Zero Sum, Book One, Kotov Syndrome

by Russell Blake

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  Chapter 5

  Steven had never registered the slightest interest in stocks or financial markets until he’d sold his company. Once retired he’d gone stir crazy, so as a pastime had indulged a lifelong fascination with fine timepieces by collecting high value watches; favoring Patek Philippes and Rolexes. That had gotten old quickly and he’d switched his focus to cryptography, which still engaged him as an ongoing fascination. But that didn’t pay well so he began dabbling in the market as an avocation – a fun way to make a few bucks and follow trends in industries that interested him. It started out more as a hobby than the borderline obsession it had evolved into over the last year.

  He’d lucked out and inked his company’s sale when a competitor had wanted to consolidate, and his cut of the proceeds had come to a little over five million bucks. Thanks to his attorney, Stan Caldwell, he’d been able to structure the deal so that virtually no tax was paid, leaving him set for the rest of his life. Timing was everything; one year later, he’d have been lucky to get the value of the furniture.

  Steven would have been set for life if he hadn’t subsequently gambled $2 million on a friend’s ‘can’t miss’ real estate play – which crashed and burned in the ensuing economic crisis. After that experience, his investment philosophy became all about minimizing losses while positioning for outsized gains, and thus he gravitated to biotech – with a lot of research carried out before any real money got invested. He’d gotten more involved over the last eighteen months as his comfort with the market grew, and had begun actively trading his holdings; making a decent chunk of change by playing the dips. He was hooked…but only enough to keep him occupied during his days.

  So far so good.

  And then he discovered Allied.

  Steven’s former partner and technical half of the setup, Jason Mallory, now ran a consulting firm specializing in designing computer networks; when he’d gotten back from Milwaukee last year he’d been talking about his new client, Allied. He’d built a scalable network for them capable of growing ten-fold over the next five years; which Jason had been highly skeptical they’d ever need, given his assessment of the operations and the cynicism of the employees.

  Steven did a slug of due diligence on the company and discovered several things he found surprising. First, Allied was mainly involved in vaccine development, which was not the typical small company play – it was usually the big boys who were involved in that sort of thing. Second, the internet message boards on Allied were abuzz with rumors about Griffen Ventures, which had apparently been instrumental in funding the last investment round and taking the company public. Griffen was one of the more controversial investors one could have because many of his past ‘triumphs’ ultimately blew up – to the detriment of most smaller stockholders. And one of the board regulars had discovered Griffen was a sponsor of several online business sites that had been writing puff pieces on Allied since February; about the time daily volume of the stock had quadrupled, and the price had gone parabolic for no apparent reason.

  It looked to Steven like a classic stock manipulation from the 1920s; he couldn’t believe it still happened in this day and age, but if he was right it could mean huge returns – and then some. Manipulation was usually a short-term game to create volatility and control the price. It could be effective for a while, but fundamentals and performance ultimately carried the day. A savvy investor could ride the upside wave with the big boys and make a killing – and if it came out the company was a dud, and that investor was short, he could be set for life.

  Jason’s insights told him the market had gotten it badly wrong so far, and that Allied had the stink of rat all over it.

  Peter Valentine was one of Steven’s longtime friends. Originally his father’s buddy, he’d become Steven’s mentor when Steven’s dad had passed away 28 years earlier. They’d developed a lifelong bond and Steven duly respected Peter’s perspective and opinions.

  Years of working for the FBI had left Peter with a substantial network of contacts, and when he cashed in his chips and retired he became a part-time private investigator to supplement his pension. As a concession to retirement he moved to a place where the weather was warm and he could fish every day: Sarasota, Florida. Peter was an amazingly resourceful guy, and his wife, Penny, was among the nicest and most patient women Steven had ever met.

  Steven had phoned on a weekend, figuring he’d be able to get them at home. The phone had rung and Penny had picked up. Her distinctive, chirpy voice never failed to raise his spirits.

  “Why, hello, Steven. To what do we owe the honor of this call, mister rich guy?”

  This was Penny’s customary greeting – never failed. They’d dubbed him ‘rich guy’ ever since he’d sold his company. In their universe it was unheard of to retire in your late thirties.

  “I was trying to make an obscene phone call and hit speed dial by mistake. How’s everything at geriatric country safari?” Steven asked.

  “Oh, pretty wild. We had a shopping cart get away from a neighbor last Saturday at the market, and it almost hit a car door. You probably got it on the satellite news.”

  “Yeah, I heard about that. I hope you’re all okay, I was going to call...”

  “You want Peter? I’ll get him. He’s out wrestling a crocodile or something. Hang on a sec.”

  He heard her yelling in the distance, a door slamming.

  “Hey, Steve.” Peter was the only person who called him Steve.

  “Hey, Peter. How goes the war?”

  “Bloodied but not bowed, my friend. What’s up on your coast?” Peter asked him. “How’s the beach bunny action? Still with Nadine?”

