Investing 101 - Jan 4, 2005 - Printable Version
- Elgindy Trial Illustrates Incompetence at the Federal Levels
by Dave Patch The testimony of former Federal Bureau of Investigations Agent Jeffrey Royer at the Anthony Elgindy stock manipulation trial in NY raises serious doubts about the win at any cost approach to Federal Agency efforts.
Under testimony Royer, on trial for securities fraud himself, claimed that he was operating under a typical agent-informant relationship when he proceeded to hand accused stock manipulator Anthony Elgindy confidential information on SEC and FBI Investigations into potential “Scam companies”. Elgindy would then take this confidential information and launch a merciless barrage of short sellers and damaging reports on these firms attempting to bring down their operations. In the wake was left untold numbers of innocent investors. Elgindy and his clan made money.
According to a Dow Jones article by Carol Remond, Royer told jurors that his desire to quash securities fraud was fueled by his own losses in a company called Webtel. Royer said he invested about $82,000 of his own and his friends' and family's money, which was lost when the company blew up.
Apparently the fact that Royer lost money in a scam stock left him compelled to include others in his suffering as he fed Elgindy this inside information to be used for stock manipulation.
The problem with this fiasco that has found its way into the US District Court in NY is that Royer and Elgindy did not operate alone in this. It was an entire network of co-conspirators that allowed the stock manipulation to transpire and those co-conspirators include Wall Street and Wall Streets illustrious regulators.
Anthony Elgindy, and former FBI Agents Jeffrey Royer and Derrick Cleveland are accused of, among other things, stock manipulation as well as insider trading. To commit a stock manipulation strategy in short selling, the short sales must go beyond the natural short sale processes; borrow a security for settlement delivery. Had Elgindy operated in that legal manner there would be no trial. Instead, in this case the sales became naked shorts as the magnitude of short sales could not meet the guidelines for trade settlements. The short sales were overwhelming and went beyond shares available to borrow. To manipulate a stock you must have access to sell any required amount necessary to do the job and Elgindy and his team were given that access.
Anthony Elgindy ran his web site that, through paid subscriptions, allowed many savvy short selling enthusiasts to a smorgasbord of juicy details about events to come. The subscribers included a reported 400 or more Hedge Funds along with other short selling professionals.
As FBI Agent Royer, and reportedly other SEC and NASD officials provided Elgindy with investigations underway, Elgindy would use his internet site to pass on such information initiating attacks on these companies. These were fraud companies and the regulators could not be bothered with their own policing.
The attacks orchestrated came by way of massive short selling that resulted in overselling of these securities and resultant stock price declines. Under the pressure of these short sales Wall Street firms and the Depository Trust and Clearing Corporation (DTCC) could not maintain trade settlements on the volumes being sold in these securities resulting in massive settlement failures.
Wall Street, by continuing to accept the trading from these Hedge Funds and short selling enthusiasts assisted in the stock manipulation and did so for the very revenues that came from the trade business.
So then, where were the Regulators to step in and take control over the matter?
Like Mr. Royer, the SEC and NASD were so narrowed in on shutting down these companies they too were willing to allow innocent investors to fall victim as Mr. Royer once had. Under Testimony Royer, referring to his providing confidential information to Elgindy claimed "It needed to be done. There was no limit to how much (Elgindy and other members of his investing Web site) could help," Royer said. Royer followed up by stating “that it is standard procedure for FBI agents working with undercover informants.” But what about the Investors?
To put things in perspective today, during this time of such an explosive trial, let’s see how things have changed.
The SEC recently released Short selling Regulation SHO. With this regulation comes a ‘threshold list” of securities with abusive settlement failures due to an oversold market for extended periods of time. The present list of companies that fall under this category is greater than 1000 and represent over 12% of all securities. Soon we will know exactly who is on this list although the regulators have already provided this confidential information to WALL STREET.
Before the regulators initiate fair market practices, let’s look at a couple recent high fliers that question our lessons learned.
Allied Capital Corporation (NYSE: ALD), has been under fire by short sellers over the manner in which they have priced securities in public offerings. These short sellers have complained to the SEC over their practices and the informal investigation yielded little. The short sellers then went on the road to the US attorney who has now opened up their own investigation into the actions of ALD. The recent news of this investigation yielded a precipitous drop in ALD’s stock price. As for ALD, they have been listed on the preliminary “threshold security” published by the NYSE for their problem stocks. The stock is oversold in short sales and the recent US Attorney action fed right into their hands.
Horizon Offshore Inc. This is a more interesting tale. Horizon is a NASDAQ listed security with slightly more than 27 Million shares outstanding. Prior to last Thursday December 30, 2004 the average daily trading volume in Horizon was maybe 1 million shares. Starting last Thursday the stock traded 33 Million, 65 Million, and 50 Million shares consecutively over the past 3 trading days. Nearly 6-times the total number of shares issued by the company had been traded. Today, January 3, 2005, the stock had a pre-market volume of over 2 million shares and opened up at $2.00/share, up 21%. After trading another 48 Million shares throughout the day, the stock closed the day at $2.01. Most of the trading took place between a window of $1.97 and $2.04. So how does stock trade 2-times outstanding and not move? Do we really think these trades will all settle? Count on Horizon being listed as a threshold security on January 10, 2005.
Finally, we will come to Biopure (NASDAQ: BPUR). This Cambridge Ma. based company has struggled recently to survive. The NASDAQ is threatening to de-list the security due to their inability to meet minimum pricing requirements of $1.00/share. Biopure has slipped in their FDA approval timeline and thus their financials are behind as well. Recently they entered into a financing agreement with Institutions and Private Investors that required significant stock dilution to raise Capital based on the low share values. Biopure is also reportedly on the “threshold list” circulating amongst Wall Street. The settlement problems they are encountering have resulted in possible de-listing and with the recent financing arrangement, excessive dilution to their stock and their investors. But the NASDAQ, who can’t enforce settlements, still considers de-listing. Only in America!
The lessons learned from spending millions of Federal dollars investigating and bringing to trial Anthony Elgindy has yielded little. In the end they will plea out Mr. Elgindy, in my opinion, for some bigger fish that will never come to fruition.
As for the SEC, they already sanctioned continued fraud when they allowed Wall Street to ignore the Securities Laws pertaining to trade settlements and grandfathered all past mistakes away when they released their new short selling regulations. They once again handed the “Confidential” information to the bad guys and said manipulate away!
In it all, it is Former FBI Agent Jeffrey Royers own words that is the most disheartening. His desire to quash securities fraud was fueled by his own losses. His method to quash the securities fraud – commit the act himself and make more suffer. Now there is a class act.
Starting January 10, 2005 look up those ‘threshold securities” and see if you too have been manipulated by a rogue system
For NYSE Securities log on to www.nyse.com/threshold and,
For NASDAQ, AMEX, and OTCBB Securities log on to http://www.nasdaqtrader.com/aspx/regsho.aspx
Happy Hunting.
Note: Anthony Elgindy and Jeffrey Royer have not been convicted of any crimes at the time of this writing. This reporting is based on court proceedings and testimony.
(Editor's note: This article is reprinted by permission from "Stockgate Today", which is hosted by http://www.investigatethesec.com/ . If you haven't already signed the petition there, do it today. This is not a recommendation to buy or sell any individual stocks. The Faulking Truth does not make individual stock recommendations. Our goal is to help make the stock market a fair system.)
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