Lying stock promoters: Bullexchange.com & the FINRA short reports

One tactic that many stock promoters use over and over again to explain why their stock promotions are followed by large stock price declines is to blame it on the short sellers. Unfortunately, FINRA abets these lies by publishing without adequate explanation data required by the SEC’s Regulation SHO. This data provides information on every share sold each day. Time and and time again I have seen stock promoters use this data to ‘show’ that the stock they are promoting is getting attacked by short sellers.

See the text of the most recent email I received from the various Bullexchange.com websites (emphasis mine):

Valued Subscribers,
Welcome New Members,
VKMD experienced a fantastic start last Thursday where many of our subscribers secured substantial gains.

However, due to a major short attack, gains were quickly reversed. We believe this was deliberate, the Finra reg sho list http://regsho.finra.org/FORFshvol20120906.txt indicates nearly 11 million shares were shorted last Thursday.

Simply put, VKMD did not end the way we hoped despite great developments we hear may be announced in coming days.

In a recent email, we had mentioned we were under new management. Due to events of the past week, the new management team has been removed and we are back under the same great team that brought you the likes of ECIT and AGRT.

We are hard at work on our next pick, and we will see you some time in October!

Your Dedicated Team at TBX
http://bullexchange.com

Searching the large text file linked above yields the following information for VKMD for the given date (formatted by me to enhance legibility):

Date      |Symbol      |ShortVolume   |ShortExemptVolume    |TotalVolume     |Market
20120906      |VKMD       |10843159        |0                                |37378406         |O

This data appears to show that out of 37,378,406 shares traded, 10,843,159 shares were sold short. This is not false, but it doesn’t mean that short sellers or market makers increased their net short position by 10 million shares. Rather, this shows all sales where the shares being sold were not already in the seller’s possession. This includes speculative short sellers, both retail traders and market makers. But far more important are market makers selling large blocks of stock. In those cases, a large shareholder might tell their broker to sell one million shares and then rather enter one big order, the broker will give the order to a market maker such as NITE to slowly sell the shares over the course of a day. The market maker sells the shares short and does not take possession of the shares it is selling until it has completed its share sales. For Reg SHO reporting purposes, these are short sales, but the market maker is not taking a speculative short position — at the end of the day the seller delivers the shares to the market maker who then delivers those shares to the buyers of the stock.

So the next time a stock promoter links to the FINRA Reg SHO short data to show that a stock dropped because of short sellers, you will know that they are lying. In fact, many times the large block sellers whose shares are sold in such a way to make them show up as ‘short sales’ in the FINRA data are the stock promoters or the people who pay for the stock promotion. So the promoters are not innocently wrong — they lie through their teeth even though they know better.

Read more about Bullexchange.com:
Awesomepennystocks.com sues Bullexchange
Awesomepennystocks.com drops lawsuit

 

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned. 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.

Global Gaming Network (GBGM): First the pump, now the big dump

The GBGM pump has been one of the more interesting pump and dumps of late. It started on Friday June 8th around the open with pump emails from PHD-Trading.com (disclosing $200,000 in compensation). I thought the email was simply spam because I could not remember ever signing up to pump websites with that email ([email protected]). I thought that email address had simply been scraped off of TimothySykes.com (where it used to be displayed on the chatroom rules page). Only much later  that day did I get around to actually looking and I had only ever received one pump email to that email address, from ThePennyStockJerk.com, a website affiliated with BestDamnPennystocks.com. All the BDPS websites had already sent teaser emails talking about their new low-float pump that they would pump Monday at the open (for BestDamnPennyStocks.com and a few premium email lists) and at the open on Tuesday (all the other websites).

It was the strong price action of GBGM that made me look into it — plus Jarmall’s questions about GBGM that convinced me that the price action was not indicative of a pure spam pump. That led me to sign up to the free email list of PHD-Trading. The welcome email I received shortly thereafter was quite informative. At the bottom of the email, the name and address (as required by the CANSPAM law) was GS MEDIA | 2885 Sanford Ave SW #16525 | Grandville, MI 49418. I know from my pump research that GS Media is one of the legal entities tied to BestDamnPennystocks.com (BDPS), which of course was scheduled to have a new pump the very next trading day.

I thought this was a good opportunity to potentially front-run the BDPS pump, so I tried to find any other links between PHD-Trading.com (and GBGM) and BDPS. One link was that BDPS had sent teaser emails saying that their upcoming pump was a low-float stock. GBGM, while having tons of shares outstanding (461 million!), had its float listed as 1.2 million shares on OTCMarkets.com. Another connection was the fact that PHD-Trading.com had both a free email list and a paid product, sold through Clickbank — while there are other stock promoters who sell access to a ‘premium service’ through Clickbank, none has used it as extensively as BDPS. There were other links as well, but I won’t disclose them in a free blog post.

