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No company, anywhere, has ever been destroyed by naked short selling.
The excuse of "naked short selling" is a ruse, employed by crooked promoters and inept management teams, to shift blame for their nefarious activities upon others.
"The only thing necessary for the triumph of evil is for good men to do nothing"
CRIME OF THE CENTURY
The Truth About Naked Short Selling
Bloomberg Report
March 14 (Bloomberg) -- Bloomberg's Michael Schneider reports on the practice of naked short selling, its impact on companies such as Overstock.com Inc. and efforts by the Securities and Exchange Commission to combat abuses. Naked short selling involves selling stocks short without borrowing the shares first, meaning sellers theoretically can place unlimited orders to drive down a company's stock. Patrick Byrne, chief executive officer of Overstock.com, and others speak. (Source: Bloomberg)
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
HATCH: Well how can we allow $6 billion a day not to be reported? It ought to be stopped.
COX: And intentionally failing to deliver that stock within the standard three-day settlement period can be market manipulation that is clearly violative of the Federal Securities laws.
O'QUINN: Which is just stealing is all it is. This is all an example of stealing.
CHANOS: It sounds ominous. It sounds nefarious. And by and large it's a non-issue in the marketplace.
ANGEL: Is somebody manipulating the shares? What is going on here? It certainly smells bad.
SCHNEIDER: Welcome to this Bloomberg News Special Report. I'm Mike Schneider.
Stock manipulation. It's a problem that dates back to a time when Wall Street was just a wall. Built by the Dutch back in 1653, stood 12 feet high, it ran pretty much beneath where I'm standing right now.
Over the centuries, investors have learned many tricks to drive stocks both up and down. One of the newest ways to drive them down - and you can make lots of money doing that - is with an obscure Wall Street trading tactic called naked short selling.
In a normal short sale, an investor borrows shares and sells them. If the price falls, he profits by replacing those borrowed shares with cheaper ones. But in a naked short sale, an investor fails to deliver the shares because he doesn't borrow them.
In extreme cases, he even sells phantom shares, shares that don't even exist.
While naked short selling is legal, manipulating markets is not, and regardless of intent, the effect of naked short selling can be the same - driving share prices lower.
Our story now begins with a man who has done more to call attention to this problem than anyone else.
BYRNE: There is in place a system. There is an Al-Qaeda, so to speak, a loosely organized group of people who are destroying small companies and looting the savings of America.
Gather round. We're doing our morning meeting this afternoon. Come on in.
SCHNEIDER: Meet Patrick Byrne, the outspoken CEO of Overstock.com, an Internet retailer based in Salt Lake City that went public in May 2002.
For the past two years, Byrne has been complaining that naked shorting has driven down share prices in thousands of small public companies, including his own, by permitting the sale of stock that, in some cases, doesn't exist.
From January 2005 to January 2007, Overstock share prices dropped nearly 70 percent.
BYRNE: It's a really simple concept, and when you get to it, you think, what's all the hullabaloo about? It's really basic. There are people selling things and not delivering.
SCHNEIDER: The 43-year-old Byrne, who counts Warren Buffett among his friends, says his troubles began after Overstock reported a profit for the second time in its history, in the fourth quarter of 2004.
UNIDENTIFIED: It is my privilege to welcome Overstock.com to NASDAQ this morning as we honor their accomplishment as one of the most innovative and successful Internet companies in recent history.
SCHNEIDER: In 2004, Overstock's sales had more than doubled, to nearly $500 million. Its stock had tripled.
But the high fives and champagne soon gave way to disbelief. From a high of $77.18 in December 2004, Overstock shares began tumbling. By December 2005, they collapsed to a low of $28.02.
Byrne become convinced his shares were being manipulated, a conclusion also reached by Tom Ronk, the President of Buyins.net. Ronk sells data on short sales to companies and investors.
RONK: Overstock is a - is the poster boy of naked short selling. What's interesting is that, from January 1st, 2005, Overstock.com has been on the naked short list for 91 percent of the trading days. In that exact same period of time, over 86 million shares have been shorted in Overstock.
How is that possible? It shouldn't be.
SCHNEIDER: Ronk says naked short selling explains the huge decline in Overstock shares that January, when the stock fell 20 percent in just one month.
RONK: We have found very large drops in U.S. stocks in one- month trading periods. So, we're seeing that, when they first come in and attack, they hit it hard. They really hit it hard, because they can get away with it. And they cause the largest damage to the stock usually in the first wave of selling.
SCHNEIDER: Overstock is just one of hundreds of companies considered at risk for manipulation by naked short sellers. They appear on stock exchange lists mandated by the Securities and Exchange Commission's Regulation Short Sales, or Reg SHO. These threshold lists consist of companies with too many trades that can't be settled because stock is not delivered to the buyer, so- called failures to deliver.
ANGEL: I mean, some people use the phrase counterfeit stock to describe the phenomenon, that if you can sell stock and you never have to deliver, it's going to have the same impact as selling, selling and selling. It's going to push the price down.
What is naked short sell?
SCHNEIDER: Angel says not all failures are the result of traders trying to manipulate stock prices. Some may be caused by clerical errors.
Overstock was on the list of failed deliveries that U.S. Exchanges released in January 2005. Along with Overstock were more than 240 other companies on NASDAQ's list, among them some familiar names - Trump Hotels and Casino Resorts, Global Crossing, Netflix, TASER and, U.S. Airways.
The New York Stock Exchange had nearly 60 companies on its list, including Delta Airlines, Martha Stewart Living Omnimedia, Krispy Kreme Doughnuts, and Winn-Dixie Stores.
And the problem is not going away. Since Reg SHO took effect, more than 4,500 companies have been affected by stock delivery failures severe enough to qualify them as threshold securities. That's roughly one in three companies traded on U.S. exchanges, the majority of them with small or very small market caps.
BYRNE: I don't opposed hedge funds. I don't oppose short selling. I object to the accumulation of unsettled trades in our financial system.
SCHNEIDER: Reg SHO is supposed to restrict short selling in threshold securities. Once a company is on an exchange's threshold list, Reg SHO requires prime brokers to settle any new trade failures after 13 consecutive trading days.
But Byrne and other CEOs say the SEC's own data prove that Reg SHO is failing to stop naked short selling. Companies including Overstock, Krispy Kreme, and Martha Stewart each have been on threshold lists for more than 400 trading days.
ANGEL: I can see no reason why sellers should be able to fail to deliver shares for years in name-brand companies. It just doesn't make sense. It raises the question, what is going on here?
SCHNEIDER: Patrick Byrne was convinced that illegal activity was responsible for the failures in Overstock trades.
BYRNE (?): There's people going to go to prison. There's nothing they can do to make me stop.
SCHNEIDER: When we return, Byrne's fight would take him to a place that is one of Wall Street's best-kept secrets.
But first - what naked short selling has in common with the Producers.
UNIDENTIFIED: There, how much percentage of a play can there be altogether?
UNIDENTIFIED: Max, you can only sell 100 percent of anything.
UNIDENTIFIED: And how much of Springtime for Hitler have we sold?
UNIDENTIFIED: Twenty-five thousand percent.
SCHNEIDER: In the Producers, down on his luck Broadway impresario Max Bialystock and his hapless accountant, Leo Bloom, sell more shares in a play than is mathematically possible.
CEOs like Frank Dobrucki have complained for years that the same Producers style accounting is at work when abusive naked short sellers target small companies.
DOBRUCKI: Twenty thousand, eight hundred percent of our company was traded in a single month. The shares weren't available. They weren't there. There was no way they could be trading.
SCHNEIDER: In March 2005, the Senate Banking Committee confronted then-SEC Chairman William Donaldson with a story about Frank Dobrucki's company, the Nevada-based real estate holding company, Global Links. An investor named Robert Simpson had set out to prove that small companies were indeed frequent targets of abusive naked short sellers.
Simpson placed an order for $5,000 worth of stock in Global Links. That got Simpson ownership of all 1.1 million Global Link shares in the market. Not some of them, all of them.
UNIDENTIFIED: There were no shares available to be borrowed, and yet in two days, there were over 50 million shares traded. That's clearly something that needs work.
SIMPSON: I was absolutely blown away when I bought 1,282,050 shares, which equated to 111 percent of the issued and outstanding. I just couldn't even fathom that. So, it wasn't just crooked, it was Wild West times 10.
SCHNEIDER: The day all this started, trading in Global Links opened at 10 cents a share. Within a second, the price dropped to a penny. An hour and 16 minutes later, Global Links stock was trading at eight one-hundredths of a penny. Prices dropped 99 percent in less than two hours.
Global Links CEO Frank Dobrucki wrote shareholders telling them the selling of Global Links shares was evidence of illegal trading, and when that occurs, he said ?
DOBRUCKI: The company cannot meet its goals, and shareholder equity is diluted so that brokers can line their pockets with illegal cash.
SCHNEIDER: The same conviction motivated Patrick Byrne to hire six-foot six-inch John O'Quinn, one of the few attorneys in the country tall enough to look him in the eye, and by reputation, a giant killer.
In Texas, they call O'Quinn the billion-dollar man because he won billion dollar judgments against makers of silicone breast implants and Fen-Phen, and against big tobacco.
O'QUINN: The deal is rigged so bad, I can make this statement safely - you have more chance to be treated fairly in a casino in Vegas than you do in the stock market. The Securities industry has things rigged where they can deal from the bottom of the deck regarding your stock and your money.
SCHNEIDER: O'Quinn's co-council is another Houston-based attorney, Wes Christian. Together they represent some 20 U.S. companies that all claim damage from naked short selling, including Overstock, Sedona Corporation, and TASER. They represent Overstock in a lawsuit seeking $3.5 billion in damages from Wall Street's biggest prime brokers, accusing them of executing short sales with no intention of delivering stock, causing Overstock's share price to drop.
All the accused have declined comment on pending litigation.
BYRNE: If you're a short seller and you abide by all the rules governing short sales, then fine. It's legitimate, it's legal, it's proper. That's not what is going on on Wall Street. What's going on on Wall Street in our cases, and we're now seeing in many other companies is a rigged system.
SCHNEIDER: But where Byrne and his lawyers see naked short sellers driving down stocks and destroying companies, many on Wall Street see something far less threatening.
CHANOS: Well, I think the phrase I would use would be red herring. It sounds ominous. It sounds nefarious, and by and large it's a non-issue in the marketplace.
SCHNEIDER: Jim Chanos runs Kynikos Associates, a New York Hedge Fund known for short selling. He says he's never naked shorted a stock. Chanos is among those on Wall Street who say CEOs who complain about short sellers are usually trying to divert attention from fundamental problems.
CHANOS: And they often find the short sellers convenient excuse as opposed to perhaps their own failings in execution to blame for share price disappointment. And that's where I think we see a lot of the sterm and drung , if you will, of this issue.
