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Well, I confirmed a bit more about Andrew Left of StockLemon (noted short seller and basher of bad microcap companies). He (or someone with the exact same name who lives in the same county, not likely) was convicted (in a civil case) of theft by double-cashing a check. I downloaded the original documents from the LA Superior Court website (case #bc269050). Since I am too lazy to put them up, you can see a copy of the writ of execution on the horrid StockLemon bashing site StockLemonAide.

Of course, when it comes down to it, you shouldn’t trust anyone, except maybe your mother (although don’t trust her for stock picks!). You shouldn’t even automatically trust me (although I am trustworthy). When it comes to investing especially, no one acts in a completely disinterested fashion. The kind of losers that praise a company such as HSOA on Yahoo’s message boards are long (or short) the stock and only want to pump (or deflate) it. Management of most every company wants to pump their company–sometimes this is just dumb, such as with CRMT or WHI, two stocks where I suffered losses after I trusted some bad management predictions–and sometimes this is fraudulent, such as in the case of Enron or Xybernaut. Short sellers (such as StockLemon) will try to bash a stock to get it to go lower.

The problem is that we cannot trust anyone. We need to verify the facts. Sometimes it will turn out that a company that looks to be failing or fraudulent will turn out to be a good company. Sometimes the short seller bashing the stock will turn out to be right (such as with Chanos and Enron or Andrew Left and GTX Global). What matters is the facts. Ironically, people like Andrew Left actually benefit the rubes that invest in fraudulent (or just bad) companies by ending the companies’ lives before they can obtain more money from investors.

See the previous posts in this series: Part 1, Part 2, Part 3

Disclosure: I am no longer long CRMT or WHI. I have no position in any other stocks mentioned. See my disclosure policy.

Andrew Left of StockLemon (www.citronresearch.com) has been accused of many things. One accusation that I have verified (assuming the person is not a different Andrew Left) is that he was barred from the commodities/futures industry for three years back in 2000. You can see details of the case here.

Basically, the whole firm for which he worked was accused and convicted of wrongdoing. A number of the principals and employees were fined, whereas Andrew Left was not fined at all. So while this is a mark against him, it is not as black a mark as StockLemon’s enemies believe it to be.

Here is a snippet of the decision regarding left:

“ANDREW LEFT-

THE PANEL FOUND THAT LEFT MADE FALSE AND MISLEADING STATEMENTS TO CHEAT, DEFRAUD OR DECEIVE A CUSTOMER IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). LEFT’S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL BARRED LEFT FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR THREE YEARS; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR TWO YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.”

The full decision can be found online at the National Futures Association website. Following is the complaint by the NFA:

COMPLAINT –

THE COMPLAINT ALLEGED THAT UCC, STERN AND SAATHOFF USED DECEPTIVE AND MISLEADING PROMOTIONAL MATERIAL, IN VIOLATION OF NFA COMPLIANCE RULES RULES 2-29(a)(1), 2-29(b)(1) AND 2-29(b)(2). THE COMPLAINT ALSO ALLEGED THAT UCC, BURSTEEN, SOMMERS, BUSHEY, BRIDGES, STEINFELD, DAYAN, PARKS, ZAGER, ZINNER, VITELLO, GETZ, LEFT AND MULLER CHEATED, DEFRAUDED AND DECEIVED COMMODITY FUTURES CUSTOMERS AND ENGAGED IN SOLICITATIONS WHICH OPERATED AS A FRAUD OR DECEIT, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). MOREOVER, THE COMPLAINT ALLEGED THAT UCC, SOMMERS, ZAGER, GROSS AND GETZ FAILED TO OBSERVE HIGH STANDARDS OF COMMERCIAL HONOR AND JUST AND EQUITABLE PRINCIPLES OF TRADE IN THE CONDUCT OF THEIR COMMODITY FUTURES BUSINESS, IN VIOLATION OF NFA COMPLIANCE RULE 2-4. FURTHERMORE, THE COMPLAINT ALLEGED THAT UCC, STERN, SAATHOFF, KAHN, FREEDBERG AND CIARAMELLA FAILED TO DILIGENTLY CARRY OUT THEIR SUPERVISORY RESPONSIBILITIES, IN VIOLATION OF NFA COMPLIANCE RULE 2-9.

