UNCOVERING DECEPTION IN THE MARKETS
By MANUEL P. ASENSIO WITH JACK BARTH
John Wiley & Sons, Inc.
Copyright © 2001 Manuel P. Asensio.
All rights reserved.
CHAPTER ONE Diana Day Afternoon.....................................1
CHAPTER TWO Making of the Short Seller.............................17
CHAPTER THREE The First Short: General Nutrition Takes III.........35
CHAPTER FOUR Diana: "The Switch Works!"............................55
CHAPTER FIVE Solv-Ex: Something Oily...............................75
CHAPTER SIX Schonberg's List......................................103
CHAPTER SEVEN By-the-Numbers Stock Promotions.....................125
CHAPTER EIGHT Gross Mismanagement.................................183
CHAPTER NINE Abusing the Process..................................203
CHAPTER TEN How to Sell Short.....................................239
EPILOGUE Get Ready for a Big One..................................253
October 15, 1996, was a make-or-break day for Asensio &
Company. We were a tiny brokerage firm, less than three years
old. Even though we had thus far achieved solid results for our investors,
we were just another struggling, small business. Few, if any,
had ever heard of us. Earlier in the year we had struck off into uncharted
territoryshort selling high flyers in the hottest sectors of a
bubbling market. Our new direction was to discover hyperpromoted,
grossly overvalued companies, research them seven ways to
Sunday, and take a trading position.
But that's not all. Although promotions that rise on hot air will
eventually fall to earth, many short sellers have gone broke waiting
for the laws of gravity to take effect. In fact, the object of our disaffection
had already cost the shorts a bundle. Many had begun to
short this puppy at $10 only to see it rise to $120, despite a flurry of
major negative news stories. Instead of just sitting back and waiting,
our plan was to escalate the fight, to get all the facts, and then to
publish the straight, fully documented story and our opinions directly
on the Internet, with no wishy-washy middleman.
Ready or not, here come the New Wave shorts.
We first issued a sell advisory on the Diana Corporation on May
29, 1996, when its stock was trading over $100, giving the company a
market capitalization of more than $500 million. The overall stock
market had since inflated so much that this may seem like peanuts,
but back in 1996 this was the big enchilada of stock promotions. This
meat distributor turned sizzling tech avatar had risen in only nine
months from $5 a share to an intraday high of $120 on May 24. It
was one of the sexiest playthings on Wall Street: volatile, high volume,
high short interest, and price action like a late '90s dot-com initial
public offering (IPO). The company was promoting an Internet access
switch that would allegedly provide huge savings and productivity
gains for Internet Service Providers (ISPs). But of all the investors
and prominent analysts pumping up the stock, apparently not one
had done the research to learn that it was all just an elaborate scam.
In the months following my first report, the stock sank like a bag
of Sakrete, dropping to as low as $20 per share. Investors who followed
Asensio & Company's advice to short Diana collectively made
millions. But the institutional wise guys promoting the stock,
whether aware of its true nature or not, just didn't quit. Five months
after our initial report, the promote became reinvigorated, and the
stock charged back up as high as $50 again.
The stakes in Diana had grown massive and the climate nasty.
On October 15, 1996, it all came to a head: apparent stock manipulation
by front-running, fat-cat investment bankers; high-level corporate
skullduggery; choruses of traders from both the short and the
long side beseeching me for information; and the complete inability
of the world's most respected stock market, the New York Stock Exchange,
to maintain a fair and orderly market.
Diana's resurgence had kicked off what some call a short squeeze
on Wall Street. This happens when a large number of investors have
sold the stock shortthat is, borrowed the stock from their brokers
to sell with the intention of buying the shares back on the market at
a future date. The short sellers are betting the stock price will fall
and that they will be able to buy it back at a lower price than what
they sold it for, pocketing the difference.
When the Diana battle was raging, the regulatory climate allowed
for liberal interpretation of the short selling rules. As a result, the company's
efforts to keep the shorts out of its stock had failed and Diana
became one of the most heavily shorted companies on Wall Street.
Investors, whether they are professional money managers or individuals
overseeing their personal investments, tend to think of the
stock market in terms of buying stockand generally holding it. Short
selling, on the other hand, is about sellingwithout first buyingto
make a profit. When a lot of traders have gone short and the stock
price begins to rise, a certain number will panic, leaping to buy the
stock and cut their losses. This can send the stock price even higher.
