Category: Stocks

My new venture: OTC MicroCap Research

While there are plenty of people who write about microcap securities fraud and pump and dump scams, too little of the research reaches the people who need it the most: the small investors who believe in the scams. To help them I have created a new website, OTCMicroCapResearch.com. The only thing on that website will be research reports on companies, mostly pump and dumps. I will take no positions in the stocks I analyze at that website, take no payment for articles (except from content syndication websites) and I will do my best to distribute my analyses so that the investing public can see it and learn to avoid pump and dump scams that way. I do not claim that there is anything particularly new about what I am doing, but it is something worth doing.

See my introductory post on why I created the new website.

My PacWest Equities (Pinksheets: PWEI) report published prior to the market open today (PWEI is now down over 75% from its open, although the Infitialis report had a lot to do with that).

 

Disclaimer: No positions in any stocks mentioned. The new website is owned by MorningLightMountain LLC, just like this website; I am the managing member of the company. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Lying stock promoters: Bullexchange.com & the FINRA short reports

One tactic that many stock promoters use over and over again to explain why their stock promotions are followed by large stock price declines is to blame it on the short sellers. Unfortunately, FINRA abets these lies by publishing without adequate explanation data required by the SEC’s Regulation SHO. This data provides information on every share sold each day. Time and and time again I have seen stock promoters use this data to ‘show’ that the stock they are promoting is getting attacked by short sellers.

See the text of the most recent email I received from the various Bullexchange.com websites (emphasis mine):

Valued Subscribers,
Welcome New Members,
VKMD experienced a fantastic start last Thursday where many of our subscribers secured substantial gains.

However, due to a major short attack, gains were quickly reversed. We believe this was deliberate, the Finra reg sho list http://regsho.finra.org/FORFshvol20120906.txt indicates nearly 11 million shares were shorted last Thursday.

Simply put, VKMD did not end the way we hoped despite great developments we hear may be announced in coming days.

In a recent email, we had mentioned we were under new management. Due to events of the past week, the new management team has been removed and we are back under the same great team that brought you the likes of ECIT and AGRT.

We are hard at work on our next pick, and we will see you some time in October!

Your Dedicated Team at TBX
http://bullexchange.com

Searching the large text file linked above yields the following information for VKMD for the given date (formatted by me to enhance legibility):

Date      |Symbol      |ShortVolume   |ShortExemptVolume    |TotalVolume     |Market
20120906      |VKMD       |10843159        |0                                |37378406         |O

This data appears to show that out of 37,378,406 shares traded, 10,843,159 shares were sold short. This is not false, but it doesn’t mean that short sellers or market makers increased their net short position by 10 million shares. Rather, this shows all sales where the shares being sold were not already in the seller’s possession. This includes speculative short sellers, both retail traders and market makers. But far more important are market makers selling large blocks of stock. In those cases, a large shareholder might tell their broker to sell one million shares and then rather enter one big order, the broker will give the order to a market maker such as NITE to slowly sell the shares over the course of a day. The market maker sells the shares short and does not take possession of the shares it is selling until it has completed its share sales. For Reg SHO reporting purposes, these are short sales, but the market maker is not taking a speculative short position — at the end of the day the seller delivers the shares to the market maker who then delivers those shares to the buyers of the stock.

So the next time a stock promoter links to the FINRA Reg SHO short data to show that a stock dropped because of short sellers, you will know that they are lying. In fact, many times the large block sellers whose shares are sold in such a way to make them show up as ‘short sales’ in the FINRA data are the stock promoters or the people who pay for the stock promotion. So the promoters are not innocently wrong — they lie through their teeth even though they know better.

Read more about Bullexchange.com:
Awesomepennystocks.com sues Bullexchange
Awesomepennystocks.com drops lawsuit

 

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Stock promoter profile: M J Capital LLC / StockRockandRoll.com / Stockbomb.com

It is always interesting to see who is behind various stock promotion websites. One interesting one is MJ Capital Management. It is not a very effective stock promoter (I like to short the stocks it promotes). Below is info on its stock promotion websites and how you can find that information. The inspiration for this post (and much of the research) comes from nodummy on the InvestorsHub DD Support Board and Fraud Research Team message board; he is one of the few non idiots on iHub and that message board is one of the few useful message boards on iHub).

