Beware the ATM: ARCA Biopharma (ABIO) Edition

It has been awhile since my last trading strategy post so I thought I would write one about something that I have been paying attention to recently. If you don’t know my core beliefs on trading strategy, read these classic blog posts first:

So you want to be a trader, Part 1
So you want to be a trader, Part 2: Finding a trading system & dealing with emotion

A good chunk of the money I make comes from day-trading. The most important thing when considering a day-trade is that fundamentals almost don’t matter — what matters is supply and demand for the stock. If you can identify situations where demand will drop throughout the day or supply will increase, or both, you will be able to profit from short-selling. Conversely, if you can identify decreasing supply or increasing demand, you can profit from buying.

Perhaps one of the most predictable sources of increased supply of stock is the company issuing shares through an already-existing ‘at-the-market’ offering, commonly known as an ATM. Now it is one thing to identify a situation where a company has an outstanding ATM facility and the company needs cash (as can be known by looking at the balance sheet and cash flow statement). That is certainly useful and many traders do that. But wouldn’t it be even better to spend the time to follow such situations prospectively and then identify how often and how much those ATMs were actually used?

This is what I am spending time and effort on right now: whenever I see a stock gapping up on news that I might want to short because the news isn’t really that great, I look for outstanding ATMs. Regardless of whether I trade the stock or not, I make a note to look back at the SEC filings in the future to see if the company actually did sell shares through the ATM on that and following days. By doing this I will get a better sense of how reliably companies will use their ATMs in these situations and this will help me better evaluate the risks of shorting these stocks.

The first stock I made a note to look back at was Arca Biopharma (ABIO). This makes for a perfect example because the company put out a 10-K soon after having a big spike on February 20, 2019, and the stock had very low volume prior to that spike. So let’s take a look. Below is the daily candlestick chart of ABIO for the year up until today.

Having identified the stock as worthy of interest and having an ATM on February 20th, we can now look at the filings to see if it used that ATM. On February 27nd, the company filed its 10-K for the year ended December 31st. On the first page we find this: “As of February 22, 2019, the Registrant had 18,355,111 shares of common stock outstanding.” The balance sheet lists 13,924,058 shares outstanding as of December 31st, 2018. So from January 1st to February 22nd, 201 ABIO issued 4.43 million shares, increasing the share count by 31.8%. Next we go to the section entitled “(7) Equity Financings and Warrants” — I knew to go there because I searched the document for “at the market” (if that doesn’t work search “at-the-market”. Unfortunately, that just describes the ATM usage for 2017 and 2018 — I want more recent issuance so I go to the “subsequent event(s)” section.

In January 2019, the Company amended the Sales Agreement to increase the maximum aggregate value of shares which it may issue and sell from time to time under the Sales Agreement by approximately $2.5 million, from $10.2 million to $12.7 million. Subsequent to December 31, 2018, the Company sold an aggregate of 4,431,053 shares of its Common Stock pursuant to the terms of the Sales Agreement, as amended, for aggregate gross proceeds of approximately $2.5 million. Net proceeds received in the period were approximately $2.4 million, after deducting initial expenses for executing the “at the market offering” and commissions paid to the placement agent. As of February 22, 2019, the Company has sold all shares available under its current prospectus to the Company’s registration statement on Form S-3 (No. 333-217450).

So between January 1st and February 22nd of 2019 Arca Biopharma sold 4.431 million shares through its ATM (which is now exhausted — the company will have to file an amended S-3 registration statement if it wishes to sell more shares) for gross proceeds of $2.5 million. Divide $2.5m by 4.431m shares to get an average price of $0.5642 per share. Given that prior to February 20th, the stock traded an average of under 200,000 shares per day and never traded over $0.45, it is a good bet that Arca Biopharma sold no shares during that time period. (Also, as of the amended prospectus on January 25th, the company said it had sold a total of $10,083,445 worth of stock through its ATM, while as of Frebruary 22nd that was $12.6 million, meaning the company sold no shares or almost no shares from January 1st to January 22nd.)

On February 20th, the stock opened at $0.90, hit a high of $0.97, and closed at the low of $0.508. Below is an intraday 5-minute candlestick chart of ABIO from that day. Note that the volume-weighted average price (VWAP) was $0.704 at the end of the day. The next day the VWAP was $0.487. So it is likely that the company sold a large number of shares over both days. The volume on February 20th was 25.94 million shares, and it was 7.14 million shares the next day. Over those two days the company likely sold 4.43 million shares, 13.4% of the total trading volume those days. It is important to look at the total trading volume like this and not just the increase in shares outstanding because if the number of shares sold by the company is small relative to the trading volume it is still possible for the stock to spike big. But here, with 13.4% of the volume being sales by the company through the ATM, that was not possible and it was all but inevitable that the stock would drop as it did.

(Two day 5-minute candlestick chart;click to enlarge)

For more on dilution, I recommend following AuspexResearch on Twitter. He is the one who got me to start looking at this stuff a couple years ago. Read a few of his Twitlonger posts.

Below is the full text of the February 20th press release that caused the stock to spike:

ARCA Biopharma Announces FDA Agreement for a Single Phase 3 Clinical Trial to Support Approval for the First Genetically-Targeted Cardiovascular Drug

