Here's the Transcript of the interview referenced by ElPrimero.

Part 2

Crime of the Century Part II: How They Scam Individual Investors

JOHN: Well, last week we created another flurry of activity with the first part of what is becoming a four part series called the ‘Crime of the Century.’ And we were talking about the phenomenon again of naked short selling. Bloomberg did a piece on naked short selling some time ago and you can usually find those segments up on YouTube if you want to watch them.

Today we’re going to talk about scamming individual investors because people have written us emails saying, “well, how do I know if they’re naked short selling what I’m involved with?” And there are other schemes out there designed to defraud investors. You know what has really impressed me the most is the fact that a lot of times people will invest and in theory the people with whom they invest are supposed to be, in a fiduciary way, watching out for their investors’ best interests but in reality they’re using their investors for their best interests and leaving the investor holding the bag. That’s the real immorality of the whole situation.

JIM: That’s what a lot of people have written about, that is called the ‘agency issue,’ where the person that you’re working with is working against your own interests and as we talked about last week there are a few bad apples on the Canadian investment banking side – not everybody, but there are a few bad apples. Some of them have been fined; in fact there is a current case going on right now and that’s what they do: They’re acting against their clients, the mining companies, and acting against their customers, the individual shareholder of the companies that they put them in. And it’s amazing how pervasive this is. We did an interview earlier in the year called Lost on Bay Street, with Alex Doulis who was an investment banker in the mining industry and he talked in a kind of tell-all book (he retired about 20 years ago) and I think a lot of people say “nah, this doesn’t go on.” I mean it is just amazing the deception that goes on here. [2:02]

JOHN: On a day-to-day basis you see this because you’ve got real time observation through a variety of different electronic tools. What we’d like to do here today on ‘scamming individual investors’ is give them an blow-by-blow inventory of how the scams function. So let’s look at the first one that’s called the Friday­-market-close-spoiling-your-weekend.

JIM: Anybody who has learned technical analysis is – you know, you’ve got short term trends, you have intermediate trends, you have long term trends. In other words, what’s going on on a weekly chart is probably more important than what’s going on on a daily chart, and also what’s going on on a monthly chart is more important – in other words, the monthly trend is more important than the weekly, the weekly more important than the daily. And this is a favorite technique and what they’ll do is, you know, a Friday before let’s say a holiday weekend or late Friday afternoon, you know, people are heading for the weekend, the last 10 minutes or 15 minutes just before the market closes, what you’ll have is a stock’ll be up – let’s say the stock is up 5% and then out of the blue 5, 10 minutes before the market closes comes a flurry of sell orders that come in and it’s done with naked short selling, or short selling. And what they’ll do is they’ll take this stock from being up 10% to being down 10% and close it on a negative basis. They’ll do it on a day let’s say that gold stocks are up, or the gold market is up or has been up all week, and they’ll slam the stock for a loss for the day and they’ll do it in the final minutes of trading on a Friday night. And what they’re trying to do here is manipulate the charts on a weekly basis and they’re trying to do it towards the end of the day when not too many people are paying attention. But it’s obviously done deliberately when they do this. [3:51]

JOHN: Well, at a break their, Jim, you were telling me that something just hit the wires – what was it?

JIM: On Friday a law firm just filed on behalf of Taser shareholders a lawsuit against the largest Wall Street firms, including Bank of America, Bear Stearns, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, UBS. The complaint accuses the defendant firms of engaging in a conspiracy to manipulate the market for Taser stock through naked short selling. And as we stand on this Friday, Taser shares are on the Threshold Security List – meaning that there’s a large amount. And the way it was discovered at their annual shareholder meeting, Taser has roughly about 60 million shares outstanding – and John, guess how many shareholders voted at the annual meeting?

JOHN: You know, I don’t know.

JIM: 80 million shareholders!

JOHN: So obviously this is becoming a known event or factor.

JIM: Oh yeah. It’s affecting shareholder meetings. I mean a company has 62 ½ million shares outstanding and 80 million shareholders voted at the annual shareholder meeting. So this is just a good example of how blatant this thing has become. And that’s why we’re calling it here the Crime of the Century. In Canada, it’s bigger than Bre-X; and this thing is just exploding as we speak. And guess what? The way it’s going to be solved is class action, billion dollar lawsuits. And John, that’s coming. And that’s the only way the crime is going to be stopped. It’s easy to catch these guys because there is a paper trail, but here is an obvious thing where this stock has just been on the naked short list –on the threshold list – and you know, it shows up in proxies, it shows up in shareholder meetings. This is just a good example. [5:33]

JOHN: So in the case of this happens, this isn’t just a broker who’s representing somebody and just happens to have shares to buy or sell late on a Friday, like “towards the end of business, okay, we’ll place these trades for my client.” This is really a planned strategy because you can see it suddenly come online on a Friday on a regular basis.

