HMNY Naked Short Selling – What is it? Why it is Bad, And How Investors Can Fight Back

It is well known that HMNY has had a historically very high short interest, I have written about this a lot here, and how it’s expensive to short this stock.   I am not against short selling generally (however I personally never short stocks as I am not comfortable with uncapped losses) it serves a purpose in the market, and in some cases can provide needed increased liquidity for certain shares and market transactions.

I am however very against Naked Short Selling -with the intention to manipulate a stock price downward.   For those who don’t know what Naked Short Selling is – it is defined as.  “the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale.”

So if you are already familiar with short selling, which is –the sale of a stock that the seller does not own. The seller makes such a sale by borrowing the stock in order to deliver it to the buyer.   The obvious big difference here in Naked short selling is the seller has not borrowed the stock needed for delivery when it is time to cover.   Traders can use Naked Selling to manipulate the price of a security by selling more shares into the marketplace than there are shares available to cover, thus putting heavy selling pressure onto the stock.

Naked Short Selling for the purpose of manipulating a stock price is illegal, and I believe it is immoral.  First I will talk about the illegal nature of it.

The SEC has made it clear in their ruling on SHO regulations “abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”   You can’t be much more clear than that, it is absolutely against the law to manipulate a stock to depress the price of a security.   There is no wiggle room on that ruling.

Now on to why I think it is immoral to attack a stock with naked short selling.  In America, we are trying to build new companies, to innovate with new technologies and new business models.  We lead the world across many industries, our technology, and our innovation as a nation is the envy of the world.  Many are trying to replicate, but none of have been as successful as the great old USA in terms of building long-term wealth and prosperity through hard work innovation and commitment to building new and better industries. This land of opportunity we live in, the rising tide that has lifted the boats for so many of us in this country, it relies on fair market and trust.   I believe it is wrong, immoral, and frankly unAmerican, to try and crush a company and manipulate its stock price for personal gain.

Unfortunately, I believe HMNY / Moviepass, has been a victim of Naked Short Selling to manipulate the stock price lower.  Before I get into that.  I want to talk about an example of where this has happened in the past, and how a brave CEO fought back against it.   I say he was brave because you must understand, it is very hard for a CEO to fight against the machine of Wall Street.  If a CEO turns on Wall Street, they know that it could likely be very detrimental to their company and their career going forward.  You don’t bite the hand that feeds unless you are very brave indeed.  It takes a real whistleblower mentality for a CEO to fight for what is right above what might just be good for him, or even his company.

Overstock CEO Patrick Byrne was just the type of CEO who was willing to fight against naked short sellers.  His story is amazing, and it highlighted that great difficulty and expense involved going after the Wall Street machine.  Way back in 2004 Byrne was upset with what he felt were vicious attacks on his company and his stock.  Byrne filed suit in California and even managed to get laws passed in his home state of Utah limiting large volumes of naked short selling and fining brokers who did so up to $10,000.00.   This, of course, infuriated Wall Street, and accusations back and forth intensified and lawsuits multiplied.  Wall Street continually poured cold water on Byrne, claiming he was a poor leader, and should not focus on short selling, but on running his business better.  Byrne claimed that big firms were spinning phony negative research through nefarious 3rd parties while making it look independent, all while naked short selling the stock, manipulating it downward, so they could profit from the fall.

Ultimately, Byrne settled all of the cases against the big brokers, the largest settlement was with Merrill Lynch who paid $20 Million dollars to end the misery.  Here’s a fantastic snippet from the Press Release Overstock issued when finalizing the settlement.  ”

“ feels the fight was well worth the effort.  Bringing this conduct to light has caused useful changes in the way the SEC regulates close-out requirements for stock trading. In short, Overstock believes the effort has helped reform the US Capital markets and lessened the opportunities for illegal stock manipulation.

Commenting on today’s settlement, CEO Patrick Byrne said, “Lao Tzu wrote, ‘In war’s victory keep to funeral ceremony.’  Though I am under no obligation to say so, I want to make clear that Bank of America had nothing to do with the behavior documented in this case. Even with Merrill Lynch, the individuals at issue are no longer employed there. I do not feel like bayonetting any more of Wall Street’s wounded today. Because we fought long and hard to get so many of the documents public, the true story of this decade-long battle can and should be told by an objective journalist. Res Ipsa Loquitur.”

Later, in an interesting twist, Goldman Sachs was fined $15 Million dollars by the SEC for not actually providing borrowed shares their customers thought they were receiving, thus putting Goldman’s own clients unknowingly in a naked short selling situation.  Goldman ultimately was settled out of the Overstock case.  If you want some very entertaining reading on the subject read the Press Release here.

