Malt Liquidity 73

Crime and Punishment

A Programming Note

Greetings from Taiwan! I’ll be a bit occupied over the holidays, but the posting shall continue. For those of you expecting financial content, of course, that will follow. And of course, some unwanted travel logs might be posted too.

Don’t do this

Here at Malt Liquidity, I like to think that the goal is never to provide financial advice or stock predictions, but rather to provide entertainment and a springboard for thoughts. Effectively, the goal is to be altruistic. However, aided in no small part by the pandemic retail trading explosion, a cottage industry of “furus” — fake gurus — popped up all over the place, from drop shipping to sneaker-botting, from anonymous Twitter profiles to the upper echelons of venture capital.

While the recent big filings were obviously concerning a different charlatan, an amusing case filed by the SEC against some other snake oil salesmen came across my desk:

To their legions of followers on social media, the eight defendants have, for years,
promoted themselves as trustworthy stock-picking gurus. In reality, they are seasoned stock manipulators. They identify stocks ripe for manipulation, acquire substantial positions in these securities, and then recommend those stocks as good investments to their followers on Twitter, in online stock-trading forums they run, and on podcasts. They encourage their followers to purchase the selected stocks, often claiming that they likewise have bought or intend to buy these stocks for themselves and hold them. Instead, the defendants sell their shares into the demand that their deceptive promotions generate.

Drumming up interest in easily manipulable instruments to then use as exit liquidity is nothing new, but it returned with a vengeance through the ICO and the wonder years of “stonks go up”, as the aptly named defendant “Ultra Calls” reminds us. Some of these frauds were done through garden variety “influencer marketing”, while others were enveloped in weird philosophical and lifestyle cults that tangentially introduced me to some of my good friends to this day. While these activities proliferated to levels impossible to maintain, it is refreshing to see some of these players get slapped down, though the trading capital that dissipated into the market is unlikely to ever return.

From at least January 2020 through present (the “Relevant Period”), the eight
Defendants earned approximately $100 million from this stock-manipulation scheme.

Ya know, maybe I should have done more than just write blog posts.

First, one or more of the Primary Defendants identified a security to manipulate (the “Selected Stock”) and purchased shares of that particular security… Next, they promoted the stock to their followers on podcasts and/or social media platforms in order to generate demand and inflate the share price. Typically, the Primary Defendants announced price targets, teased upcoming news about the company,
and/or stated their intention to buy shares or hold their current positions for longer periods. Finally, after promoting the stock to their followers in these ways, the Primary Defendants sold their shares into the demand generated by their recommendations.

While this is a classic pump and dump, it’s worth noting that “talking your book” is basically a standard practice across the financial industry, whether it’s done by talking heads, hedge fund managers, or your average Uber driver. Where this turns into illegal conduct is through misinformation, advertising, and disguising your intentions.

The Defendants each included disclaimers on their Twitter accounts that they
were not providing stock recommendations or financial advice. But they intended for their followers to act on their promotional tweets, and understood that their followers would do so. Constantin, for example, acknowledged in an interview with Knight and Hennessey on PGIR: “I understand that if I call something, you know, everybody and their mom is going to buy.”

It should be obvious, but simply claiming that something is “not financial advice” does not absolve you of the consequences of, you know, giving financial advice fraudulently.

Not legal advice.

The Defendants understood that they were participating in an unlawful market-
manipulation scheme, and that they were profiting from misleading their followers. The Defendants sometimes discussed their scheme over Discord voice chats that they believed were private, but were being recorded. For example, on March 1, 2021, Knight and Cooperman(along with others) discussed the group’s manipulation…
Knight: Get caught? . . . We’re robbing f*cking idiots of their money. . .
Cooperman: It’s so funny because I can see the . . . . I can like see the timeline of these. Like I get it [the ticker], I send it to Dan [Knight]. I know Dan’s on voice. Dan tells you guys. I see it go up more. Then I send it to Gary [Deel] and I see it go up like way more [laughter] . . . . My other thing is too, is like alright, if we lose on one of these, we’ve won on like a hundred so . . .

