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October 11, 2007 - Elimination of Grandfather Provision of Regulation SHO - The SEC has amended Regulation SHO to eliminate the grandfather provision effective October 15, 2007 (SEC Rule 203(B)(3)(i).1 In order to accommodate the transition, market participants that have any grandfathered fails in a threshold security as of the effective date will have 35 settlement days to close out. If the position is not closed out within those 35 days, the clearing firm and the broker-dealers for whom it clears may not accept any short sale orders or effect further short sales in the particular threshold security without borrowing, or entering into a bona-fide arrangement to borrow, the security until the participant closes out the entire fail position. This 35-day period is a one-time phase in period. If a security becomes a threshold security after the effective date of the amendment, any fails (whether established before or after the threshold date) would be subject to the 13-day close out requirement.
Ok, how can one normally (not naked) short pennies?
To 'Paul123456' on 'Naked Shorting' -
dd....
http://investorshub.advfn.com/boards/board.asp?board_id=4887
http://siliconinvestor.advfn.com/subject.aspx?subjectid=55464&ref=IH
http://investorshub.advfn.com/boards/board.asp?board_id=7537
God Bless America
How do people naked short? Is it possible to short penny stocks? It is being done, so it must be possible. Any feedback would be greatly appreciated.
thanks
GreedyFox, I took a look at ECFL after I saw your post. fyi, Compare ECFL and CKYS....both large short positions, but CKYS has a chart trending up and a P/E = 1.
Regards,
5cap
anti-US - 666 - cartel info? -
http://www.netcastdaily.com/broadcast/fsn2006-1028-2b.m3u
Long Shareholders demand nss-fraudsters should spend rest
of life in jail its a must for US Liberty future? -
http://www.faulkingtruth.com/Articles/Investing101/1058.html
In his complaint letter to the NASD, Frizzell lists a few
of the reasons that brokers have given their clients
for failing to deliver the stock certificates to their
rightful owners.
It is a list worthy of David Letterman’s Top Ten:
The most alarming problems are represented by those
shareholders who have been requesting certs from their brokers
since the company’s first announcement of a distribution
seven months ago.
Here is a sampling of excuses being given to shareholders
as reasons for their inability to obtain a cert:
1. “We had your cert, but it is now lost. It will take us
another 6 to 8 weeks to obtain another one.”
2. “This stock purchase was a book entry only and no
certificate is available.”
3. “Your stock was classified as a worthless security and is
no longer in your account.”
4. “Our clearing firm has not been able to deliver these
certificates due to a backlog of requests at the transfer
agency.”
5. “I have been instructed we are no longer pulling certs for
CMKM and there is nothing I can do. You need to contact the
company.”
6. “CMKM Diamonds has a “K” code next to it, indicating that
it is being held in safekeeping for the client.
The clearing agent has made the decision not to issue
certs but rather fax a copy of the certs it holds to
the transfer agent.”
7. “Attached herewith is evidence of ownership of shares
held electronically by XYZ clearing for ABC broker.
ABC to confirm receipt of this proof of shares of CMKM
and related companies are held with XYZ.”
8. “In light of the lack of cooperation
(by the transfer agent), your May 15th, 2006 deadline
must be bogus and must be extended, and Entourage shares
could of course still be sent to ABC for the benefit of XYZ.”
9. “MNO said they had discussed with the Task Force
the acceptability of the affidavit as proof of ownership
in lieu of the certificate, and that it would be accepted.”
No such conversation ever occurred with the Task Force members.
10. “We ordered your certificate, and it has been lost.
You must now fill out a loss certificate.”
The transfer agent confirms that no certificate was
ever issued.
Each quoted statement above is taken verbatim from a
shareholder’s letter or from a broker’s written response
to a shareholder’s request for a cert.
I could continue with pages and pages of documented
incidences of these broker responses to the requests of
the shareholders if such is necessary to establish the
need for a full investigation.
http://www.cmkmtaskforce.com/
http://millionaires.proboards81.com/index.cgi?board=main&action=display&thread=1162407888
http://millionaires.proboards81.com/index.cgi?board=main&action=display&thread=1162429886
http://millionaires.proboards81.com/index.cgi?board=main&action=display&thread=1162462369
Posted By: amoebazsighhhh
What do You Long Investors think about nss illegal scums? -
and what should all Long Team do and demand? -
to get a fair level stock market playingfields? -
Tia.
Here's another company fighting against naked shorting.
It would be nice to have a news release from Unico about
their naked shorting, but for now this will have to do.
One might be able to draw similar conclusions about
Unico's situation? -
Phantom Entertainment, Inc. -
(PHEI) SqueezeTrigger Price Is $0.105
PR Newswire - October 16, 2006 09:05
Approximately 159.1 Million Shares Shorted Since January 2005
According to BUYINS.NET Research Report
SEATTLE, Oct 16, 2006 /PRNewswire-FirstCall via COMTEX/ --
Phantom Entertainment, Inc. -
(OTC Bulletin Board: PHEI) announced today that
BUYINS.NET,
http://www.buyins.net,
is reiterating coverage of
Phantom Entertainment, Inc.
after releasing the latest short sale data to October 2006.
From January 2005 to October 2006
approximately 2.1 billion total aggregate shares of PHEI
have traded for a total dollar value of nearly
$216.3 million.
