Crime of the Century, Part IV: Fingerprints at the Crime Scene, Protecting Mining Companies & Internet Rats

JOHN: Well, we've been causing quite a row out on the internet, it seems like, Jim, with our seriesCrime of the Century, and today we're doingCrime of the Century, Part IV. We've been talking specifically about naked short selling, but other issues that are related into it. Today we're going to talk about fingerprints and the crime at the scene. We hear about forensic analysis, or forensic accounting trying to find out what had gone wrong. This is somewhat the same thing. How do you tell who is doing what and where? And then we're going to talk about how mining companies can protect themselves from this type of assault because it really affects them and their investors. And then we're going to look at how the media is being used to bilk investors out of their money. Now, surely they wouldn't do that, Jim?

JIM: You know, one of the amazing things about this is we're talking with several law firms right now on this very issue and working with them. And the senior partner told me, he said, one of the reasons that they are fighting in keeping this out of the court room is, John, you know, it's like, what do you do when they – there is a crime scene. You get the forensic pathologists, they come in and they dust for finger prints. Well, in the securities market, every crime scene has fingerprints. And the unfortunate thing for the criminals is every trade transaction is a written record. You cannot get rid of it. When a bad apple investment bank comes in two seconds before the market closes and drives the stock price down by 8%, that is a written record. Or if a company shows up on the Reg SHO list on a naked short selling, that is a written record. And if you're an investment bank and you're executing a trade for an individual, that's a record that could be subpoenaed in court.

In fact, there was a court case in Canada involving an investment scheme offshore where you had seven BC brokers that were named and were aiding and abetting in this issue in the Netherland Antilles where a lot of this stuff occurs offshore, where it's hidden from regulators. All of this can be subpoenaed in a court of law. And that's why, like, for example, like last week where Wes Christian talked about, remember the old RICO, the racketeering charges. When you're involved in this, this is the equivalent to racketeering. And this is why the bankers have been trying to fight to keep this out of the court rooms because once it gets in the court rooms, John, the fingerprints are all over the crime scene. You can't hide this. You can't destroy the trading records for a day. You've got to keep the trading records. So the unfortunate thing for the criminals is there's a written record of this; and there is a clear path here that the regulators can follow to identify how the crime has been committed because there are fingerprints. There is every bit of evidence all over the place and that's why they are fighting like the dickens to keep this out of the court room because once they get in the court room, they are nailed. [3:15]

JOHN: Plus a lot comes out in discovery that really was unknown before, just things that you wouldn't even think of and that may lead to other trails and other areas, so as long as you can keep it out of discovery, then you're better off. That is their philosophy in this.

JIM: Yeah. And especially as we mentioned in the Part Two of Crime of the Century, all of these trading techniques, you might be able to argue, it was two seconds to the market close and we just had this one trade that went off. Okay. That might be dismissible, but when you see it on a daily basis, when you see it done with hundreds of companies, that's a hard one to explain. You can't say, well, it's just coincidental by the end of the day even though the stock is up in the last two seconds of trading, one company this week was trading in a range and I kid you not, the last second in trading, they took the stock down six or seven percent and the company executive called down to the market maker and said, “What happened here? The stocks trading at one level all day and the last second of trading, there is this trade that goes off and the stock is taken down.”

I got a call from an executive one day where we were talking and his stock which had been up 5% that day in the final two seconds of trading, one of these bad apple Canadian investment banks took his stock down 8% -- in the last final two seconds of trading! And we've got these print out screens around and that's why we are keeping track of this kind of activity that's being done on 10 stocks. We have trade screens that identify the bankers, identify the seconds of the trade.

And John, once again, this is the great thing that the regulators have and the prosecutors have is there are finger prints on the crime scene that can't be erased, so it's not like you can throw away the weapon and dispose of it. It's there for everybody to see and every securities firm has to keep records for years in case they ever get audited and that's why the biggest fight right now is to keep it out of the court rooms. And it was very much similar to, you remember the fight over tobacco and it was to keep it out of the court rooms, and finally it was the state's attorney generals that brought it to a class action lawsuit with the state attorney's general that actually brought down the tobacco companies. They could no longer hide this. And that's what's coming next to the security industry, firms like John O’Quinn’s and Wes Christian’s and his law firm that are pioneering this with software that can go in.

