Monday, March 27, 2006

2006 Dumb Ass Securities Regulator of the Year

"I have two companies that actually went bankrupt
because -- that’s a reason I’m a regulator now and not an investor.
Securities Director for the State of Connecticut

WINNER - 2006
Dumb Ass Securities Regulator of the Year

The "Naked Short Selling" lie relies upon a number of techniques and people to maintain the ruse. The most important task for these scammers is to enlist people in positions of authority to say or do something, no matter how inane, to advance their cause. There may be no better example of this task than the episode that took place with Senator Bob Bennett of Utah who got tricked into making a fuss over Global Links. While Senator Bennett will NEVER breath another word about Global Links again, the usual suspects in this scam will continue to tout the fact that, once, in a misinformed moment, they tricked the good senator from Utah into bringing the topic of "naked short selling" into the public arena.

There have been others in positions of influence who've been inadvertently tricked into lending credence to this scam movement. Financial journalists Felicia Taylor and Ron Insana have both been caught up in the scam and humiliated themselves in front of the investment community. However, as astute investors, it doesn't surprise us to see such occurrences. Obviously, we EXPECT to see the "naked short selling" lie trumpeted by the likes of a Mark Faulk or "Bob O'Brien" or any of the other players who directly or indirectly benefit from advancing this lie. And, of course, the handful of crooked corporate executives like Gary Valinoti and Rodney Young who have benefitted from this diversion as they raped their investors and ran their companies into the ground will be out there making a lot of noise, too.

So it's not shocking when a politician gets caught up in this trap. It's not even a big surprise when a financial journalist or two picks up the banner. They could just as easily be the weathergirl or covering sports, given their educational backgrounds.

But when a securities regulator, and not just ANY securities regulator, but the DIRECTOR of a state level securities division gets hornswoggled, we take notice. This dude isn't just some desk jockey making xerox copies of his face in some back office in Hartford. This dimwit is the public face of securities regulation for an entire state. In part, we have to admire the guile of these scammers to enlist the aid of such a regulator. But even more, we stand in awe of the dumbassedness displayed by Mr. Ralph Lambiase, Securities Director for the State of Connecticut, and the 2006 Recipient of the Dumb Ass Securities Regulator of the Year Award.

Mr. Lambiase earns his reward largely for his display of ineptitude as he chaired the NASAA Conference on "Naked Short Selling" on November 30, 2005. A transcript of this conference is available at a number of different locations on the internet. You should be able to Google it in about 20 seconds.

While most of this conference focused on the minutae of securities processing, settlements, and securities margin policies, there were a number of striking admissions and statements made. Consider this quote from the Securities Director for the State of Connecticut: "And I’m not going to talk about a company because I don’t think companies -- companies are not the issue to us. I need to make that clear. Companies are not the issue." Now, as any reader of this blog or any other responsible, financial website would know, investing is always and everywhere about THE COMPANY. The COMPANY is the ISSUE, Mr. Lambiase. Your task is to PROTECT investors, Mr. Lambiase. And investing, like it or not, starts with learning about companies. When you eschew "the company", Mr. Lambiase, you reinforce a pattern of behavior that has harmed tens, if not hundreds, of thousands of investors. If a company blasts through all of their working capital and has nothing to show for it besides a shell to be reverse merged yet again into the next scam coming down the road, then the subsequent fall of their share price is not a consequence of "naked short selling". It is a consequence of company management running her shareholders' equity into the ground. Your failure to place the focus where it rightfully belongs does not help investors, Mr. Lambiase. You've simply conditioned a fresh group of prospects to be financially plundered by the next Rodney Young or Robert Simpson to come down the pike.

A reader of the NASAA Conference transcript just has to ask themselves, "Has Ralph Lambiase never heard of a 'pump and dump'?" Because he's clearly been victimized by at least one of them.

Remember the key factors necessary for a successful "Pump and Dump". (1) A company with dismal fundamentals; and, (2) A relatively low public float compared to the number of total shares outstanding. Mr. Lambiase is clearly a good target for anyone running a "Pump and Dump" as he will not focus on "the company". Later in the transcript, we read this: "
I own one stock. It’s less than a couple of thousand dollars. And believe me, I’d give it to you if you want the darn thing, which is why I’m still working today, okay? Okay, in one instance there was one company had about 20 million… I actually had one of my staff look at this issue and if he’s listening, thank you Sal and Mark for doing all this for me. But they said there’s one company that had about let’s say 20 million shares outstanding,just about, ballpark number, outstanding. And they looked at it, they looked at the stock statistics and they go, 'Okay, 80 percent of it was shown held by insiders.' Now being relatively smart, you go, 'Okay, that’s got to give you about a four million share float if insiders are locking up 80 percent of 20 million.' Right? So that’s four million -- it kind of stands out -- in the float, yet when they looked at the statistics on NASDAQ Trader, whatever it’s referred to, they showed that the total shares shorted was 6.5 million. So the question I have and I don’t know if there’s inaccuracies in the reports, but that would mean if you only have 4 million shares but yet there is 6.5 million shorted, how does that happen?"

