I started investing in some years ago and I have a special skill in picking stocks which are fraudulent and will quickly drop a lot. Some examples were:

  • CLDR which dropped from $10 to $5 overnight
  • LAKE
  • AIMT which dropped hard after FDA approval
  • INPX down 60-80% after reverse split news

What insurance or safety do investors have against rapid price movement, bear raids, or heavy shorting? Considering AIMT dropped from 36-38 to 20, beginning long before the Corona virus outbreak.

More precisely is there any safety or insurance for investors when this scenario is happening?

  • Company A has a market cap of X with a stock price of Y
  • Company B wants to buy out company A
  • Company B starts to manipulate and spread false news about company A
  • Company B collaborates with investment banks and hedge funds to bring the valuation down,
  • Company A drops 1/2 to 2/3 of its original price Y
  • Company B makes a generous offer and buys company A at this depressed price, perhaps at 1/2 the original valuation

While price is dropping, there is only good news about company A. In some cases, a company B board member could have insider information, timing the buyout before good news is released to the public (for example, a pending drug approval).

Investors were right:

  • They invested their money in a good company
  • Good news was released along the way (FDA approval, good sales numbers, new product pipeline, buyout news, more investments from companies)
  • Any yet in the end they lost 50% of their investment

Something similar can happen with AIMT (A company) and Nestle (B company). AIMT is dropping price rapidly after a lot of risks went out from the picture.

Based on this video:

I believe that in the short or mid term that stock price can be easily manipulated with fake news and naked shorting. The SEC is unable to do anything about it (I have seen this in multiple cases).

I have come to believe that investing in small companies and not indexes for the long term is just gambling because price can be easily manipulated as explained above. CEOs and CFOs can lie without much consequence. They can use buzzwords which can generate high interest in the stock (pump and dump with secondary offering e.g. Corona virus stocks or INPX). However, I don't think that this is true for companies with huge market caps because it's harder to manipulate them.

Thank you very much for any insights or ideas that you have!

  • 1
    Naked shorting is still illegal. If you perform this for the purposes of manipulating a stock price to buyout the company you've violated multiple SEC rules and regulations. – Norgate Data Mar 8 '20 at 2:03
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    You would become very vulnerable to a short squeeze. In 2008, more shares in Volkswagen were shorted than were actually in free circulation, and so the share price soared to record levels as the shorters had to pay any price to cover their positions, and lost a lot of money. reuters.com/article/us-volkswagen-idUSTRE49R3I920081028 – Mike Scott Mar 8 '20 at 9:54
  • Thank you Norgate Data, I am aware of most of the things which are illegal in Nasdaq, although I am quite sure they cannot catch all of those incidents. I am also quite sure it was bear raid, and SEC is doing nothing. So I feel a bit ignorant to not consider options which are illegal, so many money involved in stock market, ppl would kill for that money and bear raiding, naked sell is just a small thing considering the money available with those technics (just like spoofing, spread games and so on) – czupe Mar 8 '20 at 13:57
  • Mike Scott, I think your answer is the most relevant so far, I would accept it. Wdyt? If someone would buy Volvswagen in the very lowest levels with 10-20% premium and so letting shorters escape from positions and long investors loosing their money? Is not it a possible outcome shorting to the ground? This is my words fear. Everyone says market should come to sense, so if a company is so cheap someone will buyout, but for what price? And when? – czupe Mar 8 '20 at 13:59
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    It's presumptuous to conclude that after getting FDA approval and share price dropped that it's a Company B conspiracy that drove AIMT's share price down. AIMT is burning through cash and has missed earnings estimates for 8 of the past 10 quarters. Any chance these may be the reason why share price dropped sharply? – Bob Baerker Mar 8 '20 at 19:46

Short positions don't change the financial fundamentals or the business prospects of a company. Large short positions can only successfully respond to serious problems.

A company with large investments in another company must disclose the investments and often needs government approval. If the approval happens quickly then it's probably just acknowledgement of the receiving a notice filing.

I can't find the reason for a large short position in AIMT except that the launch of the new product shows the current market demand versus the previous potential market demand. However, Nestle is very interested in something and it may be the future development. The recent drop in stock price continued as if in response to, or in spite of, the Nestle investment.

I would take the new funding of the development-stage company to be good news because the company does have future prospects in addition to the current product. The newly issued shares don't trade in the float and the company directly receives the funds from the newly issued shares.

Oh, concerning AIMT, the FDA is requiring that prescribing doctors participate in a "Risk Evaluation and Mitigation Strategy" and that's something like a conditional approval. But Nestle doesn't seem to be concerned about the situation.

  • Thank you Spring. I think I am quite much aware of the risks with AIMT. Also the sales risks, what if the estimated sales numbers were to optimistic and the potential 2bln market in US is too generous and the 6bln word wide market is also too ambitious. What if DBVT will get another approval and consumers will like they product more. I know the risks, and concerns... Also knowing that 2 years ago when the company had no phase trials even, no product line, nothing almost the market valuated to 40USD and double market cap at least... So these kind of drop is not real, logical. – czupe Mar 8 '20 at 14:02
  • and we cannot just explain it so far (1.5 month every day dropping almost), we cannot explain it with: - sell the news (because approval was not sure) - or market is hesitated without sales number Because lot of things are derisked it should be in the price, and not halfing it. Regarding to REMS, valid point, but this information was also provided by company and was public knowledge, so should not shock the market afterwards. This is the de facto standard for these kind of drugs to came out with REMS (because it is life threatening) – czupe Mar 8 '20 at 14:04
  • Well, Nestle's recent investment in AIMT is at $31.97 a share. The convertible preferred purchase and the common stock purchase work out the same. A Bloomberg article says that the short sellers are just expecting slow sales of the current product. Also, the short sellers have a small float to attack. But all the new investment seems to be going to Nestle. Short sellers would probably be interested in buying shares issued at a fixed price and at the current price. That would flatten the short position even though there could be a time-lock to wait out. – S Spring Mar 8 '20 at 21:14
  • Thank you S Spring, I appreciate much the good conversation here. Also there was some calculations if you sum all the shorted stocks and comparing the publicly floating shares (without institutions investments) then you will get more shares then retail traders could have, so either some institutions e.g. CS is shorting it, or there is some naked shorting is going on, quite easy to see this. If we think about the price can even drop with Corona Virus news to even 10-15USD levels, which would be even more crazy, then I would expect much short coverage. – czupe Mar 8 '20 at 21:37
  • I really fear the worst: buyout in even lower prices around 15USD or something. Which would be a disaster to long investors and would be amazing to Nestle, if you think about they have 20% slightly higher shares, but they will buy the company in discount price, quite easy to see who is the biggest winner with low company price. Only time will, tell but it seems like I cannot have a guarantee that this will not happen in the next half year (Nestle first investment will be expired I think around September or something, se we can expect the next move around that). – czupe Mar 8 '20 at 21:38

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