CYNK Short Squeeze Scam Costs Trader His Job

Tyler Durden's picture




 

"My 10-year-old knew it was a scam. It was a complete joke," rages Tom Laresca - a market-maker at Buckman Buckman & Reid - who sold "pure madness" stock CYNK Technology short at $6 last week. Laresca assumed (reasonably so) that the SEC would suspend trading, sending the price towards zero. Despite Zero Hedge's initial exposure of this farce to the world (and the rest of the mainstream media's attention following), the SEC was slow and CYNK soared to $16, squeezing Laresca and forcing his firm to cut off his ability to hold positions - he plans to resign today. "I wish people would just not trade the stupid things."

 

As Bloomberg reports, a Wall Street trader said Cynk Technology Corp.’s (CYNK) 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.

“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.”

 

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.

Instead of falling, the share price more than doubled the next day, July 9, starting the squeeze. Market-makers who had sold the stock short got nervous and scrambled to buy stock to close their positions, driving it even higher, 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.”

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, and slammed the SEC...

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?

 

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.

 

“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.”

The end result of this farce... more unemployment...

Laresca said that his firm cut off his ability to hold positions after the Cynk fiasco and that he plans to resign today. He declined to say what the trades cost.

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.

It's not just Laresca who has a major problem, as we noted previously - cost of carry on the short is adding up all the time CYNK is halted...

Case in point, this sad individual who on that bulletin board of epic retail investor comedy, Yahoo Finance, has explained their problem: it appears some brokers actually did allow shorting of CYNK, at a cost. A rather high and recurring cost it would appear.

 

 

Oops.

*  *  *
But all the other momo stocks trading at triple-digit P/Es are not stupid...? Or are they - according to Yellen?

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Tue, 07/15/2014 - 13:39 | 4959691 TeamDepends
TeamDepends's picture

"I just wish people would not trade the stupid things".  Like debt-backed fiat paper?

Tue, 07/15/2014 - 13:41 | 4959697 gh0atrider
gh0atrider's picture

Don't try and short stupidity in a stupid world.

Tue, 07/15/2014 - 13:46 | 4959727 NoDebt
NoDebt's picture

Being early is the same as being wrong.  Sorry, punk.  You knew what you were doing.  You just overestimated the SEC.  

Tue, 07/15/2014 - 13:59 | 4959759 gh0atrider
gh0atrider's picture

Yes, this guy said he wishes people wouldn't trade the stupid things but he went short?  So he was trading them.  Basically, he thought he could still walk into this casino and come out a winner.

Tue, 07/15/2014 - 14:34 | 4959890 CrazyCooter
CrazyCooter's picture

I bet Chelsea Clinton's hedge fund hubby made a bundle. This guys problem is that he isn't an insider.

Bagholder!

Regards,

Cooter

Tue, 07/15/2014 - 14:45 | 4959946 cifo
cifo's picture

I bet the SEC made some nice money on this one.

Tue, 07/15/2014 - 15:13 | 4960090 Pool Shark
Pool Shark's picture

 

 

Aaaaand,... that's what happens sometimes when you're picking up nickles in front of a steamroller...

 

 

Tue, 07/15/2014 - 15:16 | 4960116 So Close
So Close's picture

Usually in the first chapter of every trader's auto biography I have ever read.   There ability to remain stupid can extend beyond your ability to stay liquid.

Tue, 07/15/2014 - 15:27 | 4960166 Say What Again
Say What Again's picture

I have a general question...  Does Reg SHO apply to OTC (a.k.a. Pink Shit) stocks?

Didn't this guy have to do the usual "Locate" before shorting?  What broker would give the OK to short after trying to do a Locate on this stock?

What about FTD for this shit?

Regulation SHO was announced by the SEC in July 2004. The rule includes a uniform "locate" requirement for short sales in all equity securities and a requirement for the firms to document what they have done to locate the securities. Regardless of whether the seller’s short position may be closed out by purchasing securities the same day, firms will need to document that they have borrowed or arranged to borrow the stock, or they have reasonable grounds to believe they can borrow the stock and deliver on delivery date.

Tue, 07/15/2014 - 15:31 | 4960189 0b1knob
0b1knob's picture

He who sells what isn't his'n.

Pays the price or goes to prison.

 

 

Attributed to Jon Corzine.

Tue, 07/15/2014 - 15:39 | 4960210 Say What Again
Say What Again's picture

I think I've found a pattern here.  Beware of any stock that rhymes with "SINK."

For example; SYNK was at $18 in July of 2013, and is now trading around $2.50

That was easy.

p.s. OB1; Are you suggesting that shorting should be made illegal?

Tue, 07/15/2014 - 17:43 | 4960595 deflator
deflator's picture

The low volumes despite parabolic increases scared me away... Usually the pumpers dump keeping a lid on parabolic spikes similar to what was seen here.. If you bought a million shares of sink at .01 would you not be selling way before it got to 6B market cap?