And you heard him talk last week where there was a case where they went in and customers were showing that they own 12 million shares of a company and firm they were dealing with only had one million shares at the DTC, so there was 11 million share that's customers held in their accounts that didn't exist. And that's why we're calling this the Crime of the Century. This is probably the biggest financial crime ever committed in this nation's history. That's how big and pervasive this is. [6:17]

JOHN: But there is going to have to be a trigger to make the securities people go after them or Congress people or members of parliament in Canada to change the law.

JIM: Well, it's starting. As we played the clip last week with Chris Cox who is the current chairman of the SEC, he talked about they are taking actions with only 400 complaints. Imagine if those 400 complaints in the US or Canada turned to 4,000 or to 40,000. A lot of individuals have written this and I have never seen the kind of response that we're getting from mining companies and individuals about this very same issue, and people are saying, “well, the little guy doesn't have a chance.” No. They do have a chance. John, it's kind of like, let's say, that you had a local gas station and people that ran this gas station were cheating people, they were doing lousy work, they were over charging people. You know, if somebody who went through that experience and told somebody else, “hey, don't go to this gas station because never going to rip you off, this is what they do,” word starts to spread and if it spreads from one person to another person – and we're going to interview later on in this segment one of the editors of Stockhouse where naked short selling is really taking on a life of its own where it's the fastest growing blogs on the site in terms of what's going on. [7:43]

JOHN: Basically, you're saying we have finger prints all over everything because we have a very extensive set of financial records that have to be kept on all of these trades. You're Deep Throat. And you're meeting somebody in a garage in Washington and say, “hey, buddy. Here is where it goes. Look over here.” Where would that be? What path would you lead these regulators down?

JIM: Well, actually, there is a six step process that the regulators could take to nail these guys. Step one, a lot of this activity occurs with the financing in the mining sector, so step one would be to take all of the private placements that were done in a year by particular investment bank or a series of investment banks because there is, believe me, there is more than one. There are quite a few. Take all of the private placements that they did, so that's a key, and say “all right, you guys are in the investment banking business, let's take a look at your records.” Then step two, take a look at trading activity in the, let's say, investment bank A is doing a financing for a mining company we'll call ABC.

So you would get all of the private placements done by the investment bank. Step two is take the trading in this mining company six months prior to the financing and six months after the financing because that's real key because usually – one mining executive sent me a graph and he was telling me about where basically they had taken this individual's company stock and drove down the price almost 75 and 80% prior to the financing and literally crushed the stock and left the company in a very vulnerable position. But anyway, step two is once you have gotten all of their private placements and their financing, then take every one of those companies that they financed and take the trading six months prior to the financing, six months after the financing. [9:57]

JOHN: But wait a minute. What about short positions in this?

JIM: My friend, you've got to step number three. See, you're a good detective.

JOHN: I'm very good at that. Yes.

JIM: Step number three is take the short positions and start monitoring the short positions six months prior to the financing and six months after the financing – so that's step three. So now you're taking a look, and what you're doing is following the trading activities prior to the financing and after, following the shorting position prior to the financing and after. And step four is also look at the firm's own trading for its own account, six months prior and six months after the financing.

Step five, take a look at the individuals that they brought in to the financing. In other words, the institutions that participate and take a look at the relationship with the investment bank and these institutions – most of them are usually hedge funds – because now what you're saying, okay, there is a collusion here, there is a crime that's taking place. Who is all part of the crime syndicate?

And step six, also take a look at chat room activity because a lot of times when they are taking down a stock, you will find what we call the internet rats that show up on the chat rooms and they start putting out false information about a company; they start maligning the reputation of the mining company executives, the board of directors. They misconstrue drill results and stuff that all of a sudden they show up. Many times, these will be brokers at the investment bank or they may be internet rats hired by the hedge fund. So there is a trail here and they can go back into these chat rooms, they can take a look, find out these people's identity. Do these people work for the investment banks? Do they work for the hedge funds?

So here is a six step process, John, from the crime scene where you can take the financing, you can take a look at trading before the financing and afterwards, the short positions before and after the financing, the trading of the firm, the relationship of these firms to the institutional clients that they bring in on the financing. And then, once again, chat room activity around the internet because they use the media –and we're going to get into some film clips next week with part five of Crime of the Century where a well known hedge fund manager talked about how he used the media as kind of a pawn in his ability to influence the price of the stock. [12:42]

JOHN: Okay. All of that side is what investigators could do, say, we were to begin prosecuting the Crime of the Century. But obviously this is ongoing until that happens, and you have mine companies or other companies that are involved in naked shorts. What can they do to protect themselves? First of all, how can they detect this because just based on the phone call that you were talking about earlier, a lot of CEOs of companies don't really quite understand this is what's going on out there?

