Timothy Sykes is a fantastically successful blogger, penny stock trader, and educator. He makes a living by teaching people how to recognize “pump and dump” schemes by penny stock promoters… and then short those stocks for a profit. They make money when the price of the stock they’ve shorted goes down… which is inevitable if you can identify a stock that is all hype and no substance.

What is a pump & dump? Essentially the promoters of a virtually worthless stock (worthless, because the company is a sham of some sort) do mass mailings of marketing materials. This is the pump. They hype a company with false and misleading information, hoping to interest people in buying the stock (taking long positions). As those people start buying up shares, the price of the stock rises rapidly. While this is happening, people who previously held the stock start selling (at an inflated price, thanks to the all the buying activity generated by their hype). This is the dump. The people selling make a ton of money on their stock.

What’s so wrong with this? The massive selling by previous owners starts to push the price back down. Eventually (often quite quickly) outsiders realize the company has no substance, and they all want to sell their shares too. This leads to a rapid decline in price, and all those who invested while the stock was being hyped and the price was rising lose a lot of money. But the original shareholders don’t care because they dumped their shares while the price was still climbing.

This is a very calculated process on the part of the original shareholders and the stock promoters. It’s not simply a factor of the market “doing it’s thing.” It’s completely orchestrated by the promoters of the stock. Their goal is to hype the stock (again, generally with no substance to support such hype, and often with flat-out false information)  so the price artificially inflates and the original stockholders are able to make substantial profits.

Tim Sykes makes his money by teaching stock traders how to recognize a pump and dump and invest in a way that creates a profit for them. They short the stock… which means they sell shares they have borrowed while the price is on the way up, and replace those borrowed shares with shares they purchase later at a lower price when the stock price inevitably falls. There is no fraud or deceit here. It’s completely legitimate. The traders using Tim’s methods are simply being smart…. recognizing a pump and dump based on publicly available information, and investing in a way that turns a profit.

(I have to say this because some people accuse Tim of being a scammer and say that his methods are unethical. Nothing could be further from the truth. He’s simply found a way to profit from the work of the scammers, without participating in the scam in any way, and there’s nothing illegal or unethical about that.)

So what does any of this have to do with Shaquille O’neal throwing a tantrum? A week ago Timothy Sykes exposed what he believed to be a pump and dump which had the active involvement of Shaq.

Late last year, a company called NXT Nutritionals Holdings Inc (NXTH.OB) spent over $500,000 on a marketing mailer that created the perfect pump & dump, which was exposed by Tim Sykes on his site. Tim says that Charles Payne of Fox News, who was promoting NXT last year, is a frequent penny stock promoter, and his name and face were attached to that NXT marketing mailer that resulted in an inflation of the price of NXT, followed by the inevitable decline. (And just to be clear, Tim’s not the only one calling out Payne and NXT. )

Of course, NXT blames the drop in their stock price on “short seller Timothy Sykes,” despite the fact that Tim didn’t even short NXTH. All he did was alert readers to what he believed was a pump and dump, and interestingly enough, the chart for NXTH shows exactly that… the price rising rapidly and then dropping dramatically. NXT Nutritionals Holdings is trying to blame Timothy for their stock price demonstrating a perfect pump and dump? Seems they have the causation wrong on that one!

And this year, NXT Nutritional Holdings did another marketing flyer that Tim again deemed a pump and dump scheme. This one included a picture of Shaquille O’Neal and an endorsement from him:

See how Shaq can help keep sales jumping

As the company’s newest spokesman, NBA all-star and world champion Shaquille O’Neal is committed to helping this company pump up its product sales in the coming months.

Turn to page 6 to find out Shaq’s game plan for promoting this new taste sensation and learn how this stock could gain 500% or more in 2010!

What the company didn’t tell people in this mailer was that Shaq held a bunch of shares of stock in NXTH, and he was able to start unloading them the same week this mailer went out. When all is said and done, the company must give Shaq a total of 3 million shares of stock for his endorsement, and he’s allowed to unload up to 20,000 shares per day, with a monthly limit of 100,000 shares.

What’s so wrong with Tim writing about this sleazy-looking situation? He called it a pump and dump, which is exactly what it looks like! O’Neal’s lawyer Dennis Roach cries:

As you well know, “pump and dump” by definition is a fraudulent activity, consequently your public statements are false and defamatory, and greatly damage to [sic] Mr. O’Neal’s reputation.

Ah, right. May Tim shouldn’t say it’s definitively a pump and dump. Just a little wording problem. (Which was fixed by Timothy changing his article to read that this is an alleged pump and dump.)