[If you're a taxpayer to the State of Connecticut, you have my condolences. You should be outraged that a public official, earning a salary on your back, is wasting his staff's time on what is clearly a textbook example of a "Pump and Dump".]

And here's a hint for you, Mr. Lambiase, if you really want to know "How does that happen?" Do some research on the non-recourse, stock loan market.

Meanwhile, the rest of you should immediately e-mail Mr. Lambiase at with whatever resources you might have at your disposal to help this poor, misinformed regulator find, download, read, and understand the 10-K's and 10-Q's that get issued by public corporations.

Trust me, that dumb ass needs all the help he can get.

Tuesday, March 07, 2006

Back Again

As you have no doubt noticed, it's been a while since I've written here. Why? Because the exercise was too predictable. With every e-mail that I received saying, "Hey, you ought to profile 'ABCD'!" I knew exactly what I would find. The same thing we always find. Capital raised. Capital gone. Fat and happy management. Bagholders left with worthless paper.

On multiple occasions over the past year, I have been confronted with the question, "Why are you doing this?" Implicit in that question, of course, is the presumption that I stand to gain from speaking out against this scam.

If anything, I stand to lose from speaking out. For I am a naked short seller and my activities are profitable because there is such an enormous population of misinformed, naive investors who continue to bid up the prices of certain shares to levels that any reasonable financial analyst would identify as "absurd". Why would I want to cull the herd for no financial gain?

The fact of the matter is that, even if the "naked short seller" scam were to disappear tomorrow, I would be able to find overvalued securities to sell short. Our markets are not homogenous; they're lumpy. There will always be sectors, and individual securities, that get ahead of themselves that will present profitable opportunities for short sellers, "naked" or otherwise. It doesn't have to cost me anything for novice investors to learn how to identify a crook trying to dump worthless stock on them using the "naked short seller" scam.

Enough of the spoon feeding. I'm not going to detail individual companies any more. I'm going to give you the tools to do it yourself. So if, after everything you've seen of these scams that seem to gravitate primarily to the Pink Sheets and the OTCBB that you still want to dip your toes into this septic, stagnant pond, then I would urge you to:


(This applies to securities of the major exchanges, too.)

As you seek investment opportunities in the micro cap sector, the
importance of reading and understanding SEC filings can not be over
emphasized. With the opportunity to enjoy fantastic investment returns in the
micro cap sector comes the risk that you will be victimized by "pump
and dump" artists. It is the information contained within a company's
10-K and 10-Q filings that can help you identify and avoid these scams.

Too many investors make their decisions based upon glossy, investor
relations materials, promotion-oriented message board posts, or websites
where investment fundamentals are either ignored or distorted.
Inevitably, the responsibility for determining whether or not a company's
finances merits your investment consideration rests solely with you. You do
not need an MBA or a CFA to do enough financial analysis to recognize a
company that does not deserve your hard-earned money.

Any investor in a company should be able to answer the following
questions before they put their first dollar into a company's stock:

(1) Where is the current market pricing this company?

(2) What does an investor get for this current market price?

(3) How has the company whose shares I might buy treated the capital
they've raised to date?

(4) How has the ownership interest represented by one share of a
company's stock changed in the past?

There is only one place to find reliable answers to these questions,
and that is in a company's current 10-Q's and 10-K's. So the first rule
of any investment in a micro cap is to demand that the company be
current in their filings. Yes, there are some non-filing companies whose
shares have made money for investors, but as a group, this population of
companies represents a very, very bad bet. No matter how enticing
their promotional literature may be, if you're buying shares of a company
that is not current in their SEC filings, then you're buying a
proverbial pig in a poke. You will find plenty of excellent, speculative
investment opportunities in the sphere of companies whose SEC filings are
current. There is never, EVER an excuse for you to invest in a company
that is in a non-filing status. As an old acquaintance once said,
"There will always be another bus coming." Make sure the one you get on has
tires, seats, and a windshield.

So your first task, as an investor, is to get some SEC filings. If
you're reading this, you have the only tool you need (a web browser) to
get them. Go to Navigate to the EDGAR site. Search for
your company. Get as many of their 10-Q's and 10-K's as you can. It
will take you all of ten to fifteen minutes to accomplish this first task.

"Where is the current market pricing this company?"

As I watch novice investors, one rhetorical question I see all too
often goes along the lines of, "It's only 20 cents. How much downside can
there be?"

The downside of all stocks is the same. You can always lose 100% of
your investment. If you buy shares in a 20 cent stock and it goes to
zero, you lose all your money, same as if you buy a 20 dollar stock and it
goes to zero. Nominal price alone is not an indicator of a stock's
downside risk.

