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Very helpful explanation from a thread about this on reddit (narrated from the first person perspective of the scammer): It's pretty beautiful in an illegal so

Very helpful explanation from a thread about this on reddit (narrated from the first person perspective of the scammer): It's pretty beautiful in an illegal sort of way: So the clever short sellers borrow and sell 100,000 shares of stock at $2 each, hoping to profit when it crashes to zero. By hypothesis, there are no buyers. But we buy. We buy those 100,000 shares for $2 each, laying out $200,000. Now we own 300.1 million shares, out of 300 million outstanding. On Thursday we go to our brokers and say "you know what, we changed our minds, we want our stock back from whoever you loaned it to." So the brokers call in the short sales. The short sellers can't borrow the stock anywhere else. We own it all. So they have to close out their short sales by buying in the stock. But they can't buy the stock anywhere else either. We own it all. So they have to buy it from us. How much do we charge? Yeah, $15. Or $20 or whatever, I don't know. We can charge whatever we want. If the short sellers don't buy the stock, they're breaking the law. So they'll pay whatever we ask. They pay $20 to buy back the shares they sold us at $2, making us a $1.8 million profit. source: https://www.reddit.com/r/investing/comments/4wvlkv/a_scam_with_354b_market_cap_dafuq/d6absj0 https://www.reddit.com/r/investing/comments/4wvlkv/a_scam_wi... [edit: formatting]

