Megas World

[mastaflash]

Some DeCosta comments on BCIT situation I had not seen before. Notice the quantity of NS shares he mentions:

STUDYING THE COMMONALITIES BETWEEN THE VICTIMS OF MADOFF AND THOSE OF ABUSIVE NAKED SHORT SELLING (ANSS) FRAUDS

I am not doing any of the forensic work on the Madoff case so I am speaking as an outsider looking in. At the end of the day I believe this case will reveal a lot of the puzzle pieces that unconflicted SROs and unconflicted staff members and commissioners of the SEC can utilize to further their efforts towards providing “investor protection and market integrity” IF THEY ARE SO INCLINED.

The question I raise is what is held in common between the victims of the Madoff (alleged) fraud and the victims of naked short selling abuses. The answer I come up with is that both sets of victims got duped by month end brokerage statements that were then and are now very misleading. One could easily make the case that they have been made INTENTIONALLY misleading in both cases.

Both Bernie and Peter Madoff have attained a working knowledge of how our DTCC-administered clearance and settlement system works beyond compare. During the “comment period” for the proposed Reg SHO they filed a brilliant paper making their case for why market maker (MMs) should be gifted with special exemptions from the tenets of the proposed Reg SHO. They won their case and the exemption package became known as the “Madoff exception”.

In this paper they cited the now famous “Manning interpretation” as well as many of the aspects of the SEC’s and NASD’s “OHRs” or “Order Handling Rules”. They illustrated how when a buy order enters their brokerage side of the business they are willing to naked short sell into it within 1/100th of a second. They bragged of how they could “guarantee” that a client of theirs would get a “fill” on their order under various circumstances.

On the abusive naked short selling side of matters there is a small corporation with the symbol “BCIT” that has what appears at first glance to be credible evidence that at least 350 million naked short sold shares exist in their share structure with only 4.7 million shares legally “outstanding”. Their dealings with the DTCC are now famous to most pro-market reform advocates.

The investors in the $50 billion apparent “Ponzi” scheme run by Madoff led to believe that they were earning a healthy return of about 12% per annum and the purchasers of the naked short sold 350 million “shares/securities entitlements” led to believe that their brokerage firms were “holding long” these “securities were obviously hoodwinked by the monthly brokerage statements they were receiving. In the Madoff case it appears to have been grossly blatant but in the naked short selling case it was very cleverly concocted.

On a monthly brokerage statement the purchases made by an unknowing investor are referred to as “securities held long”. The first question that arises is are the mere “securities entitlements” resulting from the “failures to deliver” (FTDs) of those buying naked short sold shares actually “securities” because in reality in the “BCIT” case they could be more properly referred to as “evidences of fraud”. Unfortunately for investors much less financially sophisticated than the Madoffs of the world one definition of a “security” is an “evidence of indebtedness” which might indeed fit the bill for these “IOUs” we refer to as “securities entitlements”. Let’s put this into the “technically true but possibly misrepresentative” category.

The next question is are these incredibly damaging “securities entitlements” being “held long” by somebody and if so where are they being “held long”. One way to rephrase this question is can it be possible to “hold long” a “security” that doesn’t have a paper-certificated security in existence to justify its existence. Apparently in DTCC lingo “holding long” can be accomplished by issuing electronic book entry representations of failed delivery obligations with no paper-certificated representation whatsoever.

Thus “holding” might be representative of electrons flying through cyberspace as opposed to anything to do with being “held” in a vault somewhere as might be implied. Perhaps a less misrepresentative phraseology might be considered but then investors might start asking questions like what exactly did I get for my money. If they learned it was just a readily sellable and nonvoting “securities entitlement” that actually did damage to the prognosis for the investment made then the next question would obviously be then why did I pay the full retail price of a legitimate “share” with voting and other rights. A “securities entitlement” initially is basically an “accounting measure” denoting a failed delivery obligation. The original “contract” stated that I’ll deliver that which I’m selling by T+3 or “settlement date”.

Due to the existence of valid reasons for slight delays in making delivery an allowance had to be made for slightly delayed deliveries. After a certain period of time, however, these readily sellable “securities entitlements” become evidentiary of a fraud. This timeframe would correlate with when it becomes perfectly obvious that the seller had no intention whatsoever to deliver that which he sold under any supposed timeframe. Perhaps after 4 or 5 days past the previously agreed upon “settlement date” or “T+3” the entry on the brokerage statement should be converted to “incredibly damaging evidences of fraud flying through cyberspace that I got hoodwinked into paying too much for”.

Maybe the Madoff as well as the abusive naked short sellers’ “leg up” on their victims is the knowledge that investors never question the veracity of monthly brokerage statements with all of those official looking government logos and guarantees embossed.

http://www.deepcapture.com/bernard-madoff-the-mafia-and-naked-short-selling/