JIM: The first thing, if you're a CEO of a mining company or you have an IR guy, you'd better have a Level 2 so you can see what's going on in your stock, you can see who is doing the trades. I was talking to a mining executive on Wednesday where he was very cognizant of the fact that his stock had been up during the day and the last two seconds this one particular Canadian investment bank took his stock down 8% in the final two seconds of the trading. So he's aware. So mining companies have to get a Level 2. They have to take a look at who is trading their stock. So that's one way that they become aware of it because if you don't have that and your stock is going down in the final two seconds of trading or they carpet bomb your stock – one company called me and their stock was subject to a carpet bombing on Wednesday where they took it down almost 15, 20%. No news. Here is a company whose revenues have tripled, whose profits have quadrupled and who are going to quadruple again and has probably the highest profit margins of any silver producer and they carpet bombed it. And we got a couple of emails from people who own the stock and it's like what's going on. And a couple of people are starting to wise up and they go, “are they carpet bombing? “ I go, “yeah.” Just coincidentally there is a short position in this company. So, Level 2.

Now, the other thing that a mining company can do is once you've got Level 2, so you're watching what's going to happen to your stock, you see what investment banks, who are the buyers, who are the sellers. Before you engage the investment bank, you have a form that the investment bank signs off to that that they will not engage in any short selling activity or jitney trades to other investment banks. [15:10]

JOHN: Wait a minute. It sounds like a sailing term. What is a jitney trade? You know, “tars, bring in the jitney.”

JIM: A jitney trade – a lot of times when you want to cover your tracks and let's say you're under close scrutiny, let's say that you're going to carpet bomb their stock and you're going to bring in the short sellers – hedge funds – that are going to start shorting. You don't want to be the guilty party, so you’ll tell the hedge fund, “Look, why don't you sell your shares short with another one of our partners here, another investment bank, so if somebody is watching us, the selling will start occurring at another investment bank rather than the investment bank that's doing the financing. And then you'll short sell the stock with another investment bank, but we'll bring you in and we'll cover your short position on the financing.”

So what you do is you have your lawyers draw up an agreement that the investment bank agrees, number one, they will not engage in any short selling activity, they will not engage in any collusion with other investment banks that short sell; and then also, there is an agreement that any short seller or any party to the transaction – in other words, any investors coming in on the financing must disclose their short positions and their holdings in the company. [16:33]

JOHN: It would seem, though, Jim, that you're getting tangled here in a lot of securities laws and other related issues, so how is this going to interact with say, for example, just taking one of these investment banks to court or something along those lines.

JIM: Well, the problem is, as we mentioned earlier, the investment banks are trying to keep this out of the courtroom because on the crime scene, the finger prints are all over it. Every single trade that occurs on a daily basis between the buying broker, selling broker, the time of the trade, we've got reams and reams of this at our attorney’s office right now that documents this kind of stuff. So a lot of these junior mining companies, John, they just don't have the money. They are paying for drills, they are paying for supplies, they are paying personnel. They can't take on the bankers in the courtroom because the bankers are filthy rich. So what you can do, though, is before you talk to these companies is you can have them sign a legal agreement that they agree not to engage in these fraudulent activities.

For example, let's say you're talking to investment banker A, you're talking about a financing and all of a sudden you see investment bank B now becomes a huge short seller and seller of your stock, and investment bank A agrees not to do any jitney trades or anything like that, what they have done if they are in collusion with this firm is they have committed perjury. And as my lawyers have told me, you can get these guys on perjury. I mean that's a serious offense. When you say, “hey, I agree not to short sell your stock, I agree not to consult in collusion in order to short sell your stock through another firm I'm in collusion with, and three, I'm not going to bring any short sellers into the offering.” So it puts the investment bank on notice that you were watching this activity and if you see this activity – all of a sudden heavy selling starts coming into your stock by another investment bank, your short position starts to go up, then it's a call to the attorneys. And so this is something, I think, that mining companies can take a step and make it part of all underwriting or talks.