I should point out that the research in this blog post was not hard at all — Jay Isip, the main person running MJ Capital LLC, does not appear to have tried to hide his identity and his companies are not difficult to understand. This is very different from some other stock promoters who use offshore companies and fake addresses or mail forwarding services to hide their identity.

The first part of my research on a stock promotion website starts with signing up to the email list. Then I look at the information disclosed in the disclaimer and below the disclaimer in the emails. The CANSPAM act requires all people sending commercial / promotional emails to disclose their name (business or personal) and a valid mailing address. StockBomb.com makes it easy by listing “MJ Capital, LLC | 110 Main Street | Newark, nj 07102”. This information then leads to a web search of the address and the legal entity. The search of the address gives us no useful information, but searching for MJ Capital LLC yields us the company’s website, www.mjcapitalmanagement.com/, and a Linked In profile page. The Linked In page doesn’t tell us much we don’t already know. The website is a great example of the kind of website that stock promoters have to sell their services to OTCBB/Pinksheets companies and shareholders in those companies.

Next, we can take a look at the WHOIS data on the StockBomb.com and MJCapitalmanagement.com domain names — to find out who registered them. This is often a waste of time because of the availability of private registration (I use that for all my domain names). In this case, registration for both these websites is private and thus not useful. Next we can look at the server where the websites are hosted. Many websites are hosted on servers with thousands of other websites, but sometimes only a handful of websites are hosted on the same server, allowing us to draw connections between those sites. You can use this website to look this info up for free (another website that allows this kind of search is ReverseInternet.com).

This search hits the jackpot for us and yields only a handful of websites:


(click image to embiggen)

This gives us a nice list of potentially-related websites:

ilovetradingpennystocks.com
mjcapitalmanagement.com
packetfusion.com
researchotc.com
stockbomb.com
stockobell.com
stockrockandroll.com
www.mjcapitalmanagement.com
www.stockbomb.com
www.stocklockandload.com
www.stockrockandroll.com

I signed up for the emails on all the stock promotion websites and then I tried looking at the one non-pump website (packetfusion.com) to find any connections between it and the pump websites, which I could not find.

ilovetradingpennystocks.com shows the same content as pennystocklocks.com, so I signed up for that website as well.

The contact email addresses for stockobell.com, researchotc.com, stocklockandload.com, stockrockandrollcom, and stockbomb.com are the same: MJCapitalManagement@gmail.com. StockLockandLoad.com and StockBomb,com both show  Jay.StockRockandRoll@Gmail.com as the contact email address for ‘general inquiries’. That is pretty conclusive evidence that all of these stock promotion websites are linked to MJ Capital LLC. Now that we are nearly certain that all the websites are run by the same person or people, we can look at the WHOIS information on all the websites. All but three of the websites were registered privately so we cannot glean any information from those. However, ilovetradingpennystocks.com, pennystocklocks.com, and stockobell.com were not registered privately.

   
(click images to embiggen)

PennyStockLocks.com is registered to Robert McConnon of New Jersey. ILoveTradingPennyStocks.com and StockoBell.com are registered by Jay Isip of New Jersey. A google search of “Jay Isip” yields a Linkedin profile as one of the top few results. That Linkedin profile shows Jay Isip as the President/CEO of MJ Capital LLC and Stock Rock and Roll LLC and lists the following as company websites: http://www.stocklockandload.com/lp/ http://www.stockbomb.com/ http://www.researchotc.com/.

The next step is to look up MJ Capital LLC and StockRockandRoll LLC (as well as PennyStockLocks LLC that I found in the disclaimer of the pennystocklocks.com website). As a note for foreign readers, the LLC is a type of limited liability company in the USA that allows for less paperwork and potentially simpler taxes than a corporation. Like US-based corporations, LLCs are registered in a state (there is no national registry). Because the email from StockBomb.com listed a New Jersey address and the phone number on the MJ Capital LLC website lists a New Jersey phone number, the obvious next step is to search New Jersey’s business registry. A quick way to find that is search the web for “corporation search New Jersey”. The top four search results all get us to the place we want to go, the New Jersey business records service. Unfortunately the search engine isn’t particularly good, so slight variations result in no results. It took me a dozen searches before I put a space between M and J (M J Capital) and found the company.

