AgFeed Addresses Naked Short Selling

AgFeed (FEED) is a small cap Chinese company that today took an unusual step. Its stock is up 17%. Now someone might say this is due to their reiterating guidance, but as we have seen in this market, that means nothing. They bought four pig farms - again, I find that highly doubtful for a pop of that magnitude. But they put the naked short sellers on notice, and as those locusts scrambled away the stock is popping.

It is quite a sad statement really - again I don't mind, nor should any investor mind, when they make a bad stock selection or bad news comes out and their stock drops. But as I watch some of these stocks on the regulation SHO list sit hammered for months on end, and then I watch when a company actually drops a warning shot against the naked short sellers - to see how violently the stock reacts - this shows you how 'rigged' things are, in the small cap world especially. (although naked short selling can be done anywhere to any stock - it affects smaller names disproportionally) If you don't have institutional support on the long side you are just a plaything for certain "pools of capital".

I usually don't bother with these things and frankly have found most companies who comment on this sort of thing to be making excuses for bad execution. And maybe I am making excuses, but to see some of these small companies shoot lights out, and continuously retract in price, makes one scratch one's head. And why is a company like this gaining 1/5th of their market cap almost instantly just by saying these sort of statements?

• AgFeed has received numerous calls from concerned shareholders over the recent stock activity. AgFeed is not aware of any negative events that could impact its fundamental business or financial projections.
• AgFeed has noticed however significant discrepancies between the shares that appear to be listed the electronic DTC system and the shares that actually exist on the shareholder records held by AgFeed's transfer agent -- potentially as a result of heavy naked short selling in FEED. In contrast to an ordinary short sale where the seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price), in a naked short sale, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. Last month, the Securities and Exchange Commission (SEC) said that it wants to ban the practice of naked short selling, and it announced a temporary ban on naked short sales of certain company shares. The SEC said that the practice is sometimes used to manipulate the price of a company's stock. SEC officials said that this procedure may have been used to drive down shares of various companies' price. The seller continuously hits the bid price and seeks to buy back shares from nervous shareholders who may sell simply because of a declining market price.
• In this regard, AgFeed believes that it may be a victim of this practice and has duly notified regulators, including the SEC. Meanwhile, shareholders may contact their stock brokers and request that their stocks not be used to assist short sellers.
• Songyan Li, Ph.D., AgFeed's Chairman, commented: "Contrary to false market rumors, AgFeed's management and board members have not sold one single share of our stock. Our role as managers is to execute on our business plan and continue to deliver superb financial results. Our responsibility as corporate officers is to ensure that the best interest of our shareholders is protected and not continue to be hurt by stock manipulators. AgFeed is fully cooperating with regulatory agencies and shall provide full assistance in any possible investigation of these market manipulative actions."

Stock up big time on such news? Coincidence? I think not. But extrapolate this across hundreds if not thousands of little no-name companies that struggle to see the light of day - especially the ones executing - and one has to question why we are not allowed an even playing field. It seems only a blockbuster announcement, which leads to a rash of short covering at once, can shake these folks off.

Again - normal short selling = good. Useful. Needed. Naked short selling = against rules, but allowed since rules are not enforced.

Comments

[User 250624:]

Gentlemen,

Interesting article for once about short selling but as usual the writer mixes apples and pears an does not know enough to write about this subject (but at least it is being written about)

People who do naked shorting don't bother to follow the rules and borrow stock. There fore us honest folks who follow the rules don't stand a chance.

The writer properly states we can contact our broker to prevent them from loaning our shares.

a most clients sign margin papers when the account is open not to borrow on the purchase of securities but we have to sign them if we are to do option transactions. Once the papers are signed the broker does what he wants to and since he can make money loaning out shares your not wanting him to doesn't mean a thing to him.

Now on the other hand in your discussion on Naked shorting perhaps the writer will tell me if the seller doesn't even go out to borrow the securities how will it make a difference if we don't loan it out?

This is the problem facing Wall Street only the naked short sellers know what they are doing and the SEC needs a lesson on how this works and they are not about to tell the SEC spoil there little and highly profitable game.

Dennis Loeser
Dennis@LoeserandGetrou...

2008 Aug 25 02:47 PM

[User 33119:]

A serious question: What ever happened to the "BUY-IN" It was a regulation that if you " Failed to deliver" your sale (the security), whether a short sale or a long sale within a stated number of days, that security would be bought in by the Brokerage firm that made that sale in order to deliver the security to the firm that was the counter side in this case the buyer . any loss would be charged to the seller's account . I hope someone can shed some light on the "BUY-IN" in regards to the naked shorts. Thank you in advance.

2008 Aug 25 03:07 PM

[User 250728:]

TIME THESE GROUPS GO TO JAIL AND THIS OUTLAWED PERIOD!

2008 Aug 25 06:52 PM

[NOWHEREMAN:]

revert to the old "up tick" rule, this would hamper all current types of shorts.

2008 Aug 26 12:52 AM