JIM: Yeah. I mean it’s done – it’s done to manipulate, it’s done to change chart patterns, it’s done to scare investors, and the reason it’s done to manipulate the market and the reason they’re doing it is because if you called up a broker and let’s say, you know, your stock is trading at a dollar and you say, “look, I want to sell 40,000 shares, the gold market has been up, the stock is up 10% today and you call up your broker. You know, just think what you’d be doing to your broker if the stock was up 10%, he takes your entire order and waits till the last 10 minutes before the market closes and puts and sells your stocks down, taking your stock from up 10% for the day down 10%. I mean you’d be firing your broker. So this is obviously done with the objective of manipulating and starting a selling trend in the stock and it’s always done when people aren’t really paying attention. I mean most traders by the end of the day, you know, the last minute of closing, nobody has got their eye on it so it comes out of the blue and it’s done intentionally to take the markets by surprise; and what they do is they take the stock from being up and they take it down for the day to a loss position. [7:06]

JOHN: Okay. So let’s go to item number 2. Last minute drop down. This almost sounds like the same thing.

JIM: Yeah. It’s a similar technique that they’ll use, but what they do is instead of doing this on a Friday just before the market closes, they’ll do this in the last 30 seconds of trading for the day, or the last two minutes before the market closes. The stock can be up a couple of pennies and then what they’ll do – and you can see this – they’ll do a cross trade between themselves. In other words, if there is not a bid there – in other words, there is a bid where people are actually saying here is a price where I want to buy this stock and then there is an ask price that’s where sellers are willing to sell it. If they don’t see bids that they can hit, they'll do it internally within themselves and they’ll create the bid and they’ll hit themselves; and they’ll do it usually with 100 shares, 200 shares and what they’ll do is they’ll knock the stock price down from being up from the day, or they’ll knock it down a couple of cents or sometimes even knock it down quite a bit. But it’s always done within the last couple of minutes of trading and so we call that the ‘last minute drop down.’ It’s very similar to spoil-your-weekend technique that they use 10, 15 minutes before the market closes on Friday. [8:21]

JOHN: Is there any way to defend yourself from that?

JIM: We’re going to get to it. I mean, yes there is – you can turn this kind of activity into the regulatory authorities and we’re going to post on our website the officials that you can contact in Canada and also the SEC on the US side. So absolutely, there are things that you can do when you see this kind of activity. But then we’re also going to talk about how you can take advantage of this when they know that, you know, the bad apple investment banks are trying to manipulate the price and steal from the shareholders. [8:54]

JOHN: Carpet bombing is the term that is used. What does that mean?

JIM: It almost reminds me of – you know, remember in World War II when the Allies were really just carpet bombing a whole city towards the end of the war. This is usually the prelude to a short selling raid on your stock. It’s usually done – the bankers will do this ahead of a financing because they’re trying to drive the price down. And what’ll happen is out of the blue – let’s say a stock trades – I don’t know – 30, 40, 50 thousand shares on a daily basis. All of a sudden, out of the blue, out of nowhere – it has nothing to do with news – they will come in and one day sell 500,000, 600,000 shares, 800,000 – I’ve seen almost a million shares – and they will just crush the stock. They’ll take it down close to 20%. And investors are saying, “What happened!” And people are looking around, calling the company, “Is there bad news. Is there something wrong with the company?”

And how it is done, is it’s done in a selling fury and what they’re trying to do most of the time you’ll see this activity done by the bankers with the hedge funds prior to a financing of a company. I mean it is absolutely common place in the industry today. And what you can usually do within two to three weeks of this event taking place, watch for the short position to be reported because 9 out of 10 times this is not the way you would sell if you were executing – like let’s say a brokerage firm called up their clients and said, “Look, the stock has had a run up; we recommend that you take profits.” This isn’t the way you would be executing a trade on behalf of your clients. This is done with the express purpose of manipulating the stock, starting a selling run on the stock; and they do it with heavy volume and they crush the stock, wiping out, taking out all the bidders that are out there and they’ll crush the stock. And it’s done with heavy volume. That’s what I call ‘carpet bombing.’

And also, another thing that you can check with. In addition to the short position as a check against this, also look for a financing to be announced by the company. Usually you can tie the short position and you can tie the financing of the company with the carpet bomb. [11:15]

JOHN: Okay. There is something here called the ‘morning pop,’ which almost sounds like the opposite of the last minute drop down.