Following are the more severe punishments meted out to some of the other people involved, which involve fines and longer bans / suspensions from the futures industry:

DECISION – SOMMERS

ON JUNE 16, 1997, NFA’S BUSINESS CONDUCT COMMITTEE ISSUED A DECISION ACCEPTING SOMMERS’ SETTLEMENT OFFER IN WHICH HE NEITHER ADMITTED NOR DENIED THE ALLEGATIONS OF THE COMPLAINT. THE BCC SUSPENDED SOMMERS FOR TWO YEARS AND SIX MONTHS, WITH CREDIT TOWARDS THE SUSPENSION PERIOD GIVEN FOR THE PAST TWO YEARS AND THREE MONTHS THAT SOMMERS HAS NOT WORKED IN THE COMMODITIES INDUSTRY. THE BCC ALSO ORDERED THAT SOMMERS SHALL TAPE RECORD ALL OF HIS TELEPHONE SOLICITATIONS FOR TWO YEARS AND RETAIN ALL TAPES FOR AT LEAST TWELVE MONTHS AND MAKE THE TAPES AVAILABLE TO NFA UPON REQUEST. IN ADDITION, THE BCC ORDERED THAT SOMMERS SHALL TESTIFY AT THE HEARING FOR RESPONDENTS IN THIS MATTER REGARDING HIS EXPERIENCE WHILE WORKING AT UCC. THE BCC FURTHER ORDERED THAT SOMMERS SHALL SUBMIT TO AN EXPEDITED HEARING PROCESS REGARDING ALLEGED SALES PRACTICE VIOLATIONS OR FAILURE TO FULFILL THE AFOREMENTIONED TAPE RECORDING REQUIREMENTS. FURTHERMORE, THE BCC ORDERED SOMMERS TO PAY A $10,000 FINE. THIS DECISION BECOMES EFFECTIVE JULY 1, 1997.

DECISION – UCC, STERN AND SAATHOFF

ON JUNE 16, 1997, NFA’S BCC ISSUED A DECISION ACCEPTING UCC, STERN AND SAATHOFF’S SETTLEMENT OFFER IN WHICH THEY NEITHER ADMITTED NOR DENIED THE ALLEGATIONS OF THE COMPLAINT. THE BCC ORDERED UCC, STERN AND SAATHOFF TO REDUCE THE NUMBER OF THE FIRM’S APS TO NO MORE THAN 66 WITHIN 60 DAYS. THE BCC ALSO ORDERED UCC, STERN AND SAATHOFF TO SUBMIT PROMOTIONAL MATERIAL TO NFA FOR REVIEW AND APPROVAL AT LEAST TWENTY-ONE DAYS PRIOR TO ITS FIRST USE. IN ADDITION, THE BCC ORDERED UCC, STERN AND SAATHOFF TO TAPE RECORD AND RETAIN TAPES OF ALL TELEPHONE CONVERSATIONS BETWEEN APS AND EXISTING AND PROSPECTIVE CUSTOMERS AND MAINTAIN A DAILY WRITTEN LOG FOR EACH CONVERSATION REFLECTING THE IDENTITY OF EACH CUSTOMER OR PROSPECTIVE CUSTOMER AND THE DATE OF EACH CONVERSATION. THESE TAPES SHALL BE PRODUCED WITHIN TEN DAYS FROM NFA’S WRITTEN REQUEST. IN ADDITION, THE BCC ORDERED THAT UCC, STERN AND SAATHOFF RESTRICT PROMOTIONAL MATERIAL AND AP SOLICIATIONS TO EXCLUDE ANY STATEMENT WHICH MAKES REFERENCE TO PROFITS WHICH COULD BE ACHIEVED IN THE FUTURE OR COULD HAVE BEEN ACHIEVED IN THE PAST BY TRADING FUTURES OR OPTIONS ON FUTURES. THE BCC ALSO ORDERED THAT UCC AND ITS APS SHALL NOT DEMONSTRATE THE EFFECTS OF LEVERAGE IN TRADING FUTURES AND OPTIONS BY USING SPECIFIC EXAMPLES OF THE PROFITS WHICH CAN BE ACHIEVED UNLESS THEY MAKE IT CLEAR THAT NO REPRESENTATION IS MADE THAT UCC’S CUSTOMERS HAVE MADE OR ARE LIKELY TO MAKE SUCH PROFITS. THE BCC FURTHER ORDERED THAT UCC, STERN AND SAATHOFF PROVIDE ADDITIONAL ETHICS TRAINING FOR APS. THE BCC ALSO ORDERED THAT UCC, STERN AND SAATHOFF EMPLOY A FULL-TIME COMPLIANCE OFFICER AND TO AGREE NOT TO COMPENSATE SUPERVISORS BASED ON THE NUMBER OF TRADES EXECUTED BY THE FIRM. THE BCC ORDERED UCC, STERN AND SAATHOFF TO SUBMIT TO AN EXPEDITED HEARING PROCESS WITH 75 DAYS BEFORE A SUBCOMMITTEE OF NFA’S HEARING COMMITTEE REGARDING ALLEGED VIOLATIONS OF ANY CONDITIONS OR TERMS OF THE OFFER OF SETTLEMENT AND THE DECISION. THE BCC FURTHER ORDERED UCC, STERN AND SAATHOFF TO PAY A FINE IN THE AMOUNT OF $200,000. FURTHERMORE, THE BCC ORDERED THAT UCC, STERN AND SAATHOFF AGREE THAT THE TERMS AND CONDITIONS OF THIS DECISION AND THE OFFER OF SETTLEMENT SHALL APPLY TO ANY NFA-REGISTERED FIRM OF WHICH STERN AND/OR SAATHOFF ARE LISTED PRINICPALS. THIS DECISION BECOMES EFFECTIVE JULY 1, 1997.