  “Uh, no, actually I’ve been seeing a girl named Jennifer for a couple of years.” (Peter knew this full well, but liked to make mischief with Nadine; a spectacular brunette Peter had sworn he’d leave his wife for had he been twenty years younger). “Peter, I need a favor, professionally-speaking.”

  “All right, Steve, what’s up?”

  Steven had laid out the whole Allied story for Peter, giving him a breakdown of Griffen’s involvement, backed up with a summary of the trading irregularities. Peter had listened carefully, stopping occasionally to write down a name or ask about spelling. At the end of the discussion they’d agreed Peter would look into Griffen and Steven would e-mail him all the info he’d accumulated.

  Steven took his time before investing in Allied, preferring caution over being foolhardy. All his inquiries confirmed his negative impression, and experience with other biotech bombs had taught him the stock could easily fall ninety or more percent within eighteen months; it was perfectly positioned to drop off a cliff if the science turned out to be bogus. If he was right, it was a once-in-a-lifetime opportunity.

  He decided to get involved. Big-time.

  Over the course of the next few weeks he violated every investing rule he knew and went short seven hundred thousand dollars worth of stock. In his view, the collapse wasn’t a matter of if, but rather a matter of when.

  The problem was that short positions required he pay to borrow the stock he’d sold short, and if the stock kept going up he could get badly hurt – if not wiped out – so once he’d established his position, he’d taken to following the stock minute by minute, real time, every day.

  The trading chicanery and implausibly glowing press kept coming and hardly a week went by where some pundit didn’t opine that the company was on the brink of greatness, or at least of being acquired at a substantial premium. So even as the company sucked money and generated nothing of apparent value the positive rhetoric was undiminished, and there were days where it rose five percent for no reason. It was disheartening, although he could see why many shareholders got sucked into the feeding frenzy. He remembered vividly one man from the message boards who claimed to have made millions from his position. It was heady stuff. Steven couldn’t believe a company with such obvious question marks surrounding its investors and technology could rate su
ch optimistic coverage in the modern, supposedly safe markets, and his anger at the manipulation mounted even as his determination strengthened.

  One morning, after watching in frustration as the price jumped for the fifth straight day on little or no volume, he had an epiphany. The idea was so simple.

  Griffen had his captive media buddies to inflate the Allied bubble. Why not create a website that laid out the case for manipulation, and which skeptically evaluated the company’s supposed innovations and scientific ‘breakthroughs’?

  It seemed straightforward. Just a matter of creating a few pages – finding a place to host it – and uploading it. A snap.

  What could be easier?

  * * * *

  Chapter 6

  Another morning, and Nicholas Griffen was furious again. He’d gotten calls from several of his investors who’d seen the new site and wanted to know if his involvement in Allied, and the precariousness of the technology, were true.

  One in particular had indicated that any publicity could endanger their ‘special’ relationship, and Griffen was no idiot. He understood the stakes involved, and further understood that while he was an important part of that particular investor’s strategy, he could rapidly lose value as his machinations were exposed. And he didn’t ever want to have his currency devalued with that player.

  The problem was, word spread faster than the speed of sound nowadays as a result of the internet, and that was hurting him. His first stage pumping of Allied had worked like a charm, luring the dumb money speculators in droves. But he still had a long way to go before they’d hit his target of a market top for the stock, and he was long in a massive way. Now, with this new website, he recognized he had a problem brewing; the longer the speculations about manipulation and the doubts about the technology were out there, the greater the likelihood a predatory player would come in and take the other side of the bet, which could be a killer given the current size of his position. The last thing he needed was a few big short funds to sense blood in the water and go to work tunneling the stock.

  He couldn’t afford that because he’d over-invested on the way up without bothering to hedge his bets, meaning the Allied shares and options were now a considerable chunk of his fund’s position; and given that he’d continued buying for months to keep upward momentum going, he was very, very pregnant with the stock.

  Trading was about to begin for the day, and he planned to temporarily dump the stock into the toilet, hopefully causing some panic selling so he could make some short term profits from a slug of short positions and put options he’d bought – both of which were time sensitive, but could make a lot of dough if the stock lost twenty percent during the day and he covered, then took the other side of the trade and the stock magically recovered.

  Griffen punched in the digits for his attorney.

  “Glen, any movement on the matter we discussed yesterday?”

  “I’m working on it. Let’s get together for lunch, someplace quiet. The club?”

  Griffen frowned. “Today’s kind of busy, can’t we do this over the phone?”

  “I’m hungry. Let’s make it around one o’clock. I’ll have some news.”

  Griffen paused, calculated. “One o’clock. Sounds great.”

  That was a good sign. It meant Glen had some information he wasn’t comfortable sharing over the phone. Perhaps things were improving after all.

  Steven finished his morning run and was at the computer by 6:20 a.m.. The markets were jittery and rumors were floating on the message boards about insiders wanting to sell ahead of bad news.

  Allied opened on time and the trading was muted, with sixty thousand shares trading hands and the price up twenty cents in the first forty-five minutes.

  Then it all crumbled.

  The boards lit up with negative chatter, the volume spiked, and the price started fluctuating wildly. The carnage hit at 10:30 EST as the stock went into freefall for six minutes.

