The Penny Stock Chronicles
Penny stock gadfly Chris DiIorio tells the SEC about his suspicion that Knight Capital is tanking penny stocks on purpose and racking up unsustainable balance-sheet liabilities. But that leads to another mystery: Why don't they seem to care?
Chris DiIorio suspected major broker-dealer Knight Capital of tanking penny stocks on purpose and racking up massive, unsustainable balance-sheet liabilities based on all the stocks it “sold” that it never really had.
It had taken him five years to reach these conclusions — five years of digging through reams of financial data in search of answers to how and why his particular penny stock investment was so brutally crushed. Knight never answered DiIorio’s questions, nor, during the reporting of this story, any of The Intercept’s.
Graphic: U.S. Securities and Exchange Commission
“The core business at Knight has always been naked shorting penny stocks,” DiIorio asserted.
Shorting a stock is betting it will drop in price: You borrow a share, sell it, hope the stock price drops, then buy another share to pay back your loan, hopefully for less than you borrowed it for.
In naked shorting, you sell a share that doesn’t exist and cash the proceeds. Do that enough and you bet the price will drop. Set it up so that it looks like you really sold the share to everyone except an obscure middleman, and the only toxic byproduct is a liability on your balance sheet representing shares you have sold but not yet purchased.
DiIorio believed this represented the secret of Knight’s success. “I told the SEC, ‘If you don’t believe me, ask Knight!’ If their penny stock volumes went to zero, what would happen to their trading profits?”
Photo: Richard Drew/AP
DiIorio filed a TCR (tip, complaint, or referral) form. Under Section 922 of the Dodd-Frank Act, the SEC has the authority to provide substantial monetary awards to eligible whistleblowers who inform the agency of securities law violations, if the subsequent enforcement actions exceed $1 million. But DiIorio says he wasn’t trying to win back his losses by filing a whistleblower complaint; he just wanted to see the ongoing fraud of investors like him put to a stop.
He also pointed to the threat to the markets from Knight’s thinning capital compared to the billion-dollar-plus “sold not yet purchased” liability. “I said, ‘Knight is insolvent, and this is how I know.’”
Indeed, the firm’s own second-quarter 2011 report to the SEC clearly showed $1.9 billion in “sold, not yet purchased” liabilities — up from $1.3 billion just six months earlier. By contrast, it reported “net current assets, which consist of net assets readily convertible into cash less current liabilities, of $105.1 million.”
Other than a perfunctory acknowledgement of receipt, the SEC did not respond to the TCR. DiIorio sent personal emails to top officials at the agency. One still exists on the SEC’s website, an October 2011 letter to Robert Khuzami, then the SEC’s head of enforcement. “Why won’t [then-Knight CEO Thomas] Joyce disclose to the investing public the nearly [$2 billion] sold not yet purchased liability is where he moves aged fails,” DiIorio wrote. “It is a structural liability and does not in fact ‘fluctuate with volumes’ as [Joyce] has said in several public filings.”
In this case, aged fails are the obligation left over when the stock whose shares the seller was supposed to actually hand over no longer exists because of a merger or split.
SEC spokesperson Ryan White declined to comment on the matter. As a matter of policy, the SEC never confirms nor denies the existence of an investigation until it reaches the public record in a court action or administrative proceeding, and it usually doesn’t inform whistleblowers about the status of their cases unless it grants them an enforcement award.
But DiIorio grew frustrated with the lack of response. “I was baffled why the SEC was not acting on what appeared to be blatant securities violations,” he said.
What About UBS?
Photo: Jin Lee/Bloomberg/Getty Images
He used the delay, however, to clear up another nagging question: What about the other major trader in these penny stocks, the Swiss bank UBS, one of the largest private banks in the world?
Time after time, DiIorio would isolate individual penny stocks and find UBS and Knight as major traders in them. While it wasn’t possible to know for sure, the correlation suggested that UBS was repeatedly on the other side of Knight’s trades; its clients would go long while Knight’s would go short. If true, that meant UBS, or its clients, were taking on multitudes of losses by design.
Why was UBS so involved with penny stocks, which had little upside potential for a global megabank? Why was it so intertwined with Knight? Who was it purchasing these penny stocks for?
And why didn’t the bank seem to care that its clients were being sold stock that kept going down in value?
