The proliferation of unsettled trades in a firm’s stock disrupts the market’s ability to find the true market-clearing price for that stock. As a result, a troubled firm that comes under such an attack will be prevented from selling any stock into the capital market in order to raise capital to fund its ongoing operations. Similarly, healthy firms cannot sell additional stock to raise capital to fund their expansion. In both cases the parties engaged in this crime will shelter themselves under ideology that runs, “These are crappy companies that do not deserve to make it!” They forget that in a free market operating under the rule of law, such questions are to be answered by the market, not by the market with one side of it being ale to manipulate prices. 

Convincing the reader of this can be accomplished through intellectual argument, which I will provide in due course in this section.

For now, however, I would like to proceed by first offering links to mainstream journalism that describes how this practice can achieve its evil effects. I am arguing, I know, the economic equivalent of saying, “Martians walk among us,” and I have learned that it is easier to do so if the reader first sees that other capable, serious, mainstream publications have glimpsed the Martians too, before I try to expose their plot. So first, please consult these sources:

• This article from Bloomberg Magazine.
• This Bloomberg Special Report (nominated for an Emmy for long-form investigative journalism)
• This Wall Street Journal article from summer, 2007 .
• This article from Time Magazine, September 2008.

Next will come a series of case studies about various well-known firms that have been affected by failures-to-deliver in their stocks (“failures to deliver” being, as the reader knows by now, the residue of naked short selling).
For the last part of this chapter, I will explain why it has taken so long for the finance guys to understand this problem.
 

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I suppose I should write something brimming with wit and brio about the chart above, but since 500 people lost their jobs today as VeraSun declared bankrupcy, I think I’ll skip that and just state the point like the crescendo of a dry old economics class:

A price is a combination of of information about value and scarcity, and because some folks likely manipulated the scarcity in VeraSun, they likely manipulated the price. Thus VeraSun was likely deprived the ability to access the capital markets at the true market-clearing price for any securities offering for at least the last year, and maybe for longer. Say what some will about its business model, its adventures in corn futures, the virtues of corn-derived ethanol (not a big fan myself), etc., the point is that those capital allocation decisions are something the market should figure out, not “something the market should figure out but one side gets to sell and fail to deliver over and over and over.”

Interestingly, we don’t even know what happened with the fails during the third quarter because, as the SEC explains right now, tonight, on their website, in this choice little nugget:

“V.1.11. Can I obtain fails information?

“Currently, threshold lists include the name and ticker symbol of securities that meet the threshold level on a particular settlement date. Some investors have requested that the SROs provide more detailed information for each threshold security, including the total number of fails, the total short interest position, the name of the broker-dealer firm responsible for the fails, and the names of the customers of responsible brokers and dealers responsible for the short sales. The fails statistics of individual firms and customers is proprietary information and may reflect firms’ trading strategies. The release of this information could be used to engage in unlawful upward manipulation of the price of the securities in order to “squeeze” the firms improperly. “

Given that a couple million American jobs rely directly or indirectly upon the survival of Ford and GM, and given that they are running out of capital and are standing on the steps of Congress with tin cups in their hands, wouldn’t it be nice if we had a functioning capital market that was determining the true market clearing price of their equity?

Once again, the following are just the failures in the CNS system, which is some unknown (but small, I believe) fraction of the total:

I guess these car guys don’t have “the juice” with the SEC that their Wall Street counterparties have. Perhaps that is because fewer staff within the SEC dream of getting jobs in Detroit than in Manhattan.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

Click to see full chart

Dendreon Corp. is a Seattle, Washington-based biotech company that researches treatments for cancer. Their approach is novel in its dirty work is done by reprogramming the body’s monoclonal antibodies (I happen to have heard of these because my scrawny tomboy high school chum grew up to be a ridiculously attractive Ph.D. at NCI researching non-idiotypic monoclonal antibodies, at which point she gave me the brush-off: such is life).I have no idea if their approach works or not, but Dendreon has created a drug, Provenge, to  treat asymptomatic, metastatic, and androgen-independent prostate cancer. Provenge has completed two Phase III clinical trials, so someone thinks it works.

In any case, the decision as to the correct price of Dendreon’s equity (and hence, the terms on which it can raise capital to fund its research) is supposed to be made by the collective wisdom of investors expressed through a marketplace operating under the rule of law. In fact, however, for some length of time and to some significant degree, the pricing of its equity has instead been determined by some hedge fund guys who think cancer patients should die so they can take ski trips to Gstaad.

Note that this firm, which in most weeks sees 2 million shares trade, accumulated at one point 18 million failures.

Stock manipulators think not just cancer patients can die to pay for ski trips to Gstaad. They also think those suffering from various pulmonary and blood diseases can die, too.

InterMune, Inc., is a California firm that focuses on the research, development, and commercialization of therapies in pulmonology and hepatology. It generates over $50 million/year in revenue, primarily from Actimmune, for patients with osteopetrosis and chronic granulomatous disease. It’s candidate drug Pirfenidone is in phase III clinical trials for the treatment of idiopathic pulmonary fibrosis. Its candidate drug ITMN-191, a hepatitis C virus protease inhibitor, is is in Phase Ib clinical trials to treat patients with HCV infections. It has license and collaboration agreements with some of the most prestigious names in biotech: Hoffmann-LaRoche, Inc. and F. Hoffmann-LaRoche, Ltd.; Genentech, Inc.; Connetics Corporation; Boehringer Ingelheim International GmbH; Novartis Corporation; Array BioPharma, Inc.; Eli Lilly & Company; and ALZA Corporation.

Stock manipulators think people with such medical problems can die, as they express by manipulating the price of InterMune stock so that InterMune cannot fund its research by accessing the capital market at the true market-clearing price of its stock.

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In the interests of journalistic integrity, I should disclose that I don’t much like the people doing this.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“

This story gets told in pictures, mostly.

Take a Mercedes, stir in a couple hundred thousand dollars, and you get a car called a Maybach. Hedge fund guys in New York and Connecticut buy them.

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This is a Humvee. US military personnel drive them around war zones.

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This is an Improvised Explosive Device. Extremists set them up on roadsides in Iraq and Afghanistan.

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When a Humvee meets and IED, this is the result:

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Fortunately, there is a company in South Carolina called “Force Protection, Inc.” They manufacture “Mine Resistant Ambush Protected” vehicles (“MRAP”).

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Under their skin, MRAPs have V-shaped hulls that deflect bomb blasts, making them nearly impervious to IED’s. The last time I checked (June, 2008), there had been 300 IED attacks in Iraq against MRAP’s, and only one death (that, when the explosion caused a roll-over which killed the soldier in the gun turret).

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The Department of Defense has placed huge orders for MRAP’s. Force Protection revenue has soared, and they are nicely profitable.

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The stock price of Force Protection was holding its own….

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A natural move at this point might have been to do a secondary, that is, to sell some more of their stock into the public market, raising capital with which they could expand their production to keep up with DOD demand.  However, someone started naked short selling them:

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Force Protection is thus not able to complete a secondary, and remains unable to meet DOD’s demand.

Thus, this month more of these will be sent home from Iraq……..

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….. so that soft hedge fund guys can have more of these:

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If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?“