DECISION – FREEDBERG, KAHN AND CIARAMELLA

ON JULY 2, 1997, NFA’S BCC ISSUED A DECISION ACCEPTING FREEDBERG’S, KAHN’S AND CIARAMELLA’S SETTLEMENT OFFERS IN WHICH THEY NEITHER ADMITTED NOR DENIED THE ALLEGATIONS OF THE COMPLAINT. THE BCC ORDERED FREEDBERG AND KAHN TO EACH PAY A FINE IN THE AMOUNT OF $20,000 AND ORDERED CIARAMELLA TO PAY A FINE IN THE AMOUNT OF $10,000. THE BCC ALSO ORDERED FREEDBERG, KAHN AND CIARAMELLA TO ONLY ACT AS NFA ASSOCIATES AND PROHIBITED THEM FROM ACTING AS A PRINCIPAL OF AN NFA MEMBER OR IN A SUPERVISORY CAPACITY FOR A PERIOD OF FIVE YEARS. THE BCC ORDERED THAT FOR A PERIOD OF TWO YEARS FREEDBERG AND KAHN SHALL TAPE RECORD ALL TELEPHONE CONVERSATIONS WITH CUSTOMERS AND RETAIN THESE TAPES FOR TWO YEARS. FREEDBERG AND KAHN SHALL MAKE THE TAPES AVAILABLE TO NFA UPON REQUEST. FREEDBERG AND KAHN SHALL ALSO MAINTAIN DAILY WRITTEN LOGS OF THEIR SOLICITATIONS. THIS DECISION BECOMES EFFECTIVE JULY 17, 1997.

DECISION – MICHAEL D. BUSHEY

ON JULY 28, 1997, THE HEARING PANEL ISSUED A DECISION ACCEPTING BUSHEY’S SETTLEMENT OFFER IN WHICH HE NEITHER ADMITTED NOR DENIED THE ALLEGATIONS ALLEGED IN THE COMPLAINT. THE HEARING PANEL BARRED BUSHEY FROM APPLYING FOR NFA MEMBERSHIP OR ASSOCIATE MEMBERSHIP, OR FROM ACTING AS A PRINCIPAL OF AN NFA MEMBER, FOR A PERIOD OF SIX YEARS, WITH CREDIT FOR THE THREE YEARS DURING WHICH HE HAS NOT WORKED IN THE FUTURES INDUSTRY. AT THE END OF THE AFOREMENTIONED BAR, BUSHEY MAY APPLY FOR NFA ASSOCIATE MEMBERSHIP ONLY, PROVIDED THAT HE SHALL NOT ACT AS A PRINCIPAL OR SUPERVISE ANY NFA MEMBER FOR TWO YEARS AFTER NFA ASSOCIATE MEMBERSHIP IS GRANTED.

IN ADDITION, BUSHEY MUST TAPE RECORD ALL OF HIS CONVERSATIONS WITH EXISTING AND POTENTIAL CUSTOMERS FOR TWO YEARS AFTER HE IS GRANTED NFA ASSOCIATE MEMBERSHIP AND RETAIN EACH TAPE FOR TWO YEARS. BUSHEY MUST ALSO MAINTAIN A DAILY WRITTEN LOG OF EACH CONVERSATION, IDENTIFYING THE CUSTOMER HE SPOKE WITH AND THE DATE. MOREOVER, ANY MEMBER SPONSORING BUSHEY AS AN ASSOCIATE MUST AGREE IN WRITING TO PERFORM THE SUPERVISORY UNDERTAKINGS CONTAINED IN THE SUPERVISORY AGREEMENT ATTACHED TO BUSHEY’S OFFER OF SETTLEMENT.