And you want to do this before you even come close to signing anything. A lot of times mining companies, John, if they are talking to bigger mining companies, let's say I'm a small junior mining company or late stage development, and one of the big boys wants to come around and sniff around my property. You sometimes will have to sign an agreement that the mining company doesn't agree to buy more than 5% of your stock, will negotiate directly with management, so the mining company is protecting itself. These are the kind of steps that mining companies need to take to protect themselves from the kind of activity that we're talking about here, so that they don't have these investment banks. That’s because nobody wants to sign a piece of paper legally that they would perjure themselves because then you've got the goods on them. Not only do you have the finger prints from the crime scene, but you also have that they perjured themselves and then they are in big trouble. [19:42]

JOHN: Let us look at the subject of what we call ‘internet rats.’ How do they factor into this? We've talked somewhat about this in the past where people deliberately wind up in the chatrooms or on the blogs and they are there as change agents so to speak to influence the value of stocks.

JIM: Yeah. What you'll generally see, and you'll see a pattern you hear, when a stock starts to crater through either one of the seven manipulation techniques I talked about: they carpet bomb your stock two seconds before the close, they take the stock market down, or they put whopper bids on the tape, or they do the hand off where they do sort of programmed trading and shorting between two exchanges. All of these things are occurring and the stock starts to take a nose dive. All of a sudden you'll see new characters appear on the chat room out of the blue. And what they'll do is the investors who may not be aware of the Level 2, they are all of a sudden looking for information. It's like what the heck just happened. Why did the stock go down when gold was up?

Is there something wrong, is there news? That's where the internet rats show up. The internet rats are usually either employed by an investment bank or a hedge fund and their job is to go on the chat room and to put out false information. They will try to misconstrue information from public releases by the company, drill results, something going on with the company. They'll start impugning the character of management or they will take something out and twist it and so it creates doubt in the investor mind. And remember, these internet rats are paid by the more people that they can get to respond to the false information that they put out.

Let's get straight to the point. Why are they doing this? They are trying to scare you out of your position so that they can steal your shares because remember, when you're shorting a stock, you've got to go back and buy it. Well, they get into trouble if people don't want to sell the stock and they are holding on the their stock, how are they going to cover their short position. So what they've got to do is take green investors and they've got to scare these investors out of their life savings so they can steal their life savings to cover their short positions. And the way they do that is it by putting out in series of false information. And if you think about it logically, if I don't own a stock, why am I spending all day putting posts on a chat room that are negative and I have no interest, invested interest in this stock? When you see somebody doing that, that's your first suspicion, ha, here is a short seller. And that's what his purpose is. He's not there to help you. He's there to steal from you. He wants to steal your shares from you at a lower price so he can profit from your misfortune by causing you to panic, sell your shares so they can come in and steal your shares. In fact, I think it was in our second broadcast where we talked about the seven manipulation techniques and we read the confessions of a basher. They have various names. I call them internet rats, people call them bashers.

And remember, when you are a short seller, a very effective tool of the short seller is the media. We're going play some film clips next week, where a well known hedge fund manager is talking about how he manipulated reporters on the stock exchange floor or reporters in the press to put out a negative story on a stock that he was short, or to put out a positive story on a stock that he was long. And so the media is mainly a pawn in this and they use the media as a pawn to either manipulate people and change their sentiment to effect outcome that they want. In this case, they are shorting the stock. They want people to lose faith in the company and sell their shares, which then brings in volume, changes sentiment and allows them to come in and steal your shares from you and your life savings so they can profit at your misfortune? [24:09]

JOHN: So when you see all of this suspicious activities appear, all right, what are your options? What can you do?

JIM: Number one, ignore them because if you respond to them, they are making then more money. They get paid by the more responses that they get to their post. The second thing is it is a felony offense. You can go to prison for posting misleading information on a website with the idea of trying to manipulate investor sentiments so you may either cover in the case of pumping a stock to help your long position or causing people to sell a stock to profit from your short position. So the next thing is turn this person in to the authorities – the SEC, the Canadian authorities. And every time you see them – and a lot of times they'll change their venue when people discover their scam, they'll change their name and they'll change their moniker and come back; or they'll go to another website and start bashing the company. But usually, there is a short position in the stock and the seven manipulation techniques that I talked about in the second program are all occurring, and you've got to turn these people in.

