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Friday, March 04, 2011 2:57:40 PM
New FINRA 4320 Short Sale Delivery Requirements
FINRA 4320. Short Sale Delivery Requirements
(a) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days, the participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity.
(1) Provided, however, if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency for thirty-five consecutive settlement days in a non-reporting threshold security that was sold pursuant to SEC Rule 144, the participant shall immediately thereafter close out the fail to deliver position in the security by purchasing securities of like kind and quantity. The requirements in paragraph (b) shall apply to all such fails to deliver that are not closed out in conformance with this paragraph (a)(1).
(b) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days (or 35 consecutive settlement days if entitled to rely on paragraph (a)(1)), the participant and any broker or dealer for which it clears transactions, including any market maker that would otherwise be entitled to rely on the exception provided in paragraph (b)(2)(iii) of Rule 203 of SEC Regulation SHO, may not accept a short sale order in the non-reporting threshold security from another person, or effect a short sale in the non-reporting threshold security for its own account, without borrowing the security or entering into a bona-fide arrangement to borrow the security, until the participant closes out the fail to deliver position by purchasing securities of like kind and quantity and that purchase has cleared and settled at a registered clearing agency.
(c) If a participant of a registered clearing agency reasonably allocates a portion of a fail to deliver position to another registered broker or dealer for which it clears trades or for which it is responsible for settlement, based on such broker or dealer's short position, then the provisions of this Rule relating to such fail to deliver position shall apply to the portion of the fail to deliver position allocated to such registered broker or dealer, and not to the participant.
(d) A participant of a registered clearing agency shall not be deemed to have fulfilled the requirements of this Rule where the participant enters into an arrangement with another person to purchase securities as required by this Rule, and the participant knows or has reason to know that the other person will not deliver securities in settlement of the purchase.
(e) For the purposes of this Rule, the following terms shall have the meanings below:
(1) the term “market maker” has the same meaning as in Section 3(a)(38) of the Exchange Act.
(2) the term “non-reporting threshold security” means any equity security of an issuer that is not registered pursuant to Section 12 of the Exchange Act and for which the issuer is not required to file reports pursuant to Section 15(d) of the Exchange Act:
(A) for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and for which on each settlement day during the five consecutive settlement day period, the reported last sale during normal market hours for the security on that settlement day that would value the aggregate fail to deliver position at $50,000 or more, provided that if there is no reported last sale on a particular settlement day, then the price used to value the position on such settlement day would be the previously reported last sale; and
(B) is included on a list published by FINRA.
A security shall cease to be a non-reporting threshold security if the aggregate fail to deliver position at a registered clearing agency does not meet or exceed either of the threshold tests specified in paragraph (e)(2)(A) of this Rule for five consecutive settlement days.
(3) the term “participant” means a participant as defined in Section 3(a)(24) of the Exchange Act, that is a FINRA member. The term “registered clearing agency” means a clearing agency, as defined in Section 3(a)(23)(A) of the Exchange Act, that is registered with the SEC pursuant to Section 17A of the Exchange Act.
(This is 3(a)(23)(A): The term "clearing agency" means any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who (i) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or (ii) otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates.
(5) the term “settlement day” means any business day on which deliveries of securities and payments of money may be made through the facilities of a registered clearing agency.
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WHY IS FINRA 4320 SO EXCITING TO THE SECURITIES LAWYERS AND THE CORPORATIONS THAT HAVE SURVVIVED THESE NSS ATTACKS?
1) It finally addresses abusive naked short selling in non-reporting issuers. Up until now the regulators and SROs have found that the investors in development stage corporations somehow did not deserve the provision of investor protection.
2) Even though it is entitled “short sale delivery requirements” it covers the failures to deliver (FTDs) involved with intentionally mislabeled “long sales”. One way to bypass the newer short selling rules is to illegal mislabel your short sale as a “long sale” and just voluntarily fail to deliver the shares.
3) It affects FTDs held in “ex-clearing” because all (approximately 1,000) clearing firms that are “participants” of the NSCC/DTCC are indeed “registered clearing agencies” in and of themselves. (see 3(a)(23)(A) in the smaller print above.)
4) It addresses the FTDs of even market makers held at registered clearing agencies. The bona fide MM exemption from needing to pre-borrow or “locate” shares before making admittedly naked short sales is the main loophole being abused. THIS IS A VERY BIG DEAL.
5) It expressly forbids a crooked clearing firm from “crossing” failed to be delivered shares to a co-conspiring clearing firm in order to reset the 13-day clock. These illegal “wash sales” are pandemic.
6) There is no “grandfathering” in of old delivery failures held in illegal “ex-clearing arrangements” as these are still FTDs as nothing ever got delivered. The mere marking to market of the monetary value of failed delivery obligations has nothing whatsoever to do with making the “good form delivery” of the securities sold needed to accomplish the “settlement” of a trade.
7) In the abusive naked short selling world there are very, very bad guys and other semi-bad guys. The semi-bad guys will probably voluntarily cover their not so huge naked short positions BEFORE the really bad guys will have time to. They may even go net long after covering knowing that their bigger brother bad guys might be in deep doo-doo.
8) All of the crooks are not going to run willy-nilly tomorrow morning and cover BUT THOSE CORPORATIONS WITH IMMENSE NAKED SHORT POSITIONS THAT ARE ABLE TO PULL OFF SOME SORT OF LARGE CORPORATE ACCOMPLISHMENT WILL BE GREATLY BENEFITTED AND THEIR NAKED SHORT POSITIONS MIGHT RISE TO THE TOP OF THE “SHORT POSITIONS TO IMMEDIATELY COVER” LIST.
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From HookMeister:
Doc, I've posted this question previously and haven't heard any response from anyone so I thought I'd ask you if you don't mind.
With respect to the NSS issue and the new regulations starting Monday, will MMs who already hold short positions prior to the new regulations be required to now comply with the new regs concerning their already existing short positions or will it only apply to new short positions going forward??
Hi HookMeister,
It’s actually the combination of all of the various new rules kicking in right now that will FINALLY make a difference as they all block some of the various loopholes in existence. The weak link has always been that the old rules only applied to delivery failures held at “registered clearing agencies” like the NSCC. The crooked clearing firms simply “paired off” outside of the NSCC, entered into illegal “ex-clearing arrangements” and forgave each other’s delivery obligations. Instead they chose to merely mark to market the monetary value of their failed delivery obligations and hide them in a “side pocket”. As a result, U.S. investors have no clue as to the damaged nature of the corporation they are investing in.
