July 15 (Bloomberg) -- A Wall Street trader said Cynk Technology Corp.’s 36,000 percent stock surge cost him his job, and he blames a short squeeze and regulators who didn’t halt the shares before the company’s value shot past $6 billion.
Tom Laresca, a market-maker at Buckman Buckman & Reid Inc., said he was among traders who thought they spotted a scam as the shares jumped to $2.25 last month from pennies. He sold it short last week around $6 -- which means selling stock you don’t own with a plan to buy it cheaper soon, pocketing the difference. Laresca figured the Securities and Exchange Commission would suspend trading, sending the price toward zero. Cynk has said it’s a social-network service with no revenue and one employee.
“The stock looked worthless, if there’s even a company behind it,” Laresca said. “My 10-year-old knew it was a scam. It was a complete joke.”
Instead of falling, the price more than doubled the next day, July 9, starting the squeeze. Market-makers who had sold the shares short got nervous and scrambled to buy them to close their positions, driving the price even higher, Laresca said. The SEC stopped trading two days later, citing concerns about the accuracy of information in the marketplace and “potentially manipulative transactions.” That was too late, Laresca said.
“When it goes from 6 cents to $16 and you haven’t done anything about it, I’m sorry but you fell asleep at the wheel,” he said. “Everybody knew it. How come they didn’t know it?”
Judith Burns, an SEC spokeswoman, declined to comment. Laresca said he resigned today after his firm cut his ability to hold positions. He declined to say what the trades cost.
“We temporarily restricted his trading activities,” said Tom Buckman, an executive at the Shrewsbury, New Jersey-based brokerage. “In the firm’s opinion, Mr. Laresca, who is a veteran trader, did not manage his Cynk Technologies position properly.”
A phone message left at Cynk’s corporate number wasn’t returned. The SEC didn’t accuse the company of wrongdoing when halting the stock.
Cynk’s price swings caught the attention of business television hosts, journalists, columnists, bloggers and Twitter pundits. As the valuation passed $5.4 billion, Wall Street blog ZeroHedge called it “pure madness.” That figure was based on the 291 million shares the company says are outstanding.
Only 500,000 of those shares were authorized to trade publicly, according to Cynk’s transfer agent, Pacific Stock Transfer. About $12 million of stock changed hands during the past month, according to data compiled by Bloomberg. The low volume meant that market-makers couldn’t find shares to cover their short positions, Laresca said.
“If you’re short, you have to buy it within five days,” Laresca said of market-making rules. “That’s what was driving the stock higher.”
While Cynk’s $6 billion paper valuation was unusual, spikes and crashes are common in the over-the-counter markets where it traded. Regulators bust alleged pump-and-dump scams there regularly. Many involve defunct companies, or shells, with shares that still trade. The SEC has suspended trading in at least 255 shells this year.
Kevin Kelly, chief investment officer at Recon Capital Partners LLC, which manages about $150 million and issues exchange-traded funds, said Laresca took a risk by shorting Cynk even if he thought it was sketchy.
“He should know that markets can stay irrational longer than you can stay solvent,” Kelly said. “He’s a professional.”
Organizers of schemes often slap a new name on the shell and announce they’re in a trendy new business, according to Thomas Sporkin, a former chief of market intelligence at the SEC. Then they distribute stock to associates who’ve agreed to trade it back and forth between themselves to make it look like investors are pushing the stock up, he said. Sometimes they hire promoters to tout the company in e-mails, Twitter postings and on blogs.
“You lure other people into the marketplace, whether they believe it’s legit or they’re just along for the pump and believe they can get out before the dump,” Sporkin said. “It’s like a big game.”
Nathan Michaud, a day trader and one-time stock promoter who runs Investorslive.com, said he didn’t see any signs that Cynk was being promoted. Articles and blog posts pointing out its valuation actually drove the price higher as traders tried to ride the surge, he said.
“The publicity given to this stock after it jumped up from 10 cents to $4 was the cause of this short squeeze,” he said.
The SEC has been fighting penny-stock fraud since the agency’s creation in the 1930s. Its first chairman, Joseph Kennedy, shut down several curb exchanges -- predecessors of today’s over-the-counter markets. In the 1990s, Jordan Belfort and his Stratton Oakmont Inc. defrauded investors out of more than $200 million using cold calls to push stocks, a scheme depicted last year in the movie “The Wolf of Wall Street.”
One of the most prolific promoters in recent years was AwesomePennyStocks, an e-mail list that helped fuel $3 billion in spikes in 39 stocks, most of which now trade for less than a cent, according to data compiled by Bloomberg. In March, the SEC sued John Babikian, a Bugatti-driving 26-year-old, claiming he used the list for a pump-and-dump. He settled this month without admitting or denying wrongdoing, and his lawyer, Stanley Morris, didn’t respond to messages seeking comment. AwesomePennyStocks closed before that case and didn’t promote Cynk.
Cynk’s auditor in 2012, Peter Messineo, worked for at least two companies promoted by the list, public filings show. Messineo, reached by phone, said he wasn’t aware of those e-mail promotions and doesn’t always follow what happens to shell companies after he audits them.
“Most of those companies go dark,” said Messineo, who hasn’t been accused of wrongdoing. “I have no clue.”
Cynk, which lists headquarters in Belize, as said on its website that it’s a service to buy contact information for people like celebrities.
OTC Markets Group Inc., which runs the trading venue once known as the pink sheets, marks questionable stocks on its website to warn investors. It branded Cynk with a skull and crossbones. Cromwell Coulson, the trading venue’s chief executive officer, who predicted the SEC suspension, said the agency will eventually figure out what happened with Cynk.
“I wish people would just not trade the stupid things,” he said.