Hype for Hire: What's The Harm?
By Dan McLaughlin Posted in Democrats — Comments (16) / Email this page » / Leave a comment »
Following my previous piece on Jerome Armstrong's role as web-based front man for what appears to have been a substantial pump-and-dump scam, the logical question becomes: what was the harm? How much money was lost by innocent investors as a result of the BluePoint scam?
On the one hand, isolating the damages caused by a fraud can be a trickier question than you might think - this was a tech stock sold at the top of the tech boom, so not all the investor losses were necessarily due to the fraud.
On the other hand, while there are still some complexities in making estimates without detailed trading data available to show who bought, when, and at what price, it's not that hard to compute a rough estimate of the total market loss here (what we securities lawyers would call "plaintiffs'-style damages"), and in the case of a genuinely manipulated market, dominated and controlled by a few players (as BluePoint allegedly was), it can be fair to attribute a large proportion of the loss, especially the short-term loss, to the pump-and-dump scheme.
According to the SEC, the stock dropped from a first-day manipulated high of $21 (an hour and a half after trading opened) to $6.875 per share a month later, to below $3 per share by late June. And the complaint alleges that the manipulators still controlled trading through late June. As of 2003, when the complaint was filed, it was trading at 10 cents a share (the company still exists, and the stock now trades at about 15 cents a share). From these figures, you could somewhat conservatively estimate that the average per-share loss by public investors was comfortably in excess of $10 per share in the first few months; while not all that was necessarily attributable to the market manipulation, it's certainly fair to say that Armstrong pimped a stock that (a) was a scam, (b) cost people at least $10 per share in real, immediate losses and (c) had only minimal real value, if that.
Having established the per-share loss, the question is how many shares were sold to innocent public investors? Again according to the SEC's complaint, BluePoint had 20 million outstanding shares, but only about 4 million of those were publicly traded (the rest were owned by the insiders). 1.15 million shares were traded the first day, most of that being sales to public investors, but some of which would be shares that changed hands a few times. Another 180,000 shares changed hands the next two days, while trading was above $17 per share, although a lot of that may have been resales by first-day buyers to the next "greater fool."
You'd need an expert to untangle from the trading volume exactly how many affected shares we're talking about here, but when you take out the duplicate trades, one might guesstimate that maybe something like 750,000 shares actually ended up in the hands of the public within the first 2-3 days (feel free to correct me if you're more familiar with the economic literature on this point; either way, detailed trading data would let you fix that number much more precisely).
Long answer made short: it would not be unfair to estimate, pending more facts, that somewhere in the neighborhood of $5-10 million was lost by people buying a nearly worthless stock that Jerome Armstrong touted for money, with a fair estimate of the real damages most likely being about $7.5 million.
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Hype for Hire: What's The Harm? 16 Comments (0 topical, 16 editorial, 0 hidden) Post a comment »
As I noted. But remember, the percentage of losses that constitute real damages is likely higher when you're talking about a market dominated and controlled by a small cabal of scam artists. This isn't a stock that drifted freely downward with the market.
of revisionism. Those were heady times, and the value of something is whatever someone will pay for it. I realize you are an expert in this stuff, and that it may be a term of art, but saying that the "intrinsic" value of a stock was next to nothing ignores the fact that people were buying stocks like BluePoint for their speculative value, as well.
In other words, some of those who lost money were willing dupes, who knew the emperor had no clothes. Their own greed cost them money, though Armstrong, by accounts, saw nothing wrong in helping them do it.
are willing dupes, at best, and potential crooks in most cases, that, however, doesn't constitute much of a defense.
If what Armstrong did was so egregious, why did the SEC let him off with just a slap on the wrist?
1. If he didn't have much money at the time, they may not have found it worthwhile to pursue him for damages beyond disgorging ill-gotten gains. As it is, the disgorgement proceedings apparently remain ongoing.
2. Proof of knowledge - there may not have been sufficient evidence to prove what he knew about the manipulation side of the scam. The standard of proof for the knowledge element of aiding and abetting another's violations is particularly high. Whereas the 17(b) charge of touting for undisclosed payola was presumably real easy to prove.