JIM: The fourth manipulation technique is something they call the ‘morning pop, end of the day drop.’ What’ll happen is they’ll get a little activity going in the morning, the stock is up and they’ll sell into the morning rally or they’ll short into the morning rally. Okay. Now, they’re shorting – the stock is going up in the morning – what they want to do is close out their positions at the end of the day at a profit and so at the end of the day they’ll start covering their shorts by hammering the stock and they’ll do a number of techniques – the last minute drop down is usually the favorite one that they’ll use in combination with the morning pop, end of the day drop. And what they’ll do is a couple of minutes before the market closes, the last 10 minutes of the market, all of a sudden selling emerges out of nowhere and especially if by the end of the day, buying interest in the stock has sort of thinned out. So that’s usually done with a combo, with the last minute drop that they use to take the stock down because then they cover their short positions; also their short positions are in the black and they’ve made a profit. [12:25]

JOHN: This is starting to sound musical. It’s the ‘drop, the pop and the hand off’ is what we’re talking about.

JIM: It almost sounds like a Top 40 song.

JOHN: It sort of does, or some sport. Anyway.

The ‘hand off.’ Now, this one as we explain it looks like somebody has got to be collaborating on this to make this one work. This isn’t just a one side raid into the market or something like that.

JIM: No. This one usually involves collusion between a couple of the investment banks and the hedge funds – the bad apples – because it takes more than one to pull this off. What will happen is let’s say a stock is traded on – I don’t know – the Toronto exchange and it’s also listed on the AMEX. What will happen is you’ve got two or three parties that are working together in collusion on this. One party will sell the other party a stock. Let’s say that investment bank A sells investment bank B 500 shares. And what will happen is then investment bank B will immediately turn around and let’s say sell those same 500 shares they just bought on the Toronto exchange, they’ll sell them on the AMEX exchange. And they keep doing this – back and forth, back and forth, back and forth. And what happens is it generates all of a sudden heavy selling activity that’s being generated on both exchanges and they go, “Oh my goodness! People are dumping the stock.” And that’s to flush people out, get other investors to where they’re fearful that “oh my goodness…,” all of a sudden there is a lot of selling coming into the stock, it’s on both exchanges, traders see that; and what they’re doing is trying to shake the apples off the tree and they’re trying to generate a lot of selling. But this one takes collusion between two or three investment houses to pull this one off. [14:12]

JOHN: What this sounds like is some kind of a coordinated arbitrage: buying on one exchange and selling on another. So what would make this potentially unethical?

JIM: Well, on the surface I mean there is nothing wrong with arbitrage. If you can buy a stock cheaper on one exchange and sell it on the other, there is nothing wrong with that. That’s just arbitrage; that’s what arbitrage is. But when you see the same investment house selling to another investment house and you see these two working together, if investment house A was really trying to arbitrage, why wouldn’t they just instead of selling the shares on the Canadian side, why wouldn’t they just go directly to the US side and sell the shares and make the money themselves? In other words, why sell it to investment house B and then B sells it on the other exchange. What they’re trying to do is generate heavy selling activity and generate enforced selling; and there is nothing that gets people’s attentions and scares investors when they see the price of their stock getting hammered and going down 10% and it’s being done on heavy volume – and especially if it’s being done on both exchanges. So that’s why it’s beyond arbitrage; it’s just another technique where they’re trying to shake investors out. And normally you’ll find that when they’re doing this in the stock, you will find that the stock they’re doing this in has a large short position. The same thing as I mentioned for example when they carpet bomb a stock, you’ll normally find a large short position, or the stock – all of a sudden a naked short position is reported on the exchange. [15:48]

JOHN: Okay. This next one is called the ‘whopper.’ And it probably doesn’t sound like hamburgers I’m going to guess – nothing with cheese on it and maybe some horsey sauce or something like that.

What are we talking about here?

JIM: This is another manipulation scheme that they use and let’s say that during the day that the stock normally trades, the volume in the stock is 25,000 to 50,000 shares. And what they’re trying to do – let’s say buying starts to come into the stock – you know, just small investors buying 500, a thousand, two thousand – all of a sudden, out of the blue someone puts an offer at the tape, 100 thousand or 200 thousand. And all of a sudden – the stock isn’t trading heavy volume and somebody puts an offer on the tape – a huge offer that is just two or three times the volume of shares traded. That is done to discourage buying and all of a sudden people say, “oh my goodness, did you see that offer of 111 thousand, 110 thousand…” what they’re doing is they’re trying to discourage buying and say, “oh my goodness, somebody big there, some institution is selling.” What they’re doing here is trying is trying to discourage and manipulate the stock priced by discouraging buyers and then encourage them to sell because there is a big seller here. So what happens is the little guy sees that and says, “oh my goodness, I’m not going to buy. I better sell now because there is big selling coming into this stock.” So once again, this is just another form to scare the little guy and pick his pocket. [17:27]

JOHN: This next one sounds interesting: ‘Bash and cover.’

