An anonymous individual writing under the name "The Pump Stopper" launched a vicious attack on Ekso Bionics Holdings Inc. (OBB:EKSO) stock on June 2 that immediately pressured it and caused it to drop 24.28% to close at $1.36 a share on heavy volume. Understandably, that makes a lot of people nervous.
Here's the thing, though.
If you've been in this game long enough, you know what to look for and why stuff like this isn't a big deal in the scheme of things.
Today we're going to talk about how to recognize a legitimate short versus a short attack and what to do about it, especially when it comes to a stock you may own like Ekso.
Here's what you need to know:
First, let's tackle the elephant in the room – stock manipulation.
Most investors are familiar with the phrase "pump and dump." That's what the SEC calls a form of financial fraud used to artificially inflate the price of a stock – usually a small-cap or microcap – for personal gain by distributing misleading and false statements. That's the pump.
The dump comes later when the fraudsters suddenly sell their stock en masse and the price drops catastrophically, causing investors to lose their money.
It used to be done in so-called boiler rooms or small back offices like those depicted in the film The Wolf of Wall Street, but now it's most commonly perpetrated via the Internet and chat boards. Pump and dump is so extensive that these kinds of stock scams may now account for an estimated 5% to 15% of all spam email.
It's blatantly illegal.
The reverse of that is called "short and distort." That's what's happening with EKSO stock.
Instead of buying the stock in question, the perpetrators typically short the targeted company first, then release theoretically independent reports and analysis that is little more than a thinly veiled smear campaign. Once the stock has fallen, the parties involved buy to cover, bank their profits, and hopefully disappear.
This, too, is illegal, but that doesn't change the fact that it happens all the time.
Sadly, the SEC is totally outclassed and seemingly always a step behind. They simply don't have the resources to detect, prosecute, and punish every short-and-distort artist out there.
Many people wonder how this is possible, especially today. It's not as difficult as you would think…
TV personality Jim Cramer gave a hair-raising interview in December 2006 that was aired in March 2007, describing how hedge fund managers and others push stocks higher or lower at will, stating specifically that some hedge fund managers spread false rumors to drive a stock down.
"What's important when you are in that hedge fund mode," he noted at the time, "is to not do anything remotely truthful because the truth is so against your view, that it's important to create a new truth, to develop a fiction."
Then he outlined three ways to do that:
- Spread false rumors
- Drive futures
- Give information to reporters who would then spread the "news" giving it an air of legitimacy
So How Do You Recognize Legitimate Shorting Versus a Short "Attack" or Even a Bluff?
There are a few giveaways:
First, real short sellers don't hide behind anonymous Internet chat boards and cutesy names. They don't have multiple email accounts to engage in rumor mongering. And they don't have websites registered in Panama that have been through nine changes hosted on seven different name servers over the past eight years. That's because guys like George Soros, Simon Cawkwell, Mark Cohodes, and Jim Chanos – some of the most famous legitimate and successful short sellers of our time – don't need to. They're idea-driven.
Second, real short sellers don't want attention. In fact, they want the exact opposite – not to tip anybody off so that they have an extended period of time to maximize their positions. "Short and distort" sellers typically use high-volume activity to drive prices down quickly in their own self-interest rather than see them collapse under their own weight.
Third, real short sellers publish factual information if they publish anything at all. Short and distort artists string together information that may or may not be germane, let alone accurate under the guise of personal opinion that makes it hard to prosecute. They rely on selected information that is taken out of context or partial truths and inference. Ethics have very little to do with how they play the game. Their sole interest is in creating short-term angst that causes investors to bail so that they make money buying depressed shares.
Obviously, this is not pleasant for anybody. Short-and-distort artists prey on panic. They have a demoralizing effect that can hurt not only individual investors, but also the companies they target by slowing down financing and growth.
Believe it or not, though, there is a silver lining.
Sometimes short sellers get burned by their own mojo. If enough people come back into a stock, that pressures the short sellers, who are then forced to cover at higher prices in something called a "short burn." The irony is that many times it's their own actions that light the fire.
The other thing to think about is that if you buy off on the targeted company's potential – in this case Ekso – a short attack can be a super time to pick up shares that are temporarily "on sale."
Speaking of which…
What's Happening with Ekso Stock
Less than an hour after I learned about the story, I was on the phone with Ekso's CEO Nathan Harding and CFO Max Scheder-Bieschin. As you might imagine, I share your concerns given the very serious nature of the allegations being made. So, I was keen to speak with them.
I learned that the company would be issuing a point-by-point rebuttal to The Pump Stopper to be posted on Ekso's website as soon as possible. That way all interested parties – investors and "The Pump Stopper" alike – would have access to it at the same time.
This is absolutely consistent with what you would expect from a public company in Ekso's position and in full compliance with SEC regulations, including FD, Rule 10b5-1 and Rule 10b5-2 governing the release of material non-public information.
The Way to Defeat "Short and Distorts" Is by Keeping Perspective
I've studied Ekso carefully, reviewed competitive offerings carefully, visited headquarters, and talked extensively with C-level executives, Ekso users, and even healthcare professionals.
To be very clear, I saw and still see tremendous potential ahead.
Short attacks like this are unfortunate and gut-wrenching. But they come… and they go.
"The Pump Stopper's" allegations seem credible at first glance, but many of them don't make sense if you stop and think about them logically for a minute.
Take the allegation that Ekso's testing centers now prefer competitive products, for example. These are the top treatment centers in the world. It's not in their interest to be exclusive with any manufacturer… not Ekso, not Rewalk (NASDAQ:RWLK), not Cyberdyne. You could easily substitute their names instead of Ekso's and instantly those companies would be on the defensive.
Instead, what these treatment centers want is to evaluate and use as many options as possible. They have a medical obligation to their clients to test any device with potential. That way they can offer the broadest spectrum of treatment.
Ekso has never communicated a goal to be the only one there, nor have they claimed that Ekso suits work on all patients. That's an inference "The Pump Stopper" hopes you'll make so you'll hit the sell button and make HIM money.
Or how about the list of employee defections?
People come and go all the time, so employment ebbs and flows with every startup, not just Ekso. This isn't unusual if you understand how Silicon Valley startups work.
Further, according to CFO Max Scheder-Bieschin, many of those same people are actually working at Ekso again at this very moment. The Pump Stopper doesn't want you to know that because that interferes with HIS agenda.
Obviously, this situation is a long way from over, which is why I am watching it carefully. There may be more selling ahead. In fact, I'd bet on it.
But what I wouldn't do is abandon ship in a panic.
We're talking about a stock that's between $1 and $2 a share. It's not like we're talking about Netflix (NASDAQ:NFLX) at $624 a share here. So your downside is limited.
That said – to be really blunt – if you cannot handle the loss of $0.37 a share, you have no business investing in the stock market, let alone a startup company like Ekso. Investing is risky and all investments can lose money. That's why you never, ever invest money in any stock that you can't afford to be without.
Further, if you've taken emotion out of the equation and properly position sized your investments, including EKSO stock, you're not going to blow up your portfolio if something goes wrong.
And, finally, keep my original instructions in mind. Ekso is a long-term investment that will be volatile. Startups always are. That's why my original instructions were to average down if the stock fell to $0.75 per share. Barring any change in the material information that Ekso releases regarding The Pump Stopper's allegations, those still stand.
Still, I know this is tough. Nobody likes to see a stock they believe in get clobbered for any reason… but keep it in perspective.
Microsoft (NASDAQ:MSFT) is on track to do $99.3 billion in global revenue for 2015. In 1976, it booked $16,005.
Many times stocks that are ultimately big winners feel frail in the beginning.