Newfangled stock scams on the rise

Rapid trades and fake filings among techniques being used

NEW YORK— Stock scams are about as old as the market itself, but the combination of worldwide information technology and automated programs that can make thousands of trades in a second has created new paths for potential frauds.

The U.S. government says alleged scammers have used methods including rapid trades, fake regulatory filings and news reports to get an advantage and make profits. Here are a few examples: In May 2010, the Dow Jones industrial average plunged 600 points in about five minutes and closed with a loss of 348 points.

Regulators said the dive was triggered by a computerized selling program, and, in April 2015, the U.S. government filed criminal charges against British futures trader Navinder Singh Sarao.

The U.S. Department of Justice said Sarao used an automated trading program to manipulate the market and charged him with fraud and commodities manipulation. Sarao has said he was merely good at his job.

Shares of Avon Products rose as much as 20 per cent in May after a false Securities and Exchange Commission (SEC) filing said an investment firm wanted to buy the cosmetics retailer for $8 billion (U.S.). That was a big premium for a company that had struggled with falling sales and reduced revenue.

In May, the SEC sued a Bulgarian man, Nedko Nedev, and said he and five others violated securities laws by creating fake takeover offers.

The SEC said Nedev also made fake bids for Rocky Mountain Chocolate Factory in 2012 and insurer Tower Group International in 2014.

In July, Twitter’s stock climbed as much as 8.5 per cent after a fake story said the messaging service received a $31-billion buyout offer.

That, too, was a significant premium over Twitter’s market cap at the time, and it came as investors worried about Twitter’s losses and its user growth.

The story appeared on a website that mimicked the business news page of Bloomberg. Twitter shares returned most of those gains after Bloomberg said the story was a fake.

The same month, two men were arrested in Israel and accused of trying to cheat millions of people by driving up the price of penny stocks by sending false and misleading spam emails.

A U.S. citizen was also sought. The charges included conspiracy and securities fraud, and the SEC said the men ran at least 20 stock promotion websites. The scam was a pump-and-dump scheme designed to drive up the price of the stocks, so the promoters can sell them at an inflated price before the truth comes out and the prices fall again.

On Tuesday, the U.S. government said a group of hackers and securities brokers broke into the computer systems of three companies that publish news releases and traded on the information in hundreds of press releases before the public saw them.

The Justice Department says the group had members in Ukraine and the U.S., and it made $100 million over the years from trading shares of heavy machinery maker Caterpillar, Invisalign braces maker Align Technology and other companies, based on info in the unpublished releases.

With all of the angst comes opportunity The chase by Frances Horodelski:

Equity markets are in a bit of panic mode. The CNN fear/greed index is down to 9 (extreme fear) and the only thing right now preventing it from being at zero is the VIX which has risen (+12% yesterday) but remains relatively low (13.7 on the spot VIX). A year ago, the index was 7 – the S&P 500 was 1933.

According to regular guest Bill Blain from Mint Partners, when the world is a mess “Buy bonds, buy bonds, and if in doubt, buy some more bonds.” And that seems to be what’s happening as the German two-year bond has fallen to a record low (27 basis points) as have French and Italian twos. U.S. tens are trading down through recent support at 2.2% and now down to May lows of about 2.1%. The twos in the U.S., while slightly lower in yield are still double (65 basis points vs 30 basis points) the lows of last October – and the curve continues to flatten but this time with the long end falling.

So it is all about the macro today (hate that!). But with all of the angst comes opportunity. Having said that, my superstitious hat sees a good bounce and then a plop and then a year-end rally (see August through December last year). Play accordingly.

Currency markets–where the moves by the Chinese are reverberating through currency, fixed income and equity markets around the world. According to Dennis Gartman, while everyone is watching the renminbi versus the U.S. dollar, he believes the more important relationship is versus the yen where that currency has seen a dramatic 40% decline against the Chinese currency since 2011. That might be the more important cross to watch. Lots of moving parts in this story. And comparisons will be made to 1998 (the Asian currency crisis) – our goal will be to distinguish this from that as well as find the opportunities in the mess.

Interesting spin. China does a tremendous amount of trade with Europe and especially Germany. The first thought was that Germany would suffer as its goods became more expensive as China’s currency weakens. The DAX got smoked yesterday (the equivalent of 400 Dow points) and it is getting smoked again today (the equivalent of another 400 Dow points). But, it the perverse world of trades, the euro is stronger because a weak yuan will ultimately stimulate a Chinese economy and ultimately make for a better market for German (and European) goods. You can’t make this stuff up. The theory is that currencies react to economic differentials not rate differentials – hence Euro up – for six days in a row.

www.bnn.ca