Penny Stock Saga – Blumont, Asiasons, LionGold

The penny stock crash started on 3 Oct 2013 and caused a short trading halt. After the halt was lifted the next day, investors suffered the full brunt of crash. This is forever stored in my memory as I witnessed the share prices diving on my computer screen. I didn’t invest in any of these stocks nor did my fund. I paid more attention to this crash because a friend of mine was partially involved in the crash. Not his money, but his clients’. Lots of millions!

Rising to the peak
Way before the crash, the rising share prices caught my attention. I checked out the company, and by any chance, they are in commodity sector, the focus of my hedge fund. I looked at the balance sheets and earnings and couldn’t figure out what is causing such a rising share price. Either they have assets that were undervalued and could potentially be re-valued highly in coming months or they could be involved in certain merger and acquisition deals soon,  I couldn’t see other reasons why the share price could rise as crazily as that. How crazy? more than 10x in 1.5 years! That’s more than 1000%. In the last 1 month before the crash, the share price rose > 80%!. This just showed how crazy the stock market can be or how irrational investors can be. As Buffett said, “only when the tide goes out do you discover who’s been swimming naked”.

With such rising share price, I guess many novice investors tried to get in, make some good returns, and get out afterwards. Some could be trading on margin, meaning they bought the shares without paying first, and sold out in 2-3 days before they were required to pay. I don’t know how many novice investors were hurt in this crash. However, the crash wiped out more than $5 billion from the market. Some people said this $5 billion was created out of thin air in the first place (speculation). So, its wiping out is not illogical. I agreed with that, however, I still felt upset when many retail investors were lured to take quick profit and suffered losses. Some could have lost their life savings. It’s true that when they took the risk to speculate in the market, they had to take the responsibility for the losses, and they could also be rewarded with the gains. Some investors must have been lucky to make profit and avoided the crash. So, the point is everyone has to pay for their action and everyone did.

How could the share price rise so much? 
From the public information, it seems to me that some directors of these companies borrowed money to buy their own shares. For stocks with low liquidity, when a large amount of money is pumped in to buy the shares, that action alone could raise the share price by substantial percentage. Try to take just $200k and invest in a very illiquid company’s share. You could instantly see more than 5% return in one day. So, could that be the first trigger? I don’t know. But the rising share price is certainly the result of more and more people buying the shares at higher prices, even though the company prospect or fundamental doesn’t change much.

Who benefited from the saga? 
1. Those early investors who bought the shares and sold out before the crash. They have to consider themselves very lucky.
2. Brokers
Every time you trade, they make a cut. The more you trade, the more they make. Imagine if the investors traded (speculated) the shares worth $1 billion, and broker took 0.1% commission. That’s $1 million commission for them.
3. Bankers
They gave the loans, earned interest, and hope they could take their loans back.
4. Employees
if they have stock options, they could realize them at good profit.
5. Other 3rd parties.
This could be those who arranged the derivatives contract or any other contracts. With such contracts, the terms can be anything. For example, contracts for short term loans, which could charge high interest, or derivative contracts with put options to avoid losses. Derivatives contracts are arranged off the market and difficult to track.
6. Other groups of people you can think of?

How could the share price crash so quickly? 
90% of the market cap wiped out in few days! First, this just indicates how much overvalued the share became in the first place. Remember that the share price rose more than 80% in the last 1 month before the crash? So speculation has gotten overheated. From the news, the banks forced sell the shares of those directors. Large number of shares. That itself would dive the share prices. After the news broke out, those retail investors, especially those trading on margin, would sell too. Since everyone was selling, the share price would fall to a price where buyers thought it’s worth buying. Apparently, no buyers in this case (or not enough buyers willing to buy large number of shares to support the share price). During the crash day, my friend got a call from his boss to check the share price. He was telling his boss the share price was 1.32. No, it dropped to 1.30. No, dropped again to 1.28. 1.25 now.. 1.20 now… and so on.. You can imagine the pressure…

It’s been nearly 1.5 years and the authority has not released full statement on their investigation. I don’t know how that could take so long and how much longer it could take. Perhaps, no one could be charged for the crash. But I’m interested to find out the details of the crash. I do hope those responsible for the stock market manipulation, if any, got charged for what they did.
Some of the companies’ directors involved borrowed money to buy the shares and suffered great losses after the crash. One even declared bankrupt. They could be largest losers. I believe they were already quite rich before this saga. Unfortunately, greed got the better of them. They risk what they have and need for what they don’t have and don’t need.

You can see their current and historical share prices here:

2 thoughts on “Penny Stock Saga – Blumont, Asiasons, LionGold

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