3 takeaways from the Cynk stock blowup

July 11, 2014: 2:27 PM ET
Cynk technology: From boom to brakes
NEW YORK (CNNMoney)

Cynk Technology may have no revenue, profits or assets, but it's certainly made a name for itself this week.

The mysterious social network captured the attention of the finance world (and eventually regulators) by soaring an incredible 25,000%.

The stock went from trading at 6 cents a share to as high as $21.95 on Thursday. The Securities and Exchange Commission suspended trading Friday due to concerns about the "accuracy and adequacy" of marketplace information as well as "potentially manipulative transactions" in the stock.

Here are three takeaways from this episode:

1 If it looks too good to be true... The suspicious case of Cynk Technology (CYNK) should serve as a reminder to investors of the dangers of playing in the shadowy and illiquid over-the-counter markets.

In its latest financial report with the SEC from November, Cynk Technology lists no revenue or assets. It also reported a $1.5 million loss for 2013.

Stocks like Cynk don't have the same transparency as ones listed on the New York Stock Exchange or Nasdaq, and it is much harder to buy and sell shares. These are markets for highly sophisticated traders and risk takers, especially because there can be volatile swings, sometimes for legitimate reasons.

"It's not like grandma and grandpa were buying or selling this stock," said Charles Whitehead, a professor at Cornell Law School.

2 Was the SEC too slow to act? It took a blog post from ZeroHedge and subsequent media attention before regulators halted trading in Cynk on Friday.

That suggests there is no price trigger (such as a 20,000% surge) where the Securities and Exchange Commission gets alerted to suspicious trading activity, at least in over the counter (OTC) markets. The SEC declined to comment.

Related: Stocks in a Friday funk

The fact that the SEC wasn't on the case earlier could be due to the nature of the OTC markets, where stocks that don't trade on exchanges like the Nasdaq change hands. These stocks are not subject to the strict reporting standards that companies like Apple (AAPL, Tech30) must adhere to.

It's also worth noting that the SEC faces a higher bar for taking action in cases where there is no false press release or similar overt action.

3. Was this another short-selling disaster? One theory is that Cynk's stock was driven up by a market manipulation scheme where a small group of insiders draw the attention of short sellers, who borrow and then sell shares in the hopes they can buy them back later at a cheaper price. The difference between selling high and buying low would represent their profit.

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Because only a limited amount of shares are available, access is controlled by insiders who can then artificially pump up the stock price. Short sellers are essentially "squeezed" -- they now need to buy shares but at a much higher price, perhaps from one of the insiders.

Such an operation could also violate securities laws.

"If you're a short seller, don't short stocks that are as illiquid as this one was, held by a small group of guys who can manipulate price -- unless you're prepared for the consequences," said Whitehead.

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