The American Spectator

home
ADVERTISEMENT
The Investor
Print Email
Text Size

The Investor

Sold Short

By on 8.14.09 @ 6:07AM

The sad saga of Greg Manning.

The SEC recently enacted a permanent rule designed to curb the practice of naked short selling, which is when a short seller — who usually borrows a stock, sells it, and then buys it back at later date — fails to locate and borrow the stock. The SEC’s new rule requires short sellers to buy or borrow the stock within four days of execution. For many, the development is long overdue. But for Greg Manning, it is far too late.

The sad tale of Greg Manning and his homegrown stamp company, Greg Manning Auctions, sheds a human light on naked short selling and stock manipulation. Manning’s story is a classic feel-good tale of American passion and entrepreneurship that eventually leads to financial ruin and despair. 

Greg Manning founded the Greg Manning Company in 1961, which eventually established itself as one of largest stamp dealers in the world. In 1993, the company, renamed Greg Manning Auctions, went public under the ticker symbol GMAI, and in 1994 had revenues exceeding $25 million. The small company grew quickly, acquiring Teletrade and establishing an Internet price that drove up the price of GMAI by multiples. 

Then in 2003, Greg Manning Auctions entered into a business relationship that would someday haunt the company. It agreed to serve as the sole stamp supplier to Afinsa Bienes Tangibles, SA, a Spanish company that held and traded investments, including stamps. Later that year, Greg Manning Auctions reported record quarterly revenues of $34.5 and net income of $2.5 million.

In December of 2003, Afinsa and Greg Manning tightened their relationship, as Afinsa became the majority shareholder of Greg Manning Auctions after acquiring 68 percent of the company. It changed the name of Greg Manning Auctions to Escala in September 2005. Escala and Afinsa combined to make up the world’s third largest auction house behind Christie’s and Sotheby’s, and, in March of 2006, Citigroup proposed an approximately $1.8 billion IPO to Afinsa’s board of directors. 

Shortly thereafter, though, things went awry, and a series of suspicious events unfolded. Suddenly, Escala’s share price began plummeting in early May 2006. There were no significant public announcements, indicating that inside information may have been percolating below the surface. 

Then, on May 9, 2006, Spanish police raided the offices of Afinsa and arrested several employees for allegedly running a pyramid scheme, an allegation that has never been proven and vigorously denied. Spanish police apparently expected not to find any stamps that Afinsa claimed it held in its offices, but everything was physically present. The allegation was based on the fact that Afinsa sold stamp collections to investors, held them in its vault on premises, and guaranteed a minimum rate of return over a specific time period, at the end of which Afinsa would either purchase the collection back or sell to a third party based on the minimum return. Authorities alleged that the business depended on bringing in more investors, lest Afinsa no longer be able to guarantee the minimum rate. Alternatively, others claimed that Afinsa’s business model made it a financial institution, given the reliance on customer deposits.

Surrounding facts indicated that certain traders almost certainly knew of and traded on the information in advance, as the decline in Escala’s share prices preceded the raid of its parent company. Furthermore, on the same day as the police raid, class action lawsuits were filed against Escala, and on the following day, a Madrid law firm filed a petition in Spanish court that placed Afinsa into involuntary bankruptcy. The timing of the filings was highly suspicious given that they coincided with the raid.

Trading patterns of Escala stock also exhibited irregularities. For example, Escala had a small public float of shares.  Prior to the raid and eventual collapse of Escala’s share price, the stock price of Escala increased even as the number of shares shorted increased significantly and steadily — an odd combination that seemed to indicate confidence on the part of short sellers that a negative event loomed. This practice was exacerbated by the naked shorting. In May of 2006, there were 9,037,738 shares on deposit at the Depository Trust and Clearing Corporation, but only 1,521,984 of those were available in the public float to settle long and short sales. The rest were either held in cash, non-marginable accounts, or were already shorted. 

But suddenly May trading volume in Escala shares exploded to 97 million shares, up from 2.7 million the previous month. Most of the volume was traded over the course of 11 days, meaning every single share would have turned over multiple times in this period — a virtual impossibility — and failure to deliver transactions rose to 57.2% of the May shorts. With millions of shares not delivered, significant evidence existed that short sellers were not borrowing for legitimate delivery and were manipulating the stock price downward. The practice also created “phantom shares” of stock, which artificially increased the public float and put further downward pressure on the share prices.

