Tuesday, June 27, 2006

高塔引凤

“Gao Ta Yin Feng”

The high tower attracts the wind. Or, as another Chinese proverb states, more bluntly, the nail that sticks up gets pounded flat.

The left-wing blogosphere, especially that portion of it centered on Markos Moulitsas’s Dailykos community blog has had a brief opportunity to bask in its sense of importance as a leader in “netroots” Democratic Party activism.

Crashing the Gates, a handbook on reinvigorating the Democratic Party co-authored by Moulitsas, has garnered respectful mainstream reviews and impressive sales. The Kos community recently concluded a successful “Yearlykos” conference in Las Vegas covered by the mainstream media, and has received recognition of its role as a nexus of support for Ned Lamont’s burgeoning challenge to Connecticut Senator (and Friend of Bush) Joe Lieberman in the upcoming Democratic primary. Beyond that, there is a general feeling that the ever more evident failings of the Bush administration—and the possibility that the Republicans may stumble badly in the 2006 elections—dictate that its earliest, most consistent, and vociferous critics deserve a hearing.

But attention has also brought scrutiny--and attack.

Mainstream punditry dipped its toe in the left blogosphere and sniffed that on-line discourse was woefully lacking in common courtesy and devoid of ideas beyond anti-Bush vitriol. The New Republic, a liberal stronghold that has been struggling with the incubus of its publisher’s wholehearted support of Joe Lieberman, ran with a dubious expose alleging that Moulitas was orchestrating the blogosphere’s policy positions through a combination of intimidation, secret instructions, and monetary incentives.

The most embarrassing development, however, has probably been the revelation—perhaps unearthed through opposition research by certain factions in the Democratic Party that have been treated harshly on the Dailykos website-- that Moulitsas’ co-author for Crashing the Gates, Jerome Armstrong, was sanctioned by the SEC in 2003 for activities as a paid-for stock tout in 2000.

When I read the SEC
complaint relating to the case—which has been thoughtfully plastered all over the Internet by the right-wing blogosphere—I saw it pertained to China-related entities in situations I recognized and understood. Armstrong was allegedly involved in efforts to make a killing on the Over the Counter (OTC) stock of BluePoint, a company linked to an enterprise in China developing Linux-based applications.

In the golden days of the Clinton-Gore Internet bubble economy, many Chinese companies were attracted to the idea of going public in the United States. The irrational exuberance of our financial markets created the perception that large amounts of capital and insanely high valuations could be won by companies that packaged themselves the right way.

Big Chinese companies could go the blue-chip route by preparing an initial public offering on a major stock exchange with the assistance of the big investment banks.

Smaller companies didn’t have that option. So they were sometimes seduced by promoters who convinced them that the onerous, time-consuming, and expensive process of a public listing could be short-circuited through the purchase of a defunct company or “shell” whose corporate status had nevertheless been maintained and whose stock—though currently worthless “penny stocks” listed on “pink sheets”—could still be traded on some stock exchanges. Once the company’s high-concept, high tech, China-linked “story” had been skillfully presented to investors and its rosy prospects demonstrated to a market hungry for stocks with growth potential, so the pitch went, a successful stock offering would inject new capital—and investors—into the company.

Often the Chinese entities involved held the assets of valid, profitable companies in their own land, which made plausible the promise that they could eventually transcend their tawdry origins on the pink sheets and gain respect in the West as legitimate, profitable enterprises with widely owned and highly valued stock.

It’s not clear how often—if ever—the promise was fulfilled. In Armstrong’s case, it appears that the grand plan was short-circuited into a stock trading scheme in which a group of U.S.-based insiders controlled virtually all the unrestricted stock and engaged in self-dealing and promotion designed to ramp up the price and make a quick killing before the inevitable crash.

If I’m reading the SEC complaint correctly, it isn’t claimed that Armstrong knew about the rot inside the company he was touting. A mere $20,000 payday (Armstrong’s alleged profits) wouldn’t seem to place him in the inner circle. So it can be argued that at the most the SEC alleged he was simply pumping for pay without knowing that stock was bogus. And maybe the SEC went out of its way to hammer him so he’d help make a case against the rest of the promoters.


Nevertheless, it’s not a pretty picture, with elements of greed and venality that are perhaps acceptable skills for a political consultant but ill-befit the image of a dedicated democracy activist.

So it’s understandable that the left blogosphere is conflicted by the revelation that one of its higher-profile members was implicated in a sleazy penny stock scheme. It stings especially since the blogosphere—both left and right—is eager to be recognized as a source of blue-chip opinions, information, and advocacy, occupying a legitimate place in America’s political discourse—and not just a penny stock charade kept afloat by semi-employed, motormouthed losers.

In the interests of disclosure, I don’t know Jerome Armstrong or the company he touted.

But I was employed for a time (for cash, not stock) by a Chinese company that attempted to achieve a stock offering in the United States through the penny stock route.

Thankfully, the deal never went anywhere because of a toxic combination of greed, incompetence, and mistrust, and by the collapse of the stock bubble that was the necessary precondition for trying to move a corporation off the pink sheets and into respectable company.

I bet Jerome Richardson wishes he could have been so lucky.