ChuckMcM 10y ago
This sounds pretty amazing but I can't figure out bindings for all the pronouns. Who are the short sellers? Who are the brokers? are they complicit? Is one of them acting as the market maker for the stock? When the con is exploded and the money gets paid back, where did it come from? The short sellers? the brokers? thin air?
- elevensies 10y ago
  This is a typical short squeeze. ( https://en.wikipedia.org/wiki/Short_squeeze https://en.wikipedia.org/wiki/Short_squeeze ) [ With the caveat that I'm far from an expert on this, I just have a collection of documents of many failed corners and very few successful corners. ] The short sellers are anyone with a negative outlook on the stock. For example, some hedge funds do 50% buying, 50% short selling, so in theory they are neutral to overall market conditions. The brokers in this case have been permitted to lend out the stock to earn extra money, the short sellers are ordinary customers of the brokers, the short sellers don't necessarily have any special relationship with the brokers. The market maker would be buying as much as selling, and not holding any position over extended time, so they don't influence this event. In theory, the short sellers have to pay up to meet their obligations.
- thegranderson 10y ago
  Haha yeah the pronouns are not the clearest in this. Let me try: Let's set up three parties to this scam: 1. The Scammers - these people start the company 2. The Short Sellers - these are the "smart money" who uncover some fictitious/sketchy company and want to profit 3. Brokers - these are the intermediaries through which both The Scammers and The Short Sellers trade First, The Scammers set up the company and take it public on some sort of lightly regulated exchange (look up pink sheets, over-the-counter trading, etc.). These are not the NY Stock Exchange where an IPO has to be somewhat legitimate. Second, The Scammers lightly trade the stock up among themselves over time until it looks overvalued enough for The Short Sellers to notice it in their quantitative screens and get interested. Then, expecting the price to drop, The Short Sellers decide they want to sell short the stock. This would generally mean that they borrow the shares from someone that has them (e.g., borrow 100 shares at $10 a share), sell them to someone else (e.g., all 100 shares at $10 a share), and buy shares again when the price goes down (e.g., buy 100 shares at $2 a share) to repay the person they bought them from (to whom they owe 100 shares, regardless of share price). So, in order for the Short Sellers to orchestrate this, they turn to Brokers, who match buyers and sellers. Since this company is a scam, only The Scammers have any shares. So the Brokers go find The Scammers (hopefully not realizing they are scammers), and ask them to lend their shares to The Short Sellers. The Scammers gladly do this. Next, the Short Sellers want to sell their borrowed shares back to someone, so they are set up for when the price drops. Again, The Scammers are glad to buy these shares (putting up some cash to do so). When enough Short Sellers get involved, or when The Scammers feel like it, they will call up their Brokers and ask for the shares they loaned back. There are some rules around this, but they can generally call them back. Now begins an epic short squeeze - the Short Sellers don't have any shares, but they owe them to someone, not realizing that the person they borrowed from is the same as the person they sold to (The Scammer in both cases). So, the Short Sellers go out looking for shares to buy to repay their loan (again, denominated in shares, not cash). But since only The Scammers have shares, they can demand any price, and they do. They demand higher and higher prices, until the Short Sellers finally have to pay up exorbitantly for shares to pay back their loan. The Short Sellers buy shares from The Scammers at wildly high prices, and return them (through a Broker) to The Scammers, who are very pleased with themselves, having both sold their shares for 100s of times what they bought them for, and having gotten the shares returned to them.
- kevinpet 10y ago
  Eve finds NeuroMama, a worthless stack of nothing but shady documents, and importantly, without a significant number of shares available to borrow. She knows how to manipulate markets and doesn't care much for legality. Eve buys a significant position in NeuroMama over a period of time. She can do this cheaply, but slightly drives up the price. Alice sees that the stock price has increased and this puts it on her radar of companies to investigate. She sees that NeuroMama is a worthless stack of nothing but shady incorporation papers. Alice thinks the stock value will decline. She goes to her broker, Bob, to borrow shares so that she can short sell. Bob calls around Long Island and locates some shares belonging to Eve for Alice to borrow. Alice offers these shares for sale. Eve buys up a significant portion of them and puts them back on the market for sale at a massive markup. Eve calls back her shares. Alice is required to return the shares to Eve. But Alice has sold those shares, so she must buy them back. She tries to find anyone to buy them from. Unfortunately, Eve is the only one selling, so Alice must pay Eve's price. The only money that has changed hands is between Alice and Eve. There was no $34B, only a small fraction of the shares changing hands at highly inflated prices. If Eve is caught she'll need to disgorge her earnings to Alice.
  - infinite8s 10y ago
    Why would Eve worry about being caught? Everything you've outlined is perfectly legal, and in fact was executed brilliantly by Porsche (http://www.reuters.com/article/us-volkswagen-idUSTRE49R3I920081028 http://www.reuters.com/article/us-volkswagen-idUSTRE49R3I920...) in 2008.
    - kirubakaran 10y ago
      executed brilliantly by Porsche Didn't really work out for them in the end. They executed the short squeeze to acquire VW but they're owned by VW now. http://www.automobilemag.com/news/porsche-and-volkswagen-what-happened/ http://www.automobilemag.com/news/porsche-and-volkswagen-wha...
      - colechristensen 10y ago
        TL;DR Banks stopped lending to Porsche before it could seal the deal because 2008 happened.
- monochromatic 10y ago
  Same here. Reading the original makes things clearer though. https://www.bloomberg.com/view/articles/2014-07-11/cynk-makes-the-case-for-buying-friends-naked-short-selling https://www.bloomberg.com/view/articles/2014-07-11/cynk-make...
- delecti 10y ago
  Side note unrelated to your question itself, the name for the reference that a pronoun points to is an antecedent. Not trying to correct you, I just think grammar is nifty.
rhizome 10y ago
Sounds like what SCOX was speculated to be doing on their way down the chute during the IBM suit.
celias 10y ago
Sounds like the plot of the "Ties That Bind Us" episode of the BBC show Hustle from 2006
theyoungestgun 10y ago
Famous example with Porsche: http://www.nytimes.com/2008/10/30/business/worldbusiness/30iht-norris31.1.17372644.html?_r=0 http://www.nytimes.com/2008/10/30/business/worldbusiness/30i...
- kirubakaran 10y ago
  As I mentioned elsewhere, it didn't really work out for them in the end. They executed the short squeeze to acquire VW but they're owned by VW now. http://www.automobilemag.com/news/porsche-and-volkswagen-what-happened/ http://www.automobilemag.com/news/porsche-and-volkswagen-wha...
downandout 10y ago
This is called a short squeeze. It's done all the time and is not illegal. Pumping the stock up at first through manipulative transactions is illegal, but not all overvalued stocks get that way through illegal means. If you have an overvalued stock and short sellers move in, conducting a short squeeze against those sellers is not by itself illegal and can be an effective way to encourage short sellers to stay away from the stock.
brownbat 10y ago
If you follow that link all the way back to the original source, you're back at Bloomberg, and the writing of Matt Levine.[0] It provides additional context, some entertaining footnotes, and is generally just very much worth the trip. [0] https://www.bloomberg.com/view/articles/2014-07-11/cynk-makes-the-case-for-buying-friends-naked-short-selling https://www.bloomberg.com/view/articles/2014-07-11/cynk-make...
- MichaelGG 10y ago
  That's so damn cool. So does the SEC regularly just raid places or wiretap them or ...? Seems like more sophisticated financial scams can just go undetected or impossible to prosecute if you split it up enough.
  - heroprotagonist 10y ago
    From that article, it sounds like the SEC wait until they hit television news..

