Calls have started to go out for the Securities and Exchange Commission to investigate yesterday’s Engadget-Apple Affair. Shares of Apple were down nearly 3% yesterday—taking something like $4 billion off the companies capitalization—after the tech blog Engadget reported product delays for the iPhone and a new Mac operating system. The blog later had to retract the story, calling it a “false alarm,” after Apple issued a definitive statement denying the delay.
“The SEC should definitely be looking into this,” a former employee of the securities regulator told DealBreaker. “There are all sorts of reasons someone might plant this story, and it looks like it could be market manipulation.”
The former SEC staffer indicated that there are a number of ways to profit by causing a temporary drop in a company’s stock. The simplest would be to buy the stock on the dip and sell it when it recovered. A more complex reason for engineering a dip would be to cover a short position in the stock, or to cover a call. May options in Apple are due to expire on Friday, raising the possibility that the panic was intentionally set-off to game the options market.
Trading volume in Apple stock was high during the brief period when the story seems to have set off a panic. At least one trader dumped ten to fifteen million worth of the stock within fifteen minutes after the phony story was posted, according to commenters at Ars Technica (via Business 2.0). Visitors to the Yahoo message board say they have asked the SEC to investigate.
Not everyone is confident that the damage to Apple is done.
“Watching the price drop like that based on one blog story might indicate a weakness in the stock,” one trader told DealBreaker. “What if it had been true? What if there’s a fire in a factory that slows production? Apple investors seem a bit prone to panic, which would make me nervous if I were long this stock.”
At AOL’s BloggingStocks, Georges Yared voices a similar concern. “One thing is for sure. If there were a delay in the iPhone's release date, the "expectations" of earnings beats and earnings raises would certainly get pushed out a quarter or two, so the urgency to be involved with the stock would lessen. Without the urgency factor and the "do I have a full position in Apple?" factor, the stock could lose a bit of its momentum and could be stuck in a trading range until definitive details and schedules are known,” Yared writes.
Posted by Glenn , May 17, 2007 11:23AM
I think the fact that the stock drops because of one blog story shows the manipulation.
Posted by joe , May 17, 2007 11:32AM
Yeah, lets investigate this "manipulation" as opposed the thousands of options and CDS trades that are clearly front running buyouts.
Posted by Anonymous , May 17, 2007 11:34AM
Let's say I have a rumour about a stock. I email the rumour to a bunch of blogs, and take a trading position in the stock at the same time. The rumour impacts the market but turns out to be bogus information. Have I broken the law? I'm going to be investigated by the SEC? What kind of gulag is that?
Posted by Anonymous , May 17, 2007 11:36AM
"Visitors to the Yahoo message board say they have asked the SEC to investigate."
Those whakos who post on Yahoo Finance message boards are constantly claiming that they've asked the SEC to investigate. Usually they're asking the SEC to investigate Cramer.
Posted by Anonymous , May 17, 2007 11:38AM
"Usually they're asking the SEC to investigate Cramer." ... Or short sellers (er, I mean, counterfeiters).
Posted by SDH , May 17, 2007 11:39AM
IT WAS ALL ONE BIG FUCKING RUSE, JUST LIKE PRINCE HARRY GOING TO IRAQ!!
Posted by , May 17, 2007 11:48AM
"I email the rumour to a bunch of blogs, and take a trading position in the stock at the same time. The rumour impacts the market but turns out to be bogus information. Have I broken the law? I'm going to be investigated by the SEC? What kind of gulag is that?"
Yes, taking positions then sending fake news would define "market manipulation" to a T. And it wasn't a "rumor" - it was a forged email from Apple.
Posted by Anonymous , May 17, 2007 11:56AM
Anonymous 11:48, what if I can't tell the difference between rumor and fake news?
Posted by law scholar , May 17, 2007 12:00PM
If you have heard a rumor and reasonably believe that it is true, spreading it probably won't get you in any legal trouble. But trading against the rumor suggests that you might not believe it.
It shouldn't be very surprising that it actually may be illegal to knowingly spread falsehoods about public companies as part of a scheme to profit from trading stock. Do you really believe you have some sort of right to engage in this kind of fraudulent scheme?
Posted by anon 11:48 , May 17, 2007 1:31PM
Well, the fact is that Engadget was basing the story on a (forged) email from apple. So, if you write a fake email, and send it in, that's pretty cut and dry. Engadget wouldn't run a story based on pure rumor.
And starting rumors and then trading is illegal, there have been dozens of such cases. Also called "Pump + Dump." See http://en.wikipedia.org/wiki/Jonathan_Lebed
If you think the rumor is true, you're probably basing in on some kind of insider information, and that's also illegal.
Posted by Bulging Bracket , May 17, 2007 4:03PM
All depends on what the basis for the rumour is. If somebody canels their vacation or looks completely panicked - then it's OK. If your Apple guy (or somebody from their fab) tells you they're screwed... you'regoing to jail. All about the fiduciary duty and whether you know/should know they have a fiduciary duty.
Kind of like tax advantaged transactions - there has to be sme risk of loss for it to be real. Talk to the bankers from the Enron & Entergy transactions about just how important not making guarantees is!