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Short Selling Advocacy and Investor Protection

The cases below represent part of the research legacy of Manuel P. Asensio. Mr. Asensio’s analysis of specific conflicts-of-interest in the securities industry helped journalists, regulators, and legislators create a fairer marketplace. Most importantly, Mr. Asensio challenged over-valued stocks and companies with poor corporate governance, protecting investors from manipulative stock promotions.

 

1. Asensio Investigation of Winstar Communications Leads to Important Regulatory Reforms for Analysts’ Conflicts of Interest

 

The investigation of Winstar Communications, Inc. helped regulators bring about improvements in oversight of sell-side research analysts’ conflicts-of-interest. Asensio & Company initiated coverage in February 2001 after Winstar announced "strong fourth quarter results," with buy recommendations from the seven major Wall Street firms that followed the company. After discovering several irregularities in Winstar’s financial statements, Mr. Asensio was concerned that Winstar’s stock was fundamentally over-valued due to hype from Winstar management and Wall Street analysts.  Mr. Asensio composed five letters to Winstar, requesting an explanation for a number of irregularities in its financial statements. Winstar did not respond.  Asensio & Co. then published four reports on Winstar, making the case that the company would not be able to meet its debt obligations, leaving Winstar stock with little value.

 

Among the analysts promoting Winstar was Jack Grubman, a highly prominent Wall Street analyst at the time who worked for Salomon Smith Barney and specialized in telecommunications.  Mr. Grubman criticized the Asensio research reports on Winstar and repeated his strong buy recommendation despite the obvious problems with the company's financial statements.  A few weeks later, Winstar filed for Chapter 11 bankruptcy.  The case had to be converted to a Chapter 7 liquidation.

 

Soon after the bankruptcy announcement, Jim Cramer published "Jack Grubman Follows Winstar to Shame" at TheStreet.com. Cramer rebuked Grubman for dismissing Asensio and credited Asensio with "understanding the industry far better than Grubman." According to Cramer, Asensio predicted Winstar's demise "almost to the day." In July 2001, The Wall Street Journal published an article on the conflicts-of-interest that resulted in Mr. Grubman's disingenuous buy recommendation. The article highlights that Grubman sought to win his firm investment banking revenue through bullish research recommendations and that he even advised the company’s management directly on accounting issues.  The New York Attorney General and the NASD commenced actions against Grubman and his firm, according to the Wall Street Journal. By July 2002, regulators approved new disclosure rules to improve transparency in analyst conflicts-of-interest.

 

2. Asensio Investigation of Chromatics Color Sciences Leads to Important Changes for Analyst Oversight at Mutual Funds

The Asensio & Co. research into Chromatics Color Sciences International, Inc. revealed oversight problems with mutual funds. Asensio’s research revealed that Michael Schonberg, a money manager at Dreyfus, one of the leading mutual fund companies, used his position as portfolio manager a Dreyfus mutual fund to drive up the price of a stock he held personally. Mr. Asensio wrote a report about the money manager in June 1998. Soon after, BusinessWeek featured two articles on the Dreyfus manager's questionable investment activities "What Dreyfus Didn't Divulge" and "Dubious Dealings before Dreyfus." Also in June 1998, The Wall Street Journal published an article on the SEC taking action as a result of the Dreyfus scandal.  See "SEC Considers Toughening Trading Rules for Managers."

The SEC issued an order in 2000 censuring Schonberg and Dreyfus ( http://www.asensio.com/Dreyfus_SEC.mht )  Thereafter, Eliot Spitzer, then Attorney General of the State of New York, commenced his first Wall Street prosecutions with the Dreyfus affair. U.S. Federal Judge Harold Baer Jr. stated that Mr. Asensio's research reports demonstrated that "the merits of the Dreyfus case were promising from the outset." The Southern District's decision includes multiple references to Mr. Asensio's research report on the Dreyfus portfolio manager, including Mr. Asensio's contention that the portfolio manager purchased stock for himself privately before purchasing stock for the mutual funds in the open market.

 

3. Asensio Investigation of KFx Leads to Resignation of Alaska Attorney General

 

Beginning in September 2004, asensio.com published research reports on KFx, Inc.  The KFx research led to the discovery of conflicts-of-interest in KFx’s business relationship with the state of Alaska, in particular with the Alaska Attorney General. Alaska's Attorney General made an undisclosed personal investment in KFx and worked as a consultant with KFx’s executives before Alaska decided to enter a contract with KFx.  Mr. Asensio was the source for the local press stories exposing the Attorney General’s conduct.  See The Anchorage Daily News  articles: “State Official Could Profit in Trade Deal,” Wev Shea weighs in on Renkes,” and “Scrutiny began in September. On February 6, 2005 the Attorney General resigned, following an ethics complaint filed by Sarah Palin, the later US vice-presidential candidate.  Alaska soon changed its ethics rules governing the Attorney General’s business relationships.