One of the most important numbers to find in your most recent 10-K or
10-Q is the fully diluted number of shares the company has outstanding.
Take this number and multiply it by the current share price. That's
where the market is currently valuing your investment candidate. And
your task as an investor is to decide whether the current market price is
justified given the rest of the information we will find in these K's
and Q's.

"What does an investor get for this current market price?"

Your first stop on a company's 10-K or 10-Q should be at their balance
sheet, specifically, the asset side of their balance sheet. What kind
of "stuff" does your candidate own? Certainly, you'll find some cash
and other "current assets". One "current asset" you should pay
particular attention to is "inventory". Every business obviously needs
inventory, but the value of the inventory on the balance sheet doesn't
necessarily reflect the value of the inventory in the real world. It is a
category that is capable of being abused, where inflated values for
"inventory" may inflate the book value of the company you're examining. As
you evaluate this number, consider how their inventory compares to their
quarterly gross revenues. An inventory figure that is unreasonably
high relative to sales may be indicative of stale, over-priced inventory
that can't be sold at prices that would be profitable.

Other "assets" you should very carefully scrutinize are "goodwill",
"prepaid expenses", other intangibles, and, especially, loans to officers
or affiliates. As an investor, you should not be very tolerant of
managements that use your company as an ATM card.

While the market value of any company should always be greater than the
sum of all its tangible assets, it should set off alarms in your
analysis when you encounter a company whose market valuation is many times
greater than its "book value", "book value" being its total assets less
its liabilities. A company's management is supposed to take the assets
at its disposal and engage in activities that create value for
shareholders. But when a company's management or its promoters tries to tell
you that they're capable of taking their asset base and creating value
that is 10, 20, or 100 times greater than their assets, you should
approach the enterprise with a great deal of skepticism. Or, better yet,
you should take your money and find a better investment opportunity.

"How has the company whose shares I might buy treated the capital
they've raised to date?"

One of the best indicators for how management is behaving towards its
owners is in the Income Statement portion of a 10-K or 10-Q. Companies
don't make their investors money by leaving their capital in a bank
account to earn interest. That capital goes to work. As a prospective
investor, you need to ask, "Where does management put my money?" The
goal of most micro cap companies is to mature into small cap, mid cap,
and, with luck, large cap companies. The label that most frequently gets
applied to these micro caps is "development stage".

"Development stage" implies a number of things. It implies that you
should not have any immediate expectations of appreciable sales or
earnings. Applying an earnings benchmark to a development stage company
completely misses the point of what it is these companies should be doing.
"Development stage" implies that management is working on building a
resource. Even without sales or earnings, an income statement is still a
good place to see how management is going about building you, the
prospective owner, a resource. Therefore, when you look at the income and
the cash flow statements, you should see a lot of money allocated to
capital expenditures or research and development (R&D). What should steer
you away from any development stage company is an inordinant amount of
money being wasted on general and administrative (G&A) expenses. All
companies, regardless of size, need to spend money on lawyers,
accountants, and office managers. And, for better or for worse, a micro cap is
going to spend a proportionately larger amount of money on G&A than a
larger company. But if you see more than a third of a company's
operating budget being wasted on G&A, close the file and move on to your next

"How has the ownership interest represented by one share of a company's
stock changed in the past?"

Small, development stage companies typically dilute their common stock
as they go from a company with a concept but no sales to a producing
firm with sales that, hopefully, will generate profits for its owners.
Along the way, for good reasons, managements may need to issue more
shares to raise additional capital to fund their development. However, as
a prospective investor, you should be acutely aware of how much of your
ownership gets diluted away as your company goes from development stage
to production. There is no rule of thumb for what constitutes a
reasonable amount of dilution and what would be excessive. Yet it's an
attribute that should not escape your attention. If you are evaluating a
company that has diluted its ownership by 50% over the past year, you
should expect to see some sort of dramatic improvement in the company's
balance sheet or progress made in terms of R&D spending or capital
expenditures. But if you see massive dilution without improvement in
financials or progress made towards key production milestones, then you should
strike the company off of your list of prospective investments and
begin evaluating the next candidate.

This little guide is not intended to turn you into a master securities
analysis. These simple screens will not help you determine whether a
company might be 10% undervalued or 10% overvalued. They are simply a
set of guidelines for determining whether a company deserves your
consideration at all.

The micro cap world is full of uncertainty. That's what makes it a
place with wonderful opportunities, but also a place where less than
reputable managers and promoters can victimize investors. If you are going
to invest in this sector, you must keep in mind that even a good
company with honest, hard-working management may fail for reasons beyond the
control of management. Careful financial analysis will not guarantee
you success with investments in the micro cap arena, but you can at
least protect yourself by weeding out those companies and managements that
never deserved your investment capital in the first place.

James R. Brownfield
Sarasota, FL