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How does the scheme played by these hit piece research providers work?

We have laid it out below, but effectively by distributing "market moving" information pieces with the intent to move the market hedge funds and sophisticated traders are able to profit at the expense of the retail and smaller investors.

 

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Timeline:

  1. Hit piece authors and their cronies put together a hit piece research piece based on due diligence they claim they have done referencing public, non public, unconfirmed and unproven damning information about a company. 

  2. Hit piece authors and cronies distribute such information to their friends, subscribers, partners, etc.

  3. They all trade in the security based on the direction the report is intended to move the stock price of such securities. To build a position to benefit from the market moving report they intend to release they:

a.       Short sell securities to other investors that are then positioned to be harmed from the information they plan to release.

b.      They sell call options to collect premiums to investors that are then positioned to be harmed from the information they plan to release.

c.       They acquire put options from investors that are then positioned to be harmed from the information they plan to release.

  1. They wait a few days to fully load up on such positions they are seeking to profit from.

  2. They release the market moving information to the market including public, non public, unsubstantiated and unproven malicious and damning information for the sole purpose of manipulating the share price in violation of SEC Rule 10b-5, which causes the security plummet in value.

  3. They then either:

a.       Cover their short position shortly after report is out locking in hefty profits.

b.      They let the call options expire that they sold collecting healthy premiums.

c.       They exercise the puts and lock in healthy gains or sell the puts at a hefty premium to what they paid profiting healthily.

  1. Then they go long the security as when the company responds with the facts the security is almost likely to recover around 70% of its value in the market profiting again from the average shareholder.

  2. After stealing money from shareholders as a result of their market moving information they disperse the market they move on to the next security.

This is a great model, only if it was legal.