The Naked Short Selling Lie

House Keeping

2006-09-22T04:50:00.000-07:00

No, I haven't disappeared from the blogosphere, but I thank those of you who have expressed an interest in my stance on "naked short selling" and who are searching for more investment ideas in this field.

There are no new candidates on my radar right now. We're intra-quarter which, from an earnings perspective, is a truly dull part of the quarter and, as you may have noticed, I prefer to use longer-dated put options when taking a position against one of these Baloney Beauties. In fact, though January is still over three months away, we are looking closely at finding ways to push our exposure out further into the 2007 calendar.

We are ever mindful of John Maynard Keynes' cautionary statement, "Markets can remain irrational longer than you can remain solvent." And as you look at the companies we profile, you can well imagine that their shareholder ranks are flooded with the irrational.

So, with that in mind, there is no guarantee that "rationality" will come to visit the markets for these profiled companies before our options expire. This leaves you, as a portfolio manager, with some house keeping tasks. You have a plethora of choices, but one simple approach you can take is to turn a plain long put position that's coming closer to expiration into a spread, by shorting a lower strike put, and to take the premiums you collect and dedicate them to another plain long put position that's further out on the calendar. It's one of the simplest ways for you to preserve some capital while maintaining your downside exposure to a stock you perceive to be overvalued.

Reg SHO Antics

Connecticut was never a state I had previously associated with inbreeding. I figured Ralph Lambiase was an anomoly, someone's dead-beat brother-in-law who couldn't otherwise hold down gainful employment who was inserted into the Connecticut division of securities by some well-connected politician to keep him from showing up every other night to bum some sleep on the couch. Now, suddenly, we come upon proof that perhaps Ralphie Boy is not such an anomoly afterall. It would appear that Richard Blumenthal, Attorney General for the state of Connecticut, has been caught up in this scam as well. He graces the SEC comment section of the Reg SHO Amendment proposal with his own tirade that begins with the predictable nonsense about FTD's and then, interestingly and entertainingly, devolves into an anti-hedge fund rant that has nothing whatsoever to do with Reg SHO or "fails to deliver".

Note to would-be new hedge fund managers: If you're considering the state of Connecticut as a candidate to domicle your new fund or your management company, take them elsewhere. Connecticut does not deserve your capital or the capital of your investors.

Maybe it's something in the water up there...

Turning Stupidity into Cash - Round 3

2006-07-26T09:51:00.000-07:00

This DISCLAIMER applies.

ATHEROGENICS
$15 January '07 PUT
BID: 4.20
ASK: 4.70

As a general rule, with but one exception (Viragen), I would never naked short biotech stocks. There is just no way of knowing who might or might not pull a rabbit out of the hat, regardless of how poorly managed the company's finances might be.

But buying puts has a very different risk profile than naked short selling. Even though both generate gains when the price of the stock in question declines, the puts present investors with the means to manage downside risk to capital. Wiping out with a put is to be expected from time to time and it's not the end of the world if a stock quadruples and the risk capital you commit to a put position disappears. It's a very different... potentially lethal... situation if you're holding a naked short position when a stock does that.

Atherogenics is, financially, in really bad shape. And, of course, there is the prerequisite group of investors out there blaming Atherogenics' problems on... you guessed it... naked short sellers.

So Atherogenics is a logical choice for a put position. However, that premium is pretty rich for a $13 stock. Once again, the smart money in the options pits seem to be telling us something.

We're listening.

POSITION SUMMARY
PRO: One of the ugliest balance sheets I have ever seen for a publicly traded company.
CON: Company has a good two year's worth of working capital. They won't need to raise money any time soon. Also, unlike so many other bogus "development stage" companies, Atherogenics is actually spending their money on R&D. 89% of their operating budget went to R&D over the past three years.

Turning Stupidity into Cash - Round 2

2006-07-19T05:24:00.000-07:00

This DISCLAIMER applies.

