Previously I discussed the dangers of the media, pointing to numerous examples, from Google and Yahoo! to Wikipedia. I also discussed how Wall Street and venture firms orchestrate pump-and-dump schemes. And I have attempted to tie all of this into Facebook. Part 1 Part 2 Part 3
Here, I discuss more details of pump-and-dump mechanism carried out by Wall Street and venture capital firms. If you pay close attention, this just might be one of the more informative articles you will read as an investor because it will help you understand how to spot and therefore avoid stock bubbles instead of getting caught in the media hype, as most do.
When one asks market advocates why the capital markets are so important to the U.S. economy, the usual response is something like this…
“The importance of the capital markets is that they provide the engine for the growth and expansion of businesses leading to job creation, which ultimately leads to higher incomes and living standards for all.”
This of course is not necessarily true. And it is almost never true for a large portion of U.S. society. Regardless, the most important component of the U.S. capital markets is the U.S. stock market which is made up of the New York Stock Exchange, the American Stock Exchange and the Nasdaq.
One of the most anticipated segments of the stock market involves initial public offerings or IPOs. When a growing company wants more access to finance capital it often sells its shares to the public in the form of an IPO.
In this piece I will not discuss whether or to what extent the capital markets deliver what they promise. Instead, I will discuss the fraud involved in the IPO market.
Amidst a fairly tame IPO market in 2011, some of the more notable initial public offerings came from the social media sector. However, the social media IPO gravy train was years in the making. For several years now, the market for venture-funds has been largely restricted to social media. I recall noting this trend about six years ago and thought it was very odd.
Soon after I realized precisely what was going on. The venture industry was creating a bubble in social media. Now venture firms are passing the torch to their Wall Street friends in order to follow through on the scam.
You might recall the venture industry also created a bubble in green energy. But this was short-lived for a variety of reasons. Today, we see the effects of the solar energy bubble that has burst, as nearly every solar and ethanol stock is in the single digits, most down by 90% from their highs. I point this out for the same reason that I plan to discuss the details of the fraudulent activities that have contributed to the social media bubble.
Wall Street is always creating bubbles; and why not? After all, these bubbles are designed so that Wall Street always wins. And they make sure of this through their control over Washington.
Advanced Methods of IPO Fraud
While Facebook has not yet been sold to the public, the valuation pump attributed to the site by Jewish financiers has already sent large ripples into the social media sector. Specifically, the Facebook valuation scam has greatly benefited LinkedIn, Groupon and Zynga, with more to come.
Now that Zynga recently completed its IPO, it has much greater access to finance capital. Thus, Wall Street is helping to fund the gamer maker’s attempts to hook kids on gambling. Since I do not use Facebook, I do not know whether the site posts ads for poker. If not, I’ll guarantee you it’s only a matter of time.
Each of these social media firms was able to receive ridiculous valuations for their initial public offering debut due to the “Facebook effect.” Throughout the social media craze, the Jewish-run media establishment has brainwashed Main Street into thinking these valuations are credible, adding to the pump phase of the scam.
Each of these social media firms also boasts several billionaires on the Forbes 400 list due to these ridiculously inflated valuations. As you might have imagined, nearly every one of these social media billionaires is Jewish.
I suspect many of these firms are using several methods of accounting trickery in order to mislead investors. We have already seen with Groupon, which has grossly inflated its revenue data. I discussed this in a special research call a year ago.
Where do you think the money is coming from to create these billionaires?
It’s coming from Main Street as I will explain in the final installment of this series.
Let’s back track to the pump portion of the scam for a minute. During LinkedIn and Groupon’s IPO, each firm sold only a tiny fraction of outstanding shares (8% and about 15%, respectively) to the public so that the demand would further boost the share price.
Does it make sense that a private company which becomes publicly owned offers such a small percentage of its shares to the public? I think not. Yet, this is a common practice for IPOs. It is especially common for “hot” high-tech IPOs.
[All of the shares are theoretically being sold to the public, but since insiders hold most of the shares and these shares are restricted, they are not available for trading]
Why would a firm offer such a small percentage of shares to the public?
As I will demonstrate later in this article, the insiders hold on to their shares in order to control the share price and exit at the top.
The scam has many more elements that occur at different stages of the IPO. Basically, you have pre-IPO, IPO and post-IPO elements to the pump-and-dump scam.