SCHNEIDER: Byrne's critics have dismissed him as a conspiracy theorist and have criticized his company's performance. In 2006, Overstock revenues fell one percent. The company lost $97 million. Share prices fell 46 percent.
BYRNE: I knew as soon as I put them on, it was going to be spun as, oh, this is a CEO who is just mad about his stock price, and it was just, you know, if you only ran a better liquor store, maybe people would stop robbing it.
SCHNEIDER: Byrne's battle against naked short sellers led him to one of Wall Street's best-kept secrets, the Depository Trust and Clearing Corporation or DTCC. It's just a few blocks from here.
On average, the DTCC says it processes more than $1.4 quadrillion worth of trades a year. That's more than 20 times the economic output of the entire planet. The DTCC also keeps track of the trades that can fail due to naked shorting.
Speaking at a conference just a few blocks from DTCC headquarters, Suzanne Trimbath, who worked for a subsidiary of the DTCC, explained the corporation's role in U.S. capital markets by comparing Wall Street to Broadway.
TRIMBATH: Imagine that all of Wall Street is a stage. The DTCC is like backstage. These are the guys that run the lights and the cameras, the grips and the gaffers, the people that moviegoers really don't need to know what they do, and you don't need to care about it. But we all do need to care about what's happening backstage at the capital markets.
SCHNEIDER: Meantime, Patrick Byrne says he received data from the DTCC that stunned him.
On January 12th, 2006, Byrne says the DTCC data indicated that there were seven million more Overstock shares in circulation than there should have been, a discrepancy coinciding with the steep decline in the company's share price.
BYRNE: If it's only seven million shares, it's 35 percent of our company has been counterfeited. I think I have a fiduciary duty to the shareholders, or the people who think they are shareholders, to clean this up.
SCHNEIDER: DTCC data obtained from the SEC through the Freedom of Information Act also revealed the scope of the failed trade problem. On an average day last March, failed trades amounted to more than 750 million shares in almost 2,700 stocks, exchange traded funds, and other securities.
In all, the DTCC says about $6 billion in trades can't be cleared every day, 1.5 percent of the total dollar value.
In this letter to the SEC, Wall Street's Trade Association, the Securities Industry and Financial Markets Associations, or SIFMA, says trade settlement failures are only a problem for an extremely small universe of securities.
Peter Chepucavage is a former SEC attorney who helped write Reg SHO.
CHEPUCAVAGE: To say it's trivial in the context of the entire universe is a meaningless statement. We all want to know more about how many fails there are with respect to short sales and who exactly is failing.
SCHNEIDER: Because trades can fail for innocent reasons, like clerical errors, the DTCC says it doesn't know how many failed trades can be blamed on abusive naked short selling. A statement on its Web site reads, ?While we have data on the volume of fails, we have no information on the underlying causes of those fails.?
DTCC officials declined our request for interviews. DTCC members include the prime brokerage firms that control the $10 billion annual stock lending market and are responsible for many of the failed trades. Officials at SIFMA declined to be interviewed too.
Up next, is the SEC doing enough to crack down on abusive naked short sellers?
COX: The next item on our agenda is the serious problem of abusive naked short sales, which can be used as a tool to drive down a company's stock price to the detriment of all of its investors.
SCHNEIDER: In July 2006, SEC Chairman Christopher Cox admitted there were loopholes in Reg SHO that permitted naked shorting to continue.
COX: There continues to be a number of threshold securities with substantial and persistent fail to deliver positions that aren't been closed out under existing delivery and settlement guidelines.
SCHNEIDER: One problem, trades that fail before a company lands on a threshold list can remain unsettled forever. The SEC wants to close that loophole by setting deadlines for settling failed trades, but some say this still isn't enough. Reg SHO, they say, will still fail to prevent abusive naked short selling, that's because the rule only forces naked short sellers to settle trades after they've failed, and by then it's too late. The alleged damage inflicted by naked shorting can occur before a company shows up on a threshold list.
Example - January 2006, shares of Audible, the company that sells audio newspapers and books, fell nearly 15 percent. The drop coincided with a jump in undelivered shares, which occurred before Audible was placed on the NASDAQ's threshold list.
RONK: Our data is showing anywhere from 15 to 35 percent drops in stock prices in the first month that this is happening. And we've seen stocks go from 26 down to three, you know, 90 percent drops in the stock price over six, seven or eight-month periods. But it's usually the first month where the most damage is done.
SCHNEIDER: In 2003, the SEC filed suit against Rhino Advisors for naked short selling shares of software company Sedona Corporation two years earlier. Rhino settled the case in 2003 for $1 million without admitting or denying wrongdoing.
According to SEC records, Rhino instructed brokers at the now-defunct brokerage Revco to clobber Sedona's stock until its share prices collapsed. The shares fell 50 percent in three weeks.
UNIDENTIFIED: Yes. Did you get anything good there for me?
EMRICH: They were congratulated for clobbering Sedona's stock. Go after, make sure you go all the way, run them out of business. I have now 15 employees when, at one time, I had over 70.
SCHNEIDER: Traders have committed federal crimes using naked short selling. This document contains e-mails written by a convicted naked short seller serving 11 years in prison for racketeering, conspiracy, securities fraud, wire fraud, and extortion.
Anthony Elgindy directed members of his Internet-based investing cartel to sell their stock in a certain company at the same time, carpet bombing, he called it. Ken Breen was lead federal prosecutor in the case.
BREEN: There was testimony at trial with regard to volume, pounding, volume trading. They were able to overwhelm the stock by just flooding the market with short sell orders. And their short sell orders would eat up all the buy orders, and it would just drive the price down.
SHAPIRO: The bottom line is that the one ?
SCHNEIDER: Former Under Secretary of Commerce Robert Shapiro works as a consulting for lawyers representing alleged victims of naked short sellers. He says as many as 1,000 public companies were damaged by naked shorting in the decade it took to get Reg SHO into the rule books.
SHAPIRO: A lot of those companies are gone. A lot of them died. This was a fatal attack.
Now, some of them were weak when they were attacked. Some of them would have failed anyway. Others wouldn't have. Again, it's not up to the naked short sellers to decide. It's up to the investors that play by the rules.
SCHNEIDER: Well if you believe the $6 billion in failed trades every day could endanger a market the size of America's, some argue the dollar value isn't the real threat. The danger, they say, is in what those trade failures represent.
CHEPUCAVAGE: And why should a group of overzealous short sellers, and frankly, they are mostly hedge funds, why should they be allowed to destroy the American dream? It's a matter of fairness. I think what you hear among all the critics is, let's just be fair. There's no need for this.
SCHNEIDER: Right now, affected companies blame hedge funds, and hedge funds are blaming the prime brokers, the firms that process trades for institutional investors.
CHANOS: If we're going to find out that there are fails in the system due to widespread naked short selling, it's going to be due to the brokerage houses, and some of my best friends are prime brokers, don't get me wrong, but it's going to be due to the back office problems at the brokerage houses, not the hedge funds.
SCHNEIDER: Patrick Byrne, who once personified the NASDAQ's hopes for a dot-com recovery, is now the poster child for all that's wrong with Reg SHO.
The day Overstock became a threshold security, in January 2005, the NASDAQ reported that more than 280,000 Overstock shares had failed to deliver. After becoming a threshold security, prime brokers were supposed to guarantee delivery of Overstock shares in any new short sales.
Instead, the number of undelivered shares skyrocketed. By March 20th, 2006, they topped 3.8 million, an increase of more than 1,200 percent.
Across the Rockies in Utah, Overstock's CEO slips his Jeep Scrambler into second gear near his company's headquarters in the foothills of the Losach Mountains. It is his place to escape. Like these roads, his battle still seems uphill, but Byrne says he won't quit.
BYRNE: So, it becomes like a game of chicken, and I'm putting a brick on the accelerator and taking my hands off the wheel. And if they do the same thing and we crash, we crash.
SCHNEIDER: Of all the numbers that we've reported here, there is one that everyone can agree on - the number one. Using the most conservative estimate, about one percent of all trades in U.S. exchanges will fail on days the market is open. State security regulators say that's one percent too much. They want the SEC and brokers and stock exchanges to take the necessary steps to ensure a 100 percent success rate.
Finally, based on data from the SEC, in the half-hour it took to watch this program on a typical trading day, about four million shares failed to deliver.
I'm Mike Schneider for Bloomberg News. Thank you for watching.
A trader I know well is a market maker and he laughs at the rest of us as he steals and enriches himself at our expense.
So did you report him to the authorities?
Market makers typically are selfish and self-serving, fleecing the society of their money with impunity.
Seldom if ever does a market maker actually concern themselves about 'making a marker.'
A trader I know well is a market maker and he laughs at the rest of us as he steals and enriches himself at our expense.
The problem is, the market maker can manipulate any stock for their personal benefit, and they do.
Seldom does any market maker concern themselves about the good of society or the market.
Their job is to make a market, not save the world.
Naked short selling most always manipulative and destructive. Abusive is an adjective and open to interpretation.
Seldom does any market maker concern themselves about the good of society or the market.
If your message board has been invaded with alias's disseminating false information for the purpose of manipulating share price, you can submit a complaint to this FBI website:
http://www.ic3.gov/faq/default.aspx
Message Board Bashers
* Be aware of stock manipulators (AKA Board Bashers) If you believe your stock message board has been corrupted by these individuals, please report them to your local message board. Each board has a link to report abuse. USE IT!
* The FBI defines an Internet crime as follows: Internet crime is defined as any illegal activity involving one or more components of the Internet, such as websites, chat rooms, and/or email. Internet crime involves the use of the Internet to communicate false or fraudulent representations to consumers.
Naked short selling is illegal
No, it's not. MM's can naked short to make market if need be. I think what you meant to say was, abusive naked short selling is illegal.
Naked short selling is illegal and endemic and the good people of the investment community need to ban together to stop it. I hope some of us will help to identify naked short selling when it occurs and advise others on how to fight it.
Excellent, vindication for Patrick, I hope the big one goes to court, got to wait another year for that though.
The full story, to date:
http://www.deepcapture.com/
tlo.
**this link may be helpful for demonstration -
http://www.businessjive.com
I'd recommend just letting the slides play through even if you know the basics, but slides 11-15 really lay out naked shorting and 16-17 will help with the economics that many people don't understand... supply curve shifting and dilution-style action.
been clueing a few people in on this situation on one of my positions, AUCI, which is a good company that got naked shorted to the ground IMO. I was under the impression that mm's shorting had to declare after 3 days unless they shuffle those shorts amongst themselves. Any citations that someone can provide regarding mm's NEVER having to declare their naked short positions? I'd just like a verification source, thanks for any help!
bizzzatch. by the way Sandy is posting on the BKMP board in third person by the handle Makman. Notice how Makman/Sandy stresses to all BKMP investors that ITS OVER! WALK AWAY! YOU LOST! NO SUEING SANDY! etc, etc,
If this has been posted before sorry go ahead and delete!
http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?dbname=2007_record&page=S9646&position=a....
