Year: 2012

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..

Update on OTC Solutions / Golden Dragon Media / Pudong LLC (allegedly) stolen email list lawsuit

See my earlier post here.

OTC SOLUTIONS, LLC , GOLDEN DRAGON MEDIA, INC.  and PUDONG, LLC

It appears that the above plaintiffs are in talks with iContact to reach some sort of settlement. Letter from 1/6/2012 (pdf). The settlement would have to be with iContact because I can’t find any record of iContact turning over the names of the John Does who are the defendants

See this memorandum opinion (pdf) from October 5, 2011. I am not quite sure what that means.

Disclaimer: No relationship with any parties in the suit. 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.

 

 

Seriously, Eric Nguyen & Jay Fung?

I am not happy with the above pumpers changing from a text to an image with a difficult to read font for their disclaimer. Here is their current image disclaimer:


(click image to see full size)

For those with bad eyes, the important part:

Please be advised that P ennyPic.com’s affiliate free penny alerts has been paid six hundred thousand dollars by a non affiliate third party nahualate s a [sic] for a one month profile of north springs resources corp. [NSRS]

Disclosure: No positions in any companies mentioned above. See my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Shorting El Chupacabra … the paid promotion of Nasdaq-listed SAPX

I love short selling pump and dumps. One of the problems with shorting pump and dumps though is that many of them are companies that have been put together for the sole purpose of being promoted and the insiders behind the pump control most of the shares, allowing them to potentially squeeze short sellers or prevent short sellers from finding shares to short prior to the stock dropping big. That risk is minimized when shorting listed companies. Listed companies that get pumped tend to be real companies with bad businesses and lots of disgruntled shareholders who are quick to sell into any spike. The large number of shareholders also means there is a good chance of finding borrows on shares to short.

My one regret of my trading in past years is that I have not been aggressive in shorting listed pump and dumps. I changed that this time. See my tweet from January 23rd in premarket: “We found the chupacabra … a current Nasdaq stock getting a paid promotion http://bit.ly/yUkARn Join chat to see what I do.” While I was trying to sell Tim Sykes’ service by using my affiliate link, those in chat could see what I did, which was short sell 3000 shares at $0.468 after commission at Interactive Brokers. Unfortunately I couldn’t find more shares. But the next day the pump continued and I found a lot more shares, averaging to 34,000 shares short at $0.46392. While I got squeezed to a high (briefly) of $0.59 in late premarket, the stock ended the day at $0.43. The next day (today) it plunged right after the market open and hit a low of $0.34. I covered at an average price of $0.374 for a 19% profit ($3,065). See my trade on Profit.ly below:

$3,064 profit SAPX Short Stock
IB auto-import 1/10 to 1/26 (to catch NUVI short I was still holding from 1/10 to 1/17 import) still short NECA STEV

Interactive Brokers

Posted by MichaelGoode /
http://profit.ly/1Mml7F/?aff=174

Daily candlestick chart of SAPX (notice the front-run prior to the start of the pump on January 23rd):

Intraday 5 minute candles from 1/20 to 1/25:

The total compensation disclosed on SAPX (Seven Arts Pictures – Nasdaq) from pumpers I follow (trying to account for multiple websites being run by the same pumper) was $150,000.

Here are some of the disclaimers. First are the ones from the weekend of January 21/22/23:

PennyPickFinders.com:

Pennypickfinders.com expects to be compensated up to Thirty Five Thousand Dollars by a third party for a two day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ). Pennypickfinders.com was previously compensated Fifteen Thousand Dollars by a third party for a one day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ).

MarketCaliber.com (exact same as the above so I figure they are the same)

MarketCaliber.com expects to be compensated up to Thirty Five Thousand Dollars by a third party for a two day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ). MarketCaliber.com was previously compensated Fifteen Thousand Dollars by a third party for a one day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ).

ResearchDrivenInvestor.com

RDI aka research driven investor llc has been previously compensated forty thousand dollars cash by legacy media group inc, a non-affiliated third party to profile SAPX for a one day investor relations campaign. RDI aka research driven investor llc has been compensated an additional forty thousand dollars cash by legacy media group inc, a non-affiliated third party to profile SAPX for a one day investor relations campaign. To date RDI aka research driven investor llc has been compensated eighty thousand dollars cash.

