A short squeeze was at the center of a recent SEC complaint brought against well known investment adviser Philip Falcone. SEC v. Falcone, 12 Civ 5027 (S.D.N.Y. Filed June 27, 2012). There the Commission alleged that Mr. Falcone purchased the float and more for an outstanding security so that he could force the short interest holders against whom he had a grudge to buy from him to cover – a short squeeze. The shorts came and were forced to pay monopoly rents. The plan worked, with one small glitch – Mr. Falcone was named as a defendant in a Commission fraud complaint.
Now the Commission has filed another complaint centered on a short squeeze. In this case however the manipulative technique was going to be used by the investors. Yet in the end the investors became the victims of another manipulative technique called scalping.
Jerry Williams moderated a popular stock trading discussion website known as the Monk’s Den. Over time he developed a large group of followers who often implemented his trading suggestions.
In 2009 Mr. Williams began touting a trading technique he called “Float Lock Down.” The strategy called for a group of investors to take advantage of market makers in penny stocks by purchasing the float and holding it. This would squeeze market makers who supposedly were naked shorts. In essence, the Float Lock Down was a short squeeze. Mr. Williams recommended two candidates for this technique. On was Cascadia Investments, Inc. The other was Green Oasis Environmental, Inc. During 2010 he promoted this approach on the Monk’s Den and at in person seminars he conducted.
Investors were not told that Mr. Williams had been hired by Cascadia and Green Oasis to promote their stocks. The two companies paid him with millions of free or heavily discounted shares. As his followers executed the Float Lock Down, Mr. Williams employed another manipulative technique – scalping. As his followers bought and held the securities of the two companies, Mr. Williams sold his shares netting him profits of over $2.4 million.
Mr. Williams utilized the same approach with a fund he helped created called the U.S. High Performance Fund. As its investment adviser Mr. Williams bought several thousand shares of Green Oasis for the fund as part of a claimed Float Lock Down. From his personal account, however, he sold shares of Green Oasis for his personal profit.
The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. SEC v. Williams, Case No 3:12-cv-01068 (D. Conn. Filed July 20, 2012).