Is is possible to short pinks? if so please PM me and explaine how, or point to a broker that can do it.
Thanks
I know I have shrunk since I started trading the penny stocks. LOL
yes and yes. good afternoon to all.
The difference between a third world country and the US is the US has a market place for investors to invest in the country"s financial well being. It doesn't make sense to me for the SEC to stand by and let are markets be destroyed by a small group of greed driven few. Is this country slipping backwards to a third world? Is that what it takes for the SEC to do something about this problem? It seems clear to me that something needs to be done. Got any ideas?
Hey Mick, do you feel Pinks are being shorted?
Thanks.
J
If anyone is interested I own www.nakedshorting.com and would like to sell it.
Might be a great site to start a grass roots campaign against the WallStreet Giants...
If you're interested email me at domainhost@comcast.net
Disclaimer: I do not know, nor do I claim to know, everything there is to know about the law in general nor Pink/OTCBB law specifically. This Board is designed to be an open and welcoming forum for the considerate exchange of thoughts, ideas and knowledge. This Board is not restricted to the discussion of legal matters; general discussion of any stock is permissible and, indeed, welcome.
Absolutely nothing said on this Board is legal or financial advice and should never, under any circumstances whatsoever, be construed by any person(s) whomsoever as the rendering of legal or financial advice or, for that matter, any advice whatsoever upon which the reader(s) should rely. All statements, whether expressly stated or implied, directly or indirectly, is simply the personal opinion of the author and should be treated as such. Any member of Investors Hub is welcome to read and post on this Board subject to this Disclaimer. Any person(s) availing themselves of the privileges of this Board shall do so subject to this Disclaimer and all the rules of Investors Hub.
Thank you for your post.
I have made it my personal mission to make this as public of a matter as possible. I want to inform as many people as possible.
Already, in a matter of a few days.......
6,475 people have viewed this video.
Lets have 10,000 people view this video. Then 100,000 people view this video. Then 1 million people view this video.
Big number but possible?
Y E S !!!!!
How?
Very, very simple. Go to the link and view the video yourself. Rate the video and then...........
THEN. This is important!
Tell 10 to watch this. We all know 10 people. Let 10 people know that it is in their interest to watch this.
We have so many people watch garbage television.... we have so many people writing spam emails..... and yet when something that is effecting their monthly finances..... something that is robbing them of their financial future.
We remain silent?
If you have seen this video. Bravo! You took the first step.
Now, step #2. Rate the video
Step #3. Tell 10 people.
What will YOU do today?
Is your stock scheduled for 'carpet bombing"?
Bloomberg Special Report - Phantom Shares (25 min)
It aired last night (3/13/07) Bloomberg TV
Watch this Bloomberg presentation on naked shorting
Morning all, Does anyone here have an opinion on XTMS? They have a PR out today canselling 394,000,000 O/S
The stock has been getting kicked around pretty bad as of late.
Kind hard to figure what effect PR will have?
Anyone?
Thanks, Peck
Hi All,
This will probably come as no suprise to anybody on this board... but I have contacted the SEC Help desk twice now, asking for specific information pertaining to exactly how the SEC addresses the mandatory close out requirements detailed in Regulation SHO. My e-mail and the SEC's response are pasted below:
Sir/Madam,
Thank you for taking the time to respond to my communication.
Could you please advise me what steps the SEC takes to ensure that the mandatory close out provision under Reg SHO is adhered to by those involved in the practice of naked short selling.
Secondly, what steps would you advise a publicly traded company to take, when they become aware that they are victims of downward price manipulation.
Preventing the public from accessing fails information due to the SEC's concern of illegal upward manipulation of price is understandable, but the SEC makes no mention of Illegal downward manipulation, what can a publicly traded company do to quickly halt this kind of fraud when it is uncovered?
Kind Regards,
The SEC's Response...
Thank you for your additional communication.
If you believe that provisions of Regulation SHO or the provisions of any other of the federal securities laws have been violated you can provide the pertinent information to our Division of Enforcement, which has authority to bring legal action against violators. You can contact our Division of Enforcement at enforcement@sec.gov.
I hope this information is helpful.
Sincerely,
Steven G. Johnston
Special Counsel
U.S. Securities and Exchange Commission
So my question still stands, as their response failed to address it... does anybody out there know exactly how the SEC enforces (if indeed they do enforce) the mandatory close out provision under Reg SHO.
Thanks for taking the time to read and respond to this post.
Cheers, J.
planner ,first i want to thank you for your work it is very informative but i have a question for you rgarding this part that you wrote:"The temptation to abuse this rule is irresistable.
Just do the math. A million naked shorted shares sold
by a market maker at 0.01 (one cent) is $10,000 that
the market maker keeps in his account, and that the
company does not get. At 0.10 (ten cents) the market
maker gets to keep $100,000. Now, that is for each
million shares that the market maker creates. "
when he naked shorted the 1000000 shares at 0.01 he has 10000$ in his account but if the market moves in this stock to 0.10 he should average down by shorting more all the way up .
so how could he gets 100000$ in his account ?he will only see his account getting more dollars in on the way down and especially under his breakeven price which should be not far from the 0.10 ?right?
your comment please ,thank for replying
Hate to say I told you so - All text book stuff
_______________________________________________________________
you mean bought buy a short seller to cover, or sold short to a buyer, or both__________________________________________________
To avoid detection and regulatory scrutiny, Lyon and Gryphon Partners employed a variety of deceptive trading techniques, including wash sales, matched orders, and pre-arranged trades, to make it appear that they were covering their short sales with open market shares, when, in fact, Lyon and Gryphon Partners were on both sides of the transactions and were covering with their PIPE shares.
Well ain't that special.
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19942 / December 12, 2006
SEC v. Edwin Buchanan Lyon, IV, Gryphon Master Fund, L.P., Gryphon Partners, L.P., Gryphon Partners (QP), L.P., Gryphon Offshore Fund, Ltd., Gryphon Management Partners, L.P., Gryphon Management Partners III, L.P., and Gryphon Advisors, L.L.C, Civil Action No. 06 CV 14338
SEC Files Fraud Charges Against Hedge Fund Manager Edwin "Bucky" Lyon, IV and the Gryphon Hedge Funds for Engaging in Illegal "Pipe" Trading Scheme
The Securities and Exchange Commission filed securities fraud and related charges today against Edwin "Bucky" Lyon, IV, Gryphon Master Fund, L.P., Gryphon Partners, L.P., Gryphon Partners (QP), L.P., Gryphon Offshore Fund, Ltd., Gryphon Management Partners, L.P., Gryphon Management Partners III, L.P., and Gryphon Advisors, L.L.C. (collectively, "Gryphon Partners") in the U.S. District Court for the Southern District of New York. The Commission's complaint alleges that the defendants collectively perpetrated an illegal trading scheme to evade the registration requirements of the federal securities laws in connection with at least thirty-five unregistered securities offerings, which are commonly referred to as "PIPEs" (Private Investments in Public Equities), made materially false representations to the PIPE issuers, and engaged in illegal insider trading.
The Commission's complaint alleges that, during the period 2001 through 2004, Lyon implemented an unlawful trading scheme that enabled Gryphon Partners to improperly realize more than $6.5 million in ill-gotten gains by investing in PIPE offerings without incurring market risk. Specifically, the complaint alleges:
Lyon and Gryphon Partners, after agreeing to invest in a PIPE transaction, sold short the issuer's stock, frequently through "naked" short sales in Canada. Once the Commission declared the resale registration statement effective, Lyon and Gryphon Partners used the PIPE shares to cover the short positions ? a practice prohibited by the registration provisions of the federal securities laws.
To avoid detection and regulatory scrutiny, Lyon and Gryphon Partners employed a variety of deceptive trading techniques, including wash sales, matched orders, and pre-arranged trades, to make it appear that they were covering their short sales with open market shares, when, in fact, Lyon and Gryphon Partners were on both sides of the transactions and were covering with their PIPE shares.
In each of the transactions, Lyon and Gryphon Partners made materially false representations to the PIPE issuers to induce them to sell securities to Gryphon Partners. As a precondition of participation in a PIPE, Lyon and Gryphon Partners had to represent that they would not sell, transfer or dispose of the PIPE shares other than in compliance with the registration provisions of the Securities Act of 1933. This representation was material to the PIPE issuers, who, as the stock purchase agreements made clear, relied on the investors' representations in order to qualify for an exemption from the registration requirements for their private offering. At the time defendants signed the securities purchase agreements, however, they intended to distribute the restricted PIPE securities in violation of the registration provisions of the Securities Act.
On at least four occasions, Lyon and Gryphon Partners engaged in illegal insider trading by selling short the securities of certain PIPE issuers prior to the public announcement of the PIPE, while using nonpublic information they received when being solicited to invest in the PIPE. Lyon and Gryphon Partners engaged in this conduct notwithstanding their agreement to keep information about the PIPE confidential and/or to refrain from trading prior to the public announcement of the PIPE. Although Lyon and Gryphon Partners received legal advice advising them not to trade prior to the public announcement of PIPE offerings, they disregarded this advice and continued to do so anyway.
By engaging in the foregoing conduct, the complaint alleges that defendants violated the registration provisions of the Securities Act (Sections 5(a), 5(b), and 5(c)) and the antifraud provisions of both the Securities Act (Section 17(a)) and the Securities Exchange Act of 1934 (Section 10(b) and Rule 10b-5, thereunder). The Commission's complaint seeks to permanently enjoin defendants from future violations of the applicable provisions of the federal securities laws, disgorgement of ill-gotten gains (with prejudgment interest thereon) and civil penalties.
The Commission acknowledges the assistance of the Investment Dealers Association of Canada. The Commission's investigation is continuing.
SEC Complaint in this matter
http://www.sec.gov/litigation/litreleases/2006/lr19942.htm
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Home | Previous Page Modified: 12/12/2006
Buckey says no retail short selling in pinks. I'm still searching for a broker that would let you do it, but Buckey sure knows his stuff.
Never mind the Bollocks......
The Honorable Christopher Cox, Chairman
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-2001
September 29, 2006
Re: File No. S7-12-06
Proposed Amendments to Regulation SHO
Dear Chairman Cox,
Thank you for providing this opportunity to comment on proposed amendments to Regulation SHO under the Securities Exchange Act of 1934. I understand the proposed amendments are intended to further reduce the number of persistent fails to deliver in certain equity securities, by eliminating the grandfather provision and narrowing the options market maker exception.