PennyStockProphet

PennyStockProphet.com expects to be compensated up to Thirty Five Thousand Dollars by a third party for a 2 day advertising agreement regarding Seven Arts Entertainment Inc (SAPX: NASDAQ)  PennyStockProphet.com was previously compensated Fifteen Thousand Dollars by a third party, for a one day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ).  Additionally, PennyStockProphet.com was also previously compensated Thirty Five Thousand Dollars by a third party for an advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX.NASDAQ).  Total past compensation for advertising services has been Fifty Thousand Dollars by a third party for 2 seperate advertising campaigns regarding Seven Arts Entertainment Inc, (SAPX.OB)

PennyStockBullReports

 Penny Stock Bull Reports aka picks penny stock llc has been previously compensated forty thousand dollars cash by research driven investor llc, a non-affiliated third party to profile SAPX for a one day investor relations campaign. Penny Stock Bull Reports aka picks penny stock llc has been compensated an additional forty thousand dollars cash by research driven investor llc, a non-affiliated third party to profile SAPX for a one day investor relations campaign. To date Penny Stock Bull Reports aka picks penny stock llc has been compensated eighty thousand dollars cash.  To view our full disclaimer please visit http://www.pennystockbullreports.com/Disclaimer.aspx

SecretStockPromoter:

 SecretStockPromoter.com expects to be compensated up to Thirty Five Thousand Dollars by a third party for a two day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ). SecretStockPromoter.com was previously compensated Fifteen Thousand Dollars by a third party for a one day advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ).  Additionally, SecretStockPromoter.com was also previously compensated Thirty Five Thousand Dollars by a third party for an advertising campaign regarding Seven Arts Entertainment, Inc. (SAPX: NASDAQ). Total past compensation for advertising services has been Fifty Thousand Dollars by a third party for 2 separate advertising campaigns regarding Seven Arts Entertainment Inc, (SAPX: NASDAQ).

 

Right before the open on January 24th Jonathan Lebed and WallStreetGrand joined the pump party and dealt their followers huge losses as SAPX gapped up big (hitting .59 in premarket trading before opening at .52 and closing at .43)

My firm Lebed Biz LLC has been compensated by a third-party (Wall Street Grand LLC) $20,000 cash for a one-month SAPX investor relations contract.

 

WSG has been compensated $40k for a two day awarerness campaign on SAPX by a third party, Legacy Media Group Inc.

 

Disclosure: No positions in companies mentioned above. I have an ongoing business relationship with Tim Sykes that is explained in my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

 

 

 

Deep Springs: A lesson in randomness

Longtime readers will know that I stress the importance of randomness in investing and trading. Any investing or trading strategy will produce a number of losers. Sometimes these losing trades or investments will cluster together purely by chance; it can be difficult to distinguish these chance losing streaks from a declining in a trading system’s performance.

Those without statistics training may find it difficult to think in probabilistic terms and and often do not realize how random the world truly is. Following is a real life example of randomness in action. Take two bright, motivated, and somewhat unusual young men, just five years apart in school, both living in the Chicago metropolitan area. One of them, named Michael, attends a pretty good suburban high school. The other, named Franklin, attends the state math and science magnet school. When it comes time, both apply to a number of colleges, including the most exclusive and unusual college in the country, Deep Springs.

The application process to get into Deep Springs is the most demanding application to any undergraduate institution in the country. After writing over 20 pages of essays each, submitting recommendations and standardized tests, both Michael and Franklin are given the chance to visit Deep Springs where they face a second screening, intended to winnow the applicants further (this is early in 1999 for Michael and 1995 for Franklin). One is rejected, the other accepted. Here their paths diverge.

Franklin attends Deep Springs for two years and then transfers to Harvard. He graduates with high honors, marries, and then works for three years in a psychology research lab at Brandeis University. He then applies and is accepted to enter the Psychology PhD program at Washington University in St. Louis, under renowned researched Henry L. Roediger III.

Five years after Franklin is accepted by Deep Springs, Michael is rejected by Deep Springs and instead he begins college at Grinnell College in Iowa, a well-respected liberal arts college. Three months later he drops out and moves back home, working a retail job for 45 hours a week while taking classes full-time at the local community college. After three semesters he transfers into to a virtually unknown Quaker liberal arts school in Indiana named Earlham College. He studies for a year, takes a year off to work in France, then after another year he graduates with high honors. He applies immediately to graduate school, and he is accepted to the Psychology PhD program at Washington University in St. Louis, studying with Henry L. Roediger III. Not long after starting graduate school he marries his college sweetheart.

