As everyone expected it would (and the only people wondering were those puzzled as to why it hadn't happened sooner) the SEC has stepped in and suspended trade in the stock of Cynk Technology. This is the company with negative net assets, no turnover, a barely functioning website and a stock market valuation that soared, at one point, to $6 billion.
This isn't normal and so quite rightly the stock has been suspended so that everyone can work out what has been happening here. The basic background to the company I explained here, The Mystery Of Cynk Technology, No Assets, No Turnover And A $4.5 Billion Valuation.
The basic intuition is that of course something is going on here but no one is as yet quite sure what it is. The obvious suspicion is that this is a pump and dump operation, something that's illegal but regrettably common in the lower depths of the stock markets. The idea is to take a very thinly traded stock and drive the price up by purchasing some of it. People will note the price rising and some of them will (or might) purchase some, pushing that price up further. At which point sell out of that original stake and bank the profits. This is market manipulation and is frowned upon. But it is also very common.
It's possible (but, please note, we have absolutely no evidence that this is true and certainly none sufficient to point to any individual or group as being responsible) that someone was trying this at Cynk Technology. But if they were it all got a bit out of hand: no one is going to ignore a company suddenly rising 23,000 % to a $4.5, $6 billion valuation. Meaning that dumping the stock and then hightailing it for the hills isn't going to work as you'll have the Hounds of the SEC following you into those hills. And they will find you.
Over at
What is so pretty about this scheme is that it doesn't rely on anyone being wrong.6 You never need to find an outside investor to say, "oh hey this nonexistent social network looks like a great buy at $600 million." Instead you just need a few people to say, "wait this nonexistent social network seems terribly overvalued at $600 million and I am going to bet against it." That's ... that's what they're supposed to do, right? Short sellers are supposed to try to root out scams and bet against them. That's good for price efficiency (it keeps down the valuation of scams) and it's good for exposing scams (short sellers have every incentive to expose frauds to the government to drive down the price of the frauds and make money for themselves).
To explain: so, OK, someone makes it look like Cynk Technologies is going through an obvious pump and dump scheme. The obvious way to do this is to actually run one: buy some stock, noisily and over time in a number of transactions and watch that price rise. Excellent: so now the price has risen (and the more outrageous the rise the better for this scenario) and the short sellers start to take a look. Obviously there's good money to be made in shorting a pump and dump so they do.
However, in order to short a stock you've got to go and borrow the stock you're shorting. And those who have lent you that stock can demand it back as an when they wish. So if you've shorted, and you've borrowed the stock from the people behind the plan, they can demand it back: at which point you've got to go and purchase stock in the market to be legal in your short. But, if those people running the scheme own all the stock that it is possible to either purchase or borrow then you've, well, you've got to deal with them, haven't you?
As Levine points out, this means that the people running such a scheme are taking money out of the hides of the shorts rather than suckers on the general market. But it's still ,as Levine also points out, something that we're probably not all that happy about having happen.
We will, eventually, find out what has actually been happening. The mills of the SEC may grind slowly but they do grind small. At present it could be any of the above stories, could just be the market in a thinly traded stock having a mind burp. But we will find out....probably about a year down the line.
