58 ATaleofTwoMarkets
stoc kas to sell it short, the pump-and-dump scheme can be run just
as easily as a bust-and-buy scam. The buster is a short seller who
benefits if a stoc kprice falls because he buys stoc ktoday but prom-
ises to pay for it at a price to be determined later. So he spreads
false rumors that a company’s sales are falling and that it is plagued
with all kinds of problems. The price busts, and the scammer gets
his shares at a low price—and then gets to watch the price rise as
people figure out there was no reason for the bust in the first place.^16
That is precisely what the drafter of the fake press release about
Emulex was trying to do.
Outdoing the brazen fraud of the perpetrators of these stories
and the lax enforcement is the galactic stupidity of those who fall
for the schemes. To take just one example, any eighth-grader could
have looked up NEI on the SEC’s Web site or any other reputable
database and found that it had filed for bankruptcy a year earlier
and that it no longer had a listed telephone number for its Dallas
headquarters, let alone any assets or operations. Yet you would be
surprised how many people buy stocks on the basis of such Internet
gibberish and buy them without even knowing anything about their
business climate, let alone management or other basic financial in-
formation.
Speaking of eighth-graders, an astonishing number of people
who should have known better lost over a quarter of a million dollars
to a junior high school kid who apparently took Internet securities
fraud up as an after-school hobby. The child, 14 years old when he
began his scam, posted hundreds of manufactured messages con-
cerning nine different obscure stocks in chat rooms and bulletin
boards and entered automatic orders to sell the stocks once they
reached hype-inflated price levels. Without admitting or denying
guilt, he agreed with the SEC to refrain from doing it again and to
disgorge his profits (though without paying any additional fine or
other penalty).^17
These anecdotal accounts and hundreds more untold indicate a
dramatic increase in negative information volatility. Certainly they
do not evidence an efficient market or one that is getting more ef-
ficient. Rather, they help explain the market manias and greed-gloom
gyrations cataloged in Chapter 1. Their limited detectability and po-
licing, coupled with the public’s evident gullibility, suggest they will
continue to plague the market.
You can be sure not only that there are other crooks and swin-
dlers looking for and sometimes finding fast and fraudulent dollars