Before I expound on this proposed rule and related matters, I want to state my position that the grandfather provision should be eliminated from Regulation SHO. The options market maker exception, and any other exceptions, should be eliminated for the protection of individual investors. We should not be creating artificial liquidity in any security, by creating an artificial supply of shares that place downward pressure on the bona fide security value.
Chairman Cox, in the opinion of thousands of individual investors, you inherited an organization that is captured by the very same Wall Street institutions the SEC is charged with regulating. You inherited an executive staff that frames opponents of so-called naked short selling, the counterfeiting of commercial securities, as just mad because they want their stock prices to go up. To borrow a phrase from Former FBI Agent Robert Maheu, "Tough assignments are not solved by wishful thinking, but rather by tough action". Chairman Cox, you have a tough assignment on your shoulders, and it is going to require tough action on your part to solve it. In my opinion, with respect to persistent, strategic and abusive naked short selling, you are looking at a multi-billion dollar organized crime operation that is going to take all the resolve you can muster to eliminate it. Fortunately, you are not alone.
I am an individual investor living in the United States of America. While I am not representing any group of investors, my thoughts and comments on this matter are representative of thousands of other individual investors across America and Canada. I know this because I have communicated with many of them on a daily basis, over a period of several years. This opportunity to comment is one of the few public opportunities that individual investors have to communicate our expectations to the Securities and Exchange Commission. Our elected officials have repeatedly demonstrated that they are captured by lobbyists, and cater exclusively to special interest groups. They have clearly forgotten what this country was founded upon, or perhaps they have not forgotten and have chosen instead to sell their souls at the expense of their constituents. The caliber of comments to the Commission on this proposed rule is outstanding. I am proud to submit my comments on this matter, on the same page of so many honorable and respectable names that I recognize.
Individual investors have met with, and wrote thousands of letters to, the US Senate Banking committee. After no action effective on the matter of naked short selling, beyond posturing, and upon concluding that an inherent conflict of interest is present within the Banking Committee, we have recently focused our efforts toward communication with the US Senate Finance Committee and the Committee on the Judiciary. I expect the campaign contributions from the broker dealer and the hedge fund communities, toward those committee members, will increase by several orders of magnitude over the next several years. We appear to be gaining some traction on this issue of so-called naked short selling though. Naked short selling is simply the counterfeiting of commercial securities, at the expense of many, for the enrichment of a few.
What we expect from the Securities and Exchange Commission is also simple. We expect to be treated with honesty and integrity, and we expect our securities regulators will perform in the utmost ethical manner. When we work everyday in an ethical and law-abiding manner, to support our families, we expect our elected and appointed officials to be working diligently in the same manner at their respective positions. Any one of us could game the system, and commit fraud to increase our income, but we do not. Only the criminals in our society do that. We expect honesty and integrity from all those we elect to office, and those appointed by them. When we look at state and federal taxation on our pay stubs, we expect our contribution is providing important services to our citizens, one of which is the protection of our retirement and discretionary investment capital from fraudulent manipulation of any kind. Theft of investment capital from any citizen is simply wrong, and illegal. Theft of investment and retirement capital from the elderly of this great nation is particularly egregious, yet it continues. Chairman Cox, you have the exclusive authority to stop it, today.
We know existing and future securities laws are irrelevant where there is little or no enforcement. We expect securities laws to be enforced, and criminals to be prosecuted. We know it is easy for criminals to "game the system" and steal our investment capital. It does not take a genius to figure out how to steal money, from any system. When they do, it should always be met with swift enforcement. It should never be met with a comparatively small fine versus the amount stolen. It should never be met with a deal to avoid criminal prosecution by increasing the monetary penalty. This is the present state of enforcement against securities fraudsters. They pay fines with our stolen capital, and then effectively write it down as a business expense. Chairman Cox, you now have the opportunity to correct this vicious cycle that has literally spun out of control. This vicious cycle presents systemic risk to our national market system, by any reasonable measure.
SEC Regulation 17A(a)(1)(A) states, The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.
Individual investors are becoming fully aware of the persistent fraud that plagues our securities markets, particularly with respect to naked short selling.
We are aware of the multitude of securities lending lawsuits against the major prime brokers,
http://tinyurl.com/o2ezl
(If the link is broken, please copy and paste into your browser address bar)
A copy of this comment letter, with active links, is available for review at,
http://tinyurl.com/mrszg
We see many of these same prime brokers receiving fines for acts that we perceive to be criminal, repeatedly. These are simply business expenses for those perpetual violators of our trust,
http://tinyurl.com/l8te7
We are aware of the problems with shareholder proxy over-voting related to issuance of electronic counterfeit securities, markers in our brokerage accounts for shares we paid for that simply do not exist anywhere in physical form.
Chairman Cox, we see members of your enforcement staff testing your resolve to stand behind them when they subpoena captured journalists.
http://tinyurl.com/mccyx
Showing his disrespect and contempt toward your most courageous, ethical and honorable staff members, we watched Jim Cramer write BULL on his SEC subpoena, on a captured cable television broadcast, providing us with visual evidence of what we already knew someone needs to bring honor and respect back to the SEC,
http://tinyurl.com/s7m3j
My fellow investors stood behind your courageous staffs decision to subpoena suspect journalists, journalists that many suspect of colluding with short sellers to drive down stock prices. Jim Cramers network polled us with a question, Did the SEC overstep its authority by subpoenaing business journalists? The network had no idea that we have clearly had enough media manipulation of this stock market. In just 24 hours, 2348 citizens voted, and 89% of us backed your staffs decision to issue those subpoenas,
http://tinyurl.com/qdg5j
We watched in utter disappointment when you halted the efforts of your staffs honorable intentions, then wrote a policy that embarrassed that same staff and their commendable subpoena actions,
http://www.sec.gov/rules/policy/2006/34-53638.pdf
We watched as former SEC attorney Gary Aguirre leveled charges against the SEC, charges that individual investors have been claiming for years. This time, we had a champion on our side, on the inside,
http://www.thesanitycheck.com/Portals/0/Let.pdf
http://www.faulkingtruth.com/Files/aguirre_congress0623.pdf
http://judiciary.senate.gov/testimony.cfm?id=1972wit_id=5485
http://tinyurl.com/lkuyh
http://www.senate.gov/finance/press/Gpress/2005/prg082306.pdf
http://www.whistleblower.org/doc/Aguirre FOIA.pdf
http://tinyurl.com/hbout
Every few months, we get a lesson from DTCC First Deputy General Counsel Larry Thompson. My fellow investors are not accepting the word of this organization that is supposed to clear our trades in their stock borrow program, but refuses to offer any transparency whatsoever. Furthermore, we are not impressed that the DTCC Board of Directors is populated with executives from the same market participants that we scrutinize for naked short selling. It seems the proverbial fox is guarding the hen-house here. This does not meet our definition of an "independent board of directors".
http://tinyurl.com/f2wzc
We watched our champion, Dr. Patrick Byrne of Overstock.com, give us a first hand account of so-called naked short selling, the counterfeiting of commercial securities. A CEO purchases two million dollars of stock in his own company, and he cannot take delivery of this stock in certificate form. Thank you for the lesson Dr. Byrne. We can never repay you for all you have done to champion the exposure of this egregious crime. We are standing behind you, and we will always be there for you when you need us,
http://tinyurl.com/zrwq8
We followed the campaign to eliminate stock certificates from our securities markets, when curiously they are the only form of stock ownership that we can trust in this market of counterfeit securities. We do not like the idea of removing stock certificates from the equation. Forgive us if we are not trusting at this stage of our journey,
http://tinyurl.com/ehoow
We took another lesson from Dr. Byrne, as he spent countless hours preparing a presentation that describes failures to deliver in the securities market. We wanted to know why we need someone like Dr. Byrne to stand up for us, on his own time, when our tax dollars are paying for thousands of lawyers and criminal prosecutors to do the same, on our dime,
http://tinyurl.com/l5jbn
We heard Senator Hatch is fearful for Dr. Byrne's life, and that he would bring the world down on whomever did it, should Dr. Byrne meet with an untimely end.
That is pretty serious stuff. When the Ranking Republican on the Select Committee on Intelligence is telling Patrick that he is worried about him remaining alive, and wants to let the bad guys know that they will have Hatch to contend with if they decide to off him,
http://tinyurl.com/gnpsj
We watched as Dr. Byrnes Overstock.com, Biovail, and Fairfax Financial Holdings sued their respective defendants alleging an entirely separate, but likely related, form of stock manipulation via tainted research reports. We did some research and found similar concerns in 1991, and we wondered why our representatives would not cleanse this market of such perpetual corruption,
http://tinyurl.com/nqlva
We reviewed the Commissions attempts to curtail naked short selling in 1999 and 2003. We read comment letters identifying companies that were targets of the flooding of counterfeit securities into our markets. Those companies were decimated just a year or two after manipulative short selling rules were revised repeatedly. Eventually, their registrations were revoked, another convenient sweeping under the rug of crimes committed against America's small businesses, their employees and investors,
http://www.sec.gov/rules/concept/s72499.shtml
http://www.sec.gov/rules/proposed/s72303.shtml
We recently watched the Vonage IPO. We noticed the counterfeiters are getting hungry, now opting to counterfeit securities right out of the gate, not even waiting for the secondary offering,
http://tinyurl.com/nwcxc
In fact, as of this writing, Vonage is still on the NYSE list of Threshold Securities,
http://tinyurl.com/5z8km
Chairman Cox, more than three months have passed since the Vonage IPO, and that security still has counterfeit securities in circulation. Please enforce the law against the perpetuators of the Vonage violations, then expeditiously move to aid the remaining hundreds of public companies that are being attacked by criminal stock counterfeiters.