Short sellers had targeted Escala’s share before, but not nearly to the same degree. In 2004, Neil Martin of Barron’s wrote a critical article about Escala’s financial position, saying that Escala’s success may have depended too heavily on parent company Afinsa, which was also Escala’s biggest customer, and that short sellers were bearish on the company. 

Interestingly enough, Congress issued a report in 1991 on short selling in which it stated that the publication Barron’s was used by short sellers to spread negative information about companies.  Louis Corrigan from Kingsford Capital, a hedge fund with heavy short positions, also reportedly told Spanish authorities that Afinsa was a fraudulent company. 

Following these reports and protests by Escala, the brokerage firm Oppenheimer looked into the company and reported on November 29, 2005 that “two financial publications published false, negative stories on Escala Group, driving the shares down 25%. Based on our research, the implied allegations in the stories are false.”  It also said that “the articles of November 22 again imply that the authors worked in conjunction with these same hedge fund managers. The fact that both articles were published on the same slow news day further raises our suspicions.”

Escala reported possible manipulative trading to the SEC and NASDAQ, but neither launched an investigation.  In May of 2006, on the day that Afinsa’s office was raided in Spain, Escala’s shares lost the majority of their trading value and never recovered. 

In December 2006, Escala shook up its management and announced that it was restating prior earnings going back to 2003. In December and into January of 2007, the market for Escala shares again exhibited signs of potential manipulation, as volume exploded, along with fails to deliver.   

Page: 1 2  

About the Author

Brett Joshpe is an attorney and entrepreneur in New York City. He is Of Counsel to the American Center for Law & Justice and co-authored the book Why You’re Wrong About the Right (Simon & Schuster, 2008).

Letter to the Editor View all comments (81) |

iamse7en| 8.14.09 @ 10:58AM

So what's the moral of the story? Do you blame naked short selling for Manning's crushed dream? Perhaps he shouldn't have struck business with Afinsa.

Naked short selling communicated important information that something fishy was going on, that the business was overvalued for whatever reason. That information helped other investors get out before they lost all their money.

As Calabria at Cato put it:

"At heart, our markets, particularly our capital markets, serve as valuable aggregators of information, generally via the price mechanism. Speculators, including those holding a naked position, help bring new and valuable information to the market place. Recall it was the short-sellers who discovered Enron’s frauds, not the regulators or the rating agencies. Banning naked positions will only serve to reduce the information content of market prices, and also further entrench incompetent management."

JP| 8.14.09 @ 4:06PM

I agree with Iamse7en,

Short selling, even naked short selling does serve the public's interest. Short selling in general can unveil information about a company that management would rather hide from investors.

Hubbard| 8.14.09 @ 5:49PM

SEC Requests copy of financial film spotlighting stock market corruption
http://www.prlog.org/10282455-sec-requests-copy-of-financial-film-stock-shock.html
I saw "Stock Shock" and it was eye-opening.

Pingback| 8.14.09 @ 6:06PM

Valuable Internet Information » The American Spectator : Sold Short links to this page. Here’s an excerpt:

> Public Company > The American Spectator : Sold Short The American Spectator : Sold Short August 14th, 2009 Goto comments Leave a comment JP| 8.14.09 @ 4:06PM. Go here to see the original: The American Spectator : Sold Short Public Company even-naked, expenses, Finance, hide, iamse7en, its-own, medicaid, non-profit-cooperative, short-selling, some-critics, still-working, the-financial, these-reporting,…

Wake Up| 8.15.09 @ 11:00AM

iamse7en, using a mechanism that is illegal and immoral to curb behavior you believe is improper is like stealing from a store that charges to much. Naked Short Selling allows criminals to sell what they do not own and in some cases does not even exist. (You want to buy a bridge that does not exist?) Bloomberg explains it well,..in Phantom Shares,..great video. http://video.google.com/videoplay?docid=4490541725797746038&ei=Q82GSuPyO6bmqQLgpu2vAQ&q=phantom+shares

Richard Baker| 8.15.09 @ 12:43PM

So if selling short is bad, when are the liberals going to condemn George Soros? His entire fortune, it seems, is built on this practice. That's where he gets the money that he uses to fund the destruction of the system by which he becomes wealthy.

False information US Bankrupt| 8.15.09 @ 3:48PM

Peterson Hits Social Security Myths
September 27, 2000
Peter Peterson, former Commerce Secretary and founder of the Concord Coalition, lamented in the New York Times this week that in the coming election "what poses for debate on entitlements may be worse than no debate at all. The bidding and one-upmanship on the campaign trail could easily lock the new president into indefensible positions that block genuine and badly needed reforms."

