A Fool writer tries some financial ju-jitsu on a ramped-up share.
Last year I concocted a new money-making wheeze involving outfits that sell overpriced tat to greedy but, shall we say, unsophisticated types. No, I don't mean wedding shops for footballers' brides, but boiler rooms. These stockbrokers bear as much resemblance to Selftrade or Barclays as a wire-fenced waste ground does to a Bentley showroom.
Boiler rooms cold call investors and spin a great story about some shares they have obtained cheaply. Once they've sold a few hundred million, the support operation that has kept the price aloft is ended. Like a hot air balloon that's run out of fuel, the share falls to its natural level. I decided to try short-selling one of these promoted shares and discover whether there was easy money to be made. (Short-selling is essentially betting that a share price will fall.)
In August the amazing A Fool And His Money Discussion Board flagged up a candidate --Northern Lynx. This was perfect, for at least three boiler rooms were pushing it. The clincher was the odd issue of 521m shares at 1.2p, diluting holders by 2.5 times. This raised only £0.55m after expenses of £0.45m yet the capitalisation of the company was over £39m just before the issue. A cynic might suspect that persons connected to Northern Lynx ended up with a lot of shares at a fraction of the market price.
I shorted the shares at about 6.5p. They went up, which was disconcerting, so I doubled my short. This is just the kind of over-confidence that has lost me a lot of money before, so don't try this at home.
In October a non-executive director resigned with immediate effect. This was a welcome smoke signal but didn't affect the price much.
Crash, bang, wallop, what a stitch-up
By February I'd almost forgotten about Northern Lynx when the price fell 38% on a single day. The rumour mill said that spreadbet companies were closing accounts that had been used to support the share price. Sure enough, two days later Northern Lynx announce that '[The] FSA is conducting enquiries in relation to potential misconduct surrounding dealings in the shares of Northern Lynx.' The price (2.75p) was still double net asset value (NAV) and ten times tangible NAV.
Three weeks later comes a juicy RNS. 'The Company has discovered that Chesteroak Limited ("Chesteroak") appears to have disposed of shares in the Company in breach of undertakings given by Chesteroak in a lock-in and orderly market agreement...
Chesteroak is now the subject of interim injunctions obtained by the Financial Services Authority on 25 January 2007 in connection with its investigations into Chesteroak's alleged involvement in assisting overseas 'boiler room' activities in the UK.'
The next day Northern Lynx suspended its Chief Executive and 47% shareholder, Andrew Lazare "pending the outcome of an ongoing internal investigation into dealings in the Company's shares." He resigned a day later.
I closed my short six weeks later at a very agreeable 0.3p, 95% down on my entry price.
At the AGM in May Andrew Lazare rode back into town with his posse. The whole board resigned, as well as the company's nominated adviser (NOMAD). Since all AIM companies must have a NOMAD, the listing was suspended. The company claimed this was only temporary and they would appoint a new NOMAD. In fact, they did the opposite and de-listed from AIM, leaving shareholders trapped in a private company effectively controlled by one man.
Most boiler room ramps have a capitalisation too small to be shortable, and shorting is dangerous and risky, so I was lucky to make so much money on Northern Lynx's downfall. My commiserations go to those who lost money on this.
Editor's Note: I'm delighted that Alun made money on this trade. That said, I'd like to repeat his warning about risk here. Share prices movements in companies like Northern Lynx can be very volatile indeed and you could get caught out by big share price rises that go against you. Your losses could be very large.
More:Boiler Room FAQ, FSA's Scams and Swindles, The Typical Boiler Room Victim, Northern Lynx Regulatory Announcements,
