Scam Science: The Short and Distort

Short sellers get a bad rep when they really shouldn't. I think it's because 90% of the population doesn't understand how you can sell something you don't own, or how you can make money by the value of something dropping. The way I used to explain it to people is that there is only one way to make money in the market: buy low and sell high. You just don't always have to do it in that order.

So the Short and Distort is merely the Pump and Dump in reverse. Rather than buying a stock and spreading a bunch of bullshit rumors about how great it is, guys who short and distort sell the stock first and then spread a bunch of bullshit rumors about how lousy it is. More often than not, the guys who run these scams are doing it on the very same stocks. Let's face it, it's hard to find more of a sure thing to short than a stock that has just been pumped and is primed for the dump.


THE BIG MONEY

The main difference between the Pump and Dump and the Short and Distort is the caliber of players involved. With the exception of professional outfits like the one I described yesterday, most Pump and Dumpers are nitwits looking for people even dumber than they are. That's simply not the case with predatory short sellers.

Short selling requires a level of capital and sophistication well above those who manipulate stocks to the long side. Because short selling is such a mystery to so many (including regulators), a well-timed short can hide a multitude of sins. And anyone who's been trading longer than two hours will tell you that stocks go down with a lot more volume and velocity than they go up.

Pump and dumpers are a short seller's best friends. Once you identify a deal that is being manipulated higher, it's a simple matter to short the stock and wait for the inevitable. But you can speed the process up if you let other traders know that a deal is garbage as well. By spreading negative rumors about a company, you can hasten the inevitable drop.

There is huge money in the Short and Distort, and some very big players do it as a matter of day to day business. Just ask Jim Cramer.


ROLL 212

Who could forget the relentless hammering Cramer took at the hands of The Daily Show's Jon Stewart? Back when Cramer was a hedgie, he was a big fan of the Short and Distort, and was dumb enough to describe what he did on a video with Aaron Trask. Roll 212:

The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
Jim Cramer Extended Interview Pt. 2
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party


Some predatory short sellers aren't content with just rumor mongering to drive a stock lower, however. Some go to extraordinary lengths to make a stock collapse. One even went so far as to bribe a couple of FBI agents to open public investigations into companies he shorted.


THE MAD MAX OF WALL STREET

Those of us who knew Tony Elgindy back in the day would hardly describe him as a criminal mastermind. He was the guy you went to see if you were looking to get involved in a net-net deal, which is why I never had anything to do with him. Aside from an afternoon in 1994 when we shared an owner's box at the track, I don't ever think we ever said two words to each other. Little did I know at the time that he was headed for the short seller's Cooperstown.

Tony's got a couple years left on an 11-year jolt in the federal pen at Terminal Island, and CNBC did a special on him back in March called The Mad Max of Wall Street. The scam he set up is pretty amazing. He went from a nickel-and-dime penny stock pimp to a guy who ran a massive short selling operation. He changed his name to Tony Pacific and started selling subscriptions to his short selling picks for $600 a month, and he had a couple hundred subscribers.

His scam was simple. He'd find a company that looked like it was being pumped and then he'd jump on it, and tell all of his subscribers to do likewise. He'd put out some negative press about the company, and all the selling pressure would drive the stock into the ground and he'd clean up. In an of itself, there was nothing necessarily illegal about what he was doing. Hell, he was making $150,000 a month just selling his picks to his subscribers.

But that wasn't good enough for Tony. He used some the money he made to buy a couple of feds. How he came across a bent FBI agent I'll never know, but I guess if you search hard enough you'll eventually find what you're looking for. At first, he just bribed the guy to go into the FBI database and find companies that were under investigation. Tony would then short the stocks and reveal the investigation publicly, driving the price of the stocks down.

Soon that wasn't enough either, though, and Tony paid his FBI stooge to open investigations into companies Tony already shorted. No longer did he have to short bogus companies with tight floats. Now he could go after legitimate companies, short the stock, and cash in when the FBI or SEC opened an investigation into the company and the stock dropped as a result.

Of course, it all came crashing down. The two feds he had on the payroll did some time, and Tony tried to flee the country while he was out on bail, which earned him two more years on his nine-year sentence for fraud. But he's just one guy. There are many others like him out there. Here's the CNBC special on Tony's sordid tale, in case you want to check it out. It's pretty unbelievable stuff:



Guys, it's been a fun but somewhat exhausting week for me. I always feel like I need a shower after writing about stuff like this. I want to thank you for hanging in there with me, and I hope you've enjoyed the series. If you have any questions, as usual, leave them in the comments and I'll do my best to answer them. Have a great weekend!

Comments (11)

 
Sep 10, 2010 - 8:54am

This is why I never watch Jim Cramer unless I want to see an example of a guy who is full of s***

 
Sep 10, 2010 - 9:27am

It is sad that we have a generation of people who get their news from the Daily Show. Cramer could not have been anymore of a bitch on that show.

 
Sep 10, 2010 - 2:46pm

Edmundo, I really don't see what is illegal about this. It seems rather rudimentary to me actually.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment. -Styles P
  • 1
 
Sep 10, 2010 - 4:16pm

It's not illegal as long as the information you are disseminating is both true and public. Where you cross the line is when you start making up negative shit or disseminating material non-public information about a company. That's what sunk Elgindy. He was using non-public information to trade (which made it insider trading) and he was then putting the non-public info out to the public.

Plus there were the small matters of bribery, obstruction of justice, flight from prosecution, etc. etc. etc.

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