3. He's testifying against Dick Cheney. (Oops, wrong story).
I like, I have a hard time cutting him out of the herd on this one. It is really hard to look at the touting done by the major brokerages and their inhouse analysts for offerings like Webvan, pets.com, furniture.com and a host of etc.coms, none of which had,(or has), any intrinsic value, and not consider them "pump and dumps" for the benfit of the big venture capital firms and selected institutional and high net worth IPO subscribers. Of course, many of these have paid heavy fines, sometimes as much as fractions of the money they made.
It might be wise to separate the "wheat from the chaff". What Armstrong did is certainly not unique since there is no real lack of 17(b) prosecutions.
However, what is particularly disgusting is the surreptitious manner in which he operated. Overall, there is some relevancy to the heady dot.com days. However, speculating on companies pushed by credible investment banks and capital groups is exceedingly different then consciously attempting to defraud investors. The first is risky, the latter is criminal.
By the way, probably most relevant:
3. He's testifying against Dick Cheney. (Oops, wrong story).
It's the SEC that cut him out of the herd of touting stocks, not us.
The only question remaining is: Is he now doing with candidates what he once did with stocks?
Who cares of it's unique? Lots of dishonest or criminal activities aren't unique, but that still doesn't mean we should trust the people involved in them.
As to your question, I think our old friend Luis said it best, "I'm shocked to find that there is gambling going on here".
Easier way to determine the market loss -- I don't say harm for reasons described below. The SEC says the defendants collectively made $4.61mm in profits from the stock sales. Given that the stock ultimately fell from zero, that's pretty much the loss to investors.
Now, was the loss "harm" to innocent investors? Well, as of March 6, 2000, there were no financials available on the company. So anyone who bought did so based on ZERO available information on the state of the company.
When the first financial information was filed on April 18, 2000, it was disclosed that the company had all of $6,863 in cash, and $12,560 in receivables and total assets of $27,168. That's right, with 20 million shares issued trading at $21 per share a company with $27,000 in assets had a market cap of $420 million.
No matter how big a scam this company was, it's hard to have a lot of sympathy for those who bought in a company with no publicly available information.
Not defending Armstrong, but discussing harm to the investors is tough.
The SEC charges seem to be over and done with. I think the focus should be on whether Armstrong and Kos have a racket where they are pimping candidates for cash.
It appears that Armstrong doesn't blog about candidates while he's on their payroll. But people have speculated that he is clandestinely slipping cash to Kos in exchange for kind words on Kos's blog.
The thing is that Kos talks up a lot of candidates on his blog, almost all of which Armstrong is not working for. So how can establish whether there was a quid pro quo?
Hasn't Kos been elusive about how much money he makes from running DailyKos?
I guess it's between him and the IRS, but your comment made me think of that.
is a no-no, at least by my understanding of securities law. It must be fully disclosed and that's for what he was nabbed. I'm surprised he wasn't tagged for the compensation, maybe I read it too quickly and missed it.
The real grabber, as far as I'm concerned, and maybe the Federali's are as well, is the small public float of the stock. The insiders would have had to hold the stock for, at minimum, 12 months, and would have to report every trade for over 500 shares. They didn't. Why?
Was the market value used for loans somewhere else? That didn't need collateral to be issued?
Sounds like an internal Chinese bank scam to me.
1.15 million shares of public floating stock is not a lot compared to the actual issuance and insider's holding. Stupid investing and rumor chasing went on, but there was more money tied up on the inside than out. How did they benefit?
That's what I'd want to know.
(I used your figures and did no independent research on this. I took a 6 hour exam today (Passed!! Yeah!) and am mentally drained. This is opinion only, but I have been in the business (trading) for 25 years. If I'm wrong in any of this, call me out and I'll answer or read what I'm pointed towards.- Porter)
is that in order for this estimate to work, you need to address whether the price changes have other factors behind them besides what Jerome is said to have done.
Just because Jerome made a deal with the SEC, it does not then follow that every consequence of a failing stock at the height of the internet bubble is solely due to his actions.