Hi Jimmy P,
Sorry I’m so slow in answering your question. With all that is going on in the Naked Short Selling world with REDDIT and such the phone won’t stop ringing. Like I said before, I think it is prudent NOT to market Medinah based upon any expected “mother of all short squeezes”. This is NOT to say that I don’t believe there is a significant naked short position out against Medinah right now, however. Despite the corporate governance miscues of a prior management member, I still feel that Medinah is probably the best documented naked short selling attack we have to date barring perhaps Overstock.com due to what they learned during the discovery process of their litigation efforts. As you might suspect most of these legal records got sealed except for some E-mail intercepts which educated us as to HOW Wall Street did its thing in the ANSS arena.
Here are some truisms regarding ANSS (Abusive Naked Short Selling). I coined this term about 8 or so year ago in order to differentiate legal NSS from ANSS. Many commentators and analysts continue to incorrectly assert that “all naked short selling is illegal”. This is not true but admittedly it’s not too far off. Legal NSS occurs when (according to the securities laws) a “bona fide” market maker short sells (without making a legal “borrow” thus making the short sale “naked”) a moderate amount of shares into buy orders in a market characterized by buy orders TEMPORARILY dominating over sell orders. A truly “bona fide” MM would then cover his naked short position as soon as sell orders dominate over buy orders causing a downtick. This is when these theoretically “bona fide” MMs are typically nowhere to be found. Why? It’s because ANSS predictably MAKES money in a pretty much risk fee fashion while covering an existing naked short position COSTS money. The money being made/rerouted is that of the purchaser of the nonexistent shares that were sold by the MM. Covering can cost a lot of money if these market manipulators misdiagnosed a company as a scam when it actually did have the goods all of the time and it never was on its corporate deathbed as was PERCEIVED. The weak link is that market makers who were ENTRUSTED with a vastly superior view of the buy and sell orders queuing up are put on the honor system as to promptly covering any naked short position on the next downtick after it was established. After all, what could possibly go wrong with handing MMs a vastly superior view of the markets and then TRUSTING them not to leverage this advantage over Main Street investors? OOPS!
Truly “bona fide” MMs are given an exemption from having to make a “pre-borrow” before making a short sale. The theory is that they don’t have time to execute a “pre-borrow” in fast moving markets. Their job is to inject LIQUIDITY especially into thinly-traded securities. It is theoretically supposed to be BOTH buy and sell side liquidity when either is needed. As a rule, abusive naked short sellers NEVER, NEVER, NEVER cover unless circumstances deem it in their best financial interests. Insanely, all they are asked to do is “mark to market” the cash value of their naked short position on a daily basis with the broker/dealer they failed to deliver shares to on settlement date. If the share price goes up a notch the settlement bank of the MM that is naked short a stock needs to cut a check to the broker/dealer whose client never got “good form delivery” of that which he THOUGHT he was buying i.e. real shares. The buyer of these nonexistent shares firstly doesn’t ever learn that what he bought didn’t get delivered because it never did exist in the first place. The cleverest of all frauds is one in which the defrauded party has no clue that he has been defrauded. His brokerage statement references the securities he paid for. If you look at the fine print, the brokerage account of the buyer of nonexistent shares is credited with a “long position” via being given a “security entitlement”. He doesn’t “own” that which he paid for. He merely “holds” a “security entitlement”. He is “entitled” to sell that which he thought he was buying even though it never existed. Often, the victim has no clue that his investment never had a chance because his invested in company has been targeted for destruction by colluding MMs and those broker/dealers that feed them business. The “cover up” of the fraud is contained in the monthly brokerage statement’s fine print. All an investor wants to do is to be able to sell that which he purchased hopefully at a profit. It’s the “at a profit” concept that rarely occurs for fledgling corporations targeted for destruction by abusive MMs.
The point needs to be made that unlike legal short sellers abusive naked short selling MMs do not pay “rent” for shares prior to selling them. One of the protective devices within the market for corporations is that as a legal short position builds up higher and higher the “rent” charged to a short seller increases due to the lack of available supply. This changes the calculus for making a short sale in the first place because the rental fee is deducted from any profit. When the rental fee becomes excessive many criminals will simply direct order flow to abusive MMs willing to share space under the umbrella of immunity from making pre-borrows entrusted with theoretically “bona fide” MMs. In the recent GameStop case, the short position actually exceeded the supply of shares in the market.