What the various “securities cops” were just reminded of is that these crooked clearing firms are indeed “registered clearing agencies” in and of themselves as per the ’34 Exchange Act. Up until now, nobody has been tallying the delivery failures hiding in these illegal “ex-clearing arrangements”. The new FINRA 4320 as of tomorrow mandates the buying in of 13 day old delivery failures of non-reporting issuers (like Medinah) IF MEDINAH’S NAME APPEARS ON THE FINRA THRESHOLD LIST. Medinah’s name is to appear on this list if both their delivery failures exceed 10,000 shares and are worth over $50,000 in the aggregate. Although Medinah’s approximately 1.3 billion shares of failed delivery failures are currently (@12-cents) worth approximately $156 million MEDINAH IS STILL NOT ON THE LIST. This is a testimony to the pandemic nature of these illegal “ex-clearing arrangements”
Why is this? FINRA leaves the tallying of the delivery failures up to the NSCC. The NSCC only tallies the delivery failures officially held at the NSCC which the crooks now avoid like the plague as the hiding spot for their delivery failures. The NSCC management, which operates as an “SRO” or “self-regulatory organization”, insanely holds that the delivery failures held by their “participants/bosses” outside of the NSCC in “ex-clearing arrangements” are of a “contractual” nature which is none of their business.
Wait a minute, the SEC has said that the SROs like FINRA and the NSCC are to provide “the first line of defense against market abuses”. Congress in Section 17A of the’34 Exchange Act mandated that its parent the DTCC “promptly settle” all securities transactions. This means that the sellers of securities must promptly deliver that which they sold on or near T+3. Illegal “ex-clearing arrangements” intentionally circumvent the “prompt settlement” of securities transactions. By definition, an SRO like the NSCC is mandated to “draft and enforce rules and regulations and to monitor the “BUSINESS CONDUCT” of its co-owning “participants.”
How can the management of an SRO like the NSCC with that SRO mandate as well as that congressional mandate as well as acting as the party acting in the capacity of providing “the first line of defense against market abuses” claim that it has no authority to address the efforts of their bosses to intentionally circumvent the “prompt settlement” of securities transactions? How can you claim to be “powerless” to follow a congressional mandate?
Forced buy-ins of 13-day old delivery failures are critical as they represent the only source of meaningful DETERRENCE to these crimes and they are the only treatment available when the sellers of securities absolutely refuse to deliver that which they sell. With FINRA 4320 in effect, non-reporting issuers are FINALLY afforded protection via mandated buy-ins but only if that 10,000 shares and $50,000 worth of delivery failures metric is reached. If the NSCC management continues to refuse to tally the delivery failures held in these “regulated clearing agencies” known as “clearing firms” in these “ex-clearing arrangements” in order to keep their bosses from being bought-in then the issue of a “securities cop” with all of these various mandates acting to directly aid and abet as well as cover up these frauds comes front and center.
The gist of it is that the mere marking to market of the monetary value of a failed delivery obligation has nothing to do whatsoever with the congressionally mandated “prompt settlement” of a securities transaction. In fact, although from a distance it serves to lend an air of legitimacy it actually is the ideal COVER UP FRAUD used to mask the fact that “prompt settlement” is not occurring.
Most securities lawyers I work with predict that FINRA 4320 will force the NSCC management to pull a “Pontius Pilate” and wash its hands of this aiding and abetting role and providing this cover up fraud and buy-in these previously unaddressed delivery failures which they theoretically had no idea existed. No doubt they will say WE ARE SHOCKED, SHOCKED and shame on you abusive bosses of ours. We had no idea these crimes were being committed on our watch.
The concept of a “securities cop” like the NSCC intentionally MANIPULATING downwards the metric needing to be reached so that investor protection is provided in order to look after the financial interests of its misbehaving bosses is unconscionable and the investing public will not tolerate these thefts any longer.
source
original post from camper9
POST
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1) WHY DO ABUSIVE NAKED SHORT SELLERS NEVER, NEVER, NEVER VOLUNTARILY COVER THEIR NAKED SHORT POSITIONS?
ANSWER:
A) They can easily gain access to the funds of uneducated investors without ever delivering anything to them. All they’re asked by the NSCC to do is to collateralize the monetary value of the failed delivery obligation on a marked to market basis. As the readily sellable share price depressing “security entitlements” resulting from all of these intentional delivery failures pile up the share price and therefore the collat. requirements drop allowing the investor’s money to flow to the party refusing to deliver that which they sold.
B) Until 4320 came along there was no deterrence, no forced buy-ins, no perp walks and no meaningful fines levied.
C) There’s a huge bonus available for bankrupting a company i.e. no taxable capital gains.
D) Often they run up so high of a naked short position that they can’t even stop their daily NSS-ing lest the share price go up and the collateralization requirements of the immense uncovered position become unbearable.
E) This is their turf and they know the loopholes better than uninformed investors (excepting of course the average Medinah investor that will soon be omniscient in these matters or die trying.)
F) These crooks have high paid lobbyists that keep convincing the politicians that the injecting of liquidity by even abusive MMs is critical to allow our markets to function smoothly.
G) The delivery failures were invisible to the investing public and the “securities cops” until 4320 came along as well as the new DTCC “obligation warehouses”.
2) What is the direct result of this phenomenon?
A) Companies that have been under attack for as many as 14 years are going to have accumulated enormous open naked short positions if the crooks have failed to bankrupt them before the world learned that they were MISDIAGNOSED as “scammy pump and dumps”.
3) What is the biggest benefit of 4320 once a company under attack gets onto the “nonreporting threshold list”?
A) Mandated buy-ins on day 13 by a party (clearing firm) that doesn’t particularly care what he pays for the stock because he gets to hand the bill to the guilty party.
4) What is the main truly meaningful deterrent to committing these crimes?
A) The fear of being bought-in at an inopportune time by a party that doesn’t care what he pays.
5) What is the ONLY cure available when the seller of securities absolutely refuses to EVER deliver the securities that it sold after contracting to deliver them by T+3?
A) Mandated buy-in.
(from www.theminingplay.com, posted by Brecciaboy)
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A DIFFERENT WAY OF LEARNING THE HEINOUS NATURE OF “EX-CLEARING” CRIMES
Your brokerage firm uses a clearing firm to “clear” the trades you make. Corrupt clearing firms have a metaphorical backroom known (metaphorically) as a “sponsor table” room. When you buy Medinah shares let’s pretend you pay with a bucket full of silver dollars. If the clearing firm of the MM that sold you shares refuses to deliver that which you purchased your bucket of coins goes into your clearing firm’s “sponsor table” firm. Your coins are dumped onto the table that the clearing firm of the MM “sponsored”.
These “sponsor tables” are unique in that that have netting around them. The floor of the “sponsor table” room is unique in that it tips as share prices drop. Since nothing was delivered your coins exist in a state of limbo UNTIL delivery occurs if it ever occurs. As the share price predictably tanks and the floor tips from naked short sales which open up more and more “sponsor tables” the clearing firm of the crooked MM as well as the crooked MM itself get to collect all of your coins that slipped into the netting EVEN THOUGH THAT WHICH THE MM SOLD NEVER EVEN EXISTED. Your coins “collateralize” the debt of the crooked MM.
The interest that your coins earn is split by your clearing firm and the crooked MM IF AND ONLY IF YOUR CLEARING FIRM REFUSES TO YELL AT THE MM AND ASK HIM TO DELIVER THAT WHICH HE SOLD TO HIS CLIENT i.e. you. In other words if he is willing to throw your financial interests under the bus he gets to share in the interest earnings. “Sponsoring” tables is easy, all you have to do is to refuse to deliver the securities that you sell.
