Last week, we wrote about DeepCapture’s (DC) take on Dendreon’s (DNDN) history, particularly its infamous financial ups and downs.

As a briefer, DC is doing a 15-part series on DNDN with a focus on media manipulation of the stock along with an examination of the naked short selling by various hedge funds. In the first part, DC calls out people like Jim Cramer from The Street and disgraced financier Michael Milken as culprits.

Though we’re still up in the air about the validity of these claims, the story is a good read nonetheless.

In Part 2, DC explores the shorting of DNDN back in March 2007 even after the FDA Oncologic Drugs Advisory Committee voted almost unanimously in favor of Provenge:

By April 13, Dendreon was worth around $20 a share.

But the short sellers did not relent. The more the stock rose in value, the more they piled on, flooding the market with still more phantom stock. On the day after the advisory panel meeting, at least 9 million phantom shares were sold, according to the SEC’s unforgivably incomplete data. During the following two weeks, between 9 and 10 million shares were “failing to deliver” on any given day. And on one day, April 13, overall short interest in Dendreon rose to 32 million shares — from just 8 million shares a few hours before.

By any reckoning, this was sheer insanity. Given Dendreon’s prospects for FDA approval, it seemed like the short sellers were flushing money down the toilet. Some observers racked it up to psychology — the short sellers had grown emotionally tied to their positions, and simply could not give them up.

But I offer several other possible hypotheses, which are all mutually compatible. The first is that the short sellers believed that they could generate enough phantom shares to drive the stock price back down, despite Dendreon’s fantastic news. The second is that the short sellers were aware that there was about to be released a wave of lopsided negative financial research and media reports (including more from Cramer) that they expected would crack the stock.

And the third explanation is that the short sellers who made this long-shot bet perhaps knew something that the rest of the world did not. They perhaps knew that some strange occurrences were imminent, and that these strange occurrences would diminish Dendreon’s prospects. And given the especially sharp increase in short selling on the morning of April 13, they might have expected that the strange occurrences would begin on that particular day.

Check out the full Part 2 right here and see how Bernie Madoff’s “Madoff Exemption” could have provided the married puts or “bullets” to manipulate DNDN…

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