I have front-run BDPS pumps in the past, and it is a risky thing to do. It worked well once and another time they delayed the pump, likely because I had front-run it. I am fairly sure they have delayed other pumps when they were frontrun. However, when I first remember hearing about their HoleinOneStocks.net website back in autumn of 2010, the premium subscribers got one pump a full day before any other BDPS websites (since then they have never gotten a pump earlier than the main BDPS website, so don’t up for them!). If PHD-Trading.com was truly a new BDPS-related website then it would make sense that they woudn’t delay the pump. I bought 40,000 shares at .265, taking a substantial risk (if I was wrong and BDPS didn’t pump GBGM then I would likely lose 50%). I shorted 5,000 shares at Interactive Brokers at .29 to reduce my risk prior to the close and then held over the weekend, selling into the opening spike Monday.

Here is my long trade:

Partly because of me shorting at .29 on Friday and partly because I made some stupid trades, I lost $766 on subsequent trades on GBGM. Click the links to see them: trade 2, trade 3, trade 4, trade 5, and trade 6.

As with almost all BDPS pumps, GBGM has now dropped big from its highs just a week ago and is now well below its price at the beginning of the pump. As with all pump and dumps, it will go even lower in the long run. I do not recommend buying pumps or trying to front-run pumps — those are both very risky and most people who try it lose big. The easiest profits anywhere are from shorting pumps, particularly from the worst promoters. For example, after 41 trades this year shorting the pumps of crappy pumpers, I have made $8800 and my dollar-weighted average profit margin is 11.15% with no losses over $90. (I have had a bad year short selling and have actually lost $1900 on my pump shorts not including my crappy pump shorts or the $8400 I have made with longer-term pump shorts.)

Below is a listing of all the compensation listed from various promoters that I have seen on GBGM. The total compensation is certainly lower than the total disclosed below because some promoters have paid part of their compensation to other promoters.

First are the various legal entities / groups that comprise the BestDamnPennyStocks.com group of pump websites.

BestdamnPennystocks.com (BDPS) discloses, as usual, the most compensation:

BestDamnPennyStocks.com expects to be compensated $500,000 Cash by a non-controlling third party for a GBGM investor relations services.

There is JackpotPennyStocks.com, an affilaite of BDPS:

JackpotPennyStocks.com expects to be compensated $20,000 from a non-controlling third party for GBGM Investor Relations services.

Another group of BDPS-affiliated websites, exemplified by GetRichPennystocks.com, was paid $30k:

GetRichPennyStocks.com expects to be compensated $30,000 cash from a non-controlling third party for GBGM Investor Relation Services.

PHD-Trading.com started the pumping last Friday and prior to that no penny stock traders I know were aware of the website and it appears that got their email list from some other pumper. They have their disclaimer as an image, copied below the quote:

PHD-Trading.com expects to be compensated two hundred thousand dollars for GBGM advertising investor relations services.


(click image to embiggen)

StockMister.com is a 2nd-tier or 3rd-tier pumper that is run by the same company as StockExploder.com (which of course disclaimed the same compensation). Here is its disclaimer:

StockMister.com’s parent company Micro-Cap Consultants, LLC has been compensated up to Two-Hundred and Fifty Thousand Dollars Cash by a third party (Online Marketing Media LLC) for a 1 Week Marketing Program regarding GBGM, Micro-Cap Consultants, LLC has also been promised an additional compensation of up to Two-Hundred and Fifty Thousand Dollars Cash by the same third party (Online Marketing Media, LLC) for the same 1 Week Period of Marketing Efforts regarding GBGM.

Stockmister paid for IPR Agency LLC (see my prior blog post about Tim Sykes looking to sue them for libel) to promote GBGM as well:

We have been compensated up to eighty thousand dollars to conduct one day of investor relations marketing for GBGM by a third party, StockMister LLC.

StockLockandLoad.com is run by a pumper who also runs StockBomb.com and Pennystocklocks.com and Stockrockandroll.com.

StockLockandLoad.com has been compensated twenty-five thousand dollars for this one-day profile on GBGM by MJ Capital, LLC.

Another pumper is Pennystockcrew.com. They win the award for smallest font used for a text disclaimer:

Penny Stock Crew has received $20,000.00 in cash compensation from Hunter Marketing LLC for the one day profile of Global Gaming Networks […] Penny Stock Crew is owned by: ODD Marketing LLC , 433 Plaza Real Suite 275, [Boca Raton, FL] 33432

PennyStocksProfile.com is a small-time pumper most noted for riding the cottails of AwesomePennystocks.com pumps SNPK and GWBU this year. Unfortunately, they use an image rather than text for their disclaimer, which makes me retyped it. The image is copied below the quote.

PennyStocksProfile.com is owned and operated by PLVP LLC. The company has been compensated $10,000 by Online Marketing LLC for publication of this information.


(click image to embiggen)

Another annoying pumper is Investors Alley Inc. (a Quebec corporation) group of at least six websites that used an image to show its disclaimer:

Please be advised that Investor Alley Inc. expect [sic] to be paid up to twenty five thousand dollars from a third party- Micro Cap Consultants – to perform promotional and advertising services for a one day profile of GBGM.


(click image to embiggen)

Stock Connection is a 5th tier stock promoter with a number of websites, including PennyStockPickAlerts.com:

PennyStockPickAlert has agreed to be compensated fifteen thousand dollars for a three day public awareness marketing campaign for GBGM from the third party InterVcap LLC.

