Expert Financial Analysis and Reporting

Stock Manipulation by Short Sellers is Endemic on Wall Street

I am convinced that price manipulation by Wall Street bad actors is endemic in the capital markets and swindles legitimate investors out of billions of dollars each year. This criminal enterprise is particularly directed against the stocks of emerging growth companies that are at the cutting edge of technological innovation and jobs creation and are so critical to solving humanity’s greatest challenges. Because my research deals with biotechnology, I am most aware of innumerable, vicious attacks on biotechnology companies, but the scheme is perpetrated on all types of companies, primarily small but also large.

I wrote an extensive report in 2015 that focused on the central role that illegal naked shorting plays in this sophisticated, criminal enterprise. At that time, I was aware of several determined efforts to try to expose and end the scheme which focused on trying to shed light on the manipulation, get the SEC to step in and/or to bring lawsuits. They went nowhere. Indeed the stock manipulation has actually intensified and the perpetrators have grown ever more brazen over the last four years. I am now making a second and more intensive effort to shed light on how Wall Street market makers and hedge funds routinely collude to manipulate and crash stock prices. I am beginning my research with this article and I am not sure what this will lead to. As I begin, I am chastened by how little I actually know about the mechanics of stock trading. I think that I am not alone.

Time after time I have seen blatant and obvious manipulation of stocks of targeted companies. Time after time I could see stocks trade down on the issuance of positive news and get mauled on any disappointing news. However, I had almost no understanding of how Wall Street trades securities and how well known hedge funds and clearing operations of “household name” investment banks could use naked shorting and related strategies to allow short sellers to easily and routinely manipulate stock prices regardless of the fundamentals.

There have been several attempts to expose Wall Street’s stock manipulation schemes and all have failed. The common thread was that they could not support their claims of stock manipulation with clear, unequivocal analytical evidence. The clearing of securities is so byzantine that insiders have been able to manipulate security prices openly without fear of being caught. Later in this series of reports, I will try to explain what they are doing and I think you will be shocked by what they are doing who is doing it. One point I would leave you with is that going to the SEC with a complaint or launching a securities fraud lawsuit has not been the answer. The failure rate with these approaches has been close to 100%. Why? Because a position at the SEC is viewed by many as a stepping stone to an extremely lucrative position on Wall Street. This leads many (me included) to believe that the SEC has been captured by the industry it purportedly regulates.

I am sometimes asked why I am so focused on this stock manipulation scheme. There are several reasons, but let me cite two of the most important. The first is the pure injustice of watching greedy hedge fund managers and their accomplices in clearing operations of prime brokers destroy small companies to feed their insatiable greed. A second is that the biopharma companies that I deal with would likely experience dramatic upside stock price moves if this scheme is unraveled, actions are taken to block the manipulation and jail the perpetrators. This would be a dramatically positive catalyst for stock prices to the benefit of companies, investors and society as a whole.

Stock Manipulation is a Cancer in Our Capital Markets

There is a cancer in our capital markets. It is the blatant manipulation of stock prices led by a group of tightly knit, colluding hedge funds that I have labeled the wolfpack. The most blatant manipulation occurs in illegal naked shorting of stocks, although the wolfpack is also very accomplished in other illegal activities. The wolfpack is aided and abetted in this scheme by prime brokers (these include “household name” investment banks), law firms specializing in class action law suits, social media bloggers controlled and paid for by hedge funds, and others.

A key skillset of the wolfpack is sophisticated use of social media. As they begin to stalk and attack, they conjure up arguments that maintain that the company’s technology is old, flawed and worthless; that management is corrupt; and that anyone with a positive view is being paid to pump the stock. They then methodically repeat and spread misinformation following the teachings of Hermann Goering who said “A lie told once is just a lie, but a lie told a thousand times becomes the truth.” Legitimate news organizations are often swept up in this and become unwitting participants. A key objective of the wolfpack was succinctly summarized by one hedge fund manager who said “We are going to make management and the company so toxic that no investor will touch it.” The consistent wolfpack goal is to severely damage stock prices and indeed the holy grail of the wolfpack is to drive a company into bankruptcy.

I believe that this highly sophisticated and long running scheme has generated hundreds of billions of dollars of profits for the perpetrators and is one of the biggest criminal enterprises in the world. The wolfpack operatives have become extremely wealthy but remain driven by unbridled greed. Their easiest and most frequent targets are small, emerging growth companies whose willingness to take risk is the driving force for technological advancements and jobs creation in our economy. However, they are vulnerable to the wolfpack because of their need to access the capital markets. The wolfpack tries to drive the stock price so low that the company is starved for capital and can’t fund its operations. The ultimate goal is to feed on the carcass of a bankrupted company.