  Breaking through $34, it fell quickly through the $33s, and then into the $32s. It just kept dropping and dropping.

  Nothing on the wire service; no news or reason for any of it. Steven sensed opportunity and decided he’d call the bluff – he’d witnessed enough of these attacks to know a head fake when he saw one. If this was a short term manipulation he could throw his day trading budget at buying shares and call options – which increased in value if the stock went up – and use the profits from the swing to offset most of this month’s losses on the Allied short position.

  He started buying shares and calls at $32.10 and kept reloading his three thousand-share buy order every time it was hit. After accumulating eighteen thousand shares and five hundred near-term expiration call options, a bid jumped in above his, and then another bid jumped in above that one. Pretty soon steady buying was coming in and the price climbed above $33.00.

  He watched as other buyers came into the market and the price stabilized. As the day progressed it became obvious a wall of buy orders sat at $34, allowing him to sell his day’s shares and options towards the close, making a tidy profit from just a few hours of understanding the game.

  Not a bad Friday; he was up 6% on the session’s buys, which had bought him breathing room on his underwater short position.

  He spent the rest of the day preparing for his flight to the East Coast, an impromptu weekend trip he’d thrown together. Jennifer was staying in California; she detested flying and wasn’t a big fan of New York. She’d agreed to stop by and take Avalon for walks and keep him in kibble, so he couldn’t complain. He kind of didn’t blame her; New York in the summer could be brutally muggy.

  Griffen entered the hushed foyer and was greeted by a vested attendant. Cherry wood paneled the walls and oil paintings of long-forgotten dignitaries scowled down at the heavy green velvet furnishings, setting a somber tone. Very old school, old money, cigars and cognac-feeling establishment. He was known at the Manhattan Polo Club, and was shown to one of the private dining rooms by the maitre d’; a serious British gentleman who’d held the coveted position for decades.

  Glen Vesper was already seated, a glass of Chardonnay half consumed, looking appropriately lawyerly. Glen was thin to the point of resembling a praying mantis, and had looked sixty-something for the fifteen years Griffen had known him. During that time, he’d seen Glen smile twice. It wasn’t a pretty sight.

  “Sorry I’m late. We’re getting creamed in the market today.” Griffen ordered a glass of Shiraz from the waiter, who disappeared soundlessly.

  Glen nodded. “I took the liberty of ordering two poached salmons. They should be here in a few minutes. I’ve some good news. We have some info on your mysterious admirer.” Glen paused to sip his wine. “First, we think it’s a civilian, not a pro. The site address was bogus, the Hotmail account a dead end; the name a fake. But we know who their service provider is, and we know they were careful. We hacked into the server and scanned the pay statements before the security software shut us down. A year’s worth of service was paid for via postal money order. No name other than the fake one, so dead-end there.”

  “Why do you think it’s a civilian, then? Seems pretty sophisticated to me,” said Griffen.

  “A pro wouldn’t have used a domestic server, for starters. And they would have used an anonymous registration service rather than filing false information. And most importantly, they wouldn’t have used a registration service that demanded payment with a credit card, which is how the registration service selected does it. You can’t fake a credit card. It was their only slip-up, and one we would have ordinarily missed.”

  Griffen smiled. “Ahhhh. I get it. You work upstream through the registrar. Have you got a name?”

  Glen shook his head. “Not yet. The registrar’s in Germany, and we’ve got one of our correspondents over there working that angle. It’ll be a few days but we should be able to get it. May cost a few bucks. I figured you’d have no objections.”

  “Gotta spend money to make money,” Griffen conc
eded.

  “Precisely. We also contacted our person at the message board service and were able to secure an IP address for the poster who’s the site creator, but unfortunately it’s a cable company IP, so there’s an additional level of diligence required to get individual account info. That probably isn’t possible, but we’re working it as well. So far Germany looks best.”

  “What can we do once we know who this is? Can we get the site shut down? Can we sue him for libel?”

  Glen looked at the ceiling. “I’m going to say this very carefully. In my opinion, there’s little to be gained by suing the person responsible for this inconvenience; I don’t see it as being worthwhile or ultimately successful.” Glen returned his gaze to Griffen. “As an officer of the court, I can’t condone you taking matters into your own hands or doing anything rash. Can I presume you won’t do anything untoward if we discover the creator’s identity?”

  “Of course not. You have my complete assurance…”

  Glen held back a smile. “I anticipated your response and instructed the German firm to contact you if they’re productive in their endeavors. How’s the Shiraz?”

  Griffen considered the wine. “Beautiful finish. I think we understand each other, Glen.”

  After lunch, Griffen returned to his office to find that a two million dollar profit-making session had turned into a net one million dollar loss on Allied.

  They’d tried some more runs at it later in the session but once the momentum was broken on the day’s swings they’d sold their remaining trading shares at a loss. Not a good day. As he closed his office for the evening, Griffen had one thought at the forefront of his attention.

  The site was screwing up his ability to make money and needed to get taken off the air, and quickly.