"Why is there so little understanding of the long-term challenge? Two big myths are anesthetizing our judgment: Myth No. 1: Social Security is in good shape because it has a trust fund. We are often told that the trust fund will keep the system solvent until 2037 if we do nothing and, if we make some minor tweaks, it will last until 2075. Who could get excited over such a distant danger?

"What we are rarely told is that the trust fund is fiscally and economically meaningless, an accounting fiction; this money has already been spent. Its so-called assets are nothing but a stack of IOU's from the Treasury. By 2015, Social Security's annual costs will start to exceed its tax revenues by ever ballooning margins.

"Because this is a pay-as-you-go system, Congress would then have to raise taxes, cut other spending or borrow from the public to redeem the IOU's -- precisely as if there were no trust fund -- or else take a heavy hatchet to Social Security and Medicare at the very moment the huge boomer generation is moving into its elder years.

"Some argue that we can use the projected budget surpluses to pay off the IOU's. Alas, this isn't possible. The surpluses themselves may not materialize. For one thing, an economic downturn could easily turn the surpluses into deficits in just a few years. For another, the budget projections assume, implausibly, that discretionary spending will not grow faster than inflation -- in spite of major new commitments to defense and education.

"If the surpluses do materialize, much of the money is likely to be spent. Gluttons don't often turn down a free lunch. Presidential candidates and members of Congress rarely withstand the temptation to give away surpluses by increasing spending or cutting taxes. There's much talk of putting a "lock box" on the surpluses. But no one has yet designed a lock box that Congress couldn't pick. Even if the lock box works, the money in the trust fund is but a small down payment on future obligations.

"Myth No. 2: The New Economy will allow us to grow our way out of the problem. According to this myth, official projections, which point to a gradual slowdown in economic growth, are too pessimistic. The critics confuse pessimism with arithmetic. Economic growth depends not just on growth in productivity, that is, output per worker, but also on rising numbers of workers. By the 2020's, the labor force will be growing only about one-tenth as fast as in the last quarter century. Given the demographics, it would fly against all logic if economic growth did not slow.

"A better question is whether the official projections are too pessimistic about the growth in productivity. But keep in mind that even a huge boost in productivity won't do much to reduce Social Security's burden. According to Alan Greenspan, the Federal Reserve chairman, eliminating Social Security's long-term deficit would require a 200 percent increase in long-term productivity, a leap that few economists, even new economy enthusiasts, believe is possible.

"Our leaders face a choice. They can address the question of entitlements for the elderly while the economy is still booming and the budget is in the black, and before most baby boomers retire. Or they can delay until the window of opportunity closes. Either way, America will change course. If we act now, everyone, young and old, will have time to adjust and prepare."

2001 Index | 2000 Index | 1999 Index | 1998 Index

The Ghost US Government| 8.15.09 @ 4:03PM

Government behind a government, a puzzle within a puzzel, and a myth within a myth. The lie behing the truth and the truth behind the lie.

The deciete infront of the deceiver, the war within a war, the death and dying walking and the mentally dead fighting in the same war, within a war. Killing and dying none know why they they are dying, and none know for what it is they are fighting for.

A country that exist in fear, and a government run by fear, and a people in terror. The terror is of a terrified government, forcet to lie, about a lie, and a truth about a lie. Sept 11th the Jewish plot to take over America and the world.

Nick| 8.15.09 @ 5:31PM

Short selling is a legitimate trading tool, when employed within the legal parameters established to protect the companies being shorted from manipulation by predators, be them speculators or competitors.

Naked shorts create fraudulent, counterfeit shares! As with counterfeiting cash, it is stealing, there are no gray areas here. Any school kid can understand if the number of shares issued are less than the number available for trade, that is proof positive that rules that dictate short selling are being broken, which is the real information for regulators to rely on that something is seriously wrong, and not with the company but within the system that is being fraudulently manipulated for ill-gotten gain and/or financial sabotage.

The market’s DNA is based on supply and demand. That ratio is part of the determining factors dictating stock value. The artificial imbalance created by counterfeit stocks resulting from uncovered shorts will adversely and artificially effect the value of the stock, further eroding legitimate stockholders valuation as well as eroding general consumer confidence in the system and the regulators ability or intent to legitimately protect the companies, investors and the market as a whole.

