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Why This Micro-Cap Company Is Targeting Naked Short Sellers
Jeremy Frommer is an American financier and entrepreneur based in New Jersey. His career includes over two decades on Wall Street, working as a hedge fund and portfolio manager, and on the sell-side of the financial industry, building and selling two financial services companies. He is CEO of Jerrick Ventures
Micro-cap company Creatd has been taking steps to protect its shareholders from abusive trading practices such as naked short selling.According to the company's CEO Jeremy Frommer, naked short selling has become a toxic lending environment among micro-cap companies.Naked short selling has also been suspected in AMC and GameStop shares. See also:Why AMC Stock Could Be A Ticking Time Bomb For Short Sellers At Current Levels
Why Creatd Is Going After Naked Short SellersCreatd (CRTD) - Get Free Report is a holding company in the communication services industry that provides opportunities for brands and creators to multiply their impact across platforms, people, and technology.
The company, headed by Jeremy Frommer, has a market cap of $22 million and was recently delisted from the Nasdaq. Creatd failed to meet the exchange's minimum bid requirements because it trades below $1 per share. Currently, the company is traded on over-the-counter (OTC) markets.
Recently, Creatd drew the market's attention after an announcement that it would engage with market surveillance firm ShareIntel to protect its shareholders from naked short-selling activities.
ShareIntel uses a SAAS (software as a service) platform that provides public companies with access to shareholder position movement and settlement data.
According to Frommer, it's necessary to take a closer look if a company and its underlying stock are being targeted by illegal practices such as naked short selling. Furthermore, the CEO promises to escalate this topic to the top level in the financial markets.
"I intend on escalating this issue to the highest levels of the financial services industry to protect the integrity of the capital markets, especially the more vulnerable entrepreneurial, growth-oriented stocks," said Creatd's CEO.
Why Is Naked Short Selling a "Death Sentence"?During RHK Capital's recent Disruptive Growth Conference, Creatd CEO Jeremy Frommer spoke about the nefarious practice of naked short selling.
He mentioned that, from United Airlines (UAL) - Get Free Report at the turn of the 21st century to GameStop (GME) - Get Free Report and AMC Entertainment (AMC) - Get Free Report more recently, the practice of naked short-selling has wiped out the reserves of many American workers.
“It has destroyed their pensions and eliminated their jobs from pilots to bag handlers to grocers, to technologists and scientists working for life-saving medication.”
Also, according to the CEO, the illegal trading practice is weakening the financial strength of the underlying companies. This has led to a toxic lending environment.
“Who pays the price? [Naked short selling] can be a death sentence for a company irrespective of the company's intrinsic value. I know that it nearly killed my company," Frommer said.
Finally, Frommer reiterated that it is almost 2023 and still no authority has addressed the issue. His criticism also said that in the last few years, what had been just an agreement between a few stock loan departments has become an "institutionalized technology-driving money-making machine."
“And it does not matter if they get fined millions or even a few billion. They are treated as line items. It’s just another cost of doing business.”
Naked Short Selling in GameStop and AMC StockGameStop and AMC investors have long urged greater transparency across the market. And with their holdings being allegedly directly harmed by practices such as naked short selling, it’s not hard to see why.
One of the indicators that raise suspicion of odd trading activities is the failure-to-deliver (FTD) data. FTD occurs when one of the parties fails to fulfill its obligations on the settlement date.
However, this metric is closely associated with naked short selling. This practice generates so-called "phantom shares" that don't exist, potentially harming the liquidity of a shorted asset and diluting its share price.
As can be seen in the chart below, throughout 2-22, GameStop's shares failed to deliver and had high peaks between May and August, surpassing the 1-million-share mark on certain trading days.
When looking at AMC's FTD data, the numbers are much higher than GameStop's. Throughout this year, failure to deliver exceeded 9 million shares in a single trading session in June, and several other times passed 1 million shares — until as recently as November. See below.
With such high FTD numbers in AMC stock, the huge community of "AMC apes" on Reddit believes that the cinema company's stock has been hurt by predatory short-selling practices, such as naked shorting.
In the middle of this year, AMC created the AMC Preferred Equity(APE) unit as a non-dilutive dividend. Their "main" purpose is to add value to AMC, but APEs can also serve as a kind of share count for the AMC's total shares.
APEs may shed light on the use of synthetic shares by AMC short sellers — as AMC CEO Adam Aron himself pointed out:
The Bottom LineNaked short selling is certainly a controversial subject. Some market participants see the practice as not harmful and believe that its prevalence has been exaggerated. Others see the practice as a confusing and harmful trading practice.
Yet none of the issues regarding naked short selling in stocks like AMC, GameStop, and micro-cap stocks have been either confirmed or clarified by authorities.
However, the U.S. Securities and Exchange Commission (SEC) has announced a proposal for one of the most significant market structure reorders in recent years. The proposal involves improving the competition between market makers and payment-per-order flow practices.
Recently, market-making companies like Citadel Securities have been the subject of a lawsuit by biotechnology company Northwest Biotherapeutics (NWBO) for allegedly illegal trading practices such as spoofing. Spoofing is a manipulative practice in which a trader issues an order but then cancels it before it is executed.
Events like the meme craze have helped bring more public interest regarding trading structure. This is a good thing, because it's pushing authorities to take a closer look at these issues and hopefully provide more clarity as soon as possible.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)