NETFLIX
$25 January '07 PUT
BID: 4.60
ASK: 4.80

We were led to Overstock long ago by the antics of her loopy CEO. Now that we've confined ourselves to the world of stocks with listed options, it is unlikely that we will find many other companies with CEOs that behave like pink sheet/penny stock operators.

Just because we might not find another "Dr." Byrne in our quest for put candidates doesn't mean that we won't find groups of loopy shareholders convinced that "naked short sellers" are harming their investments and that the way to "fight back" is to loyally hold their shares, come what may, as the company spirals into the ground.

Netflix provides such an opportunity. The first warning sign that Netflix would be a good put candidate was the widely disseminated story within "Get Shorty" circles that David Patch had latched onto Netflix. As anyone who follows the "naked short seller" scam is well aware, David Patch is the kiss of Death for any company that attracts his attention.

There is a lot of stupid money following the "naked short seller" movement and some of that stupid money has found its way into Netflix shares. Our selection of Netflix as a put candidate is in no way an indication that we feel Netflix management is either incompetent or criminal. However, they operate in a business environment that has become extremely cut-throat. And while the use of the postal service may have been a great way to cut out overhead from the "physical retail floor" model of video rental, both models will eventually succumb to digital forms of delivery in the very near future.

POSITION SUMMARY
PRO: Absurd valuation, slowing growth, and stiff competition in a media delivery format that is technologically obsolete.
CON: Company actually has earnings. And while the valuation is silly, the company is in not in imminent danger of financial insolvency.

Turning Stupidity into Cash - Round 1

2006-07-12T06:10:00.000-07:00

This DISCLAIMER applies.

OVERSTOCK
$20 January '07 PUT
BID: 3.50
ASK: 3.70

Because the small investor must rely upon the options pits in order to benefit from the "naked short seller" scam, a lot of worthy candidates must be excluded from consideration. There are no put options that trade on the pinkest of the pink sheet disasters nor will you find options listed for most of the trash on the OTCBB.

But one excellent candidate that does have listed options is Overstock. In many ways, Overstock, with its CEO Patrick Byrne doing his best immitation of Chris Farly from "Tommy Boy" (except for the part where "Tommy" actually manages to save the family business), is a "naked short seller" poster child. There's not a quarter that goes by where "Dr." Burn doesn't manage to find an opportunity to lash out at those evil "naked short sellers" who have somehow caused him to miss revenue targets, stifle Overstock's growth, and trashed the company's working capital situation.

Overstock is also a great example of the odd pricing we will find in the options pits. The guys in the options pits are a lot smarter than you and me. They don't fall for this "naked short seller" nonsense which is evidenced by the pricing you see for the puts of companies we will target.

Take a typical day in the pits with a typical company like, say, Walmart. Walmart trades this morning around $ 46. With the common trading at that price, we then check out the January '07 calls and puts for the $ 45 strike. The calls are priced 3.60/3.80 , the puts 1.85/1.95 . With most stocks, you will find that the options pricing shows a bias that suggests modest gains are to come.

Overstock's options pricing shows an interesting contrast to typical options pricing. With the common trading just under $ 21, the January '07 calls and puts for the $ 20 strike tell a much different story. The calls are priced 3.50/3.80 , the puts 3.50/3.70 . The sharpies in the options pits are in on the joke. They know that the "naked short seller" excuse is nothing more than a poor excuse for executive ineptitude and have priced their instruments accordingly.

Unfortunately, this means it will be more difficult for us to make money off of these puts than we could otherwise make if the options were priced like those for "normal" stocks. But take some comfort in knowing that the "smart" money has voiced its opinion in the options pits. "Smart" money doesn't always win, but there's worse things you can do with your speculative capital than to put it with the "smart" money.

POSITION SUMMARY
PRO: Decelerating growth, tenuous working capital situation. No ability to "brand" in a low-margin, cut-throat sector.
CON: "Fulfillment" business has relatively attractive margins and could be the focus of a shrewd restructuring.

