Monday, April 07, 2008

The SEC Cracks a Naked Short Nut-Case

In the "Baloney Blitzkrieg" chapter of Wall Street Versus America, I describe the looniness surrounding a grimy little diamond mining shell company called CMKM Diamonds -- a company that barely existed except for a share-generating mechanism, a loudmouth CEO named Urban Casavant, and a handful of exceedingly stupid shareholders who made fools of themselves on picket lines when they weren't sending threatening emails to journalists and regulators.

It was a good example of how a small group of determined crackpots can cause damage to our regulatory system, in this case by pushing a fraudulent "stock counterfeiting" conspiracy theory.

Above all, CMKM was a textbook case of corporate blame-shifting, and today the SEC put the blame where it really belonged, charging the company with a massive fraud in which Casavant personally raked in $31 million.

The SEC complaint observes:

Casavant generated investor interest in CMK by using false press releases, Internet chat boards, and "funny car" race events across the country. To divert attention from their own dumping of CMK shares, Casavant persuaded CMK's investors that the reported high trading volume in CMK stock reflected extensive "naked short sellng" rather than ordinary stock dilution. This promotion was extremely successful, and about 40,000 investors purchased CMK stock during the period of the fraud. In reality, Casavant ran the company from his house in Las Vegas, and CMK had no meaningful operations other than issuing and promoting its own stock. [emphasis added]

Patrick Byrne, the full-time Wikipedia editor who mismanages in his spare time, has taken over the naked shorting banner from Casavant. Naturally, his company has never made a dime in profits and is also under SEC investigation.

Unfortunately, it took CMKM years to grind its way through the SEC system, and the Overstock case is "only" two years old. So stay tuned--but be patient.

Floyd Norris, commenting on a typically paranoid email from a naked shorting nut, says "Do you think that reader will admit he was fooled? I don’t."

I agree, and the snail-like SEC, which did not "set any speed records for filing," as Floyd points out, must share the blame for that.

Apart from its extreme slowness in processing this and other cases -- Overstock's is a good example -- the SEC has made matters worse by pandering to naked shorting loons. The agency has diverted valuable resources in pursuit of its "Regulation SHO" idiocy, which has no real effect on the markets while fueling conspiracy theories that gull the naive.

© 2008 Gary Weiss. All rights reserved.

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