New York-Innovation in the investment research industry takes many forms from new research technologies, such as using bots to mine the deep web, to new forms of delivery such as blogs or chat rooms. We recently stumbled on a differentiated business model which has been developed in the wake of declining Wall Street coverage of small cap stocks. No, we’re not talking about paid-for research (which is booming, by the way) or exchanges such as NRE, IRN or Bright Meridian designed to intermediate the payment for research by companies covered (which are not booming). The approach is the opposite of paid-for research: short the under-covered stock then write a negative research report.
We came across this approach with the launch of Citron Research, which says it is a source of “skeptical stock critiques.” Actually, Citron Research is a rebranded version of stocklemon.com which has been around since 2001. The approach is straightforward:
1. develop a negative thesis on a small cap or micro cap stock which has little or no analyst coverage,
2. put on a short position,
3. release a negative research report.
After the stock goes down, cover your short position and find the next short idea.
Wait, is this legal? you ask. How does this differ from the accusations Overstock and Biovail leveled against Gradient? Good questions. Citron’s approach differs from the Overstock allegations in that its website discloses (somewhat) what it is doing. The disclaimer on the home page states: “At any times [sic] the principals of Stocklemon.com might hold a position in any of the securities profiled on the site. Stocklemon.com will not report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market.” A separate disclosure page indicates that those behind Citron usually have a position: “The principals of Citron Research most always hold a position in any of the securities profiled on the site. Citron Research will not report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market.” The disclosure leaves something to be desired, but may be enough to protect Citron.
Or, maybe not. One of the unsavory aspects of Citron Research is its anonymity. There are no people listed-no analysts, no management team, no address, no phone number, nada. There is an ability to send messages via a form. This is partly self-protection against hate mail and harassment, but it does not instill great confidence in the research.
So what is the quality of the research? The reality is that there is some value in it. Take Citron’s work on Tuberoo.com, a pink sheet listed YouTube wannabe. Tubearoo.com is being promoted by a “Featured Stock Report” on www.VisionInvestorReport.com which is little more than a brochure comparing Tubearoo.com to YouTube. For its part, Citron points out the weak financials behind Tubearoo.com ($960.00 in first quarter revenues), a ridiculous valuation, and the absurdity of the YouTube comparison. Citron also links the parent of Tubearoo.com (Innovision International) to a Philippines-based bucket shop that is blacklisted by the Australian regulatory authorities.
In this case, Citron is a good antidote to what appears to be an attempt to hype a questionable pink sheet stock. Think of Citron as the reverse to paid-for research. It has even figured out how to use the PR channel so important to paid-for research. Earlier this week, Citron sent out a press release saying it filed a “formal letter of complaint with the SEC” regarding Home Solutions of America. This letter (which is anonymous and unsigned) was sent to the regional director of the SEC’s office in Fort Worth (location of Home Solutions.)
There is great demand for increased small cap coverage. We are getting requests from multiple buy side clients for guidance on good sources of small cap research. This partly reflects the impact of CCAs on the second and third-tier brokers. The smaller brokers have been providing research coverage of small cap companies in their region, and now they are getting less commission flow, as more buy side firms use CCAs. The result is greater demand for small cap coverage.
At the same time, paid-for research is flourishing, and, from the buy side perspective, some of it is well-researched, such as Dutton & Associates. On the other end of the spectrum you have schlock such as www.VisionInvestorReport.com. Citron, despite its own credibility issues, serves a useful function to the extent it creates a check on the more egregious paid-for promotionism.
[Footnote: One of the firms that Citron goes after is Xinghua Finance, parent of Ford Equity Research, Glass Lewis, and Washington Analysis. The analysis is over-the-top, casting departed CFO Shelly Singhal as “puppetmaster of Xinghua Media,” but does claim that, among other things, Singhal was a director of Chell Group, whose chairman was arrested by Canadian authorities for boiler room activities.]
Comment by elric lloyd-langton:
Not quite the same tactic as Citron, but a tactic used to extract value from more ethical investors, is Naked Shorting.