We looked at another threshold security, Taser. The maker of one the most life saving tools that law enforcement has ever had at their disposal. Although it spends hundreds of days sitting on the NASDAQ threshold security list, since the commencement of Regulation SHO in January 2005, we didnt hear a word from Tasers CEO. We found there is only one large-cap CEO willing to stand up against the criminals that raid our portfolios every day, Patrick Byrne. Dr. Byrne knows the consequences of his efforts to cleanse this market of perpetual corruption, but he continues this battle with the determination and skill of a well-trained army. We watched as Taser was placed under investigation by the SEC on a TIP. We watched as the investigation closed a year later, with no charges. We looked at Tasers decimated stock price and how the entire process looked all too familiar. We were curious why the SEC would receive a TIP on Taser, and the stock would fall off the charts, beginning on day-one of the newly implemented Regulation SHO. Was the tipster ever investigated for stock manipulation? False statements to the SEC?
http://tinyurl.com/z47zw
We witnessed the State of Utah take a leadership role when they passed Senate Bill 3004, imposing penalties on and exposing naked short sellers. We sent messages to every Utah Senator, and the Governor, telling them how proud we were of them for listening to us and for standing up for what is right and just. We saw the Utah law challenged, and its implementation delayed by the same industry lobby groups that we believe have captured the SEC and our elected officials,
http://www.le.state.ut.us/2006S3/bills/sbillenr/sb3004.pdf
Out of a collection of what we believe to be several hundred criminal stock manipulators, we saw the SEC act on a handful,
http://tinyurl.com/k3tyq
We saw countries around the world becoming aware of the manipulative short selling practices in the United States markets. Once the crown jewel of the financial markets, we continue to see deteriorating interest in our markets by public companies. In a sense, one could theorize, the word is out on the street about the corruption infested US market system,
http://tinyurl.com/fjb9p
Mr. Chairman, we know your job is difficult. We recently heard from former Chairman Arthur Levitt about the incredible pressures of your position. In an interview, he is quoted And when all else failed, lobbyists would cash in their chips with members of House and Senate committees to threaten the SEC - an independent regulatory agency - with budget cuts to get what they wanted. Regrettably, I occasionally found myself succumbing to this immense pressure in order to save the commission.
http://tinyurl.com/zf5lk
We learned three out of four U.S. investors (76%) say someone who naked shorts a stock should face civil (8%) or criminal penalties (9%) or both (59%). By the same margin (76%), investors believe such penalties should be about as (65%) or more (11%) severe than those for fraud and counterfeiting, according to a recent survey commissioned by Working Americans for an Open Economy, conducted online by Harris Interactive® among 1,243 investors nationwide,
http://tinyurl.com/elb7q
We saw Refco implode, perhaps the best show since the LTCM collapse, but the broadcast media was curiously silent on the issue. We appreciated the Time Magazine story on Refco and naked short selling, but there was not a regulator, a law enforcement officer, or politician in the land that would lift the lid on the full scope of this crime, still.
http://tinyurl.com/zruu6
We waited patiently as Dateline NBC released their report on naked short selling, after eighteen months of research. We were disappointed when they finally aired it, eight minutes in its final form. The network must have been proud. Edited down, diluted, it was nearly useless, except for the honorable CEO of a small company we met. We found another champion of honesty and integrity. Rodney Young, CEO of Eagletech, a small business decimated by criminal naked short sellers. We think Mr. Young is a true American hero, and we followed him to Washington DC on February 13 of this year. We listened as he testified in front of your Commissioners on the revocation of his companys securities. We knew he was challenging the constitutionality of the Regulation SHO grandfather provision and we were behind him 100%. We looked at your empty chair throughout the proceeding Chairman Cox. I wish you could have been there to listen to this honorable man in person,
http://tinyurl.com/ppqgj
Still, we wondered what happened to Datelines eighteen months of interviews and preparation for the show that was to expose naked short selling to all Americans. We looked to the board of directors at NBC parent General Electric because we wondered who would accept such a lousy return on their eighteen-month investment. We found Chase Manhattan, J.P. Morgan Co, Citicorp, Morgan Guaranty Trust, State Street Bank and Trust, Banco Nacional de Mexico, and The New York Stock Exchange. These are all smart people. We figured NBC must be a strategic loss leader for the parent company. In our opinion, Dateline was another strategic failure to deliver.
We read Dr. Leslie Bonnies study on Strategic Delivery Failures in U.S. Equity Markets, the Wharton-UNC study titled Failure is an option, the Finnerty Study on short selling, and the Advanced Small Business Alliance position paper on naked short selling.
http://www.businessjive.com/nss/bonistudy.pdf
http://www.businessjive.com/nss/failureoption.pdf
http://www.businessjive.com/nss/jdfinnerty050505.pdf
http://www.advancedsmallbusiness.org/positionpaper.htm
We watched a former DTCC board member submit to a public grilling on naked short selling during a NJ State hearing for his treasurer post,
http://tinyurl.com/nq5xp
When asked if he ever participated in naked short selling at one of his former employers, there was a four-second pause before the reply came. Please look at your watch and observe the second had tick, four times in silence.
Chairman Cox, individual investors have sought relief from the manipulative practices of illegal naked short selling predating the 1999 SEC Concept Release No. 34-42037 File No. S7-24-99 on Short Sales. Our research indicates the resultant Regulation SHO to be an utter failure with respect to investor protections and categorically fails to curtail manipulative naked short selling practices throughout the industry. We find it appalling to find dozens of securities listed on the Regulation SHO Threshold lists, some for more than a year, with no relief from regulatory agencies sworn to protect investors against such manipulation.
I respectfully request that you commence enforcement action on criminal naked short sellers under the following existing laws and regulations, to name a few:
RICO Act under 18 U.S.C. 1961(1)
Securities Act of 1934 Section 20 -- Liabilities of Controlling
Securities Act of 1933 Section 17 -- Fraudulent Interstate Transactions
Securities Act of 1934 Section 17A - National System for Clearance
Securities Exchange Act of 1934 Section 8 -- Restrictions on Borrowing
Securities Exchange Act of 1934 Rule 15c3-3 -- Customer Protection
Securities Exchange Act of 1934 Rule 15c6-1 -- Settlement Cycle
Title 18—Crimes and Criminal Procedure
Sherman Antitrust Act
U.S.A. PATRIOT Act
The Martin Act
How many billions of dollars from counterfeit securities sales and manipulating short sellers is being used to finance terrorism against our own citizens? Mr. James S. Shorris, NASD Executive Vice President and Head of Enforcement recently stated "Suspicious Activity Reports provide law enforcement with information that's critical for investigating and prosecuting money laundering, terrorist financing and other financial crimes,". "Broker-dealers have an obligation to investigate 'red flags' indicating suspicious activity and, where appropriate, to file SARs. Main Street investors agree with Mr. Shorris. We suggest there is a sea of red flags that need urgent attention.
When I began writing this letter, I considered a line-by-line response to all of the Commissions requests for comments. I read the entire proposal, including this statement, To allow market participants sufficient time to comply with the new close-out requirements, the proposals include a 35 settlement day phase-in period following the effective date of the amendment. With all due respect Mr. Chairman, market participants are not the entity we are concerned with here. Market participants are handling our assets. We are the owners of the capital, and we are the owners of the securities. When market participants continually seek to avoid transparency when managing our money, that's not the kind of organization that deserves much consideration where rule making is concerned. We are concerned with the shareholders of public companies like Overtock.com that have been watching their investment appear on the NASDAQ threshold security list for eighteen months. We are concerned about retirement fund participants and mutual fund holders of manipulated securities like Overstock.com, and Taser. The SEC is far too concerned with pleasing self regulatory organizations that are no more capable of regulating themselves than a kid in a candy store. Trades should settle at T+3, not T+300, period. The multitude of questions the Commission seeks comments on are simply not germane to the issue at hand. The problem and the solution have been identified. Stop the counterfeiting of commercial securities, protect investors, and settle the trades.
Chairman Cox, I recognize your task to rid our markets of manipulative naked short selling is no simple matter. I, along with thousands of other individual investors have listened to you since your appointment to the Commission. We are encouraged by your apparent receptiveness to cleaning up our corrupt markets. Although the political pressure must be incredible, and the influence from the financial institutions you govern must seem insurmountable, we are counting on you to be the first SEC Chairman to eliminate this perpetual crime against Main Street investors.
In closing, I would like to revisit that statement by Former FBI Agent Robert Maheu, "Tough assignments are not solved by wishful thinking, but rather by tough action".
Be a Chairman for the people, for the millions of American citizens that want to trust our capital markets with their retirement and discretionary investment capital. While the challenge is great, you must realize that you are the only one that has the authority to correct this systemic risk that naked short selling represents in our markets. We are counting on you to do the right thing and we are more than ready and willing to stand behind you. Surely, a few million Main Street investors standing behind you are stronger than a few dozen securities counterfeiting thugs. Just say the word and we will be there. We only ask that you lead the way, with an unwavering commitment to prosecute criminals, and bring integrity back to our securities markets.
Sincerely,
Anonymous American Investor
Main Street
Anytown, USA
A copy of this comment letter, with active links, is available for review at,
http://tinyurl.com/mrszg
Site: http://marketreform.proboards46.com/index.cgi
C'mon Gang, Lets get the Petition on every board!!! Pass it Around
http://www.petitiononline.com/mrktrfrm/petition.html
I think people entering this market should be aware of all the risks facing them.
Yes, hedge funds may short the stocks they've just helped finance, but this wouldn't even be possible if the CEOs weren't usually collaborating to one degree or another. It's not necessarily a black and white picture of good versus evil.
The only thing that seems clear to me is that penny traders need to discount 90% of what they hear from the company, and hold the other 10% to extreme scrutiny. The game is rigged, but maybe the smarter traders don't take it on as a crusade, but rather make it their primary mission to emerge intact from their trading experience.
But it certainly helps to know where the landmines are buried ahead of time. I like to collect all this information simply so I can have a clearer idea of the odds that are stacked against me. It reminds me to stay humble and grab reasonable profits when they present themselves.
Who do I need to email and how do I do it. Please PM how and who to contact. Thanks
fyi: Straight Talk on Penny Stocks
Penny stocks are usually defined as companies with stock trading under $5 a share and with market caps of under $200 million. The Motley Fool's standard line on penny stocks is to just say no. But for advanced investors who stick to industries they understand, are prepared to do serious research, and who only buy companies that consistently generate cash at bargain prices, tiny stocks might be worth the risk.
By Zeke Ashton
November 19, 2001
If you've been a reader of The Motley Fool for any amount of time, you are probably familiar with our stance on "penny stocks" -- just say no. I hasten to add that it is with good reason that we urge investors to stay away from the pennies -- and I encourage you to read the articles in the "related links" section of this page for more about the dangers of penny stocks.
What is a penny stock?
But what exactly are penny stocks? As has been loosely defined by various writers here at The Motley Fool, they are companies with share prices of below $5 and market caps below $200 million.
While I agree that when combined, avoiding stocks with the two criteria above will dramatically lower your chances of getting sucked into a penny stock scam, personally, some of my best ideas would have qualified as a "penny stocks" -- i.e., the stock was trading at less than $5 and had a market cap of less than $200 million when I purchased my shares.
While I strongly believe that beginning investors or those without the time to do in-depth research are much better off sticking to bigger fish, I just as strongly believe that for advanced investors, with the time and the inclination, finding the undervalued gems with market caps of between $50 to $250 million offers the best chance to beat the market -- and some of them will happen to trade for less than $5 a stub. I think that, if you know what to look for (and what to look out for) going in, an advanced investor can do a lot to separate the gems from the scams in this area of the market.
But before I tell you what I look for, you're going to get some disclaimers (you didn't think I'd just let you go on to the good stuff without scaring the pants off of you first, did ya?)
Who should target small stocks?