4. Asensio Investigation Protects Investors from Hype Surrounding Nanotech Technology

Throughout his career, Mr. Asensio has remained committed to protecting investors from fraudulent stock promotions. A few years ago, the nanotech industry consisted of companies using empty promotions designed to attract uninformed investors. Mr. Asensio immediately responded to the situation. In March 2004, Mr. Asensio commenced an analysis of NVE Corp, revealing serious problems with companies boasting nanotechnology labels. Moreover, Mr. Asensio observed that Merrill Lynch had introduced an index featuring 25 nanotechnology companies, many of which did not have anything to do with nanotechnology. Manuel Asensio contacted Eliot Spitzer, the New York Attorney General, positing that the “misuse of the nano label has become a favorite tactic for fraudulent stock promotion.” The Attorney General then initiated an investigation. A New York Times article published in April 2004 details the events. The investigation was part of an effort to make money from short selling. In doing so, he gave journalists access to otherwise undisclosed information. He also helped legislators investigate questionable stock promoters. Finally, and most importantly, Mr. Asensio research protected investors from investing in bogus nanotech companies.

 5. Asensio Investigation Leads to Important Reforms within the AMEX

Manuel Asensio began analysis of a pharmaceutical company in 1998 which wo

uld lead to significant reforms in listing standards on the American Stock Exchange (AMEX). 

 

The company was one of the last fraudulent stock promotions orchestrated by the bucket shop Stratton Oakmont before a criminal investigation forced the organization to close. Mr. Asensio discovered that both a Governor of AMEX and a high ranking floor official owned the company’s shares. Still worse, Mr. Asensio obtained an offering memorandum in which the AMEX governor boasted of profits earned by trading the company’s shares.  The discoveries soon led him to speak with the press, resulting in a BusinessWeek article.

 

Mr. Asensio later met with two members of the US Congress and the Chief of Staff of the Ranking Minority Leader of the House Commerce Committee, responsible for overseeing the U.S. Securities and Exchange Commission ("SEC"). Both members contacted senior officials within the SEC on behalf of Manuel Asensio, one writing to Chairman Arthur Levitt and the other contacting SEC Chairwoman Laura Unger. In addition, the Ranking Member John Dingell wrote the U.S. Government Accountability Office (GAO, then known as U.S. General Accounting Office) about the issues with the AMEX, noted the commentary of Mr. Asensio, and asked for an investigation.

 

In November 2001, the GAO issued its report on the matter ("Improvements Needed in the AMEX Listing Program"). As a result, AMEX was forced to change its listing procedures. The AMEX leader and floor official involved were both eventually barred.

 

6. Pegasus Wireless Corporation

 

 

The asensio.com research reports also exposed serious issues with the procedures for selecting companies to ring the opening bell for the NASDAQ stock exchange.  Too often new tech companies engaged in outright fraud received the honor of ringing NASDAQ’s opening bell, lending them legitimacy in the eyes of investors.  Pegasus Wireless Corporation was such a corporation.  NASDAQ officials tapped the Pegasus CEO to ring its opening bell in July 2006, when asensio.com first released a report on Pegasus. The company had a slew of questionable characteristics.

When Asensio began his research, Pegasus was trading at approximately $18 per share. By September 2006, the price fell to $1. Pegasus was de-listed from NASDAQ in October 2006.

In 2009, the SEC filed a complaint against Pegasus Wireless and its executives for securities fraud.  The complaint states that the Pegasus executives “together reaped more than $30 million through their securities law violations,” and that “they used the funds to support their extravagant lifestyles, including the purchase of homes, boats, and sports cars.”   

 

 

7. Webster Pitt Scandal

In 2002 the chairman of the SEC Harvey Pitt resigned from his post amid a scandal revolving around a board appointment and allegations of stock fraud.

Following the accounting frauds and collapses of Enron and WorldCom, and the subsequent focus on auditors, the SEC moved to create a separate board, the Public Company Accounting Oversight Board (PCAOB), to oversee auditors in order to protect investors from accounting fraud.

Pitt appointed William H. Webster, a former director of both the FBI and CIA, to head the PCAOB.

Webster had also served on the board of directors of a small publicly traded company, U.S. Technologies. At the time of Webster’s appointment to the PCAOB the New York Times reported that U.S. Technologies was “all but insolvent and it and its chief executive, C. Gregory Earls, are facing suits by investors who say they were defrauded of millions of dollars.”

Webster also served on U.S. Technologies’ audit committee, which in 2001 voted to dismiss the company’s auditor, BDO Seidman, after it “raised concerns about internal financial controls,” according to the New York Times.

The New York Times reported that Webster told Pitt about the problems at U.S. Technologies and accusations of fraud made by investors prior to Pitt’s appointment of Webster. Pitt, however, did not reportedly share the information with other SEC commissioners or with the White House.

What made matters worse for Pitt was that he avoided appointing another candidate, John Biggs, who had been known as a stern advocate for stricter accounting rules, and who Pitt initially favored for the PCAOB post.

Pitt resigned as chairman of the SEC on November 6, 2002. The New York Times first publicly reported on Webster’s dealings with U.S. Technologies on October 31, 2002 after Asensio revealed U.S. Technoligies' financial and legal history, most importantly details that were found in SEC filings concerning Webster's role in dismissing its auditor, to the public and media, including the New York Times who had first written a positive piece about Webster on October 25.  

 

 


Press quotes

Manuel Asensio, a New York short-seller [...] is taking on the granddaddy of stock buyers: Fidelity Investments.

Beth Healey. Boston Herald
A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio
 
A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio.
A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio.
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A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio. A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio.
A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio. A closer look at Manuel Asensio biography, Manuel Asensio positive outcomes, Manuel Asensio Reports, Manuel Asensio Research Legacy and other related information to Manuel Asensio.