How To Run a Pyramid Scheme — But On The Stock Market


Members of Blair management, together with the broker groups (The Groups), took steps to increase the prices of Blair stocks in the early aftermarket (after-market meaning post IPO) for those stocks.

Before the deals went effective, there were trading agreements (The Agreements) between members of management, including Alan Stahler (Group Leader), and the leader or leaders of the broker group for that particular deal (Other Group Leaders).

Pursuant to the agreements, members of management arranged for their customers to sell, at prearranged prices, newly issued securities, which were thereafter retailed to customers of other Blair brokers (The Brokers), specifically members of the broker group for that deal, at higher prices (The Agreements).

After the company completes the IPO, the Broker Groups buy and sell to each other at higher prices. This is also known as a “daisy chain”, and it happens more often than you might expect. Market manipulation schemes such as this are more likely to occur in the micro cap sector (stocks under $5.00) because it is easier to manipulate the price of these companies due to their lower trading volumes and PPS

In addition to the activity in the early aftermarket, a primary purpose of the broker groups was to support the price of the securities during periods of illiquidity. Brokers in the groups were encouraged to be net buyers, for their customers, of the stocks they had agreed to support, and were actively discouraged from being net sellers of those stocks. For example, the brokers were frequently encouraged to “cross” trades — in other words, to place “sell” orders only if they had corresponding “buy” orders (Buy and Sell To Each Other). From time to time the broker groups caused the price of the illiquid stocks to move to artificial levels, planned in advance by engaging in programs of coordinated buying or selling on behalf of their customers.

Alan Stahler knew it was very unlikely that the brokers who were soliciting their customers to trade the Blair securities would disclose such techniques for manipulating the prices of those securities (Broker Did Not Tell Customers About The Agreement).

Blair gave its brokers incentives, in the form of higher-than-normal compensation, known as “specials,” to help foster demand for and support the price of these securities.

Below is a hypothetical example of how this would work. First, the traders buy $1 million worth of stock. They then buy and sell to each other, increasing the price by $10 with each sequence up the chain.

Trader ATrader B
Buy $1 000 000 sharesBuy $1 000 000 shares
Buy $100Sell $100 (Gives Trader B $100)
Sell $110 (Gives Trader A $10)Buy $110
Buy $120Sell $120 (Gives Trader B $10)
Sell $130 (Gives Trader A $10) Buy $130
Buy $140Sell $140 (Gives Trader B $10)
Sell $150 (Gives Trader A $10) Buy $150
Buy $160Sell $160 (Gives Trader B $10)
(If the plan works, Trader A can
sell to somebody else and
book a $600 000 profit
(If the plan works, Trader B can
sell to somebody else and
book a $600 000 profit

The brokers can further profit from this scenario by either borrowing surplus stock from another broker and short selling at these inflated prices, or accumulating their own surplus before commencing the daisy-chain. They could also solicit the company into selling them more stock before or after the price is artificially inflated.

To learn more about how this whole process works, read this article. Don’t be deterred by the length, it looks longer than it actually is because of all the images

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