The total aggregate number of shares shorted in
this time period is approximately 159.1 million shares.
The PHEI SqueezeTrigger price of $0.105 is
the volume weighted average short price of
all short selling in PHEI.
The first of several short squeezes is expected
to begin when shares of PHEI close above $0.007,
where approximately 5 million shares have been shorted.
To access SqueezeTrigger
Prices ahead of potential short squeezes beginning, visit
http://www.buyins.net.
Phantom Entertainment, Inc. -
has been on the OTCBB Naked Short Threshold list 5 times
under the symbols IFLB and IFLBE.
Brokerage firms have been out of compliance with
Regulation SHO once.
Regulation SHO took effect January 3, 2005, and
provides a new regulatory framework governing short selling
of securities.
It was designed with the objective of simplifying and
modernizing short sale regulation and providing controls
where they are most needed.
At the conclusion of each settlement day, data is provided
on securities in which:
1) there are at least 10,000 shares in aggregate failed deliveries for the security for five consecutive settlement days, and
2) these failures constitute at least 0.5% of the issuer's total shares outstanding.
SEC Regulation SHO, under the Securities Exchange Act of 1934,
mandates that, if a clearing agent has had a fail-to-deliver
position for 13 consecutive settlement days, that
clearing agent, and the broker/dealer it clears for,
must purchase securities to close out its fail
to deliver position. ? -
is that the Law? -
and has any broker lost their license? -
or are they only paying fines with a million for
every billion? -
the judges are payed off too? -
or why do they only make fines? -
when the robbers should be prison 100 years? -
for the large crimes! -
and the gov. under-staffed? -
the illegal brokers robbing from fair -
honest Investors? -
I think all Investors -
should demand a new police force -
larger than any prev. police force -
to clean up in "the brokers sewage" the Americas -
biggest 666 fraud 9/11 nss scums!!!
Stock Investments -
is the backbone of America's Free Society &
Liberty -
No 666 should be able to make trillions of dollars by
nss robbery on the stock market -
year after year and no force going after them? -
its like the 9/11 airplane the airforce were
not allowed to stop??? -
what 666 has taken over the American 888 Society -
the 666 nss brokers have become the largest
robbers in the American History -
what a terrible shame to a Free Society -
representing the Liberty of the World!!!
God Bless
http://www.888c.com/
Next short play to accumulate is ECFL, similar to CSHD when it started.
COMPANY NEWS AND PRESS RELEASES FROM OTHER SOURCES:
Oct 09, 2006 (M2 PRESSWIRE via COMTEX) -- October 9, 2006 / M2 PRESSWIRE / BUYINS.NET, www.buyins.net, is initiating coverage of eCarfly, Inc. (OTC: ECFL) after releasing the latest short sale data to October 2006. From January 2005 to October 2006 approximately 401.5 million total aggregate shares of ECFL have traded for a total dollar value of nearly $57.7 million. The total aggregate number of shares shorted in this time period is approximately 30.9 million shares. The reported Total Short Interest as of September 12th is 24,890. The ECFL SqueezeTrigger price of $0.14 is the volume weighted average short price of all short selling in ECFL. A short squeeze is expected to begin when shares of ECFL close above $0.14. To access SqueezeTrigger Prices ahead of potential short squeezes beginning, visit http://www.buyins.net.
Month Total Vol. Short Vol Avg.Price $Value
Feb 05 250 19 $0.50 $10
July 100 8 $0.10 $1
Aug 25 2 $0.50 $1
Sept 180 14 $0.10 $1
Oct 30 2 $0.10 $0
Dec 125 10 $0.10 $1
Feb 06 400 31 $0.30 $9
Mar 64 5 $0.30 $1
July 18,573,100 1,430,129 $0.29 $408,302
Aug 138,024,096 10,627,855 $0.18 $1,909,826
Sept 228,106,688 17,564,215 $0.12 $2,025,154
Oct 16,750,099 1,289,758 $0.08 $96,990
Tot 401,455,157 30,912,047 $0.14 $4,440,296
*short volume is approximated using a proprietary algorithm.
**average short price is calculated using a volume weighted average short price.
***short volume is the total short trade volume and does not account for covers.
About eCarfly, Inc.
eCarfly, Inc. provides individuals and automotive dealers a hassle-free and cost-effective alternative to sell their vehicles online. With the knowledge, experience, and understanding of the automotive industry, eCarfly knows exactly what works and what doesn't. eCarfly is currently focusing on online vehicle auctions, industrial equipment, aircraft, personal watercraft auctions, and partnerships with companies and private individuals interested in selling their personal vehicles.
FOR IMMEDIATE RELEASE* NAKED, SHORT AND GREEDY
STP Advisory Services, LLC
2118 Wilshire Blvd. #596, Santa Monica, CA 90403
*FOR IMMEDIATE RELEASE*
ARE INVESTORS PAYING FOR STOCKS THEY DON’T RECEIVE?
Attend An Eye-Opening Event In Los Angeles on October 19, 2006: NAKED, SHORT AND GREEDY: Is Wall Street Abusing Short Sales?
Los Angeles, CA
What damage is done to investors when the system routinely
tolerates stock-delivery failures? Should more be done to stop short-selling abuses?
