[Corp. Watch] 'Penny stock' scams are microcosm of larger stock market's systemic fraud

[Corporation Watch]

The Internet's Role in Gaming the Markets

  By Floyd Norris

(NY Times, May 8) -- 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 (SEC) 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.

	The Internet has made it far easier for any investor to quickly find  
SEC 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 it from a re-seller that got it from the SEC).

	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 people can promote the stock at very  
low cost on online bulletin boards. (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 has no other business other than printing shares by the  
millions.

	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 hedgefunds at deep discounts 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 SEC 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 [over-the-counter] 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 hedgefunds were  
the buyers and distributors of the stock issued by the company, said  
his client had not promoted the stock he was buying and then 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.

	Ribotsky's funds have made similar investments in numerous other  
companies, and claim to be among the most profitable hedgefunds in  
recent years.

	In this case, they have the option to buy MotivNation stock any time  
they want at 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 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 short-sellers? They have violated SEC 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.