Groupon and the Naked Short:
I became interested in Groupon(NASDAQ:GRPN) when a fellow SA member (Brent Atwood) posted a StockTalk on the subject of GRPN being naked shorted. You can Google his name and a cached version of his StockTalk will appear. When originally reading his article, I thought that he was one of those conspiracy wackos. Over the course of time it became very apparent that he was correct in his assessment of the naked shorting on GRPN.
Before I address Naked Short selling and how it relates to GRPN, let's review a few items.
"Naked short selling is a case of short selling without first arranging a borrow. If the stock is in short supply, finding shares to borrow can be difficult. The seller may also decide not to borrow the shares, in some cases because lenders are not available, or because of the costs of lending. When shares are not borrowed within the clearing time period and the short-seller does not tender shares to the buyer, the trade is considered to have "Failed To Deliver." Nevertheless, the trade will continue to sit open or the buyer may be credited the shares by the DTCC until the short-seller either closes out the position or borrows the shares.
It is difficult to measure how often naked short selling occurs. Fails to deliver are not necessarily indicative of naked shorting, and can result from both "long" transactions (stock purchases) and short sales. Naked shorting can be invisible in a liquid market, as long as the short sale is eventually delivered to the buyer. However, if the covers are impossible to find, the trades fail. Fail reports are published regularly by the SEC and a sudden rise in the number of fails-to-deliver will alert the SEC to the possibility of naked short selling. In some recent cases, it was claimed that the daily activity was larger than all of the available shares, which would normally be unlikely." - SEC Chairman Christopher Cox
Make no mistake about it, naked shorting is the equivalent of counterfeiting. People that naked short an equity are essentially selling something they don't own. FTD's may go unsettled for an indefinite time. Thus, an equity may have a fixed float, but in reality may have a massive amount of fictitious shares being traded. These counterfeit shares wreak havoc on a company's shares.
Diluting existing shareholders.
Suppressing the natural bid/ask, placing enormous downward pressure on a stock.
Destroys a company's ability to grow by preventing it from accessing capital via acquisitions, employee compensation, hiring new talent, etc.
Many sources have indicated that hundreds of companies that have went bankrupt due to naked shorting.
So what do the big players in the industry have to say on the matter?
"...when someone fails to borrow and deliver the securities needed to make good on a short position, after failing even to determine that they can be borrowed, that is not contributing to an orderly market, it is undermining it. And in the context of a potential "distort and short" campaign aimed at an otherwise sound financial institution, this kind of manipulative activity can have drastic consequences"
Shocking huh? Of course let's not ignore an un-redacted document that Goldman, BoA/Merrill Lynch lawyers accidentally released in their legal proceeding with their Overstock lawsuit.
"We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them." - Thomas Tranfaglia former Merrill Pro president 2005 email"
Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. "We have to be careful not to link locates to fails [because] we have told the regulators we can't," - Goldman executive"
"Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of "failing" trades - in other words, not bothering to locate, borrow, and deliver stock within the time allotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, "We will let you fail."
""*uck the compliance area - procedures, schmecedures" - Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales."
Now from the infamous Universal Express legal proceedings, in which Universal Express received a Florida jury verdict in excess of $700,000,000 against "naked shorters", after which the SEC proceeded to throw the legal book at Universal Express.
"The SEC has permitted billions, if not trillions, of unregistered and counterfeit shares to be sold in the name of companies by brokers and dealers. Those shares are never delivered to ordinary investors, thus destroying the investments of these investors and their retirement savings. This further dilutes and destroys the market value and stock prices of thousands of companies, forcing them to downsize or go out of business and thus resulting in the loss of jobs for tens of thousands of their employees. In addition, trillions of unpaid tax dollars are not being paid to the government which, if paid, would have eased the tax burden on all ordinary taxpayers and have paid off most of our National Debt."
My research on GRPN and whether or not there's any naked shorting occurring, began with the SEC and FINRA. The SEC publishes any Failure To Delivers (FTDs) at their website here.