If they get enough complaints at the SEC – there was a very famous case with the internet stocks in the late 90s of some people that were using the chat rooms to pump these stocks. They got caught. They are now serving time. They are in prison. And that's what you have to do. You have to put these people in prison and have that happen enough times and enough publicity and then these people will go to jail. What you don't want to do is number one, sell your stock.

And that's why we always talk about go to the company website, get the information directly from the company, read the press releases, call up management, do your due diligence so you understand what it is you own so you can spot these internet rats when they show up and start putting out false information; or if they raise some doubt, you know, call up the management of the company and say, “hey, there is this internet rat on your chat room and he's saying this” and this and this. Get the scoop straight from the horse's mouth. And then the third thing you do, just file a complaint with regulators about these people that are manipulating the chat rooms for that very purpose because eventually, if the regulators hear enough about a particular character, they can look into it and find out who that person is. And if they catch them and then the regulators find out that either one they are working for an investment bank, or two, they have been hired by a hedge fund to put out this information and that hedge fund is shorting the stock or the investment bank is shorting the stock, John, they are going to prison.

And also as we conclude Part 4 of the Crime of the Century, I just want to point out, Jim Sinclair at his website why JSmineset has now offered a $50,000 reward for information leading to the identification of the manager or managers of the hedge fund pool operators illegally shorting junior gold shares. The purpose is to level the field –and he's extended this and I believe him to be good for the money – and you know, something, we may even join him in this process. So if you are a former trader, broker, working at a hedge fund or an investment bank that you know of that was engaged in this activity, Sinclair is now offering a $50,000 reward. And if you are a former trader or have information or you know for a fact you can email me as well and we'll make sure that this information is disseminated to the appropriate people. [27:52]

JOHN: You're saying trader, not traitor; right?

JIM: Yeah. Trader. Maybe you were executing these trades at a hedge fund or an investment bank or are involved in this, or you worked for either one of these entities and you were one of the chat room rats that was going out and disseminating and putting out false information on companies that were being shorted because there is a hedge fund pool. They are a group of hedge funds that are involved in this activity and they are getting cooperation from the investment banks. And as Wes Christian talked about last week, this is collusion in many ways, John, because it would be the same thing – you have a fiduciary obligation, just like if somebody called me up and said, “Jim, I want you to sell 100 shares of Exxon and I'll deliver the certificates, well, we wouldn't execute that trade until you we know that we had the shares in our account.” So if you're a brokerage firm and somebody is shorting a stock and they don't have proof that they have the stock, you're under the obligation to secure proof that they do have those shares to back up their short position. So once again, culpability and the gatekeepers in this are the investment banks. [29:07]

JOHN: So basically what you're saying is that traders execute and traders are executed. How is that?

JIM: That's what it may be coming to.

JOHN: We'll follow that. Coming up next week we'll have Part 5 of the Crime of the Century, and Jim, what will we focus on at that time?

JIM: We’re going to sum up: we'll sum up what regulators can do, what companies can do, what investors can do; and then I’m going to invite Eric King on the show. Eric is probably one of the best chart readers and he's going to talk about some of these manipulation schemes. Eric is a private investor by profession. He reads the charts, he talks about this and we'll illustrate some examples. We're not going to disclose the companies, but he'll describe how he spots it occurring in real time, so investors can get some tips from Eric how they can, if they've got Level 2 or they are looking at the charts, see these crimes that are being committed as these criminals try to defraud investors out of their life savings. So that's going to be coming up next week.

And then after that, we're going to be writing a series of articles that we're going to publish on the web. I'm going to come out of my retirement writing to take this on. In fact, my wife who retired last December was so incensed as I was going through this material and just sharing it with her, we are actually going to come up with a new web page that's going to list companies that are on the naked short list. We're going to have link to stories, press releases, we're going to have sites they can go to, speeches so that investors can be educated and become aware of this. And what we're hoping is eventually that this is picked up by the national media; and once the national media picks up on this that it's eventually picked up by the regulators and the politicians until steps are taken to prevent this crime from occurring on a repeated basis. It was so blatant this week, John. I got calls literally from five and six mining companies where this was occurring in real time. They were made aware of the two second drop down, the carpet bomb, the monster bid – all of these things that we’ve been talking about, the word is spreading and people are becoming more educated. [31:20]

JOHN: And you're listening to the Financial Sense Newshour atwww.financialsense.com.