Every night the crooked MM that sold you nonexistent shares gets to go into the “sponsor table” room and collect whatever coins fell into the netting from all of the tables he sponsored which might be in the thousands or tens of thousands after 14 years. If the crooked MM “recruits” other MMs and various hedge funds to sponsor tables the coins will flow into the netting very rapidly FROM ALL “SPONSORED” TABLES as the share price plummets. If they succeed in bankrupting the company they targeted to destroy all of your coins will be gone and in the possession of the crooked MM despite the fact that he still hasn’t delivered anything and what he sold to you doesn’t even exist.
After you bought the shares you got a monthly brokerage statement that “implied” that your clearing firm was “holding long” your shares. You probably assumed they were in some type of vault at the DTC depository. Two corrupt clearing firms can easily “pair up” outside of the NSCC (ex-clearing) and offer each other and each other’s clients the use of their “sponsor table” rooms. This amounts to allowing a bunch of crooks to sell a given clearing firm’s clients fake shares and never deliver them if and only if the other clearing firm extends the same courtesy. The NSCC management mandated to regulate the “business conduct” of its “participating clearing firms” that co-own the NSCC holds that what their bosses do outside of the NSCC proper is none of their business.
(from www.theminingplay.com, posted by Brecciaboy)
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My most popular question du jour has to do with historically when do the naked short sellers typically cover. The answer is usually never or about as often as a tiny junior explorer makes a discovery like that at Lipangue which is next to never.
First of all, you have to qualify which type of short sellers you’re referring to-the jet skiers or the aircraft carriers.
The jet skiers are the smaller market makers, broker/dealers, hedge funds, prime brokers, etc. that might be short only perhaps 30 million shares. They have a lesser ability to collateralize their naked short position as the PPS advances. They’ll typically cover first but they’re actually in the catbird seat because they can cover and then go net long if they know that an aircraft carrier that’s short maybe 400 million shares is in deep doo-doo. When there’s blood in the water on Wall Street all bets are off.
Aircraft carriers can’t turn on a dime and cover and go net long like the jet skiers can. At this point in the battle the jet skiers are ticked off at the aircraft carriers because they were probably “recruited” by the aircraft carriers to help finish off this “scammy” PinkSheet piece of gradu that turned out to be a little feistier than anticipated.
One thing about abusive naked short sellers is that they have discipline. They’ll cover when they know their goose is cooked. When you’re naked short thousands of development stage U.S. corporations the aircraft carriers only have “X” amount of net capital reserves to spread around to collateralize these “open positions”. If you “accidentally” ran up an immense naked short position but failed to kill your target you’re typically left with 3 options to still win the war. You can do whatever is needed to get your target delisted, bankrupt them or get their registration revoked. If Medinah lands a generous JV arrangement then all 3 of those options are gone.
Since abusive naked short sellers never really know how many other crooks are naked short the target then it sometimes becomes a race to beat the others to cover. Oftentimes the jet skiers have no choice in covering because the clearing firm they operate through starts sweating bullets because it is eventually on the hook for the failed delivery obligation. If the jet skiers do not supply much order flow to the clearing firm then they’re apt to be thrown under the bus. Clearing agreements always spell out that the clearing firm can buy-in those “open positions” whenever they so choose. Since the monetary value of all open naked short positions needs to be collateralized on a daily marked to market basis it’s usually financial constraints that lead to the covering.
When the goose is indeed cooked, a powerful option is lost to the crooks. When under duress the crooks can always transfer a naked short position “across the street” like a hot potato until the heat is off. Then it’s transferred back by another illegal “wash sale”. When the goose is cooked and everybody knows it there won’t be any willing co-conspirators to accept that transfer. The new FINRA Rule 4320 kicking in soon looks really nice. For the first time the CLEARING FIRM of the bad guys is handcuffed from misbehaving.
(from www.theminingplay.com, posted by Brecciaboy)
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IS NSS TECHNICALLY “UNLAWFUL” OR “ILLEGAL”?
In regards to issues of “unlawfulness” or “illegalities” in the securities markets one has to go to the all encompassing anti-fraud rule within the ‘34 Exchange Act namely Rule 10b-5.
Rule 10b-5 -- Employment of Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
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The first concept to keep straight is that a technically “unlawful” act has nothing to do with whether or not that act is regularly prosecuted by the authorities. The DOJ or FBI usually need a referral from the SEC before they come on the scene. When it comes to abusive naked short selling crimes the SEC, FINRA, and the DTC and NSCC subdivisions of the DTCC are squarely in “cover up” mode. The last folks the regulators and the SROs want sniffing around is the DOJ, FBI or the FFETF [Financial Fraud Enforcement Task Force] with the power to put people in jail.
IS WHAT IS DESCRIBED BELOW AN “UNLAWFUL” SCHEME TO DEFRAUD DONE IN CONNECTION WITH THE SALE OF A SECURITY?
1) A corrupt MM illegally accesses the universally abused bona fide MM exemption from needing to effect a pre-borrow or “locate” before making admittedly naked short sales. He has no intent to ever deliver that which he is selling. Note that a truly bona fide MM that legally accesses that exemption would cover that naked short position on the very next downtick in share prices when the injection of buy-side liquidity is needed.
2) He sells nonexistent shares to a buyer but refuses to either deliver them or buy them back when the share price drops.
3) The buyer’s account is credited with a readily sellable share price depressing “security entitlement” as per UCC Article 8. Because of this the buyer is blindfolded to the deceit/fraud.
4) As these “refusals to deliver” and the “security entitlements” they spawn accumulate invisibly in the share structure of the corporation targeted for destruction the share price predictably tanks because the “supply” of that which must be treated as being readily sellable (shares and/or “security entitlements”) is knowingly and intentionally being manipulated upwards (scienter).
5) Since the NSCC only mandates that its “participants” collateralize the monetary value of failed delivery obligations on a daily marked to market basis as the share price drops (gets MANIPULATED downwards-a crime) so too do the collateralization requirements.
6) This results in the funds of the investor flowing to the MM that illegally accessed the bona fide MM exemption but refused to cover his naked short position on the very next downtick after the naked short sale was made as a truly bona fide MM would have. This flow of investor funds occurs despite the fact that what was sold never existed and never got delivered. With this being the NSCC policy, imagine the checks and balances that would be in place in a clearance and settlement system with integrity should abusive participants access this gold-plated invitation to defraud investors. The alarm bells would start sounding on about T+6 or so and forced buy-ins would rapidly occur.
Quite clearly this is an “unlawful scheme to defraud investors done in connection with the purchase and sale of a security”.
WHAT IS THE “SCHEME” TO DEFRAUD?
The “scheme” is to be able to sell nonexistent securities via illegally accessing the bona fide MM exemption and avoid the costs or potential unavailability associated with making legitimate pre-borrows in order to gain access to the funds of the investor without ever having to deliver the nonexistent shares you sold.