Wayne Jett | 8.15.09 @ 5:38PM

Thank you for this coverage of financial fraud known as naked short selling. The destruction of Greg Manning's company was accomplished by means similar to tactics used to destroy several thousand additional companies, including several very large firms during 2008. For example, Bear Stearn, Fannie Mae, Freddie Mac, Lehman Bros., IndyMac, Washington Mutual and others were brought down by tactics enabled by the SEC which included naked short selling of millions of phantom, counterfeit shares. General Motors, General Electric (once stated to be the world's largest industrial company) were attacked by the same methods.

A Canadian financial firm called Fairfax Financial Holdings (FFH) traded on the NYSE and a NASDAQ company called Overstock.com have filed lawsuits against cabals of hedge funds for targeting their companies with destructive tactics including hatchet jobs printed by "independent research" firms and various financial reporters. Also, OSTK has sued about a dozen major brokerage firms for conspiring with the hedge funds to drive down its share price.

Financial fraud is at the center of what caused the financial events of 2008. Fraud is exhibited also in the commodities markets, as the unmonitored, "dark" markets in crude oil futures enabled trebling of the oil price above market levels. This robbed the middle class of trillions and destroyed economic growth worldwide.

Much more attention ought to be given to financial fraud. The SEC must be stripped of its power to shield Wall Street's big players from prosecution for financial crimes. Wall Street's inner elite dominate federal policymaking and thus have a choke-hold on the middle class. This must be countered and reversed.

bidrec| 8.16.09 @ 12:05PM

Spyro Contogouris mentions the case of Escala/Greg Manning in his threat to Fairfax Financial

"I will try to make this the most respectful letter I can under the circumstances. No doubt you are aware that these are very critical times for your former employer Fairfax Financial Holdings, Ltd . So I want this to be "fair and friendly" . . . . In this spirit, I am available to meet with you in London at your earliest convenience . I would like to lay out a series of maps, flow charts and related exhibits which I have put together that I feel are missing some critical pieces. Take just a minute, sit back and try to view what the world will look like for Fairfax and its former officers three years from now given the current level of regulatory scrutiny. Look to the lessons of Enron and most recently of Escala Group (NASDAQ :ESCL; I have attached the information at the end of this letter for your reference) . . . . I can help by
introducing you to a former highcould act as a confidential liaison with current regulators on your behalf to set the record straight and get to the bottom of this . . . . I indulge your attention to a recent witness in the Enron trial testifying that a certain research report led a high ranking executive to say aloud, "they're onto us!" I cannot help to speculate that a similar thought process may have played some part in your decision to move to London . . . . Please help me fill in the blanks . . . . I can be in London at your convenience over the next several weeks with all of my materials . . . . I will arrive with the aforementioned former Government person
who can speak to you with the highest degree of confidentiality .' "

http://securities.stanford.edu/1037/FFH_01/200695_o01n_064197.pdf pp. 55 56

cloggervic| 8.17.09 @ 5:16PM

iamse7en is confusing naked shorting with legal short selling. Legal short selling is necessary to balance the upside effect of buying on margin. The regulations in fact link the two in an attampt to create this balance, by stipulating that the only shares that can be borrowed by short sellers to sell short are those which have been bought with margin borrowing. (At least that what it should say, but the flawed rule allows 1.4 times as many shares to be lent to short sellers as have been bought with margin borrowing).

Naked shorting however has no balance on the buy side, and so is exactly what the plaintiffs say it is : Flooding the market with counterfeit shares and depressing the price. Any major player (like GS for example) who was caught doing that should simply have all their management jailed and the company nationalized. It's no different from printing your own $100 bills.

Pingback| 9.15.09 @ 5:19PM

Sold Short | links to this page. Here’s an excerpt:

Sold Short | Home Biography Articles Joshpe Real Estate Photo Gallery Contact Sold Short By brett | Comments (0) | Trackbacks (0) Please see my American Spectator article about naked short selling, stock manipulation, and the sad saga of entrepreneur, Greg Manning. Share/Save If you want to follow this post leave a comment below and continue the thread, or subscribe to…

Job Revell| 12.3.09 @ 10:12PM

Hopefully Greg Manning Company will has a chance to prosper, it has given us a lesson and valuable experience to carry on.
jump higher and Mp3 rocket pro

Pingback| 1.7.10 @ 3:03PM

Kingsford Capital And The Captured Media | LILA RAJIVA: The Mind-Body Politic links to this page. Here’s an excerpt:

…offices, using multiple cars to trail the executives, etc. I assume Kingsford Capital is one of his clients.” My Comment: I’ll make two points here. One:  The story that Escala was done in by abusive short-selling is contested. (Further note - the journalist contesting the story is one of the principal targets of the Deep Capture thesis of a captured media) Here is a rebuttal of the media (Barron’s)…

Kim| 3.19.10 @ 9:38AM

Now, It becomes easy to buy/renew av Wildcard SSL Certificates through ClickSSL.com

Jenny Brady| 5.10.10 @ 8:26AM

Warning Tape, Cable Protection Cover, Scaffolding Tag, Warning Marker, Warning Board, Caution Tape, Tape tile, Detectable Tape & More.

