Monday, August 25, 2008

AgFeed (FEED) Addresses Naked Short Sellers - Stock up 17%

AgFeed (FEED) is a small cap Chinese company that today took an unusual step. It's 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 4 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 their 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.

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