Another pumper that promoted GBGM is GlobalInvestmentAlert.com, with which I was not familiar prior to this pumps:

GIA, Inc expects to be compensated up to $100,000 by CF, Inc for one weeks coverage of GBGM.

 

 

Disclaimer: I have no position in any stocks mentioned and I have no relationship with any people mentioned, except for Jarmall who is a member of Tim Sykes’ Trading Challenge (I work for Tim with that). I trade pump and dumps and OTCBB / Pinksheets stocks. 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.

Ten easy steps to 1000% gains: How to create a pump company from scratch

One thing that most investors and traders do not know about the crazy, slimy underworld of OTCBB and Pinksheets stocks is that a large proportion of the companies are created for the sole purpose of being used in pump and dump schemes. Below is a guide to how penny stock operators create listed companies for pump and dumps. Not all of these steps are used in every pump and many pumps do not involve many of these steps.

(Note: I am not an expert on this so it is quite possible that there are significant errors in this post. As always I welcome corrections.)

The Ten-Step Guide to Creating a Pump and Dump

Option 1: Start from scratch

1. Create a corporate shell.
2. Use a Regulation S placement to sell stock to a few close associates. These ‘seed’ shareholders often pay just a few thousand dollars for the stock.
3. Do a reverse merger with some company with a promotable product or technology (the best companies have cool new technology in the development stage so they can be hyped without worrying about actual sales or profits). You can buy some technology that doesn’t work but sounds like it should to laypersons for a couple hundred thousand dollars or a chunk of shares in the public company. If you have no good ideas and have no connections, start your own mining company, lease a mining claim for $10,000 and pay an engineer $5,000 to say it is worth digging.
4. Fund the company by selling convertible debt to insiders / friends. Bonus points are earned for using front companies based offshore to hide the identities of the beneficial owners of the debt.
5. Do a large forward split to get the share count into the tens or hundreds of millions. (These first five steps can take up to a year or more in order to ensure that all your shares are free-trading and not restricted shares.)
6. Contract a stock promoter to promote the stock at an arbitrary price ($1.00 per share or thereabouts is common for big promotions).
7. Sell some shares at a pre-arranged price in large blocks to the promoters or friends. Use these sales to create a bit of a price history at a high price.
8. Install a friend or compliant stooge as the company’s President/CEO and make sure that he follows your instructions.
9. Have the CEO/President start putting out press releases to coincide with the start of the promotional campaign. This way people unfamiliar with pump & dump campaigns will interpret the new volume in the stock as legitimate investor interest (and not the blatant stock promotion it is). It is much harder for the SEC to go after promoters who lie and exaggerate than it is for them to go after corporate officers who lie, so stick to verifiable facts and positive opinions in the press releases.
10. As soon as the promotion starts, start selling your shares on the offer and let the stock slowly uptick to keep traders interested. Because you controlled the company from the very beginning, all the shares being sold belong to you and your associates. Selling shares slowly while letting the stock go up slowly seems to be the most effective way to sell the largest number of shares. Careful manipulation of the price action by providing bid support is also important (it is also illegal but very hard to prove).

Option 2: Purchase control of a publicly-traded shell company

1. Purchase control of a traded shell company on the OTCBB or Pinksheets. Last I checked, such companies, depending on the details (OTCBB companies are more valuable than Pinksheets companies, operating companies with few operations are more valuable than shell companies), the publicly traded shell can cost from $100,000 to maybe $500,000.

2. This step is not necessary.

3.  Same as step 3 above — do a reverse merger with a company (that you control) with a promotable technology or product. You can use the reverse merger to dilute the existing shareholders into irrelevance.
4. Same as step 4 above  — fund the company by selling convertible debt to yourself and friends. Again, if there are lots of other shareholders, you can use unfavorable debt deals to dilute them into irrelevance.
5.  Same as step 5 above — do a stock split to increase the number of shares outstanding. Unlike when starting from scratch, you have a number of shares of your company that are still in the hands of the public. You will thus want to support the stock price or manipulate it higher during and after the stock price. Real companies share prices drop in proportion to the increase in number of shares during a stock price. You are looking to increase the market cap of your company drastically so you will have to keep the price from dropping. The few public shareholders of your stock will benefit handsomely but they should have mostly been diluted into irrelevance by steps 3 and 4.
6. Same as step 6 above — contract with a stock promoter.
7. Similar to step 7 above, but there are already shares out there and a trading history, so it is best to use wash sales and matched trades between multiple accounts to build a trading history at the current (high) price that you wish to start the promotion at. (Caution: this is illegal.)
8. Same as step 8 above — install a friend or stooge as company CEO/President.
9. Same as step 9 above — have the CEO issue press releases to coincide with the promotion.
10. Same as step 10 above.

For an investment of some time and up to $5 million dollars for the most expensive of promotional campaigns, it is possible to realize over $100 million in profits. It is quite possible to put together a pump like this for under $1 million (and for just a few hundred thousand) and you can still expect to realize returns in excess of 1000%.