Part of the problem is that for young corporations, the costs of being “fully reporting” to the SEC is cost prohibitive especially after Sarbanes-Oxley and SOX 404. These corporations are given a break and can trade on the PinkSheets where the information disclosure requirements are less expensive and audited financials are not required. Once they can comfortably afford to become “fully reporting” they can opt to do just that and gain the credibility attendant to that. The problem has always been that the SEC has always had the attitude that any young corporation that is not fully reporting to the SEC DOESN’T DESERVE PROTECTION FROM ABUSIVE NAKED SHORT SELLING. The SEC is the primary regulator of our markets. Standing behind the SEC is a secondary tier of regulators called SROs or “Self-Regulatory Organizations”. Expecting the Wall Street participants to self-regulate is an insane concept since they have both superior visibility of our markets and a superior knowledge of the inner workings of our markets. The complexity of our clearance and settlement system is beyond description. Abusive MMs are often looked upon as “sheriffs” on the prowl for scams. Note the combination of no SEC protection, the SRO foxes being allowed to guard the henhouse and missing innate market protections associated with pre-borrows getting more expensive as the short position against a corporation increases. Where things can get interesting is when the diagnosis of a company like Medinah as a “scam” was incorrect. Unfortunately for Medinah shareholders, it only took 21 years for Medinah/Auryn to prove that the ADL Mining District is for real.
There is a concept referred to as “pairing off” which corrupt MMs use. Corrupt MM “A” might owe corrupt MM “B” the delivery of $20 million worth of let’s say Medinah shares. Corrupt MM “B” might owe $20 million worth of Cerro Dorado shares to corrupt MM “A”. What “A” and “B” will do is “pair off” and essentially say you don’t have to deliver the Medinah shares you owe me if you don’t force me to pay you the Cerro shares I owe you. The net effect is both share prices get clobbered. Both corrupt MMs actually have the duty to “buy in” (in a timely fashion) the other MM’s debt via the open market and return the missing shares to their purchaser and deliver the bill to the MM that sold the shares. This is a No-No on Wall Street. I used to refer to it as the 11th Commandment. Thou shalt not buy-in a fellow Wall Street “participant”. In essence, there is no “day of reckoning” for a naked short position. The “marked to market” process gives it a hint of legitimacy but it’s totally bogus. Wall Street will paint even abusive naked short selling MMs as “providers of much needed liquidity in thinly traded securities”. They theoretically are assuming high levels of RISK while providing these much-needed services. In actuality, there is very little risk in putting your thumb on the share price scale in an effort to rid the markets of presumedly scammy corporations. Through the years “presumably scammy” corporations gave way to easy to kill corporations regardless of their prognosis for success. Young corporations are easy to kill because they are defenseless until they become cash flow positive. Small companies, especially the junior mineral explorers, tend to have high monthly burn rates that typically need to be serviced by selling shares. The crooks know that they can force young corporations to pay their fixed monthly burn rate by selling more and more (constantly declining in value) shares per month just to pay the bills.
If a company has 100 million shares “outstanding” and there is a naked short position of 80 million shares then there are 180 million “shares and/or entitlements” that could be sold at any time. This is the SUPPLY variable. Even in highly manipulated markets, the variables of SUPPLY and DEMAND still interact to determine the share price via what’s referred to as the “share price discovery process”. The problem is that the SUPPLY variable in ANSS has been MANIPULATED upwards. Likewise, the EFFECTIVE DEMAND variable has been artificially manipulated downwards because the DEMAND for shares has been muted by the naked short sales. Simultaneous manipulation of the SUPPLY variable upwards and the EFFECTIVE DEMAND variable downwards will render the price “discovered” to be well below the correct share price that would be “discovered” if the two variables weren’t manipulated. This all sets up a self-fulfilling prophecy. If a group of MMs diagnose a fledgling company as a “scam” they will typically drive it out of existence whether it is a “scam” or not.