Notice that on a single trading day (05/14/2014), there were over 2.4 million GRPN transactions that generated an FTD. The is not 2.4 million shares. Its 2.4 million FTDs!!! Thus, if we assume the average transaction was 100 shares, one can conclude there were conservatively 240 million shares that that went short GRPN. How's that even remotely possible? Its not. I have also listed FTD's for peers and also for larger corporations for comparison.
SETTLEMENTDAT SYMBOL QUANTITYFAILS PRICE
20140514 GRPN 2402337 6.33
20140501 COUP 32356 16.82
20140507 SALE 34848 30.18
Compare GRPN to some of the titans in the industry.
SETTLEMENTDATE SYMBOL QUANTITYFAILS PRICE
20140506 AMZN 20669 310.05
20140507 INTC 105960 26.20
This is so blatantly obvious, you may wonder what why the SEC doesn't do something about it? Their normal response is to state that 99% of all trades are legal and thus, it would make no sense implementing a fail safe mechanism to prevent naked shorting. Well my friends, that 1% equates to billions of dollars annually that is coming out of your pension, 401K, tax dollars, etc. Now, you might be thinking one data point doesn't make a trend or pattern. So I decided to rewind the tape and access the archived data that the SEC provides on their site.
SETTLEMENTDATE SYMBOL QUANTITYFAILS PRICE
20140218 GRPN 22894 10.51
20140219 GRPN 31282 10.26
20140220 GRPN 69858 10.02
20140221 GRPN 452 10.29
20140224 GRPN 26451 8.04
20140225 GRPN 2278 7.78
20140226 GRPN 9941 8.41
20140227 GRPN 15948 8.26
20140228 GRPN 22943 8.52
20140501 GRPN 7871 6.99
20140502 GRPN 18035 7.08
20140505 GRPN 68617 7.09
20140506 GRPN 22921 6.89
20140507 GRPN 9000 6.72
20140508 GRPN 16913 5.33
20140509 GRPN 29876 5.66
20140512 GRPN 5206 6.05
20140513 GRPN 9279 6.15
20140514 GRPN 2402337 6.33
20140203 GRPN 2198 10.46
20140205 GRPN 49438 10.51
20140211 GRPN 39795 11.08
20140213 GRPN 20754 10.49
20140214 GRPN 32566 10.76
20140115 GRPN 39435 11.41
20140116 GRPN 20015 11.04
20140117 GRPN 8550 10.98
20140121 GRPN 32613 10.84
20140122 GRPN 4116 10.95
20140123 GRPN 11471 10.75
20140124 GRPN 822 10.64
20140127 GRPN 495748 10.28
20140128 GRPN 111134 10.00
20140129 GRPN 7628 10.52
20140130 GRPN 21845 10.43
20140131 GRPN 918 10.87
20140103 GRPN 7605 11.85
20140106 GRPN 3393 12.08
20140107 GRPN 12886 11.89
20140108 GRPN 10369 11.88
20140109 GRPN 61339 11.78
20140110 GRPN 17918 11.44
20140113 GRPN 86694 11.56
20140114 GRPN 143456 10.98
What happens when the market doesn't comply with the naked short? You keep printing fictitious shares and naked short them. This was the case at the end of December. Keep in mind the highlighted items below of totals 610,000 FTD's, not shares!!! A modest 60 to 100 million shares naked shorted.
SETTLEMENTDATE SYMBOL QUANTITYFAILS PRICE
20131216 GRPN 16493 10.24
20131217 GRPN 40344 10.36
20131218 GRPN 4409 10.66
20131219 GRPN 289413 11.27
20131220 GRPN 1459 11.65
20131223 GRPN 1679 11.67
20131224 GRPN 6639 11.82
20131226 GRPN 321338 11.84
20131227 GRPN 2040 11.99
20131231 GRPN 12512 11.33
What is causing all of these FTD's to occur with GRPN? Obviously it has to do with people shorting the stock when there are no available shares to short. You might then ask yourself, why does the SEC allow a company to be shorted when there are no shares to be shorted, as proven by the millions of FTDs being generated by GRPN?