And no tantrum is complete without demands for ridiculous things from the person we’re trying to scare!

Demand is hereby made the [sic] you immediately remove all of these postings from your website, blogs, Twittter accounts and any other form of public dissemination and refrain from any other damaging and defamatory conduct. Time is clearly of the essence due to the aggredious [sic] nature of your accusations.

(Aside: Can’t Shaq afford an attorney who can put together a proper sentence and spell correctly, or can at least afford spell-check? That’s “egregious,” you rocket scientist. Not “aggredious.” And if your last name was Roach, would you use a domain name for your law firm of roachlaw.net? There are just too many jokes made available when your email address is [email protected]. )

So what is a blogger supposed to do when he wants to expose something that he believes is a scam? Choose his words very carefully, and let the readers decide. That’s exactly what Tim has done in his update on this issue: Is This Shaquille O’Neal Penny Stock A Pump & Dump? Help Me Decide! (Tim learns fast!)

And Tim gets it right. It’s important to expose scams and not let threatening-sounding legal letters scare you. Multi-level marketing lawyer Gerry Nehra tried to do the same thing to me when I raised questions about the company he represents, Shop To Earn. Making outrageous threats when writers are giving their opinions… which is incidentally protected speech under our Constitution…. should be cause for writers and bloggers everywhere to shine an even brighter light on shady-looking situations like NXTH. Investigative journalist Gary Weiss points out that Shaq and his lawyer have probably guaranteed themselves the “Streisand Effect.” The more they try to shut people up about Shaq’s  involvement with questionable company NXT Nutritional Holdings, the more people are going to talk about it. (Exhibit A – My blog post here!)

I say we should write about these companies even more because apparently they’ve got something to hide. If everything is on the up-and-up, why make such silly threats? Why not offer up the information/data that will clear your name? People like Roach and Nehra who do the bidding for these people and companies can’t do that, because they apparently don’t have data or information that clears them.

Tim writes:

But as I reread my post I was reminded again of the importance of publically exposing pump and dumps and that I was providing my readers with information that was 100% true and supported by the publicly available sources which I quoted…after all, it’s not my fault that Shaq and/or his attorneys don’t understand that NXT Nutritionals Holdings Inc. (NXTH) looks very much like a pump & dump…perhaps if I educate them, while educating everyone else through this blog, perhaps then, the threats would disappear and Shaq and his attorneys, would not threaten me, but instead thank and congratulate me for teaching them, as everyone else does….so here’s what we’re gonna do.I’ve changed the title on the old post to state Shaq’s “alleged pump & dump” and I’m gonna present the facts of the case below…after you finish reading, you can vote in the poll and you tell me what you conclude…based on my readers’ opinions, we’ll see….also please send this post to friends and family not only to educate them but so we can give Shaq and his lawyer a better public consensus.

Timothy Sykes lays out the facts about NXT Nutritional Holdings as he sees them, and his analysis is based on his expert analysis of tons of companies like this. Go to Tim’s site to read all the details, but here are the points he makes:

1. NXTH FITS THE DEFINITION OF A PUMP & DUMP
2: CONTRARY TO THE INCREDIBLY POSITIVE PROMOTIONAL MAILERS, NXTH’S BUSINESS STINKS:
3. PEOPLE HAVE LOTS OF SHARES AT DISCOUNT PRICES:
4. SHAQ HAS BEEN ASSOCIATED WITH CORPORATE SCAMS IN THE PAST:
5. PROMOTIONAL MAILERS MAKING ABSURD CLAIMS
6. QUESTIONABLE CEO BACKGROUND
7. PAID STOCK PROMOTERS LIKE CHARLES PAYNE HAVE HISTORY OF SEC VIOLATIONS:
8. THE CHART FITS THE PUMP & DUMP PATTERN

Tim concludes:

That’s my case as to why I believe NXTH looks like a pump & dump…given all those facts and considering Shaq could start selling 100,000 shares/week the first week of February, right when this latest $320,000+ mailer was being sent out, well, it just seems awfully questionable…perhaps Shaq doesn’t even know about stock and his advisors just absolutely suck…I dunno, you tell me…the one thing we don’t know yet is if Shaq sold any shares this past week…if he did, then that raises even more question, but maybe he didn’t…gotta wait for the SEC filings (speaking of, isn’t NXTH behind on reporting quarterly numbers? LOL)

Doesn’t that bring us back to the old “if it looks like a duck, and walks like a duck, and quacks like a duck”… it must be a duck??? (But don’t actually call it a duck, because a roach may tell you to shut up!)