Turning Stupidity into Cash

2006-07-11T13:56:00.000-07:00

Over the years, we've made some decent coin taking positions against companies that blamed their problems on "naked short sellers". Unfortunately, it's something that 99% of the investment community can't do. Even though "naked short selling" is legal (despite what so many scammers would have you believe), it's a pain in the neck. The compliance issues are complicated, it requires a lot of capital, and the transactional expenses make it impractical for small blocks.

That doesn't mean that there aren't opportunities for smaller investors to take advantage of those companies OR investors that complain about "naked short selling". A good place for small investors to turn stupidity into cash is in the options pits. Buying puts on the shares of these companies gives investors an opportunity to profit when those stock valuations are completely unjustified by their fundamentals.

Buying put options entails a great deal of risk. You may lose all of your investment if the anticipated move in the underlying stock's price does not materialize.

The material contained within this blog is not intended to serve as investment advice. It is presented for informational purposes ONLY. By accessing this site, you agree to indemnify the blog manager and all entities responsible for its delivery to your internet device from any and all claims for losses or damages that you may incur while attempting to pursue the investment strategies discussed here.

The manager of this blog or the manager's associates MAY take, or MAY have ALREADY taken, positions in some OR all of the securities discussed on this site.

THE STRATEGIES DISCUSSED HERE WILL ENTAIL A GREAT DEAL OF FINANCIAL RISK FOR ANY INVESTOR THAT PURSUES THEM. PROCEED WITH CAUTION. IF YOU DO NOT COMPLETELY UNDERSTAND THE RISKS INVOLVED, THEN GO AWAY.

The information here is provided to you free of cost. However, if you benefit from the information presented on this blog, I would ask you to consider a donation to the following charity:

All Faiths Food Bank
717 Cattleman Road
Sarasota, FL 34232

(Please put "Naked Short Selling Lie" in the Memo field of your check.)

NOTE: I have NO affiliation with All Faiths Food Bank beyond seeing them as a worthwhile charity that serves the needy in this community. Don't hassle them if you hate what I have to say about your stock. They have one of the most impressive ratios of services provided to funds raised that I have seen.

Time to find some candidates...

Ban Short Selling Now!

2006-06-08T20:04:00.000-07:00

Yes, you read that right.

We should ban short selling.

Yes, yes, I'm serious.

Honest.

Yes, yes, yes, all of it. No more borrowing shares for short selling. No more hypothecation calculations or affirmative determinations or any other back office headaches. Let's just bring it all to an end, here and now.

Well, maybe not RIGHT now, but how about within the next year? Let's give the scammers what they want: a world where the short selling of common stocks doesn't exist, by, say, July 1, 2007.

So long as there is a sliver of truth to the allegations that scammers like Mark Faulk, "Bud" Burrell, David Patch, DeWayne Reeves, "Bob O'Brien", or the rest of these crooks engaged in this scam level against short sellers, the investment community will constantly be on the defensive.

So give the crooks what they want. Give them a world where there is no short selling of common stocks... no "naked short selling", no Stock Borrow Program, no hypothecation, no leasing, no lending. Get rid of all of it. If you want to sell a share of stock, you must deposit your certificate into an account and someone in the P&S department must verify that it is a genuine certificate, freely transferable to another party after being traded on a public exchange or over the counter, with proper endorsements to guarantee transfer. If you don't have a "genuine", "certificated" share in your account, then you can't sell. No exceptions. Not even for market makers. Every transaction in the shares of a company's common stock will result in an actual transfer of all ownership interests. There will be no more games with proxy rights and no more games with the tax status of certain, advantageous dividend plays. Your company declares a dividend, you get the dividend with no questions about the taxable status of the dividend that's been paid.

There are too many loose ends in the world of short selling of common stocks that, frankly, can't be properly remedied. There is no way to reconcile the voting rights of a company with a million shares outstanding if there are two million shares held long in various accounts against a million shares held short. The scammers cling to this small sliver of truth of voter dilution to advance their fraudulent cause. Take it away from them. If you own a hundred shares of a company with a million shares outstanding, you have a right to weighted vote of 0.01% of the company's voting shares. It is not right that your voting power should be diluted by short selling of any flavor.