WAS THE BUYER OF THE SHARES DECEIVED OR DEFRAUDED?
The buyer was under the impression that he was buying and getting delivery of SEC-registered units of equity ownership (“shares”) in a corporation of which there are a finite amount “outstanding” as indicated on that company’s financials. He was deceived. He thought he was acquiring a voting power equal to the amount of shares he purchased divided by the number of shares advertised as being “outstanding” in the company’s 10-K. He didn’t get this. He thought he would earn preferential tax treatment for all of his shares on any “qualified dividend” the company issued. He will not get this as per IRS policies limiting the tax preferential treatment only to the number of shares legally “outstanding”.
He thought that the amount of shares readily sellable at any given time were just the number of shares “outstanding” plus any shares borrowed for the sake of legitimate short sales and subsequently sold. He was wrong. He thought that in the case of insolvency he had a valid claim to the percentage of assets calculated by dividing the number of shares “outstanding” by the number he purchased (dissolution rights). He was wrong. He thought that there were no parties on Wall Street heavily financially incentivized to bankrupt this company. He was mistaken. He thought that the DTCC was going to follow its congressional mandate to make sure that his trade would “promptly settle” i.e. buy-in the delivery failure on perhaps T+6 when it became obvious that the seller had no intent to deliver that which he sold. Again, he was deceived/defrauded.
AS PER SECTION “C” OF 10B-5 DOES THIS “COURSE OF BUSINESS…OPERATE AS A FRAUD OR DECEIT UPON ANY PERSON IN CONNECTION WITH THE PURCHASE OF A SECURITY”?
Of course it does.
WALL STREET’S REBUTTAL: STEALING THE FUNDS OF INVESTORS IN DEVELOPMENT STAGE U.S. CORPORATION ACTUALLY HAS ALTRUISTIC UNDERPINNINGS.
FACT: The most readily available supply of shares to borrow and then legally short sell come from margin accounts and institutional shareholders trying to earn a little margin interest to increase their “alpha”.
FACT: The nonmarginable “penny stocks” typically attacked do not have many if any shares in either location and are thus difficult or extremely expensive to legally short sell.
FACT: The best way to circumvent this reality is to work with crooked MMs willing to illegally access their bona fide MM exemption. Access is typically attainable by directing cash generating order flow in the direction of a willing MM.
THE MINDSET OF SOME ABUSIVE NAKED SHORT SELLERS: The destruction of certain U.S. corporations and the stealing of the funds of investors in companies that we abusive naked short sellers deem (in our infinite wisdom) to be “scams” is actually a good way to “hasten the demise” of these “scammy pump and dumps” so that future investors don’t get swindled by these scamsters. In other words, stealing from investors is a good way to address assumed stealing from investors and perpetrating a heinous form of securities fraud is the proper way to address suspected frauds.
The question arises; why not just file a complaint with the SEC in order to perform your “shareholder advocate” role.
Possible answer: That doesn’t pay as well.
ISSUES REGARDING SECTION b OF 10b-5 AND THOS MANDATED TO KEEP TALLIES OF DELIVERY FAILURES
Section b deals with facts of a “material” nature. It deems it unlawful to EITHER “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading in connection with the purchase or sale of any security”.
In connection with the “full disclosure” of all “material” facts to prospective investors what fact could possibly be more “material” to the prognosis for the success of a potential investment then the presence of an enormous amount of share price depressing “security entitlements” poisoning the share structure and prognosis for success of a corporation?
Note that Section b makes it unlawful to omit to state a material fact. Who is or should be in possession of the combined number of delivery failures residing in either the DTCC or in “ex-clearing arrangements”? The answer is BOTH the NSCC as the party keeping the tally as well as FINRA mandated to receive the reports of the NSCC and construct and maintain the “threshold lists”.
The question arises as to how these 2 SROs mandated to act as “the first line of defense against market abuses” (as per the SEC) and also acting with the mandate to create and enforce laws associated with the “business conduct” of its “participants” in the case of the NSCC and “members” in the case of FINRA can refuse to keep this most “material” of all information secret from prospective investors.
The answer is simple, due to the levels of historical abuses our SROs and regulators are stuck in “cover up” mode and by definition you cannot be acting in robust investor protection mode and cover up mode simultaneously. What is at stake here is millions of U.S. citizens learning that many of the investments they have made throughout history in development stage corporations never had a chance to succeed. Instead the fates of these corporations, the jobs they could have provided and the investments made therein were thrown under the bus in exchange for some type of corrupt vigilante type service.
It is extremely obvious that in order to move from cover up mode where investors have no clue how damaged the corporation is that they are buying shares of back into robust investor protection mode an embarrassingly obvious event must occur. The sellers of nonexistent shares caught gaming the system must be FORCED to go into their wallet, retrieve the stolen money and buy back and deliver the shares they promised to deliver on T+3 but refused to.
The obviousness of this only solution and the refusal to demand it up until now has forever tarnished the integrity of our markets. Once the share price depressing “security entitlements” are forcibly removed from these corporate share structures then an unmanipulated “supply” variable can finally interact with an unmanipulated “demand” variable to “discover” an unmanipulated share price through the price discovery process. What could possibly be a more obvious remedy to finally reroute our SROs and regulators away from cover up mode and back into investor protection mode.
SUMMARY
Relatively defenseless nonmarginable “penny stocks” are the easiest for short sellers to bankrupt. The problem is that they are the most difficult to LEGALLY short sell since very few shares are held in margin accounts or by institutions willing to loan them out. Short sellers not afraid to act outside of the securities laws can easily find corrupt MMs to ILLEGALLY “rent out” space under their “bona fide MM” umbrella of immunity from having to pre-borrow or make a “locate” before making naked short sales. Avoiding either expensive or unavailable “pre-borrows” is often the inducement to break the law. The corrupt MMs are rewarded for their breaking of the law by cash generating order flow from the criminals refusing to play by the rules.
The added expense and difficulty to legally short sell development stage securities in a sense should add protection to these corporations that are relatively defenseless during their particular stage of development in these “corporate incubators” known as the PinkSheets and the OTCBB. It is also true that these circumstances could foster and promote “pump and dumps”. The concept that abusive naked short sellers justify stealing the funds of today’s investors in order to hasten the demise of corporations in order to protect future investors in that (allegedly) “scammy” corporation from being defrauded by corrupt management teams represents a pathological mindset beyond comprehension. At the very least, these criminals should carry some form of billion dollar “malpractice” insurance when their diagnosis that “X” U.S. corporation is a “scam” proves to be unfounded.
(from www.theminingplay.com, posted by Brecciaboy) Emphasis above is mine.
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thanks to camper9 .. brecciaboy and the miningplay.com for
the above posts .. wanted to combine all of the posts into
one for ease of access and reading on the NSS board
thanks to greg for the request :)
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4kids
all jmo
FINRA 4320. Short Sale Delivery Requirements
(a) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days, the participant shall immediately thereafter close out the fail to deliver position by purchasing securities of like kind and quantity.