ChuckMcM 10y ago

This sounds pretty amazing but I can't figure out bindings for all the pronouns. Who are the short sellers? Who are the brokers? are they complicit? Is one of them acting as the market maker for the stock? When the con is exploded and the money gets paid back, where did it come from? The short sellers? the brokers? thin air?

elevensies 10y ago
This is a typical short squeeze. ( https://en.wikipedia.org/wiki/Short_squeeze https://en.wikipedia.org/wiki/Short_squeeze ) [ With the caveat that I'm far from an expert on this, I just have a collection of documents of many failed corners and very few successful corners. ] The short sellers are anyone with a negative outlook on the stock. For example, some hedge funds do 50% buying, 50% short selling, so in theory they are neutral to overall market conditions. The brokers in this case have been permitted to lend out the stock to earn extra money, the short sellers are ordinary customers of the brokers, the short sellers don't necessarily have any special relationship with the brokers. The market maker would be buying as much as selling, and not holding any position over extended time, so they don't influence this event. In theory, the short sellers have to pay up to meet their obligations.
thegranderson 10y ago
Haha yeah the pronouns are not the clearest in this. Let me try: Let's set up three parties to this scam: 1. The Scammers - these people start the company 2. The Short Sellers - these are the "smart money" who uncover some fictitious/sketchy company and want to profit 3. Brokers - these are the intermediaries through which both The Scammers and The Short Sellers trade First, The Scammers set up the company and take it public on some sort of lightly regulated exchange (look up pink sheets, over-the-counter trading, etc.). These are not the NY Stock Exchange where an IPO has to be somewhat legitimate. Second, The Scammers lightly trade the stock up among themselves over time until it looks overvalued enough for The Short Sellers to notice it in their quantitative screens and get interested. Then, expecting the price to drop, The Short Sellers decide they want to sell short the stock. This would generally mean that they borrow the shares from someone that has them (e.g., borrow 100 shares at $10 a share), sell them to someone else (e.g., all 100 shares at $10 a share), and buy shares again when the price goes down (e.g., buy 100 shares at $2 a share) to repay the person they bought them from (to whom they owe 100 shares, regardless of share price). So, in order for the Short Sellers to orchestrate this, they turn to Brokers, who match buyers and sellers. Since this company is a scam, only The Scammers have any shares. So the Brokers go find The Scammers (hopefully not realizing they are scammers), and ask them to lend their shares to The Short Sellers. The Scammers gladly do this. Next, the Short Sellers want to sell their borrowed shares back to someone, so they are set up for when the price drops. Again, The Scammers are glad to buy these shares (putting up some cash to do so). When enough Short Sellers get involved, or when The Scammers feel like it, they will call up their Brokers and ask for the shares they loaned back. There are some rules around this, but they can generally call them back. Now begins an epic short squeeze - the Short Sellers don't have any shares, but they owe them to someone, not realizing that the person they borrowed from is the same as the person they sold to (The Scammer in both cases). So, the Short Sellers go out looking for shares to buy to repay their loan (again, denominated in shares, not cash). But since only The Scammers have shares, they can demand any price, and they do. They demand higher and higher prices, until the Short Sellers finally have to pay up exorbitantly for shares to pay back their loan. The Short Sellers buy shares from The Scammers at wildly high prices, and return them (through a Broker) to The Scammers, who are very pleased with themselves, having both sold their shares for 100s of times what they bought them for, and having gotten the shares returned to them.
kevinpet 10y ago
Eve finds NeuroMama, a worthless stack of nothing but shady documents, and importantly, without a significant number of shares available to borrow. She knows how to manipulate markets and doesn't care much for legality. Eve buys a significant position in NeuroMama over a period of time. She can do this cheaply, but slightly drives up the price. Alice sees that the stock price has increased and this puts it on her radar of companies to investigate. She sees that NeuroMama is a worthless stack of nothing but shady incorporation papers. Alice thinks the stock value will decline. She goes to her broker, Bob, to borrow shares so that she can short sell. Bob calls around Long Island and locates some shares belonging to Eve for Alice to borrow. Alice offers these shares for sale. Eve buys up a significant portion of them and puts them back on the market for sale at a massive markup. Eve calls back her shares. Alice is required to return the shares to Eve. But Alice has sold those shares, so she must buy them back. She tries to find anyone to buy them from. Unfortunately, Eve is the only one selling, so Alice must pay Eve's price. The only money that has changed hands is between Alice and Eve. There was no $34B, only a small fraction of the shares changing hands at highly inflated prices. If Eve is caught she'll need to disgorge her earnings to Alice.
- infinite8s 10y ago
  Why would Eve worry about being caught? Everything you've outlined is perfectly legal, and in fact was executed brilliantly by Porsche (http://www.reuters.com/article/us-volkswagen-idUSTRE49R3I920081028 http://www.reuters.com/article/us-volkswagen-idUSTRE49R3I920...) in 2008.
  - kirubakaran 10y ago
    executed brilliantly by Porsche Didn't really work out for them in the end. They executed the short squeeze to acquire VW but they're owned by VW now. http://www.automobilemag.com/news/porsche-and-volkswagen-what-happened/ http://www.automobilemag.com/news/porsche-and-volkswagen-wha...
    - colechristensen 10y ago
      TL;DR Banks stopped lending to Porsche before it could seal the deal because 2008 happened.
monochromatic 10y ago
Same here. Reading the original makes things clearer though. https://www.bloomberg.com/view/articles/2014-07-11/cynk-makes-the-case-for-buying-friends-naked-short-selling https://www.bloomberg.com/view/articles/2014-07-11/cynk-make...
delecti 10y ago
Side note unrelated to your question itself, the name for the reference that a pronoun points to is an antecedent. Not trying to correct you, I just think grammar is nifty.