Of course, if this recommendation alone were enacted, the scammers would clean up in the markets. People like Gary Valinoti, Urban Casavant, Robert Simpson, and Rodney Young would love nothing more than to be able to drill investors into the dirt without the hindrances of a bunch of short selling financiers who might recognize them for the crooks they happen to be.

I'm not saying that these crooks should be given free reign to rape investors with impunity. On the contrary, this proposal comes with a caveat.

For now is also the time to extend the single stock futures market to the OTCBB and the pink sheets... and to every other listed or over the counter common equity security with a CUSIP that does not currently have a series of futures listed on the CBOE. The decision to forbid short selling of common stocks in all circumstances should be accompanied with the MANDATORY listing and trading of single stock futures for every common stock with a CUSIP. In this day and age, it just can't be that difficult to add another digit to a CUSIP. It only needs to be a 0 or a 1, for even and odd years of delivery. Make it uniform, with December expirations. The third Friday of every December, one of the futures CUSIPs leaps forward two years. The current contracts get settled, with real shares of course. Any party to a futures contract that fails to deliver by Monday morning gets immediately bought in, debited for their buy in, with ultimate financial and administrative responsibility for resolving the delivery of shares behind the trade resting with their broker/dealer. This system should be put together and in place by June 1, 2007.

This should alleviate all of the objections that these scammers pretend to have about "naked short selling".

But it won't. Because the issue was never about "naked short selling". The issue has always been about diverting attention away from pitiful, or crooked, managements that run their shareholders' equity into the ground.

So go ahead, write your favorite scammer. Unmask these cretins. The email addresses of Faulk, Patch, "O'Brien", Reeves, and the rest of the crooks are easily found on line. Ask them what they think of getting rid of ALL short selling altogether and bringing a uniform futures exchange to these markets.

They won't like it one bit.

Because they know it would mean the end of their ability to rip off investors.

Dennis Rodman was right about Utah

2006-05-26T13:24:00.000-07:00

Sorry, Mr. Lambiase. Time to move you on down the blog, for now. I never thought your dumbassedness could be topped in the sphere of securities regulation.

I hadn't counted on the State of Utah and neither, apparently, had the rest of the securities industry. SB3004, the "Byrne Bill" has been passed and signed into law by Governor Huntsman.

What to do?

Well, don't panic. Because in all likelihood, none of its language pertains to you. If you're a fund manager engaging in naked short selling and you're domiciled anywhere else but Utah, you can go back to screening through the trash for gems like Overstock to add to the short side of your fund.

But what if you're a broker/dealer, registered in the State of Utah, and you've had this heap of shit legislation dropped on your compliance officer?

Well, the news is not quite as bad as it may seem. The usual scammers, "Bob O'Brien", David Patch, and Mark Faulk, are all touting this legislation as being key to the elimination of "naked short selling".

It will do nothing of the kind.

Your only duty, as a broker/dealer, is to report a fail to deliver. That is all. If you report the failure to deliver, you're off the hook.

In fact, if it is your broker/dealer, through a principal trade done against one of your proprietary trading accounts, that is responsible for the fail to deliver, all you have to do is report it. This bill provides no penalty for a failure to deliver, merely a penalty for failing to REPORT a failure to delivery.

It is a do-nothing bill because it does nothing... besides add to your compliance and reporting requirements which are already horrendous.

Unfortunately, Dennis Rodman couldn't avoid Utah. You can. At the very least, you should consider shuttering any branches that are marginally productive in the State of Utah. You may want to institute rules that require confirmed, satisfactory delivery of stock certificates in your retail accounts before you let customers place sell orders. You might also consider a surcharge on tickets for trades executed on behalf of Utah residents. When they complain, just blame it on the Byrne Bill.

Byrne, baby, Byrne.

Let that asshole reap what he's sown.

2006 Dumb Ass Securities Regulator of the Year

2006-03-27T09:57:00.000-08:00

"I have two companies that actually went bankrupt
because -- that’s a reason I’m a regulator now and not an investor."
RALPH LAMBIASE
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 ralph.lambiase@ct.gov 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.

