On October 31st, 2012, VirnetX (VHC) and Apple (AAPL) will get down to business in an East Texas U.S. District courtroom in a patent infringement trial, with each company's respective legal eagles trying to convince a jury why their client is right. VirnetX sued Apple, alleging infringement of multiple patents by multiple Apple products. As this date approaches, it is interesting to note, there is an enormous and growing short interest betting against VirnetX. As of 9/14/2012, there were a reported 16.8M shares short which is nearly 40% of the free float. This number is up nearly 3M from the 7/13/12 reporting period.
Based on my experience, when there is such a large short interest and a relatively significant binary event imminent, there can be unusual information flows that can give the appearance of being coordinated or timed. Below are some examples of what I'm referring to that happened in July of this year taking VirnetX's stock price from an intraday high of $41.93 to an intraday low of below $22 in just 10 trading days.
July 12th - Mitel settles and signs patent agreement with VirnetX.
July 16th - VHC hits a new intraday high of $41.93.
July 18th - Jim Cramer of CNBC declares VHC a "buy."
July 23rd - Herb Greenberg of CNBC airs a segment called "hidden risks of VirnetX"; states the CEO controls 18.8% of VHC shares with "most pledged against some kind of an obligation." He also mentions a "negative twist to the Apple complaint."
July 24th - VirnetX issues press release saying the Administrative Law Judge assigned to the ITC case identified a procedural discrepancy in VirnetX complaint.
July 24th - VirnetX files Schedule 13D detailing CEO's pledged shares situation (6.853M shares worth $160M pledged against a $5M loan).
July 25th - Herb Greenberg of CNBC publishes "Part 2: Hidden Risk At VirnetX?"
July 26th (1:19pm Est) - flyonthewall.com publishes "VirnetX mentioned cautiously on a SeekingAlpha blog"
July 26th (2:18pm Est) - flyonthewall.com publishes "VirnetX tumbles after columnist says stock overvalued" about the SAME article.
Note: I have not seen flyonthewall.com pick-up other Seeking Alpha stories - 15 minutes after being published?
July 27th - Stock hits intraday low of below $22 per share.
August 3rd - VirnetX issues press release that NEC settles and signs patent agreement with VirnetX.
August 7th - Seeking Alpha publishes "VirnetX: Do You Believe In Fairytales? Part 2" by the same disclosed VHC short seller as part 1 (now using the pseudonym "Value Bulldog") - timed perfectly after another VirnetX settlement announcement.
Now fast forward to October 8th - a mere 21 days before the VirnetX and Apple trial is scheduled to begin - Herb Greenberg of CNBC reports that brokerage Craig-Hallum downgrades VirnetX to a "sell" but that isn't the best part - he announces that Craig-Hallum is also dropping coverage.
Huh? Come Again? They are downgrading to "sell" AND dropping coverage? 21 Days before the trial starts!
Why does the Craig-Hallum analyst (Jeff Van Rhee) need to downgrade VirnetX to a "sell" if the brokerage is dropping coverage? I think this is unusual - at least I have never heard of that being done. In Van Rhee's note posted here on Investor Village - The first sentence says: "Due to an analyst departure, we are taking over coverage of VirnetX and simultaneously reducing our rating to Sell and dropping coverage."
The analyst that used to cover VirnetX for Craig-Hallum was Robert Tango - he left Craig-Hallum 5 months ago and joined Gilford Securities in May of 2012 - by the way, Mr. Tango has a $65 price target on VirnetX.
I am not saying there is a large conspiracy at work nor am I accusing anybody in this article of doing anything illegal - but sometimes I just have to scratch my head, tune out the noise, and trust in the due diligence I have done on my investment in VirnetX.
Financial information sourced from FinViz, Nasdaq.com, and Stockcharts.com.
Disclosure: I am long VHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE. I do not short stocks nor do I invest in options.