JIM: At the same time that these guys are manipulating this stock, what they’re going to do – now remember, what they want to do is scare people. In most of the cases they’ve used naked short positions to do this because they couldn’t do this selling shares for client accounts because they would get sued if that’s the way they executed a sell order for a client. So it’s done with naked short selling. Now, they’ve done this. They’ve gone in. They’ve taken a naked short position to drive it down. Now what they have to do now is they have to cover their short position. So how do you cover? Well, you’ve got to scare people out of the stock. So they have brokers at the firm that they pay – they’re called professional bashers – and what they’ll do is they’ll start showing up out of the blue – good results come out and all of a sudden you get these nefarious characters that show up on a chat-room and they start putting out false information. I’ve seen them where they said the companies bankrupt or they say the drill results are phony. They start impugning the management, board members, and they’ll start attacking the company, the management of the company, the board of directors and they start putting out false, misleading information. And the purpose of which is to create negative sentiment in this stock - because remember, when you’ve got a naked short position you’ve sold shares, you’ve sold counterfeit shares that you don’t own; and so eventually you’re going to have to cover that because it’s reported on the exchange. Well, how are you going to cover and make a profit? You’ve got to scare people out and especially the little investor. And so what you’ve got to do is you have these professional brokers that go onto these chat-rooms and then what they do is they start putting just a series of negative stories that call into question the company and they start scaring it. And most of them it’s rumors, it’s false, it’s innuendos; but the express purpose is “we’ve shorted the heck out of this stock, now we want to take profits, so we’ve got cover our short positions.” [19:40]

JOHN: Didn’t people do something like this in the late-90s. As I recall, there was some kind of scandal out there. Some people went to prison. I mean what about Charlie Sheen in the movie?

JIM: Well, it happens. There were a couple of individuals in the late 90s that were going into chat-rooms and they were using the chat-rooms to manipulate the stock. Yeah, you can go to prison for this. In fact, you can get sued over this. It’s libelous, especially when you impugn the character of management, board members or the company itself. And especially when you’re putting out false information with the idea of profiting from that false information by your short position. This is a felony. And there was a recent case I think in the Bloomberg special where they talked about a hedge fund that was doing this and they got caught and now the people in that hedge fund are doing prison time. [20:28]

JOHN: Probably the first tip off in the whole thing is the fact that somebody shows up on one of these blogs or in the chat-rooms and then begins to pump out all of this negative information. The first thought you would want to have is doesn’t this person have a life. I mean, you know, it’s okay to be there for a couple of hours a day, or an hour or so, but as soon as they do that then you have to suspect that there’s something else going on. But it’s amazing how people tend to fall for this stuff.

JIM: Oh, absolutely because you’re right. The first question is you should ask: Why is this person doing this, saying all this negative stuff, if he doesn’t own the stock why is he spending all this time on this stock chat-room; what’s his motivation? His motivation is to put out false information so his short position can cover by scaring innocent investors by putting out false information. So John, this is a felony offense because what you’re doing is you’re trying to manipulate the stock price for the benefit of covering a short position – both of which are felonies. [21:34]

JOHN: So why isn’t this policed? Why can’t they do that?

JIM: I mean it is so widespread on the chat-rooms. It is so widespread – it’s been going on for decades in terms of putting out rumors and stuff like that. You always heard this with shortsellers, but you know, the internet has now given immediate response for the shortsellers and the criminals. They now can use the internet to their advantage to spread false information. [22:01]

JOHN: Let’s pick some real world examples about this. As a result of our show last week, a new blog came out on Stockhouse which is one of the chat areas and let’s read what was in there because this is a prime example of exactly what we’re talking about.

JIM: Okay. I’m going to read this. This is on the Stockhouse board. They’ve got a new blog called junior mining investors robbed by Canadian investment banks. And this was a blog post – in fact, it was one of the first ones. And it goes:

Hello, as many of you are aware I am a paid basher. As childish as bashing might seem on the surface, a lot of money actually exchanges hands based on the work we do. I work for an investment firm based in Toronto, Ontario, Canada. I worked in cooperation with several others and under several aliases in several online investment forums

And he lists his different monikers.

To make a long story short, I have had an epiphany in the past few days. I watched the movie Fight Club and as brutal as the movie is on the surface, it actually caused me to question a lot of things I do or have done in my life. The next day I was involved in a single vehicle car accident which caused my vehicle to roll over. I walked away from it all but it got me to thinking: I only live once. Is this what I want for my life? Is this what I’ve always wanted to do? I’m not even proud of my career or myself. I say that I’m a stockbroker, but that’s a lie. We are basically paid con men. I quit today, no questions asked. I just walked out. I’m 23 years old and this is not what I want out of life. The scheme works like this. Be aware of it so you can guard yourself. Our company monitors undervalued companies with strong assets and strong potential. When a company, for example, reaches an overbought situation, our company begins selling shares we do not own in the hopes of purchasing these shares at a lower price later on. As the share price dips, our company purchases these shares for a cheaper price at a lower ask price. That is where we come in. We bash the stock online to try and further the negative sentiment so that the stock gaps down and increases our profit margin. This type of activity is called naked short selling and should be made to be illegal. Our firm is a well-established one that deals out shares that we don’t own and then sends out an army of online rats to undermine the company’s successes to drive the price down.

