BIG PLAYERS, LITTLE STOCKS, AND NAKED SHORTS

Part 2 by David Dayen

Part 2

A self-appointed stock sleuth finds financial giants trading extensively in little penny stocks like the one he owned that tanked. And he learns something amazing: Some brokers can sell shares that don’t actually exist.

CHRIS DIIORIO HAD lost a million dollars when the penny stock he was betting on shed 98 percent of its value in a matter of weeks. But when he looked deeper, he found this wasn’t a typical penny stock pump-and-dump scheme. He was determined to get to the bottom of it.

For one thing, there were two huge companies involved.

UBS, one of the world’s largest private banks, seemed to have no business trading in penny stocks. “This was a $50 billion-plus bank, it didn’t seem like penny stocks would move the needle,” DiIorio said. But just in December 2011, UBS’s trades in 32 penny stocks represented over half of the firm’s total share volume, according to his calculations.

In a one-line response to a series of detailed questions from The Intercept, UBS media relations director Peter Stack wrote in an email: “UBS applies strict due diligence and anti-money-laundering standards to all its business.”

After some research, DiIorio became even more disturbed by the presence of the other company, Knight Capital, which has traded an average of more than 2 billion shares of penny stocks daily for the past three years.

Read on.

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