Two class action lawsuits were filed in April 2006 in Manhattan federal court, byan electronic trading exchange and by a hedge fund, against eleven large primebrokers. The plaintiffs allege the defendants conspired since 2000 to transactshort sales without delivering shares to buyers. If true, American investors who
paid for tens of millions of corporate shares actually hold nothing but electronic entries.
In 2004, after years of complaints that naked short sales, i.e., short sales that fail to deliver the shares sold, were systematically attacking and destroying share prices, the Securities & Exchange Commission (SEC) adopted Regulation SHO. But Regulation SHO did not enforce strict requirements to deliver shares in a timely manner. It allowed existing failures to remain undelivered, tacitly permitting lax treatment of stock-delivery failures by brokerages, stock exchanges and
clearing organizations.
Important Questions Will be Discussed
Has the SECs lax enforcement of clearing and settlement procedures created systemic risk in the United States capital markets? Does the failure to provide final delivery for stock trades undercut the rigor of investment analysis and victimize portfolio management? Are billions of dollars in investment value being drained from ordinary investors in the stock market? Does the solution lie in requiring daily reporting on stock-delivery failures and tighter stock borrow requirements? Are pension funds and individual investors already
exposed to enormous losses? These questions and related issues will be discussed by three highly qualified speakers
at this enlightening event.
The Panelists
Dr. Patrick Byrne, CEO of NASDAQ-traded Overstock.com, will discuss the effects on a company of high volume trading in shares apparently exceeding the number issued and outstanding, and the unwillingness of Depository Trust & Clearing Corporation to disclose data on stock-delivery failures.
Arne Alsin, portfolio manager and financial writer, will share his insights, reflecting upon how naked short sales generate phantom shares, and how this changes the risks and valuations portfolio managers and analysts must consider.
Dr. Susanne Trimbath, a research economist with operations management experience in financial services, will explain how abusive trading practices can exploit loopholes in
the stock settlement system, allowing buyers funds to be cleared for transfer to sellers without actual delivery of shares.
The Panel will be moderated by Wayne Jett, Managing Principal and Chief Economist, Classical Capital LLC, a registered investment advisory firm.
The Specifics
This important event will take place on Thursday, October 19, 2006 from 7:30 a.m. to 11:00 a.m., at the elegant Park Hyatt Los Angeles located at 2151 Avenue of the Stars in the Century City area of Los Angeles, California. Registration for the event
will be $45 in advance (register before October 18), $60 at the door. For further information (and secure online registration) go to: www.STPAdvisors.com/events.html
About the host: STP Advisory Services, LLC, is based in Santa Monica, CA. STP advises clients on capital markets, real estate and the economy.
Press Contact: Irina Somerton
Somerton Public Relations & Public Affairs
Phone: 310 461 1416
Fax: 310 461 1304
Email: IS@SomertonPRPA.com
-----------------
Please feel free to place this on other boards.
Sidesteps - Cha Cha Cha
The Securities Industries Association, exercising extraordinary private access to U.S. Securities and Exchange Commission staff during the development of the controversial “Regulation SHO,” appears to have quietly “torpedoed” a rule that would have made settlement of fails-to-deliver contractual and mandatory, FinancialWire has exclusively learned from various sources close to and involved in the process.
The SIA is a membership organization of some 800 securities firms, It’s membership, at http://www.sia.com/member_directory/index.html, include such industry heavyweights as Bank of America Corp. (NYSE: BAC), Bear Stearns Cos. (NYSE: BSC), Citigroup Inc. (NYSE: C) and Merrill Lynch (NYSE: MER), many of whom have been charged in civil suits and even regulatory actions for not only fails-to-deliver but also by entities such as The Electronic Trading Group, LLC, for charging unearned fees, commissions and interest on short sales when the broker-dealers failed to borrow or deliver the stock to back a short position.
Others defendants in that suit, which the plaintiffs hope to convert to a class action, include Credit Suisse Group ((NYSE: CSR), Deutsche Bank ((NYSE: DB), Goldman Sachs Group Inc. (NYSE: GS), Lehman Brothers Inc. (NYSE: LEH), Morgan Stanley (NYSE: MS), Bank of New York ((NYSE: BK), and UBS AG (NYSE: UBS).
"Defendants collusively condone and engage in these practices to their individual and collective enrichment, routinely alternating among themselves in the roles of prime broker who fails to deliver and third-party broker-dealer who permits the (failure to deliver) to persist," according to the filings.
The SIA is said to have privately, and out of the public’s eye, vehemently and successfully opposed language that would have created a contractual obligation on the part of its brokerage members. The language was one of the preferred alternatives in the original SEC staff draft, and which, if adopted as proposed, would have drastically altered how Regulation SHO has operated for the past one-and one-half years.
Rule 203, as adopted:
“We are adopting proposed Rule 203, with some modifications, after considering the comments received. As adopted, Rule 203(b) creates a uniform Commission rule requiring a broker-dealer, prior to effecting a short sale in any equity security, to "locate" securities available for borrowing. For covered securities, Rule 203 supplants current overlapping SRO rules. Specifically, the rule prohibits a broker-dealer from accepting a short sale order in any equity security from another person, or effecting a short sale order for the broker-dealer's own account unless the broker-dealer has (1) borrowed the security, or entered into an arrangement to borrow the security, or (2) has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. The locate must be made and documented prior to effecting a short sale, regardless of whether the seller's short position may be closed out by purchasing securities the same day.”
