Not all traders feeding off of Galleon's wind down are making wise moves. Today squawk-boxes on tech desk were buzzing about the movement of $AERG, Applied Energetics. A penny stock position Galleon held 7.5 million shares in at the end of the second quarter.
"The stock fell on the first news of Galleon troubles and today it was doing its reversal off the news of Galleon's portfolio liquidation," says CNBC contributor Paul Kedrosky.
When a hedge fund like Galleon is thought to be forced into selling off stocks to pay back upset investors dying to get out, the street will immediately try to figure out the firm's current positions and then short the heck out of those stocks. The trick is you need an inside line, hopefully a friendly tip from the funds broker dealer or someone inside the firm to confirm what the heck they really hold. If you don't have one of those special lines then a short seller will look at whatever is listed in the funds last SEC filing known as a 13-F.
Now hear is why some traders were laughing about other vulture like traders getting burned on $AERG today.
"Because smarter money went short initially, the stock fell and they quickly took profits. Naive short sellers piled in late, and so market-makers and hedgies slipped in a few trades, force a short-covering rally and blow up the naive short-sellers," says the author of Infectious Greed Paul Kedrosky.
The stock rose 20 percent at its peak today.
"The best part, of course, is that no one has any idea if Galleon even still owns AERG given this speculative fun comes from the 6/30/09 13-F filing," says Kedrosky
Which leads us to another question-- what kind of fundamental analysis was Galleon really doing to get into a tech stock that never has traded above a $1?
Tim Connolly of Sconset Capital told Dealbreaker, "A while back SAC Capital mentioned they had a position in the stock. Galleon likely piggy backed on SAC being in the trade instead of doing fundamental research before they loaded up on $AERG."
Jon Najarion, of Optionmonster.com, told Dealbreaker the only thing he's seen are rumors of Galleon liquidating their stocks and that's acting as a catalyst for folks to get short what they thought Gallon was selling. "So now the naïve traders are taking the pipe big time. For the most part the smart money bought as the dumb money sold," says Najarion.