We have talked about the SEC’s whistleblower program before, and while it’s obvious that you can’t be a party committing the illegal acts, it seems pretty prudent to collect recordings and archive messages and tweets if you’re privy to the discussion of them.

In another surreptitiously recorded Discord call… Knight acknowledged that he understood the Primary Defendants were engaging in market manipulation, and explained why he posted fewer recommendations on Twitter and Atlas than the Primary Defendants:
“[The less] I mention a stock, the less likely I get involved whenever all of
Atlas gets a class action f*cking lawsuit . . . I’m playing this extremely
smart, for the very long term. If you don’t think all these f*ckers go to jail
or at least get sued, you are crazy. . . playing stupid does not work in
court. . . it’s market manipulation. . . . I mean you look up the definition of
market manipulation . . .”

Chat messages and phone logs are inevitably the downfall of all illegal/insider/manipulative traders, and you might wonder why there are always logs, whether it’s LIBOR rigging, silver spoofing, or bypassing internal risk management levering the fuck up. Truthfully, it’s because trading is boring. Watching price movement is like watching television static, where the time spent is only retroactively worthwhile based on your PnL. You can’t do something that requires significant attention lest you miss a trade, so the only respite to the tedium is distracted reading and chatting. Theoretically, everyone knows to not put things into writing, but the thought of sitting in a vacuum left to your own devices is a daunting reality. But if you do have to talk about your trading activities, legal or otherwise, maybe don’t call your group chat “wirefraud”.

What would Harold and Kumar do?

In case you were wondering what the conditions of the Bahamian prison SBF was sent to are like, here’s a particularly harrowing description of a place that is decidedly not a $30 million dollar penthouse apartment:

For many inmates living in maximum security at the Bahamas Department of Correctional Services, preparing for bed means mopping up sludgy puddles of faeces and urine, dusting off aged cardboard mats and lying down to sleep in a small, torrid prison cell, cramped among five or six other men…

“Dogs don’t deserve to live in the state that maximum security is in,” one prison officer told The Nassau Guardian on the condition of anonymity.

“There’s no ventilation. Boy, you don’t even know. Did you know that rats run up and down all day, every day? It’s not fit for humanity.”

The rats, the officer said, appear to feel more at home than the inmates.

One wonders if fighting extradition is really the best idea here. In any case, he’ll be stuck there until February. That’s the thing about skirting regulations in sketchy jurisdictions — when you do get caught, the accommodations might skirt the implicit regulations of “basic human decency.” In an unrelated, but equally awe-striking portrayal of the brazen behavior of Bahamian authorities, here’s this post about the arrest of two poker players from a few years ago. I recommend reading the full story, which describes sketchy detainment in a prison-style refugee camp with similar sanitary standards as described above, but also contains this bizarrely hilarious anecdote:

There wasn’t much to do there, but some people did have cards. One night a few guys came up to me and asked if I wanted to play poker haha. So I went over and they explained the rules in really broken english. Basically there were no poker chips or anything. All they had were these stiff clothes pins. It was like Texas hold em, and you could fold pre-flop, but if you’re in and you lose the hand, you have stick it on your ear, and it hurt. And if you won a hand, you could take a clothes pin off your ear. Basically you’re out totally if you have so many clothes pins on your ears that you can’t stand the pain anymore, so you quit OR you have all the clothes pins on your ears, which doesn’t happen because they hurt too damn much. Needless to say, it was the most high stakes game of poker I ever played. It actually looked so painful when the other guys put the clothes pins on their ear that I took the game super seriously haha. I think I only had 1 or 2 on my ears by the end, and I ended up winning. The prize was a blow pop, which I actually kept for ages after I got back before being like “What am I doing…” and throwing it out LOL.

Life, uh, finds a way.