And the he goes on and talks about that they get paid – and when you respond to a basher you’re actually helping him. He goes here:

Learn how professional bashers are paid. When you reply to bashers you give them an opportunity to earn approximately 5 to $7. The service agreement that they enter with their employers state: Their messages will be monitored for content, profanity and lies – the more the better. But overseers and the like don’t have the time to check all their bashed messages. Only occasional spot checks are done. Those who manage the basher will generally read the headlines to see if a basher is replying to other posters by name. That tells them the basher isn’t just posting blindly or repeatedly the same message over and over, since they won’t get paid for those. True to form, a basher will put the bite on anyone, even their unscrupulous employers. A basher will attempt to milk three to five replies per post at one to two dollars each. This way, the bashers spreads negative influence to as many stockholders as possible.

And you can read this post. I’m not going to get into anymore but this is just an example and anybody who is in this sector that has gone to a chat-room obviously has seen many of these guys show up in a stock, bashing management. And it’s funny. On the Canadian side you can get sued for libel much easier than you can on the US side. I mean it’s much easier to libel somebody, so a lot of times they’ll show up on the US chat-rooms on Yahoo and it’s one of the reasons a while back we interviewed the proprietor of a new forum called Agoracom.com and that was strictly to eliminate these bashers because they know these bashers are brokers paid by shortsellers to influence the price of this stock. That’s how pervasive this is. It’s almost equivalent to the mutual fund scandals that were revealed a couple of years ago where mutual fund clients allowed their professional clients an unfair advantage against regular shareholders. [26:50]

JOHN: Jim, I want you to check your trade screens for now, I can’t name the company here but tell what you see happening on there.

JIM: We have a combination here of manipulation technique number one, spoil your market. This stock has been up 10% for the day and it’s a combo of spoil your market and a last minute drop down. Here we are – as you and I are talking, there are two minutes to closing market and all of a sudden they’re knocking out all of the bids and driving the price of the shares down. So we’ve got the spoil your market weekend, and we’ve got the last minute drop down occurring as you and I are speaking. In fact, we’ve got – let me just see here – one minute before the market close I’m monitoring this in two markets. This company is listed on two exchanges and it’s amazing, we’re talking about it and I’m watching it unfold as we talk. [27:47]

JOHN: It’s interesting we look at this – I’m not going to read person and place and everything –

Jim and John, I don’t want to take up time on the questions of the Financial Sense Newshour but I do want to address Jim quest of blasting the naked short carpet bombing. You are wasting your time and money. The Vancouver and Montreal stocks exchanges and to some degree the Toronto as well are just not geared to give you the high ethical standards you want to impose on everyone. You cannot change the system. You will go broke trying. You do not have the money. What is ethical here in the US cannot be imposed on a system which has been in operation for decades. Besides, I can hear it right now: Who does this Yank think he is? Let’s fix his clock. You can bet on it once you are blacklisted. They’ll succeed.

Well, the email goes on:

Some time ago you had a guy on your show who talked about Murray Pezim. He was the guy who was the inventor of this practice. There were a group of us in our late 20s who had studied Murray’s tactics in the 50s. Murray was an habitual guy who operated basically the same way in every promotion he took on. We searched the Northern Miner, Financial Times, Survey of Mines as soon as it came out for companies that Murray was in and played the game, not on the basis of what the company had but on the basis of how we knew Pezim operated. I do not know the ratio, but I would say only one prospect in 60 will ever become a mine. But the 59 Get-Rich-Quick Uranium Ltd.’s owned by a crook want financing, so they go out and hire a guy like Pezim offering him 10 million shares at 25 cents and give him a directorship which he will put on hold. Say the stock is selling at 25 cents and the company has 60 claims 10 miles west of the Denison ore body. They have done surface scratching and would like to do some diamond drilling. The reason Pezim had to leave Toronto in the night and appeared subsequently in Vancouver in the 50s was: he used some assay results from someone else claiming they had come from his latest promotion – a common practice in penny mines. We usually hopped on Pezim’s stocks between Christmas and New Year’s and got out early March and shorted it late March, early April covering late September. By far the best and most successful effort you can use to help would be in my opinion to tell the US public about the companies which are about to go into production, such as you were doing now [JOHN: And he lists a bunch of them], interviewing the executives of these companies and giving us your opinion on the economy. [30:09]