Business Reviews | 6.30.10 @ 3:24PM

Fascinating.and I agree in the most part. Keep up the good work.I will undoubtedly be back shortly
Cheap Seo Services | Financial Performance Indicators

Golden Finance | 6.30.10 @ 3:24PM

I was very encouraged to find this site. I wanted to thank you for this special read. I definitely savored every little bit of it and I have you bookmarked to check out new stuff you post.
Info Beasiswa | News Techno

Personal Finance | 6.30.10 @ 3:25PM

Thanks for an honest and truthful post, the like of which is surprisingly rare and all the more valuable for it. Regards,
Wii Reviews | Debt Sentlement

Dreaming Art | 6.30.10 @ 3:27PM

I definitely enjoying every little bit of it. It is a great website and nice share. I want to thank you. Good job! You guys do a great blog, and have some great contents. Keep up the good work
2fanonline | Exotic Destinations

cinta laura| 11.21.10 @ 6:10AM

The first step of short selling involves contacting the bank's loss mitigation division. When mortgagors start behind with loan payments their statement is assigned to a loss mitigator.Beard Trimmer

More Articles by Brett Joshpe

More Articles From The Investor

Farrell’s Fallacies

May 9, 2013 | Ross Kaminsky

Alice’s Stock Market

June 15, 2012 | Ross Kaminsky

Sell First, Ask Questions Later

November 10, 2011 | Ross Kaminsky

Globalize Your Portfolio!

September 15, 2011 | G. Tracy Mehan, III

The Fed’s Philosopher King

August 25, 2011 | Victor Sperandeo

http://spectator.org/archives/2009/08/14/sold-short

ADVERTISEMENT

Latest Headlines

Real Immigration Reform Requires Free Markets

Ross Kaminsky|79 comments

Enough With the Bipartisanship

Matt Purple|40 comments

The United States of El Norte

Larry Thornberry|55 comments

Vodka = Vodka = Vodka

Daniel J. Flynn|79 comments

Laying Down My Pen

Quin Hillyer

Tornado Chasers

Claire Healey|32 comments

We Will Remember

Roger Kaplan|25 comments

The Chinese Waltz

George H. Wittman|2 comments

The Spectacle Blog

Updated: NBC News: Holder Personally Approved Fox Reporter Warrant

Ross Kaminsky | 3:45PM

Felonious Attorney General?

Kaylin Bugos | 3:21PM

Did the Boy Scouts Cave to Pressure?

Claire Healey | 3:14PM

BBC World Survey Ranks Israel Near Bottom in Global Popularity

Aaron Goldstein | 12:36PM

Obamacare is a Big and Growing Problem for Democrats

Ross Kaminsky | 11:03AM

Stein on IRS Scandal

Patrick Ryan | 10:29AM

The Restricted Engine

Yogi Love | 6:00AM

Muslim, Er, Youth Riots in Sweden

Aaron Goldstein | 12:41AM

SPONSORED LINKS

FLASHBACK TO: 1995

Clip of the Day

H/T to National Review Online

Most Popular Articles

Time to Go for the Kill

Peter Ferrara | 5.22.13

Obama and the IRS: The Smoking Gun?

Jeffrey Lord | 5.20.13

#FreeKate? Movement to Normalize Pedophilia Finds Its Poster Girl

Robert Stacy McCain | 5.23.13

The Inoperative Jay Carney

Jeffrey Lord | 5.23.13

Damage Control for Dummies

Matt Purple | 5.22.13

Holding AWOL Obama Accountable

Betsy McCaughey | 5.23.13

Obama’s Assault on the First Amendment

George Neumayr | 5.22.13

Obama's Imbroglios

R. Emmett Tyrrell, Jr. | 5.23.13

ADVERTISEMENT

Home |About |Contributors |Advertise |Donate |Privacy Policy |Contact

The American Spectator Foundation is the 501(c)(3) organization responsible for publishing The American Spectator magazine and training aspiring journalists who espouse traditional American values. Your contributions are tax deductible to the extent permitted by law. Each donor receives a year-end summary of their giving for tax purposes.

Copyright 2013, The American Spectator. All rights reserved.