GlobeNewswire•February 20, 2019
FDA Special Protocol Assessment agreement granted for PRECISION-AF clinical trial evaluating Gencaro as a potential treatment for atrial fibrillation in a heart failure population that has no FDA approved drug therapies 58% treatment benefit seen versus active comparator in Phase 2B for planned Phase 3 target population
Gencaro development program has FDA Fast Track designation
U.S. and European cardiovascular patents and regulations may provide commercial exclusivity for Gencaro for 10 years post approval
WESTMINSTER, Colo., Feb. 20, 2019 (GLOBE NEWSWIRE) — ARCA biopharma, Inc. (ABIO), a biopharmaceutical company applying a precision medicine approach to developing genetically-targeted therapies for cardiovascular diseases, today announced that it has reached agreement with the U.S. Food and Drug Administration (FDA) regarding a Special Protocol Assessment (SPA) on the design of a pivotal Phase 3 clinical trial, PRECISION-AF, to assess the safety and efficacy of GencaroTM (bucindolol hydrochloride) as a genetically-targeted treatment for atrial fibrillation (AF) in patients with a specific type of heart failure (HF). The target population for the planned Phase 3 clinical trial, partially identified by precision therapeutic phenotyping, currently has no FDA approved drug therapies. This SPA provides agreement that the Phase 3 protocol design, clinical endpoints, trial population and statistical analyses adequately address objectives that, if met, would support a regulatory submission seeking approval of Gencaro for the prevention of AF recurrence in a genotype-defined HF population.
If PRECISION-AF is successful and Gencaro gains regulatory approval, it has the potential to be unique in several aspects, including:
The first genetically-targeted cardiovascular therapy;
The only drug therapy indicated in HF patients with mid-range ejection fraction (HFmrEF); and,
The only drug therapy for AF approved against an active comparator.
The SPA process is designed to facilitate review and approval of drugs by allowing FDA to evaluate the proposed design and size of specific clinical trials that are intended to form the primary demonstration of a drug product’s efficacy and safety. FDA ultimately assesses whether the protocol design and planned analysis of the trial are acceptable to support regulatory approval of the product candidate for the indication studied. An SPA agreement can potentially reduce the regulatory risk of bringing a drug to market.
“Consistent with our mission to develop precision therapies on a pharmacogenetic platform, this SPA agreement with the FDA provides a clearly defined regulatory pathway for the Phase 3 development of Gencaro in a genotype-specific heart failure population that currently has no FDA approved drug therapy,” said Michael R. Bristow, MD, PhD, Chief Executive Officer of ARCA biopharma. “If the previous foundational therapeutic observations in the GENETIC-AF and BEST trials are confirmed in PRECISION-AF, we believe Gencaro could potentially provide a new standard of treatment for AF prevention for the estimated 2.5 million HFmrEF patients in the major markets in U.S., Europe and Japan.”
In accordance with the Company’s SPA agreement with FDA, PRECISION-AF is designed as a single, adequate and well-controlled Phase 3 clinical trial that may be sufficient to support an New Drug Application (NDA) submission for an AF indication if the objectives of the trial are achieved consistent with the requirements of the SPA. The trial is designed as a double-blind, active-controlled, multicenter, international study comparing Gencaro with Toprol-XL (metoprolol succinate) for the prevention of AF recurrence or all-cause mortality (ACM) in HFmrEF patients. HFmrEF is defined as HF with a left ventricular ejection fraction (LVEF) ≥ 40% and < 50%, which constituted approximately half of the enrolled population in the Phase 2 GENETIC-AF trial. PRECISION-AF is designed to enroll approximately 400 patients who have: HFmrEF, a recent AF event, and the genotype which responds most favorably to Gencaro. The primary endpoint of the trial will be time to first event of atrial fibrillation/atrial flutter (AF/AFL) or ACM during the 26-week Follow-up Period. In the recently completed GENETIC-AF trial, Gencaro showed a 58% treatment benefit compared to Toprol-XL in reducing AF recurrence in the HFmrEF population targeted for Phase 3 (hazard ratio = 0.42; 95% CI: 0.21, 0.86; p = 0.017). With 400 patients (200 per arm) the trial will have 90% power at a p-value of 0.01 to detect a 45% treatment benefit for Gencaro compared to Toprol-XL. Subject to securing additional financing, ARCA anticipates initiating PRECISION-AF in the fourth quarter of 2019.
About Special Protocol Assessment (SPA)
An SPA is an agreement with the FDA that the proposed trial protocol design, clinical endpoints and statistical analyses are acceptable to support regulatory approval. For further information regarding the SPA process, please visit the FDA website, www.fda.gov. A SPA agreement is not a guarantee of approval, and there are no assurances that the design of, or data collected from, the planned Gencaro clinical trial (PRECISION-AF) will be adequate to obtain the requisite regulatory approvals for the marketing of Gencaro.
About Atrial Fibrillation (AF)
AF, the most common sustained cardiac arrhythmia, is a serious disorder in which the normally regular and coordinated contraction pattern of the heart’s two small upper chambers, or the atria, becomes irregular, rapid and uncoordinated. AF can cause distressing symptoms that significantly impact quality of life and can also bring potentially serious medical consequences, including increasing the risk of stroke and serious cardiovascular complications. AF is considered an epidemic cardiovascular disease and a major public health burden. In 2015, there were approximately 5.2 million patients who had been diagnosed with AF in the United States. It is estimated that AF costs the U.S. economy about $6.0 billion annually.
About ARCA biopharma
ARCA biopharma is dedicated to developing genetically-targeted therapies for cardiovascular diseases through a precision medicine approach to drug development. ARCA’s lead product candidate, GencaroTM (bucindolol hydrochloride), is an investigational, pharmacologically unique beta-blocker and mild vasodilator being developed for the potential treatment of atrial fibrillation in heart failure patients with mid-range ejection fraction. ARCA has identified common genetic variations that it believes predict individual patient response to Gencaro, giving it the potential to be the first genetically-targeted AF prevention treatment. The Gencaro development program has been granted Fast Track designation by FDA. ARCA is also developing AB171, a thiol-substituted isosorbide mononitrate, as a potential genetically-targeted treatment for heart failure and peripheral arterial disease (PAD). For more information, please visit www.arcabio.com.
Safe Harbor Statement
This press release contains “forward-looking statements” for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, potential future development plans for Gencaro, ARCA’s ability to complete any Phase 3 clinical trial, the likelihood for PRECISION-AF results to satisfy the requirements of the SPA, ARCA’s ability to raise sufficient capital to fund the PRECSION-AF trial and its other operations, the expected features and characteristics of Gencaro, including the potential for genetic variations to predict individual patient response to Gencaro, Gencaro’s potential to treat AF and/or HFmrEF, future treatment options for patients with AF and/or HFmrEF, and the potential for Gencaro to be the first genetically-targeted AF prevention treatment. Such statements are based on management’s current expectations and involve risks and uncertainties. Actual results and performance could differ materially from those projected in the forward-looking statements as a result of many factors, including, without limitation, the risks and uncertainties associated with: ARCA’s financial resources and whether they will be sufficient to meet its business objectives and operational requirements; ARCA may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of Gencaro or to otherwise continue operations in the future; an FDA SPA agreement does not guarantee approval of Gencaro or any other particular outcome from regulatory review; results of earlier clinical trials may not be confirmed in future trials; the protection and market exclusivity provided by ARCA’s intellectual property; risks related to the drug discovery and the regulatory approval process; and, the impact of competitive products and technological changes. These and other factors are identified and described in more detail in ARCA’s filings with the Securities and Exchange Commission, including without limitation ARCA’s annual report on Form 10-K for the year ended December 31, 2017, and subsequent filings. ARCA disclaims any intent or obligation to update these forward-looking statements.
Investor & Media Contact:
Derek Cole
720.940.2163
derek.cole@arcabio.com
A photo accompanying this announcement is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/af496e97-20da-420a-bf93-e51b3a3ed740

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

Scottsdale Capital Advisors Sues me

Scottsdale Capital Advisors (referred to here and in many court filings as SCA) sued me personally and my company, MorningLightMountain LLC (referred to here and in many court filings as MLM), in The Kalamazoo County Circuit Court in Michigan. My lawyers removed it to federal court (Scottsdale Capital Advisors Corp. v. MorningLightMountain, LLC (1:18-cv-00533) U.S. District Court, W.D. Michigan) and then agreed with SCA’s lawyers to remand it back to state court. You can see all the initial filings and the filings that happened at the federal level for free at the Court Listener website:

https://www.courtlistener.com/docket/6627318/scottsdale-capital-advisors-corp-v-morninglightmountain-llc/