It is my true conviction that those with less than one year's experience investing in individual stocks should not even think about investing in small cap stocks, particularly if you haven't found your rhythm with the mid- and large-cap universe yet. Also, until you know your way around a balance sheet, income statement, and cash flow statement like you know the route from your house to the nearest convenience store, don't even think about it.
Finally, you need to be suitably prepared to take everything you hear and read with a grain of salt, be ready to challenge every assumption, and in short, examine every possible scenario that could cause your company to fail in order to ensure that you are getting a real business for your money. Also, you need to have the time and the desire to keep digging for more information, even after you've bought the stock, so that you know more about it than your average Fool small-cap writer.
Even armed with the disclaimers above, it's best to concentrate your efforts where it will bear the most fruit -- and that means knowing where not to go.
Where not to
First of all, I don't bother with stocks that aren't traded on one of the major U.S. exchanges. That means no bulletin board (better known as over-the-counter, or OTC) stocks for me. Essentially, most bulletin board stocks are those that for whatever reason don't qualify (or can't afford) a listing on one of the major exchanges. Besides, my online broker doesn't offer bulletin board stocks, so I couldn't buy one if I wanted to. So I just don't bother.
Second, if the company doesn't have revenues, I look no further. And if the revenues aren't at a minimal level, say, $10 million annually or so, it isn't worth my time. I also make sure that the company has been generating revenues for several years -- I don't want any flash-in-the-pan companies in my portfolio. I typically am exceptionally careful in the sub-$50 million market cap area -- and I generally don't go in there unless the situation is almost perfect.
Third, I never, ever waste my time looking at those small-cap companies that are hyped in the various e-mails I get from websites and promoters that are dedicated to penny stock investing. Just about all of these promotions are paid advertisements in which the company gives the penny stock tip-sheet operator some sort of payment, either in shares or in cash, in order to hype the stock. I just delete those messages.
Finally, I don't bother looking at companies that compete in industries that I don't like or understand well. I know a couple of industries pretty well, and I know of several industries where the economic characteristics are outstanding -- and I stick to those.
As a final disclaimer, I never, ever invest in any small company without having first read its annual 10-K and most recent 10-Q filing. I never fail to find some piece of material information (either good or bad) that changes the way I think about the investment as a result of reading these two documents.
What I look for: cash, cash, and more cash
Essentially, when evaluating small companies for investment, the ability to generate cash is king. I look for companies that have demonstrated the ability to consistently generate cash, and are actually growing their free cash flow over time. I aim to buy these companies at a very low multiple on that cash flow -- ideally under six times. This low price compensates me for the risk I am taking by purchasing a tiny, illiquid stock -- it's the old "margin of safety" that I am looking for. I never try to pay fair value for these stocks -- if I don't think I am getting the company for 20 or 30 cents on the dollar, it's not worth the risk.
The other thing I look for is cash on the balance sheet. If I find a stock trading for $3 a share, and that company has $2.75 a share in cash on the books and is also generating cash from the business, well... it's tough to lose a lot of money on those types of stocks.
As a final risk-control technique, I limit any tiny stock to no more than 5% of my portfolio, and usually I keep the percentage to 2.5%. That way, even if I'm wrong, I haven't invested more than I can afford to lose on any one stock.
Zeke Ashton urges extreme caution even for advanced investors who are considering looking at tiny companies, and is not responsible for you losing your shirt to some penny-stock-pumping scam artist if you do. The Motley Fool has a full disclosure policy.
http://www.fool.com/foolish8/2001/foolish8011119.htm
fyi: SEC Shorting Target was Served by Canadian Broker
by Stockwatch Business Reporter
Canada StockWatch
March 14, 2006
The U.S. Securities and Exchange Commission has settled with three New York hedge funds that nearly had the Holy Grail of hedge fund management -- a shorting recipe with guaranteed profits. The funds allegedly made $7-million as they funnelled two years of naked shorting through a Canadian brokerage. (All figures are in U.S. dollars.)
It seems the shorting was only profitable until the SEC came along. In a simultaneous lawsuit and settlement filed Tuesday, the SEC sued the hedge funds, Langley Partners LP, North Olmsted Partners LP and Quantico Partners LP, and their portfolio manager, Jeffery Thorp.
The SEC says the hedge funds shorted 23 stocks between August, 2000, and March, 2002, and covered with restricted shares bought at a discount in so-called PIPE offerings. (PIPE stands for private investment in public equity.) The PIPE shares were discounted to compensate for trading restrictions, typically a hold period of two to four months.
"[The] strategy was simple: to short sell Langley Partners' entire restricted PIPE allocation as quickly as possible ... then to close out those short positions using the PIPE shares," the SEC says.
For example, the SEC says Langley Partners invested $1.1-million in 100,000 restricted shares of MGI Pharma Inc., a Minneapolis pharmaceutical company, and immediately sold 100,000 shares short for $1,335,500. By doing so, Langley was guaranteed a $235,500 profit.
The SEC says Langley could not short MGI or any of the other companies in a conventional manner because they were too thinly traded. The SEC says the hedge funds repeated this profitable formula with 23 companies, mostly Nasdaq-listed small-caps.
To mask the shorting, the SEC says Mr. Thorp would cover by selling the PIPE shares into the Canadian account in wash trades. "Thorp would call or instant message his Canadian broker to inform him that Langley Partners intended to sell a certain number of its PIPE shares ... at a particular time and price using a particular exchange, and would instruct the broker to enter a buy order," the SEC says.
In some instances the SEC says Mr. Thorp would also cover the short by "closing the box."
"To close the box, Langley Partners simply journaled its PIPE shares from its cash account to its short account," the SEC says.
Unlike prior SEC cases that include Canadian firms, the SEC will not identify the Canadian brokerage. "We are still investigating," says SEC lawyer Daniel Chaudoin. It is believed the brokerage is a Toronto-area firm, but Mr. Chaudoin would not confirm this.
The SEC credits the Investment Dealers Association with helping in the investigation. IDA investigators in Toronto were not available for comment.
$15.8-million in fines
The hedge funds have agreed to pay $13.5-million to settle the allegations, without admitting any wrongdoing. The portfolio manager, Mr. Thorp, has agreed to pay $2.3-million, also without admitting he did anything wrong. The funds' lawyer did not return calls.
Hedge fund shorting made headlines last month when Toronto Stock Exchange listing Biovail Corp. filed a $4.6-billion market manipulation lawsuit against billionaire hedge fund manager Steven Cohen and his SAC Capital funds. In that case, Biovail says SAC Capital carried out co-ordinated attacks on the stock while holding short positions.
That case has yet to go to court, and SAC Capital denies any wrongdoing.
http://www.rgm.com/articles/stockwatch.html
Here is a useful website for people interested in this topic:
http://www.rgm.com/shortselling.html
fyi: Naked Short Sellers Hurt Companies With Stock They Don't Have
Bloomberg.com
By Bob Drummond
August 4, 2006
Movie Gallery Inc. shares fell 20 percent on Feb. 3, their biggest nosedive in almost a decade. At the time, there didn't seem to be a reason for the jaw-dropping rout.
Analysts who follow Dothan, Alabama-based Movie Gallery, the second-largest video rental chain in the U.S., speculated that investors were spooked after a large money manager cut its stake or that they were worried sales wouldn't meet expectations.
Another possible factor surfaced two weeks later, and it had nothing to do with financial performance. On Feb. 17, the Nasdaq Stock Market added Movie Gallery to a list of stocks considered, under a new U.S. Securities and Exchange Commission regulation, to be at risk for manipulation by naked short sellers.
In naked shorting, traders who hope to profit from falling prices sell shares without borrowing stock. Using that strategy, naked short sellers can drive down prices by flooding the market with orders to sell shares they don't have.
``These people are lying, they're cheating and they're stealing,'' says Wes Christian, a Houston lawyer who represents Internet discount retailer Overstock.com Inc. and more than a dozen other companies that say their stocks were pummeled by naked shorting. ``This is, in our opinion, the biggest commercial fraud in U.S. history.''
Movie Gallery Chief Financial Officer Thomas Johnson says he has asked the SEC to investigate whether naked short sellers helped undercut the stock.
`It's Extremely Frustrating'
``I'm throwing out the towel, saying `Help me,''' Johnson, 43, says. ``There are rules designed to deal with this, and people are still managing to do these naked short sales. It's extremely frustrating. It's like being on the front line and people are shooting you from every direction.''
In traditional short selling, traders rely on a strategy that's the mirror opposite of the time-honored adage to buy low and sell high. Short sellers borrow stock through a broker and hope to profit by selling shares high and later buying them back at lower prices to repay the loan.
Naked short sellers do the same thing, with one difference: They don't borrow any shares. Naked short selling isn't illegal in most cases, unless authorities can prove fraud, such as a scheme to manipulate stock prices.
The threat to investors arises because traders in naked short sales aren't limited by the number of shares available to borrow. If a naked short seller doesn't intend to borrow stock, he can pump a theoretically unlimited volume of sales into the market, driving down a company's shares.
`They Can Overwhelm'
Instead of hoping a stock will fall, like a traditional short seller, an unscrupulous naked short seller may be able to help make it happen.
``If they don't have to borrow shares, there's nothing that keeps someone from selling and selling and hammering the market with sell orders,'' says Leslie Boni, a former University of New Mexico finance professor who studied naked short selling as a visiting scholar at the SEC in 2003 and 2004.
``They can overwhelm the number of buyers, and as the buyers dry up, the price keeps dropping,'' she says.
When Movie Gallery's stock crashed on Feb. 3, short sellers sold almost 750,000 shares, or 11 percent of the shares traded that day, according to short-sale records compiled by Nasdaq.
Daily short sales averaged almost 370,000 shares over the first eight days of February, up from 70,000 on Jan. 31, while the stock plunged 36 percent to $3.47 from $5.45. As the stock was falling, a growing number of sellers weren't delivering shares to buyers, a warning sign under SEC rules of possible naked short selling.
`Warping the Market'
Nasdaq put Movie Gallery on its list of companies at risk of manipulation because from trades through Feb. 8, those undelivered shares topped 160,000, or 0.5 percent of Movie Gallery's total shares. When companies surpass that threshold, SEC rules impose restrictions on further short selling.
Patrick Byrne, chief executive officer of Salt Lake City- based Overstock.com, has been the most vocal executive charging that abusive short-selling schemes are draining the lifeblood from many companies.
``I've been pouring kerosene on myself and setting myself on fire because I think there are global, systematic issues with naked short selling,'' Byrne, 43, says. ``It's warping the market price of some small-cap companies and destroying American entrepreneurship.''
As of July 10, Overstock.com had been on Nasdaq's list of potential naked-short-selling targets every day since April 22, 2005, and its shares had fallen 45 percent over that period.