Unfortunately the State of New Jersey made me pay $0.10 to get the unofficial certificate of formation (pdf), but I paid and that gave me the valuable information that Jerome Isip formed the company on October 5, 2011. The unofficial certificate of formation (pdf) of StockRockandRoll LLC lists Jerome J. Isip as the person who formed the company (on April 17, 2008) — that leads me to conclude that his middle name is Jay and he is the same person as Jay Isip. Also listed as member/managers (owners/executives) of the LLC are Mike Killian and Nirav Amin. Google searches of those names yielded little info — I will return to them shortly, though. PennyStockLocks LLC (pdf) was formed on May 24th, 2011 as a single-member LLC by Robert McConnon. I tried searching the web for his name and found little other than a previous iHub post by nodummy on StockRockandRoll (I wish I had seen that earlier — it could have saved me some time). Reading that post led me to search for “Mike stockrockandroll” which led me to this Linkedin page of a purported co-founder of StockRockandRoll.com. StockRockandRoll LLC also has a Facebook page.

While I obviously can’t be certain, it would make sense that Mike Killian is the Mike who is a founding partner of StockRockandRoll LLC (and the “M” in MJ Captial — MJ likely stands for Mike & Jay). As to Nirav Amin, I have no clue where he went. Presumably he is no longer with the company.

So, what does this mean? StockRockandRoll LLC was the first company (from 2008); at some point, Nirav Amin likely left and in 2011 Isip started working with McConnon, who started his own website. Since PennyStockLocks.com has been set up and receiving payments for stock promotion, it has disclosed the exact same amount of compensation on every pump as has StockRockandRoll.com. In other ways (such as ilovetradingpennystocks.com, an Isip-registered domain name, showing the pennystocklocks.com content) the two LLCs appear to act as one. I believe that the M J Capital LLC was set up later in 2011 to give the group a more ‘professional’ look so they could more easily sell their services to the people who pay for pumps.

What conclusions can we make from all this information? First, stock promotion can be quite lucrative. The sum of compensation disclosed through 6/19/2012 in 2012 is $1,349,500 (this number could be off by a bit due to my counting error). Obviously there are significant expenses, the largest of which is new subscriber acquisition costs. Second, there is not that much benefit to finding out all this information for most stock promoters: I get pump emails from each of these pump websites at the same time (and I wouldn’t consider buying their pumps anyway because they tend to gap up and then drop). Third, stock promoters like to continually add new websites: ResearchOTC.com was created most recently, in September 2011, while StockRockandRoll.com has been around since 2008.

[Edit 29 August 2012 – It appears that MJ Capital LLC has added a new website, MomentumOTC.com, and that website is advertising with pay per click text ads on Bing. The website was first registered almost a year ago but I had not seen it advertised prior to today. The domain name is privately registered and it is on a server with thousands of other websites, but the CANSPAM-required name and address at the bottom of its emails gives pennystocklocks.com as the owner of the domain.]

Below are charts of recent MJ Capital LLC paid promotions (they do uncompensated pumps from time to time that go up a lot, at least for the first few minutes):

LGBS – Promoted on 8/2/2012 – $25,000 paid for promotion

KALO – Promoted on 7/10/2012 – $20,000 paid for promotion by Equities Awareness Group, LLC

LBGO – Promoted on 6/26/2012 – $25,000 paid for promotion by Winning Media, LLC

Disclaimer: No relationship with any parties named above (except that I trade their pump and dumps) and no positions in any stocks or funds mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Global Gaming Network (GBGM): First the pump, now the big dump

The GBGM pump has been one of the more interesting pump and dumps of late. It started on Friday June 8th around the open with pump emails from PHD-Trading.com (disclosing $200,000 in compensation). I thought the email was simply spam because I could not remember ever signing up to pump websites with that email (chatroom@reap..trades.com). I thought that email address had simply been scraped off of TimothySykes.com (where it used to be displayed on the chatroom rules page). Only much later  that day did I get around to actually looking and I had only ever received one pump email to that email address, from ThePennyStockJerk.com, a website affiliated with BestDamnPennystocks.com. All the BDPS websites had already sent teaser emails talking about their new low-float pump that they would pump Monday at the open (for BestDamnPennyStocks.com and a few premium email lists) and at the open on Tuesday (all the other websites).