Full federal case docket
(Note that the links that are not PDFs are OCR text of the filings performed by CourtListener.com and will have errors):

1. May 11, 2018 Main Doc Notice of Removal Download PDF

Att 1 Exhibit 1 – Summons & Complaint Download PDF

Att 2 Exhibit 2 – First Amended Complaint Download PDF

Att 3 Exhibit 3 – State Court Register of Actions Download PDF

Att 4 Exhibit 4 – FINRA Amended Extended Hr’g Panel Decision Download PDF

Att 5 Exhibit 5 – Scottsdale Schedule of Commission & Fees Download PDF

Att 6 Exhibit 6 – Proof of Service for Notice of Removal Download PDF

2. May 14, 2018 Main Doc Notice Regarding Assignment of Case Download PDF

3. May 14, 2018 Main Doc Corporate Disclosure Statement Download PDF

4. May 18, 2018 Main Doc Stipulation and Order (Proposed-one document) Download PDF

Kalamazoo County Circuit Court does not yet allow the public electronic access to court records. To keep my readers updated, I will be posting a copy of the register of actions (docket) every so often as well as posting scans of all documents publicly available in the case.

The case is 2018-0153-CZ in the Civil Division of the Ninth Judicial Circuit Court of the State of Michigan.

Scottsdale Capital Advisors Corp.

v

Does 1-10
Michael Goode
MorningLightMountain, LLC

Michigan State case register of actions (2018-0153-CZ)

Register of Actions as of 4/11/2019 (PDF)
[All links below are to PDF files]

4/16/2018 – Summons and Complaint – Civil – New Filing
Service To: Defendant MorningLightMountain, LLC; Defendant Goode,
Michael; Defendant Does 1
10

4/17/2018 – Notice of Review by Business Court Judge

4/20/2018 – Amended Complaint
Party: Plaintiff Scottsdale Capital Advisors Corp.

5/11/2018 – Notice of Removal to Federal Court
Party: Plaintiff Scottsdale Capital Advisors Corp.; Defendant MorningLightMountainLLC; Defendant Goode, Michael; Defendant Does 110
[This is the same as the notice of removal filed in the federal case; the exhibits are not included in this scan because they were included with the federal case linked above]

5/25/2018 – Stipulation with Order Regarding:
Fixing Deadline to Response to First Amended Complaint

5/25/2018 – Substitution of Attorney and Order
Party: Plaintiff Scottsdale Capital Advisors Corp.

5/29/2018 – Court of Appeals- Supreme Court – Remand for:
Remanded from the Western Distict of Michigan

6/7/2018 –  Answer to Amended Complaint
Party:
 Defendant MorningLightMountain, LLC; Defendant Goode, Michael

6/7/2018 –  Motion for Summary Disposition
Party: Defendant MorningLightMountain, LLC; Defendant Goode, Michael
First Amended Complaintwith Brief in Support

6/7/2018 –  Praecipe

6/7/2018 –  Proof of Service

6/7/2018 –  Notice of Scheduled Proceeding
on Defendants Motion for Summary Disposition

6/27/2018 – Civil Proceedings Scheduling Order MCR 2.401
Party: Plaintiff Scottsdale Capital Advisors Corp.; Defendant MorningLightMountain, LLC; Defendant Goode, Michael

8/2/2018 – Stipulation
Stipulation to Amend Scheduling Order

8/14/2018 – Adjournment Stipulation and Order
Party: Plaintiff Scottsdale Capital Advisors Corp.; Defendant MomingLightMountain, LLC; Defendant Goode, Michael; Defendant Does 110
to Amend Scheduling Order

8/15/2018 –  Notice of Scheduled Proceeding

8/17/2018 –  Response to: (Specify)
Party: Plaintiff Scottsdale Capital Advisors Corp.
in Opposition to Motion for Summary Disposition of First Amended Complaint

8/17/2018 –  Proof of Service
Reply in support of Defendants’ Motion for Summary Disposition of First Amended Complaint

8/20/2018 –  Response to: (Specify)
Party: Defendant MomingLightMountain, LLC; Defendant Goode, Michael
Reply in support of Defendants‘ Motion for Summary Disposition of First Amended Complaint

8/20/2018 –  Proof of Service
on Plaintiffs Response in Opposition to Motion for Summary Disposition of First Amended Complaint

8/20/2018 –  Motion for Pro Hac Vice 
Plaintiffs Motion for Temporary Admission of Out of State Attorney, Nicholas A. Kurtz with supporting documentation

8/20/2018 –  Proof of Service
on Plaintiffs Motion for Temporary Admission of Out of State Attorney, Nicholas A. Kurtz with supporting documentation

8/21/2018 –  Order for Pro Hac Vice
as to Nicholas A. Kurtz

8/22/2018 – Motion for Summary Disposition (9:00 AM) (Judicial Officer: Lipsey, Alexander C.)
Events: 06/07/2018 Motion for Summary Disposition

9/14/2018 – Notice of Scheduled Proceeding
Amended Trial date – original set for the wrong date

9/18/2018 – Proof of Service
Plaintiffs First Set of Interrogatories to Defendants; Request for Production to Defendants

10/4/2018 – Opinion

10/9/2018 – Miscellaneous Filing
Notice of Withdrawal of Plaintiffs Counsel Nicholas A. Kurtz
10/09/2018

10/9/2018 – Proof of Service
of Notice of Withdrawal of Plaintiffs Counsel Nicholas A. Kurtz

10/22/2018 – Transcript
Motion for Summary Disposition Wednesday, August 22, 2018

10/22/2018 – List of Witnesses that may be Produced
Party: Plaintiff Scottsdale Capital Advisors Corp
.

10/22/2018 – Proof of Service
of Plaintiffs Witness List

10/22/2018 – Proof of Service
Served” Defendants’ First Interrogatories, and First Request for Records

10/22/2018 – Proof of Service
Defendant‘s Answers to Plaintiff’s First set of Interrogatories and Request for Production

10/25/2018 – Motion for Reconsideration Relief from Judgment
Party: Defendant
MorningLightMountain, LLC; Defendant Goode, Michael
with Proof of Service

10/25/2018 – Order Denying Motion for Reconsideration
Order Denying Defendants’ Motion for Reconsideration with proof of service

10/30/2018 – Return of Document
Party: Defense
Attorney Pinsky, H Rhett

11/13/2018 – Amended Complaint
Party: Defendant
MorningLightMountain, LLC; Defendant Goode, Michael
Defendants‘ Consent for Plaintiff to File Second Amended Complaint with Reliance on Jury Demand

11/13/2018
Proof of Service
of DefendantsConsent for Plaintiff to File Second Amended Complaint and Plaintiff’s Second Amended Complaint and Reliance on Jury Demand

