The following day, one of this blog's readers ("Jim") made a related comment that I hope you did not miss.

Measuredmarkets Inc., a research firm in Toronto, found indications of suspicious trading in the securities of 41 percent of companies receiving buyout bids.

Of course this was immediately dismissed by the S.E.C. who "would not comment on the study but said that it had looked at Measuredmarkets' system and concluded that surveillance techniques of self-regulatory organizations like the New York Stock Exchange were more sophisticated." LOL!

Link to story:

---

When I clicked through the link, I found a case study that eight of my readers (Team BFT plus Leisa) became participants, without any of them or me knowing at the time.

You see, it was August 10 at 3:59pm that I sent the mail out re Bally Total Fitness. Here's the mail.

Sent: Thu 8/10/2006 3:59 PM

Hi All,

This is the TeamCara BFT project

Bally Total Fitness (BFT) [GICS 25]

http://www.hoovers.com/bally-total-fitness/--ID__47485--/free-co-factsheet.xhtml
http://finance.yahoo.com/q?s=bft
http://stockcharts.com/gallery/?BFT
http://www.investertech.com/tkchart/tkchart.asp?stkname=BFT&wt=60
http://www.advfn.com/p.php?pid=financials&btn=s_ok&symbol=bft

The issue here is whether this Company is a potential take-over candidate. Sales are flat, there are financial losses, and employee numbers are down a lot. In addition, the Company does have credibility issues:

In one article the dislike for management is palpable: "We do not think the CEO is up to the task," said Pearlman, who runs a Los Angeles-based hedge fund, Liberation Investments LLC. "The capital markets hate him, the bondholders don't like him, and there's a credibility issue with the management team."

But Bally is an internationally recognized brand, so eventually if the stock gets low enough, it could be the object of attention of private equity players.

The stock was trading as high as $9.92 in Mar-Apr, but is now down under $4.

In Sept 2005, the stock took off from about $3.40, to go all the way up to almost $10 in 7 months. But whatever drove it, has run out of steam. The share price will likely fall back to the very low 3's and maybe the 2's. Yesterday it hit $3.50, and RSI on the 30-minute data almost hit zero, which I haven't seen before. Volume of selling was huge.

There are now senior management changes. Apparently the new CFO is interim, which suggests that somebody is putting a plan in place to re-organize the company.

A class-action lawsuit by disgruntled shareholders was dismissed on July 14.

Now I haven't gone into the financials much at all, but the revenue for 2005 was $1.1 billion, and the gross profit was $300 million. Debt service of $85 million took the company into a small loss, and liabilities have fallen in the past couple years.

The market cap is about $150 million only. I have to think the brand name is worth a lot more, and the debts could be restructured by a powerful private equity group. Clearly, such a buyer could find superior management.

So I just don't understand why this company has to go bankrupt. I think somebody will make a play for it, and do that fairly soon before the brand is broken irretrievably.

I have no other knowledge of this company or position in the stock.

I'd like to do a "special situation" report for the blog and get it out fairly soon. The objective is to prove that not having any axe to grind can help get out good quality research, regardless of source. If I'm right in my assumption here, I'm going to appeal to the readers to form interest-specific investment clubs that share these reports to other readers who have volunteered. Only those who are volunteering and contributing are going to get access to the initial publishing of these reports. Later, I'll release them to all readers.

If you were in an investment club, and asked to do a short report for the members, how would you go about it? Please send me your notes. I'll collate the responses from those who send me notes in the next week and then present them to a CFA/analyst who writes up small cap studies on a professional basis.

Pls return to the direct e-mail address from where you got this e-mail, and mark it TeamCara BFT

Thanks.

/Bill

Now here's what MeasuredMarkets published later.

Bally Total Fitness: abnormal trading ahead of the news. Sat, Aug 12, 2006 What caused the remarkable trading anomalies on 27 July? Were the sellers of shares on August 8 - 10 just fortunate or well informed, in selling ahead of the news reported on August 11?

"Bally Total Fitness Holding Corp. shares plunged Friday after the health-club operator said its top executive had resigned, effective immediately, and that it was no longer exploring its possible sale. The Chicago-based company also said continuing weakness in membership additions is restraining cash flow." Wall Street Journal OnLine August 11, 2006 11:46 a.m.

Yes, I questioned the trading " before the news. The trading told me something was about to happen.

In a study conducted by MeasuredMarkets for The New York Times, it was discovered that suspicious trading occurred in 37 of 90 cases (41 pct). I'm not shocked; I'm not even surprised. I think their numbers are too low.

I have always figured that illegal trading occurs in about 50 pct of merger and acquisition, LBO and corporate re-organization deals, and that if regulators were serious, and had the budget to do the required job, they could put a couple thousand people in jail every year for this type of crime.

I think the problem is pervasive, but also swept under the table so that the authorities can continue to sell their lemonade that markets are transparent and fair to all.

Every time front-running exists, the rest of us lose.

Interesting today that Prudential Financial Inc has come to a final agreement to pay $600 million in damages and fines for involvement in illegal trading schemes. That enabled them to stay out of jail, which if you happen to be a rock, with the strength of Gibraltar, you can pull off.

Ask the Little People how many years in jail they could get for theft of $2,500 from the Pru, which is miniscule fraction of the $2.5 billion in trades that Pru scammed the Little People.

Apparently what's good for the goose is unheard of for the gander. That has to stop. It doesn't mean a thing that the Pru had to pay $600 million. That will be a footnote to their financial statements.

The problem will continue until ;

In the interim, you and I can watch this situation like a hawk, and report our suspicions. The best we can do is to help one another because the people in high places are too busy helping themselves.