Part 3
Naked Shorts Can’t Stay Naked Forever
The Penny Stock Chronicles
Penny stock gadfly Chris DiIorio tells the SEC about his suspicion that Knight Capital is tanking penny stocks on purpose and racking up unsustainable balance-sheet liabilities. But that leads to another mystery: Why don't they seem to care?
The Bolsonaros argue that they are controversial in order to get attention in the news.
Seems like he lost money on this stock because the company was worthless. Naked shorts not really relevant to the loss.
Aged Fails for Knight were as follows for the following years I have gone through their SEC 10-K filings and these are what was reported by Knight for these years. They are not hidden. They were easy to find.
2005: $42.1M
2006: $42.3M
2007:$134.3M
2008: $47.6M
2009: $87.5M
2010: $102.5M
2011: $69.9M
2012: $163.5M
2013: $48.9M
2014: $325.5M
2015: $32.8M
http://www.sec.gov
Finance capitalism is fundamentally evil and inevitably doomed (along with its industrial brothers) in a world with an unsustainable and growing population of wannabe consumers and depleted resources.
The SEC exists to serve the players in this perverse system and would never “adjust it” to anything resembling fairness, even if that were possible.
As for the supposed victim here, betting the farm on a remote chance to “to get rich quick” is both stupid and as perverse as the system itself. He more than deserves his fate.
It might be a good idea to publish these articles in a place where the readers believe in this clusterfuck system designed to concentrate wealth for people who don’t do useful work. Or maybe TI would like to attract more of those gullible folks, in which case, carry on.
Horrible header for those prone to motion sickness…
So..is the intercept going to start feeding us articles a paragraph at a time now?
Probably reading on mobile, like I was. Switch to desktop and get the entire article.
Calling the SEC? Good luck with that. The government is complicit in these scams in order to keep the stock market pumped to the crazy levels we see today. If housing and equities crash-this country goes down in flames. And again if I understand this story , the guy didn’t lose a million dollars. If I invest $100 with Bernie Madoff and he tells me five years later its worth a thousand dollars-does that mean I lost $1000 when the scam collapses? No.
Pigs get fat-hogs get slaughtered. No sympathy for the subject of this story
To David Dayen,
Next time you write a financial story, perhaps you should review their public filings. You accuse Knight capital of hiding their Aged Fails, yet they have disclosed those amounts in their SEC filed 10K as I’ve shown earlier in this thread.
You can find all of ANY public company’s public filings the EDGAR located at :
http://www.sec.gov
It’s actually quite disappointing you didn’t do this as large part of your story is easily discredited.
Very sorry
I think you’re missing the point. Huge amounts of “aged fails” are hidden elsewhere. That’s the issue – if they were in that column, they wouldn’t be liabilities.
Besides, even if you’re right, it doesn’t change the fact that it is contrary to moral justice to all something you haven’t got in order to crush the price so low that you break the company & effectively destroy forever the things you claimed to be selling (that you never, & could never, actually get – like frozen shares!)
The whole world of high finance is corrupt. But when you are playing with other people’s money, you likely don’t really care as long as you get your salary even if they go bust.
This company was not crushed by naked short sellers. It was crushed by not having any revenue.
And I think you’re missing the point about what an ‘audited’ financial statement is or means. These were audited by PWC. Putting together a 10-K document like this isn’t just one asshole in a dark room making shit up.
It’s a team of people including external lawyers and PWC reviewing. There are NO hidden numbers. The audit workpapers all tie back to every number that is presented in the document.
Yea, I agree with you on the moral justice. I’m just saying Dayen’s hyperbole is not supported by the facts.
One thing I also noticed in their financials is the fact that they have Aged Fails as a receivable as well as a payable. I can quickly see how two companies can work together to do what Dayen is suggesting as one company would have an Aged AR Fail while the partner company would have an Aged AP Fail.
Of course, after they are done screwing the victim, they merely agree to settle their outstanding AR and AP aged fails and split the profits somehow.
This whole thing sounds like nothing more than a simple Bait-and-Switch tactic to me with the CUSIP numbers.
You aren’t getting it. These aren’t technically aged fails yet because they are sitting in the Obligation Warehouse.
