The Internet’s Role in Gaming the Markets

The Internet’s Role in Gaming the Markets:

HERE’S an investment opportunity you might be able to pass up.

The company has no operations, and no prospects of any. Its previous operations all failed, and the reports the company files with the Securities and Exchange Commission show that its only source of cash is issuing stock.

But a few weeks ago, this stock shot upward on huge volume, providing what may have been huge profits for the people who were being allowed to buy stock from the company at a deep discount to market price. Perhaps not so coincidentally, some Internet message boards buzzed with activity at the same time, promoting the stock as one that was sure to keep rising.
The name of the company is MotivNation, but that is of little importance. There are many companies like it.

A look at MotivNation’s trading activity this year provides a window on a netherworld of the American stock market. It also illustrates the paradox of the intersection of the penny stock market — a traditional area of stock promotion and “pump and dump” schemes — and the Internet.

On the one hand, the Internet has made it far easier for any investor who wants to do so to quickly find S.E.C. filings by any company. Twenty years ago, getting a copy of a corporate filing was either slow (ask the company to send you one) or expensive (buy a filing from a company that could get it from the S.E.C.). Now anyone with Internet access can download corporate reports within seconds after they are filed.

But the Internet has also made stock manipulation much easier. In the old days, a person — perhaps a broker for a penny stock firm — would have to contact an investor and talk him or her into buying the stock. That was expensive. Now, mass e-mail messages can be sent out — it appears that happened with MotivNation — and anonymous posters on bulletin boards can promote the stock at very low cost. One enthusiast signed his posts, “Cantgetmyname.”
Anyone who bothers to read the annual report filed by MotivNation can learn just how little fundamental value the company has, and how the company prints shares by the millions while it has no other business.

To be sure, the filing of that annual report was delayed past the due date, and by the time it arrived the stock promotion appeared to have settled down. In the weeks before the filing, the price of 100 shares of the stock leaped to a high of 37 cents, from 2 cents, and hundreds of millions of shares were traded. Now it is back to about 12 cents, still an amazing price given the company’s lack of a business.

Where did those shares come from? Many millions were newly printed by the company, sold to hedge funds at deep discounts to market value and almost immediately sold on to speculators. Others appear to have been sold by speculators who did not own any shares, and did not borrow any, but were placing bets that the stock price would decline. They were engaging in what is called naked short-selling, which is illegal if it is intended to manipulate the stock.
How many shares were created by each method? From the annual report, we know that MotivNation issued 28 million shares in the first quarter, but there is no way to know how many were issued after the end of the quarter, while volume was still high. As of the end of the quarter, the company had 134 million shares outstanding, up from 30 million last June, just before the company’s only operating subsidiary went into bankruptcy and ceased operations.
Under S.E.C. rules, stock markets each day release the name of any company where there have been failures to deliver at least one-half of 1 percent of the outstanding shares — a figure that for this company would be fewer than 700,000 shares. MotivNation went on the OTC Bulletin Board list a few days before the stock peaked in late March, and has stayed there since. From publicly available information, there is no way to know how many failures to deliver there have been.

A call to the phone number for MotivNation, in Irvine, Calif., was picked up by an answering machine that did not indicate whose number it was. The call was not returned.
Yoel Goldfeder, a lawyer for Corey Ribotsky, whose hedge funds were the buyers and distributors of the stock issued by the company, said his client had not promoted the stock he was buying and selling to the public. “We definitely would not have been involved in marketing anything, especially, as in this case, if there was nothing much to market,” he said.
Mr. Ribotsky’s funds have made similar investments in numerous other companies, and claim to be among the most profitable hedge funds in recent years. In this case, they have the right to buy MotivNation stock at any time they want — paying half of the lowest price the stock has traded for in any three of the most recent 20 days. There is a limit as to how many shares the funds can own, but that limit is irrelevant since they can purchase more shares as soon as they sell the ones already bought.

Who’s the villain here? Is it Mr. Ribotsky’s funds? They appear to have followed the rules. Is it the company? It has made the required disclosures, albeit sometimes on a tardy basis. Is it people who promoted the stock? Perhaps, but it is not easy to know exactly who they are. Is it the naked shorts? They have violated S.E.C. rules, but at the same time they have probably saved investors money by keeping the stock from rising to heights even more absurd than the ones it reached.

If the villain is not easy to spot, the victims are. They are the people who will end up owning worthless stock. Don’t be surprised if some of them conclude that they were victimized not by the people who promoted a company with nothing to recommend it, but by the naked short-sellers who figured out what was happening and, in effect, siphoned off some profits that would have gone to the promoters.