It was the strong price action of GBGM that made me look into it — plus Jarmall’s questions about GBGM that convinced me that the price action was not indicative of a pure spam pump. That led me to sign up to the free email list of PHD-Trading. The welcome email I received shortly thereafter was quite informative. At the bottom of the email, the name and address (as required by the CANSPAM law) was GS MEDIA | 2885 Sanford Ave SW #16525 | Grandville, MI 49418. I know from my pump research that GS Media is one of the legal entities tied to BestDamnPennystocks.com (BDPS), which of course was scheduled to have a new pump the very next trading day.

I thought this was a good opportunity to potentially front-run the BDPS pump, so I tried to find any other links between PHD-Trading.com (and GBGM) and BDPS. One link was that BDPS had sent teaser emails saying that their upcoming pump was a low-float stock. GBGM, while having tons of shares outstanding (461 million!), had its float listed as 1.2 million shares on OTCMarkets.com. Another connection was the fact that PHD-Trading.com had both a free email list and a paid product, sold through Clickbank — while there are other stock promoters who sell access to a ‘premium service’ through Clickbank, none has used it as extensively as BDPS. There were other links as well, but I won’t disclose them in a free blog post.

I have front-run BDPS pumps in the past, and it is a risky thing to do. It worked well once and another time they delayed the pump, likely because I had front-run it. I am fairly sure they have delayed other pumps when they were frontrun. However, when I first remember hearing about their HoleinOneStocks.net website back in autumn of 2010, the premium subscribers got one pump a full day before any other BDPS websites (since then they have never gotten a pump earlier than the main BDPS website, so don’t up for them!). If PHD-Trading.com was truly a new BDPS-related website then it would make sense that they woudn’t delay the pump. I bought 40,000 shares at .265, taking a substantial risk (if I was wrong and BDPS didn’t pump GBGM then I would likely lose 50%). I shorted 5,000 shares at Interactive Brokers at .29 to reduce my risk prior to the close and then held over the weekend, selling into the opening spike Monday.

Here is my long trade:

Partly because of me shorting at .29 on Friday and partly because I made some stupid trades, I lost $766 on subsequent trades on GBGM. Click the links to see them: trade 2, trade 3, trade 4, trade 5, and trade 6.

As with almost all BDPS pumps, GBGM has now dropped big from its highs just a week ago and is now well below its price at the beginning of the pump. As with all pump and dumps, it will go even lower in the long run. I do not recommend buying pumps or trying to front-run pumps — those are both very risky and most people who try it lose big. The easiest profits anywhere are from shorting pumps, particularly from the worst promoters. For example, after 41 trades this year shorting the pumps of crappy pumpers, I have made $8800 and my dollar-weighted average profit margin is 11.15% with no losses over $90. (I have had a bad year short selling and have actually lost $1900 on my pump shorts not including my crappy pump shorts or the $8400 I have made with longer-term pump shorts.)

Below is a listing of all the compensation listed from various promoters that I have seen on GBGM. The total compensation is certainly lower than the total disclosed below because some promoters have paid part of their compensation to other promoters.

First are the various legal entities / groups that comprise the BestDamnPennyStocks.com group of pump websites.

BestdamnPennystocks.com (BDPS) discloses, as usual, the most compensation:

BestDamnPennyStocks.com expects to be compensated $500,000 Cash by a non-controlling third party for a GBGM investor relations services.

There is JackpotPennyStocks.com, an affilaite of BDPS:

JackpotPennyStocks.com expects to be compensated $20,000 from a non-controlling third party for GBGM Investor Relations services.

Another group of BDPS-affiliated websites, exemplified by GetRichPennystocks.com, was paid $30k:

GetRichPennyStocks.com expects to be compensated $30,000 cash from a non-controlling third party for GBGM Investor Relation Services.

PHD-Trading.com started the pumping last Friday and prior to that no penny stock traders I know were aware of the website and it appears that got their email list from some other pumper. They have their disclaimer as an image, copied below the quote:

PHD-Trading.com expects to be compensated two hundred thousand dollars for GBGM advertising investor relations services.


(click image to embiggen)

StockMister.com is a 2nd-tier or 3rd-tier pumper that is run by the same company as StockExploder.com (which of course disclaimed the same compensation). Here is its disclaimer:

StockMister.com’s parent company Micro-Cap Consultants, LLC has been compensated up to Two-Hundred and Fifty Thousand Dollars Cash by a third party (Online Marketing Media LLC) for a 1 Week Marketing Program regarding GBGM, Micro-Cap Consultants, LLC has also been promised an additional compensation of up to Two-Hundred and Fifty Thousand Dollars Cash by the same third party (Online Marketing Media, LLC) for the same 1 Week Period of Marketing Efforts regarding GBGM.