There were more than 3 million shares short in Diana and only
5 million total shares outstandinga huge short interest. This means
that an inordinate number of traders had chosen to short Diana, expecting
its price to fall. A large short interest in a stock usually indicates
negative investor sentiment and should be a blinking caution
light to anybody thinking of buying the stock. Sure, all those short
sellers might be wrong, but as a group short sellers have always been
accorded a grudging respect on Wall Street for the quality of their
research. In this case, the large short interest also meant that there
might be more "weak hands" out there holding short positions who
could be induced to panic and buy if the stock price were to rise
suddenly and steeply.
Amid this "squeeze," we hired a software expert and a hardware
expertunfortunately, both must remain anonymouswith intimate
knowledge of Diana's switch and other switches that actually worked.
With their input I began preparing an extensive plain-language 16-page
engineering report detailing the flaws in its technology and
proving beyond doubt that it was, in fact, a worthless, obsolete device.
During the three weeks it took to prepare this report, Diana
kept rising and rising. Shorts were feeling the pain. Finally, on October
15, we were ready to release the report.
Up until this day, we had released all our reports via the PR
Newswire. PR Newswire publishes releases about stock opinions
from firms in good standing with the National Association of Securities
Dealers (NASD). These releases can then be picked up by the
other wire services. This report needed to be handled differently,
however. For one thing, it isn't practical to issue a 16-page press release,
especially not one of such a technical nature. For another, our
report had been leaked. Before it was published, we were getting
calls about it from retail and institutional investors and brokers, and
we knew this would continue.
We needed to release the report simultaneously and democratically.
I didn't want to give it to one person and then have that person
characterize it to others rather than passing on the actual document.
If we were to fax the document separately to individuals, our fax machine
and personnel would be tied up; it would be time-consuming
We wanted no one to control the report. It is what it is. Come
and get it, draw your own conclusions, form your own opinion.
Thus, we decided to publish the report on the Internet after
putting out a brief release announcing its existence and Web location.
That was the genesis of our policy of free and open dissemination
of our information. No fee, no commitment, no need to
open an account. Get it and read it anonymously.
We announced the location of our report over the PR
Newswire at 7:01 A.M. and again at 9:10 A.M. Both releases were
picked up by the major wire services. On the first day, the report was
downloaded over 300 times.
I had barely been home the night before our release. I hadn't
slept much that entire weekbecause of work, not because of tension.
For me, researching and preparing a report is relaxing. We
were discovering information that added to our conviction about
Diana's stock and business at deep levels. We were talking to people
who were involved in the design of products competitive to Diana's.
They knew this design, and they knew how it compared to
others. We could describe not just the functionality of Diana's
equipment but also the genesis of its design, how it was designed,
and its flaws. We were confident of the accuracy, completeness, and
fairness of our report. From that does not come anxiety or nervousness.
From that comes peace, satisfaction, conviction. Regardless
of the price action. Regardless of the "squeeze."
The tension would come later, when Diana's insiders successfully
manipulated the stock, and New York Stock Exchange officials failed
to stop them. Not that anyone should ever count on any officialExchange
or otherwiseto stop stock promoters from going about
Diana had recently trumpeted a "deal" it had made with a company
called Concentric Network Corporation that we discovered to
be a sham. Concentric was a real company, but this turned out to be
a false deal. Diana had simply enlisted a legitimate but needy third
party to help simulate "sales." I thought our report would undermine
any credibility Diana would receive from this announcement.
On the other hand, several major institutions were still issuing buy
recommendations on Diana and holding its stock. All I had was faith
in the efficient pricing mechanism, despite what I knew these institutions
could do to Diana's stock price in the short term.
I got to work early that day, concerned about our first foray onto
the Internet. My office, which was at 555 Madison Avenue at the
time, was a 12-by-12-foot room with force-fed air. We had to put in
a big fan that sounded like an airplane engine. It was hot and noisy
all year round. Coming out of that room was like stepping out of a
steam cooker. We had three work areas in that tiny room, with a fax
machine, a printer, four computers, and six phones with seven lines.
It was like being in the cockpit of a 747. When a phone rang, you
had to pick it up quickly, because it hurt if you didn't.