There are many cases in which the wolfpack eagerly attacks companies developing potentially societal changing technologies, always with the desire to drive stock prices down and not infrequently to force the companies into bankruptcy. This is all to the benefit of employees of the tightly knit community of the wolfpack. Driven by insatiable greed, they are striving to upgrade their multi-million dollar houses in the Hamptons to multi-multimillion dollar homes and/or adding a penthouse in Miami Beach to complement their Connecticut homes, Manhattan apartments, London townhouses, Aspen ski chalets, art collections, ad infinitum. They only measure success in money and material goods and are utterly immoral in their actions.

Who Am I to Make Such a Devastating Accusation?

This is a pretty powerful indictment so you are doubtlessly asking how I can make such a charge. Let me provide some background. I spent most of my career on Wall Street as an analyst and also as Director of research, most notably at Smith Barney and Hambrecht & Quist. My 40 year analytical career was focused first on pharmaceuticals and then on biotechnology. I was the first analyst to cover Amgen as I was the pharmaceutical analyst at Smith Barney when they underwrote the initial public offering of Amgen. I also called on Genentech before they came public. At H&Q, I ran the annual health care conference (now called JP Morgan) early in its existence in the late 1980s and early 1990s.During my career I have called on literally hundreds of biotechnology companies as the industry developed from obscurity (initially the large drug companies and investors dismissed biotechnology as just a manufacturing technique) to the major driving force that it now is in biopharma. Multinational pharmaceutical firms have changed from skeptics to going all in on biotechnology.

I had a reasonably successful career on Wall Street and always meaningfully invested in the several firms that I worked for. This worked out pretty well as four of these firms were acquired in an ever consolidating Wall Street. This gave me some financial security to do something I had always wanted to do and that was start my own firm and to work for myself. I strongly believed that there was a great opportunity to focus on small, emerging biotechnology firms. I had considerable background in the area, a love of the sciences that drove these companies and a great respect for entrepreneurs willing to take incredible risk. I also thought that many of these companies were not well or broadly covered. Most of the research coverage came from analysts at investment banks who were banking these companies. Analysts hired at these firms are incredibly smart, but are compromised because the profits that drive these firms and pay their salaries come from investment banking fees, not research analysis. 

With this mindset, I felt that there was a promising business opportunity to bring unbiased research into the analysis of such companies. About fifteen years ago, I started the process that ultimately led to the creation of my blog SmithOnStocks. My experience in the area which guided my approach was that the tried and true method of making money in small stocks was to try to call outcomes on key events, usually clinical trials and sometimes regulatory events like product approvals. Granted, focusing on binary events such as clinical trials is quite risky and there are many more failures than successes, but success can lead to spectacular outcomes so that one good call could offset several bad ones. That had been my experience. Slowly at first and then with shocking realization I saw that this strategy just wasn’t working, at least in the short term.

To my great astonishment, I saw all too often that positive news would lead to a small bounce in the stock only to be followed by a sharp, inexplicable decline. In cases in which there was disappointment, the stock was devastated far beyond reason. OK, if this happened occasionally, it could be attributed to the market perceiving the outcome in a very different and more negative way. I am not the Delphi Oracle; I make mistakes. However, in many, many cases I was not alone as other investors also were perplexed by the “good news is bad news” and “bad news is devastation” scenarios. It just wasn’t me that was scratching my head. Moreover, oftentimes after a negative news item, the stock would come under sustained long term pressure leading to penny stock status and not infrequently bankruptcy.

There was a pattern to these prolonged, unrelenting attacks and there seemed to be a consistent game plan in which illegal naked shorting was the lynchpin. Naked shorting is a Wall Street invention in which counterfeit shares are created and then sold into the market. Many millions can be created rapidly and then sold into the market to overwhelm buy orders.

Trading in dark pools and algorithmic trading in which thousands of trades (buy and sell) can be executed in the blink of an eye give even more power to illegal naked shorting. This is all far too complex for most investors, me included, to understand. Indeed, hedge funds often employ PhD mathematicians to develop their naked shorting strategies. Later in this report, I will touch more on illegal naked shorting, but it is incredibly complex and this is a big part of the reason that nothing has been done about it.

Stay tuned for the next article.

Categorized as Smith On Stocks Blog