Stockmister paid for IPR Agency LLC (see my prior blog post about Tim Sykes looking to sue them for libel) to promote GBGM as well:

We have been compensated up to eighty thousand dollars to conduct one day of investor relations marketing for GBGM by a third party, StockMister LLC.

StockLockandLoad.com is run by a pumper who also runs StockBomb.com and Pennystocklocks.com and Stockrockandroll.com.

StockLockandLoad.com has been compensated twenty-five thousand dollars for this one-day profile on GBGM by MJ Capital, LLC.

Another pumper is Pennystockcrew.com. They win the award for smallest font used for a text disclaimer:

Penny Stock Crew has received $20,000.00 in cash compensation from Hunter Marketing LLC for the one day profile of Global Gaming Networks […] Penny Stock Crew is owned by: ODD Marketing LLC , 433 Plaza Real Suite 275, [Boca Raton, FL] 33432

PennyStocksProfile.com is a small-time pumper most noted for riding the cottails of AwesomePennystocks.com pumps SNPK and GWBU this year. Unfortunately, they use an image rather than text for their disclaimer, which makes me retyped it. The image is copied below the quote.

PennyStocksProfile.com is owned and operated by PLVP LLC. The company has been compensated $10,000 by Online Marketing LLC for publication of this information.


(click image to embiggen)

Another annoying pumper is Investors Alley Inc. (a Quebec corporation) group of at least six websites that used an image to show its disclaimer:

Please be advised that Investor Alley Inc. expect [sic] to be paid up to twenty five thousand dollars from a third party- Micro Cap Consultants – to perform promotional and advertising services for a one day profile of GBGM.


(click image to embiggen)

Stock Connection is a 5th tier stock promoter with a number of websites, including PennyStockPickAlerts.com:

PennyStockPickAlert has agreed to be compensated fifteen thousand dollars for a three day public awareness marketing campaign for GBGM from the third party InterVcap LLC.

Another pumper that promoted GBGM is GlobalInvestmentAlert.com, with which I was not familiar prior to this pumps:

GIA, Inc expects to be compensated up to $100,000 by CF, Inc for one weeks coverage of GBGM.

 

 

Disclaimer: I have no position in any stocks mentioned and I have no relationship with any people mentioned, except for Jarmall who is a member of Tim Sykes’ Trading Challenge (I work for Tim with that). I trade pump and dumps and OTCBB / Pinksheets stocks. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

We are all in this together … or not

Whenever you hear that phrase, “We’re all in this together,” be very, very cautious. That is what scammers will say to convince you to do stupid things with your money (like buying pumped stocks) and what both hucksters and even non-fraudulent trading gurus will say to try to get their hands on your money.

The simple truth of the matter is that everyone has different goals and priorities. The most important thing you can do is to make sure you are aware of how the priorities of those you deal with and listen to differ from your own. A stock promoter’s goal is simply to get you to buy stock — damn you and your kid’s college fund.  A trading guru who sells his services with an alert service or trading chatroom benefits the longer you subscribe. His financial interest is best served by selling something that you will continue to want or need for years and years. The guru’s monetary motivation will — ceteris paribus of course — cause him to charge as much as he can for as little as he can. He will sell you hard to get you to pay him more money.

Even saying that all traders care about is profits is wrong. Especially in the penny stock world there are many of us who are motivated by other things besides profits (of course we are all motivated to a large extent by profits). I remember getting a bunch of flak from commenters on this blog when I accused a certain pumper of violating securities laws (six months later the SEC sued him). People attacked me for potentially destroying profitable trading opportunities. But I along with most other bloggers don’t just do this for money.

At the end of the day, each of us is motivated by different things, some of which are obvious, some of which are not. Money is the most obvious, but most of have emotional motivations — we genuinely want to help those we come across. Some of us have other motives that drive us, more powerful motives. When the time comes, my motivations will be made clear. In the meantime, let us embrace the motto “All for one, one for all, and every man for himself!”