(1) Provided, however, if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency for thirty-five consecutive settlement days in a non-reporting threshold security that was sold pursuant to SEC Rule 144, the participant shall immediately thereafter close out the fail to deliver position in the security by purchasing securities of like kind and quantity. The requirements in paragraph (b) shall apply to all such fails to deliver that are not closed out in conformance with this paragraph (a)(1).
(b) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in a non-reporting threshold security for 13 consecutive settlement days (or 35 consecutive settlement days if entitled to rely on paragraph (a)(1)), the participant and any broker or dealer for which it clears transactions, including any market maker that would otherwise be entitled to rely on the exception provided in paragraph (b)(2)(iii) of Rule 203 of SEC Regulation SHO, may not accept a short sale order in the non-reporting threshold security from another person, or effect a short sale in the non-reporting threshold security for its own account, without borrowing the security or entering into a bona-fide arrangement to borrow the security, until the participant closes out the fail to deliver position by purchasing securities of like kind and quantity and that purchase has cleared and settled at a registered clearing agency.
(c) If a participant of a registered clearing agency reasonably allocates a portion of a fail to deliver position to another registered broker or dealer for which it clears trades or for which it is responsible for settlement, based on such broker or dealer's short position, then the provisions of this Rule relating to such fail to deliver position shall apply to the portion of the fail to deliver position allocated to such registered broker or dealer, and not to the participant.
(d) A participant of a registered clearing agency shall not be deemed to have fulfilled the requirements of this Rule where the participant enters into an arrangement with another person to purchase securities as required by this Rule, and the participant knows or has reason to know that the other person will not deliver securities in settlement of the purchase.
(e) For the purposes of this Rule, the following terms shall have the meanings below:
(1) the term “market maker” has the same meaning as in Section 3(a)(38) of the Exchange Act.
(2) the term “non-reporting threshold security” means any equity security of an issuer that is not registered pursuant to Section 12 of the Exchange Act and for which the issuer is not required to file reports pursuant to Section 15(d) of the Exchange Act:
(A) for which there is an aggregate fail to deliver position for five consecutive settlement days at a registered clearing agency of 10,000 shares or more and for which on each settlement day during the five consecutive settlement day period, the reported last sale during normal market hours for the security on that settlement day that would value the aggregate fail to deliver position at $50,000 or more, provided that if there is no reported last sale on a particular settlement day, then the price used to value the position on such settlement day would be the previously reported last sale; and
(B) is included on a list published by FINRA.
A security shall cease to be a non-reporting threshold security if the aggregate fail to deliver position at a registered clearing agency does not meet or exceed either of the threshold tests specified in paragraph (e)(2)(A) of this Rule for five consecutive settlement days.
(3) the term “participant” means a participant as defined in Section 3(a)(24) of the Exchange Act, that is a FINRA member. The term “registered clearing agency” means a clearing agency, as defined in Section 3(a)(23)(A) of the Exchange Act, that is registered with the SEC pursuant to Section 17A of the Exchange Act.
(This is 3(a)(23)(A): The term "clearing agency" means any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who (i) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or (ii) otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates.
(5) the term “settlement day” means any business day on which deliveries of securities and payments of money may be made through the facilities of a registered clearing agency.
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WHY IS FINRA 4320 SO EXCITING TO THE SECURITIES LAWYERS AND THE CORPORATIONS THAT HAVE SURVVIVED THESE NSS ATTACKS?
1) It finally addresses abusive naked short selling in non-reporting issuers. Up until now the regulators and SROs have found that the investors in development stage corporations somehow did not deserve the provision of investor protection.
2) Even though it is entitled “short sale delivery requirements” it covers the failures to deliver (FTDs) involved with intentionally mislabeled “long sales”. One way to bypass the newer short selling rules is to illegal mislabel your short sale as a “long sale” and just voluntarily fail to deliver the shares.
3) It affects FTDs held in “ex-clearing” because all (approximately 1,000) clearing firms that are “participants” of the NSCC/DTCC are indeed “registered clearing agencies” in and of themselves. (see 3(a)(23)(A) in the smaller print above.)
4) It addresses the FTDs of even market makers held at registered clearing agencies. The bona fide MM exemption from needing to pre-borrow or “locate” shares before making admittedly naked short sales is the main loophole being abused. THIS IS A VERY BIG DEAL.
5) It expressly forbids a crooked clearing firm from “crossing” failed to be delivered shares to a co-conspiring clearing firm in order to reset the 13-day clock. These illegal “wash sales” are pandemic.
6) There is no “grandfathering” in of old delivery failures held in illegal “ex-clearing arrangements” as these are still FTDs as nothing ever got delivered. The mere marking to market of the monetary value of failed delivery obligations has nothing whatsoever to do with making the “good form delivery” of the securities sold needed to accomplish the “settlement” of a trade.
7) In the abusive naked short selling world there are very, very bad guys and other semi-bad guys. The semi-bad guys will probably voluntarily cover their not so huge naked short positions BEFORE the really bad guys will have time to. They may even go net long after covering knowing that their bigger brother bad guys might be in deep doo-doo.
8) All of the crooks are not going to run willy-nilly tomorrow morning and cover BUT THOSE CORPORATIONS WITH IMMENSE NAKED SHORT POSITIONS THAT ARE ABLE TO PULL OFF SOME SORT OF LARGE CORPORATE ACCOMPLISHMENT WILL BE GREATLY BENEFITTED AND THEIR NAKED SHORT POSITIONS MIGHT RISE TO THE TOP OF THE “SHORT POSITIONS TO IMMEDIATELY COVER” LIST.
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From HookMeister:
Doc, I've posted this question previously and haven't heard any response from anyone so I thought I'd ask you if you don't mind.
With respect to the NSS issue and the new regulations starting Monday, will MMs who already hold short positions prior to the new regulations be required to now comply with the new regs concerning their already existing short positions or will it only apply to new short positions going forward??
Hi HookMeister,
It’s actually the combination of all of the various new rules kicking in right now that will FINALLY make a difference as they all block some of the various loopholes in existence. The weak link has always been that the old rules only applied to delivery failures held at “registered clearing agencies” like the NSCC. The crooked clearing firms simply “paired off” outside of the NSCC, entered into illegal “ex-clearing arrangements” and forgave each other’s delivery obligations. Instead they chose to merely mark to market the monetary value of their failed delivery obligations and hide them in a “side pocket”. As a result, U.S. investors have no clue as to the damaged nature of the corporation they are investing in.
