LDK Solar: The Naked Shorting Crime 28 comments
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Recent experiences have demonstrated to me the realities of a crime.
The crime is that of the naked short selling of stocks for the purpose of market manipulation (yes, it is actually a crime).
Case in point: LDK Solar (LDK).
In brief, allegations were recently made against the company by a former accounting controller. In the first ten days of trading upon the release of this claim, approximately 152 million shares changed hands. It should be noted that the company was still in IPO lock-in, and so the only shares on the market available for trade added up to around 17 million shares. Now, perhaps in the chaos, shares were traded through an average of 9 times each in the first 10 days, but since the ticker appeared on the naked short threshold list on October 16th, we do know that at least some of the shares were not being delivered due to naked short selling. As of 12/21/07, LDK remains on the naked short threshold list.
Now, naked shorting of stocks "by market makers engaged in bona fide market making" is not illegal or unethical. However, "selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price" is, indeed, illegal and unethical (see here).
It should be noted that in the process of naked shorting a stock, dilution of the shorted stock occurs due to the introduction of virtual shares (fails) into the system by the naked short seller. According to the SEC, "the value of a stock is determined by the basic relationship between supply and demand. If many people want a stock (demand is high), then the price will rise. If a few people want a stock (demand is low), then the price will fall." Well, this seems pretty obvious, but it should be reiterated. Public companies are required to follow guidelines when altering the number of shares available for trade (dilution), because to do so alters the "supply" side of the equation. It is in the Investor's critical interest to have access to information regarding the "supply" of a stock that they would like to purchase. However, information on the level of dilution of a stock due to naked short activity is not available to the public. Thus, in the case of the purchase of a stock that is listed on the naked threshold list, the investor has no way of knowing how many shares of a stock are outstanding, and thus has fundamentally no way of making an informed decision on an appropriate value for the stock.
The case of LDK is a convoluted one, and has not yet entirely concluded. However, it is a demonstration of the issues surrounding the naked shorting process, and it should be investigated, both from a law enforcement perspective, and from an ongoing market regulation perspective. As an investor in this company, do I not have reason to expect information on the number of shares of stock available for trade? I believe that I and other investors should very much be able to expect that this information is made public on some basis by the DTCC.
Disclosure: Author holds a long position in LDK
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This article has 28 comments:
Dear Bill,
I was astonished to see how biased and full of dirt you could be in your latest article on LDK. I think you do not read any other news than barrons since you do not know the difference between self acquittal and audit by Big Four firms. Is this attack to justify your opinion on LDK in october which was proved to be wrong recently? I believe that as an editor at once reputed Barrons you should keep your biased opinions to yourself and rather write some unbiased articles showing us facts rather than using your imagination and being paranoid. If you want to post your personal opinions, you can start a personal blog against LDK. I even have a title for you in my mind "How LDK pissed me off by being Right". You seem to blindly believe in Situ rather than a reputed firm. Can you please enlighten LDK investors by giving a solid reason for that rather than basing your articles on some vague sources. I must also warn you that you might be testing the patience of investors who are being hurt by your sensational one sided journalism. If you do not stick to facts and reality you might be required to divulge your sources in the court of law in the very near future.
thanks
Happy Holidays!
You say that "real investors base their decisions off the facts," which is something I would agree with. Really, all that this article is requesting (it was originally written as a letter) is for the facts of the number of "fails" to be provided to the investor by the DTCC. Without this information, the dilution of the stock is unknown, and the investor is lacking knowledge on a crucial component of the supply/demand equation. Help us out; write to the SEC and your Congresspeople.
c.) PROTECTED OPINION
asensio.com reports contain opinions and contain no statements of fact. All of the statements published by asensio.com constitute written opinions and are not provided to assist any individual or entity in making any investment decision.
Asensio is on the wrong side of this one, and looks to be trying to avoid a squeeze.
The best judge of a company is its customer base. LDK probably got a better client list, and contract string than any other company in the solar sector. And it is safe to assume that these client companies have checked out LDK better than anybody else.