An example of the 10 steps to creating a pump & dump

Following are the steps allegedly taken by the insiders and promoters of RCYT (promoted in February 2010). All quotes below are from the SEC complaint (pdf). See also the SEC litigation release about the lawsuit. Note that many of the steps were completed in a different order than I have above. First, though, meet the defendants in the lawsuit:

A. Defendants

8. Recycle Tech is a Colorado company. From February 16, 2010 through June 2010 its principal place of business was Miami, Florida. Its common stock is quoted on the OTC Link (formerly, “Pink Sheets”) operated by OTC Markets Group Inc. under the symbol “RCYT.” From no later than February 2010 to June 2010, Recycle Tech purported to be a development and engineering firm specializing in “green building.”

9. Sepe, age 54, is a resident of Miami. At the time of the scheme, he was a longtime acquaintance of Halperin and is listed as the officer or director of several private Florida companies.

10. Halperin, age 63, is a resident of Aventura, Florida. He is an attorney licensed to practice law in Florida and is the sole member of the law firm Ronny J. Halperin, P.A. Halperin also served as CEO of HydroGenetics, Inc., a Florida corporation, from January 2009 until April 2009, and served as its director from 2009 until late 2011.

11. Gonzalez, age 33, is a resident of Miami and a friend of Sepe’s nephew. Since February 16, 2010, Gonzalez has been the CEO and President of Recycle Tech.

12. OTC Solutions is a Maryland limited liability company formed by Thompson in 2007 as a marketing and advertising company. From no later than January through March 2010, it was associated with “Explicit Picks” and “Ox of Wall Street,” both stock promotional newsletters.

13. Thompson, age 35, is a resident of Bethesda, Maryland. From no later than January through March 2010, he was the sole member of OTC Solutions.

14. Pudong is a Florida limited liability company with its principal place of business in Delray Beach, Florida. From no later than January through March 2010, it was a marketing and advertising company associated with “Penny Pic,” a stock promotional newsletter.

15. Fung, age 37, is a resident of Delray Beach, Florida. From at least January through March 2010, he was the sole member of Pudong.

16. Rees, age 44, is a resident of Salt Lake City, Utah. He is a corporate and securities attorney licensed to practice law in Utah. He is a partner at the Utah law firm Vincent & Rees, LLC.

1. “On February 16, 2010, Sepe and Halperin orchestrated the purchase of Recycle Tech from the professional shell provider. Sepe paid more than $200,000 to the professional shell provider for Green Building’s purchase of the majority of Recycle Tech’s [RCYT] shares. Halperin, in turn, provided a common stock purchase agreement to Gonzalez for his signature. Pursuant to this agreement, Green Building became the owner of the controlling majority of Recycle Tech’s shares. With the reverse merger completed, Gonzalez took his position as CEO and president of Recycle Tech.”

2. This step was not necessary.

3. Completed in step 1.

4. Rather than issue convertible debt, the people involved with RCYT allegedly purchased already outstanding convertible debt: “In late January 2010, Halperin retained Vincent & Rees to coordinate the purchase, assignment, and subsequent conversion of Recycle Tech’s debt into purportedly free-trading stock. Halperin also asked Rees to issue an opinion letter regarding the transactions, and he provided Rees with the necessary documents and signatures for the transaction.” The outstanding share count of RCYT was doubled by the conversion of the debts into shares: “In early February 2010, pursuant to the Opinion Letter and the corporate resolution, Recycle Tech’s transfer agent issued more than 25 million shares of stock to more than twenty Assignees, including OTC Solutions, Pudong, and Halperin”

5. This step was not taken.

6. “Four days after the February 18 press release, OTC Solutions and Pudong started touting Recycle Tech stock in their newsletters. Thompson and Fung, the respective owners of OTC Solutions and Pudong, had previously agreed to coordinate their touting with each other and with Sepe. Before they issued their newsletters, Sepe agreed to provide Thompson and Fung with 2.325 million shares each of Recycle Tech stock. Halperin provided the actual shares to Thompson and Fung.”

7. In the case of RCYT, the SEC has not alleged that the insiders/promoters engaged in manipulative trading.

8. “With the reverse merger completed, Gonzalez took his position as CEO and president of Recycle Tech.”

9. “From February 18 to 25, 2010, Recycle Tech issued seven false and misleading press releases. As CEO of Recycle Tech, Gonzalez had ultimate authority over the press releases. He drafted them, hired a public relations consultant, and provided the releases to the consultant. Gonzalez also instructed the consultant to issue the press releases pursuant to a time schedule Sepe set.”

10. “Taking advantage of Recycle Tech’s artificially raised stock price, a number of the Defendants sold their shares. From February 23, 2010 to March 2, 2010, Halperin sold 1,130,000 shares for $235,060. From February 22, 2010 to February 25, 2010, OTC Solutions sold 2,325,000 shares for $441,722. On February 23, 2010, Pudong sold 2,325,000 shares for $456,457. On February 23, 2010, Rees sold 25,000 shares for $5,982. Sepe, who did not directly receive shares of Recycle Tech stock pursuant to the conversion of debt, was compensated from others’ sales of Recycle Tech stock. Halperin wired Sepe’s company, Charter Consulting, $300,000 from his law firm account on April 12, 2010. At least $150,000 of that wire came from the illegal sale of Recycle Tech stock.”