 

 I'm thinking that the guy that owned millions of shares of cynk was asleep at the wheel of his yacht and when he finally checked his ticker symbol and shit his pants the SEC halted trading as soon as he put his million share market sell order in.

Tue, 07/15/2014 - 17:08 | 4960519 First There Is ...
First There Is A Mountain's picture

It absolutely applies. In a not so distant former life, I was a MM who sometimes picked up the occasional Bully (bulletin board) or Pink Sheet and traded it. Are they supposed to get locates? Yes or reasonably believe they can buy them back on the "open market". See the gaping, "I can drive a truck through this" intrepretation? "Well fuck yeah I can buy them back. I'll just take a few guys when it starts dumping and I'm flat - no problem" lol.  

Market makers are told on one hand they can naked short in order to add liquidity while on the other being told they need to get locates. One of the requisites of being a bona fide market maker is being on the bid or offer like 75% of the time. Well, who the fuck is going to be on the bid 75% of the time, particularly if they are sellers? Who's going to be offer 75% of the time if they got a VWAP buy order? It's a FUCKING JOKE with a capital J. My guess is our little Dago Friend just decided to get short thinking it would get halted intraday and he'd make out like a bandit. Do the math. Get short 50K, 100Kor 200K of this pig @ $6 and watch it run to $20 and you're starting to get in real trouble if your dad's not the boss. 

Tue, 07/15/2014 - 17:32 | 4960579 Say What Again
Say What Again's picture

Thank you for the info.

The other piece of data I find unusual about this story is the position size this guy took on relative to the number of outstanding shares.  That should have been a huge red flag.

What I've learned though the years is nothing matters more than the position size relative to account size and expected stop level / exit points.  PS is even more important than where you get in or out.

"Greed" is a double edge sword

Tue, 07/15/2014 - 14:48 | 4959960 Say What Again
Say What Again's picture

@gh0atrider,

You should read the post more carefully.  It was Cromwell Coulson, the CEO for OTC Markets Group Inc., who said that -- Not Tom Laresca

Tue, 07/15/2014 - 15:14 | 4960097 cifo
cifo's picture

There is always a chance, if you are lucky. But you still have to play to win. This time he lost.

If he did not know the risk, then he is stupid.

Tue, 07/15/2014 - 15:21 | 4960141 Say What Again
Say What Again's picture

Tom Laresca may or may not be stupid.  But, Tom did not make the comment regarding "stupid thangs"

One thing for sure, his timing was not optimal.

Tue, 07/15/2014 - 15:33 | 4960191 cifo
cifo's picture

You, Sir, are a nice guy :)

I would marry you if you were a woman :)

 

Tue, 07/15/2014 - 15:36 | 4960203 cifo
cifo's picture

Very probably Tom Laresca is not stupid. If he was, he wouldn't be where he is.

 

Tue, 07/15/2014 - 15:44 | 4960238 Dr_Dazed
Dr_Dazed's picture

Wait a sec...  Hi's out of a job after having made a trade in an ill-liquid short which he cannot cover because it's no longer tradiong...Was this not stupid is as stupid does?  Just because someone is a "trader" don't imply smartness.  He's in a world of hurt.

Tue, 07/15/2014 - 15:45 | 4960239 Dr_Dazed
Dr_Dazed's picture

Wait a sec...  Hi's out of a job after having made a trade in an ill-liquid short which he cannot cover because it's no longer tradiong...Was this not stupid is as stupid does?  Just because someone is a "trader" don't imply smartness.  He's in a world of hurt.

Tue, 07/15/2014 - 16:07 | 4960334 cynicalskeptic
cynicalskeptic's picture

Counting on the SEC or ANY gov regulators to do their jobs sounds like a suicidal strategy to me....

Tue, 07/15/2014 - 16:36 | 4960394 Say What Again
Say What Again's picture

I agree.  In addition to counting on the SEC, bad timing and poor risk-management were Tom's biggest mistakes.

The Kelly Formula is not the best, but it is easy to calculate, and it would have limited Tom's position size. 

This is how traders blow up and wind up selling used cars.

Tue, 07/15/2014 - 14:27 | 4959856 CrashisOptimistic
CrashisOptimistic's picture

How about this:

DON'T TRADE.  IT'S NOT A MARKET. 

It is amazing how quickly Michael Lewis was ushered off the stage.  Too many jobs depend on the charade.

Tue, 07/15/2014 - 15:07 | 4960076 cossack55
cossack55's picture

Too true.

 

I would list the "stupid things" here, but I don't think my rheumatiz will allow me to type for 6 hours.

Tue, 07/15/2014 - 13:43 | 4959709 john39
john39's picture

that doesn't leave much...

Tue, 07/15/2014 - 15:16 | 4960115 CheapBastard
CheapBastard's picture

How much did his 10-year-old gamble?