11/15/2018 – Answer to Amended Complaint
Party: Defendant MorningLightMountain, LLC
; Defendant Goode, Michael
Answer to PlaintiffsFirst Amended Complaint with Affirmative and Other Defenses and Reliance on Jury Demand

11/15/2018 – Motion for Summary Disposition
Party: Defendant MorningLightMountain, LLC
; Defendant Goode, Michael
of Second Amended Complaint

11/15/2018 – Brief – Memorandum
Supporting Motion for Summary Disposition of Second Amended Complaint

11/15/2018
Praecipe

11/15/2018 – Proof of Service
of Motion for Summary Disposition of Second Amended Complaint, Answer to Plaintiffs First
Amended Complaint with Affirmative and Other Defenses

11/15/2018 – Notice of Scheduled Proceeding
of Motion for Summary Disposition scheduled for December 6 @ 1:30 pm

11/26/2018 –  Motion for Pro Hac Vice
Plaintiffs Motion for Temporary Admission of Out of State Attorney with supporting documentation

11/27/2018 –  Order for Pro Hac Vice
as to Jordan Susman

11/29/2018 –  List of Witnesses that may be Produced
Party: Defendant MomingLightMountain, LLC; Defendant Goode, Michael
Preliminary Witness List

11/29/2018 –  Proof of Service
of Defendants‘ Preliminary Witness list, Defendants‘ Second Interrogatories, and Defendants’ Second Requests for Records

11/30/2018 –  Notice of Scheduled Proceeding
DefendantsMotion for Summary Disposition rescheduled from 12/06/2018 due to court scheduling conflictparties also emailed notice on 11/30/2018

12/3/2018 –  Response to: (Specify)
Party: Plaintiff Scottsdale Capital Advisors Corp.
Plaintiffs Response in Opposition to Motion for Summary Disposition of Second Amended Complaint

12/3/2018 –  Proof of Service
Plaintiffs Response in Opposition to Motion for Summary Disposition of Second Amended Complaint

12/10/2018 –  Response to: (Specify)
Party: Defendant Goode, Michael; Defendant Does 110
Reply in Support of Motion for Summary Disposition of Second Amended Complaint

12/10-2018 – Proof of Service
of DefendantsReply in Support of Motion for Summary Disposition on Second Amended Complaint

12/10/2018 –  Motion for Pro Hac Vice
Plaintiffs Motion for Temporary Admission of Out of State Attorney with supporting documentation

12/11/2018 –  Order for Pro Hac Vice

12/14/2018  – Motion for Summary Disposition (2:30 PM) (Judicial Officer: Lipsey, Alexander C.)
Events: 11/15/2018 Motion for Summary Disposition
Rescheduled from 12/06/2018parties were emailed notice of the change in date and time on 11/30/2018 – tjc

12/19/2018 – Transcript
of Hearing on Motion for Summary Disposition that was held on Friday, December 14, 2018 @ 2:45 pm

1/11/2019 – Amended Complaint
Party: Plaintiff Scottsdale Capital Advisors Corp.
Plaintiffs Third Amended Complaint and Jury Demand

1/11/2019 – Proof of Service
of Plaintiffs Third Amended Complaint, Plaintiffs Responses to DefendantsSecond Requests for Records, and Plaintiffs Answers to Defendants’ Second Interrogatories

2/1/2019 – Motion for Summary Disposition
Party: Defendant MorningLightMountain, LLC; Defendant Goode, Michael

2/1/2019 – Brief – Memorandum
Brief in support of Defendants’ Motion for Summary Disposition

2/1/2019 – Praecipe
Defendants‘ Motion for Summary Disposition

2/1/2019 – Proof of Service
Defendants’ Motion for Summary Disposition; Brief in support; Praecipe

2/1/2019 – Answer to Amended Complaint
Party: Defendant MomingLightMountain, LLC; Defendant Goode, Michael
Defendants’ Joint Answer to Third Amended Complaint with Reliance on Jury Demand

2/4/2019 – Notice of Scheduled Proceeding
of Motion for Summary Disposition

2/6/2019 – CANCELED – Settlement Conference (1:30 PM) (Judicial Officer: Lipsey, Alexander C.Other (specify)
12/26/2018 Continued to 02/06/2019 Stipulation and Order Scottsdale Capital Advisors Corp.; MorningLightMountain, LLC; Goode, Michael; Does 1-10

3/20/2019 – Opposition to:
Plaintiff’s Response in Opposition to Motion for Summary Disposition of Third Amended Complaint

3/20/2019 – Proof of Service
Plaintiff’s Response in Opposition to Motion for Summary Disposition of Third Amended Complaint

3/22/2019 – Response to: (specify)
Party: Defendant MomingLightMountain, LLC; Defendant Goode, Michael; Defendant Does 110
Defendant’s Reply in Support of Motion for Summary Disposition of Third Amended Complaint

3/25/2019 – Proof of Service
Defendants Reply in Support of Motion for Summary Disposition of Third Amended Complaint

3/26/2019 – Motion for Summary Disposition (10:00 AM) (Judicial Officer: Lipsey, Alexander C.)
Events: 02/01/2019 Motion for Summary Disposition

4/4/2019 – Order Denying Motion for Summary Disposition
Party: Defendant MomingLightMountain,
LLC; Defendant Goode, Michael
Omnibus Order Denying Motion for Summary Disposition and Granting Stay of Proceedings Pending Completion of Interlocutory Appeal

4/8/2019 – Reporter -Recorder Certificate- Ordering Transcript on Appeal

4/8/2019 – Transcript
March 26, 2019 – Motion for Summary Disposition

CANCELED 4/9/2019 –  Civil Jury Trial (9:00 AM) (Judicial Officer: Lipsey, Alexander C.)
Other (specify)
01/15/2019 Continued to 04/16/2019Stipulation and OrderScottsdale Capital Advisors Corp.; MomingLightMountain, LLC; Goode, Michael; Does 110

[Filings and Circuit Court register of actions last updated 4/11/2019]

Michigan Court of Appeals (MCOA) Docket

Online docket (case #348702)

04/25/2019  #1  App For Leave to Appeal – Civil

04/04/2019  #2  Order Appealed From

04/25/2019  #3  Transcript Filed By Party

05/06/2019  #4  Notice Of Filing Transcript

05/16/2019  #5  Answer – Application

05/16/2019  #6  Motion: Strike

05/23/2019  #7  Answer – Motion

Due to the litigation I will not be providing my opinion on this case or on any of the parties involved so please do not ask.

Disclaimer: I and MorningLightMountain LLC of which I am the sole member are being sued for defamation and false light invasion of privacy by Scottsdale Capital Advisors. 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.

Some Forms 3 & 4, MintBroker, and how three microcap stocks moved 200%+ in days

Check out MintBroker International Ltd’s SEC filings on EDGAR. There was nothing filed prior to June 29th, 2018. The only SEC forms filed so far are forms 3 and 4.

