Incredible Wall Street Stories Sometimes the market provides us with stories that one wouldn’t believe if one weren’t able to observe them with one’s own eyes. Occasionally they involve outright fraud, such as the artificial short-squeeze organized in CYNK earlier this year – a ‘social media’ company based in Belize with a single employee, that never had a single dime in earnings or revenues for that matter, and does not even have a web site (i.e., a shell company).
The company’s market cap rose from an already far too high $17 million to an incredible $6.4 billion in the space of three weeks until trading was suspended by the SEC. By this time, most of the short sellers had already been bankrupted – not only by the huge price rise in the stock, but by the enormous cost involved in borrowing the shares (these borrowing costs seem to actually have been a major feature of the scam). In fact, the most recent information suggests that CYNK was also tied to a complex money laundering scheme. Amazingly, the stock still trades at 11 cents, presumably because its price has been supported by frantic short covering on the way down. ‘Pump and dump’ schemes are a dime a dozen, but this one was noteworthy because it involved a different and quite innovative method of defrauding investors. Instead of mainly aiming to defraud the buyers of the stock, it was designed from the outset as a way of bilking short sellers. What the perpetrators probably didn’t consider was that the squeeze would drive the price to a level that would alert the authorities.
Still, while the CYNK case is unique among pump-and-dump schemes in some respects, it is still clearly identifiable some kind of fraud.
GTAT’s Shareholders See $1.45 billion Disappear in a Flash GTAT’s investors by contrast are probably scratching their heads right now, wondering why they have just been hit by a ton of bricks in what appeared to be a perfectly legitimate investment. As things stand, we don’t yet know every detail of this case, but here is a brief summary: GTAT (‘GT Advanced Technologies’) is a putative maker of sapphire glass. This glass was going to be used in Apple’s new line of i-Phones, and Apple in fact advanced some $580 million to the company so it could invest in furnaces and other equipment needed to produce sapphire glass. Something seems not to have worked out as planned though, as the i-Phone 6 series was released sans sapphire glass.
Upon the release of the new i-Phones, a few analysts lowered their rating of GTAT and withdrew their ‘strong buy’ recommendations – but not all of them did. In fact, as of Friday last week, with its market cap at $1.55 billion, the stock still had three ‘buy’ ratings assigned to it by Wall Street’s bien pensants, complete with rather fanciful price targets. If you still needed proof that a great many WS analysts are of no use to investors – in a bull market you don’t need them and in a bear market you don’t want them (we concede of course that there exist numerous exceptions to this rule) – here you have it.
This post was published at Acting-Man on October 7, 2014.