POSITION
PAPER
August 12, 2005
SHORT
SELLING COMBINED WITH FRAUDULENT STOCK MANIPULATION
Submitted
by Gregory J. Halpern – CEO, Circle Group Holdings, Inc. (CXN: AMEX)
Mr. Halpern is the Director of the Midwest Regional Chapter for the CEO Council
The millions of small business
professionals that own and operate small companies in this country produce a
majority of
But small public companies and their
shareholders are facing a severe problem, and they are looking to the Securities
& Exchange Commission, the Justice Department, and the F.B.I. to help them
get urgently needed relief. The problem is that short selling is being
intentionally combined with fraudulent stock manipulation to destroy the value
that small American businesses in the capital markets work so hard to achieve.
The points contained in this position paper have tremendous merit for all small
public companies but it must be pointed out that it was written with a bias
because our company, Circle Group Holdings, has been under constant attack from
a well-organized group of criminals for over a year and a half. Our management
team and employees, who are all owners of the company’s stock, are tenacious,
tough minded, fighters of injustice, with multi-faceted business experience and
backgrounds in martial arts. Thanks to our intestinal fortitude learned from
these backgrounds, we have survived the attacks, and fully expect to survive any
additional attacks. From early 2004, until the present, Circle Group has
successfully battled its attackers by getting several public web sites and chat
boards to remove malicious phony content, getting a protective court order and
winning motions on cutting edge Internet
jurisdiction issues. We found out through this experience that one of our
attackers is now a defendant in other securities matters and is currently being
prosecuted by the SEC for another unrelated stock fraud. Tragically, many other
small public companies have gone out of business. Still more will not survive
the attacks or mount any serious defense against the perpetrators who work in
hiding, often live and/or operate off shore, have completely phony identities
and are cloaked by the anonymity of the
Internet.
For additional perspective our
company, Circle Group Holdings has a legitimate natural food technology solution
for obesity called Z-Trim that was developed at the U.S. Department of
Agriculture over many years with significant amount of taxpayer dollars. Many
anonymous attacks have been made against the company and its personnel in
particular saying that Z-Trim is a scam. Except for bashers, no one on the
planet has even suggested that Z-Trim invented by one of the world’s most
influential agricultural scientists, is a bad invention. Yet the bashers who
attack the company, post numerous outrageous lies about Z-Trim. It is amazing
that the number one health problem in the world today is obesity, and this
outstanding technology could reverse the course of this devastating disease, yet
here is this group of criminals posting lie after lie with their only goal to
destroy the value of the company’s equity and shareholder value. Many innovations and inventions that could have benefited
humankind will never get to market because of the companies that were destroyed
by these criminals.
When just looking at approximately
5000 small and micro-cap companies that have an average issued and outstanding
share total of 40 million shares, and multiplying that by an average $5 loss on
share value, we estimate the losses to investors to be at least a trillion
dollars annually. The number is probably a lot higher when you factor all the
other companies attacked and then lost jobs, potential new economies of scale
that never develop, lost capital markets formation, increased cost burdens on
government and families to support those individuals wiped out, lost individual
and corporate taxable revenue to the treasury, lost improvements to our lives
from innovation that does not occur, and lost investor confidence in the
emerging markets as well as erosion of the American Dream.
Therefore, the primary objective of
this Position Paper is to provide valuable information and suggestions that if
heeded, and if existing laws are enforced, will help countless companies and
their shareholders avoid suffering this fate in the future. Without help, many
companies will not survive, and many more will have their shareholders’ value
severely damaged. The criminals who perpetrate the attacks being discussed here
are bold, well organized economic terrorists who commit securities fraud daily,
without punishment, and who benefit immensely from the technological advances of
the Internet and the economics of regulatory authorities who are challenged to
justify the cost of pursuing these crimes. After a miserable half decade in the
capital markets, if the economy is to ever improve in a noticeable way, this
problem must be fixed. While serving large corporations to better prevent
rampant fraud exposed in recent times, Sarbanes has not served small business in
any way to restore investor confidence in the market as evidenced by the lack of
capital market investment and investors continued knee jerk reactions to nearly
every piece of daily news. The good news is that the legal system in place, if
utilized as suggested herein, already provides the ability to remove most of the
current network of criminals from the capital markets and restore investor
confidence, thereby stimulating many other areas of our economy.
Unscrupulous speculators have found
ways to short stocks and then manipulate companies stock prices lower by
continuously attacking the companies on Internet financial chat boards,
websites, and through other highly illegal and unethical means. Agents for competitors or shareholders
of competing companies’ stocks may also make these attacks for obvious reasons.