Back Again

2006-03-07T06:09:00.000-08:00

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:

READ THAT SEC FILING

(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 www.sec.gov.  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
candidate.

"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

Datascension

2005-04-21T13:05:00.000-07:00

Capital Raised: $ 14.49 million
Capital Burned: $ 10.65 million
Previous Executive Compensation: $150,000 for the CEO and the COO

When you first open Datascension's SEC filings, the first thing that strikes you is a balance sheet that appears to show a company with a net worth greater than zero. In fact, the balance sheet shows a net worth of $4.07 million which is remarkable for a candidate in this group of cellar dwellers.

Unfortunately, Datascension's balance sheet does not hold up to close scrutiny. The first thing that you notice is the size of their intangibles. Datascension hasn't amortized their goodwill over the past year and it stood at $1.69 million as of December 31. There is an additional $2.08 million in intangibles they book as "Discount on debt issuance", which is an entry they use to reconcile the exchange of their convertible securities for common stock.

Finally, there is the issue of a $1.02 million "Asset held for sale". Dig through their notes and you find that this amount is for a loan that had been made to Nutek Oil where "it was determined there is the potential the entire amount of the receivable will not be received."

So much for Datascension's net worth.

Provectus Pharmaceuticals

2005-04-20T03:57:00.000-07:00

Capital Raised: $ 23.73 million
Capital Burned: $ 14.57 million
Previous Executive Compensation: Not Available, disclosed on their proxy statement

At first glance, Provectus appears to be a company that hasn't completely burned through all of their capital. Upon closer examination, we find an intangible $10 million item on their balance sheet carried as "patents". Whether or not Provectus really has patents worth $10 million is subject to debate, but their income statement shows 2004 total revenues of just under $32,000 while they took a $671,000 amortization charge against those patents.

Frequently, you will hear the "naked short seller" scammers talk about all the wonderful research and development that isn't getting done because "naked short selling" suffocates these small, innovative companies. Over the past three years, Provectus has spent nearly five times more money on general and administrative expenses than they spent on actual research and development.

How long do you think that kind of behavior would be tolerated at a real research and development oriented company?

CyberAds, Inc.

2005-04-19T07:31:00.000-07:00

Capital Raised: $ 16.63 million
Capital Burned: $ 19.23 million
Previous Executive Compensation: $250,000 for the President

Just another Berlin Beauty. Moving right along...

CalbaTech, Inc.

2005-04-18T10:35:00.000-07:00

Capital Raised: $ 3.75 million
Capital Burned: $ 4.41 million
Previous Executive Compensation: $ 142,083 for each of three executives in 2003

CalbaTech is another one of the Berlin Beauties. Otherwise, there's not much that is remarkable about them.

In defense of the three top executives, their filings state that none of them were able to draw 100% of the salaries that was due to them in cash. It's not immediately clear whether or not they drew some other form of renumeration in lieu of the salary that was owed them. Sometimes running a company into the ground doesn't pay such a handsome salary afterall.

Bentley Commerce Corp

2005-04-15T03:36:00.000-07:00

Capital Raised: $ 17.65 million
Capital Burned: $ 18.34 million
Previous Executive Compensation: One salary as high as $402,093 (2004)

Bentley Commerce Corp is one of several score of companies that complained about naked short selling abuses on the Berlin Stock Exchange. Bentley made a huge fuss over the "unauthorized" listing and immeidately issued a press release when they got word that the Berlin-Bremen had delisted them.

In that May 14, 2004 press release, the company's chairman stated, "Bentley Commerce is making every effort to protect and increase shareholder value." After reading their SEC filings, you can at least respect their sense of humor.

Zann Corp

2005-04-14T04:00:00.000-07:00

Capital Raised: $ 25.57 million
Capital Burned: $ 27.13 million
Previous Executive Compensation: $312,500 EACH for the Chairman and Vice Chairman in 2001

Zann Corp is another not so exceptional company that draws our attention only because of its President and CEO, Robert C. Simpson. Mr. Simpson, you may recall, is the gentleman who bought all of the Global Links shares after their reverse split.