AT THE END OF THE AFOREMENTIONED MEMBERSHIP BAR, NEITHER THE COMPLAINT NOR THE DECISION IN THIS CASE SHALL SERVE AS THE SOLE BASIS FOR A PROCEEDING TO DENY BUSHEY’S NFA ASSOCIATE MEMBERSHIP. THIS DECISION BECOMES EFFECTIVE AUGUST 12, 1997.

…

WILLIAM KELLY PARKS –

THE PANEL FOUND THAT PARKS MADE FALSE AND MISLEADING STATEMENTS THAT WERE INTENDED TO CHEAT, DEFRAUD, AND DECEIVE CUSTOMERS, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). PARK’S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL FINED PARKS $10,000; BARRED HIM FROM ASSOCIATION WITH OR ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR ONE YEAR; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR THREE YEARS, WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

…

ARNOLD ZAGER –

THE PANEL FOUND THAT ZAGER MADE FALSE AND MISLEADING STATEMENTS THAT WERE INTENDED TO AND DID CHEAT A CUSTOMER, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). FURTHER, ZAGER ENGAGED IN CONDUCT INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE, IN VIOLATION OF NFA COMPLIANCE RULE 2-4.

CONSEQUENTLY, THE PANEL FINED ZAGER $10,000; BARRED HIM FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR THREE YEARS; ORDERED HIM TO ATTEND AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR THREE YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS. DAVID BRIDGES –

THE PANEL FOUND THAT BRIDGES MADE FALSE AND MISLEADING STATEMENTS IN RECKLESS DISREGARD FOR THE TRUTH, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). BRIDGES’ CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL FINED BRIDGES $5,000 AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR THREE YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

…

BENJI DAYAN –

THE PANEL FOUND THAT DAYAN MADE FALSE AND MISLEADING STATEMENTS WITH A RECKLESS DISREGARD FOR THE TRUTH, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). DAYAN’S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL FINED DAYAN $2,000; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR THREE YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

JEFFREY BURSTEEN –

THE PANEL FOUND THAT BURSTEEN MADE STATEMENTS THAT WERE INTENDED TO CHEAT, DEFRAUD, OR DECEIVE CUSTOMERS, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). BURSTEEN’S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL FINED BURSTEEN $5,000; BARRED HIM FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR ONE YEAR; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR THREE YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO LOG AND TAPE RECORD ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

KENNETH ZINNER –

THE PANEL FOUND THAT ZINNER MADE FALSE AND MISLEADING STATEMENTS THAT WERE INTENDED TO AND DID CHEAT, DEFRAUD, AND DECEIVE CUSTOMERS, IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). ZINNER’S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL FINED ZINNER $15,000; BARRED HIM FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR THREE YEARS; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR THREE YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO LOG AND TAPE RECORD ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

…

BRIDGES’ AND DAYAN’S APPEALS –

ON MARCH 3, 1998, DAVID RAY BRIDGES AND BENJI SCOTT DAYAN FILED NOTICES OF APPEAL FROM THE HEARING PANEL’S DECISION WITH NFA’S APPEALS COMMITTEE. BRIDGES AND DAYAN REQUEST THAT THE APPEALS COMMITTEE REVERSE THE HEARING PANEL’S DECISION AS TO THEM IN ITS ENTIRETY.

DECISION –

ON MAY 13, 1998, NFA’S APPEALS COMMITTEE ISSUED A DECISION ACCEPTING DAYAN’S SETTLEMENT OFFER. THE APPEALS COMMITTEE AFFIRMED THE HEARING PANEL’S FINDINGS THAT DAYAN VIOLATED NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1).

THE APPEALS COMMITTEE ALSO ORDERED DAYAN TO WITHDRAW FROM ANY STATUS WHICH HE HAS WITH NFA AND/OR THE CFTC AND ORDERED DAYAN TO NOT APPLY WITH NFA OR THE CFTC IN ANY CAPACITY FOR ONE YEAR. DURING THIS ONE-YEAR BAR FROM NFA AND THE CFTC, DAYAN IS REQUIRED TO ATTEND A FOUR-HOUR ETHICS TRAINING COURSE AND TO TAKE AND PASS THE SERIES 3 EXAM BEFORE RE-APPLYING FOR REGISTRATION. THE APPEALS COMMITTEE ALSO IMPOSED RESTRICTIONS AND CONDITIONS ON DAYAN’S REGISTERED ACTIVITIES FOR A PERIOD OF THREE YEARS EXCLUSIVE OF ANY PERIOD DURING WHICH DAYAN IS NOT AN ASSOCIATE OF AN NFA MEMBER. THIS DECISION BECOMES EFFECTIVE ON MAY 18, 1998.