The SEC describes the use of these forms (emphasis mine):

Corporate insiders – meaning a company’s officers and directors, and any beneficial owners of more than ten percent of a class of the company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934 – must file with the SEC a statement of ownership regarding those securities.

New Concept Energy (GBR)

First I want to look at New Concept Energy (GBR). As of its most recent SEC Form 10-Q/A, GBR showed 2,131,935 shares outstanding as of May 11, 2018.

Here is a more zoomed-in view showing each date:

The stock first spiked on June 28th, gapping up big on no apparent news (a form SC-13D had been filed after the previous day’s close by Realty Advisors, Inc but that disclosed no new information — all the info in it was available in the June 21st, 2018 8-k filed by GBR). The stock then closed at $1.7201, well below the open price of $3.02. On July 29th GBR gapped down a tiny bit to $1.69 before spiking big and closing at $4.22. At 6:39 pm (all times Eastern) MintBroker filed an SEC Form 3 showing direct ownership of 1,073,713 shares with the “date of event requiring statement” being 06/29/2018.

The following trading day, July 2nd, GBR opened at $5.90 and hit a high of $12.75 before closing at $8.90. On July 3rd the stock gapped up again, opening at $12.00 and then dropping to close at $4.11. A form 4 filed by MintBroker at 11:14am on July 3rd revealed that the company had sold 114,576 shares on July 2nd at an average price of $11.32 and still owned 959,137 shares.

The following day the market was closed for the July 4th Independence Day holiday. On July 5th, GBR gapped up, opening at $5.03 and closing at $4.95. At 11:51am on July 5th MintBroker filed another form 4 showing that it had sold 959,137 shares on July 3rd at an average price of $8.682 and no longer owned any shares.

It is easy to guess at MintBroker’s profits with this information. I added up the total sales of stock to get $9,624,227.75 ($8.9635 per share). If we assume it paid an average of $4.22 (the close on July 29th), which is almost certainly higher than the price it actually paid, then it paid $4,531,068.86 for those shares and profited $5,093,159. Of course there is lots of information I don’t have so this is just an educated guess.

MER Telemanagement Solutions ltd (MTSL)

As of it most recent Form 20-F from December 31, 2017, MER Telemanagement Solutions (MTSL) reported 3,120,684 shares outstanding. Below is the daily candlestick chart of MTSL:

On July 10th, 2018 MTSL spiked from an open of $1.10 to close at $2.73. The next day it gapped up to $4.00 and closed at $2.19. The following day, July 12th at 1:56pm, MintBroker filed a form 4 showing that it had acquired 147,716 shares at an average price of $4.6189 on 7/11/2018 and had sold 446,911 shares at an average price of $3.603 on the same day. MintBroker has not filed any other SEC forms on MTSL.

Obviously the number of shares on that form 4 don’t match and it wasn’t a form 3 indicating that it wasn’t the first acquisition of MTSL shares by MintBroker. My opinion given that information is that MintBroker likely bought the other 299,195 shares on July 10th. Assuming that those shares were purchased at an average of $2.73 (the closing price on July 10th), the average purchase price of the total 446,911 shares would be $3.3543. That gives me an estimate of ‘only’ $111,146 in profits.

Avalon Holdings (AWX)

Avalon Holdings is the most recent stock for which MintBroker has filed a Form 3 or Form 4. As of May 4th (per the company’s May 10th Form 10-Q) Avalon Holdings reported 3,191,100 shares outstanding. Below is the daily candlestick chart of AWX:

Starting on July 24th, AWX started spiking on no news. It traded thrice the shares outstanding on each of the following two days. On July 27th, 2018 at 5:47pm MintBroker filed an SEC Form 3 showing direct ownership of 1,922,095 shares with the “date of event requiring statement” being 7/27/2018.

In premarket trading AWX hit a high of $36.00 but since 8:30am has dropped a lot and as I write this the stock is at $7.80. I eagerly await a future MintBroker Form 4 on AWX.

Final Results: AWX

This section was added on August 2nd after MintBroker filed the expected Forms 4 showing that they sold all of their shares. Following are the dates/details of the Forms 4.

7/30/2018 4:58pm Form 4 —  192,340 shares sold at $15.5054 (incorrectly showed “A” in box 4 which would mean ‘acquired’).
7/31/2018 1:34pm Form 4 — 719,885 shares sold at an average price of $8.175
8/1/2018 11:19am Form 4 — 799,720 shares sold at average price of $4.1506
8/1/2018 11:42am Form 4 — 202,642 shares sold at average price of $3.911 (zero shares held after this)
8/1/2018 1:41pm Form 4/A — correcting 7/30 form 4 to show 192,340 shares sold at $15.504 on 7/27

This adds up to an average sale price of $6.779 on 1,914,587 shares. Note that this does not quite add up to the number of shares shown in the form 3 (1,922,095) — in fact it is 7,508 shares less. But that is not important compared to the total number of shares traded by MintBroker so I will ignore the difference.

If I were to use the same very conservative estimate I used on GBR and MTSL to guess the purchase price of all those AWX shares I would use the closing price on 7/27, which was $10.25. This would have resulted in a MintBroker loss of $6.65 million dollars. However, most of the spike on AWX on 7/27 came at the end of the day and for most of the day it traded under $7.00. In fact, as of the close on 7/27 the volume-weighted average price (VWAP) of AWX was only $7.282 (see intraday chart with VWAP). If that is the price that MintBroker paid then it only lost $963,037 on the trade. Obviously if Mintbroker bought below the vwap or had acquired some portion of the shares on a prior day at a lower price it is still possible that they made money on the trade — there is no way for us to know just by looking at their filings.

Who/What is MintBroker?

MintBroker International, Ltd has its address listed as

ELIZABETH AVE. & BAY STREET
NASSAU C5 N-8340

in its SEC filings. This is the same address given by Suretrader for “Swiss America Securities Ltd” the company that runs it. It appears that MintBroker International Ltd is the successor to Swiss America Securities or the parent company of it because the Suretrader website shows the copyright as “Copyright 2008 – 2018 MintBroker International, Ltd”

To remove any doubt, MintBroker is owned by Guy Gentile, as he describes in his recent lawsuit, Mint Bank International, LLC and Guy Gentile Nigro v. Office of the Commissioner of Financial Institutions of
Puerto Rico et al. ((3:18-cv-01441) US District Court, District of Puerto Rico) (See docket on CourtListener.com).

21. Gentile is the current beneficial owner of a group of financial institutions located in the United States and other foreign countries (“Group”). The Group consists of MintBroker International, Limited in the Bahamas and its wholly-owned subsidiaries, MintBroker International Limited in U.K. The Group is involved in various areas of the financial markets including, but not limited to, holding accounts of clearing firms and maintaining custody of funds.
22. The SureTrader division of MintBroker has enjoyed significant success.

Besides being known for owning Suretrader, Guy Gentile was also the subject of an engaging article in Bloomberg in early 2017, “‘Bro, I’m Going Rogue’: The Wall Street Informant Who Double-Crossed the FBI.”