The morning of October 15, 1996, Asensio & Company's tiny
broker-dealer trading fund was short 43,000 shares at an average
price of $38, a $1.6 million position. Diana had closed the previous
day at $30.95, down $0.47, which made our unrealized profit before
the opening 43,000 shares x ($38$30.95) = $303,150. That's small
potatoes to a Wall Street hot shot. To us it represented a big chunk of
our trading capital.
The stock opened at $32, but there was palpable tension in the
trading. Few buyers. No sellers. Traders were standing to the side and
observing. The stock slowly sank over the first hour of trading. It hit
$28.63 at 10:26 A.M. We were comfortable, looking forward to further
trading. We had a high degree of certainty that this stock promotion
was finished. People had to realize, we reasoned, that there
was no realistic possibility of Diana ever creating value, of having
sales or gross profit margins with this product. This stock had a long
way to fall.
And then came the halt.
I gazed incredulously at my ADP quote machine. Trading in Diana
had been halted by the New York Stock Exchange. What?! Why?
How was the order flow going right before the halt? Who halted it?
When was it going to open again? I phoned our superb floor brokers,
the twins Larry and Howard Helfant. Throughout the morning
they had been giving me "looks": how many buyers were in the
crowd, how many sellers. What the specialist had on the books: how
much was on the bid, how much was on the offer. Who was on the
bid, who was on the offer, who was in the crowd. This is the type of
information that can be obtained only from Johnny-on-the-spot
traders in a listed market.
Meanwhile, it seemed like every short seller in the game was
calling me. Even diehard longs were phoning. This was only our
second hostile, adversarial short sell, but the first had been nothing
I had too many calls to return. People with connections to the
promote were trying to get through to tell me what the company
was up to. But I didn't speak to them, either. I was focused on what
was happening at the New York Stock Exchange. When I tried to
reach Richard A. Grasso, its chairman, I was shunted down the chain
of command to the general counsel, who referred me even further
down the chain. I finally got a callback from Tom Viet, the Exchange's
vice president of client servicesthe man in charge of
keeping Diana, the NYSE's paying customer, happy. I asked him
about the Exchange's halt policies, who had requested Diana's halt,
and the reasons the Exchange had allowed it.
Trading halts arise from significant order imbalances or when a
company has news to release that is expected to impact its stock
price. In theory this allows investors to digest the news and make informed
Under the listing agreement, companies listed on the NYSE are
asked to call the Exchange 10 minutes before making a material
statement. Client Services then calls the trading floor to recommend
that trading on the security be halted. A floor governor makes the
ultimate decision whether to halt the stock. It takes the say-so of
two floor officials to override this recommendation.
Legitimate trading halts occur often; they're a useful way to maintain
a fair and orderly market. But what was up with Diana? What did
the company all of a sudden claim was so important? What possibly
could have occurred? If it had something to announce, one would
think it should have been announced before the stock opened. Suddenly
at ten o'clock, on the morning we release our report, the company
makes representations to the New York Stock Exchange that
something has occurred. My initial impression was that there had
been no legitimate reason for Diana's request to halt trading.
Nevertheless, the stock continued to be held. It was now past
noon. This was no ordinary halt. Where was Diana's immediately
pending, big market-moving news? If the halt was a reaction to
our report, then it had nothing to do with any internal Diana
news. If the company wanted to comment on our report, it could,
but that was no reason to halt the stock. I already knew of the
scarcely concealed contempt the Street has for short sellers, but
now I sensed a palpable and dangerous prejudice that favored paying
customers of the New York Stock Exchange over the public.
Along with other short sellers and the integrity of the markets in
general, I was a victim of that prejudice.
At 2:34 P.M., almost four hours after the trading halt, Diana issued
a press release. The "news," which supposedly refuted my report,
cited nothing specific. It referred to me as "a short seller posing
as a securities analyst of Diana's stock." In fact, I was an analystthe
only securities analyst doing independent, objective, and, most important,
uncompromised work on Diana.
James Fiedler was the head of a small company called Sattel
Communications Corp., a division of Diana that had supposedly
created the would-be wonder switch. Fiedler claimed to possess a
letter from an engineering analyst alleging that I solicited a negatively
biased technical report from him in exchange for $5,000 plus
a percentage of my short-selling profits. In fact, I had never solicited
from anyone anything but unbiased, truthful information on Sattel's
products. Within 24 hours I served a demand on Diana to produce
this letter, but to this day it has never surfaced.