This is a true story of how two similar people end up in the same place despite wildly divergent paths (and their paths have since diverged again). Randomness is a powerful force and given the large number of uncorrelated events we all experience in our lives, coincidences are bound to happen and sometimes they are so prevalent that we become convinced that fate and destiny exist.

Never underestimate the power of randomness. When it comes to trading it is easy to see illusory correlation and find spurious correlations that do not continue and were simply the result of random chance.

Disclosure: The above is true. Please see my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Some important advice for those who use offshore brokers like Suretrader

I received the following in a detailed email from my CPA. As always, get your own tax advice, but I did want to put out some information excerpted from my CPA’s email:

As part of the Hiring Incentives to Restore Employment Act enacted in 2010, U.S. citizens and resident aliens living in the U.S. and holding specified foreign financial assets with an aggregate value exceeding either $50,000.00 ($100,000 if filing Married Filing Joint, (“MFS”)) on the last day of the taxable year, or $75,000.00 ($150,000 if filing MFJ) at any time during the taxable year, must report certain information about these assets on Form 8938.

…

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification, the IRS noted. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Just keep that in mind if you have decided to open up an account at SureTrader after Timothy Sykes recommended them.

[Edit 4/16/2012: This page on the IRS website indicates a significantly lower, $10,000 threshold for reporting foreign accounts on a different form, Form TDF 90-22.1]

Disclosure: I have no connection to SureTrader. I have an ongoing business relationship with Tim Sykes that is explained in my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

A little bit of trader transparency

While plenty of trading gurus and twitter traders like to talk about how transparent they are, most say little about themselves or their trades. Many go by aliases, many post their trades only after they have supposedly made them, or put their trades up on their website, pretending that by posting a trade on their own website with no third-party verification it somehow proves they made the trade. Screw them all! I have nothing to hide so I am posting below details from my past tax returns. Furthermore, I have directly imported all my past trades (where that was possible) to Profit.ly. I went back and hand-entered trades from accounts I could no longer auto-import from. See my trades on Profit.ly here. This listing of my trades is not guaranteed to be correct — I am sure that there are small mistakes in trades I hand-entered and auto-importing of trades appears to have missed a few trades. That being said, my record on Profit.ly is an honest accounting of my trades and is very close to the gains that I have reported to the IRS.

Besides the trades that I have posted on Profit.ly, I thought I could provide a bit more information on my trading gains. From 2007 until January 1, 2011, my trades on Profit.ly show $497,167 in profit. For the tax years 2007 to 2010 I reported to the IRS $510,553 in gross trading profit (this excludes long-term capital gains and expenses other than commissions). See below for details.

2007
I do not have electronic copies of my tax returns from this year.
Long-term capital gains: $12,386
Dividends: $4,857
Gross trading profits (short term capital gains on Schedule D): $58,697

I did not have enough trading activity to file as a business trader in 2007 so most of my (modest) trading expenses were not deductible.

The vast majority of my trading in 2007 was in my individual Interactive Brokers account, since closed. See the 59-page PDF activity statement showing all my 2007 activity.

2008

Schedule D long-term gains: $5,030
Schedule D short-term gains: $203,726
Add back trading gains transferred to Schedule C: $31,451
Add back loss on private company LLC investment: $18,633
Gross trading profits: $253,810
Trading expenses: $31,451
Net trading profits: $222,359

Starting in 2008 I began filing as a business trader, which allowed me to deduct trading-related expenses. Because of the special tax treatment that business traders receive (deductible expenses but no self-employment tax) my accounting firm transfers as much income from Schedule D to Schedule C as is necessary to zero out the trading expenses.

Almost half of my trading expenses, $14,189, were due to interest (almost all of which was a loan from a family member for funds I used for trading). Getting a sit-to-stand desk and four touchscreen computer monitors accounted for another good chunk of expenses and I paid Tim Sykes a bunch of money in 2008 too.

The vast majority of my trading activity up until May took place in my individual IB account, since closed. See all my 2008 activity in this account. I opened a new account (that I currently use) at IB that was my primary trading account for the rest of the year.