The key here is that “(1)” requires an actual “borrow,” but “2” does not. Staff had wanted to eliminate “(2)” but the SIA, privately and out of the public eye, strenuously opposed that, knowing, perhaps, uniquely, that the word “locate” does not actually require a borrow and delivery, and its position prevailed inside the SEC’s process.’
Some of the staff were said to have been surprised that no issuer had opposed the inclusion of provision “(2),” but no one should have been caught unawares, since only the SEC staff and the SIA understood the implications that the final result removed all the “teeth” from Regulation SHO, something that has continued to confuse and mystify many industry observers, and also only the two understood the meaning of the word “locate.”
One source told FinancialWire that “the locate requirement is interpreted to mean that all you need to do is find the stock as opposed to finding it and contracting to borrow it. Finding is satisfied by seeing it on the ‘easy to borrow list’ and under some circumstances having the customer tell you he found it. But you can also preborrow or reserve the stock which is done for various purposes. In discussions leading up to Reg SHO the possibility of a conractual requirement was discussed but the SIA vehemently opposed it on the grounds it would result in unnecessary borrowing costs.”
Another close to the process pointed out that “the word ‘locate’ was first floated in a 1973 release and I believe it comes from rule 15c3-3 where arguably it had the meaning of found and borrowed. Reg SHO however only requires you to find it and if its not there 3 days later, you have still satisfied the requirement even though you never borrowed it but you located it.”
In its public comment letter, dated January 30, 2004, the SIA had noted that in developing "Easy to Borrow" lists, broker-dealer stock loan desks use information from a number of sources, including institutional lenders that have sophisticated systems for estimating borrow supply. Broker-dealer stock loan desks also consider the availability of inventory at their own firms and potential availability from other broker-dealers that act as conduit lenders.
While a former staffer admits that the contractual proposal championed did not prevail in the final adopting rule, he does not criticize the SIA. “The SIA has enormous access but they also provide significant industry knowledge of the inner workings of the market,” he states.
Even U.S. Senators have been mystified that Regulation SHO, which sheds “light” on the enormity of the fails-to-deliver for companies on the list, some of which have been there almost since the rule was adopted, and at least one SEC Commissioner, William Donaldson, testifying before the Senate, have been unable to explain why Regulation SHO “isn’t working” to reduce or elmininate “fails to deliver.”
They’ve been asking the wrong people. The SIA understands it completely.
It is not known if the rule can be modified to eliminate provision “(2),” but that would apparently resolve the major issues associated with the ineffectiveness of Regulation SHO as it exists today.
Finally tired of Naked Shorting? 30 seconds is all it takes to begin making a difference!
http://www.investigatethesec.com/
Incredible how some continue to deny any existence of this common problem...
StockGate: Investigations Said To Center On Depository Trust and Clearing Practices
September 26, 2005 (FinancialWire) Up to 35 brokerages and clearning firms, including Merrill Lynch (NYSE: MER), Morgan Stanley (NYSE: MWD), Bear Stearns (NYSE: BSC), and UBS Paine Webber (NYSE: UBS) at the top to regional outfits are apparently under intense NASD pressure to settle failed short trades in Regulation SHO threshold securities or have their clearance firms do it for them at possible substantive losses.
The NASD is in turn acting under political and regulatory pressure from the 11-state North American Association of Securities Administrators task force headed by Connecticut’s Ralph Lambiase, a sharp critic of the Depository Trust & Clearing Corp., whose controversial “stock borrow program” is said by DealFlow to be considered by the regulators as a key facilitator of naked short sales.
Lambiase had publicly asked the SEC to “fix” the DTCC “problem” as it was considering the adoption of Regulation SHO last year, but taking a page from numerous U.S. Senators, he and other state regulators have grown tired of waiting for Regulation SHO to do more than simply shine a magnification light on the massive fails-to-deliver problem.
DealFlow said NASD officials are concerned that stock loan programs are being used to settle failed short trades in Reg SHO threshold stocks, which must be closed out voluntarily or through forced buy-ins within 13 days. “The regulators are concerned that the stock loan are being used instead of market purchases to provide the shares needed for settlement, creating new transactions that will ultimately fail to settle as well.”
The state regulators, DealFlow said, have been “highly critical of the SEC's decision to ‘grandfather’ settlement failures resulting from naked short sales up to levels that trigger threshold status under Reg SHO.”
NAASA was particularly concerned about Regulation SHO, because it excluded the small cap market from any meaningful regulation. “NASAA said the proposal included replacing the so-called ‘tick test’ with a rule that would provide a uniform price test using the "consolidated best bid" as the reference point for permissible short sales. This, however, would not address problems relating to the naked short selling of smaller, less liquid securities, because , NASAA argued, the requirement of the consolidated best bids meant it could not be applied to securities that were not subject to real-time consolidated quotes. That included Nasdaq Small Cap, OTCBB, and Pink Sheet securities.
NASAA also questioned the wisdom of grandfathering settlement failures under the threshold level, asking why the SEC was willing to permit significant settlement failures at all.”
“while there are instances when settlement may be legitimately delayed, existing regulations provide for extensions for settlement. If the Commission continues to allow settlement failures, it may well facilitate the harm that the proposal is designed to remedy,” Lambiase warned the SEC.