NFA APPEALS COMMITTEE DECISION–PARKS, ZINNER AND BRIDGES

On March 14, 2000, NFA’s Appeals Committee issued a Decision affirming in all respects the NFA Hearing Panel’s findings that Parks and Bridges violated NFA Compliance Rules, and affirming in part and modifying in part the NFA Hearing Panel’s penalties imposed on Parks, Zinner and Bridges.

Specifically, the Appeals Committee affirmed the $10,000 fine the Hearing Panel had imposed on Parks, but modified the sanctions to permanently bar him from NFA membership and Associate and principal status with any NFA Member.

Furthermore, the Appeals Committee affirmed the $15,000 fine the Hearing Panel had imposed on Zinner, but modified the sanctions to permanently bar him from NFA memberhsip and Associate and principal status with any NFA Member.

Moreover, the Appeals Committee affirmed the $5,000 fine the Hearing Panel had imposed on Bridges, but modified the sanctions to bar him for two years from NFA membership and Associate and principal status with any NFA Member. Further, the Appeals Committee imposed the following restrictions and conditions on Bridges’ activities for three years after his two-year bar expires: (i) he may not function as a principal, partner, officer, director, or branch manager of any NFA Member; (ii) he may not become or remain associated with any NFA Member (sponsor) unless the sponsor agrees in writing to establish and implement written supervisory policies and procedures to ensure that his activities are in compliance with the restrictions imposed by this Decision, and certifies that it understands that any violation of its obligation under this Decision may be grounds for disciplinary action against the sponsor; (iii) he may not directly or indirectly exercise supervisory authority over any person required to be registered as an AP; and (iv) his sponsor must tape record all conversations that occur between him and both existing and potential customers (and Bridges must have no control over the taping process), retain each tape for two years, and maintain a daily written log that reflects, at a minimum, the first and last name of each existing and potential customer that he spoke with on that day.

This Decision becomes effective April 13, 2000.

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Disclosure: I have no connection with Andrew Left. I have never traded futures. I have never been convicted of anything above the level of a parking ticket. This article was edited on June 4, 2009 to remove some of the complaint (the full complaint had been posted) to make the article more concise and also at the request of one of the three named defendants against whom the NFA dropped its charges.

I had my first 40 visit day yesterday! Of course, that was mostly because of my recent discussion of StockLemon and HSOA. It is an interesting subject but I hope to get back to more relevant topics (i.e., how to find good investments) soon.

I should note that with the recent sell-off there are a lot of good stocks trading at good prices. Berkshire Hathaway (BRK A or BRK B) just reported great earnings, and remains cheap enough so as to almost get Buffett’s services for free. NAHC, CINF, and MIGP are a couple nice insurance companies trading right near book value. For a micro-cap insurer trading significantly below book (albeit one with a few troubles, though it remains profitable) I like RTWI. I should mention that I haven’t done full due diligence on NAHC or CINF, so caveat emptor.

Disclosure: I own shares in BRK.B, RTWI, and MIGP. My disclosure policy believes in proper diversification–investing only in insurance companies would be risky.

Can StockLemon be trusted? To those who ‘invest’ in the stocks the website bashes, the answer is no. But I see no reason why Andrew Left’s writings should be ignored. If his critics are correct, then he lies repeatedly and blatantly. Yet no one has ever won a libel or defamation suit against him. He has been sued for libel three times (to my knowledge). He has won twice, while one is still ongoing.

He won the first case, filed by GTX Global Corp, in a preliminary hearing, because the plaintiff did not have enough evidence to warrant it proceeding to full trial. I should mention that GTX Global (now trading as VSTC.PK) is now worthless, so Andrew Left was right about the company being a ‘phantom company‘.

The second case was filed by CEO of iMergent (IIG), Don Danks. Because the information on this suit was not freely available online, I looked it up on the L.A. Superior Court’s website. This case was dismissed (Andrew Left won). I found the following documents:
1. Andrew Left’s initial response to the lawsuit
2. Case against StockLemon.com dismissed
3. Case against Left dismissed due to default of plaintiff
4. Minute order describing dismissal
5. Outline of case history

I probably could have gotten more and better documents, but I had to pay a per-document fee to download those documents. I should note that since Stocklemon first panned iMergent on February 24, 2005, the stock has gone nowhere overall (it was around $20 per share then and is around there now), although it did drop below $4 in October 2005 and only traded above $30 briefly. So in other words, though StockLemon was wrong about iMergent, it still would have been a profitable and easy short.