Since abusive MMs NEVER cover until it is in their financial interests to do so, naked short positions become accretive with time. The most highly targeted corporations on all of Wall Street are the junior mineral explorers and the fledgling pharmaceutical corporations. In the case of the junior explorers, the reasons are three-fold. Firstly, their chance of making a discovery and getting it into production are about 1-in-1,000. If you have been naked shorting all of the 2,000 or so junior explorers you have absolutely made a fortune through time. Secondly, the junior explorers have relatively high monthly burn rates. All they do is spend money and rarely if ever make any. This means that they have to constantly go to the market and sell shares at typically severely discounted levels due to the risk, at lower and lower share price levels. The cause of death is typically dilution. Thirdly, many junior explorers operate out of Canada where the naked short selling rules in the American markets are extremely lax.
The typical junior mineral explorer can’t survive a naked short selling attack for more than a year or so. Medinah is obviously an enigma. They’ve been fighting these battles for about 21 years. The initial attack started in Canada after Medinah noticed that Dayton Mining, then the darling of the Canadian mining industry, didn’t tie down the mining concessions around its open pit operations at the Andacollo Mine near La Serena, Chile. Medinah opportunistically tied down all of the surrounding properties including some within the open pit itself. The abusive naked short selling attack by the Canadian brokerage industry and the hedge funds that had recently funded Dayton to the tune of $60 million was brutal. The broker/dealer at the spearhead of the attack actually became insolvent. The “corporate autopsy” after the insolvency was performed by Ernst and Young. It revealed that 98% of the trades made by this firm were naked short sale orders, mostly against junior mineral explorers.
Medinah even survived the corporate governance miscues of a former management member that issued an inordinate amount of shares without telling anybody. I THINK THE MOST MISUNDERSTOOD CONCEPT IN REGARDS TO MEDINAH IS THAT THE WALL STREET “PARTICIPATING” MARKET MAKERS AND BROKER/DEALERS THAT CO-OWN THE NSCC SUBDIVISION OF THE DTC HAD FULL VISIBILITY OF THE DISPARITY BETWEEN THE NUMBER OF SHARES OUTSTANDING THAT WAS VISIBLE BY THE MEDINAH SHAREHOLDERS AND REALITY. If I had no ethics and knew what Medinah’s past CEO was doing, I would have naked short sold Medinah with a vengeance knowing that the share price was bound to collapse when the truth came out. It was a total no-brainer.
So how in the heck did Medinah survive all of this for all of those years? The development efforts at the ADL Mining District continued to exceed all expectations. They’ve got the goods. In fact, if they didn’t have the goods, they’d have gone insolvent 18 years ago. How do you know if your invested-in company has a preexisting naked short position? The answer to this is associated with the nature of the “marking to market” process needed to be done by the abusive MMs with large naked short positions. When you’re dealing with a stock trading in the “triple-0’s” i.e. $0.000X or “double-0’s” i.e. $0.00Y, a small incremental gain in the share price can represent a huge percentage gain in the share price. It’s the percentage gain that needs to be “marked to market”. Abusive MMs that have not been able to deliver the knock out punch after 21 years of naked shorting can’t afford to let the share price uptick without putting up a fight. What you’ll witness throughout a day’s trading is tiny little sell orders amounting to perhaps $10 or so constantly hitting the bid and thereby resetting the marked to market share price.
If the stock sees a wave of buying on large volume resulting in share price appreciation, you would expect to see either large amounts of nonexistent stock dumped on the market at the end of the day or at least a de minimis bid tapping at the closing bell. This would leave the impression to those that don’t follow the market throughout the day that Medinah was down on huge volume, an ominous message that shareholders are hitting the exits in droves. This is despite the fact that they were actually up on large volume. A couple of months ago on a Friday afternoon with 4 minutes left in the trading session, some mystery seller dumped 28 million shares on the market knocking out bid after underlying bid. Real shareholders owning real shares just don’t do that. Abusive MMs with large preexisting naked short positions could be forced to be this obvious in order to keep from making out a very large check at the end of the day. Instead, their settlement bank probably ended up receiving a very large check at the end of the day.
So how do you beat these guys? You become cash flow positive. If your share price is in the gutter, you buy back ultra-cheap shares and cancel them thereby tightening up your float. Future cash dividends will be extremely generous since less shares need to share the dividend cash. In an environment in which interest rates are super low like right now, inordinately large dividends (as a % of share price) will drive the share price to the proper levels. If the projected mine life is substantial, then shareholders might be able to look forward to a long stream of cash dividends. Kevin made a post within the last 3 or so days which I think is very prescient regarding tightening up the float. Thanks jimmy P. for the question and again I’m sorry to respond so slowly.