 

Disclaimer: No positions in any stocks mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

Taxes for day-traders

See the embedded video for a quick summary of the major tax issues for traders and what business trader status means. Obviously I am not a CPA and I have no formal accounting training. Please see JK Lasser’s Your Income Tax 2012 and Robert Green’s Tax Guide for Traders. If you want to really get hard-core, see the relevant IRS publications:

IRS Publication 550
(the portion of this that relates to business traders as opposed to investors is excerpted below the video)

Please note that futures contracts are treated differently and I do not address that in the video.

Here is the relevant portion of IRS Publication 550 on business traders:

Special Rules for Traders in Securities

Special rules apply if you are a trader in securities in the business of buying and selling securities for your own account. To be engaged in business as a trader in securities, you must meet all the following conditions.

  • You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation.
  • Your activity must be substantial.
  • You must carry on the activity with continuity and regularity.

The following facts and circumstances should be considered in determining if your activity is a securities trading business.

  • Typical holding periods for securities bought and sold.
  • The frequency and dollar amount of your trades during the year.
  • The extent to which you pursue the activity to produce income for a livelihood.
  • The amount of time you devote to the activity.

If your trading activities do not meet the above definition of a business, you are considered an investor, and not a trader. It does not matter whether you call yourself a trader or a “day trader.”

Note.

You may be a trader in some securities and have other securities you hold for investment. The special rules discussed here do not apply to the securities held for investment. You must keep detailed records to distinguish the securities. The securities held for investment must be identified as such in your records on the day you got them (for example, by holding them in a separate brokerage account).

How To Report

Transactions from trading activities result in capital gains and losses and must be reported on Form 8949 and Schedule D (Form 1040), as appropriate. Losses from these transactions are subject to the limit on capital losses explained earlier in this chapter.

Mark-to-market election made.   If you made the mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D. In that case, securities held at the end of the year in your business as a trader are marked to market by treating them as if they were sold (and reacquired) for fair market value on the last business day of the year. But do not mark to market any securities you held for investment. Report sales from those securities on Form 8949 and Schedule D, as appropriate, not Form 4797. See the 2011 Instructions for Schedule D.

Expenses.   Interest expense and other investment expenses that an investor would deduct on Schedule A (Form 1040) are deducted by a trader on Schedule C (Form 1040), Profit or Loss From Business, if the expenses are from the trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business.

Self-employment tax.   Gains and losses from selling securities as a trader are not subject to self-employment tax. This is true whether the election is made or not. For an exception that applies to section 1256 contracts, see Self-Employment Income earlier under Section 1256 Contracts Marked to Market.

How To Make the Mark-to-Market Election

To make the mark-to-market election for 2012, you must file a statement by April 17, 2012. This statement should be attached to either your 2011 individual income tax return or a request for an extension of time to file that return. The statement must include the following information.

  • That you are making an election under section 475(f) of the Internal Revenue Code.
  • The first tax year for which the election is effective.
  • The trade or business for which you are making the election.

If you are not required to file a 2011 income tax return, you make the election by placing the above statement in your books and records no later than March 15, 2012. Attach a copy of the statement to your 2012 return.

If your method of accounting for 2011 is inconsistent with the mark-to-market election, you must change your method of accounting for securities under Revenue Procedure 2011-14 (or its successor) available at www.irs.gov/irb/2011-04_IRB/ar08.html. Revenue Procedure 2011-14 requires you to file Form 3115, Application for Change in Accounting Method. Follow its instructions. Enter “64” on line 1a of the Form 3115.

Once you make the election, it will apply to 2012 and all later tax years, unless you get permission from the IRS to revoke it. The effect of making the election is described under Mark-to-market election made, earlier.

For more information on this election, see Revenue Procedure 99-17, on page 52 of Internal Revenue Bulletin 1999-7 at
www.irs.gov/pub/irs-irbs/irb99-07.pdf.

 

Disclaimer: I AM NOT A CPA OR TAX EXPERT! What I say above may be wrong. Please consult your CPA or tax lawyer for tax advice. I use Green’s accounting firm to prepare my taxes. The links for the above books are using my Amazon.com affiliate link. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

SEC sues Wolfson brothers for naked short selling

The SEC just sued two brothers, Jeffrey A. Wolfson and Robert A. Wolfson, for violating Regulation SHO, which governs short sales.