Man bets his life savings in the hopes of getting mega rich while doing nothing to earn it. Wall Street eats him for breakfast. Man is pissed at loosing his savings to crooks, while trying to do the same thing they are. Boo Hoo.
The entire stock market is the living embodiment of greed. I’ve got no tears for this schmuck. He’s not alone either. The market crash of 29 was caused by the entire country thinking they could get rich overnight, by borrowing to invest. In other words..greed. Plain ole greed. Why this nation hasn’t hung these 1% bastards is beyond me, but one thing is blindingly clear.
Piketty warned them. They’ve raised their middle finger in response. At some point, something will trigger an inequality shit storm of biblical proportions. And I’ll laugh my ass off, as one by one, these criminals will reap the rewards of their failure to see it coming.
As for the SEC’s failure to respond? Hahahahaha! Banker’s attorneys in charge of oversight of banker criminals. Hahahahahahaha..hohohohohohoh..hahahahahahaha. sheezusHchrist.
DUH!!!!!!!!!!!!!!!!!!!!!!
Meanwhile, the Dumbest Country on the Planet continues to bend over for it’s daily 16th Amendment buttfuck while chasing a virtual ghost on their “smartphone”. Dumb is a massive fucking understatement. If stupidity were weather, this country would be a nation sized 8.9 hurricane. All they have to do is collectively say…Fuck you….with a tax revolt and bring this war criminal government to it’s knees. Unfortunately, the DCOTP is too busy staring at their goddamned smartphones to realize.. they are carrying the very device that has already ended their so called…ahem… freedom. That baby flew the cukkoo’s nest a long time ago. All that’s left is the guns. And the USG knows it. Guess what they’ll come for next. DUH. And guess how they know who owns them? The GUN REGISTRY!!! Brilliant. Folks, what we have here is a massive fucking failure to recognize the 800lb gorilla in the room. And it’s PISSED OFF.
Meanwhile, tonight, the entire planet will tune in to DIMWITS-R-US, to see which one of the two liars of liars running for the Kingship of the DCOTP, will tear the others face off. Murikan entertainment at it’s finest. King George lll must be rolling on the floor in raucous, gut splitting laughter.
Not that I disagree with anything you’ve said, but this company Knight capital has fully disclosed their Aged Fails.
The author didn’t bother to actually read Knights most recent 10k public filing.
And it’s only 32.5m
work for Knight, do ya?
No, not at all. But this type of evidence is so easily found that it’s disturbing the author didn’t locate it. These are public documents.
He should have done some research on this before printing these sort of hyperboles. Could lead to lawsuits.
See my other posts on this. It’s just a blunder on Dayen’s part.
Aged fails. right. Sounds like the Boomer generation. Of which I’m one.
However, were talking $32 MILLION FUCKING DOLLARS worth of stockshit they failed at supplying to someone. Sounds like a racket to me. As for the amount, this country has gotten too used to large numbers. That’s a fucking fortune. If this was a bank robbery, the news would shock the planet. Here, the Wallstreet criminals are ALLOWED to rob people. Of course, it’s their oversight buddy, the SEC who ALLOWS them.. “meh…it’s ONLY $32Mil.. pocket change. Just don’t let the masses know…they might get a little edgy if they find out we let WS criminals get away with this.”
I don’t know, but in my universe, we’d drag these cocksuckers from their granite palaces and hang them upside down from lamp posts and light them on fire …alive..
Back here on planet earth, the masses just shrug and stare at their smartphones. Dumb asses.
So, if you read my posts, you’d see it was over $325M and is now reduced to $32M. ie…They ARE CLEARING THEM. This is some sort of temporary clearing process in stock transaction.
Yea, there’s lot’s of money floating around out there…but Dayen is saying this process is some sort of economic boogyman, which it’s not.
$32M out of $16T economy doesn’t mean squat. And the only real story here is how the stockbroker idiot lost his money in a bad investment or a con by Adrian Stone and Best Rate Travel.
I agree with everything Galactus is saying.
Beers at Dorrians’ after work Galactus??
idiot.
“At some point, something will trigger an inequality shit storm of biblical proportions. And I’ll laugh my ass off, as one by one, these criminals will reap the rewards of their failure to see it coming.”