Now mind you, there were plenty of Wall Street brokerages who loathed Overstock and their CEO for all this trouble and mischief caused by Byrne.  It cost both Overstock and the brokerages lots of time and money to deal with all of this fighting, and there really was no clear winner, other than maybe the lawyers who got paid a ton of money.   But the point here is that if we want or expect our boy Ted and HMNY to start fighting Wall Street, you can forget about it.   Ted needs Wall Street big shots one heck of a lot more than he needs retail investors to be happy.  Ted might be mad as hell about the short selling & naked short selling going on, but there is little he can do, he certainly doesn’t want to fight the same fight Byrne did.  Not only is it a big distraction, it costs lots of money, and the fight pits you and your company against Wall Street for years down the road.  So that just is not going to happen.

Now, why do I think that HMNY has been a victim of Naked Short Selling and manipulation?  Well, for the lawyers here or fans of law movies, we have the classic means, motive, and opportunity.

Who is my suspect?  Well, it is AMC of course!  AMC wants MoviePass dead, and while that may seem stupid idea for AMC, this is more about control of American consumers from an old-time puppet CEO in Adam Aron, who does not want to see a challenger company disintermediate his theater and come between AMC and the consumer.  MoviePass has already begun that irreversible disruption, and Adam is fighting mad.   It has been nothing less than all-out war with AMC, with Adam taking the unusual step for a large company CEO of blasting MoviePass at nearly every opportunity, even on AMC’s earnings call, even when AMC had clearly benefited from MoviePass related increases in attendance and sales revenue.  So motive is established and clear – AMC wants MoviePass dead!

Does AMC have the means to manipulate HMNY stock?  You bet they do, AMC is owned and controlled by Wanda group, Aron downplays the Chinese connection, but the facts are clear -AMC is a Chinese majority owned and controlled company.   In fact, the last 2 Board Chairmans have been appointed by Chinese company Wanda, and Adam Aron, is really just a bit of a stooge for Wanda, running the US AMC, while bigger things are happening back in China.

The newest Chairman of the Board for AMC is John Zeng, Zeng is also the President of Wanda Film Group, Zeng is the Chinese conglomerate’s most senior executive in charge of all film-related activity. That includes Wanda Cinemas, Wanda Films and the Qingdao Movie Metropolis in China.  So, yes, AMC is Chinese owned and run.  Aron takes his orders from Wanda.  There is no doubt about that.

Now back to the means.  Wanda has two very large backers, and in a  “you can’t make this stuff up” kind of way, one of them is none other than the Chinese government, and the other is Alibaba!  That’s right, AMC is actually owned partially by the Chinese government, let that one sink in just a bit.  The pockets behind AMC are let’s say, as large as the mother earth itself.

Now, do you think for even a minute that the Chinese like to play fair when a little startup American company is starting to mess with one of their investments?  History proves that China will do what it has to do to protect its interests.   Yes- AMC has the means to naked short sell HMNY into oblivion should they want them dead, and we have established already, AMC wants MoviePass dead.

Now, onto the opportunity.  Just because AMC wants to kill AMC, and would love to see the company stock shrivel up and die, and they have the money to do it, is there really any opportunity for AMC to make that happen.  OF COURSE THERE IS!

Naked short selling really is very loosely monitored by the SEC.  As you have seen with the Overstock story, even if a company suspects it is happening, they are reluctant to defend against it, because they don’t want to risk pissing off Wall Street.  Further, short sellers have very little reporting requirements.  Have you ever noticed it is almost impossible to find out who is shorting a stock and how much?   To make matters even worse, institutional sellers use something called dark pools, which are trades handled outside of the major exchanges to conduct short selling arrangements where there is total lack of any transparency.   And of course, the big firms like Goldman and Merrill are complicit in all of this, because they don’t care if they can make some quick money off doing a short sell deal, even if they neglect doing their part in providing the borrowed shares.  (Note: I am not saying GS or Merill is doing this here, just using them as examples).   So, the opportunity to commit the crime is there, AMC could easily utilize institutions, dark pools, and even offshore traders to execute all kinds of crazy short selling activity.   They could do it through connections via Wanda, Alibaba, or the Chinese Government.

So there you have it, Means, Motive, and Opportunity on manipulative naked short selling.   AMC has them all at their fingertips and has been unusually vocal about it.  What or who could stop them from carrying it out?  The SEC! ha fat chance! They are slow, understaffed, and have nobody complaining to them about it anyway.   

Unless… We long shareholders of HMNY start to complain.  We are the only party in this mess who can fight back!   We have nothing to lose, and everything to gain.   Not only does it serve us longs financially to get the SEC off their butts and start investigating this debacle.   It is our moral duty as Americans to fight against the evils of naked short selling, trying to destroy American industry and ingenuity!   To not complain to the SEC about this would be – well – downright unAmerican!

So I urge you go to the SEC website, fill out their complaint form, they have a specific area in the form identifying naked short selling, let them know you stand against this, and if you have lost money on it, let them know that too!  If they hear from enough of us, they will act!

Heres the link to file your complaint

Let’s fight this together.  Do it for your pocketbook, do it for your country! Do it for your children!   FIGHT BACK!