Tue, 07/15/2014 - 13:53 | 4959749 Quinvarius
Quinvarius's picture

It is only cool when a "market maker" invents more paper shares of a thing than exists and sells them in hopes of screwing the public.  When said market maker gets his ass reamed, then it is a travesty for the SEC to deal with.  The dude is a cry baby punk.  He should resign.

Tue, 07/15/2014 - 14:22 | 4959828 Gaius Frakkin' ...
Gaius Frakkin' Baltar's picture

Stupid things are okay as long as they last a long time.

It's long-term con-artists pointing their fingers at short-term con-artists, because they don't want the sheep scared off before they sharpen their own sheers.

Tue, 07/15/2014 - 14:25 | 4959849 Mercuryquicksilver
Mercuryquicksilver's picture

"I wish people would just not trade the stupid things." Says the guy who traded the stupid thing.

 

Why is CYNK any different than BTC?

Tue, 07/15/2014 - 14:49 | 4959963 Say What Again
Say What Again's picture

You should read the post more carefully.  It was Cromwell Coulson, the CEO for OTC Markets Group Inc., who said that -- Not Tom Laresca

Tue, 07/15/2014 - 16:19 | 4960380 gh0atrider
gh0atrider's picture

Maybe because BTC is not a company dumbass?

Tue, 07/15/2014 - 15:53 | 4960275 Grinder74
Grinder74's picture

So sue the SEC.  They happily sue anyone over the slight misplacement of a word in a footer.  Sue them for negligence and "market manipulation".

Tue, 07/15/2014 - 20:07 | 4961023 Buck Johnson
Buck Johnson's picture

He must have cost his firm alot of money for them to do what they did.

Tue, 07/15/2014 - 13:41 | 4959694 LawsofPhysics
LawsofPhysics's picture

But don't worry folks, none of these paper-pushers will go bankrupt or to prison.

 

(good thing he made more than enough to retire 1000x over...)

 

Full faith and credit...

Tue, 07/15/2014 - 13:41 | 4959695 Xibalba
Xibalba's picture

When has the SEC, Justice Dept, or any other fake enforcement agency ever been 'awake at the wheel'? Just give me one instance.  

Tue, 07/15/2014 - 13:43 | 4959706 camaro68ss
camaro68ss's picture

Only when average joes try to scam the system?

Tue, 07/15/2014 - 13:46 | 4959721 Xibalba
Xibalba's picture

LIke Abacus?  The bank that is, not the squid.  

 

http://www.businessweek.com/articles/2013-01-31/mortgage-fraud-prosecuto...

Tue, 07/15/2014 - 13:47 | 4959726 Beam Me Up Scotty
Beam Me Up Scotty's picture

"How am I going to cover my short...Scott Trade charges 12% margin interest"

How about selling some of your profitable stocks and putting enough money into your account to cover the margin?   Or take the money out of your bank account earning .01% interest.

Tue, 07/15/2014 - 13:45 | 4959717 Ms. Erable
Ms. Erable's picture

They wake up long enough to sue the playas after the fact so as to get their skim. All else is midget tranny porn.

Tue, 07/15/2014 - 15:54 | 4960282 Grinder74
Grinder74's picture

When they can take individuals and small start-up firms for everything they're worth.  

Tue, 07/15/2014 - 13:41 | 4959698 slaughterer
slaughterer's picture

I shorted CYNK from $18.50 to $20.50.  But I did not lose my job like this guy. 

Tue, 07/15/2014 - 14:14 | 4959812 SMG
SMG's picture

The real crime is the people who created this fraud of CYNK will get off scott free with billions of dollars.  All hail our Oligarchy.

Tue, 07/15/2014 - 13:42 | 4959705 Sutton
Sutton's picture

I see that Waddell and Reid is now Buckman, Buckman and Reid. They strike again.

Tue, 07/15/2014 - 14:05 | 4959780 stacking12321
stacking12321's picture

waddell and rEEd, two e's.

close, though. you get the tungsten medal.

Tue, 07/15/2014 - 13:44 | 4959707 ParkAveFlasher
ParkAveFlasher's picture

Let the buyer (or shorter) beware.

Tue, 07/15/2014 - 13:43 | 4959711 frankTHE COIN
frankTHE COIN's picture

Forget Teen Spirit. There's some Malfeasance in the Ether.

Tue, 07/15/2014 - 13:58 | 4959755 Keyser
Keyser's picture

Yeah, pump-and-dump greed ether...

 

Tue, 07/15/2014 - 13:44 | 4959713 Fuh Querada
Fuh Querada's picture

Why are all these ZH posts followed by photographs of women indulging in sexual foreplay?

Tue, 07/15/2014 - 13:51 | 4959742 NoDebt
NoDebt's picture

Is that a serious problem for you?

And the ads are selected on-the-fly based on what Google (and probably the NSA) knows about you and your internet history.  So don't act like you've never seen anything like that before.  I get a lot of ads for incontenence and male pattern baldness products as well as snake oil cures for imaginary diseases.  They must know something about me that even I don't know.

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