Investing 101 - Apr 18, 2004 - Printable Version
- Pump and Dump or Short and Distort?
by Mark Faulk On April 1st, the NASD implemented new regulations (by amending rule 3370) in a "better late than never" attempt to curtail the practice of naked short selling, and the SEC is working towards the same goal (although they are moving at a snail's pace, in this writer's opinion). I wrote an article ( http://www.faulkingtruth.com/article/?Investing101&1001 ) and commentary ( http://www.faulkingtruth.com/article/?Commentary&1001 ) on this issue shortly before the new NASD regulations took effect, and was amazed at the controversy that the articles stirred up. While doing research for a followup article, it became obvious that the two sides (one opposing the new regulations, the other supporting them) are worlds apart. Why would any reasonable person oppose a law that, in the simplest of terms, makes "visitors" to our country's stock market (mainly Canadian brokers and offshore lenders) abide by the same laws that all Americans live by every day?
Here is the simple answer to that question: no reasonable person (or group) would oppose such a law. Many of those that do most likely have a vested interest in keeping the practice alive, and are taking money away from honest American investors by enacting naked short selling schemes, the methods of which are detailed in the above mentioned articles. I received numerous emails that highlighted the extreme views of both sides, one side praising me for "speaking the truth", the other calling me "a faulking idiot" and a "moron", and blaming the woes of struggling OTC companies entirely on the companies themselves.
The argument against the new NASD rules is as basic as it is groundless. According to online publications such as our-street.com (who actually titled one of their articles opposing the new regulations "Regulation SHO, A prelude to financial chaos" http://www.our-street.com/Shortseller_war.htm ), regulators shouldn't enact laws banning naked short selling because there is fraud on both sides of the issue. In other words, since there exist illegal pump and dump schemes that try to artificially inflate the price of small OTC stocks, and since naked short sellers are trying to illegally drive the price of the same stocks down, then the two groups of con artists will in effect cancel each other out. That's right, because there are criminals on one side of the issue, opponents of the new regulations believe we should continue to allow criminal activity on the other side. That way, the small investor gets screwed both coming and going. In this case, the old saying "two wrongs don't make a right" was never more true. Most of these publications try to justify their blatant disregard for the small investor by claiming that they would support laws that curtail both practices, and our-street even lists a few decent ideas to do just that. But the fact remains that in the end, they oppose the very laws that could finally give small investors and legitimate companies a fighting chance. And Lord knows, honest investors needs all the help they can get.
On the other side of the argument, proponents believe that the new regulations will be a magic bullet that fixes all that is wrong with the OTC market. They are no more accurate in their assertions than those that oppose the new laws. Fraud on the corporate side is just as rampant as fraud on the naked short selling side, and both issues need to be addressed before it it safe for the average investor to swim safely back into the OTC waters. Are some of the proponents of the new regulations so-called corporate "pump and dump artists" waiting to perpetuate their schemes on unsuspecting investors? It's quite possible, just as it's likely that many of those who oppose the new regulations are themselves naked short sellers who make a profit by robbing honest investors. As I said before, two wrongs don't make a right.
Last week, I ended my commentary on the subject of naked short selling with this statement: "The obvious solution is simple: if foreign countries want to buy U.S. securities, then they need to follow our rules, and our rules need to be far more stringent against naked short selling (and short selling in general) as well. End of story." I believe that truer words were never spoken, but in one respect I was totally wrong: the story doesn't end there. In fact, it is only the beginning. This is the faulking truth: until the SEC and NASD enact regulations that eliminate fraud on both sides of the issue, the small investor will continue to face the very real danger of getting fleeced by con artists every time he/she invests in the OTC market.
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Investing 101 Archives:
Financial Terrorism in America (Mark Faulk, Mar 19, 2004)
Pump and Dump or Short and Distort? (Mark Faulk, Apr 18, 2004)
Response From Berliner Freiverkehr and The Berlin-Bremen Stock Exchange (The Faulking Truth, Jun 3, 2004)
The Berlin Connection? SEC and NASD to Meet With German Brokerage Firm Tomorrow (Mark Faulk, Jun 3, 2004)
Is Dateline Losing Credibility Over StockGate Story Delays? (Mark Faulk, Jun 11, 2004)
Who's Looking Out For You? SEC Critics Seeking Investigation (Mark Faulk, Jun 27, 2004)
He Said, She Said: SEC, NASD At Odds Over Status of Proposal (Mark Faulk, Aug 5, 2004)
The Berlin Connection: 250 Companies Out (And Counting) (Mark Faulk, Aug 30, 2004)
Jag Media Case Dismissed by Judge, Citing Filing Deficiencies (Dave Patch, Sep 9, 2004)
A Twelve Step Program to Clean up the OTC Stock Market (Mark Faulk, Sep 14, 2004)
Is Time Running Short in StockGate Scandal? (Mark Faulk, Oct 5, 2004)
Dateline: The Waiting is the Hardest Part (Mark Faulk, Nov 16, 2004)
Death of an Investment Class (Dave Patch, Dec 30, 2004)
Elgindy Trial Illustrates Incompetence at the Federal Levels (Dave Patch, Jan 4, 2005)
The Year of the Investor (Mark Faulk, Jan 5, 2005)
Regulation SHO’s Threshold Lists Leave More Questions than Answers (Dave Patch, Jan 11, 2005)
Feeding the Stock Market Beast (Mark Faulk, Jan 11, 2005)
Economic Corruption US Style (Joel S. Hirschhorn, Feb 27, 2005)
Stockgate Goes to Congress (Mark Faulk, Mar 10, 2005)
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FINALLY! Dateline to Air Stockgate Segment April 10th (Mark Faulk, Mar 28, 2005)
Dateline Stockgate Update: POSTPONED YET AGAIN! (Mark Faulk, Apr 6, 2005)
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