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  • amazon_scam amazon_scam Jul 26, 2007 12:40 AM Flag

    How the scam works (repost)

    This is a story about imaginary company � Company X. X has been in the internet retailing business for more than 10 years. Earnings have been somewhat erratic but revenue has gradually increased.

    Company X has 1,000,000 shares of stock outstanding. Unlike most similar companies, 100% of the stock is owned by insiders and institutions.

    Our story begins with the announcement that earnings have doubled. A few days later the stock price has jumped to $10/share.

    Along comes ordinary value investor Bob. Bob does some research. Yes, earnings did double but from 1 cent a share to 2 cents a share on sales of $1 billion. Bob concludes that the stock is overvalued. Their margins are thin; they are in a very competitive marketplace, etc. Their PE is over 100. Bob finds it hard to believe that they can radically improve margins or double sales. Bob notes a broad negative consensus among analysts whose price targets and risk assessments are consistent with his analysis. He makes the rational decision to sell 1000 shares of the stock short.

    Now, since rest of the world has done the same research, you might think that there would be no one to buy the stock. But the insider group has an evil plan. They buy Bob�s stock.

    After buying Bob�s stock, the insider group has 1,001,000 shares because of the float created by this transaction. And they have paid out $10,000.

    The insider group is very rich and has a lot of cash. It bids up the price of the stock. Most of the cash from these purchases is simply cycled back to the insider group since they own all of the stock that can be purchased. As the price increases, Bob shorts more stock. In fact, Bob tells his friends about company X whose stock price has been driven to fanciful heights. So Bob�s friends start shorting the stock. By the end of the month, 50,000 shares of the stock have been shorted and the price of the stock has been driven to $20/share.

    The insider group continues to bid up the price of the stock. Sometimes they are buying the stock from Bob or his friends. And sometimes they are just buying it from other insiders in the group. BUT the insider group knows something that Bob and his friends don�t know: Since they own all of the stock, they know exactly how much stock has REALLY been shorted and exactly how much has been paid. The public short interest numbers are meaningless because they include all of the sham transactions among the insiders. They have complete control over this artificial short squeeze.

    As the stock price continues to rise, Bob and many of his friends try to hold on. But the only stock to buy is owned by the insider group. They are more than happy to sell the stock back� slowly and over time - for an average of $27/share. Most cover their positions at huge losses. Bob, however, is determined to hold on.

    The company is able to manipulate numbers for a few quarters. They are very clever. The company has computers and software that support its web business. They �announce� that they are getting into the business of selling ecommerce services to third parties. What was an expense becomes, for a short time, as asset. In fact �earnings� double again to almost 4 cents.

    Eventually, the stock price hits $30.

    Bob can�t hold out any longer. As he looks at the numbers for one last time he notes, with irony, that company X has never actually earned any profits. Their retained earnings after ten years in business were over $2 billion in the red. Of course, it doesn�t matter. He is wiped out. His wife divorces him and his dog dies.

    By this time, it has attracted a large number of retail momentum buyers. The insiders and institutions bleed down their positions making enormous amounts of money.

    The story ends with Bob stuffing newspaper into his coat. It�s going to be a cold night on the street.

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