`It's a Nonissue'
Investors who specialize in selling short say naked shorting is rare and complaints from supposed victims are overblown. ``The phrase I would use would be red herring,'' says Jim Chanos, 48, who runs Kynikos Associates Ltd., a New York-based hedge fund firm known for short selling.
He says he's never used naked short selling as a technique. ``It sounds ominous, it sounds nefarious and, by and large, it's a nonissue in the marketplace,'' he says.
Wall Street traders have long thought that most complaints about naked short selling come from executives at poorly managed companies looking for a scapegoat when investors sour on their stocks, says Peter Chepucavage, a securities lawyer who has worked for the SEC and is now at Plexus Consulting Group LLC in Washington.
``The Street's view is that this never was a real problem, and that these guys are whiners,'' he says.
`Play by the Rules'
Phillip Marcum, CEO of Denver-based Metretek Technologies Inc., says he doesn't need excuses for his company's performance and generally doesn't give short sellers a second thought. ``We're a real company, with real investors and real revenue,'' says Marcum, 62, whose company sells commercial electricity- backup systems and meters to measure gas-well production.
Metretek shares quintupled in the 12 months through the end of March, when the company announced a $28 million sale of additional stock.
Still, the American Stock Exchange on April 10 put Metretek on its list of potential naked-shorting targets because of an increase in shares that weren't delivered to buyers. On March 30, Metretek's shares fell almost 7 percent as sales rocketed to 169,000 shares from a daily average of 11,000 a week earlier.
``You can't control somebody who shorts stock,'' Marcum says. ``But they've got to play by the rules. It seems to me, there ought to be severe penalties if you sell short without borrowing the stock. Can't they find out who's doing this and do something about these people?''
Enforcement Actions Coming
The short answer is no. The SEC puts most of its restrictions on brokerages, not naked short sellers. In one exception, SEC rules forbid naked short sales in connection with stock offerings. The SEC and exchanges have been investigating possible fraud in those instances.
``This is an area where we have seen problems, and you can expect enforcement actions,'' said Susan Merrill, the New York Stock Exchange's regulation enforcement chief, speaking to a securities industry conference in June.
In the past three years, the SEC has imposed a total of just under $24 million in penalties in five cases alleging that traders and investment firms illegally covered naked short sales using shares from stock offerings. Four cases were settled without admissions or denials of wrongdoing; the fifth is pending.
The reason company executives and short sellers debate the scope of naked short selling is partly because there aren't statistics that specifically measure such transactions.
750 Million Shares
New York-based Depository Trust & Clearing Corp., which processes the vast majority of U.S. trading, does keep track of how much stock has been sold and not delivered on schedule to the purchasers.
On an average day in March, those unsettled trades amounted to more than 750 million shares in almost 2,700 stocks, exchange- traded funds and other securities, according to Depository Trust & Clearing data obtained from the SEC through Freedom of Information Act requests.
Because there are innocuous reasons why stock may not get to the purchaser on time, such as paperwork delays, it's impossible to tell how many of those shares, known as failures to deliver, can be blamed on naked short sales, Depository Trust & Clearing spokesman Stuart Goldstein says. ``We're not in a position to know why trades fail,'' he says.
Failed deliveries of shares to buyers do provide the foundation for an SEC rule designed to blunt potential market manipulation. The measure is part of a broader package of short- selling rules known as Regulation SHO, for Short Sales.
Single Standard
The rule, called Reg SHO, was approved unanimously in 2004 after almost five years of consideration under three SEC chairmen. While Reg SHO doesn't outlaw naked short sales per se, it targets companies with enough failed deliveries to raise concerns about naked short selling, and it restricts further short sales of those stocks.
Reg SHO's short-selling restrictions took effect in January 2005.
The regulation's naked-shorting provisions were designed to create a single SEC standard to replace individual rules that previously were set by each exchange.
Supplanting exchange rules with one regulation meant the SEC, and not just market regulators, could police enforcement, says lawyer Chepucavage, 58, who helped draft Reg SHO. ``There was a belief that the markets weren't aggressive enough in enforcing the rules,'' he says. ``They tended to treat them as traffic ticket-type cases.''
Under the SEC rule, Nasdaq, the NYSE, the American Stock Exchange and smaller markets must get daily reports from Depository Trust & Clearing about failed deliveries.
The Restrictions
When an exchange finds that a company has accumulated unsettled trades equal to at least 10,000 shares and 0.5 percent of outstanding stock for five consecutive trading days, it's subject to stricter requirements for future short sales.
Exchanges keep the companies on these lists until failed deliveries fall back below the 0.5 percent level for five straight trading days.
Once a stock is on a list, Reg SHO requires any new short sales to be settled within 13 trading days. If shares haven't been delivered by that time, the brokerage involved in the sale must buy stock for delivery to the buyer.
If it doesn't, Reg SHO forbids the broker from handling additional short sales of that company's shares unless it makes binding arrangements to borrow the necessary stock. During June, more than 425 companies were on an exchange list.
Short Sales Increase
For the first year after the restrictions took effect in January 2005, the markets' lists suggest that Reg SHO cut down potential naked shorting. This year, the number of possible naked short sales has increased.
From February through May, the average lists reported more stocks than in any month since August 2005. The number of new companies that surpassed Reg SHO's thresholds for the first time also jumped in February, to an average of 18.5 from as few as 15 in October 2005.
Depository Trust & Clearing's statistics on total failed deliveries of shares to buyers show a similar trajectory: In February and March, more than 700 million shares that were sold were not delivered to buyers on an average day, the highest levels since December 2004, the month before Reg SHO took effect.
Shares of Inhibitex Inc., a biotech drug developer in Atlanta's northern suburb of Alpharetta, plummeted 9.8 percent on Feb. 27, their biggest one-day drop in more than 14 months and the worst showing among more than 160 stocks in the Nasdaq Biotech Index.
`Manipulating the Stock'
Nasdaq short sale records show that, during the two days ended on Feb. 27, short sellers traded almost 410,000 shares, up from fewer than 9,500 over the two preceding days. Enough traders failed to deliver stock over Reg SHO's limit for five straight days, so Nasdaq put Inhibitex on its list on March 8.
Company executives didn't return calls seeking comment.
Audible Inc., which sells audio newspapers and books on the Web, had delivery failures that broke Reg SHO's threshold from trading on Jan. 4. Over five days, short sales had averaged 309,000 shares, almost triple the level for the preceding week.
Audible, based in Wayne, New Jersey, ranked last in the 279- member Russell 2000 Technology Index during that stretch, falling 15.5 percent. ``When you're manipulating the stock, you're taking away from investors, the business itself and our employees,'' says David Joseph, 37, an Audible vice president.
These apparent short sale jumps were allowed by a snag in Reg SHO. Under the rule, delivery deadlines apply only to short sales made after a company appears on one of the markets' lists. Naked shorting before that point, including the trades that put a company over the rule's thresholds in the first place, can remain unsettled indefinitely.
SEC Reviews Rule
``It's a loophole which allows an unlimited number of fails against anybody,'' says Robert Shapiro, an economist and former U.S. undersecretary of commerce, who is a consultant for Christian and other lawyers representing alleged victims of naked shorting.
On July 12, the SEC voted unanimously to propose changes to short sale regulations that would remove that clause and set deadlines for settling trades before a stock is added to a threshold list. ``There are still persistent failures to deliver in the marketplace, and some of that is undoubtedly attributable to loopholes in our rule,'' SEC Chairman Christopher Cox said.
The hole in the rule helps explain why some companies have stayed on the threshold lists for months or longer.
As of July 17, New York-based Martha Stewart Living Omnimedia Inc., popular with short sellers since its eponymous founder's March 2004 trial and prison sentence for lying to federal investigators probing insider trading, had been on the NYSE's threshold list 383 times, or every day since Reg SHO took effect more than 18 months earlier.
Krispy Kreme
Taser International Inc. had a 379-day streak on Nasdaq's list that ended on July 11. The stun gun manufacturer based in Scottsdale, Arizona, had faced an SEC probe of its accounting and product safety claims, and its shares fell 78 percent in 2005. The SEC ended its inquiry in May without bringing any charges.
Krispy Kreme Doughnuts Inc., a one-time Wall Street favorite that fell from grace as the SEC investigated its accounting in 2004, was on the NYSE list for almost 18 months. Shares of the Winston-Salem, North Carolina-based company plunged 54 percent in 2005.
Taser and Krispy Kreme are typical examples of companies pounced on by short sellers after setbacks threaten stock prices. ``There's no doubt some companies have issues other than stock manipulation,'' Christian says.
``But they should be allowed to succeed or fail on their own and not because of manipulative market conditions,'' he says. ``This is not just attributable to whining companies that couldn't make it.''
14 Lawsuits Filed
The stakes in the debate were raised when an alliance of lawyers, including Christian, 53, and fellow Houston litigator John O'Quinn -- a billionaire from fees in a $206 billion tobacco industry settlement -- joined forces to represent companies alleging fraud in naked shorting.
The group has already filed 14 lawsuits against short sellers, brokers and Depository Trust & Clearing and plans at least 20, Christian says.
A short sale begins, like other trades, when investors tell their brokers they want to sell stock. Reg SHO says a broker must check to make sure a brokerage or institutional investor has stock it's willing to loan the short seller in time for settlement, which for most U.S. stock transactions takes place three business days after a trade.
`It's Demoralizing'
After confirming the availability of stock loans, brokers send a sell order to the appropriate exchange, where shares are sold to investors who want to buy the stock. There's no law requiring short sellers to actually borrow shares.
Last month, NYSE Regulation said it fined four securities firms a total of $1.25 million for Reg SHO-related violations, such as failing to properly confirm and document the availability of stock loans before handling short sales. The brokers, units of Daiwa Securities Group Inc., Goldman Sachs Group Inc., Citigroup Inc., and Credit Suisse Group, accepted the NYSE's fines without admitting or denying wrongdoing.
In a traditional short sale, buyers receive actual shares in a company. In a naked short sale, buyers effectively get an IOU promising that stock will be delivered at a later date.
When naked short sellers target a company, the results can be devastating, says David Vey, chairman of King of Prussia, Pennsylvania-based Sedona Corp., which sells software programs that help banks manage customer databases.
``It's demoralizing when you're working hard and someone else is staying awake at night trying to figure out how to take your money,'' Vey says.
`Prove Staying Power'
In 2003, the SEC filed a suit alleging that a single naked short seller, Rhino Advisors Inc., a New York-based investment firm, accounted for 40 percent of all Sedona transactions during 21 days in March 2001. The short sales came after the company sold debt securities that could be converted into shares.
The stock plunged from a high of $1.50 to as little as 72 cents in that period. Rhino settled the case in 2003 for $1 million without admitting or denying wrongdoing.
That kind of drubbing makes it difficult to attract new investors and capital and leaves potential customers wary, Vey says. ``You have to prove credibility and some kind of staying power,'' he says. ``People don't want to buy your product if they're worried you're not going to be here in two years.''