Goldman Sachs trade report
Image cut from tax return Schedule D
Image cut from tax return Schedule D continuation sheet
Image cut from tax return Schedule C

2009

Schedule D short-term gains: $84,992
Add back trading gains transferred to Schedule C: $15,178
Add back short-term losses on Prosper.com loans: $201
Gross trading profits: $100,371
Trading expenses: $15,178
Net trading profit: $85,193

Again, approximately half my trading expenses were due to interest, most of which was from a loan from a family member to fund my trading accounts.

Image cut from tax return Schedule D
Image cut from tax return Schedule D continuation sheet
Image cut from Schedule C
Goldman Sachs trade report

2010
In 2010 I elected to become a mark-to-market trader; consequently my trading gains are now filed on Form 4797, not Schedule D.
Form 4797 gross trading gains: $87,871
Subtract gain on Section 197 expensed trading DVD: $156
Add back trading gains transferred to Schedule C: $3,680
Add Broadstreet trading gains: $6,280
Gross trading profits: $97,675
Trading expenses: $9,960
Net trading profit: $87,715

Image cut from 4797
Image cut from detailed statement of gains
Image cut from Schedule C for trading business
Image of other (prop firm) trading income

Lightspeed trade activity (Account opened and closed in 2010)
Broadstreet trade report (Account opened and closed in 2010)

2011
I have not received 1099 forms yet. Preliminary data downloaded from my brokers and analyzed by Tradelog is provided below but it has not been verified / double checked.

Interactive Brokers: $67,823 gross profit (net of $10,094 in commissions; $2,901,330 in sales and $2,833,507 in purchases)
SpeedTrader:  $86,212 gross profit (net of $13,153 in commissions; $4,120,830 in sales and $4,037,953 in purchases)
Capstone: $196 gross profit (net of $142 in commissions; $12,797 in sales and $12,601 in purchases)
Gross profit $154,231

I will update this post after I have received my 1099 forms.

Disclosure: I remain a satisfied client of Interactive Brokers and Capstone. I am no longer a client of any other broker or proprietary trading firm mentioned. I have an ongoing business relationship with Tim Sykes that is explained in my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Penny stock trader Nate Michaud settles with SEC in pump & dump case

Nathan M. Michaud, a prominent penny stock trader, has settled with the Securities and Exchange Commission regarding a civil suit filed by the SEC in May 2009 regarding a pump & dump that occurred in the stock of Asia Global from August 2006 until February 2007. Michaud is known online as “Investorslive”, has 9,000 Twitter followers, and runs the website Investorslive.com and since 2009 he has run the trading chatroom InvestorsUnderground.com. The settlement proposal, under which Michaud has agreed to pay $93,914.19 to the SEC, was filed on December 21st, 2011 with the U.S. District Court of Delaware.

The original SEC complaint in the case was filed May 20, 2009 and can be found online at the SEC’s website (direct link to pdf). A summary of the complaint can also be found on the the SEC’s website (link). The misdeeds alleged by the SEC in this case were fairly complicated and involved eight different people (since amended to include four others) and in the pump and dumps of four different stocks. A parallel criminal case filed by the US Attorney for the District of Delaware charged six of the eight sued by the SEC (Michaud and Adam S. Rosengard were the only two charged civilly and not criminally). Named in the SEC civil case and also in the criminal case were Pawel P. Dynkowski, Matthew W. Brown (founder of InvestorsHub), Jacob Canceli, Gerard J. D’Amaro, Joseph Mangiapane Jr., and Marc J. Riviello. I will not further discuss the criminal case in this post– much has been written about that already.

Following are excerpts from the original SEC complaint that highlight the allegations against Michaud. (Also see the 2nd amended complaint that I downloaded from the Delaware District Court, from December 22, 2011, which includes four additional defendants.)

4. Brown planned the Asia Global pump-and-dump scheme with Defendants Joseph Mangiapane and Marc Riviello, who were both registered representatives at a small broker-dealer in California.  Dynkowski and Defendant Nathan Michaud, who met through InvestorsHub.com, pumped the price of the stock using wash sales, matched orders, and other manipulative trading, coordinated with false, misleading, and touting press releases by the company. The scheme occurred in three cycles:  August-September 2006, November-December 2006, and January-February 2007.  After manipulating the price of the stock, Dynkowski, Brown, Mangiapane, and Riviello dumped more  than 54 million shares that had been improperly registered on SEC Form S-8 and held in nominee accounts.  The illicit proceeds from this scheme totaled at least $4,050,529.