The only other piece of "news" in this release was an incredibly
premature, ridiculously trivial, and ultimately untrue announcement.
Only 15 days into the new fiscal quarter, Sattel was supposedly expecting
to report a modest profit in the quarter as opposed to a forecasted
loss. (We already knew that the only deal it had going was
with Concentric. There would be no additional income from any
other source.) Sattel also announced it had added new personnel in
sales and research and development, and a new chief financial officer.
Good reason for a trading haltnot.
Well, that was the big news. No transaction had occurred, let
alone one that would be expected to have a significant impact on
the stock price. Furthermore, nothing in this release was of such an
abstruse or confusing nature that it would necessitate the continued
halt of trading in the stock.
All that had happened was that James Fiedler, a man who
seemed more and more to be the architect of an overblown stock
promotion, had been involved in a fabricated attack on my integrity.
But I can absorb a personal attack. What made me truly livid was the
way that Fiedler abused the procedures of New York Stock Exchange
in order to halt trading in Diana.
Americans have a collective sense of entitlement that extends to
justice. When fairness is denied, when those in power change the rules
without explanation simply because they can, we react with frustration
and anger. I know that I certainly do. But there was no time for
that now. There was work to be done, facts to uncover. I had to decide:
What if the stock reopens higher? Do I stay in if it's going back
to $50? It had been at $29that's $21 of losses times tens of thousands
of shares. And if the market could so easily shrug off the cold truths in
our report, will it continue on back to $100? Why not? Crazier things
happen all the time. I had to deliberate these questions seriously.
At any rate, the Diana release had no substance. A securities analyst
would not be able to look at it and say "Yes, here's something to
buy on." So why did the company issue it? It needed to show that
the game was still on. In effect, they were signaling the promoters
that Diana was ready, willing, and able to take the scam to the next
higher level of deception: "Yes, people, the cat's out of the bag. But
we're in it together, and for the long run. If you liked our stock
when you didn't know the truth about it, you gotta love it now."
And then there are those investors who perceive a company's
statements as authoritative because they want to. They're hopeful;
they refuse to take their losses. They blame the stock's decline on a
short seller. They may think, "Okay, he's taken his shot, the worst is
over ... it's going back to $120!"
The so-called news was out. There was nothing that required
thoughtful assimilation. So the next question was: Why isn't the
stock trading now? There was a good answer to this from a stock
manipulator's point of view, which I would soon learn, but I never
learned the NYSE-sanctioned answerthe possible justification for
continuing to halt the stock for yet another hour after the Diana press
release. Only a few minutes were left in the trading day.
Okay, I thought, the stock will stay closed until tomorrow. Let
investors read our report and Diana's vapid press release tonight. It's
good to allow everyone to think things through overnight. But that
didn't happen. Instead, trading resumed at 3:51:56, more than five
hours after the halt. Again, there was no expressed reason why the
NYSE reopened the stock a mere eight minutes before the close.
Why not wait till the next morning? We quickly learned the sinister
strategy behind allowing only eight minutes of trading.
When trading resumed, a 32,100-share block immediately crossed
the tape at $33.50, almost $4 above where the stock had last traded
before the halt. The run-up ravaged our tiny trading account. In the
few remaining minutes before 4 P.M., 188,200 shares traded, closing at
the high of the day, $35.75. Incredibly, the Dianites had tacked 5
points onto the price since the stock was halted, costing the tiny Asensio
trading fund $244,750. This represented a disastrous 50 percent of
the net regulatory capital of our brokerage operation. More significantly,
on a day when the most lethal possible news had been releaseda
report that definitively refuted any possibility that this
company's product possessed the virtues it had been claimingthe
stock actually closed more than 2 points above the previous day's close.
It appeared that the promoters' spin had carried the day. We had
taken our best shot and the market shrugged it off. According to the
script Diana's promoters concocted that day, the pall cast upon the
company would now lift, and the stock could rise back where it belonged,
over $100. I didn't know specifically who had been buying
the stock in those eight minutes, but I did know that someone had
done a helluva job rallying the troops. I figured that during the five-hour
halt, some or all of the major institutions supporting the stock
had scrounged up buyers to pile into Diana.