 

Many thanks go to Janice Shell for summarizing the steps undertaken by shell companies destined for pump and dump schemes. I have added more detail and more steps and I of course take full responsibility for any errors I have introduced. David Baines often writes about the above steps taken by penny stock pump and dump operators.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. 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.

 

We are all in this together … or not

Whenever you hear that phrase, “We’re all in this together,” be very, very cautious. That is what scammers will say to convince you to do stupid things with your money (like buying pumped stocks) and what both hucksters and even non-fraudulent trading gurus will say to try to get their hands on your money.

The simple truth of the matter is that everyone has different goals and priorities. The most important thing you can do is to make sure you are aware of how the priorities of those you deal with and listen to differ from your own. A stock promoter’s goal is simply to get you to buy stock — damn you and your kid’s college fund.  A trading guru who sells his services with an alert service or trading chatroom benefits the longer you subscribe. His financial interest is best served by selling something that you will continue to want or need for years and years. The guru’s monetary motivation will — ceteris paribus of course — cause him to charge as much as he can for as little as he can. He will sell you hard to get you to pay him more money.

Even saying that all traders care about is profits is wrong. Especially in the penny stock world there are many of us who are motivated by other things besides profits (of course we are all motivated to a large extent by profits). I remember getting a bunch of flak from commenters on this blog when I accused a certain pumper of violating securities laws (six months later the SEC sued him). People attacked me for potentially destroying profitable trading opportunities. But I along with most other bloggers don’t just do this for money.

At the end of the day, each of us is motivated by different things, some of which are obvious, some of which are not. Money is the most obvious, but most of have emotional motivations — we genuinely want to help those we come across. Some of us have other motives that drive us, more powerful motives. When the time comes, my motivations will be made clear. In the meantime, let us embrace the motto “All for one, one for all, and every man for himself!”

 

Disclaimer: No positions in any stocks mentioned. 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 little bit of trader transparency

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

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

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

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

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

2008

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

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

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

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

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

2009

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

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

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

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

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

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

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

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

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

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

The new uptick rule (also known as the short sale restriction or SSR)

After the SEC reinstated a new version of the uptick rule following the 2008 financial crisis, there has been very little information available online. If you search for “uptick rule” most of the info you will find is on the old uptick rule. The current version isn’t really an uptick rule at all, but rather an upbid rule. This new version was first put into effect in November 2010.

Simply put, shares of a stock cannot be sold short at or below the best bid when the rule is in effect. The short seller must sell on the offer and wait for a buyer to fill his offer. The rule goes into effect when a stock’s price decreases by 10% or more from its previous day’s close. Once a stock has dropped 10% from its previous day’s close (even if just briefly dropping that far) the rule will then be in effect for the rest of the day and the next trading day. The rule can only be triggered during regular trading hours although if it is triggered it remains in force during after-hours and pre-market trading.

For those who use Interactive Brokers’ TWS platform, a little red circle will appear to the right of the stock description when the uptick rule is in effect. If you mouse over the red circle it will say “Short sale restriction is in effect from [date] to [date].”

In the screenshot below, IB TWS indicates that the uptick rule is in effect for PRGN with a little red circle to the right of the ticker.

ssr

There are some exemptions to the upbid rule but they do not apply to small traders. See this broker’s description of the exceptions.

The complete uptick rule can be found in this March 10th 2011 amendment to Regulation SHO (pdf).

I encourage reading the NYSE’s statement (pdf) about how it will enforce the uptick rule.

Disclaimer: No positions in any stock mentioned. 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.

2011 Super-mega-ultra pump and dump recap

I haven’t done any posts like this so far this year so I am going pretty far back. Please remind me in the comments of any big pumps I forget  and I’ll add them. See my last pump and dump recap from January to see some mailer pumps from the very beginning of the year.

Mailer Pumps

SPLM – $400k snail mail pump. See an image of the disclaimer here. The last part of the disclaimer is the most interesting: “”In order to enhance public awareness of Sentry Petroleum Ltd., and other companies profiled by WER [World Energy Report] through the distribution of this report, ECA [Energy Capital Advisors] paid WER four hundred thousand dollars. These funds were applied towards costs associated with creating, printing, and distributing this report. ECA will pay no additional sums. WER, ECA, and those associated with them may own shares and effect transactions in securities of Sentry Petroleum Ltd and other companies mentioned in this publication the sale of which could adversely affect the share price. The owner of ECA owns approximately zero point two six (0.36) percent of the outstanding shares Sentry Petroleum Ltd [sic] and will not sell any of those shares within ninety days of the date of this mailing.” [emphasis mine]

 

 

KNKT – $800k pump from Capital Financial Media (CFM). See post here (unfortunately the pump website is offline).