JIM: The first thing that we’re trying to do here in these seven manipulation techniques is at least warn people when they’re fleecing and when they’re going to try to pick your pocket, so you can be aware; and then I’m going to tell you how to take advantage of it in just a moment. And I guess the other thing I sort of disagree here in the age of the internet information travels. I was amazed at the response to last week’s program. You’ve seen nothing yet. Wait till you see what’s coming next week, and the week after and the week after that. So this information is getting out there and hopefully if enough of this information gets out and you’re going to hear from in just a minute a clip of Harvey Pitt who used to be the head of the SEC giving a speech in Washington about this practice, and also a Senator from Utah, Senator Bennett who just gave a speech on the Senate floor on this issue. So as more and more people hear about this, hopefully as the mainstream picks up on this, eventually it’s going to be picked up by regulators and perhaps a political person wanting to make a career and that’s how you bring about change. [31:14]

JOHN: And we also look at the fact that this whole issue of really a crime of naked short selling has gotten the attention of Bloomberg already, that of a former chairman of the SEC, and some people in Congress are already beginning to talk about it, so there is already attention being paid to it. And as more and more scams emerge on Wall Street – or at least more and more trouble – I think people will be more and more inclined to listen to things that they can prevent.

JIM: Sure. As this information gets out on the internet and so investors see this kind of activity occurring in a junior stock, at least they’ll know what’s causing it. They’re not going to say, “Okay…” the last thing you want to do is you own the stock, you panic, you go to the chat-room and there’s some basher trying to scare the heck out of you. You’ll be aware of the crime they’re trying to commit and you’ll recognize it for what it is. There is a lot of this information. All you have to do is type in the name of a brokerage firm and then put in “naked short selling” next to it and just google it and you’ll see. I mean there is a case here that was reported – there’s a grand jury indictment out of North Carolina that involves seven BC brokers – this was reported in the Vancouver Sun on April 29th of this year. Last year there was one of these firms that was fined for naked short selling, so I mean the information is out there. One of the ways if you’re going to be in this sector, we recommend that you go to Stockwatch, Stockhouse – you get a Level 2 where you can see where the bids and asks are, you can see who is selling the stock and the way that they sell it. You can see who is buying the stock; you can accumulate for example in a month, you can say, “all right, who was the largest seller of this stock?” And this is what I’m teaching mining companies where I can show them how the investment banks are doing this to their stock and they’re trying to drive their stock down ahead of the financing. So there are programs that you can spend and you can get this information.

So, John, let’s go now to Harvey Pitt, who is the former head of the SEC in a speech that he gave in Washington towards the end of last year regarding naked short selling:

First, SROs and the SEC need actively to pursue ongoing chronic and serial short selling infractions. Next. Meaningful penalties have to be imposed for violations of existing Reg SHO requirements. Third, the SEC should define and punish as fraud, abusive naked short selling practices. Next. The SEC should act quickly and forcefully, otherwise, state regulation is more likely. And as I’ve already said, I don’t think that’s the best way to go.

Our capital markets work because they’re governed by uniform rules from Portland, Maine to Portland, Oregon. State regulation means fragmented requirements, practices, and procedures, and could cause loss of our competitive edge. Next. The SEC should eliminate the option market maker exception. It isn’t demonstrably of any value, and it risks facilitating illegal activity. Next. Reg SHO should impose firm locate requirements as a condition precedent to all short sales. Next. Reg SHO should cover securities that are also traded in the pink sheets. Naked shorts occur in the shares of small, thinly traded issuers, and those are likely to trade in the pink sheets. Next. Chronic and unjustified violations of T+3 settlement rules should be punished. Next. Before brokers are allowed to borrow margin shares, they should make clear disclosure and give investors the opportunity to opt out. Next. Securities lending should occur openly and transparently at arms-length prices, enhancing returns, increasing efficiency, promoting valid short selling, and curbing abuses.

Next. The NSCC should allow members to settle borrowing and lending activity through these facilities that I’ve just mentioned so accurate accounting and data is available to market participants and regulators. Next. Shady activities thrive in shadowy market corners. Exchanges in other markets should be required to report the securities on daily threshold lists and aggregate daily volume of fails for each such security. And, finally, Form 13F, institutional investor’s reports, should disclose both short and long positions. That would provide issuers and investors with a better understanding of trading activity. [37:04]

JIM: Here was the former head of the SEC. He is talking about how bad this has become. And you notice one of the first things he said: you’ve got to impose meaningful penalties. And you know, there was a firm last year that was caught doing this in Canada and they were fined $75,000. And I mean that’s like handing out a parking ticket to a bank robber. As long as the penalty is only a parking ticket, you’re going to see more banks robbed – or in this case, more companies and shareholders robbed. And we’re going to get into the solution; a plan that should be adopted in terms of legislation and it would involve penalties that are equal to 100 times the amount of fees that the bankers collected in doing this. That’s because the bankers are the gatekeepers. A hedge fund would not be able to get away with this kind of activity if it was properly supervised by the banks.