The Pre-IPO Pump
Privately-held firms decide to go public for a variety of reasons. For investors and owners of these firms, an IPO represents an exit strategy because they sell their shares in the firm to the public. Prior to the IPO the firm must be valued. During the valuation process venture investors, key employees and other investors in the firm meet with the underwriting bank to determine the valuation of the firm.
Generally speaking, when a business valuation is performed firms are valued based on how fast they are able to increase their revenues and earnings. Although many other considerations are involved, these two variables are the primary determinants of the valuation process (see “The Goldman Sachs Facebook Pump and Dump,” for more details about the valuation process).
In many cases, private firms are taken public right when they are peaking in earnings or revenue growth. Thus, the IPO is scheduled to take place during the period when earnings or revenue growth has experienced its most rapid acceleration in order to ensure the highest possible valuation. This enables the investors and key employees to sell their shares at the highest price when the IPO occurs. The dump can occur just before the IPO hits the market, as institutional investors buy the IPO outside of the market, and any time after the IPO.
But the scam has many more layers of complexity. Prior to an IPO, the complete ownership of the firm consists of a handful of investors and employees. Thus, these “insiders” can determine the amount of shares they want to sell in the IPO (although each firm has restrictions on liquidation of shares based on requirements set forth by the main investors and lead underwriting bank).
The IPO Pump
During the initial public offering of the stock it is common (especially with high-tech firms) for only a small fraction of the total outstanding shares to be entered into the stock market for trading. While the original owners, employees and investment firms (otherwise known as insiders) sell some of their shares, they retain the majority of stock ownership.
There are some restrictions on stock sales by insiders (known as lock-up periods), but when only 10% or so of all outstanding shares have entered the market, you can imagine that a much larger percentage of the shares are being held back voluntarily. This is done in order to keep the price of shares high.
Therefore, insiders are able to dictate the trading price of shares in the market based on when, how much and how fast they sell their shares into the market. Since the price of securities is determined by supply and demand, by restricting the supply to very low levels, insiders keep the demand for shares high. This pushes the price per share higher.
The Post-IPO Pump
The next step of the scam places Wall Street analysts on center stage. Since the IPO is often scheduled to occur during the period when earnings have peaked, Wall Street banks and venture investors realize the share price stands a good chance to decline over the next couple of years after the firm was sold to the public. This is where Wall Street comes into the act.
You see, when a private firm wants to raise capital, it needs to find financial institutions that will underwrite the security offering. When these firms look for underwriters they select the banks that pledge their support the stock regardless what happens in the months following the IPO. Hence, underwriters are selected primarily based on their pledge of support for the stock even when the business soars.
If the firm begins to experience a slowdown or other issues that raise a red flag, the research analysts employed by the firm that was involved in the underwriting arrangement often brush off or explain away the issues and continue to maintain buy ratings for the stock. This in itself constitutes fraud. Nevertheless, it is a VERY COMMON practice on Wall Street that has been going on for decades. However, the impact of this portion of the scam continues to increase each year due to Main Street’s open access to the capital markets.
As the share price rises, the insiders receive an increase in wealth on paper to reflect the number of shares they are holding outside of the stock market (known as restricted stock). When insiders sell their shares, their paper gains turn into real gains.
As previously discussed, there are usually some restrictions which are established by the underwriting firms when the IPO deal is structured. For instance, insiders are often subject to lockup periods. This prevents them from selling a certain amount of shares prior to some period after the IPO, usually between 30 to 90 days.
After the lock-up period, insiders can sell their shares at any time they want. And because only a few individuals (the insiders) control the majority of shares, they have a potentially huge impact on the share price.
Since the price of securities is determined by supply and demand, by restricting the supply to very low levels, insiders keep the demand for shares high. This pushes the price per share higher. But this scam only works if Wall Street and the media continue to hype the firm.
The supply in this case is determined by the number of shares available to investors, referred to as the float. The demand is determined by the price investors are willing to pay for each share of the security, which is based on the number of investors, the cash they are willing to invest and the hype behind the security. The remaining shares are kept out of the market due to insider ownership, for follow-on and shelf offerings.
When insiders sell their shares, they usually do so gradually so that the price does not decline significantly. In other words, as insiders sell shares of formerly restricted stock, these shares enter the market and increase the float, or the number of shares available for trading. Insiders usually sell their shares gradually or in lots that can be absorbed by the current trading volume so that the share price does not decline.