UTOG – $2.5m mailer pump. Trading was suspended by the SEC for two weeks at the beginning of June (a rare case where the SEC suspended trading in an active pump & dump). See website www.AmericanEnergyReport.com Disclaimer: “AmericanEnergyReport.com has been retained by an unrelated third party to perform promotional and advertising services intended to increase investor awareness of UnionTown Energy Inc. (UTOG). To date, AmericanEnergyReport.com has received two million five hundred thousand US dollars from an unrelated third party for performing these services. The services performed have included profiling the company on the AmericanEnergyReport.com website and issuing opinions concerning UTOG in newsletters and press releases. AmericanEnergyReport.com has received this amount as a production budget for advertising efforts and will retain amounts over and above the cost of production, copywriting services, mailing and other distribution expenses as a fee for our services. In addition AmericanEnergyReport.com expects to receive an additional two million dollars cash in future compensation for the continuation of the marketing program for an additional 3 months and to cover marketing vendors to pay for the costs of creating and distributing this report online in an effort to build market awareness, and AmericanEnergyReport.com will disclose any future compensation.”

 

LEXG – The greatest pump I have ever seen and probably one of the best ever. Note not just the price movement but the incredible volume — the value of stock traded on its last big up day exceeded $100m. This had a $3.29m budget disclaimed on these two websites: http://www.smauthority.com/video and http://www.thestockdetective.com/lexg/

Disclaimer: “Lithium Exploration Group, (LEXG), the company featured in this issue, appears as paid advertising, paid by Gekko Industries to provide public awareness for LEXG. … CM [Circuit Media] has received and managed a total production budget of $3,296,800 for this advertising effort and will retain any amounts over and above the cost of production, copywriting services, mailing and other distribution expenses, as a fee for its services. TSD [TheStockDetective] is paid $50,000 as an editorial fee from CM and also expects to receive new subscribers as a result of this advertising effort.”

Please note that unlike most of the stock charts on this page, the chart below is not log scale, to make seeing the price action during the pumps easier to see.

JAMN – An incredibly successful pump, the second most successful pump I have ever seen, after LEXG. This was pumped by HackTheStockMarket.com; see the pump page here (or here or here). The name and address information required by the CAN-SPAM law from this pumper changed multiple times, which leads me to believe it was all fake. HackTheStockMarket disclosed only $15,500 in payment for the promotion. The disclaimer was an image that is shown below.

Please note that unlike most of the stock charts on this page, the chart below is not log scale, to make seeing the price action during the pumps easier to see.

AVVC – $1.8m budget disclosed on this mailer pump. Lots of speculators / traders / idiots lost big going long on this stock — it was the first big pump failure following a string of very successful pumps early this year. Disclaimer: “CFM has received and managed a total production budget of $1,800,000 for this online advertising effort and will retain any amounts over and above the cost of production, copywriting services, mailing and other distribution expenses, as a fee for its services. Breakaway Stocks is paid $5,000 as an editorial fee from CFM and also expects to receive new subscriber revenue as a result of this advertising effort.” from this website.

LOGL – $1.275m mailer pump — see the SI pump mailer message board.

TBBC –  This was a large pump from multiple sources with over $800,000 in compensation. Following are those that I can find:

“Charles Payne’s Common Sense Newsletter received forty thousand dollars, as an editorial fee, from Creative Direct Marketing Group, Inc., which it received from the featured Company. This company was chosen to be profiled after Charles Payne’s Common Sense Newsletter completed due diligence on the company. Charles Payne’s Common Sense Newsletter expects to generate revenue and new newsletter subscribers and valuable exposure, the amount of which is unknown at this time, resulting from the distribution of this report. Creative Direct Marketing Group, Inc. received fifteen thousand, eight hundred dollars from the Company, for the costs of creating and distributing this report in an effort to build investor awareness.” from this pump website

“StockMarketLife.com has been retained by an unrelated third party whose principal is a shareholder of the featured company, The Brainy Brands Company Inc. (TBBC), to perform promotional and advertising services intended to increase investor awareness of TBBC. StockMarketLife.com expects to receive up to six hundred thousand US dollars from the unrelated third party for performing these services. The services performed have included profiling the company on the StockMarketLife.com website and issuing opinions, including Charles Payne’s report, concerning TBBC on this website, online marketing, in newsletters and press releases. StockMarketLife.com has received this amount as a production budget for advertising efforts and will retain amounts over and above the cost of the production, copywriting services, mailing, media buying and other online distribution expenses as a fee for our services.” This disclaimer was also in emails from GreenGainers.com and PowerPennyStocks.com, which all appear to be run by the same person/company.

“PennyStockRewards.com is a wholly owned subsidiary of Asset Development Strategies Corp.  Currently Asset Development Strategies Corp. has been compensated $50000.00 for this advertising program from a non-affiliated third party shareholder who will be selling stock in TBBC.”

WallStreetPennyStockAdvisors.com received $200,000

 

RYUN – I am not sure of the details of this pump.

AAGC – $1.26m budget disclosed. Absolute destruction. Michael Williams Market Movers was paid $20,000 by Citiglory Consultants Ltd and Citiglory paid $1,265,178 for the cost of the promotion — due to website troubles I lost my copy of the disclaimer (the bastards had it as an image that I had saved). See the online version of the mailer (no longer working).