And in the future, if there is a polysilicon supply crisis, then the other compaines in the solar sector will probably suffer more than LDK, because firstly, according to reports, LDK is located in a province rich with Silicon ore, and secondly LDK is building its own polysilicon plant, and has hired the US company Fluor corp. for that purpose. Thanks.
www.informedinvestors....
he worked for a hedge fund in past!!!
Mr. Alpert began his journalism career as a general assignment reporter for the Hudson Dispatch in Union City, N.J., where he worked from 1981 to 1982. He first joined Barron's as a staff writer in 1984. He resigned in September 1988 to become a stock analyst at a research-oriented hedge fund. He rejoined Barron's in 1996
@gull island: Buzz off and let the smart kids talk, shill. Long positions take a long time to sort out. It's why they're called long positions. Try dictionary.com.
From the available data, there is a very strong possibility that LDK is very good company having great growth potential, supported by the fact that some dominant companies in the solar field are becoming their customers. People who bought their stock, they might have bet on the right horse, and now they have to protect their lunch from getting eaten by thugs, by fighting untrue and unfair publicity !! Let's squeeze them hard !!!
Congrat to you guys; if you made money on the short side by timing the trades; but for each of you there are hundreds of my and my friends' brothers and sisters who invest only on the long side. They choose the horse by doing their homework. I hate to see them lose money to the thugs, who use lies, and manipulations to create a psychology of fear.
It has been claimed and I quote from Bill Alpert's Barrons' Article:
"What dismayed investors were September-quarter gross margins of 30.8% -- down from 35% in June and 39% in 2006. Piper Jaffray's Jesse Pichel noted that LDK gross margins were still an inexplicable 10 percentage points above those of peer ReneSola (SOLA). LDK inventory is turning just 2.2 times a year. Pichel downgraded the shares to a Sell with a price target of 34.50."
In summary the answers to why RENESOLA's margins are 10% points lower than LDK are found in RENESOLA's press releases and financial statements. The difference is in the technology. Majority of RENESOLA's solar wafers produced up to 3rd Qtr of 2007 are monocrystalline wafers while LDK's are MULTIcrystalline wafers. Why would this difference account for LDK's margin's being better?
First, RENESOLA in their IPO papers stated and I quote from
www.buchanan.uk.com/cg......
"In early 2007, the Directors intend to commence the installation of 15 multicrystalline furnaces, which each have a capacity in excess of 2,400 kg per month. Multicrystalline furnaces are more energy efficient than monocrystalline furnaces and require a lower grade of polysilicon which would improve the yield from ReneSola's raw materials."
What happened since then? Did RENESOLA achieve full capacity production yet on cheaper and more efficient Multi-crystalline solar wafer production? The answers are in RENESOLA's 3rd quarter ER. www.renesola.com/inves......
"ReneSola commenced the installation of multicrystalline furnaces in September following the delivery of the coated crucibles. 15 multicrystalline furnaces, with a combined manufacturing capacity of 75 MW, have now been delivered and installed and are in initial production. The remaining 17 furnaces will be delivered and installed, as planned, by the end of 2007."
If you use your brains, then you would see that majority of RENESOLA's products were still made using the less efficient mono-crystalline methods and they are just going on-stream with Multi-crystalline production in 4th Qtr of 2007. RENESOLA is just playing catch up to LDK and are aware their margins are lower hence their decision to switch to the more efficient production of multicrystalline wafers.
JASO dropped about 3%
SPWR dropped 1.5%
SOLF dropped 0%
TSL dropped 3%
STP dropped 0% and
LDK dropped 35% !!
But we know the inner story which you won't find on the headlines.
So, please keep digging for the truth . Happy holidays !
“In order to facilitate the offering of the ADSs, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the ADSs. Specifically, the underwriters may sell more ADSs than they are obligated to purchase under the underwriting agreement, creating a short position…
The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position….
A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market after pricing that could adversely affect investors who purchase in the offering.”