What the various “securities cops” were just reminded of is that these crooked clearing firms are indeed “registered clearing agencies” in and of themselves as per the ’34 Exchange Act. Up until now, nobody has been tallying the delivery failures hiding in these illegal “ex-clearing arrangements”. The new FINRA 4320 as of tomorrow mandates the buying in of 13 day old delivery failures of non-reporting issuers (like Medinah) IF MEDINAH’S NAME APPEARS ON THE FINRA THRESHOLD LIST. Medinah’s name is to appear on this list if both their delivery failures exceed 10,000 shares and are worth over $50,000 in the aggregate. Although Medinah’s approximately 1.3 billion shares of failed delivery failures are currently (@12-cents) worth approximately $156 million MEDINAH IS STILL NOT ON THE LIST. This is a testimony to the pandemic nature of these illegal “ex-clearing arrangements”
Why is this? FINRA leaves the tallying of the delivery failures up to the NSCC. The NSCC only tallies the delivery failures officially held at the NSCC which the crooks now avoid like the plague as the hiding spot for their delivery failures. The NSCC management, which operates as an “SRO” or “self-regulatory organization”, insanely holds that the delivery failures held by their “participants/bosses” outside of the NSCC in “ex-clearing arrangements” are of a “contractual” nature which is none of their business.
Wait a minute, the SEC has said that the SROs like FINRA and the NSCC are to provide “the first line of defense against market abuses”. Congress in Section 17A of the’34 Exchange Act mandated that its parent the DTCC “promptly settle” all securities transactions. This means that the sellers of securities must promptly deliver that which they sold on or near T+3. Illegal “ex-clearing arrangements” intentionally circumvent the “prompt settlement” of securities transactions. By definition, an SRO like the NSCC is mandated to “draft and enforce rules and regulations and to monitor the “BUSINESS CONDUCT” of its co-owning “participants.”
How can the management of an SRO like the NSCC with that SRO mandate as well as that congressional mandate as well as acting as the party acting in the capacity of providing “the first line of defense against market abuses” claim that it has no authority to address the efforts of their bosses to intentionally circumvent the “prompt settlement” of securities transactions? How can you claim to be “powerless” to follow a congressional mandate?
Forced buy-ins of 13-day old delivery failures are critical as they represent the only source of meaningful DETERRENCE to these crimes and they are the only treatment available when the sellers of securities absolutely refuse to deliver that which they sell. With FINRA 4320 in effect, non-reporting issuers are FINALLY afforded protection via mandated buy-ins but only if that 10,000 shares and $50,000 worth of delivery failures metric is reached. If the NSCC management continues to refuse to tally the delivery failures held in these “regulated clearing agencies” known as “clearing firms” in these “ex-clearing arrangements” in order to keep their bosses from being bought-in then the issue of a “securities cop” with all of these various mandates acting to directly aid and abet as well as cover up these frauds comes front and center.
The gist of it is that the mere marking to market of the monetary value of a failed delivery obligation has nothing to do whatsoever with the congressionally mandated “prompt settlement” of a securities transaction. In fact, although from a distance it serves to lend an air of legitimacy it actually is the ideal COVER UP FRAUD used to mask the fact that “prompt settlement” is not occurring.
Most securities lawyers I work with predict that FINRA 4320 will force the NSCC management to pull a “Pontius Pilate” and wash its hands of this aiding and abetting role and providing this cover up fraud and buy-in these previously unaddressed delivery failures which they theoretically had no idea existed. No doubt they will say WE ARE SHOCKED, SHOCKED and shame on you abusive bosses of ours. We had no idea these crimes were being committed on our watch.
The concept of a “securities cop” like the NSCC intentionally MANIPULATING downwards the metric needing to be reached so that investor protection is provided in order to look after the financial interests of its misbehaving bosses is unconscionable and the investing public will not tolerate these thefts any longer.
source
original post from camper9
POST
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1) WHY DO ABUSIVE NAKED SHORT SELLERS NEVER, NEVER, NEVER VOLUNTARILY COVER THEIR NAKED SHORT POSITIONS?
ANSWER:
A) They can easily gain access to the funds of uneducated investors without ever delivering anything to them. All they’re asked by the NSCC to do is to collateralize the monetary value of the failed delivery obligation on a marked to market basis. As the readily sellable share price depressing “security entitlements” resulting from all of these intentional delivery failures pile up the share price and therefore the collat. requirements drop allowing the investor’s money to flow to the party refusing to deliver that which they sold.
B) Until 4320 came along there was no deterrence, no forced buy-ins, no perp walks and no meaningful fines levied.
C) There’s a huge bonus available for bankrupting a company i.e. no taxable capital gains.
D) Often they run up so high of a naked short position that they can’t even stop their daily NSS-ing lest the share price go up and the collateralization requirements of the immense uncovered position become unbearable.
E) This is their turf and they know the loopholes better than uninformed investors (excepting of course the average Medinah investor that will soon be omniscient in these matters or die trying.)
F) These crooks have high paid lobbyists that keep convincing the politicians that the injecting of liquidity by even abusive MMs is critical to allow our markets to function smoothly.
G) The delivery failures were invisible to the investing public and the “securities cops” until 4320 came along as well as the new DTCC “obligation warehouses”.
2) What is the direct result of this phenomenon?
A) Companies that have been under attack for as many as 14 years are going to have accumulated enormous open naked short positions if the crooks have failed to bankrupt them before the world learned that they were MISDIAGNOSED as “scammy pump and dumps”.
3) What is the biggest benefit of 4320 once a company under attack gets onto the “nonreporting threshold list”?
A) Mandated buy-ins on day 13 by a party (clearing firm) that doesn’t particularly care what he pays for the stock because he gets to hand the bill to the guilty party.
4) What is the main truly meaningful deterrent to committing these crimes?
A) The fear of being bought-in at an inopportune time by a party that doesn’t care what he pays.
5) What is the ONLY cure available when the seller of securities absolutely refuses to EVER deliver the securities that it sold after contracting to deliver them by T+3?
A) Mandated buy-in.
(from www.theminingplay.com, posted by Brecciaboy)
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A DIFFERENT WAY OF LEARNING THE HEINOUS NATURE OF “EX-CLEARING” CRIMES
Your brokerage firm uses a clearing firm to “clear” the trades you make. Corrupt clearing firms have a metaphorical backroom known (metaphorically) as a “sponsor table” room. When you buy Medinah shares let’s pretend you pay with a bucket full of silver dollars. If the clearing firm of the MM that sold you shares refuses to deliver that which you purchased your bucket of coins goes into your clearing firm’s “sponsor table” firm. Your coins are dumped onto the table that the clearing firm of the MM “sponsored”.
These “sponsor tables” are unique in that that have netting around them. The floor of the “sponsor table” room is unique in that it tips as share prices drop. Since nothing was delivered your coins exist in a state of limbo UNTIL delivery occurs if it ever occurs. As the share price predictably tanks and the floor tips from naked short sales which open up more and more “sponsor tables” the clearing firm of the crooked MM as well as the crooked MM itself get to collect all of your coins that slipped into the netting EVEN THOUGH THAT WHICH THE MM SOLD NEVER EVEN EXISTED. Your coins “collateralize” the debt of the crooked MM.
The interest that your coins earn is split by your clearing firm and the crooked MM IF AND ONLY IF YOUR CLEARING FIRM REFUSES TO YELL AT THE MM AND ASK HIM TO DELIVER THAT WHICH HE SOLD TO HIS CLIENT i.e. you. In other words if he is willing to throw your financial interests under the bus he gets to share in the interest earnings. “Sponsoring” tables is easy, all you have to do is to refuse to deliver the securities that you sell.