[Edit 8/2/2018]: Bloomberg had a nice story on the run-up in Avalon Holding Coporation (AWX) shares in which they talked to the CEO of Avalon and to Guy Gentile. Today Matt Levine of Bloomberg analyzed the situation:

His brokerage firm announced stakes in three tiny companies, including $13 million waste-management firm Avalon Holdings Corp., whose prices all “skyrocketed and then dropped.” The fun part is Gentile’s explanation:

“This is no pump-and-dump scheme,” Gentile, chief executive officer of MintBroker, said over the phone. “We were going to try to do a hostile takeover of the company.”

Ah. But here’s what Avalon said:

In response to inquiries regarding a potential change in control, Mr. Ronald Klingle, Chairman and Chief Executive Officer of the Company, holds approximately 67% of the voting power in Avalon, and has advised the Company that he has no present plans to divest any of his holdings.

What … happened here? Did Gentile not know that the company’s stock was controlled by its CEO? (It’s easy to find out!) Did he know that but think that he could do a hostile takeover anyway? (By, like, calling up the CEO and being real hostile on the phone until he agreed to sell?) Was it a pump-and-dump scheme, but Gentile was too lazy to make up a plausible cover story?

Note: Timestamps on SEC filings come from Acquire Media NewsEdge V8. Screenshot.

Disclaimer: I am short 30 shares of AWX and I may close that position or increase it or even go long at any time. I have no position in any other stock mentioned above. I have no relationship with any parties mentioned above except that one of the trading platforms I use is DAS Trader Pro and it may share common ownership with MintBroker (I am not sure). 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.

The Great Seadrill trade I missed and the OCC

First, because I cannot resist — just replace “OPP” with “OCC” when you sing along.


I’m not down with OPP. But I am down with The OCC (The Options Clearing Corporation). They are the ones who determine settlement and other important technical details of traded options. For most options traders, The OCC is unimportant — each option has a strike price and an expiry date and that is all that really matters. But when there are corporate events such as mergers, splits, bankruptcies, and the like, the OCC’s decisions become important.

Seadrill Inc (SDRL) just emerged today from its long trip through bankruptcy. From the company’s press release:

SDRL – Seadrill Announces Emergence from Chapter 11

Hamilton, Bermuda, July 2, 2018 – Seadrill Limited (“Seadrill” or the “Company“) announces today (the “Effective Date“) that it has emerged from chapter 11 after successfully completing its reorganization pursuant to its chapter 11 plan of reorganization (the “Plan“). All conditions precedent to the restructuring contemplated by the Plan have been satisfied or otherwise waived.

The Plan has equitized approximately $2.4 billion in unsecured bond obligations, more than $1 billion in contingent newbuild obligations, substantial unliquidated guaranty obligations, and c. $250 million in unsecured interest rate and currency swap claims, while extending near term debt maturities, providing the Company with over $1 billion in fresh capital and leaving employee, customer, and ordinary trade claims largely unimpaired.

The Plan has re-profiled the Company’s debt and provided substantial liquidity that puts the Company in a strong position to execute its business plan. The figures presented below highlight key financial metrics as of the Effective Date:

  • total cash of c.$2.1 billion;
  • secured bank debt of c.$5.7 billion with the first maturity in 2022;
  • new Secured Notes of c.$880 million maturing in 2025;
  • backlog of c.$2.3 billion for Seadrill Limited, excluding Seamex and Seadrill Partners; and
  • common shares issued of 100 million as described further below.

Issuance, Listing and Trading of New Common Stock

The Company has received approval to list its new common shares with the new CUSIP number G7998G 106 (the “New Common Shares“) on the New York Stock Exchange (the “NYSE“) under the same NYSE ticker symbol “SDRL” as the Company’s existing common shares (with the CUSIP G7945E 105) (the “Existing Shares“).  Subject to the relevant approvals, the Company also intends to have its equity listed on the Oslo Stock Exchange (ISIN BMG7998G1069).

On the Effective Date, the Company will have approximately 100 million New Common Shares outstanding.  The New Common Shares will be allocated as set forth below, in accordance with provisions of the Plan and issued on the Effective Date:

  • 14.25% of the New Common Shares issued to holders of unsecured claims against the Company and certain of its chapter 11 debtor affiliates;
  • 23.75% of the New Common Shares issued to participants in the $200 million equity investment under the Plan;
  • 54.625% of the New Common Shares issued to participants in the $880 million new secured notes investment under the Plan;
  • 1.9% of the New Common Shares issued to holders of existing common equity interest in the Company as of the Effective Date, an effective exchange ratio of approximately 0.0037345 New Common Shares per each Existing Share, and
  • 5.475% of the New Common Shares issued as a structuring fee to certain of the new money investors.

Trading in approximately 16 million New Common Shares issued to existing shareholders and holders of unsecured claims will commence on the NYSE one day after the Effective Date, on July 3, 2018, under the ticker symbol “SDRL”. Additional shares may commence trading in the coming weeks after a resale registration statement on Form F-1 with respect to additional shares issued on the Effective Date to certain investors is declared effective by the Securities and Exchange Commission. The Existing Shares will continue to trade on both the NYSE and Oslo Stock Exchanges under the same ticker symbol through the close of trading on the Effective Date but thereafter such trading will be suspended and the shares will be cancelled in due course.

Because the Company will continue to use the ticker symbol SDRL, holders of Existing Shares, brokers, dealers and agents effecting trades in the Existing Shares, and persons who expect to receive New Common Shares or effect trades in New Common Shares, should take note of the anticipated cancellation of the Existing Shares and issuance of New Common Shares, and the two different CUSIP numbers signifying the Existing Shares and the New Common Shares, in trading or taking any other actions in respect of shares of the Company that trade under the “SDRL” ticker.

Any questions regarding these distributions should be directed to the Company’s claims and noticing agent, Prime Clerk, on the numbers provided below.

Yesterday the OCC filed the preliminary notice (pdf) for how SDRL options would be treated. Below is the important part:

On April 17, 2018, United States Bankruptcy Court for the Southern District of Texas Victoria Division confirmed the Second Amended Joint Plan of Reorganization (“Plan”) for Seadrill Limited (SDRL). The Plan became effective on July 2, 2018, and SDRL shares were canceled. Under the Plan, SDRL shares will be converted into the right to receive approximately 0.0037345 (New) Seadrill Limited Common Share. Pursuant to the Plan, fractional shares will be rounded up or down to the nearest whole share with half shares being
rounded down.

Because fractional share amounts less than 0.5 will be rounded down, it is anticipated that SDRL1 options will not be adjusted to call for delivery of (New) SDRL Common Shares (100 x approximately 0.0037345 = approximately 0.37345). OCC will delay settlement until the final rate has been confirmed.