Things looked grim. And we had no way of knowing what was
actually going on.
It wasn't until a Securities and Exchange Commission (SEC) filing
a few weeks later that the story became clear. What happened
was, that morning the followers of Diana's institutional backers who
were already stuck bought even more shares while the broader Diana
market sold off. The tide had turned before the halt. Those who
could get out had started doing just that. It appeared that major
holders, unable to unwind their large, concentrated positions, had
tried to create market action to keep the followers in. But the followers
elected to take the opportunity created by the institutions
buying more of what they already owned and sold to them. The institutions
couldn't prop up the stock if their own followers were selling
to them. Despite what had looked early on to be a rout for the
manipulators, the credibility of the facts had overpowered them,
foiling their strategy and necessitating more drastic action. We'll
probably never know exactly what went on behind the scenes. We
can, however, indulge in some informed speculation.
In those five hours, Team Diana strategized its defense. Calls
would have to have been made from the real inside promoters to
the people they had put into the stock. The call was simple. Here's
what might have been said: "We have looked at Asensio's report.
We view this as a buying opportunity and are going to do just
thatbuy." Those people would have to have made determinations,
in the face of my report, whether to buy along with the orders
from the big perma-bull holders or to abandon the promote.
This is what I believed happened during the unjustified five-hour
trading halt. Of course, these calls should have occurred while
the market in Diana was open and flowing, but they didn't. That's a
very important distinction. In a football game, if a running back has
broken into the clear and is charging toward the goal line, the defense
isn't allowed to suddenly call a time out in the middle of the
play to foil the touchdown. All they can do is chase after him.
Companies have many weapons to counteract the market effect
of short sellers. Their corporate communications departments can
publicly refute any reports or rumors that they feel are damaging
their share price. They can make new announcements that might
appear to have the potential to increase shareholder value. If they
feel their share price has been battered unfairly, they can use cash reserves
to repurchase their own stockor at least announce plans to
do soshoring up the price as well as banking this "bargain" stock.
And they can attempt to attract new buyers through vigorous promotion
and solicitation by complicit financial institutions. All of this
is standard corporate procedurethese are perfectly legitimate attempts
to support the price of a stock. I say, let them support their
stock, but don't let them manipulate it.
If Diana supporters could concentrate their buying at the end of
the day and cause the stock to close up, they could score a significant
propaganda victory. Many people might not even realize it had been
halted a large part of the day. The promoters could never sustain this
kind of manipulation over five hoursthere was too great a risk of
rebellion in the ranks, as had happened that morning; in a mere eight
minutes, however, a bogus buying frenzy could be better simulated.
During the five-hour trading halt, Diana surely disclosed its
"news" to individuals who then helped arrange large and aggressive
stock purchases immediately upon the resumption of trading. This
buying volume was intended to make it appear that Diana's press release
had generated interest in the stock and had successfully discredited
our reportto create the illusion that Asensio & Company
had artificially depressed its stock and that it would now recover and
rise. It was also to serve as a cover story that gave institutional buyers
an excuse for their buying.
For whatever reason, Dawson Samberg Capital Management,
Inc., a large, well-known, and highly respected institutional investor
specializing in technology stocks, owned a shameful 7.8 percent of
Diana. What was happening here? Based on the per-share price disclosed
in the SEC filing, during the last eight minutes of that day,
Dawson Samberg apparently purchased for its clients 35,000 shares
of Diana at an average cost of $34.31.
Consider what this means. Dawson Samberg probably spent as
much as $1.2 million of its investors' money in order to support a
company whose lead product had that morning been debunked in
exacting detail. Representatives of Dawson Samberg would have
been seriously malfeasant to further invest substantial sums in the
company without having read the report. If they saw the report
and believed it, they should have sold the stock, or at least stopped
to think a little: "Hmm, maybe we should wait a quarter or two.
Why rush out and buy a stock on the very day that serious questions
are being raised about it? If we really believe in this company,
and we already own almost 8 percent, why rush in now?" Instead,
knowing that Diana had neither denied the report nor offered any
specific rebuttal for any single point made in it, Dawson Samberg
In this case, we thought Dawson Samberg's action went beyond
simply being irresponsible. Arthur Samberg, the president of Dawson
Samberg, had in fact purchased 20,000 Diana shares for his own
private account months earlier in a negotiated transaction at a per-share
price of $20.50. Now, this is a supposedly shrewd guy. Why
would a shrewd guy buy this stock?