You may also recall that Mr. Simpson expressed concern about the existence of an issue of preferred stock that Global Links might have that would block him from taking control of Global Links. It happens that Mr. Simpson had good cause to be concerned, for he is the owner of Zann Corp's Series C Preferred Stock. Not to be outdone by the piddling voting rights of Global Links' Series B issue, these "C" shares are entitled to one hundred votes per share for any matter brought to the common stockholders.

Mr. Simpson put those voting rights to good use on 2005 April 4. That was the day that it was announced that Zann Corp's articles of incorporation were being amended to increase the number of authorized shares of common stock from 11.4 million to 4 billion and to give permission to the board of directors to implement a reverse split of up to 1:350 over the next year.

The best part of this announcement can be found near the end.

"Dr. Simpson will have the power to approve the proposed corporate actions without the concurrence of any of our other stockholders.

WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. [The all caps is their emphasis, not mine.]

We appreciate your continued interest in Zann Corp."

Who could possibly continue to be interested in a company that so brazenly runs roughshod over their shareholders?

Global Links Corp

2005-04-13T03:36:00.000-07:00

Capital Raised: $ 4.67million
Capital Burned: $ 4.45 million
Previous Executive Compensation: $143,627 annually (2004) for the current CEO

As broken down companies go, there's nothing exceptional about Global Links' balance sheet. It's the same old thing we see in a lot of these candidates for stock hospice. Millions raised, millions gone, and a nice salary for the man at the top.

What has made Global Links entertaining to watch has been their creative approach to common stockholder dilution and how they've managed this share dilution while effortlessly keeping control out of the hands of the shareholders being diluted.

Global Links made headlines when, after their February 1, 2005 reverse stock split, a Form 3 was filed by Robert C Simpson claiming to have acquired nearly 1.2 million shares of Global Links. This was supposed to have constituted 100 percent of Global Links' outstanding shares. Despite this acquisition by Mr. Simpson, millions of shares of Global Links common continued to trade, thereby fueling accusations that "naked short sellers" were somehow involved and actively seeking to harm Global Links. The story made more headlines when Senator Bennett of Utah referenced Global Links and Mr. Simpson in a Senate banking committee.

Unfortunately, Senator Bennett did not do any research on Global Links before he made his ill-timed remarks to SEC Chairman William Donaldson.

Had Senator Bennett done his research on Global Links, he would have immediately recognized their M.O. For the fourteen months prior to the February 1 reverse split, Global Links had diluted their previous common stockholders by some 90 percent. The company is a perpetual share issuing machine. In the sixty days that followed their reverse split, Global Links diluted their stock by over 70 percent.

Had Senator Bennett done his research on Global Links, he would have found that there was an amendment to a previous share offering filed with the SEC for 600 million shares that stipulated that the offering would not be affected by any future splits of the company's common stock.

So much for Mr. Simpson's 100 percent stake in Global Links.

However, this sundae has a very special cherry on top of it. Dig further through Global Links' SEC filings and you will find one of the most offensive notes ever seen in a company's annual report.

Global Links has an issue of Series B Preferred Stock outstanding. Some of the issue was given away to management in lieu of compensation in 2003, more was handed out in the time that followed. For bookkeeping purposes, the company has assigned a value of $15,000 for the entire 15 million share issue of Series B Preferred.

Here's the fun part.

Each share of Series B Preferred has the right to TWENTY votes for any vote involving the company's common shareholders. According to a Financialwire article in March, Mr. Simpson expressed concern that there might be a form of preferred shares that could prevent him from taking control of the company. Mr. Simpson had good reason to express concern as we shall see when we review Zann Corp tomorrow.

Eagletech Communications

2005-04-12T10:00:00.000-07:00

Capital Raised: $16.76 million
Capital Burned: $18.26 million
Previous Executive Compensation: $90,200 annual salary plus $2.3 million in stock awards in 1999

Like every other company that you will see that complains about "naked short selling", Eagletech is another one of those companies that has run their shareholders' equity into the ground while executive suite personnel lined their pockets. Eagletech isn't really a distinctive company in this series. They haven't bothered to prepare and submit an SEC filing in over three years. Their last released balance sheet was for the period ending December 31, 2001 and had all of $1,322 worth of cash on it.

