What we can learn from the fake Avon $AVP buyout offer

If you are going to manipulate stocks by putting out fake news, I have some advice:

1) Don’t do it. It is very easy to get caught and you will likely not make much money.
2) If you do put out fake news, at least don’t make the obvious (and easily traceable) trade of buying near-term out of the money call options and selling into the spike or buying a large position in the stock and selling into the spike.

While the alleged perpetrator of the fraudulent buyouts of Avon (AVP), Rocky Mountain Chocolate Factory (RMCF), and Tower Group (no longer trading; bought out at $1.50) did not buy just prior to putting out fake buyout offers, he already had large positions in those stocks. His filings submitted to the SEC were also traceable to his IP address despite using a proxy server. His methods were also similar in RMCF and AVP, which enabled the SEC to search only for people trading both stocks in large quantities around the fake buyouts, drastically narrowing the lists of suspects.

Matt Levine analysis of the frauds
Bloomberg News article on frauds
SEC complaint (PDF)

 

Disclaimer: I have no position in any stock mentioned. I have no relationship with any parties mentioned above. 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.

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