “Obviously they are about to raid the financials.” Followed with “the next thing to do is try to wreck and rumor down a particular subprime mortgage company, just hit the wires and take one down.”
At this point Cramer has not yet identified the subprime mortgage company but was sure a raid was imminent. It was 11:18 a.m. Jim continued to blog with the details of his comment made the previous Friday, “It is very easy to spread those rumors.”
By 11:24 Cramer posted on his blog “the bears are operating today on LEND. Fun to watch as LEND will be silent”. LEND was Accredited and Cramer was documenting what he saw was a bear raid orchestrated in a fashion he was well accustom to as a hedge fund manager himself.
At 3:19 p.m., Cramer reported in that the scheme used to decimate LEND shareholders. Cramer claims that through first hand contacts he received, the rumors surrounding LEND started with, “they spread the story that there was an FBI raid on the place and then that second curve was liquidating.”
Jim later blogged “these are all lies --but the hardball the shorts are playing is unbelievable.” Only to follow up by declaring, “with more hedge funds than ever, there are more lies than ever. If you can't handle a blatant lie about your stock and want to buy more, my suggestion: sell it.”
Looking back on the trading that single day in LEND, more than 10 million shares traded after the stock was dropped $3.00/share and each of those 10 million shares traded between $1.00 and $3.00 below previous market close.
Cramer claims the buyers after the raid were hedge funds in need of covering but who were the sellers? Were innocent investors sucked out of their investments by the “raid” tactic? Isn’t the purposeful dissemination of false information to the street as harmful if not more harmful than a spam e-mail sent over the Internet?
Wall Street is a reactionary body of individuals who typically respond to world events, social changes, weather conditions, and rumors as well as the business fundamentals being presented. Those that work in these markets are very aware of what will create a Wall Street reaction and without the possibility of necessarily creating a world event or changes in the weather, many are limited to moving markets by making up rumors.
Which now leads us to the house fire.
Wall Street insiders, those that create the reactions that we see externally, must be held to the same standards as any corporation that puts out a press release that may contain false or misleading information. But they are not.
The SEC this week stopped trading on 35 public companies because of an e-mail spam scheme that may have had no involvement in the companies whatsoever. The e-mail spams were these false rumors created by invested third parties. Since these individuals most likely are not part f the Wall Street system they must present the rumors directly to the public.
For Wall Street there is no need for the public dissemination of a fake story because you already have the inside track on those that move markets. The insiders. And what took place with LEND this week was no different than a spam e-mail except it was started by a larger investor with greater access to the pulse of the market and with greater opportunity to profit from the reaction. And according to Cramer, who was a former hedge fund manager, it happens all the time.
So lets stop with the public displays of beating on the small guys like they are the only crooks out there. The reality is, it takes hundreds of small crooks to create the level of fraud one large connected hedge fund can create. Unfortunately the SEC continues to focus on the 100 individually and not the 1.
I was going to contact the SEC for an opinion on this but decided not to as I have become increasingly nauseous over the lack of communication that comes from this agency. There are only so many times a tax paying citizen can listen to "no comment" from a federal employee on the taxpayer payroll.