There is currently pending a libel lawsuit by Smart-Tek Solutions Inc against Andrew Left (of StockLemon). The case is ongoing and an outline of the proceedings of the case can be found online (the case number is 06-A-521546-C). Ignoring the question of whether Left was libelous, he certainly was right: anyone who invested in Smart-Tek on April 5th, 2006 the day after he panned the company would have lost at least 75% of their investment.

I should also point out that while YP Corp did not sue Andrew Left, it did threaten him. Of course, it looks like he turned out to be right with regards to YP as well. An individual who had invested in YP back when StockLemon pilloried it would have lost over 75% of his or her investment.

Oh, and regarding Andrew Left’s favorite company, (*cough*) HSOA, you can find an impartial (if old) report on it at SmartMoney.

Disclosure: I am not long or short any of the companies mentioned above. I have no connection with StockLemon or Andrew Left (although I have previously gotten some profitable short ideas from his website). See my disclosure policy.

After my last post regarding Home Solutions (HSOA) and Andrew Left’s (of Stocklemon.com) accusations against the company, I received the following comment:

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August 3, 2007 at 4:46 pm || Crazy Bob said: So what you are saying is that Andrew Left contacted you and asked you to post this withouut doing any homework on his actual attacks of HSOA.Can you tell me why he changes his accusations, or why HSOA has not been targeted by SEC as a fraud?Was this hedge manager by chance also a contact of Andrew Left, who has managed to skirt the law but was stripped of his securities license for fraud, bankrupted the company he was CEO of prior to starting blogging and stole checks to begin Stock Lemon according to court filings.Just checking to see if you did your homework or if you are getting suckered in to make Andrew Left look good.

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I have to say that I can’t imagine someone attacking me like this for pumping up a company and talking about how wonderful it is (by the way, Berkshire Hathaway is wonderful!). But if I bash a company that someone is in love with, well, that’s a different matter. All the great (Jim Chanos, Jesse Livermore) and not so great (Manuel P. Asensio, Andrew Left) short sellers get attacked and pilloried. Yet their job is one of the most important in a capitalist economy. They are the realists, the cynics, the skeptics that help to keep frauds from remaining in business and help to destroy companies that produce nothing but press releases.Andrew Left of StockLemon may or may not be a great guy. He may or may not embellish his reports. He may or not always be truthful. I am not one to know. But the man has successfully spotted and publicized many fraudulent companies. So if you are an investor in HSOA or any of the companies he has profiled, you should at least carefully examine his arguments.Below is my reply to the above comment on my previous post:

This is the type of comment that makes me tend to believe Andrew Left. It is the same type of comment that people made all these years against Manuel P. Asensio (an outspoken shorter of stocks). It involves hyperbole and innuendo and unproven assumptions.

I’ll address your comments:

1. Andrew Left has never contacted me. I contacted him because I wanted him to disclose his exact stake in HSOA. I believe that he should disclose more clearly when he is short a stock.

2. I have no opinion of whether HSOA is a fraud or not. Frankly, the only reason I am involved is because it is entertaining. If you rely upon the SEC to find fraud, then you, sir, are a fool. The SEC generally does not investigate until after fraudulent companies implode (cf. Enron, Xybernaut, etc.).

3. The hedge fund manager I mentioned is LONG the stock. She hates Stocklemon.

4. As far as homework, I did enough homework to find out that Left has prevailed in two libel lawsuits filed by companies he targeted. The outcome of one of those lawsuits (by Imergent) was not freely available and I paid the L.A. Superior Court to get a copy of the decision. Numerous companies he has targeted have deserved his ire and have since de-listed or gone bankrupt.

5. I have not seen any solid evidence that Left did anything besides run a company that failed (and that may be a different Andrew Left). Searching the SEC brings up no evidence of any actions against him or the StockLemon website. Searching the web likewise brings up no credible evidence for him losing his securities license.

Disclosure: I am long Berkshire Hathaway. I have no position in HSOA. My disclosure policy is rock solid.

Home Solutions of America, Inc. [[hsoa]] is a big target of numerous short sellers who allege that the company is almost entirely fraudulent. Management of course insists that this is not true. Perhaps the biggest critic of HSOA is StockLemon, a website run by Andrew Left, a short seller. He is holding a conference call to discuss his newest accusations of fraud against Home Solutions. While Left has been criticized for his tactics, I should note that he has won multiple defamation and libel lawsuits brought by previous corporate targets (to my knowledge he has never lost such a lawsuit). In other words, he tends to speak the truth (or at least does not outright lie). With regards to HSOA’s honesty, even one hedge fund manager I know who is long HSOA admits that there is a possibility that the company is fraudulent.