The bloggers and bashers spend their days, nights, and weekends, viciously
attacking the companies they short with continuous false disparaging chat board
posts about the companies, their management, employees, products and
investors. Some of these shorting
syndicates and other bashing groups are well organized, but all have one goal in
mind, posting defamatory negative false or distorted information in an effort to
severely damage a company’s reputation and stock price. Some bashers also
utilize so-called “watchdog” websites to attack companies, but only after
alerting their subscribers that they are going to issue a negative report about
a targeted company. This gives
their subscribers the opportunity to get a solid short position before the
attack begins, thus creating additional short or negative pressure on a stock.
These activities constitute securities fraud.
One listed company sells a
homeopathic medication to reduce the duration of the common cold. The company was attacked by a group that
called for a class action suit for users of the product who suffered a loss of
smell from using the product. A
website posted this information encouraging people to contact them to discuss
potential legal actions against the company. A Dow Jones newswire article reported on
these so-called consumer complaints about the product and their loss of
smell. The company has given
assurances that it adheres to FDA guidelines and restrictions and was unaware of
an FDA inquiry into the safety of their product. As a result of the group that attacked
them and the news articles that followed, the company’s stock price began to
drop, and kept dropping until their market cap was cut to less than half. The number of people who signed up to be
a part of the class action suit against the company turned out to be only two, a
husband and wife. They both claimed to have some loss of smell from using the
product, but only after the website and news article came out. The stock
recovered some of its huge drop once people realized that the claims made
against the company weren’t what they first appeared to be. Unfortunately, the stock price has only
gone up to a portion of what it lost, and the shareholders who lost in excess of
several hundred million dollars are the ones who suffered as a result of
this.
The criminals are short-selling
bashers, and illegal stock manipulators, who repeatedly post outrageous known
lies or distorted half-truths with a dogged determination and single-minded
purpose – use any means possible to drive the stock price down.
In the small and micro cap market,
most increases in value to a stock occur when more people buy more shares. Any
such occurrence will automatically result in relentless postings that the
company is a pump and dump scheme. The bashers will post as many as a dozen
posts at a time under multiple aliases in order to dominate a chat board. On some message boards that give you the
option, they continuously post under multiple aliases with a strong sell
sentiment, even if they may only post about the weather or some other nonsense
post, so that a person visiting that chat board would see an overwhelming
majority of the posts and posters with a strong sell sentiment. They disparage
the company’s products, employees, management, business plans, and anything else
about the company so they can create serious doubt about the company in the
minds of investors and potential investors. They post their opinions but make
them appear to be facts. They make very slanted
interpretations of anything the company does as if they were giving an expert
analysis, with their conclusions always being the most negative they can
be. When the company issues a
positive press release, they state that the press release is all hype, released
only to increase the stock price.
If an insider makes a sale or exercises an option, they post false claims
that management is dumping the stock because it is getting ready to drop. They
ask questions about the company and its products such as: “What studies have
they done to prove that their products are safe?” and “What’s to say that their
products don’t cause cancer?” and “Don’t you think that the SEC should look into
the way this company does business?” All comments made are negative or are
cleverly and carefully worded posts intended to damage the company, by either
giving people the idea that the company’s products are unsafe or cause cancer,
that the company’s management is incompetent or dishonest, or to make people
think that the company is doing something illegal and needs to be investigated
by the SEC.
Honest investors, who happen upon
the board, will often get buyers remorse from seeing an overwhelming negative
sentiment and immediately “panic sell” the stock, which creates additional
downward pressure and serves the criminal campaign well. Occasionally, an
investor will attempt to say something positive about the company, but the
resulting attacks on them will be vicious, thereby hurting their confidence in
their investment decision and causing them to promptly abandon the board and
usually the stock altogether. They simply do not realize that the bashers are on
the board 24 by 7 because that is their job. That is how they earn their
living.
There is no limit to what the
bashers will do to try and drive down a stock price. They constantly make statements about
how bad a victim company is managed or how incompetent it’s CEO is and call for
shareholders to ask that the CEO be replaced. Another common practice is to make
harassing phone calls to a company’s customers and suppliers and flood them with
negative questions and comments about the company, its products and its
management in order to damage the business relationships that it has with these
companies. This practice has and will continue to destroy many new, existing,
and developing business relationships. Bashers make posts about forming
shareholder class action lawsuits against management and directors and intimate
that the SEC should be investigating the company for fraud and lots of other
securities violations. They
encourage investors to contact the SEC about all of the supposed improprieties
of what they refer to as the “pump and dump scheme” company.
