Hi MDMNJaded,
In the study of Wall Street “frauds on the market”, these crimes are typically put into 1 of 3 categories with clever names. #1 is the “Pump and Dump”, wherein a corrupt corporate insider will get his hands on super-cheap shares, tell a bunch of overly positive lies on either press releases or on the Internet (the “pump”), and then sell the shares into the wave of buying induced by the “pump”, which is referred to as the “dump”.
#2 is referred to as the “short and distort”. Typically, “naked” short sellers that never executed a “pre-borrow” before making a short sale, as mandated by law, will try to cover their short position at low share price levels after flooding the Internet with false news about the company i.e. the “distort”.
#3 is the “EPS” or “Embedded Poop and Scoop”. This is by far the most heinous of all of the “frauds on the market” yet the least well understood. This typically involves a Wall Street participant, that secretly thinks that a certain company has a good chance of being successful, attacks this company (“poops” on it and its chances for success) on an Internet site WHERE THE SHAREHOLDERS OF THE COMPANY TEND TO CONGREGATE, like an investment forum. This is where the perpetrator “embeds” itself, among the intended victims. The fraudster doesn’t want to pay “retail” prices for the stock she or he secretly admires, but publicly attacks it. By definition, most of the attacks involve lies because remember, the perpetrator secretly wants to own shares of the company with certain assets and a certain management team. She or he feel “entitled” to be able to buy shares cheaper than Main Street investors. This is a common theme in the various securities frauds occurring on Wall Street.
The problem for both the company and its shareholders is that the perpetrator needs to convince existing shareholders to sell their shares. The most common argument is that the stock is “overvalued” at current prices. Getting naïve shareholders to sell their shares will obviously drive the share price down. But that’s where the heavy lifting really starts for the perpetrators of this particular fraud. Now they have 2 options, either convince yet more naïve shareholders to sell their shares at the all-time-low which is hard to do, or approach the company and try to convince the company to let them finance the company AT SHARE PRICE LEVELS THAT HAVE BEEN PREVIOUSLY MANIPULATED DOWNWARDS. Note the similarity to the wave of illegal “PIPE” (Private Investment in Public Equity) financings we saw many years ago on Wall Street, usually involving convertible debentures.
This is probably the toughest of the 3 types of frauds to pull off. The perpetrator, that is constantly deriding the company, its management, and its assets, needs to convince naïve shareholders of a couple of things. First, that they have a superior level of knowledge about investing or about the industry that the targeted company operates in. “Trust me, I’m brilliant.” They need to assert all kinds of accusations about the company or its management team, in order to induce the selling of shares. It has to be bogus because, remember, the fraudster secretly is just fine with the company’s assets and management team. The perpetrator simply refuses to pay RETAIL prices.
The behavioral disorder you see most in these fraudsters is Narcissistic Personality Disorder or “NPD”. Why is this? People with NPD are often habitual liars, sometimes “pathologic” and sometimes “compulsive”. “Pathologic liars” can’t help themselves. They’re “hard-wired” to lie if the truth were to reveal that maybe they’re not the smartest guy on the planet or in any given industry. That just cannot be allowed to happen to a person with “NPD”. Another trait they exhibit is the inability to sense that there are VICTIMS involved in these illegal attacks. That fact just doesn’t register. THESE ARE NOT NECESSARILY BAD PEOPLE; THEY DO WHAT THEIR BRAIN TELLS THEM TO DO WHEN THEIR “SMARTEST GUY IN THE ROOM” PERSONA IS JEOPARDIZED. Are “hoarders” bad people just because they can’t pass up a garage sale even though they can’t navigate the hallways in their house because of the existing clutter? No, they too are “Hard-wired”.
Folks with NPD are the best perpetrators of EPS frauds. There’s so much lying involved that lying can’t be allowed to bother the perpetrator as long as the lying protects the persona that the fraudster is brilliant. Under those circumstances, lying is OK, it becomes almost existential. Victims, what victims? I’m ENTITLED to be able to buy shares cheaper than these illiterate mere Main Street mortals. This is my turf; I’m a Wall Street professional. If somebody presents themselves as a THREAT to projecting this persona, then that person needs to be DISCREDITED in a non-stop fashion.
As far as how the PIVOT gives away the existence of this fraud, if the fraudster successfully establishes a long position at bargain basement levels, then naturally they will want to make a 180-degree PIVOT and become a cheerleader, in order to drive the share price upwards. One day, management is a bunch of lying crooks and the next day they’re not half bad. One day the company’s assets are trash, and the next day the company has a serious shot at being a huge success. One day “Medinah is on the brink of being de-listed” and “I wouldn’t buy Medinah shares with a gun to my head”, the next day, “I recommend buying Medinah shares over Auryn shares.” He doesn’t want anybody buying Auryn shares NOW because he’s trying to buy a large block of them from management real cheaply.
After the PIVOT, the victims whose investment never had a chance of going up in price PRE-PIVOT, if the perpetrator is really good at what they do, then sit there wondering if EVERYTHING alleged over the last “X” number of years was all one big lie designed to make the Wall Streeter a bunch of money. The victimized shareholders are often left so dazed and confused that some of them just want out to end the frustration. The PIVOT is what informs the victims, whether existing shareholders or shareholders previously convinced to sell their shares, that they’ve been duped. How would you like to be an ex-shareholder that just got convinced by their “advisor” to sell all of his shares at the all-time low, only to see the “advisor” approach management and make a pitch to buy a block of shares out of the Treasury. On the next day, the “advisor” makes an Internet post “son of a gun, Auryn isn’t half bad after all and management has a solid plan to advance the company.” These people cannot visualize VICTIMS. Management doesn’t change its stripes overnight. The assets don’t change their value overnight. The perpetrator of the fraud changes its behavior overnight, and that’s when the light shines in.
In these frauds, you’ll notice that whenever POSITIVE NEWS is released by management, the perpetrator will IMMEDIATELY try to convert the POSITIVE NEWS into NEGATIVE NEWS before the shareholders are able to properly digest the POSITIVE NEWS. This way, both POSITIVE and NEGATIVE news result in share price depression. If this nefarious activity lasts for several years, and if corporate developments have indeed been POSITIVE, then there will occur a DISCONNECT between the actual value of the company and its assets and the market-determined market cap of the company. This is when OPPORTUNISTS, aware of these frauds, tend to show up, i.e. immediately POST-PIVOT.
If the perpetrator is not able to manipulate the share price down to the desired level, then things can get really crazy. If the perpetrator approaches management and says that she or he wants to buy a bunch of shares out of the Treasury (real cheaply) for his, let’s say, hedge fund clients, then in MID-PIVOT, you are exposed as being guilty of 1 of 2 things. You were either lying about all of those assaults on management and the quality of the assets over the last half dozen years OR you’re currently willing to take a client’s money and earn a fee, and then throw your client under the bus because you knew that management was a bunch of schmucks and that the assets are worthless. Pick your poison. PIVOTS PROVIDE SUNLIGHT IN A VERY DARK WORLD.
Even better, thank you for sharing the info with civility … priceless.