According to DealFlow, Lambiase urged the SEC to reconsider its stance regarding the role of the stock borrow program operated by the Depository Trust Corp. (DTC). NASAA wrote that as a threshold matter, NASAA believes that the Commission should explicitly prohibit the DTC from lending more shares of a security than it actually holds. The utility of the overall proposed rule would be severely impaired unless the Commission undertakes to implement such a prohibition."
Brent Baker, an attorney with Woodbury Kesler in Salt Lake City and counsel to naked shorting target and eight-month old threshold list company Overstock.com, previously spent 14 years at the SEC, including time in the Division of Enforcement, was quoted as saying he believes that the SEC tried, with Regulation SHO, to put "their finger in the dike" but failed.
“Three or four years ago naked short selling was being perpetrated by promoters in the micro cap world," he says. "they would publish 'exposes' on the Internet... and they would bring pressure on these little companies."
“However, short selling has changed,” noted DealFlow. He believes the SEC does not realize that abusive short selling practices have been adopted by others and are now built into business models of large, mainstream hedge funds.
The business model has proven to be very lucrative.
The Top 400 richest Americans now includes these hedge fund gadzillionaires:
83 Simons, James H 2,700 67 East Setauket, NY Hedge funds
93 Cohen, Steven A 2,500 49 Greenwich, CT Hedge funds
93 Kovner, Bruce 2,500 60 New York, NY Hedge funds
133 Jones, Paul Tudor II 2,000 51 Greenwich, CT Hedge funds
133 Milken, Michael Robert 2,000 59 Los Angeles, CA Investments
164 Druckenmiller, Stanley 1,800 53 New York, NY Hedge funds
207 Griffin, Kenneth C 1,500 36 Chicago, IL Hedge funds
207 Ziff, Daniel Morton 1,500 33 New York, NY Inheritance, hedge funds
207 Ziff, Dirk Edward 1,500 41 New York, NY Inheritance, hedge funds
207 Ziff, Robert David 1,500 39 New York, NY Inheritance, hedge funds
346 Bacon, Louis Moore 1,000 49 London, United Kingdom
384 Cayne, James 900 71 New York, NY Bear Stearns
Meanwhile, the NY Post has reported that traders in Nasdaq stocks are racing to beat a rumored regulatory deadline to close out their positions or take huge losses as clearing firms do it for them.
“Naked short sales are trades executed without borrowing stock beforehand. Naked short sellers can overwhelm an orderly trading market, since unlike traditional short sellers, there is technically no limit to how much stock can be sold short illegally, noted the Post.
The Post also reported recently that the NASD and numerous state securities regulators, led by Ralph Lambiase of Connecticut's Division of Securities and Business Investments, have vowed to increase scrutiny of naked short sales.
“A buy-in is the worst possible development for a short-seller, since he has to accept any price given,” it stated.
It seems that everytime the DTCC, which is also the target of numerous lawsuits brought by failed companies and a scorching expose in Investment Dealers Digest, gets under pressure, it begins striking out blindly in all directions. FinancialWire can often determine when the heat has been turned up because it is among the media, also thought to have included Dateline NBC, that begins to receive threats from the organization.
In February, the DTCC interfered with FinancialWire’s distribution to Investors Business Daily, and in the past week it sought once more to interfere with another distribution, saying that FinancialWire receives monies for its editorial coverage of the naked short selling issue.
Marshal Shichtman, Esq., attorney for FinancialWire, has been in touch with Proskauer Rose, the outside counsel for the DTCC, warning it of slander, tortuous interference with FinancialWire’s business and because the DTCC is owned by two SROs, the NASD and the NYSE, of First Amendment violations.
Shichtman will be similarly warning the SROs and the directors of the DTCC of what he terms their risks associated with the ruthless, reckless and irresponsible actions of their clearance entity.
In a letter to constituent investor advocate Dave Patch, whose persistence in criticizing Federal regulators over the past several years for shareholder losses at the hands of illegal manipulators was at times a lone quest, often covered only by FinancialWire, Connecticut Division of Securities Director Ralph A. Lambiase, the immediate past president of the North American Securities Administrators Association outlined for the first time the efforts a “working group” of state regulators have been undertaking to assail abusive market practices that Lambiase said has been directly responsible for “an unmistakable loss of investor confidence by the arguably millions of investors who have lost their monies.”
It was an unusual move by Lambiase to outline the states’ enforcement plans in a letter to Patch, who has been vilified and scorned by many top regulators and institutions for his efforts, which includes the maintenance of a website, http://www.investigatethesec.com .
Lambiase said that his efforts, and efforts of others, such as Tanya Solov, Director of the Illinois Securities Department, Tanya Durkee, Deputy Commissioner, Vermont Department of Securities, and Rex A. Staples, General Counsel for NASAA, was stimulated by Patch, and an ever-growing group of concerned citizens who have “continued to champion the issue of reform in the naked short selling area for so long,” and added that it has been those grassroots efforts that constitute the “primary reason we are beginning to see reform of any sort.” Lambiase was clear in stating that it is “your determination and persistence in seeing that this wrong is righted is in part responsible for my interest, as well as that of other state regulators.”
Lambiase, whose initial letter to the U.S. Securities and Exchange Commission stated that the SEC needs to look at the role of the Depository Trust and Clearing Corp. in allowing these abuse practices to continue, said that it seems “clear that had the SRO’s and the SEC exercised greater diligence in enforcing pre-existing rules, Reg SHO would likely have been unnecessary.”