SEC press release
SEC complaint (PDF)

All quotes below are from the SEC Complaint.

The allegations are rather complicated, but the essence is that they abused in multiple ways the market maker exception from the Reg SHO rule requiring locates of stock sold short:

The Respondents in this matter, who were not conducting bona-fide market making activities but were instead engaged in “naked” short sale transactions for their
personal investment purposes, improperly utilized the Market Maker Exception from Rule 203(b)(1) in order to avoid locating shares before effecting short sales as part of “reverse conversion” and “assist” transactions, as further described below. Because the Respondents failed to borrow or arrange to borrow securities to make delivery when delivery was due, the short sales as part of the reverse conversions and assists were “naked” short sales. These
same Respondents also violated Rule 203(b)(3) by repeatedly engaging in a series of sham transactions to ostensibly “reset” the thirteen-day clock for complying with the close-out requirement, but without actually purchasing shares in a bona fide transaction. These sham transactions enabled the Respondents to circumvent Reg. SHO, allowed them to generate millions of dollars in profits because they did not actually borrow or arrange to borrow the
securities they were selling short, and caused their clearing broker to have large persistent fail to deliver positions in these threshold securities, thus undermining one important
purpose of Reg. SHO.

 

One interesting thing is that these transactions were designed not to short stocks for the Wolfsons’ accounts but to enable them to essentially lend out hard to borrow stocks and profit from the fees:

9. Reverse conversions are executed to meet a one-sided market demand for hard-to-borrow threshold securities. The buyers of the threshold securities, in this case
large prime brokerage firms, engaged in the conversion transaction that allowed them to 4acquire a long stock position that is hedged by the synthetic short options position. The brokerage firm could then loan out the shares of the threshold securities and received fees from the borrowers. Those loan fees can be quite significant when the stock is a threshold security, because threshold securities are generally hard to borrow and therefore command
large fees in the stock loan market. Indeed, the borrow rate (referred to as a “negative rebate” because it is paid by the borrower to the lender) on a threshold security can be as
high as 50% of the stock’s market price (on an annualized basis), as compared to a small positive rebate that a financial institution borrowing securities would receive from the lender to compensate for cash collateral it posts to the lender when a security is easy to
borrow. In many cases, certain threshold securities could not be borrowed at all. Alternatively, if the shares could be borrowed, the price to borrow was often much higher
than the price at which the Respondents were willing and able to transact in reverse conversions because they did not have and did not intend to actually buy or borrow the
stock they were selling short.

 
10. As a result, the Respondents, who did not comply with the “locate” requirements of Rule 203(b)(1) before selling the stock and did not comply with the close out requirements of Rule 203(b)(3), were able to attract the business of prime brokerage firms seeking to create inventory for stock loans on hard to borrow securities.

 

A couple conclusions that I draw from this are that yes naked short selling is real, but it is not easy to do. Also, there is still no evidence of the ‘evil naked shorts’ who use their naked short selling to manipulate lower price of certain stocks.

 

 

Disclosure: No positions in any companies mentioned above and no connection to any parties named above. I was friends with a Wolfson in college but I doubt that he is related. See my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

 

 

Update on Tim Sykes’ trading system

As I wrote previously, I have been trading stocks using Tim Sykes’ trading system. This has been quite profitable for me (but is not my most profitable trading strategy). To update my previous post, since then I have made only about $6,000 more trading Sykes’ system. November and December were tough for me in most of my trading (in one trading system I have been using for 6 months, I saw an 80% draw down) and I messed up lots of things; I also dealt with an injury to my wrist that made trading more difficult. Despite all this, I never lost a substantial sum of money on Sykes’ system and continue to believe in it.

Probably the best reason to believe that Sykes’ system works? Look at his trades on Covestor. This comes straight from his brokerage account, so it cannot be faked. So many people who sell trading systems won’t give their real trading performance. The reason is because it is usually very bad. (Please keep in mind that Covestor does not account for cash in a trading account, so the raw percentage return is incorrect; so instead of a 2000% return, Syke’s return since the fall of 2007 is more like 300%.)