Every night the crooked MM that sold you nonexistent shares gets to go into the “sponsor table” room and collect whatever coins fell into the netting from all of the tables he sponsored which might be in the thousands or tens of thousands after 14 years. If the crooked MM “recruits” other MMs and various hedge funds to sponsor tables the coins will flow into the netting very rapidly FROM ALL “SPONSORED” TABLES as the share price plummets. If they succeed in bankrupting the company they targeted to destroy all of your coins will be gone and in the possession of the crooked MM despite the fact that he still hasn’t delivered anything and what he sold to you doesn’t even exist.
After you bought the shares you got a monthly brokerage statement that “implied” that your clearing firm was “holding long” your shares. You probably assumed they were in some type of vault at the DTC depository. Two corrupt clearing firms can easily “pair up” outside of the NSCC (ex-clearing) and offer each other and each other’s clients the use of their “sponsor table” rooms. This amounts to allowing a bunch of crooks to sell a given clearing firm’s clients fake shares and never deliver them if and only if the other clearing firm extends the same courtesy. The NSCC management mandated to regulate the “business conduct” of its “participating clearing firms” that co-own the NSCC holds that what their bosses do outside of the NSCC proper is none of their business.
(from www.theminingplay.com, posted by Brecciaboy)
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My most popular question du jour has to do with historically when do the naked short sellers typically cover. The answer is usually never or about as often as a tiny junior explorer makes a discovery like that at Lipangue which is next to never.
First of all, you have to qualify which type of short sellers you’re referring to-the jet skiers or the aircraft carriers.
The jet skiers are the smaller market makers, broker/dealers, hedge funds, prime brokers, etc. that might be short only perhaps 30 million shares. They have a lesser ability to collateralize their naked short position as the PPS advances. They’ll typically cover first but they’re actually in the catbird seat because they can cover and then go net long if they know that an aircraft carrier that’s short maybe 400 million shares is in deep doo-doo. When there’s blood in the water on Wall Street all bets are off.
Aircraft carriers can’t turn on a dime and cover and go net long like the jet skiers can. At this point in the battle the jet skiers are ticked off at the aircraft carriers because they were probably “recruited” by the aircraft carriers to help finish off this “scammy” PinkSheet piece of gradu that turned out to be a little feistier than anticipated.
One thing about abusive naked short sellers is that they have discipline. They’ll cover when they know their goose is cooked. When you’re naked short thousands of development stage U.S. corporations the aircraft carriers only have “X” amount of net capital reserves to spread around to collateralize these “open positions”. If you “accidentally” ran up an immense naked short position but failed to kill your target you’re typically left with 3 options to still win the war. You can do whatever is needed to get your target delisted, bankrupt them or get their registration revoked. If Medinah lands a generous JV arrangement then all 3 of those options are gone.
Since abusive naked short sellers never really know how many other crooks are naked short the target then it sometimes becomes a race to beat the others to cover. Oftentimes the jet skiers have no choice in covering because the clearing firm they operate through starts sweating bullets because it is eventually on the hook for the failed delivery obligation. If the jet skiers do not supply much order flow to the clearing firm then they’re apt to be thrown under the bus. Clearing agreements always spell out that the clearing firm can buy-in those “open positions” whenever they so choose. Since the monetary value of all open naked short positions needs to be collateralized on a daily marked to market basis it’s usually financial constraints that lead to the covering.
When the goose is indeed cooked, a powerful option is lost to the crooks. When under duress the crooks can always transfer a naked short position “across the street” like a hot potato until the heat is off. Then it’s transferred back by another illegal “wash sale”. When the goose is cooked and everybody knows it there won’t be any willing co-conspirators to accept that transfer. The new FINRA Rule 4320 kicking in soon looks really nice. For the first time the CLEARING FIRM of the bad guys is handcuffed from misbehaving.
(from www.theminingplay.com, posted by Brecciaboy)
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IS NSS TECHNICALLY “UNLAWFUL” OR “ILLEGAL”?
In regards to issues of “unlawfulness” or “illegalities” in the securities markets one has to go to the all encompassing anti-fraud rule within the ‘34 Exchange Act namely Rule 10b-5.
Rule 10b-5 -- Employment of Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
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The first concept to keep straight is that a technically “unlawful” act has nothing to do with whether or not that act is regularly prosecuted by the authorities. The DOJ or FBI usually need a referral from the SEC before they come on the scene. When it comes to abusive naked short selling crimes the SEC, FINRA, and the DTC and NSCC subdivisions of the DTCC are squarely in “cover up” mode. The last folks the regulators and the SROs want sniffing around is the DOJ, FBI or the FFETF [Financial Fraud Enforcement Task Force] with the power to put people in jail.
IS WHAT IS DESCRIBED BELOW AN “UNLAWFUL” SCHEME TO DEFRAUD DONE IN CONNECTION WITH THE SALE OF A SECURITY?
1) A corrupt MM illegally accesses the universally abused bona fide MM exemption from needing to effect a pre-borrow or “locate” before making admittedly naked short sales. He has no intent to ever deliver that which he is selling. Note that a truly bona fide MM that legally accesses that exemption would cover that naked short position on the very next downtick in share prices when the injection of buy-side liquidity is needed.
2) He sells nonexistent shares to a buyer but refuses to either deliver them or buy them back when the share price drops.
3) The buyer’s account is credited with a readily sellable share price depressing “security entitlement” as per UCC Article 8. Because of this the buyer is blindfolded to the deceit/fraud.
4) As these “refusals to deliver” and the “security entitlements” they spawn accumulate invisibly in the share structure of the corporation targeted for destruction the share price predictably tanks because the “supply” of that which must be treated as being readily sellable (shares and/or “security entitlements”) is knowingly and intentionally being manipulated upwards (scienter).
5) Since the NSCC only mandates that its “participants” collateralize the monetary value of failed delivery obligations on a daily marked to market basis as the share price drops (gets MANIPULATED downwards-a crime) so too do the collateralization requirements.
6) This results in the funds of the investor flowing to the MM that illegally accessed the bona fide MM exemption but refused to cover his naked short position on the very next downtick after the naked short sale was made as a truly bona fide MM would have. This flow of investor funds occurs despite the fact that what was sold never existed and never got delivered. With this being the NSCC policy, imagine the checks and balances that would be in place in a clearance and settlement system with integrity should abusive participants access this gold-plated invitation to defraud investors. The alarm bells would start sounding on about T+6 or so and forced buy-ins would rapidly occur.
Quite clearly this is an “unlawful scheme to defraud investors done in connection with the purchase and sale of a security”.
WHAT IS THE “SCHEME” TO DEFRAUD?
The “scheme” is to be able to sell nonexistent securities via illegally accessing the bona fide MM exemption and avoid the costs or potential unavailability associated with making legitimate pre-borrows in order to gain access to the funds of the investor without ever having to deliver the nonexistent shares you sold.
