This is a long read but well worth the time imo. From one of the experts in naked short selling. Another junior is referenced but this pertains to many legitimate junior miners.

WEEKEND HOMEWORK ASSIGNMENT

For those of you interested in studying how the noose is tightening on Wall Street in regards to abusive naked short selling crimes utilizing “short and distort” campaigns you might study up on the Barry Minkow case as outlined on deepcapture.com. Here are a couple of quotes from that website:
Quote #1:
“Minkow’s manipulation of the market … caused a severe drop in the stock prices of a large local corporation (Lennar, Inc.). This type of deceit and abuse of trust will not be tolerated… we will investigate and prosecute stock manipulation cases to help protect the integrity of our capital markets…When false statements are disseminated to deceive the investing public, whether they’re designed to prop up a company or tear it down, the FBI will dedicate all available resources to bring disseminators of such falsehoods to justice.” – United States Department of Justice, Press release, March 24, 2011

(COMMENT: The risk of doing jail time is the ONLY meaningful deterrent to the commission of “short and distort” crimes by already ultra-wealthy parties. Paltry fines that amount to speeding tickets and that are looked upon as a mere cost of doing business offer no deterrence. The SROs, the regulators and the congressional oversight committees collectively have conflicts of interest beyond your imagination in regards to them following their congressional mandate to provide investor protection. The concept of “self-regulation” in an environment with trillions of the investment dollars of far less financially sophisticated citizens being up for grabs and certain parties having enormous “home court advantage” due to informational as well as experiential asymmetries never had a chance to succeed. In fact, just the opposite occurs as the mere existence of SROs provides the misrepresentation that there are unconflicted “securities cops” walking the beat. The DOJ and the FBI do not share these conflicts of interest and the deterrence they provide is truly meaningful. This arrival on the scene by the DOJ, FBI and the FFETF is a very big deal.)

Quote #2:
“Minkow Charged In Stock Fraud, Extortion Case – A financial fraud investigator and ex-convict was charged with conspiracy in a Florida federal court on Thursday, a week after agreeing to plead guilty to allegations that he intentionally depressed a company’s stock with false accusations of fraud.” – Law360, March 24, 2011

(COMMENT: Concentrate on the “intentional depression of share prices via false accusations of fraud” as this is the modus operandi of many of the “distorters” retained in “short and distort” campaigns.)

The FBI, the DOJ and the FFETF have been promising to the anti-naked short selling market reform community a vast clean up of the compensated Internet basher/”cyber sleuth” community that spreads lies about corporations and their management teams while working in concert with those that have established either legal or illegal short positions against the company targeted for destruction. These campaigns are sometimes referred to as “short and distort” campaigns. Sometimes the “shorter” and the “distorter” are the same party and other times the “distorting” is contracted out.

The typical modus operandi involves abusive market makers and co-conspiring hedge funds selling massive amounts of nonexistent securities into the markets of U.S. corporations they deemed to be an easy prey, easy to smear or whose chances for success were infinitesimally low. You can see why (insert junior miner) was the perfect target. After refusing to deliver that which they sold on T+3, the previously agreed to “settlement date”, these securities fraudsters know that the accounts of those buying the nonexistent securities will be credited with readily sellable share price depressing “security entitlements” as mandated by UCC Article 8. This is because the default assumption at the SRO known as the NSCC is that all of their co-owning “participants” would never misbehave and thus all delivery failures, by default, are associated with legitimate delivery “delays” only. They know that these readily sellable “security entitlements” are indistinguishable from legitimate shares on the monthly brokerage statement of the investor being defrauded.

Due to the intentional flooding of the corporation’s share structure with these mere “security entitlements” as the “supply” of that which by law must be treated as being readily sellable (legitimate shares PLUS all “entitlements”) increases then the share price by definition must go down. Since on Wall Street the sellers of even nonexistent shares need only collateralize the monetary value of their failed delivery obligation before gaining access to an investor’s money as the share price drops so too do the collateralization requirements. This unconscionably allows the funds of the party being defrauded to flow to the party refusing to deliver that which it sold. This is despite the fact that what is being sold does not even exist.

The role of the compensated Internet basher is to leverage the existence of all of those “extra” mere “entitlements” and induce the panic selling of a certain percentage of BOTH the legitimate shares that a corporation has “outstanding” that were indeed delivered and the same percentage of the mere “security entitlements” credited to the accounts of the purchasers of the never to be delivered shares. As in the Minkow case this is often done by the spreading of false rumors and the accusations of fraud being committed by a corporation’s management team. Think of these poisoned share structures as a big bloated piñata that Internet bashers take swings at to induce copious amounts of sell orders to flow from.