If you want to give Tim Sykes’ system a try, I suggest reading all his past blog posts in which he describes his trades. Then consider purchasing his Pennystocking 2 DVD and/or his TimAlerts trading-notification service. (The one problem with TimAlerts is that so many people now subscribe that his followers move the market with less liquid stocks.) I recommend avoiding his other DVDs: TimRaw is one long ramble, Pennystocking is very basic (just use wikipedia and buy Tim’s book), and his new TimFundamentals DVD seems pointless–he has already explained the material in that DVD on his blog.

Disclosure: I am an affiliate of Tim. I am also a TimAlerts subscriber for life and have purchased his Pennystocking (1 & 2) DVDs and have attended his trading seminar.

Now is a Good Time to Buy Back Stock

Many companies borrowed money to buy back stock when their stock prices were high. Now that stock prices have fallen they are conserving cash. That is backwards. One tiny little company did the opposite. That company is TSR, Inc. [[tsri]]. I have previously written about TSR, recommending it when its stock price was about twice as high as it is now (oops), and then writing about my attempt to get the company to spend its cash hoard. The company instituted a buyback plan but bought few shares. Then today it announced that it had just bought back over 10% of the outstanding shares at a price of $2.30 per share. At this price the company bought its stock for 80% of its net cash + receivables + Treasury bonds. This will be accretive to book value per share and will not harm the company’s liquidity. That is how companies should use buybacks.

From the press release:

TSR, Inc., (NASDAQ:TSRI – News) a provider of computer programming consulting services, announced today that it had repurchased 456,523 shares of its Common Stock in a private transaction at a purchase price of $2.30 per share. The repurchase is in addition to repurchases that may be effected from time to time pursuant to the Company’s previously announced stock repurchase program. Pursuant to the stock repurchase program, the Company’s Board of Directors has authorized repurchase of up to 300,000 shares, of which approximately 61,000 have been repurchased. There were approximately 4,500,000 shares outstanding prior to the purchase.

At current prices I believe TSR to be an excellent investment. By my calculation, the company’ recent buyback increased the per-share net quick assets (net cash plus marketable securities and receivables, including non-current treasury bonds) to $2.97 per share from $2.90 per share. At $2.30 per share it is at under 80% of net cash plus marketable securities and it trades at a P/E of 11. The stock is illiquid, so anyone buying it should use limit orders.

Disclosure: I am long TSRI.

How to Get Rich Trading Penny Stocks

I first heard about Timothy Sykes at the beginning of this year. I was skeptical of his claims of making lots of money trading and even more skeptical about his ability to teach others to trade successfully. My article, “Timothy Sykes is Full of Bullship,” started a dialogue between Tim and myself. I started reading his blog and following his trades. I read every single blog post he had ever written. I became convinced that he was a talented and profitable trader and that his trading system worked. I then decided to subscribe to his TimAlerts trade service, where he sends out pre-market watchlists and alerts of his trades via email, to see if I could profitably follow his trades.

In the chart below you can see my profits from trading Tim’s system. Sometimes I followed his trades, sometimes I didn’t, and sometimes I traded stocks he did not even find. I started out trading small and increased the size of my trades over time (the red and fuchsia dots indicate where I increased my max position size).


(note: while the blue squares represent trades, many of them are me just adding to or gradually closing positions in what is essentially the same trade)

As you can see from the chart, I have done well. In just over 3 months I have made $40,000 trading his system. In one trade yesterday I made $19,000 in two days. But the amount of money I have made is not nearly as impressive as the lack of drawdowns that I have had. The one large (percentage-wise) drawdown I had (on 7/29) was my first trade after increasing my position size and it was an accidental trade that I did not even mean to make! Otherwise, my maximum drawdown was 15%, and even that was due to making a dumb mistake–getting too large of a position in an illiquid stock.

After my success trading Sykes’ system, I became the first lifetime subscriber to TimAlerts and wrote a blog post, “Why I Paid Timothy Sykes $2,000.” So, if you ever consider trading stocks (and not just buying and holding index funds as an investment, which everyone should do), then why not learn from Tim Sykes, one of the few people who makes money trading and has demonstrated an ability to teach others how to profitably trade. I recommend reading his blog, buying his book, and signing up for TimAlerts.

If you doubt my performance of Sykes’ performance, I suggest visiting Covestor, where all of Sykes’ trades and some of mine have been verified directly from our brokerage accounts.

Disclosure: I am a customer of Timothy Sykes and am the first TimAlerts for Life member. I am an affiliate of his and make a 25% commission on any sales he makes through the links on this article.