He said his working group has begun meeting with SRO’s and issuers alike, and that it will “continue to exert substantial effort to remedy the remaining abusive practices in naked short selling until we are confident at the state level that the companines in our communities and citizens that invest in them will no longer be the possible targets of abusive naked short sellers.”
It had been previously rumored that the reason the NASD has been issuing subpoenas to a dozen or more brokerages over their “fails to deliver” and their failures to enforce buy-ins is due to those regulating at the Federal level not wanting to be trumped again by a state investigation such as occurred in several Spitzer reform efforts.
Lambiase so far appears to be taking the posture that the state group is ready to step in if the Federal regulators do not, thus “inspiring” the current efforts rumored to be occurring at the Federal level.
To make the point, he told Patch in the letter obtained by FinancialWire that “there remains a substantial distance between REG SHO and the ultimate goal of including substantive protections for small business issuers.”
It is these small businesses in our communities, Lambiase pointed out, “who take entrepreneurial risks to grow their companies through listings on the OTCBB and Pink Sheets. These small businesses not only provide employment for the residents of their communities, but also offer the general public the opportunity to invest in local businesses with promising products or services.
“While it may be true that a number of small companies lack the financial depth to succeed, they are nonetheless entitled to succeed or fail by their own honest business decisions and not as a result of the corrupt acts of abusive short sellers.
In what some believe is another swipe at the secretive DTCC, he said that “without transparency, we cannot, as yet, precisely identify each small business that failed as a direct result of abusinve naked short selling nor quantify the exact number of jobs lost to our local economies when these companies are forced to close their doors.”
In what is an unmistakable prod to the SEC, Lambiase said that institution is “moving slowly forward as Reg SHO in its current state is studied and debated seemingly ad infinitum. While slight modifications to the existing Rule may result from such an approach, a far more threatening pattern of abuse is certain to continue unless wholesale reforms are made to remedy the concerns of the small business community.”
He said that even Congress, whose members have also called the SEC on the carpet for the slow progress associated with Reg SHO may in fact be missing the point that “abusive short selling poses a direct threat to the economic well being of small business and the entire community.”
The 11-state task force reportedly was in serious strategy sessions a few weeks ago.
The New York Post quoted one regulator as saying there is “an epidemic” of naked shorting. Regulation SHO has made that evident for the world to see. Numerous U.S. Senators have called the Regulation fully ineffective, and have repeatedly called upon the SEC Commissioners to get the practice under control.
The Post said that an SEC official confirmed to it “that no complaints have been brought in the nine months since Regulation SHO went into effect.”
It quoted one state securities regulator, Bill Reilly of Florida, as saying he expects the increased effort will result in more voluntary compliance from dealers, as well as enforcement activity.
That may or may not resolve the DTCC “problem.” Recently a stock transfer agent, Transfer Online Inc., had asked then-SEC Chair William Donaldson to put a stop to the control the Depository Trust & Clearing Corp. and Automatic Data Processing (NYSE: ADP) are fast gaining over the transfer business, and to demand DTCC transparency.
Excerpts from the letter, posted at http://www.faulkingtruth.com/Articles/LettersToEditor/1012.html , states: “Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.
“Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.
“I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co.
“Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company.
“I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding.
“Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data?
“In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and the organizations that represent them then the market can neither be transparent nor fair.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in its media censorship.
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
For up-to-the-minute news, features and links click on http://www.financialwire.net
FinancialWire is an independent, proprietary news service of Investrend Information, a division of Investrend Communications, Inc. It is not a press release service and receives no compensation for its news or opinions. Other divisions of Investrend, however, provide shareholder empowerment platforms such as forums, independent research and webcasting. For more information or to receive the FirstAlert daily summary of news, commentary, research reports, webcasts, events and conference calls, click on http://www.investrend.com/contact.asp
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They've screwed so many for so long, may justice be louder than thunder.
They only read the ones sent by the hedge funds where they used to work <gggg>. They have special spam filters to delete any E-Mails that say "help stop manipulation by hedge funds!!"
'Bout damned time, RRufff. Here's something that strikes me as fishy, though...
The Post said that an SEC official confirmed to it “that no complaints have been brought in the nine months since Regulation SHO went into effect.”
I guess they've overlooked my letter?
StockGate: The States Are Coming! The States Are Coming! The Subpeonas Are Flying. / FinancialWire®
September 9, 2005 (FinancialWire) Why aren’t brokerages, floor specialists and market makers such as Morgan Stanley (NYSE: MWD), Janney Montgomery, Wells Fargo (NYSE: WFC) or E*Trade (NYSE: ET) settling their trades and effecting buy-ins when there are fails-to-deliver?
September 9, 2005 (FinancialWire) Why aren’t brokerages, floor specialists and market makers such as Morgan Stanley (NYSE: MWD), Janney Montgomery, Wells Fargo (NYSE: WFC) or E*Trade (NYSE: ET) settling their trades and effecting buy-ins when there are fails-to-deliver?
As it turns out, that is what the NASD now wants to know, according to those who have received its subpoenas.
For most of two years, as FinancialWire has been reporting this national scandal known as StockGate, detractors as high as the Depository Trust & Clearing Corp. have insinuated that illegal naked short selling really doesn’t exist, or if it does, those asking for an accounting of the practice are making mountains out of mole hills.