What this means is that the options will now be for zero shares of new SDRL. So one $0.50 put will pay out $50.00. So even if someone had bought $0.50 puts at $0.45 yesterday they will still make a nice 11% return. Do note that this OCC memo is preliminary and the final memo and settlement have not yet occurred. I will update this blog post once final settlement on the options has occurred.

Comparison to Ocean Rig (ORIG) bankruptcy emergence options adjustment

In September 2017 Ocean Rig UDW (ORIG) emerged from bankruptcy with old shareholders getting a tiny fraction of new shares. In that instance, the old options were cash-settled. See the preliminary OCC notice (dated 9/21/2017) and the final OCC notice (dated 9/27/2017).

From the preliminary OCC notice:

Ocean Rig UDW Inc. (ORIG) has announced a 1-for-9200 reverse stock split/Scheme of Arrangement. As a result of the reverse stock split/Scheme of Arrangement, each ORIG Common Share will be converted into the right to receive approximately 0.0001087 (New) Ocean Rig UDW Inc. Common Shares. The reverse stock split will become effective before the market open on September 22, 2017. Cash will be paid in lieu of fractional ORIG shares

The cash in lieu amount was then determined ( and announced in the final OCC memo:

Adjusted Ocean Rig UDW Inc. options were adjusted on September 22, 2017 (See OCC Information Memo #41867). The new deliverable became cash in lieu of approximately 0.01087 fractional ORIG Shares. The settlement of the ORIG1 options exercise/assignment activity was subject to delayed settlement.

OCC has been informed that a price of $23.50 per whole ORIG share will be used to determine the cash in lieu amount at a rate of 0.01087.

Accordingly, the cash in lieu amount is:
0.01087 x $23.50 = $0.26 per ORIG1 Contract

Now that the exact cash in lieu amount has been determined, OCC will require Put exercisers and Call assignees, during the period of September 22, 2017 through September 27, 2017, to deliver the appropriate cash amount

I was told by an experienced trader that I trust that how the OCC determines settlement in these cases of corporate events is determined by the company — so when a similar situation happens in the future both the cash in lieu of settlement and the rounding of shares (up or down) are both possible.

For the record: some final charts of Seadrill during the bankruptcy:

  

And here is a final chart of Seadrill affiliate North Atlantic Drilling (NADLQ), whose shareholders were completely wiped out in the bankruptcy:

I did not short NADLQ because of the high borrow rate and low price and uncertainty about when the stock would be deleted.

And here is the Ocean Rig UDW (ORIG) chart showing the time during which it emerged from bankruptcy — it appears that the two daily candlesticks in the $700 range are data errors — the stock closed at $0.075 on the last day of trading prior to emergence from bankruptcy and the 9200 for 1 reverse split. It opened around $40 the next day (it actually opened above $100 but those trades were busted)

Here are charts showing the actual prices (with no apparent data errors):

Disclaimer. I am short a tiny position of SDRL July 20th 2018 $0.50 calls. No position in any other stock mentioned and I have no relationship with anyone mentioned in this post. 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.

An Introduction to shelf registrations

Probably the most common kind of way of issuing and registering new stocks is a shelf registration. This is filed on SEC Form S-3 (F-3 if the issuer is a foreign company). These can be used with multiple types of offerings, including most commonly PIPEs, Private Investments in Public Equities, where the shares have been sold to an investor and the shares are now being registered so that investor can sell those shares; ATMs or At the Market Offerings (PDF), where a company sells shares into the open market from time to time; and registration of shares underlying warrants or convertible bonds.

Shelf Takedowns by Greenberg Traurig (PDF)
FAQs about Shelf Offerings by Morrison Foerster (PDF)

Besides the actual shelf registration statement, the company has to file a prospectus supplement within two days of whichever comes first, the offering being priced or the shelf registration being used. Also, just because a shelf registration is filed does not mean it can be used immediately — the registration needs to be declared effective after the SEC reviews the registration. This typically takes two to three weeks from when the registration statement is filed. When a shelf registration (or another registration statement) has become effective a form EFFECT will be posted. For example, here is a shelf registration, prospectus, and EFFECT for Diana Containerships (DCIX):

 

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. 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.

Some good posts on offerings and fundamental research

These come from Auspex Research on Twitter. Follow him. He has no blog but he does occasionally post longer thoughts on Twitlonger.

A Gevo Inspired Twitlonger (10 June 2016)
When A+B = D (17 November 2016)
Realtime Analysis using Twitlonger (22 November 2016).

Disclaimer. No position in any stocks mentioned and I have no business relationship with Auspex (I don’t even know his real name). 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.

A Short blog post of much importance

If you come across a bear and decide to run, what matters is that you run faster than the slowest person you are with, not that you be able to outrun everyone you are with or outrun the bear. This same sort of logic applies to trading, too. You don’t need to be the smartest (or fastest) trader around, just smarter (of faster) than enough people with enough buying power to move stocks.

 

Disclosure: 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 Freezes accounts used in illegal sales of unregistered shares of Biozoom $BIZM

Earlier today the SEC announced that it froze accounts of eight different Argentinians who had illegally sold unregistered shares of Biozoom (BIZM). Two others who had not yet sold shares also had their accounts frozen. A week ago the SEC suspended trading in Biozoom. See my original post on the Biozoom promotion as well as the Promotion Stock Secrets post on the individuals behind the promotion.

SEC press release
SEC complaint

The sheer number of shares sold and the profits involved are impressive. Here is a good description of what transpired from the SEC press release:

The SEC’s complaint alleges that from March to June 2013, the ten defendants received more than 20 million shares of Entertainment Art, which was one-third of the company’s total outstanding shares. In a one-month period beginning in mid-May, eight of them sold more than 14 million shares. The sales yielded almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze.

The ten defendants in the litigation are: Magdalena Tavella, Andres Horacio Ficicchia, Gonzalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman and Mariano Pablo Ferrari (Mariano Graciarena and Fernando Loureyro are also named but had not yet sold shares). The defendants claimed to have purchased shares in Biozoom (then known as Entertainment Art Inc.) from the company’s original seed shareholders between November 2012 and March 2013, but those shareholders had already sold all their shares back in 2009.

Despite the SEC’s quick action, over $17m in illicit profits were already wired overseas and are now beyond the reach of American authorities. Most likely none of the individuals whose names appeared on the accounts were behind the fraud. It is believed by many that Francisco Abellan has controlled scheme from the start.

The US brokerages used by the defendants are well-known to everyone who is familiar with the penny stock world: Legend Securities and Scottsdale Capital Advisors.

For further details, I suggest reading Promotion Stock Secret’s post on this litigation (same post as here).

Disclaimer: I am net long 1700 shares of BIZM (long 11,700 shares in one account and short 10,000 shares in another account); I have no positions in any other stock mentioned and 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.