Again, the media and Wall Street are important players during the dump because they generate demand for increasing shares that enter the market when insiders sell. And they do this by continuing to hype the stock.
In some cases, insiders will dump shares onto the market if they feel the price is poised to collapse.
In others cases insiders will sell their shares quickly in order to cause other investors to exit as the stock price declines. Thereafter, insiders often get back in at the bottom in a way that does not attract much attention. Only later do they make further purchases more noticeable in order to lure Main Street back in, which pushes the share price up again.
Perhaps the most blatant aspect of fraud involved in this scam is that insiders know in advance where the company’s business is headed. Therefore, they can buy and sell company stock according to the future performance of the firm. In other words, insiders reap massive profits from insider information. The situation is similar for employee stock options. And this money that is taken comes from investors.
According to securities regulations, this type of insider trading by executives and employees of the firm is 100% legal. Thus is represents just another example of securities fraud endorsed by the SEC, as I discussed in America’s Financial Apocalypse.
The LinkedIn Pump-and-Dump
I recently followed up on a series of articles I wrote about LinkedIn pointing to the dump. The latest article notified readers that the dump portion of the scam had commenced.
LinkedIn (LNKD) currently has 97,560,000 outstanding shares of common stock. However, only about half of this amount or 43,160,000 is available on the stock market.
The number of shares available for trading in the stock market is referred to as the float. In generally, the lower the float, the more easily the share price can be manipulated. For firms that have been recently sold to the public markets (via and IPO) the remaining shares (i.e. the difference between the number of outstanding shares and the float) are those held by insiders.
[For firms that have been in the market for a long time, most of these shares are referred to as treasury stock because they have been repurchased by the firm. Treasury stock is used for stock options programs and for acquisitions]
In the case of LinkedIn, if we subtract the float from the outstanding shares, we get a difference of 44,400,000 shares. Where are the remaining 44,400,000 shares?
They are held as restricted stock by insiders.
What is the relevance of this low float?
Because the float is low, the quantity of shares available for buying and selling is low. And when the demand by investors to own the stock is high, this causes the price to rise. As previously discussed, the media often generates hype which increases investor demand for the stock.
If all 97,560,000 shares were available for trading in the stock market, this would satisfy the appetite of investors. As a result, the price per share would decline or not rise by as much.
But remember, the shares held out of the market by insiders are still valued at the price determined by trading in the stock market. As well, remember that at least in initial weeks/months after the IPO, insiders still own most of the shares. Thus, by slowly selling shares (so as to not increase selling pressure) insiders can gradually cash in while the price is high. This represents another primary element of the dump.
The Media Participates in all Stages of the Pump
By continuously publishing articles and broadcasting news pieces about these firms (as well as promoting them directly), investors start to think they will have a chance to get in early on “the next Microsoft.” This contributes further to the pump.
Because there are not many shares for sale in the stock market relative to the demand, greedy and naïve investors fight with each other to buy these shares once they hit the market, pushing the price higher. And remember that the underwriting firms that took the firm public often provide bogus support in the form of analyst research, which paints an inflated picture of the firm.
The entire Jewish-run media monopoly is involved in this securities manipulation, from CNBC, FBN and Bloomberg, to the Wall Street Journal, Barron’s, Forbes, the New York Times and so forth.
Hedge Funds Also Get in on the Scam
Hedge fund managers take note when an IPO has been overhyped. They basically jump in before or immediately after the shares begin trading and ride the price all the way up, with the intention of dumping shares before the selloff. Thus, hedge funds also contribute to the pump.
It seems that in the U.S., the only time fraud is punished is when it has been committed by the little guy. Ironically, when wealthy individuals and corporations commit fraud, it involves huge sums of money and affects millions of Americans. In contrast, most fraud committed by the small guys is for much smaller amounts of money and affects a much smaller number of people.
By now, you should recognize a common theme seen in the U.S. Fraud is permissible so long as it is committed by wealthy individuals and corporations. This is in contrast to all other nations on earth, whereby fraud is an equal opportunity crime.
[Although I promised to discuss the role of Goldman Sachs in the Facebook pump-and-dump last time, I decided not to include it here because I did not want readers to be overwhelmed with information overload]
The fifth and final part of this article will address Goldman’s role in the pump-and-dump.