Bashers will also send messages to
the SEC, and other government agencies that might affect a companies’ business,
with accusations of wrong doing by the company, and its officers and other
employees. As a result, a company might get an inquiry from a well-meaning
employee of the Better Business Bureau, FDA, NASD, the exchange the company
trades on, or various others. Even though the company is able to answer such an
inquiry, for a small company this is time consuming, costly, and diverts
valuable limited resources away from the company’s actual business all to the
gleeful delight and self serving interest of the criminals while assisting
greatly in the success of the illegal manipulation.
Bashers post predictions of a much
lower stock price in the near future to convince existing stockholders to sell
so they don’t lose all of their investment. They make statements on a regular
basis about the company being de-listed or going bankrupt, and they attack any
shareholders that try to post anything positive about the company in an effort
to defend it against the bashers. One website targeted companies by posting
press releases about their victims, and misrepresenting them to look like they
were produced by the SEC. That same website posted information that made it look
like every company it reported on had their trading suspended or was being
investigated by the SEC. The owner of the website is being prosecuted for
securities fraud on another matter.
As a result of those postings, each company’s stock price dropped
dramatically. Why do the bashers do this? They do it to scare as many potential
investors as possible away from purchasing the stock, and as many existing
shareholders as they can into selling the stock in order to drive the stock
price down. Again, as you can start to see, it all has a premeditated and
cumulative negative effect.
Companies that are attacked in this
manner will often times ignore it at first, as just some disgruntled former
employees. Depending on how aggressive and coordinated the bashers are, a
targeted stock can drop quickly. The companies must then take notice and deal
with the problem. They will get calls on a daily basis from shareholders that
want to know about all the negative things that have been posted about them, and
why the stock price is dropping.
They want to know if the SEC is really investigating the company, or if
there are class action suits pending against them or if their products are safe
or not. The companies will then have to be in the business of following the
various chat boards to see what is being said about them so that they can
respond to their shareholders and potential investors that call them. This is
not only an added expense in time and money for the company, but it also
distracts them from the task of building their company and running the
day-to-day operations of their business.
Companies that try to defend
themselves through legal means will face still higher costs and an even greater
waste of resources that make this activity difficult
and expensive. Regardless, nearly every activity the bashers undertake is
illegal, not policed, and designed to be totally self-serving and cumulative –
and it almost always works. But when it doesn’t work enough to destroy most if
not all the value, more bashers will be employed to expand the fraud by making
the population of unhappy investors look even larger.
As the stock depreciates, the
funding that most bootstrapping entrepreneurs need to grow their emerging
businesses dries up, even though the extreme costs of being a public enterprise
do not decrease. This leads to the loss of jobs, GNP, additional erosion of
investor faith and the decline of economies of scale.
The bashers claim to be protected by
freedom of speech under the First Amendment. The problem with their argument is
that what they are doing is illegal and fraudulent stock manipulation at the
criminal level, defamation and tortuous interference with business relationships
at the civil level. Chat board providers claim immunity from prosecution in
anything relating to what is posted on their chat boards. In the late 1990’s, in
an effort to allow free flow of content in the Internet, the Communications
Decency Act, was enacted to protect Yahoo, AOL and other web portals from
liability whenever posters put up content that was illegal, immoral or otherwise
objectionable. So for example, if our children chatted with a masquerading
Internet predator or saw pornography on an AOL website, then AOL would not have
any responsibility.
The Act is now a shield of immunity
for internet service providers and message and chat board companies that shy
away from the moral responsibility due solely to the costs and resources they
claim are needed to remove illegal, fraudulent, defamatory or otherwise
destructive content. They have abuse departments who can only be contacted by
email, and that only very selectively take any action against posters for
violating their terms of service policy.
Basically what it has turned into is an environment where anyone can post
anything they want about a company no matter how far from the truth that is, and
the company has very little, if any recourse against the anonymous person. Yet
such a post can cause severe damage to the company and its future.
Bashers can work alone or with other
bashers to attack a company, and post their attacks using multiple aliases to
hold a conversation that appears to be among more than one poster, in order to
give visitors to the chat boards the impression that there are many people
sending these doomsday messages, and giving the attacks the appearance of
credibility. The bashers use multiple aliases, anonymous email accounts, roving
IP addresses and public access points, as well as other methods to avoid being
traceable. Here are some of the
comments that were made on one of the basher websites.
“Don't even bother trying to ID the
account. It was created at the
“Who are we? Your worst
nightmare! “
”Imagine an anonymous team of
professional researchers and writers with a network of
mainstream contacts and all the investigative tools the Internet has to offer
digging into your scam. Imagine a flash mob featuring you popping up overnight
at twenty anonymous sites and sent to major news services via a news
feed.”