The crimes typically cited include “kiting” frauds, extortion, conspiracy, share price manipulation and racketeering. Although 1st Amendment rights to free speech are usually used as a cover for this criminal behavior the courts are finally dismissing those rights as being applicable during the commission of a crime. Most securities lawyers agree that the heretofore missing deterrence to these crimes will be greatly bolstered by the palpable risk of doing jail time for playing a critical role in aiding and abetting these thefts i.e. acting as the “distorter”.

In our markets, the “supply” of and the “demand” for shares interact to determine share prices through the “price discovery” mechanism. In essence, the court found that the intentional MANIPULATION upwards of the “supply” of shares through the use of deceit and the simultaneous MANIPULATION downwards of the “demand” for shares again through the use of deceit is indeed a crime. This is because the “share price discovery” process is always at work even when the “supply” and “demand” variables are subject to being intentionally MANIPULATED.

When this downward share price MANIPULATION involves various parties assuming short positions and various parties propagating the lies then the concept of conspiracy and racketeering comes into play. Since share price manipulation is clearly a criminal endeavor and due to the nature of the “price discovery” process always at work in our markets then the intentional spreading of falsehoods while working directly or indirectly in concert with the recipients of the stolen funds plays a key role in these theft as the approximate 5 year sentence of Minkow confirms.

In the Lennar/Minkow case the misrepresentations allegedly made by Minkow resulted in the loss of approximately $300 million by the Lennar shareholders. That’s real money. The court records reveal that Minkow was employed by a party with a grudge against Lennar. Finally, a court of law has reaffirmed that it is a crime to deceive investors into making panic sales of shares resulting in the manipulation of share prices downwards and the shunting of the investment funds of investors into the wallets of those co-conspirators with short positions.

“PUMP AND DUMPERS” VERSUS “SHORT AND DISTORTERS”

The “pump and dump” form of securities fraud typically involves a corrupt management team member putting out fraudulent/embellished press releases (the “pump”) followed by selling his shares into the buying generated by the bogus PR (the “dump”). It is diametrically opposed to the “short and distort” in some aspects but not all. The difference involves the recourse available once the defrauded party learns he’s been defrauded.

The “pump and dumper” is easily identifiable and easy to go after in a legal sense. The “distorters” in “short and distort” crimes, however, typically hide behind 1st Amendment rights to free speech, Internet anonymity and a series of proxy servers used to prevent identification. Minkow, like most of the “distorters”, hid behind the façade of being a professional “fraud detector” that could allegedly smell a fraud from a mile away. Having already served time for fraud his mantra was that it takes a fraud to catch a fraud. Most of the “distorters” on the various “bashing” websites operate behind the same façade. They actually pose as “shareholder advocates” whose mission is to MANIPULATE downwards the share prices of corporations they (in their infinite wisdom) deem to be “scams” in an effort to drive the corporation into bankruptcy. As the reasoning goes, this then prevents future shareholders from being “scammed” by misbehaving management teams. The fact that the investment funds of the CURRENT shareholders gets shunted to the parties selling nonexistent shares all day long i.e. their employers apparently doesn’t bother them even though they portray themselves as “shareholder advocates”.

The problem is that mere “bashing” doesn’t pay very well UNLESS you’re working in concert with parties benefitting from the share price manipulation downwards i.e. legal or illegal short sellers. This is where the concepts of conspiracy and racketeering come onto the scene. It’s a bit odd but to this day I don’t think that the average compensated Internet basher has a clue as to the integral role he or she plays in aiding and abetting this crime wave. If you’re busy bashing 20 different U.S. corporations where would you ever find the time to peel back enough layers of the onion to confirm that your diagnosis of “scam” is correct? If you con a group of people to sell their shares of an alleged “scam” at the 1-cent level and the company ends up really “having the goods” and goes to $1 per share how could you ever compensate those that you defrauded?
Due to the extremely critical role of paid Internet bashers being able to induce the panic selling of the either real or fake shares bought by impressionable investors the Minkow case represents a huge breakthrough. Based upon the assumption that all human beings are down deep good people, my personal prayer would be that the paid Internet bashers of the world might realize what exactly they’re doing for a living and how their role is so integral to these thefts. If from an ethical point of view after being educated as to the nature of these thefts they still have no problem with what they do then so be it. One of the key legal aspects that comes into play is that of “scienter” which is having the knowledge that what you are doing is illegal. The blatant theft of the investment funds of CURRENT shareholders being routed to the sellers of nonexistent securities in order to theoretically prevent FUTURE shareholders from being scammed just doesn’t make a lot of sense especially in the minds of the CURRENT shareholders. I will be the first to admit, however, that it is indeed a very clever façade to present in order to cover up these frauds and perhaps to still be able to sleep at night.

I encourage you to follow deepcapture.com and its coverage of the Minkow case. Also rent a copy of the DVD “Inside Job” with Matt Damon. It is the most succinct summary of the recent (2008) Wall Street meltdown and highlights the insatiable greed of those on Wall Street that are routinely picking our pockets via crimes like abusive naked short selling.