Tuesday 1st June 2004
Naked shorting is the sale of fictitious shares i.e. the seller either is NOT required to make an
undertaking that he can or will deliver the stock he has sold, or simply fails to deliver. This
practice ? thought by many to be immoral – is quite capable of bringing a blameless small
company to its knees through no fault of its own, although it is fair to say that some weak
organisations do cite it as an excuse for their own poor share price performance. On 1st April
2004, new regulations in the US made the practice of naked shorting just about impossible,
by requiring that sellers of any stock must be able to deliver the sold shares within 2 days of
Between January and April, hundreds of US companies found themselves listed in Berlin, on
the Berlin Stock Exchange, without their knowledge or consent. Why might this be?
An overview of what is being called Stockgate appears here:
The Financial Times had this to say:
Another of the many commentaries from the US is here:
All of these cite the arbitrage exception to the naked shorting rules as being a loophole which
can be used now that these companies are listed on a foreign exchange. The wording of this
exception Rule 10a-1 (e)(8) is as follows: (NB paragraphs (a) and (b) of this section refers
to the short selling rules)
(e) The provisions of paragraphs (a) and (b) of this section (and of any exchange rule
adopted in accordance with paragraph (a) of this section) shall not apply to:
(8) Any sale of a security registered on, or admitted to unlisted trading privileges on, a
national securities exchange effected for a special international arbitrage account for the bona
fide purpose of profiting from a current difference between the price of such security on a
securities market not within or subject to the jurisdiction of the United States and on a
securities market subject to the jurisdiction of the United States; provided the seller at the
time of such sale knows or, by virtue of information currently received, has reasonable
grounds to believe that an offer enabling him to cover such sale is then available to him in such
foreign securities market and intends to accept such offer immediately;
Nowhere is the actual use of this loophole spelled out but the implication appears to be that
the stock is SOLD in the domestic market, in anticipation of immediately BUYING at a
lower price in the overseas market to cover the sale and make a profit from the difference in
price. However, for this to be a loophole, there must be an advantage to the US seller thus
one can speculate that if the seller then fails to purchase in the foreign market, the wording of
reasonable grounds to believe appears to permit any number of excuses for such failure to
cover the short. In the meantime, the now-naked short remains open.or is eventually settled
via the stock borrow program of the US Depositary Trust and Clearing Corporation (DTC).
So what has this to do with UK listed companies?
Go first to http://www.berlinerboerse.de/?LANG=en
Choose About Us
Choose New Companies
Then browse through the pages to understand the sheer scope and scale of what was done in
just a few weeks during March and April 2004. Allegedly, the bulk listings began earlier than
this, but I cannot find evidence of dates on the BSE`s website prior to 1st March.
145 UK listed companies largely small caps and speculative stocks have been listed on the
Berlin Exchange since 1st March. At the same time, hundreds more companies from all over
the world, but mainly from the US and Canada, were also listed, largely by the same brokers
– 1170 and 1172. It is notable that the majority of companies listed are small cap and/or
speculative stocks, particularly the huge number of mining and exploration vehicles.
A Google search turns up very many US companies complaining bitterly that within only
weeks of the effective outlawing of naked shorting in the US on 1st April, they have
discovered that they are now exposed WITHOUT THEIR KNOWLEDGE OR CONSENT
to the same activity via apparently – the arbitrage loophole. The Berlin Stock Exchange deny
that the exchange is being used for naked shorting, but it is a remarkable coincidence that
highly speculative US short targets, many of them already in severe trouble, suddenly end up
– in their hundreds – listed on a foreign exchange within a very “short” period indeed of the
ending of the practice in the US. It is a fact that one of the complainants, Goldspring, which
now appears to have been removed from trading, had been listed in Berlin in late November
2003. Its price experienced a fairly volatile rollercoaster ride, from 0.45 Euros in November
to approximately 0.8 Euros by mid-Feb. On 1st April the price in Berlin was 0.7 Euros, but
immediately began to fall sharply, and by early May, when Goldspring requested the removal
of their listing, the price was down to 0.4 Euros. Interestingly, no volume AT ALL was
recorded for the stock during the entire period of its listing ? a common feature of the recently
listed US and UK stocks. There is virtually NO trading going on in Berlin in the shares of
these companies. Which once again raises the question: why were they listed?
Are UK companies also being targeted via a similar route?