Secondly, like Sarbanes-Oxley, you put the CEO of the investment bank in prison for 10 years and exchange his pin-stripes for orange stripes. And so I want to get ahead of myself because we’ll be talking about this in part IV because next week we’re going to have a law firm that is a specialist in this kind of activity and also class action lawsuits. And we’re going to talk to him about these activities in terms of how it goes on, how it’s manipulated and what are the legal consequences for people caught doing this kind of activity.

But it is starting to catch on, more people are starting to notice it. [38:39]

JOHN: And it’s not just the SEC. We now have prominent senators – Senator Bennett from Utah I would say talking about this on the floor of the Senate. So there is now attention being paid to it. And as I said, if things tend to get worse just even economically there will be a lot more motivation for them to take notice and do something preemptively so to speak rather than waiting until another debacle erupts in their faces.

JIM: But you know, John, that’s here on the US side. On the Canadian side they need to play catch up. I was at a gold show when I first became aware of this back in late 2002 and 2003 and I can remember talking to a mining company executive who was made aware this his investment bank was doing this to his stock and basically they ended up not doing business and there was a little bit of an altercation. This was at the San Francisco gold show and I can remember the mining company telling me that the investment banker said, “you know, we’re untouchable.” And it’s amazing because in the April 29th story in the Vancouver Sun involving seven Canadian BC brokers who were caught in this illegal activity, one, the Investment Dealers Association of Canada was hot on the trail of one of these firms in regards to this allegation. So what they did is they appointed a public accounting firm to supervise so that they wouldn’t engage in this kind of activity. And lo and behold, even when they were supposed to be supervised by this accounting firm the firm still went ahead and did it. In other words, crime pays; if you can rob a bank and all the fines are going to be equivalent to a parking ticket, you’re going to get more of the same activity. And so here you had the BC authorities supervising a firm for engaging in illegal activity and they hired a public accounting firm and in the midst of this they catch them doing it again – even when they’re supposed to be under supervision. This gets back to the story that this mining company told me. He goes, “We’re untouchable. You can’t touch us.” This is just a blatant disregard – it’s been going on for two or three decades and that is really the attitude that many people have today. [40:57]

JOHN: Well, maybe yes and no, as far as the untouchability. Maybe untouchable today but as we said, there is more attention being paid to this.

Here is the transaction: Broker A shorts 1,000 shares. At the end of 13 days, which is the period he has to produce the shares, he has been unable to find any--probably hasn't even looked--but he has this requirement under the SEC rule to produce 1,000 shares. So he goes to broker B and says quietly: “Sell me a thousand shares.” Broker B says: “I don't have any.”

Broker A says: “It doesn't matter. Sell me a thousand shares so I can cover.”

Broker B: “All right. I will sell you a thousand shares so you can cover. And there will be no passage of money. This is just a deal between the two of us – a rollover.”

At the end of 13 days, broker B has to deliver a thousand shares, so broker A sells the same 1,000 phantom shares back to broker B, and they ping-pong these back and forth for as long as they want.

So you can have a situation where people are selling shares that don't exist, taking commissions on the sale, and the profits of the sale, and never, ever having to produce the shares." [42:22]

JOHN: That was Republican Congressman Robert Bennett from Utah, describing on the floor of the Senate exactly how the naked short transaction takes place.

JIM: Yeah, they just keep rolling it over from one broker to the other. I’ve seen junior mining stocks remain on the naked short list, John, for literally months.

JOHN: You know, when you really look at it and we’ve boiled it all down, it’s a fancy series of transactions but it just boils down to basically counterfeiting shares that don’t exist. They’re created in phantom space. As we conclude this whole segment, let’s listen to Wes Christian from last year’s Bloomberg special on this. This is just a very short cut.

This same conviction motivated Patrick Byrne to hire 6’ 6” John O’Quinn, one of the few attorneys in the country tall enough to look him in the eye; and by reputation a giant killer. In Texas, they call O’Quinn the Billion Dollar Man because he won billion dollar judgments against makers of silicone breast implants, and Phen-fan and against big tobacco.

“The deal is rigged so bad I can make this statement safely: You have more chance to be treated fairly in a casino in Vegas than you do in the stock market. The securities industry has things rigged where they can deal from the bottom of the deck regarding your stock and your money.”

O’Quinn’s co-counsel is another Houston-based attorney, Wes Christian. Together they represent some 20 US companies that all claim damage from naked short selling, including Overstock, Sedona Corporation and Taser. They represent Overstock in a lawsuit seeking 3 ½ billion dollars in damages from Wall Street’s biggest prime brokers, accusing them of executing short sales with no intention of delivering stock, causing Overstock’s share price to drop. All the accused had declined comment on pending litigation.

“If you’re a short seller, and you abide by all the rules governing short sales, then fine – It’s legitimate, it’s legal, it’s proper. That’s not what is going on on Wall Street. What’s going on on Wall Street in our cases – and we’re now seeing in many other companies is a rigged system.”

