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EDITORIAL: What Nobody Has Said About the CYNK Fiasco



July 13, 2014: Much has been written about the CYNK Technology Corp (CYNK) scam over the last few days. CNBC has covered it extensively with several articles on their website and analyst commentary during the course of their regular programming--unusual since the network does not usually bring penny stocks into focus.  In the course of their reporting, CNBC analysts have shown how surprisingly naive these stock market "masters" are about penny stocks and the operation of Pump & Dump schemes.

Others have published their own conclusions, some with self-serving motives----this blog post by self-professed guru, Tim Sykes, comes to mind-- or "what the heck are you thinking" messages, like this Motley Fool piece.

We think that the closest-to-the-truth analysis, detailing what really happened, has come from Paulo Santos in an article published by Seeking Alpha. CYNK was a carefully executed scheme designed to squeeze shorts rather than just simply dump stock into the market--although we're sure there was plenty of that too. The lesson that should be learned here is one we've preached all along: shorting penny stock promotions is just as dangerous as going long on them.  In the end, the only ones sure to make money on these schemes are the ones perpetrating them.  It has long been unfathomable to us that stock traders would allow themselves to be used as marks, parlaying their hopes of making a few dollars into windfalls of millions for the unscrupulous.

What nobody else has said

There is no sense in rehashing the events of the last few days when it has been done so well by so many. That is why we've resisted analyzing, commenting, or conducting a forensic study of the happenings of the last few days, even when asked for a "quotable" from a major media outlet or an opinion from those in the general public who look to us as a beacon of truth in these clashes between fraudsters and the well intended. We couldn't possibly say anything that hasn't been already said--sometimes eloquently--several times.

Ah, and yet here we are, posting this editorial. And that's because we've come to the realization that through all of the insight offered by CNBC and Sykes and Seeking Alpha and Promotion Stock Secrets and Motley Fool and The Deal and Businessweek and Bloomberg and even the SEC, nobody BUT NOBODY has stated one very important fact: it's obvious; it's important; it's critical.

CYNK is not alone.  There are hundreds if not thousands of CYNKs out there. Dozens of these schemes are being perpetrated every day. Such are the facts of life in the penny stock market, also known as the OTC.

Why CYNK?

The only reason that the CYNK scam came into the limelight was because of the brazen way in which the scheme was carried out.  Had this been just another Pump & Dump scheme carried out over time and with smaller moves over longer periods of time, it is unlikely that it would have been more than just a blip on a screen. Certainly CNBC would not have taken note had the market cap not reached unreasonable levels so quickly. It was that network's reporting that hastened the scheme, as trading volume tripled on July 10 over the previous two days, sending the share price temporarily into the stratosphere and creating enough interest to enable the those with larceny in their heart to cash in some of their chips.  It is also what hastened the SEC's interference, so many of those chips were left on the table.

By why CYNK? It was a year ago that a similarly executed short squeeze scheme was perpetrated on shares of Lot78, Inc. (LOTE).  In 2011, LEXG was the short squeeze play which sent the stock to ridiculous valuations. Nobody said "boo" about either of those two schemes; certainly not the mainstream media.

CYNK is not even close to the biggest penny stock fraud out there. A look at the Past Performances chart over the Pump & Dump period, shows that the total volume traded was only 866,665 shares, which certainly supports Santos' theory that the insiders controlled the stock. Furthermore, if we assume that Santos is correct in his presumption of wash trading in order to pump the share price, then the actual retail trading volume was considerably lower, as is the total dollar volume of $12 million.  This is not even close to being in the top ten of Pump & Dump schemes for 2014 thus far. Although chances are the scheme would have been longer lived had the publicity not forced the SEC's hand.




There are so many much bigger Pump & Dump schemes past and present that trivialize the CYNK scheme, but whose antics have not been noted because they have avoided incurring wild swings. Many of them are being perpetrated by famous names, such as former Fox Business News contributor Tobin Smith, who was fired by the network after it realized that he was an integral part in such schemes. Other frauds are conducted by convicted felons, sometimes through veiled associations, but often openly.

An example of a bigger Pump & Dump scheme

One of the biggest ongoing schemes has to be that of Hemp, Inc. (HEMP) an operation masterminded by former guest of the federal penitentiary system, Bruce Perlowin. One of the beneficiaries of the recent frenzy in marijuana stocks, HEMP has amply lined the pockets of its masters while perhaps staying under the regulators' radar by mostly relying on social media pumping of its shares and not on the mainstream newsletters than appear in traders inboxes on a daily basis. HEMP has also begun a policy of announcing deals for consulting services with other OTC companies, in an obvious attempt to boost their share prices. Most of these companies were barely in existence prior to their association with Perlowin. Many have several hundred million--REVI, WBXU, LKEN--or billions--STBVHIMR, DEWM-- of shares outstanding that are trading at hundredths of a penny. WBXU has been suspended from trading since it announced its association with HEMP and is now relegated to trading on the little-followed grey sheets.

HEMP seemingly prints share certificates at will. It would require a team of accountants to calculate the number of shares outstanding fully-diluted, but it appears to be several billion more than the current 3 billion shares authorized. Perlowin's sleight-of-hand has enabled HEMP to be deemed worthy of a $145 million market cap, while listing only $8 million in assets on the books--we would question the accuracy of that valuation--on a non-fully diluted basis. Fully diluted, HEMP probably carries an unfathomable market value of over a billion dollars.

HEMP Chart

While the pot stock frenzy of last winter has subsided, HEMP still trades million of dollars' worth of stock every month. The reported change of lifestyle in Perlowin, his ex-wife and his many associates, who are reportedly flashing money and engaging in many extravagances, supports our estimate that the HEMP scheme has provided at least $30 million in improved amenities to the group.

If the SEC ends its summer hiatus of imposing trading suspensions on questionable marijuana-related companies, a temporary halt to trading in shares of HEMP and its associate penny stock companies, could finally be the alarm that awakens those who believe in fairy tales, and would certainly be a jolt to other marijuana schemes.

So whose fault is all this?

Whenever a scheme like CYNK ends, leaving bag holders stuck with millions of dollars in losses, the victims look for a scapegoat.  Well first and foremost, these marks should look in the mirror.  The allure of a get-rich-scheme has left them with egg on their faces, as such schemes are apt to do. Then, of course, there's the perpetrators of the schemes. Few are ever brought to justice and still fewer face criminal charges. Most of those that must pay the piper get away with a slap on the wrist, a hard-to-enforce penny stock ban, and a monetary penalty that is usually a fraction of the actual value of their ill-gotten booty.

The one entity that is never called to account, but must be cut a fair slice of the blame pie, is the United States Securities and Exchange Commission, commonly known as the SEC. This is the Federal government's authority on the public markets.  The government is responsible for protecting the public good and the SEC surely is deficient in their responsibility. The CYNK fiasco proved that the SEC is capable of stepping in at a moment's notice to protect investors. It's just unfortunate that it took massive publicity of this fraud to force the regulator's hand.

Perhaps CNBC and other mainstream media outlets should look at other, bigger penny stock schemes out there designed to fleece America.