Skyline Builders Group Holding - SKBL

Quick Take

As I mentioned in my piece on Diginex (DGNX) Tuesday, there are some names out there that have behaved like the champs they truly must be over the last couple of weeks, and here are a few thoughts on another one.

One of the things that has perplexed me over the years is thinking about how the bad actors and fraudsters actually unload their inflated shares on the unsuspecting public shareholders. Many times you will watch a stock get destroyed over some time period and eventually file for bankruptcy, and you think to yourself that the insiders just had to have cashed out along the way. Then they file a proxy and you find that no, actually, the insiders still apparently hold as much stock as they did before the collapse.

If you have followed the insider trading case of Terren Peizer at all, it would appear to be more difficult than you might believe. Mr. Peizer was a former confidant of Michael Milken, organized and ran several crappy companies, and belatedly had a measure of fleeting success with the one that got him in trouble. But even he, the market pro that he is, couldn’t manage to dump his position without alerting the watchdogs at the SEC. Surely if anyone is aware of ways to covertly offload a major position it must be him, right? Did he just commit a rookie mistake or is there perhaps some more to it?

In the old days people would speculate that the fraudsters were dually listing their shares (something DGNX is doing and always a red flag in my book) on foreign exchanges in order to dump shares offshore. Different markets have different rules on insiders and sales and holding periods and the fraudsters were believed to somehow be able to take advantage of these gaps in regulations for their own benefit.

Here in the USA, between the typical 180-day or 360-day lockups some of these new IPO insiders have to abide by, and then there are the rule 144 restrictions on insider sales and trading volumes that pretty much prohibit insider dumping once those lock-up restrictions are lifted. It might take years for a really large holder of stock (as is the case in pretty much all of these Chinese companies) to dump their position on unsuspecting shareholders.

(And I’m not talking about someone like Tim Cook looking to dump his comparatively tiny 3.2M AAPL shares out of the 15 Billion share total for a stock that trades 30M shares each day. Tim Cook dumping his entire position wouldn’t be a great signal, but it would hardly be disruptive. In the above example, Terren Peizer owned 10M shares or over 50% of OTRK’s total shares in a stock that traded less than 50K shares a day. This is where the rule 144 stuff becomes an issue.)

There is, however, one method that these companies may be using that has not received much attention, and which I thought I would highlight in today’s spiel.