The NASD apparently didn’t jump into this process with a lot of conviction, however. It appears that it is a defensive move aimed at keeping state regulators at bay. They apparently didn’t want to be “Spitzered” again.
Instead of Spitzer, however, it is Ralph Lambiase, head of the Connecticut securities division, and immediate past president of the North American Securities Administrators Association, and an on-the-record critic of the DTCC, who is heading up an 11-state task force reportedly in serious strategy sessions this week.
The New York Post quoted one regulator as saying there is “an epidemic” of naked shorting. Regulation SHO has made that evident for the world to see. Numerous U.S. Senators have called the Regulation fully ineffective, and have repeatedly called upon the SEC Commissioners to get the practice under control.
The Post said that an SEC official confirmed to it “that no complaints have been brought in the nine months since Regulation SHO went into effect.”
It quoted one state securities regulator, Bill Reilly of Florida, as saying he expects the increased effort will result in more voluntary compliance from dealers, as well as enforcement activity.
That may or may not resolve the DTCC “problem.” Recently a stock transfer agent, Transfer Online Inc., had asked then-SEC Chair William Donaldson to put a stop to the control the Depository Trust & Clearing Corp. and Automatic Data Processing (NYSE: ADP) are fast gaining over the transfer business, and to demand DTCC transparency.
Excerpts from the letter, posted at http://www.faulkingtruth.com/Articles/LettersToEditor/1012.html , states: “Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.
“Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.
“I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co.
“Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company.
“I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding.
“Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data?
“In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and the organizations that represent them then the market can neither be transparent nor fair.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in its media censorship.
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
For up-to-the-minute news, features and links click on http://www.financialwire.net
FinancialWire is an independent, proprietary news service of Investrend Information, a division of Investrend Communications, Inc. It is not a press release service and receives no compensation for its news or opinions. Other divisions of Investrend, however, provide shareholder empowerment platforms such as forums, independent research and webcasting. For more information or to receive the FirstAlert daily summary of news, commentary, research reports, webcasts, events and conference calls, click on http://www.investrend.com/contact.asp
For a free annual report on a company mentioned in the news, please click on http://investrend.ar.wilink.com/?level=279
The FinancialWire NewsFeed is now available in multiple formats to your site or desktop, free. Click on: http://www.investrend.com/XmlFeeds?level=268
NASD IS PROBING NAKED SHORT SALES
By RODDY BOYD
If the National Association of Securities Dealers has its way, the naked shorts will be forced to cover up.
The NASD has requested data from the stock-lending operations of Wall Street giants in a bid to get to the bottom of what one regulator has called an epidemic of so-called naked shorting.
The requests went out to dealers large and small, from Morgan Stanley to Janney Montgomery Scott.
Naked shorting occurs when a short seller hoping to profit from a decline in a stock's price fails to borrow shares prior to establishing the position.
The practice has the potential to swamp thinly traded stocks with sell orders; numerous companies have argued that naked shorting has forced their stock prices below minimum listing requirements.
While always technically illegal, the Securities and Exchange Commission enacted Regulation SHO in January to curb the practice once and for all.
One individual at a large Wall Street firm that received the NASD's request said that it focused on stock loans resulting in trades that do not settle properly.
Regulators and anti-naked shorting advocates argue that dealers lend out more shares than are publicly available to trade.
An SEC official confirmed that no complaints have been brought in the nine months since Regulation SHO went into effect.
One avenue where additional pressure will be put on the Feds to act is the state level.
Ralph Lambiase, the head of the Connecticut division of securities and business investments, is said to be heading up an 11-state task force designed to crack down on the practice.
The task force, under the auspices of the North American Securities Administrators Association, and consisting of state securities regulators from all 50 states and Canada, is plotting strategy in meetings this week.
One state securities regulator, Bill Reilly of Florida, said he expected the increased effort would result in more voluntary compliance from dealers, as well as enforcement activity.
http://www.nypost.com/business/27781.htm
StockGate: Is All Heck About To Break Loose? / FinancialWire®
August 25, 2005 (FinancialWire) With JPMorgan Chase & Co. (NYSE: JPM), Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc., Morgan Stanley (NYSE: WMD) and Merrill Lynch & Co. (NYSE: MER), who dominate the credit-derivatives market, reportedly among 14 banks being called on the carpet by the NY Fed over “unconfirmed trades,” and a super task force of regulators reportedly auditing the top brokerages over allegations of illegal naked short selling,
August 25, 2005 (FinancialWire) With JPMorgan Chase & Co. (NYSE: JPM), Deutsche Bank AG (NYSE: DB), Goldman Sachs Group Inc., Morgan Stanley (NYSE: WMD) and Merrill Lynch & Co. (NYSE: MER), who dominate the credit-derivatives market, reportedly among 14 banks being called on the carpet by the NY Fed over “unconfirmed trades,” and a super task force of regulators reportedly auditing the top brokerages over allegations of illegal naked short selling, it could soon be “SHO and tell” time.
Regulators are smarting over allegations that they gave super hedge funds a free pass because “fails to deliver” were just too massive to reconcile in the “grandfather clause” in Regulation SHO after the FTDs couldn’t be cleaned up even with a six months notice, and there is growing evidence that the U.S. Securities and Exchange Commission, the NASD and the New York Stock Exchange are not about to let some state regulator do another “Spitzer” on them.