TKDN – $1.4m budget disclosed. Absolute destruction. Disclaimer: “CFM has received and managed a total production budget of $1,400,000 for this online advertising effort and will retain any amounts over and above the cost of production, copywriting services, mailing and other distribution expenses, as a fee for its services. M3 Profit Accelerator is paid $3,000 as an editorial fee from CFM and also expects to receive new subscriber revenue as a result of this advertising effort.” (CFM = Capital Financial Media). See the online version of the mailer at SmallCapFortunes

TKDN is an even more impressive dump when considered over nine months (hardly the long-term!) it dropped from a high of about $1.34 to a low of $0.006 — a drop of 99.55%.

Note: on 12/19/2011 the pumps in this post run by the big three email pumpers were removed to a GoodeTrades Premium post and more info on those pumps was added.

Disclaimer: No positions. 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 facts about how stock promoters Golden Dragon Media & Pudong LLC work

All of the following is quoted from documents filed in this case stemming from the alleged misappropriation of some stock promoters’ email lists: OTC Solutions LLC , Golden Dragon Media Inc, and Pudong LLC v. John Does 1-50 (link to Justia summary).

First, check out the original complaint from June 29th, 2010.

Each Plaintiff has numerous lists (“Subscriber Lists”), comprising anywhere from 25,000 to 65,000 subscribers. Each list has grown as a result of significant marketing efforts by Plaintiffs, which includes Internet-based advertising costs in excess of $30,000 per day. Each Plaintiff has numerous lists (“Subscriber Lists”), comprisinganywhere from 25,000 to 65,000 subscribers. Each list has grown as a result ofsignificant marketing efforts by Plaintiffs, which includes Internet-based advertising costs in excess of $30,000 per day.
That is a pretty impressive list size, and by my count the pumpers named above have 20 different websites between them that are currently functioning (I am sure they have others that I am not aware of). Advertising costs of $30,000 per day translates to $10.95 million per year. That number seems high relative to the amount of compensation disclosed in these pumpers’ emails.

I will blog more on this lawsuit. Please leave a comment if you have any clue what happened to it though. The most recent update in PACER was from last December and nothing was filed to close the case in any way. Please check out most of the important filings on this case, which have been uploaded to Scribd.


Day-Trader performance measurement

Unlike a hedge fund manager or a person with a ‘real’ job, a full-time day-trader needs to consider both his own pay and the returns he earns on his capital. A trader who spends a lot of time trading but has little capital will find that his ‘hourly wage’ is so low that he would have been better off not trading.

So unlike hedge fund managers or investors, I measure my performance in terms of imputed wages and return on capital. I have a minimum hurdle rate on each that I must meet to justify my continued trading. First, there is my imputed wage. As an intelligent and well-educated person with a good work ethic I could be expected to make a good wage at a real job. That being said, I have essentially no job/career experience and my education (an M.A. in cognitive psychology) is essentially worthless. After finishing my Master’s degree in mid-2007 (before the financial crisis came to a head) I succeeded in landing only one job interview, for a $33,000 per year dead-end job crunching data for the St. Louis Fed. I was not even offered that job. I ended up working for an acquaintance’s start-up company for low pay plus equity but left that after half a year to trade full-time.

Realistically, I would not expect to be able to make more than $30,000 per year if I were to get a ‘real job’. However, I am confident that I could grow that amount to over $50,000 within 5 to 10 years. Consequently, I set my ‘imputed wage’ at $50,000 a year.  Obviously a real job would have fringe benefits that would add value, but I assume that the benefits of trading, such as working for myself and not commuting and saving money on work clothes, roughly equal the fringe benefits I would otherwise receive. I subtract this imputed wage from my annual trading earnings before considering my investment performance.

Return on capital (annual percent return) is an important measure of return. However, you cannot buy groceries (or lunch at Per Se) with percent returns, only with dollars. So the smaller the capital, the less meaningful percent returns are in the real world. However, because I calculate an imputed wage that I subtract from my trading profits, when computing return on capital I only need to concern myself with percent returns and earning a decent return on my capital. Now, any good analyst knows that cost of equity is determined by the riskiness of the business (or trading strategy). So what is an appropriate cost of equity?

I think that it is a bit silly to calculate an exact cost of equity (the minimum investment return that is acceptable) as analysts do with public and private companies (see this slideshow on how to calculate them). A few important things to consider that will increase the cost of equity for a trader are: high maximum drawdowns, increased frequency of drawdowns, fewer trades, longer trades (swing trading), larger position sizes, use of leverage, and return volatility. My particular method of trading penny stocks, because I never hold very long and keep my position size small both in absolute terms and relative to my capital, means that my cost of equity is low relative to other trading strategies. I therefore set my annual cost of equity at 10% compounded. What I mean by this is that if I do not make my 10% in one year I feel the need to make up the difference the next year. Compared to an expected return of maybe 7% to 8% for a buy and hold portfolio of stocks (with large drawdowns) this seems reasonable. My trading strategy is much lower risk than the market portfolio. I can say this because so far this year I have not had a negative month. In fact, in 2010 I only had one negative month, when I lost $1579 in March 2010. Below are my monthly returns since 2010:

Monthly returns, January 2010 to August 2011
2010
1.91%
2.10%
-0.29%
4.29%
3.16%
0.74%
1.74%
0.94%
1.79%
1.10%
1.26%
1.56%
2011
4.19%
1.57%
2.49%
2.84%
2.52%
3.47%
1.89%
1.18%

For those of you with a basic understanding of computing compounded returns, you can calculate that my time-weighted IRR for 2011 is 21.98% so far. To calculate my return minus my imputed salary I simply subtract my monthly imputed salary $4167 ($50,000 / 12 months) from each month’s dollar return and then calculate and chain the new percent returns to get my time-weighted post-salary IRR. This is at 13.87% for the current year, so I have made an acceptable return so far. Obviously I aim to generate higher than just acceptable returns, but my goal as a full-time trader is not to generate the highest return possible but to generate good returns while minimizing my risk. Over the last two years I have done that quite well.

The problem of too much capital

I have a large amount of cash in my trading accounts. This obviously reduces my returns because I keep my position size tiny and I have not even come close to using all my capital in the last year or two. Most professional full-time day-traders that I know prefer to keep their trading accounts relatively small so as to minimize the urge to take overly large positions. Due to my personality I have no such urge so it does not harm me to keep extra money in my trading accounts. Because of this I can also avoid having a separate emergency fund–I know I always have plenty of cash in my trading accounts. Also, with bond yields so low over the last couple years there is little opportunity cost to keeping so much cash. That being said, my percent returns have been juiced the last few months by a large withdrawal I made from my trading accounts to buy a house with cash. While it may seem silly to pay cash when mortgages are at 4%, by paying cash I reduce my overall leverage and earn a guaranteed 4% return on money I wasn’t really using anyway.

For those with too little capital

The problem of too much capital is very far from most trader’s problem of having too little capital. I see so many people trading and spending lots of time trading, with $5,000 or smaller accounts. If that is all the money they have it seems foolish to spend a ton of time learning to trade if that requires them to neglect a day-job. While I have known some people who have built up such a small account, it is very hard to do. Now if someone starts trading with such a small sum of money but can increase his account size after he has learned to trade and become profitable, then that is a very smart thing to do. And if a trader can trade without impairing his job performance or by utilizing free time, then that is also fine. But I am sure that many people who try to trade with small amounts of capital would be better off putting the effort into improving their career prospects. It would be a poor tradeoff indeed to sacrifice the potential for large salary increases just to obtain a few thousand dollars in trading gains.

That being said, one benefit of having a small amount of capital is that a trader can take much more risk. For someone with a $50,000/year job and a $10,000 trading account, a 50% drawdown is not nearly as big a problem as it would be for me. That person can easily save enough money in a year to bring the account size back to where it was.

Technical details

I encourage reading of Investment Performance Measurement which is a great book on all the nitty-gritty details of exactly measuring performance and calculating different types of IRR.

For calculating my time-weighted IRR I simply do it by month using my monthly starting capital in all my accounts and then dividing my monthly return into that figure, chaining the resulting monthly percent returns. I withdraw money from my accounts over time so by not breaking my performance down into smaller time periods separated by each withdrawal my calculated performance ends up being slightly lower than my real performance. To reduce the data entry work this is an acceptable short cut. Somebody gradually adding money to his trading accounts would inflate his calculated performance by not properly accounting for the deposits to his trading accounts.

Those who add or subtract money from a trading portfolio that is not in substantially all cash should also compute their money-weighted IRR to determine if they are adding or subtracting value by changing how much money is in their account/portfolio.

One last note

My monthly performance numbers do not include non-commission broker costs or other costs. These should add up to a few thousand dollars this year.

Disclaimer: 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.

Silence in the library

My blogcation has now become an indefinite halt of regular blogging. Simply put, my blogging is not currently offering enough rewards (monetary and psychological) to compensate for the effort and hassle.  I will continue to post interesting links on Twitter (though rarely) and I will occasionally post new articles here. I am not disappearing completely from the internet; I will continue to be the administrator/moderator of Tim Sykes’ chatroom.

I will continue to upload most of my trades to Profit.ly, which I update weekly or bi-weekly (from the beginning on this blog I have said that I will not share my trades in my ‘super-secret’ trading strategy and I do not upload those trades to Profit.ly; excepting for that strategy and a new pseudo-arbitrage strategy I have been using since December, I upload all of my new trades).

If you comment on this post, you can save time and effort by simply posting the number of one of the three most likely categories of comments:

(1) I love you! Please don’t go!
(2) You owe me more free content! You are a jerk for not giving me what I want for free!
(3) You are stupid, ugly, and your trading sucks. The world will be a better place without you polluting the blogosphere. I think so little of you that I compulsively read your blog and feel compelled to comment on it.

Disclosure: I get paid for moderating Sykes’ chatroom based on how many people are in it during trading hours. 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.