”Here we are. And with anonymous
proxy servers and public hard-wired and wireless Internet access points, there
isn't a damn thing you can do about it. By the time you intimidate one of our
free host sites to kill a report; it has been copied and mirrored ten
times.”
There are also websites set up that
offer to drive a company’s stock price down for a fee - NEW FROM FAKE - THE "DEATH STAR" FAKE's
Bulgarian programmers have finally perfected the ultimate weapon of stock mass
destruction. Basing their model on former Blinder and Robinson Broker
Wendy Gordan of
FAKE's business philosophy is
simple: We are in it for the money. Period. We don't care who gets hurt,
what companies get destroyed, or what innovative or lifesaving products never
see the light of day!! We are here to get ours, and yours. FAKE the
rest of them!! That is the attitude customers appreciate from a professional
paid basher organization.
Message boards such as Yahoo, Raging
Bull, and Silicon Investor give investors the opportunity to share their views
and comments as they may relate to specific stocks or general investing. But
they also allow disgruntled former employees, competitors, stock manipulators
and others to post their negative messages. In many cases these negative posters
have "shorted" a stock and want to do all that they can to see the stock price
move downward. Negative posters usually don’t work alone. They team up with other “bashers” and
gang attack a company.
The ISPs, and message and chat board
companies have the best of both worlds. They are essentially immune from
prosecution for any content that is posted on the websites or servers that they
control, but they reap the benefits from all of the ad and other revenue that is
generated by the banner and pop-up ads and services that appear or are offered
on their websites and message and chat boards. This lack of accountability is a
conflict of interest and needs to be remedied. The conflict of interest is very
apparent when abuse complaints that are made by individuals and will they
actually do anything to remove the abuse, even though they have this as an
option as spelled out in their companies for posts that violate a provider’s
Terms of Service Policy pass with no action to remedy the abuse. They send
auto-reply emails which tell you to use their profanity filters, or to put the
posters on an ignore list, but very rarely Terms of Service policies.
A
Call For Help
Some
will say that people don’t pay attention to chat boards, but they do. Ask some
shareholders if they ever go to financial chat boards. You will be surprised by
the number of people that do. The plan of the basher is to create havoc and
cause sincere investors to lose confidence in the targeted companies. One poster
we identified has made over 70,000 posts attacking various companies and hurting
shareholder value. These bashers know that nothing will happen to them for doing
this, and they feel that they are protected by the anonymity of the Internet,
Freedom of Speech, SLAPP legislation and Internet jurisdictional issues, so they
continue their relentless illegal attempts at manipulating stock prices of small
businesses across
These
bloggers and bashers for the financial gain of criminals and the support of
economic terrorists are intentionally damaging shareholder value. This activity
is illegal and needs to be stopped immediately to restore the smaller capital
markets. This will in turn lead to the eventual and positive restoration of the
overall capital markets and then finally the overall economy.
With
this Position Paper we respectfully request that the SEC, in conjunction with
all other state and federal law enforcement agencies, utilize the laws that
already exist and are available to make the pursuit of these criminals a top and
immediate priority. Companies with chat boards and phony web sites need to be
forced to remove false content and turn over all records related to those
individuals. We ask that the SEC expose, prosecute and convict these cyber
criminals; it is the correct legal and moral activity to undertake at this time.
Publish their real names on lists similar to what is now done with convicted
child molesters so that service providers can guard against such criminals in
the future. Making examples of the current batch of stock fraud cyber criminals,
and then keeping the boards clean in the future, will have a profound positive
effect on the capital markets and ultimately the economy. Although there are
many phony web sites, there are truly only three influential chat boards where
the problems are proliferated as described above. Yahoo alone receives, and
profits immensely from over one hundred million investor hits per day, so
putting pressure on them will cause its management to be influenced into
becoming responsible for the crimes committed without hiding behind the CDA.
Investor confidence needs to be restored, and this is one problem that has to be
addressed and remedied in order for that to happen. Small public companies need
the SEC’s help in this matter immediately to put these criminals out of
business. Contrary to administrative sentiment, it would take very few resources
to fix this problem. The criminals engaged in this activity are certainly
cowards, as they do everything they can to retain their anonymity. For the
reasons mentioned herein, it will require only a small amount of low budget
intervention and prosecution by Federal authorities to insure that criminals are
not so brazen and eager to attack small public companies in this manner in the
future. Only then can the goal of efficient small company capital formation be
achieved.