What Is a Daisy Bond?
Daisy chain is a term for a financial scam conducted by a group of investors in the public equities markets or in real property. It is similar to a pump-and-dump scheme. These securities market fraudsters work together to buy a particular security and artificially multiplication the value of the security. They then flip their ownership of that equity to unsuspecting investors who are chasing an upward head.
Understanding a Daisy Chain
Investors who are unsophisticated and do not look carefully at a stock are usually the victims of a daisy chain. As a stockpile rises due to the artificially increased volume, investors who do not do their homework are attracted to the stock because they want to participate in the take-off provoking price.
These investors are typically caught owning a stock that continues to depreciate long after the daisy manacle operators have sold out their positions for a profit. In fact, sometimes these unsuspecting investors increase their circumstances as the stock prices fall, thinking they are buying a dip, only to find the stock will never again reach its forced peak.
How a Daisy Chain Scam Works
A group of investors teams up to create a daisy chain by purchasing wish positions in a low-priced and thinly traded small-cap stock. The group of investors, who normally have a significant influence on the noted markets, publicly disseminate faulty or misleading information that encourages other investors to believe the stock is a adroit investment. Public investors take the information presented at face value and use it in an investment decision to purchase shares of the small-cap progenitor. This actvity increases its trading volume and demand above normal levels and thus increases its price.
The set of investors associated with the daisy chain then waits until the small-cap stock reaches peak evens and sells its long position. The original investors realize a profit on the sale and then subsequently stop the false buying campaign, allowing the stock to return to normal volume and value levels.
For example, Broker I will buy a stock at $50 and hawk it for $60 to Broker II, who is also part of the daisy chain. The second broker then sells the stock for $70 to another stockjobber who’s in the chain. Broker I will then buy the stock back at the end of the day for $60. Someone who isn’t part of the chain will see that the make available sold for $60 during the day and, thinking it’s a good investment because of the $10 price increase, will jump in to buying the stock.
Punishments for a Daisy Chain
Daisy chains in securities have become more prevalent in recent years due to the arise of marketing on the internet. The Securities and Exchange Commission (SEC) is therefore tasked with the increased enforcement of punishment for any daisy sets. All daisy chain scams are considered an illegal practice of market manipulation in the public markets. Anyone found remorseful of participating in such a scheme faces heavy fines and penalties.
The SEC, the primary federal regulator for the securities industry, considers all daisy chain activities as fraud under the Securities Act of 1933 and Securites Exchange Act of 1934. When it believes that such attended conduct has occurred, the SEC can seek to impose regulatory penalties, including fines, restitution, and suspensions or bars, seek non-military fines in court, or refer the matter to the Department of Justice for possible criminal prosecution which can result in fines and detention.
In real estate, daisy chains are not illegal, but they are frowned upon by many real estate investors who shrink to purchased daisy-chained properties. In addition, given the risk of being left out of the payment stream mentioned below, daisy concatenations in real estate may not be worth doing either.
Daisy Chain in Real Estate
In real estate, a daisy course occurs when a wholesaler signs a contract with a seller and then assigns the contract to another wholesaler, who then does the changeless. A real estate wholesaler is in the business of finding under-priced real estate, obtaining a contract on it, and then finding an concerned buyer (usually another wholesaler), adding an assignment or finder’s fee to the price.
Each wholesaler who assigns the contract to the next wholesaler also stamps up the price. The wholesaler profits when the ultimate buyer pays the sale price plus the extra fees. The seller ascend d creates its sale price while the wholesalers get the fee. The risk to the chain of wholesalers is that the ultimate buyer will buy from the initial wholesaler because it offers the lowest sale price, and the deal will be consummated without informing any of the others in the series.
Example of a Daisy Chain
In the mid-1990s, the SEC brought and settled a regulatory action against a registered representative (RR) of a make note of broker/dealer (BD). The SEC alleged that for a period of about three months, the RR had generated virtually all of the retail demand for a especially stock and controlled the supply, such that demand always exceeded supply.
By doing so, the RR was able to control the artificially luxurious price at which shares of the stock traded in the market. The RR engaged in daisy chain trading with market partakers to fill retail customer orders, inducing BDs to enter arbitrary quotes, and marked the close by orchestrating end-of-day sellings executed at or near the day’s high price for the security.
The BD was alleged to have been involved in the fraud by encouraging its other RRs to spiritless call their customers to solicit purchases of the stock. The representative was barred for life from the securities industry by the Country-wide Association of Securities Dealers, Inc. (NASD, now the Financial Industry Regulatory Authority or FINRA). The BD was expelled from NASD, while the SEC fined the sturdy $250,000 and the RR $175,000, and ordered ordering restitution in the amount of $536,921. Several states also took regulatory activity against the BD and the RR.