Of small cap UK companies that have suffered recently, Bioprogress and Proteome Sciences
spring to mind. Both have halved from recent highs, partly due, it has been thought, to
organised shorting by hedge funds intent on destabilising a substantial margin trade position to
bring the stocks ever lower
Proteome Sciences (PRM.BE) has been listed on the Berlin Stock Exchange since Autumn
Bioprogress ? as discovered by a sharpeyed ADFVN bulletin board poster known as
?Scram? – was listed on 21 April 2004 (BPRG.BE). Both companies are known in the US
through an earlier listing on the OTCBB in the case of BPRG, and commercial relationships in
the case of PRM. On 1st April ? the day from which the focus of US naked shorters was
switched to stocks listed in Berlin – Proteome was standing at ï¿½1.90 per share, having
reached ï¿½2.30 on an earlier high, and had been trading steadily for the previous month in the
ï¿½2.10 – ï¿½1.90 range. Bioprogress had come off an earlier unsustainable high at ï¿½1.60 to a
6-week trading range of ï¿½1.00 – ï¿½1.20.
On 1st April, Proteome Sciences share price began to fall sharply and by 28th April had
On 29th April, just 8 days after listing in Berlin, Bioprogress began a rapid descent to 75p by
Neither have recovered more than a fraction of their earlier highs.
Perhaps but perhaps not.
Many companies have had a hard time of it during April and May, which has been put down
to poor market conditions, macroeconomic effects throughout the world, and general
underperformance. In the particular cases of Bioprogress and Proteome, traders were
becoming increasingly nervous as expected commercial deals failed to materialise.
However, six other UK companies were listed in Berlin on the same day as Bioprogress ?
21st April. Their short term charts make interesting reading:
Regal Petroleum share price declined from 10 May
Pipex Comms share price began a decline at the end of March, which has steepened since 29
RAB Capital share price commenced a decline on 20 April, corrected a little on 26 April, but
resumed an overall downtrend on 28th
African Gold share price decline commenced 22 April, flattened off from 26 April 6 May,
and then resumed the downtrend.
Oystertec follows a similar pattern to Pipex, though the price has since recovered
ASK Central ? the company was under offer, which became conditional in early May ? hence
there was no share price effect.
Several more UK companies were listed on 28 April. Of these:
Supercart?s price already in decline from 54p to 36p ? fell to 23p between 29 April and 20
Visonic, after two weeks of trading sideways, commenced falling sharply on 30 April
Omega Int began to fall from ï¿½1.23 on 4 May to ï¿½1.04 by 20 May
The charts of two more companies listed on that day, Dignity and Polaron, show them to
have been good short candidates. Dignity had experienced a sharp rise and Polaron
appeared to be rapidly declining. However, neither appeared to have suffered ill-effects after
their Berlin listing.
Another group of UK companies were listed in Berlin on 1 March 2004. A review of their
charts is even more interesting! The companies involved are Golden Prospect, Gold Mines of
Sardinia, Glencar Mining, Eurasia Mining, Avocet Mining, Randgold, African Eagle, Oxus
Gold, Griffin Mining and Tertiary Minerals. It is worth noting that most of the UK companies
listed since 1 March are highly speculative, many illiquid, and several were already excellent
short candidates. In fact, one has to wonder why this relative handful of 145 companies have
been added at all, if it were not for the fact that most of them, at some point, will be or have
been first rate shorts.
All the above looks at only a few of the UK companies listed in Berlin during the last 3
months, and any evidence that they are being targeted by naked shorters is purely
circumstantial. However, the charts and the general absence of any trading in these stocks on
the Berlin Exchange do appear to be telling a story.
It is clear that there are many more UK companies enjoying a Berlin listing, in addition to the
145 that have been listed since 1st March this year. A random input of various UK tickers,
particularly those of speculative stocks, into the Berlin Exchanges search facility turns up a
result in many cases. Some will no doubt have chosen to be listed there others may as yet be
unaware. How many more of these older listings are now increasingly vulnerable to a shorting
community focused on the Berlin exchange? Proteome Sciences might be a salutary example.
Finally – could it be that the generally poor market conditions which have been given as a
reason for sliding prices in many UK listed smallcap and speculative stocks have been a
symptom rather than a cause?
Wendy Durham 1st June 2004
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