…

46.  Defendant Nathan Michaud, a trader whom Dynkowski had previously met  through InvestorsHub.com, also participated in this scheme.  In August and September 2006, Dynkowski and Michaud, as well as others, engaged in wash sales, matched orders, and other manipulative trading to generate phony volume and artificially inflate Asia Global’s stock price.  When the scheme began, Asia Global traded for approximately 11  cents per  share.  Starting on August 9,2006,  Dynkowski and Michaud began to pump the stock using wash sales, matched orders, and other manipulative trading.  Dynkowski and Michaud continued their manipulative trading through the end of September 2006.

47.  This manipulative trading artificially inflated Asia Global’s stock price. In the space of thirteen trading days, the price ofAsia Global’s stock rose from 11.5-cents per share at the close of the market on August 9, 2006, to an intraday high of 41  cents per share on August 25,2006.   As i a  Global’s daily volume likewise jumped by millions of shares per  day during this period.

 

When asked for comment via email, Nathan Michaud emphasized that he “had nothing to do with the dumping” of improperly registered stock. From the SEC complaint: “Dynkowski, Brown, Mangiapane, and Riviello dumped more  than 54 million shares that had been improperly registered on SEC Form S-8 and held in nominee accounts.“.

The SEC asked the court to punish Michaud with the following actions:

c)  permanently enjoin Defendant Michaud from engaging in future conduct in violation ofExchange Act Section 10(b) [15 U.S.C.  § 78j(b)], Rule lOb-5 thereunder [17 C.F.R. § 240.10b-5], and Securities Act Section 17(a) [15 U.S.C. § 77q(a)];

…

f)  order Defendant Michaud to pay civil penalties under Exchange Act Section 21 (d)(3) [15 U.S.C. § 78u(d)(3)];

…

h)   order Defendants Dynkowski, Brown, Canceli, D’Amaro, Mangiapane, Michaud, Riviello, and Rosengard to disgorge, with prejudgment interest, any ill-gotten gains and provide an accounting of  monies they received;

The settlement proposal was filed by the SEC with the Delaware District Court on December 21, 2011, as was Michaud’s consent to the settlement. As is usual with SEC settlements, by consenting to the settlement, Michaud neither confirmed nor denied wrongdoing and agreed not to break securities laws in the future. He was also ordered to pay $40,600 of disgorgement of profits, $3,314.19 in interest, and a civil penalty of $50,000 (totaling $93,914.19).

From the settlement proposal:

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant is liable for disgorgement of $40,600, representing profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $3314.19, and a civil penalty in the amount of $50,000 pursuant to Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)].

Previously, Timothy Sykes wrote about the allegations against Michaud back in August 2010.

What is my take on this? I have interacted with Nate Michaud online since April 2008 and I was in his chat room for all of 2009 and 2010. In none of my interactions with him has he come across as anything less than honest and I have not later found anything of substance he has said to be untruthful. He continues to trade pump and dumps (both long and short). I do believe that he is guilty of impropriety in the case he settled with the SEC, but I have not seen anything to indicate that he has acted improperly since I have known him. Please see my disclosures below on my relationship with Nate Michaud.

Update 1/25/2012: The judge has signed off on the settlement (PDF), making it official. One interesting thing to note is that Michaud signed the settlement in November 2010 — it took over a year for it to get filed with the court and approved by the judge (due to the related criminal case against other people).

 

Disclosure: I used to be an affiliate of InvestorsUnderground (IU) stock chat, for which I received 50% of a new subscriber’s first month’s payment and 25% on an ongoing basis. I have not received any affiliate payments from them since December 2010. I am no longer a member of InvestorsUnderground stock chat; my membership ended at the end of 2010. I had subscribed to IU since its inception at the beginning of 2009 and I paid the standard rate of membership for charter members, which was $99/quarter (I also was a member of the free predecessor chat, Green on the Screen, for 6 months starting in summer 2008). From 2009 through 2010, I received a total of $5,720.39 (net of Paypal fees) from Pietro Rossa Trading (the Nevada corporation through which Nate Michaud runs InvestorsUnderground). 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.