rhizome 10y ago

Sounds like what SCOX was speculated to be doing on their way down the chute during the IBM suit.

celias 10y ago

Sounds like the plot of the "Ties That Bind Us" episode of the BBC show Hustle from 2006

theyoungestgun 10y ago

Famous example with Porsche: http://www.nytimes.com/2008/10/30/business/worldbusiness/30iht-norris31.1.17372644.html?_r=0 http://www.nytimes.com/2008/10/30/business/worldbusiness/30i...

kirubakaran 10y ago
As I mentioned elsewhere, it didn't really work out for them in the end. They executed the short squeeze to acquire VW but they're owned by VW now. http://www.automobilemag.com/news/porsche-and-volkswagen-what-happened/ http://www.automobilemag.com/news/porsche-and-volkswagen-wha...

downandout 10y ago

This is called a short squeeze. It's done all the time and is not illegal. Pumping the stock up at first through manipulative transactions is illegal, but not all overvalued stocks get that way through illegal means. If you have an overvalued stock and short sellers move in, conducting a short squeeze against those sellers is not by itself illegal and can be an effective way to encourage short sellers to stay away from the stock.

brownbat 10y ago

If you follow that link all the way back to the original source, you're back at Bloomberg, and the writing of Matt Levine.[0] It provides additional context, some entertaining footnotes, and is generally just very much worth the trip. [0] https://www.bloomberg.com/view/articles/2014-07-11/cynk-makes-the-case-for-buying-friends-naked-short-selling https://www.bloomberg.com/view/articles/2014-07-11/cynk-make...

MichaelGG 10y ago
That's so damn cool. So does the SEC regularly just raid places or wiretap them or ...? Seems like more sophisticated financial scams can just go undetected or impossible to prosecute if you split it up enough.
- heroprotagonist 10y ago
  From that article, it sounds like the SEC wait until they hit television news..