For my part, I asked Andrew Left to disclose during his conference call exactly how much he is short HSOA. He said that he would. One problem I have with him is that he does not normally disclose which of the stocks he mentions on his website he is or is not short. I always do that.

Reprinted below is his press release regarding his conference call:

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Citron Research to Hold Conference Call on Home Solutions of America
August 2, 2007
Los Angeles, CA.- Citron Research, a leading provider of information on the small
cap markets, will hold its first ever conference call to discuss the current state of
affairs at Home Solutions of America (Nasdaq:HSOA) on Monday August 6 at 11:00
am (Eastern). Editor of Citron Research, Andrew Left, will host the conference call. Left states,
“It is important for all investors, whether long, short, or curious, to listen to this
conference call as it should give them a deeper understanding of the company.
Furthermore, it will bring up some interesting questions that require substantive
answers from management on their investors’ call on August 8th.
Among some of the topics addressed in the conference call will be:
The August 2nd ruling regarding responsibility of insurance companies in NO.
The effect of the recent housing market/credit crunch on Home Solutions
The many accusations of fraud against the company
Transparency of receivables status and collect ability
Analyst coverage of the stock
Corporate Credibility at Home Solutions of America
A formal invitation to the call will be sent to: Securities and Exchange Commission,
NASD, and NASDAQ.
Citron will also hold a Q&A period. Citron will answer all substantive question.
All questions must be emailed beforehand to questions@citronresearch.com
Dial in instructions for the call are
US and Canada Dial-in: 1-800-391-1709
International Dial-in: 001-310-539-2229
Conference Bridge#: 768274
Contact:
Info@citronresearch.com
(213) 596-0492

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Disclosure: I hold no interest (long or short) in HSOA. My disclosure policy has never been accused of fraud, although it did once steal a cookie from the cookie jar.

Research Frontiers (REFR) is, if not a fraudulent company, certainly a failed company. Forty years since it was founded it has no product, 14 employees, revenues below $300k per year, and yet it has a market cap of $200 million. Of the company’s 14 employees, 4 are technical/research employees. Only one of those employees has a PhD (in chemistry). (See the company’s 10k for details; this information is around page 10, after the list of licensees). This is not what you want to see in a technology start-up.

Research Frontiers owns the technology to tint glass and plastic by running an electric current through the material. One problem with the technology: the electricity is required to keep the glass clear. This minimizes the possible uses for Research Frontier’s tinting solution for safety reasons: it would be unfortunate for a car’s engine and battery to die, causing the windows to all go dark. Also, this makes it harder to use the technology in highly portable applications such as glasses (0.6 watts per square foot are required to keep the glass clear). The glass has also been derided as not becoming clear enough when the tinting is off. Research Frontier’s R&D spending is minuscule and it competes with companies much larger than itself that already have products on the market (such as the tinting solution in Transitions(TM) glasses, which is a passive system that darkens in response to UV light).

I recommend pursuing the archives at Asensio.com, detailing Manuel Asensio’s battle against REFR (he was/is a well-known short-seller, although I should note that he has his own detractors). To see the bull argument, see Gene Marcial’s short column at BusinessWeek. For a more nuanced view, take a look at this Forbes column from 2003.

If you value your money, stay away from Research Frontiers. Also, note that while I often profile bad investments, I do not recommend engaging in short selling; it is very risky.

Disclosure: I am not short REFR. I have never smoked REFR either. My disclosure policy once smoked a chocolate cigar but it did not inhale.

The great stock speculator, Jesse Livermore, was known primarily as a short seller of stocks. He was even blamed by some for the stock market crash of 1929. While he made money shorting stocks (thus profiting when their prices decreased), he also speculated on the long side as well. His story is a great story, and he has many tips that are useful even for people who do not share his extreme risk-seeking behavior.

I highly recommend Edwin Lefevre’s fictionalized account of Livermore’s first two decades in the market, Reminiscences of a Stock Operator. Of course, we would all be wise to remember that there is much more to life than the market. Livermore committed suicide in 1940; his suicide note read: “My whole life has been a failure.”

I do not think shorting stocks is a good idea for most people. It is very easy to quickly lose a lot of money shorting stocks. However, shorts can tell us a lot, and it behooves us to understand and pay attention to stock shorting.

First, let’s start with a simple definition: shorting a stock involves borrowing that stock from someone who owns it and immediately selling it, with the promise to buy back that stock in the future. Someone who is short a stock makes money if the stock decreases in price.