SEC suspends trading in Biozoom $BIZM due to alleged Rule 144 violation

This year has already seen more suspensions by the SEC of actively traded pump and dumps than any year since I started trading them back in 2007. Today’s suspension of Biozoom takes it to the next level though: the stock had only been actively promoted for a month and it was averaging huge dollar volume (for an OTC stock) of over $10 million per day. This is much higher volume than any other promoted stock was doing at the time it was suspended. When the SEC has in past years suspended stocks that were the subject of stock promotions, it was usually long after the initial stock promotion. The reason for this suspension was also quite clear and was different from the normal reasons given by the SEC.

Before looking at the details of the suspension of Biozoom (BIZM), I recap other notable trading suspensions this year (links are to my blog posts on the suspensions):

1 March 2013 – Southern USA Resources (SUSA): This was a mailer promotion that had not collapsed at the time it was suspended.

The Commission temporarily suspended trading in the securities of Southern USA Resources because of questions that have been raised about the accuracy of assertions by Southern USA Resources, and by others, in press releases and other public statements to investors, and in promotional mailers, concerning, among other things: (i) the company’s operations; and (ii) thecompany’s outstanding shares.

susa

8 March 2013 – Endeavor Power Corp. (EDVP): This was an email promotion by various poor promoters the day before the suspension; it had previously been promoted in January by others.

It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Endeavor Power Corp. (“Endeavor Power”), quoted under the ticker symbol EDVP, because of questions regarding the accuracy of assertions in Endeavor Power’s public filings and press releases relating to, among other things, patents.

edvp

14 March 2013 – Face Up Entertainment (FUEG): This suspension was likely related to a Department of Justice criminal investigation into death threats made by some people involved in the promotion against one of the promoters.

The Commission temporarily suspended trading in the securities of Face Up because of questions concerning the adequacy and accuracy of publicly available information about Face Up, including, among other things, its financial condition, the control of the company, itsbusiness operations, and trading in its securities.

fueg

10 June 2013 – Polar Petroleum (POLR): This hard mailer and email pump lasted  for a month and a half before being suspended and it averaged over $1 million in daily dollar volume over that period. The suspension was almost certainly related to the company’s press releases that said more about Exxon’s operations than about Polar Petroleum’s.

The Commission temporarily suspended trading in the securities of Polar because of questions
regarding the accuracy and adequacy of assertions by Polar, and by others, to investors in press
releases and promotional material concerning, among other things, the company’s assets,
operations, and financial condition.

polr

 

 

Besides the increased pace of SEC trading suspensions of active stock promotions this year, FINRA also joined the party, halting trading in Eco-Trade Corp (BOPT) for 14 trading days back in April, just a week after the beginning of a disastrous promotion by StockMarketAuthority / StockDectective that saw the stock drop in days from $0.24 to $.05. FINRA has for awhile had the ability to halt trading in OTCBB stocks but to my knowledge this is the first time they used that power. FINRA gave no notice whatsoever nor any explanation

bopt

The Biozoom Suspension

SEC press release
Suspension Order

Unlike the previous suspensions this year, the SEC was quite specific in why Biozoom’s stock was suspended:

The Commission is concerned that certain Biozoom affiliates and shareholders may have unjustifiably relied upon Rule 144 of the Securities Act of 1933 (“Securities Act”) and they, Biozoom, and others may be engaged in an unlawful distribution of securities through the OTCBB.

The SEC has a concise but vague description of Rule 144:

Rule 144 provides an exemption and permits the public resale of restricted or control securities if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time. But even if you’ve met the conditions of the rule, you can’t sell your restricted securities to the public until you’ve gotten a transfer agent to remove the legend.

The law firm Morrison Foerster at Mofo.com has much better description of Rule 144 and what it means (pdf). I am not a securities lawyer and am certainly not an expert on Rule 144, but the likely cause is that the insiders / control persons selling the shares had to wait 12 months after obtaining the shares before selling them (because Biozoom was listed as a shell company as recently as February 2013). Thanks to nodummy of Promotion Stock Secrets and Janice Shell for pointing this out. If Biozoom had not ever been a shell company then insiders would only have to wait 6 months before selling restricted shares under Rule 144.

I expect to see some litigation releases relating to the allegedly illegal share sales sometime in the coming months. See my previous report on Biozoom (and make sure to check out all the other articles about the company I link to). One interesting thing to note is that while I and others (like Ashraf Eassa writing at SeekingAlpha) have brought up the likelihood that the promotional campaign is being paid for by a shareholder (despite the promoters disclosing no compensation), which would make the promotion illegal, this was not mentioned in the SEC suspension order. I believe that the Rule 144 violation is simply easier and quicker to prove and that in time the SEC will sue the promoters for what I believe to be a false disclosure of no compensation.

bizm

A Note on Trading BIZM

I made more than a few thousand dollars buying BIZM and shorting it at various times over the last month. Especially after the POLR suspension I became very cautious especially considering the lack of disclosure of compensation in the BIZM promotional materials. I warned people repeatedly in TimAlerts chat that it was risky to hold BIZM overnight. But I tried to get cute and get out at the best possible price and ended up not fully filling my sell order. Trying to save a few cents per share will likely end up costing me over $3 per share: I bet BIZM opens under $0.50.

 

MichaelGoode

sell I agree with them but it isn’t news. And I still put the risk of a suspension of BIZM at low. I still refuse to hold long o/n because of that risk though

Posted Jun 24, 2:47 PM

 

MichaelGoode

I plan to sell into the next BIZM spike … no matter what I won’t hold o/n although I think it closes strong and gaps up

Posted Jun 24, 3:17 PM

MichaelGoode

sold BIZXM @ 3.41

Posted Jun 24, 3:59 PM

 

MichaelGoode

actually not all my BIZM filled — I waited too long. Still net long 1700 o/n.

Posted Jun 24, 4:01 PM

[Update 2013-6-27]: See Janice Shell’s article on what the recent rash of SEC trading suspensions means for pumps.

Disclaimer: I am net long 1700 shares of BIZM (long 11,700 shares in one account and short 10,000 shares in another account); I am short 3200 shares of POLR; I have no positions in any other stock mentioned and 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.

My new venture: OTC MicroCap Research

While there are plenty of people who write about microcap securities fraud and pump and dump scams, too little of the research reaches the people who need it the most: the small investors who believe in the scams. To help them I have created a new website, OTCMicroCapResearch.com. The only thing on that website will be research reports on companies, mostly pump and dumps. I will take no positions in the stocks I analyze at that website, take no payment for articles (except from content syndication websites) and I will do my best to distribute my analyses so that the investing public can see it and learn to avoid pump and dump scams that way. I do not claim that there is anything particularly new about what I am doing, but it is something worth doing.

See my introductory post on why I created the new website.

My PacWest Equities (Pinksheets: PWEI) report published prior to the market open today (PWEI is now down over 75% from its open, although the Infitialis report had a lot to do with that).

 

Disclaimer: No positions in any stocks mentioned. The new website is owned by MorningLightMountain LLC, just like this website; I am the managing member of the company. 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.