What makes Eagletech especially interesting is an open letter that hit the newswires in early April. This letter, penned by company president and CEO Rodney Young, made quite the production of enumerating the same list of halftruths that all of these companies and their promoters use to divert attention away from their finances. However, what REALLY stood out in Mr. Young's letter was the statement "The law makes no distinction between the counterfeiting of a development stage startup public company and for example, Microsoft Corporation. By the way, while listed in the 'Pink Sheets' in 1975 Microsoft reported three employees and income of $16,000 for the period."

By the way, Mr. Young, Microsoft Corporation was NEVER listed on the Pink Sheets. Microsoft's IPO was done in 1986 and they went directly to the Nasdaq.

One frequent accusation hurled by these parties seeking out the "naked short seller" witch is that these derelict companies are the source of tomorrow's economic growth. They will tell you that the next Microsoft or Dell or Genentech is buried somewhere in the Pink Sheets just waiting to hit the big time if they could only ward off those evil "naked short sellers". What they don't want you to know is that neither Bill Gates nor Michael Dell drew a six figure salary and awarded themselves millions of dollars worth of free stock before they sold their first copy of MS-DOS or their first PC.

Jag Media Holdings

2005-04-11T20:32:00.000-07:00

Capital Raised: $43.66 million
Capital Burned: $44.02 million
Previous Executive Compensation: $150,000 per year to each of three senior executives

Jag Media is, in so many ways, the perfect example of a company that has run its shareholders' equity into the ground and then sought to blame outsiders for its problems. As if running through $44 million worth of capital was not insult enough to Jag Media shareholders, they also have in place a toxic funding package with Cornell Capital.

Jag Media has aggressively pursued lawsuits against hundreds of financial institutions and harassed DTCC over an alleged naked short position that, according to some of the chronically financial illiterates who follow this stock, runs between 100 and 300 million shares.

Unfortunately for Jag Media and her shareholders, the naked short position has no role in Jag Media's negative net worth. "Naked short sellers" don't make executive decisions regarding a corporation's finances. The $44 million that was exhausted by Jag Media was done at the behest of her own management.

Despite Jag Media's grave financial condition, the company still sports a market cap of nearly $15 million. Some shareholders figure there's no point in selling at the current market price, that it's easier to just ride the thing to zero.

And so they shall.

Welcome.

2005-04-11T08:18:00.000-07:00

By now, you may have heard about a mysterious "problem" in our financial markets that is hurting investors and stifling small companies. That problem is "naked short selling".

Unfortunately, the "naked short selling" problem is not a problem at all. It is a diversion. It is a tactic used by managements and promoters to keep their investors' attention away from the true cause of their portfolio losses.

Where do you look to see who's truly responsible for the condition that so many of these companies find themselves in? You look at the SEC filings. I have investigated scores of companies that have complained about "naked short selling". Supposedly, "naked short selling" keeps companies from raising capital and artificially depresses their share prices. In EACH and EVERY company I have ever examined, I have found that all of these companies have been able to raise capital, some of them have raised tens of millions of dollars in capital in fact, and all of them have share prices that are far above what any reasonable investor would pay for these companies based upon a sound, analytical approach to their financial statements.

Accompany me through the SEC filings of these companies that blame "naked short sellers" for their problems and you will see the same old pattern over and over again:

Companies raise capital.
Companies burn through their capital.
Managements get a handsome compensation package until the money is all gone.
Managements blame outsiders for the depleted condition of the company.

Unfortunately, there are plenty of investors who fall prey to this scandal. They put their money into these derelict companies and then believe the very people who have run their companies into the ground when they seek to cast the blame elsewhere. The very first lesson you should take away from this blog is to never, ever invest your money in a company that would try to blame its problems on "naked short sellers". It is a long time proven formula for identifying a company that is not generating value for its investors.