Why would anyone go short? If a stock is highly overvalued, or a company is run by complete idiots or a kleptomaniacal management, it would be wise to go short and benefit from the stock eventually falling. However, shorting a stock exposes you to infinite risk–if the stock more than doubles, you will lose more money than you invested. Going long, on the other hand, is much less risky, since you can only lose the money that you originally invested. Another problem with shorting is timing: for example, look at the chart for Cheniere Energy (LNG). Cheniere has not yet made any money from its main business, liquefied natural gas receiving terminals, and there is a significant risk of the company going bankrupt before it ever makes money. But with the increase in natural gas prices, the stock price shot up drastically in 2004. This led to a number of people shorting the stock, and they made plenty of money as the stock fell below $28 (from a high of $40).

Since that time, however, Cheniere’s stock has gradually bounced around, bringing it back up to its previous highs (and back below again). All that happened despite no fundamental changes in Cheniere’s outlook. Another interesting company has been Overstock.com (OSTK). While shorts have made money in this stock over the last year, and the company still looks overvalued, there is no reason the stock price could not shoot up again, giving the shorts some huge losses.

One last problem with shorting is that it requires betting against the long-term trend of the market. Over time, most companies become more profitable, and the U.S. economy as a whole grows at about the rate of 3.5% each year if we subtract inflation. If we figure in an average inflation rate of about 4% per year, then we add those two rates together with the average dividend rate (historically) of about 2.5% to get the average growth in stock prices per year: about 10%. In the long run, shorts will lose. In the short run, however, the market is far from perfect, and a savvy short can profit.

Just for your information, there is another way to profit via a stock’s declining price. That is via the use of put options. They have the benefit of reducing risk to the amount used to purchase the put, while also increasing leverage. On the other hand, options have a limited lifespan, so if you buy an October put and the stock doesn’t decline until November, then your put will expire worthless.

So why do people short sell? There are several different strategies to short selling. The classic hedging or market-neutral strategy involves buying the stocks of good companies in an industry and then selling short the bad companies. This same strategy can be used with all stocks in the market–buying the best and selling the worst. This way, a money manager can make profits even if the market as a whole does not go up. An astute manager would be net short (have more short than long positions) if he thought that the market should decline, and be net long if he though the market should go up.

Others, who sell options, may wish to short a stock so that their market risk is neutralized. A seller of call options would short the underlying stock to remain market-neutral, whereas a seller of puts would buy the stock. Other investors (including hedge funds and mutual funds) may choose to short sell some stocks as a kind of insurance for their (much larger) long positions.

So, anyway, to the main point of this article: why should everyone know about shorting? Simply put, short sellers tend to be the most sophisticated investors and speculators; many hedge funds use short-selling strategies. The short interest ratio is easily available for most stocks, and we can find it for free at Yahoo Finance. For example, see the short ratio of XJT (it is under share statistics). It is currently at 29%. For most companies, the short percentage will be well under 1% (such as for GE). Besides using Yahoo Finance, you can also find short interest from E*Trade (even if you are not a customer); they report the last four months of short interest. For Nasdaq stocks, visit the Nasdaq website to find the number of shares short for a given stock.

For comparison, check out the short ratios of GM (11%) and British Petroleum (BP) (.1%). So how reliable and how useful are short ratios? For any one stock, they are not a very reliable indicator of how the company is doing or where the stock will go. In general, however, stocks of companies with high short ratios (over 2.5%) tend to do worse than stocks of companies with low short ratios. If you wish to read further, I suggest the following article: Short-sellers, Fundamental Analysis and Stock Returns, by Dechow, Hutton Meulbroek, and Sloan.

A stock will tend to do poorly if it is overpriced or if the underlying company is doing poorly. Thus, short ratios will tell us whether some sophisticated investors think a company is doing poorly or if its stock is overvalued. If we are buying too many stocks with high short ratios, we are probably doing things wrong. It is important to remember that as value investors, we will often buy stocks selling at lows. These stocks may have been overpriced or fairly priced, but they would by definition be great candidates for shorting. Therefore, it does not surprise me if a stock I find attractive has a high short ratio.

What is important is that as the stock decreases in price and becomes a better value, the short ratio should decrease. So if I am tracking a stock that goes from having a 15% short ratio to a 5% short ratio, then there are a number of sophisticated investors who believe that the stock is no longer overvalued. Conversely, if a stock has a short ratio that is increasing considerably, we should be wary about any problems that the company may be having.

If you are interested in how short interest relates to the market as a whole, I suggest the academic paper by Lamont and Stein: Aggregate Short Interest and Market Valuations. The punchline is shown by the figure at the end of the paper: short interest does not really tell us that much. If anything, a low overall short interest level indicates stock market losses and a high level predicts stock market gains!

Disclosure: I hold no shares (long or short) of any of the companies mentioned in this article. See the disclosure policy.