On July 10, Sedona shares closed at 21 cents in over-the- counter trading.
`A Bit Overdone'
Depository Trust & Clearing's Goldstein, 55, says failed deliveries represent only a tiny fraction of U.S. stock trading, and naked short selling is one of many explanations for settlement delays.
At the end of 2005, about 23,000 trades hadn't settled compared with about 26 million transactions on a typical day last year, Depository Trust & Clearing says. ``We're not saying there is no problem, but to suggest the sky is falling might be a bit overdone,'' Goldstein says.
While there's more than one reason shares might not be delivered to buyers, Depository Trust & Clearing statistics for the days immediately after the SEC announced it would have new rules show that there could have been hundreds of millions of naked short sales.
In eight trading days after the SEC released details of the new rule on July 28, 2004, failures to deliver skyrocketed 70 percent to more than 1 billion shares. They kept rising and, within a month, topped 2 billion shares.
Before the Rule
The size and suddenness of that surge suggests it was caused by a rush of naked short sales rather than a rash of bookkeeping snags, Chepucavage says. ``One might speculate that people were getting their naked short sales in before the rule took effect,'' he says.
The rule's dependence on threshold lists was aimed at weeding out most of the clerical delays in stock sales that didn't produce shares at settlement, says Boni, 49, who's now a managing director at UNX Inc., a brokerage in Burbank, California.
Short sales and stock price movements for companies added to the SEC's lists, in some cases, recall an old saying: Just because you're paranoid doesn't mean that someone's not out to get you.
In April, Z-Trim Holdings Inc., which makes a calorie-free fat substitute for processed foods, hired lawyers Christian and O'Quinn to investigate whether naked short sellers sold shares of the company, which is based in the Chicago suburb of Mundelein.
`Huge Losses'
Reg SHO data show that Z-Trim, then known as Circle Group Holdings Inc., was placed on the American Stock Exchange's threshold list on March 3, 2005, reflecting failed deliveries from trading through Feb. 22.
Over five trading days, daily short sales climbed to almost 40,000 shares on Feb. 22, from 3,300 a week earlier, while Circle Group's stock fell 24 percent to 76 cents from $1.
``Stock manipulators can cause huge losses for real people who invested real money,'' Z-Trim CEO Gregory Halpern says. The company retained lawyers to try to protect its investors, he says.
``We aren't sitting here complaining that our stock was manipulated, woe is me,'' Halpern, 48, says. ``But having been thrust into that battle, we're going to fight like hell, because we have a responsibility to our shareholders.''
For Dallas-based business software maker I2 Technologies Inc., threshold-busting trades occurred on Sept. 30, 2005, when short sales more than doubled to 51,000 shares from 21,000 the previous day. I2's shares fell 10.1 percent to $18.64 from $20.73.
Worst Day
That was the stock's worst day in almost eight months and the third-biggest decline in the 575-member Nasdaq Computer Index. Company executives declined to comment.
Meanwhile, companies continue to see shares tumble under possible pressure from naked short sales. A month after Movie Gallery's stock collapsed in February, the company's investors had an even worse day, on March 8, after the company met with lenders about revising restrictions regarding loans.
Over two days, shares fell more than 34 percent, while short sales averaged 2.5 million shares -- up from an average of 300,000 during the previous week. Trading on March 8 created enough failed deliveries that Movie Gallery was again added to Nasdaq's threshold list.
Cromwell Coulson, CEO of New York-based Pink Sheets LLC, which runs a market for over-the-counter stocks, says making more information public about short sales is a key to fighting abuses, particularly for investors and executives in small companies.
For example, under a new NASD rule, Nasdaq's threshold lists in July started including failures to deliver for shares of some small, over-the-counter companies that weren't covered by Reg SHO. Nasdaq also began including OTC Bulletin Board and Pink Sheets companies in monthly short-interest reports in July.
`A Bogeyman'
``Naked short selling has been a bogeyman; it was like Bigfoot,'' Coulson, 40, says. ``Everybody thought it was out there, but nobody knew for sure.''
Sedona's Vey says regulators at the SEC and each stock market need to hit some abusive traders with multimillion-dollar fines. ``They need to make a few examples out of people,'' he says. Until penalties are big enough to take the profit out of stock manipulation, he says, all the rules and procedures in the world will make no difference.
http://www.rgm.com/articles/bloomberg2.html
Thanks Again Stock Lobster
I read your other post, Good Read do appreciate the help!
Hope I am not off topic on this board asking this but
Where can I find an up to date A/S O/S etc..
You can go crazy looking for it in SEC the
Pink Sheets is usually 1 to 2 years old.
One more thing On Topic I have looked at http://www.buyins.net
but is there any way to find this naked short info for free?
OK thanks Planner5 and Stock Lobster I have really learned a lot on this" naked short board " I was at a loss on this subject before I got here!
Just an fyi:
Please have very little illusions about pinksheet companies. They are to be traded only, not held for any length of time. And to be correct, the market makers are usually working on behalf of someone. If you see VERT, VFIN or CLYP on the ask, that is probably the company itself diluting shareholder value. The market maker is merely the agent placing the order.
There are certainly occasions where market makers have manipulated trading, but the worst that penny investors repeatedly face is inflicted on them by either the pipe financers who funded their company, the same funds shorting the company stock, or the company itself killing the PPS by massive dilution.
Yes, there are a handful of legitimate startups traded in the pennies, but they are hard to find, and often they have very little volume as they are not being heavily promoted. This may not be attractive to the average penny player looking for high returns in a short time frame.
You might want to read this post I wrote regarding the pinksheet market. It has been verified by someone who is a pipe financer, as well as a number of veteran traders on this board.
http://www.investorshub.com/boards/read_msg.asp?Message_id=15162657&txt2find=repost
Thanks Stock Lobster
I do help the needy :) I keep my priorities straight.
Hey is that you in the suit? And I thought I was crazy LOL
I did get in JCMP, my first investment. Would not of done it, but I had a dream to do it LOL (don't know if its a good or bad lead yet!)
I Also have been researching and feel sorry for some of these companies really trying to make a go of it, I believe in this country and I believe in the people in it. I hate to see the MMs take down companies like this.
Like LLEG I will probably get a few before they open the plant back up in mid 2007 maybe sooner. I was thinking about getting in it sooner for the long haul because I believe they are going to make it. After being on this board I am more skeptical about any company making it? IMO the MMS aren't running LLEG's show YET.
Does every company start in the Pink? If so it is possible the MMs won't destroy your company? I am really pushing to get some DKGR Monday for a short run, I know Quartzsite pretty well and have done a little prospecting my self around that area, If they are telling the truth, then that placer might have some good pockets.
IMO it could very well make it to .20 -.40 like the board is ranting and raving about but they have an O/S of 300m with 500m restricted that's 800m and who knows when the 500m restriction is lifted? I think after reading this board the MMs got there hands in this a little but not big time yet like I have seen other mining companies. So if the MMs decide they want to take it over it could be a bad deal.
I saw on mining company with over 100Billion O/S WOW people where buying it to! It look a little to insane for me I don't remember the company sorry.
I figure my money is a lost in the pinks but I still want to try and do it wisely and not just jump in on every thing I think I will make a million bucks on when it gets out of 0.0001 LOL
This is all just IMO and. I also have a mental condition and all of this information might be completely delusional!
The thinly traded OTCB and pinksheets are prime targets for manipulation by crooked CEOs, trading groups, and shorters as well.
When I think about it, given the high probability that most companies around here are scams of some kind, or at the least woefully underfunded, you can hardly blame shorters for taking the easy route. After all, if 90% of pennies are destined to collapse, their odds of their making a profit on any given trade are much higher than ours as longs.
Penny stock longs must be the real lunatic risk takers. On some days it feels like fewer than 1 in 10 trades held for more than three days turns out profitably. Dilution is another risk for anyone holding a pennystock even overnight..
Scalping and trading for a few hours is, imho, starting to look more and more attractive.
I predict with the shorting information coming to light, pink/otcbb stocks will have a shorter shelf life than they have even now, which is short to say the least. Traders, including myself, won't be holding for the "big" payday anymore. Just got to get in and get out quick. Yes, daytraders already employ this strategy, but for folks like me that don't daytrade (even my "scalps" I hold for a day or two) will be much quicker on the sell trigger knowing that the shorters can come in at any moment and kill you. I further predict that this information coming to the masses of "regular" traders such as myself will fundamentally change the nature of trading of Pink/OTCBB stocks as it confirms (always suspected but now confirmed) that stocks are indeed manipulated.
One way only
Take the shares out of the US system.
G
Sirius, I'd say to follow your instinct. Don't buy a .0001 with billions of shares outstanding unless you consider your investment a disposable lottery ticket that you wouldn't mind losing. In that case, why not give it to the homeless?
The problem with a .0001 is that although the potential is large, the odds are not in your favor, and the risks are various. Either the stock could lose it's bid, and you could be trapped without exit for months. Or, the company could decide to do a reverse split in order to continue their goal of funding through massive dilution. Worse yet, you could end up being stuck in a stock with no bid, and additionally be forced to endure a Reverse Split with no choice of escape. This is a common insult to injury experience for too many penny players, as reverse splits are dilution's evil twin.
re your other point, I personally don't understand the logic of claiming a large naked short position on a .0001 stock from a company that is printing millions of shares a week. It's possible I'm missing something, however, and I'm willing to be educated.
If you want to take a chance on a sub-penny stock, my recommendation is to find one in the .001-.002 range. They are already out of the danger zone of the triple zeros, and there is actually a greater chance of a .002 running to .02c or better, than of a .0001 ever making it to .001. You're right that the right choice can make you a 10x profit, but the trick is not to run out of money before you find that winner.
You can increase the odds of NOT getting slaughtered by checking the boards carefully for keyword "dilution" and the ticker of whatever stock you're considering buying. Dilution is the single most important thing we have to worry about in the pennies. It will kill any run, and drop the PPS 1000% in a few weeks. Fundamentals and Due Dillligence mean nothing in the face of an onslaught of company dilution, imo.
That is merely my observation, and one you are welcome to disagree with.
I wish you the best of luck. Always consider many opinions before making any decision, and then check them against your gut. Sounds like your instincts are good.
fyi, it's possible to short pinksheets in addition to penny stocks. It may not be something most people can afford, but it is possible.
fyi:
http://www.investorshub.com/boards/replies.asp?msg=14368696
http://www.investorshub.com/boards/read_msg.asp?message_id=14368842
http://www.investorshub.com/boards/read_msg.asp?message_id=14368863
It is my understanding that we the investor cannot short a pink stock. Reason being someone with mega funds could short it right into oblivian so they don't allow it. The question is How do you force the large position of shorts to cover?
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