I’ve read that Jamie Dimon is building a Compound/Fortress in the South Pacific for the day that the SHTF. All these greedy money shufflers will slink off into the sunset with their ill gotten gains and leave the rest of us holding the bag
quote”All these greedy money shufflers will slink off into the sunset with their ill gotten gains and leave the rest of us holding the bag.”
Yeah, the INCOME TAX bag. Like I said..the Dumbest Country on the Planet. 99.999999% don’t have a clue what this insidious scam really is. And how it works. Meanwhile, they just bend over every working hour of their wretched little tax enslaved lives. And so will their grandchildren’s great grandchildren’s children. Just to pay the CURRENT multi TRILLION dollar national …ahem…DEBT. Which btw, will NEVER be paid down.
Meanwhile, WS bankers laughs their ass off. After all… THEY designed it..in 1913.
I fully expect my 401k to be stolen, again, in the no to distant future. If I had balls I’d cash out and drop out while I can
You have two large corporations playing footsie with each other across international boundaries. Both are tied in to the financial systems of their respective countries with special rights and privileges. Somehow, clever accounting tricks seem to be at the core of this story.
The article appears to be implying that a loss in one area is in some way being translated into positive in another area. There are a couple of ways to do that. The most common way is a through a tax dodge of some sort.
We’ll see.
answer: sec, what department please?
caller: i want to file a complaint regard trading fraud by short selling.
answer: one moment please.
– action- hello, you have reached so-and-so of the trading investigations. please leave a message so that we can get back to you.
caller: i have some information regarding possible trading fraud and naked short selling. my number is ### ### ####.
months later…
answer: sec, what dept please?
caller: i want to report trading fraud by naked short selling, i have evidence of it
answer: one moment…..
– action- hello, you have reached so-and-so of the trading investigations. please leave a message so that we can get back to you.
caller: i called some time back about trading fraud by naked shorting. my number is ### ### ####. i havent heard back and i’m waiting to hear back.
months later…
months later…
months later…
months later…
months later…
months later…
months later…
months later…
months later…
months later…
If you are an executive of a company and you want to hit the jackpot, all you have to do is backdate your options to a nice low buy day. What happens then is that the company digs into their pocket (from your payments to the company) and buy the stock at that price. I dont know the mechanics of this fraud by the SEC jumps up and down many times. You can even hear them screaming in the night sometimes if you listen closely. And then, then they get reports about the wallstreet criminals who rob America of billions and they ask if they should jump up and down and the polical pimped out sold out whores in congress tell them to back off. Then Americans jump up and down and the SEC says that no reasonable prosecutor would ever take the case because there is no case. It was just a robbery that never really happened. It was all in our minds…
Market manipulation is an investor fraud, but I don’t see the Aged Fails boogeyman that the author sees.
Knight only has $32M in Aged Fails currently. Hardly a number to create any market risk.
It’s hardly “massive” or “unsustainable” as stated. See my previous comment for proof
right, but the author is saying the aged fails are accounted for in the ‘financial instruments sold, not yet purchased’ line item. this is because the Obligation Warehouse asks the buy and seller if they ‘know’ the transaction, allowing Knight to record aged fails in the US$1.8bn of equities portion of the ‘financial instruments sold’ liability (see note 6 of the 2015 10K). my guess is in the next part of the series, we’ll come to find out that UBS is facilitating this behavior by providing their assent to the Obligation Warehouse. not exactly sure why yet…i’m sure they’re taking something on the fee side and probably providing liquidity to clients who have dubious sources of funds? curious how ubs gets rid of the asset
you protest too much to not be an employee at Knight. does your boss know you’re here instead of posting lies to a penny stock message board somehwhere?
So nice. Thank you, Barabbas. I needed a good laugh/cry.
According to Knight’s most recent 10-K, their aged fails resides in their “Payable to brokers, dealers and clearing organizations” line item on their balance sheet in their liabilities section.
See note 9 on page 92.
Securities Failed To Receive were $32.8M on 12/31/15.
https://www.sec.gov/Archives/edgar/data/1569391/000156939116000018/kcg1231201510k.htm
Also, the Aged Fails as of 12/31/14 were $325.5M. They have decreased almost $300M in 2015.
So, the theory on increasing aged fails being some mysterious boogyman doesn’t seem to jive with the actual numbers being reported.