Samberg held those shares on October 15. Although there are
no laws or Exchange rules against such dealings, he faced an awkward
conflict of interest, or at least the appearance of such a conflict.
He had to decide whether to use investors' funds to buy and therefore
help prop up the stock price or to exit before it collapsed completely.
Who goes first?
Such maneuvers aren't just harmless little zero-sum games that
cigar-chomping tycoons play to one-up other tycoons. These
machinations have real victims. Small investors were drawn into the
Diana promote as cannon fodder. To many of them and their brokers,
Dawson Samberg's purchases were an endorsement of Diana.
To them, Dawson Samberg's actions meant a hell of a lot more than
the advice of some Cuban from a firm they'd never heard of. Followers
left in this stock until the bitter end saw their investment
shrink 99 percent. There are other victims, too: legitimate companies
that honestly state their risks and potential. They shouldn't lose
out on funding to the Dianas of their industries.
The Asensio & Company trading account held only $500,000 in
net equity in October 1996. I didn't know about the heavy Dawson
Samberg purchasing at the time. What I did know was that we were
facing a potential killer: The short interest was so gargantuan that it
was like rocket fuel. Short sellers forced to cover might end up tussling
over shares like bargain shoppers elbowing each other over discounted
Versace. In the short run, this could juice up the stock price
into the stratosphere. And last time Diana ran up it had gone all the
way to $120.
Although I had taken some profits that morning, I was still short
a lot of shares.
We have to manage our risk. Back then, unbelievably, we paid
our monthly operating expenses with our monthly trading profits.
We are also technically sensitive to price action and volume. Wall
Street is not a place for martyrs. We don't sit on a stock and take
losses. We believe the only right thing to do is to manage the risk,
preserve our capital, continue the work, and come back again with
a more profitable position. Winning the war doesn't require winning
I know this is not at all the way that short sellers are perceived.
Because of the theoretically unlimited downside risk we take, we are
considered buccaneers. And because of the aggressive, public brand
of short selling we do at Asensio & Company, I know that we in
particular are perceived as stubborn and combative.
I have seen too many short sellers, especially in the bull market
of the late 1990s, stand firm in the face of mounting losses. We did
not want to become another bull market casualty. Even if a company
is ultimately doomed, a great promote and a tight rig can temporarily
shoot its stock into the stratosphere. Short sellers who, like us,
have limited amounts of capital and who refuse to cut their losses are
often not there at the end for the collapse.
I stayed in the office very late on the night of October fifteenth
wondering whom I had spoken to who had spoken to Diana. I tried
to discover who had provided Diana with the letters that said I had
solicited a negative report. That's not as hopeless as it sounds. Whenever
you break an industry down to its lowest common denominator,
you will always find a small group of people who know each
other. That's an important concept when you're dealing with the
sort of esoteric products we usually find at the center of a stock promote.
Only so many people are truly informed on any abstruse
technology, even fewer on the specific application being touted. If
you dig deep enough, usually you will find someone knowledgeable
who is willing to discuss it. That said, I wasn't able to trace the alleged
letter, and to this day a copy has never surfaced. Either Fiedler
fabricated the letter's very existence, or whoever had been coerced
into concocting such a letter managed to save his or her own reputation
in the end by suppressing its release.
The uncertainty that night was beyond frustrating. After all the
work that went into Diana, after all the millions of dollars I had
generated for our clients, our little trading fund faced a potentially
crippling depletion of capital. Future campaignsresearch and reporting
on the many, many other frauds that were thriving in a
raging, ravenous marketmight have to be sidetracked by the
more immediate need to generate operating capital.
What's worse, a terrible injustice would have been perpetrated.
The bad guys were standing on the other side of the river, laughing,
with their saddlebags full of loot. And as the stock rose higher
and higher, the short sellers, despite being on the correct side of
the Diana fraud, would have been squeezed out of the market,
sending the stock ever higher and "justifying" the institutional
support for this no-product company. October 16 would truly be a
day of reckoning.
A little of my own background and the firm's early short-selling
history might be helpful before I write about how things turned out
for the mighty Diana team and its hagridden short sellers.