WAS THE BUYER OF THE SHARES DECEIVED OR DEFRAUDED?
The buyer was under the impression that he was buying and getting delivery of SEC-registered units of equity ownership (“shares”) in a corporation of which there are a finite amount “outstanding” as indicated on that company’s financials. He was deceived. He thought he was acquiring a voting power equal to the amount of shares he purchased divided by the number of shares advertised as being “outstanding” in the company’s 10-K. He didn’t get this. He thought he would earn preferential tax treatment for all of his shares on any “qualified dividend” the company issued. He will not get this as per IRS policies limiting the tax preferential treatment only to the number of shares legally “outstanding”.
He thought that the amount of shares readily sellable at any given time were just the number of shares “outstanding” plus any shares borrowed for the sake of legitimate short sales and subsequently sold. He was wrong. He thought that in the case of insolvency he had a valid claim to the percentage of assets calculated by dividing the number of shares “outstanding” by the number he purchased (dissolution rights). He was wrong. He thought that there were no parties on Wall Street heavily financially incentivized to bankrupt this company. He was mistaken. He thought that the DTCC was going to follow its congressional mandate to make sure that his trade would “promptly settle” i.e. buy-in the delivery failure on perhaps T+6 when it became obvious that the seller had no intent to deliver that which he sold. Again, he was deceived/defrauded.
AS PER SECTION “C” OF 10B-5 DOES THIS “COURSE OF BUSINESS…OPERATE AS A FRAUD OR DECEIT UPON ANY PERSON IN CONNECTION WITH THE PURCHASE OF A SECURITY”?
Of course it does.
WALL STREET’S REBUTTAL: STEALING THE FUNDS OF INVESTORS IN DEVELOPMENT STAGE U.S. CORPORATION ACTUALLY HAS ALTRUISTIC UNDERPINNINGS.
FACT: The most readily available supply of shares to borrow and then legally short sell come from margin accounts and institutional shareholders trying to earn a little margin interest to increase their “alpha”.
FACT: The nonmarginable “penny stocks” typically attacked do not have many if any shares in either location and are thus difficult or extremely expensive to legally short sell.
FACT: The best way to circumvent this reality is to work with crooked MMs willing to illegally access their bona fide MM exemption. Access is typically attainable by directing cash generating order flow in the direction of a willing MM.
THE MINDSET OF SOME ABUSIVE NAKED SHORT SELLERS: The destruction of certain U.S. corporations and the stealing of the funds of investors in companies that we abusive naked short sellers deem (in our infinite wisdom) to be “scams” is actually a good way to “hasten the demise” of these “scammy pump and dumps” so that future investors don’t get swindled by these scamsters. In other words, stealing from investors is a good way to address assumed stealing from investors and perpetrating a heinous form of securities fraud is the proper way to address suspected frauds.
The question arises; why not just file a complaint with the SEC in order to perform your “shareholder advocate” role.
Possible answer: That doesn’t pay as well.
ISSUES REGARDING SECTION b OF 10b-5 AND THOS MANDATED TO KEEP TALLIES OF DELIVERY FAILURES
Section b deals with facts of a “material” nature. It deems it unlawful to EITHER “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading in connection with the purchase or sale of any security”.
In connection with the “full disclosure” of all “material” facts to prospective investors what fact could possibly be more “material” to the prognosis for the success of a potential investment then the presence of an enormous amount of share price depressing “security entitlements” poisoning the share structure and prognosis for success of a corporation?
Note that Section b makes it unlawful to omit to state a material fact. Who is or should be in possession of the combined number of delivery failures residing in either the DTCC or in “ex-clearing arrangements”? The answer is BOTH the NSCC as the party keeping the tally as well as FINRA mandated to receive the reports of the NSCC and construct and maintain the “threshold lists”.
The question arises as to how these 2 SROs mandated to act as “the first line of defense against market abuses” (as per the SEC) and also acting with the mandate to create and enforce laws associated with the “business conduct” of its “participants” in the case of the NSCC and “members” in the case of FINRA can refuse to keep this most “material” of all information secret from prospective investors.
The answer is simple, due to the levels of historical abuses our SROs and regulators are stuck in “cover up” mode and by definition you cannot be acting in robust investor protection mode and cover up mode simultaneously. What is at stake here is millions of U.S. citizens learning that many of the investments they have made throughout history in development stage corporations never had a chance to succeed. Instead the fates of these corporations, the jobs they could have provided and the investments made therein were thrown under the bus in exchange for some type of corrupt vigilante type service.
It is extremely obvious that in order to move from cover up mode where investors have no clue how damaged the corporation is that they are buying shares of back into robust investor protection mode an embarrassingly obvious event must occur. The sellers of nonexistent shares caught gaming the system must be FORCED to go into their wallet, retrieve the stolen money and buy back and deliver the shares they promised to deliver on T+3 but refused to.
The obviousness of this only solution and the refusal to demand it up until now has forever tarnished the integrity of our markets. Once the share price depressing “security entitlements” are forcibly removed from these corporate share structures then an unmanipulated “supply” variable can finally interact with an unmanipulated “demand” variable to “discover” an unmanipulated share price through the price discovery process. What could possibly be a more obvious remedy to finally reroute our SROs and regulators away from cover up mode and back into investor protection mode.
SUMMARY
Relatively defenseless nonmarginable “penny stocks” are the easiest for short sellers to bankrupt. The problem is that they are the most difficult to LEGALLY short sell since very few shares are held in margin accounts or by institutions willing to loan them out. Short sellers not afraid to act outside of the securities laws can easily find corrupt MMs to ILLEGALLY “rent out” space under their “bona fide MM” umbrella of immunity from having to pre-borrow or make a “locate” before making naked short sales. Avoiding either expensive or unavailable “pre-borrows” is often the inducement to break the law. The corrupt MMs are rewarded for their breaking of the law by cash generating order flow from the criminals refusing to play by the rules.
The added expense and difficulty to legally short sell development stage securities in a sense should add protection to these corporations that are relatively defenseless during their particular stage of development in these “corporate incubators” known as the PinkSheets and the OTCBB. It is also true that these circumstances could foster and promote “pump and dumps”. The concept that abusive naked short sellers justify stealing the funds of today’s investors in order to hasten the demise of corporations in order to protect future investors in that (allegedly) “scammy” corporation from being defrauded by corrupt management teams represents a pathological mindset beyond comprehension. At the very least, these criminals should carry some form of billion dollar “malpractice” insurance when their diagnosis that “X” U.S. corporation is a “scam” proves to be unfounded.
(from www.theminingplay.com, posted by Brecciaboy) Emphasis above is mine.
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thanks to camper9 .. brecciaboy and the miningplay.com for
the above posts .. wanted to combine all of the posts into
one for ease of access and reading on the NSS board
thanks to greg for the request :)
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4kids
all jmo
10/5/07 -- there are no coincidences here ...
oh and like many other longs .. not selling at this level --
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