So, this story has at least one factual inaccuracy. Didn’t you guys go and read their public filings before you wrote this story?
Why are they carrying these positions in the first place? Naked shorts are illegal, except for the exemption for short periods of time to keep a orderly market.
I think the author is on to something. Like to know how they are clearing these trades. Common sense would tell you that they have to buy the reversed shares to close them. If I am short 100 shares of Google and it splits 5 for 1, my account will now be short 500 shares at the new lower price. This is not rocket appliances!
My question is, are the companies in on it? Why the reverse splits, who is leading this, Knight?
dilorio didn’t lose 1M. he lost 100k his original investment.
I do not claim to understand the details of this apparent scam. But here goes.
1. Two of the largest trading and banking companies in the world are involved in massive fraud which results in the impoverishment of many people.
2. This has been reported to the relevant authorities.
3. Those authorities have done nothing about it.
What can we do about it?
A couple of suggestions:
1. Fraudsters hate publicity – aid them by sharing this information as widely as possible.
2. Put pressure on the relevant authorities – they also hate publicity, unless they are generating it themselves.
3. While the detail of this is mind boggling to most people, it can be made much clearer, as films such as The Big Short have demonstrated. A challenge for today’s film makers.
1. Fraudsters hate publicity? nah. they dont. they have swatters for that. They make a living on deception. They’re used to it.
2. call the sec. leave a message. call them again. leave another message. keep calling until they arrest you for …. harrassment.
3. We live in a very big boxing ring. They wait until we have assets and paid down credit. Then they beat us up by jumping on prices to force secon mortgages and more charge card purchasing at increased rates. Then they close factory or buyout or plop a megabillion competitor in the area.
Watch all the films you like. Have plenty of popcorn. Cross your fingers and hope spacex isnt hiring wannabe astronuts for minimum wage, or any wage.
What an evil cliffhanger! (Most interesting piece ive read in a long time)
The entire market is a scam. Penny stocks are used to entice money out of investors like Mr. DiIorio. Market makers like Knight Capital don’t need to manipulate share prices, they make money on every single trade. The stock eventually finds its proper price, thanks to the magic of the market, of $0.
The scandal is not naked shorts, as suspicious as they might sound. It’s that companies can offer shares to the public on electronic exchanges with no requirement to disclose the details of their business. Some may consider this to be free enterprise at play. But a market where information about what is being sold is not readily available. is a market designed to take advantage of the little investor. He or she always loses because others are acting based on superior knowledge. A Mr. DiIorio might get lucky once or twice, but he will lose over the long run.
In the original article, management of the company Mr. DiIorio invested in, structured a lock-up agreement that made it easier for them to pump and dump the stock. When they pumped the stock, new investors tried to buy and because of the artificial shortage of stock created by the lock-up agreement, the market maker, Knight Capital, had no choice but to sell short in order to maintain liquidity in the market.
The ‘naked short’ is not the problem – that’s just a distraction. The scandal is the existence of the pink sheets market.
aha. very dissappointed, not funny at all.
mr benito is not kidding here. A market maker will naked short but
1. has a specified time to cover
2. can maintain a rolling balance by buying to cover then reshorting
3. will report the amound as an aggregate which does not provide enuf detail to determine if they are beyond the cover date.
However the real naked short problem is not with the marketmakers – it’s with the wealthy fraudsters who are their customers who are permitted to maked short on the promise to cover. In the instance of an attack on a pharma startup, these promises to cover are disregarded and the marketmaker may or may not have a fine attached to that, i dont know. TRY ASKING CHARLES SCHWAB.
The funny part will be when Mr. Dilorio is sent to jail for harassing the SEC.
If a sucker is born every minute, benitoe, the sucker-Market business must be booming.
In any case, there’s not much you can do for someone who would buy into a “lock up agreement” on highly volatile penny stocks in the age of computerized trading. That would be like trying to debate Trump on a one year clock (after listening to Trump for a year … it’s all over but the crying.)
We need to make an appeal to ISIS to capture these criminals because it’s painfully obvious we are no longer capable of enforcing the rule of law in this country.