“Which is just stealing is all it is. This is all an example of stealing.” [44:18]

JOHN: You know, as I go down this list, we talk about spoiling your weekend (which is really a market-close type of tactic), last minute dropdown, carpet bombing, the morning pop, the hand off, the whopper, and bash and cover; for the average investor this is like swimming in a shark-infested ocean. How do they hope to survive in the midst of all of this?

JIM: One of the reasons we are trying to expose these seven techniques is so that if you are an investor, let’s say you’ve bought a few shares of a junior and you see these manipulation techniques that “ah,” you’ll say, “I know what they’re doing.” And so they’re not going to frighten you – or if you see a basher show up on a chat-room and all of a sudden he starts to knock down the company, say bad things about management, its board of directors, the project, the drill results etc. And so that you can be made aware of it.

But you know, the other thing is you need to learn to buy your shares much like the smart money commercials. In the futures market you have the commercials and then you have the non-commercials; and the non-commercials tend to trade in the futures market, they’re more momentum based, they just jump on anything that’s going up. But if you watch the commercials – these are hedgers, people that may be using the product – these are the smart guys, the smart money in the market and usually what’ll happen is when something starts to trend down – let’s say a particular commodity like oil is trending down and it’s selling off – what will happen is – let’s take the reverse position first: Something starts to go up and it’s really going up in price, a commodity, let’s say it’s oil. What the commercials will begin to do is they will begin to sell as it keeps going up – not all at once, not trying to smash the price of the commodity because they would lose their profits much like these bad apple investment banks and their hedge funds try to manipulate the stock. But the commercials will come in as the price is going up, they will start to scale in their sell orders. Conversely, when a commodity is in a down trend what you’ll see them do – they don’t go in at once and buy and say, “Hi, we’ve picked the bottom. This is it,” and they blow their wallet and they buy. What they’ll begin to do is they’ll start scaling in and quietly accumulating as it goes down.

So the way you work against these illegal shortsellers and naked manipulators who are basically trying to pick your pocket, what you do when you see this kind of activity, whether it’s 15 minute close on Friday and they start to take the stock down – it was amazing, John, while you and I were doing this show it was actually happening with one screen I had of a particular company on my Bloomberg. And they were doing this in literally the last two minutes of the close – and the Friday-market-spoil-your-weekend and the last minute drop down. But if you see this kind of activities occur – let’s say you have a Level 2 with Stockwatch or Stockhouse, then what you do is, okay, they’re manipulating the stock, what you do is you have a bid at one dollar, remove that bid and lower your bid and force the shortseller to go to your bid. In other words, lower your bid and make them sell you their shares at a lower price because there’s greater risk to a shortseller if you keep forcing him to come down lower and take your bids because that way you’re buying at a lower price.

But more importantly, if you see this kind of activity at least now you’ve been alerted to it and you understand them because, John, you seen it, we’ve gotten a lot of emails on the show “I don’t understand XYZ company reported great drill results; they just reported a resource update and they’ve increased the amount of ounces by 250,000 ounces and the stock goes down. Now when you see this Friday market close and they try to smash the stock or two minutes before the market closes at the end of the day. They’re taking the stock down, it’s up. Or carpet bombing – all of a sudden out of the blue huge volumes of heavy selling comes in. When you see that activity you now know you can check with for example the short position; within the next two to three weeks, you know you can check if the company is doing a financing so you’ll spot their investment banker selling the shares short in heavy selling prior to the financing.

So now you’ve been alerted to these kind of things, now you can use that to your own advantage and then we’re also going to post on the website the complaint section for the SEC and last week we didn’t post the Canadian’s side so now we’ve got the Canadian side so you can report this activity in the stock. It’s amazing, John, I’ve already gotten calls from probably 10 mining companies and I’ve already set up three of them, how they can monitor – these are companies that are going to be needing financing in the next six months and I told them how they can spot this kind of activity with the bankers that they’re talking to and force the bankers to sign an agreement that they have not in any way engaged in short selling. So this is the kind of stuff – there are steps you can take and I do believe in the end right triumphs over wrong and I think this is bigger than Bre-X and this is a wrong that is in bad need of correction.

And hopefully, as we continue this series over the next three weeks it’s going to bring enough public attention to it either from the mainstream media or it’s going to bring enough attention, you know, like I mentioned I cited a report last week where the underperformance of Canadian exchange compared to the AIM for this very reason and money is now leaving Canada for this very reason because of this activity because people know that this exists. And so, hopefully this is going to go higher up and especially if the media catches on to it and next week as I mentioned we’re going to have a trial lawyer on who specializes in naked short selling and it will tell you what your rights are and we’re going to talk about the legalities of it and what can be done about it and that’ll be coming up next week. [50:54]

JOHN: You’re listening to the Financial Sense Newshour at www.financialsense.com.