I believe there are certain entities that are pulling the strings on GRPN's share price. How does it work? Follow me on this. Imagine if there were X number of available shares of the float that are lended out to be shorted. What would happen if a trading house knew exactly how many shares to short before it would generate an FTD? Well, if I was that trading house, I would take a large 'legal' short leading up to a companies earnings. This position would not trip any FTD's. However it would be very close to that threshold. Then, when earnings came out, they could infinitely click on the naked short button. This would trigger massive amount of selling pressure on the stock. Let's be clear, that selling pressure is coming directly from counterfeited shares - they have not been backed up by real shares. Thus, when the share price gets hammered into oblivion by the naked shorting, they can cover their original short positions and make millions in illicit gains.
GRPN's short volume is amazing. It's taking a massive pounding from an entity that doesn't want to let the FTD threshold go away. FINRA's website also supplies daily short volume on GRPN.
Date Symbol ShortVolume ShortExemptVolume TotalVolume
20140602 GRPN 5686752 9927 15453413
20140530 GRPN 2933227 3800 5150880
20140529 GRPN 3037525 400 7275941
20140528 GRPN 2276850 126391 4327649
20140527 GRPN 1083153 145900 3220177
20140523 GRPN 1648783 4557 4349989
20140522 GRPN 2785701 1415 5247299
20140521 GRPN 3216925 700 8278955
20140520 GRPN 1804583 0 4349387
20140519 GRPN 1419070 483 3138725
20140516 GRPN 1063884 3830 2331999
20140515 GRPN 2210260 8715 4880987
20140514 GRPN 4879994 4599 8096806
20140513 GRPN 2549757 98835 4764039
20140512 GRPN 4335150 121117 7411188
Call to Action
Have you ever flashed a light in a dark cupboard? Only to see the cockroaches scurry into the shadows? That's what GRPN needs. It needs everyone to understand what is happening to its stock. It starts with the SEC and FINRA. They need to investigate the millions of FTD's that are being generated from GRPN's daily trading activities. The SEC needs to develop a mechanism to sync up REAL shares that are loaned out to be shorted. Thus, a roll call can be made, to make sure the system can be purged of counterfeit shares. However, based on their reaction to Universal Express's initial jury awarded court victory, there's absolutely no chance that they will do anything. After all, bringing Naked Shorting into the limelight, severely damages the integrity of the markets.
The last two quarterly announcements saw GRPN drop an amazing 35% (from after hours high through the next days closing) and another whopping 20%. In both quarters, GRPN slaughtered revenue expectations by a country mile. Their earnings were a little light, but no where near to justify the brutal pounding the equity took.
So, the last thing you may be thinking. Why am I even talking about GRPN and Naked Shorts, if I have an extremely large position in GRPN? Because the downward pressure on GRPN is illegal. If it wasn't for the massive naked shorting, GRPN would be trading at a much higher share price. GRPN is growing annual revenues by more than 20%, has 11,200 employees and has a NET cash position of $1 billion. They are projecting significant EPS growth for the latter half of the year and CY15. Thus, eventually market forces will correct GRPN's share price. If it doesn't, they will go private or will be the target of a takeover.
Looking forward, I'm very optimistic about GRPN shares. Why? Because GRPN's forward guidance will exceed Quarter Over Quarter (QoQ) and Year Over Year (YoY) comparisons. Otherwise, fear mongering won't work, as EPS growth will be in full gear. The projected growth in EPS for GRPN will be the flash light that will vaporize the FTD's and the naked shorting of GRPN shares. This alone will liberate the share price to new highs.
Disclosure: I have a large position in GRPN. I'm also looking to add to my current long position. My 2 year price target for GRPN is $15.
Disclosure: I am long GRPN.
Additional disclosure: Plan on buying more GRPN