OK lets review the sequence of events:
a) man buys totally worthless stock that does not meet standards of trading on regulated exchanges, instead trades on OTC market
b) stock is worthless. stock was always worthless. stock was worthless when he bought it and worthless when it was sold naked short. IMPORTANT FACT.
c) stock may or may not have been sold naked short by Knight. Keep in mind that regardless of whether it is sold naked short, IT IS WORTHLESS
d) sore loser who loses complains that he’s a loser who loses. so sorry man, maybe you shouldn’t have bought a crappy stock that crapped all over you
Unfortunately, this sort of crime is just too complicated for the American public to comprehend. Instead, politicians are rewarded for hounding food-stamp recipients who purchase (legally) a steak or a bag of potato chips.
Meanwhile, my Midwest middle class brethren generally assume these brokers worked hard for their success and asking them too many questions amounts to petty vindictiveness. >:-D “Don’t be jealous, get a job!” Yeah, OK.
The important thing is not for everyone to understand the nature of the crime. The important thing is for people like David to report on it, and for ordinary people to get pissed off at the regulatory agencies, whether they understand the crime or not. And maybe one day one of these bozos will go to jail and the system will get corrected.
And, after you remove the legalese and assume that the brokers are “borrowing imaginary shorts from themselves and not truly accruing liability”, what is actually happening is that these brokers are:
Flooding the market with bogus information to manipulate the market to their benefit.
I have to say, this series is keeping my interest piqued.
Robbing people, populations and nations is the mainstay of wallstreet and their deviate derivations. CONSIDER THIS…
let’s suppose you want to become an instant billionaire.
1. find a private company doing a good steady business that grows as the population grows.
2. monetize it by printing paper to represent the company and call it stock.
3. price the stock according to not cash flow, but future value, pick a number
4. list it with an exchange and underwriter(maybe) or marketmaker
5. voila
This rape of the future is what wallstreet has done to countries – because what it does is it hands the real future value to a few people and dead ends the ability of cash recirculation and real time prosperity. Worse yet, these future valuations are inflated absurd preposterous economic tsunamis that do more to destroy civilisations than any storm.
have a nice day
before i forget..
Hellary Clinton is their favorite moll.
Did hellary pursue wallstreet criminals? no.
Why not?
https://theintercept.com/2016/08/26/clinton-foundation-spin/
she’s the monster’s mother.
Mafia now ‘Italy’s No. 1 bank’ thanks to banksters: Report
Facebook censors palestine
Please join the boycott and don’t use facebook
Remember that the SEC let Bernie Madoff get away with running the world’s biggest ponzi scheme, despite Harry Markopolos — over the course of about 10 years — giving then numerous tips and indisputable proof of what was happening. Madoff turned himself in the end, they never caught him.
Don’t be surprised that they also don’t care about anyone smaller than Madoff.
This is so much more blatant than I was expecting. Apparently it’s NOT just the Federal Reserve that has a license to print money whenever they feel like!
Christopher Cox, chairman under g.w.bushya, tried really really really really really really really really hard to put an end to the naked short sell fraud. He happened to be from long beach, california, the starting place of the corporation (ngwy) that ran stores on line.
During his time there was a company called Introgen doing cancer research in Texas with respect to P53, LiFraumeni syndrome. In february of 2016, there was a thing on PBS about an entire family in utah with this syndrome and they were discussing some hopes of recent research into P53 by some OTHER concern – with no mention of Introgen.
http://pbs.cor/newshour/bb/elephant-genes-hold-big-hopes-for-cancer-researchers/
So why is this family not going to or benefitting from the treatment offered by Introgen? Why because Introgen was bankrupted by naked short sellers running hedge funds and after the bankruptcy, Sanofy-Aventis just happened by co-incidence to get all the patents of Introgen.
So in what dire straits is this family in Utah in now? – i dont know but they were sorely misled.
and what did the SEC do about this naked short selling when informed about it? – didnt log the complaints at all, into the circular file.
S.E.C. Saving Executive Criminals.
I get the strong impression that the SEC views its mission as *protecting* securities firms, not policing them, an impression strengthened by President Obama’s appointing Mary Jo White, a Wall Street lawyer, to chair the SEC. She has shown great determination not to offend past or potential Wall Street customers since, after all, after her term she will return to representing them. (Obama’s idea of the SEC mission is revealed by his choice of Chair.)