Another (Alleged) Naked Shorting Con Game is Busted

Could this be a trend? I hope so. The SEC has been stepping up its anti-fraud actions just a bit in recent weeks, and today nailed a particularly odiferous little company, Pegasus Wireless, one of the charter members of the baloney brigade anti-"naked shorting" con games.

Pegasus and two ex-officers of the company was nailed by the feds, who said that they

...illegally sold hundreds of millions of Pegasus shares they secretly controlled and lied about the sales in company filings, the SEC said today in an e-mailed statement. The sales were used to support [ex-CEO Jay] Knabb and ][ex-CFO Stephen] Durland’s lavish lifestyles and purchases of boats, sports cars and homes, the SEC said.

“The public had no idea that insiders were controlling the shares and dumping them,” Bob Leach, chief of the SEC’s San Francisco branch, said in a phone interview. “It was all smoke and mirrors.”

Indeed, while there was some good coverage of the company in the media, there was also some pretty bad stuff, with Pegasus planting crap (like this and this) in the media describing how this poor, downtrodden company was being targeted by shorts, particularly of the naked variety. Here some of the hooey that came down the pike from the two articles I just linked:

Sept. 25, 2006:

The technology that Knabb is scheduled to unveil days from now, he says, will beat Apple Computer (nasdaq: AAPL - news - people ) to market by several months.. . .

. . .Meanwhile, Pegasus shares are under constant attack. What’s striking about the activity affecting the company’s stock are the concurrent volume spikes in trading, the build-up of short interest from almost nothing to about half the available float, and the sharp decline in the price. All of this has occurred in the last three months.

and

Oct. 3, 2006:

There's a hit out on Pegasus Wireless.

As if a 95% plummet in its stock price since May weren't enough, signs of trouble were already popping up before the Fremont, Calif., wireless equipment maker moved its stock from the over-the-counter bulletin boards to the Nasdaq national market in April.

. . .

Negative news reports started appearing, even as the company reported positive earnings and made plans to unveil its promising new technology that allows video streaming from a home computer to television sets throughout a house. In late August, Pegasus customers and suppliers began getting strange e-mails attempting to warn them away from Pegasus, claiming mismanagement in one of its majority-owned subsidiaries.

Records held by Pegasus' transfer agent indicated there may be as many as 30 million more shares out there than it has on record. That suggests that short-sellers have been selling shares without actually borrowing them--a controversial practice known as naked short-selling.

Oh no! Horrors! But the SEC has another perspective on this said story:\

"Knabb and Durland were basically printing Pegasus shares to enrich themselves at the expense of investors," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office, in a statement.

According to the SEC's complaint, Knabb and Durland created Pegasus from a dormant shell company around June 2005 and through "touting several acquisitions" briefly got the company's stock price to soar, giving Pegasus a market value of more than $1.4 billion.

But the SEC said Knabb and Durland secretly controlled hundreds of millions of Pegasus shares, which they sold to individual investors and dumped on the open market through 2008. Knabb and Durland, the SEC said, did not report any of these transactions and instead "falsely told investors they owned only minimal amounts of stock and received no compensation from Pegasus."

Unfortunately, thanks in large measure to some pretty abysmal journalism, Lord knows how many investors were lulled into thinking that this dog's breakfast of a company was actually a "victim of short-sellers." Hey we all make mistakes, but the pumping of Pegasus demonstrates that sometimes the media can become, unintentionally, an ally of bad companies ripping off investors.

© 2009 Gary Weiss. All rights reserved.