The North American Securities Administrators Association, representing state regulators, was sharply critical of the Depository Trust and Clearing Corp., co-owned by the NYSE and NASDAQ, during the comment period over Regulation SHO, and FinancialWire has been aware for some time that some state regulators have been looking into why the DTCC has fails to deliver amounting to $6 billion a day.
NASDAQ may soon pull out of the DTCC and form its own clearing group, according to Traders Magazine. A break-up of the DTCC has been editorially endorsed by Investrend Information, publishers of FinancialWire.
A growing chorus has also risen from Congress to “make Regulation SHO effective,” rather than what critics say it has been so far, a showcase of illegal manipulation.
TheStreet.com’s (NASDAQ: TSCM) RealMoney said that the market “dived” Wednesday over the Fed letter, saying the market may be concerned this is “another Long term Capital type event in the making.”
A banking industry group was quoted as saying as recently as July 27 that an “urgent” effort is needed to tackle the “serious” accumulation of trade confirmations.
At the same time, news reports say that examiners from the NASD, NYSE and SEC are “in the middle of a sweep designed to ferret out brokerages breaking rules designed to eliminate naked short selling.”
A battle royale, including competing lawsuits, are being waged between Overstock.com (NASDAQ: OSTK), which alleges that Rocker Partners, a major hedge fund said by some to be the leading shorter of a large segment of the NYSE Regulation SHO “threshold list,” is engaging I illegal manipulative activites.
TheStreet.com’s Kevin Kelleher said the “scarcity of hard data on the illicit trading tactic so far has only polarized the debate on how serious a problem it has become.”
Despite a number of semi-favorable articles in TheStreet.com, Overstock CEO Byrne has named the company as a part of the media conspiracy supporting misdeeds by hedge funds.
The hedge funds, Kelleher said, say that “most of the positions created by failed deliveries are related to options trading and not a concerted effort to drive stocks down.
“That may be the case. But without better data on stocks that failed to deliver, the rest of us will never know for sure.
“Meanwhile, what little data are available suggest that naked shorting may indeed be out of control and that a much-ballyhooed trading rule known as Regulation SHO has so far done little to rein it in.”
He said that naked shorting “is in essence make-believe short-selling. In the same way kids play doctor without the medical equipment, naked shorters sell unborrowed stocks, stocks that no one has borrowed and possibly never will. The SEC allows naked shorting in two cases: to maintain liquidity in hard-to-find shares and for anyone who shorted unborrowed shares before 2005. That second exemption has generated its own share of controversy.”
He said that the outcry has steadily increased. “In recent months, newsletters like CrossCurrents and Biotech Monthly have sounded alarms on naked shorting.”
"I'm quite confident that this is a much larger issue than anyone cares to consider," Kelleher quotes CrossCurrents editor Alan Newman. “It's hard to find bears any harder-core than Newman, who in February 2000 put a then-unthinkable 3000 target on Nasdaq and who today expects the Dow to sink to 8500. When the uber-bears are worried about the adverse impact of shorting, it's time to start worrying.”
Newman explains naked short-selling in eye-opening clarity, he notes: “Selling unborrowed shares means the buyer doesn't get delivery of the shares he bought. "There are now two actual owners of the same shares. The exact same shares now show up long in both accounts," Newman says. "Every 100 shares of a naked short is a duplication of real shares, just as if the shares had been photocopied and distributed."
Kelleher also quotes Larry Thompson, the First Deputy General Counsel at the Depository Trust and Clearing Corporation, a central clearinghouse for trade settlement, that about 1.5% of the dollar volume of stocks traded each day fail to deliver. In a Q&A published this March on the DTCC site, "fails to deliver and receive amount to about $6 billion daily ... including both new fails and aged fails."
Overall, said TheStreet.com, “1.5% of volume may not be much of an impact. But judging from the way some stocks spend weeks and months on the threshold list of shares that face persistent delivery failures, the naked shorting is concentrated in illiquid shares known to be hedge fund targets. The bulk are traded over the counter, but some are well known, such as Netflix, Netease (NASDAQ: NTES), Shanda Interactive (NASDAQ: SNDA), and Taser International (NASDAQ: TASR).
He said that perhaps the most telling data came from a simple Freedom of Information Act filed by an individual investor who asked the SEC for aggregate data on failed deliveries on the NYSE and Nasdaq. Before Regulation SHO was passed in September 2004, an average of about 155 million shares a day failed to deliver on the two exchanges, excluding OTC and Pink Sheet stocks, TheStreet.com says the data showed.
“After Regulation SHO was passed, the delivery failures rose, averaging 205 million shares a day in December and rising as high as 259 million on Dec. 22 alone. Since the law went into effect on Jan. 3, the delivery failures have declined, but are still only about 20% below their levels of last summer.
“The SEC, wanting to avoid short-squeezes in dozens of stocks caused by the closing out of naked short positions, opted to ‘grandfather in’ any failed deliveries before Jan. 3. But that opened the door to another problem: In the four months between the date Regulation SHO went into effect and the date it took effect, the grandfather provision gave anyone who was so inclined a generous period of time to build up naked short positions in any stock he liked.
“Or, to use the counterfeit analogy, imagine outlawing the printing of funny money, but giving everyone four months to print up as much as they'd like. Only then would counterfeit dollars be illegal -- but only to print, not to use.”
He points out that “it wasn't as if regulators weren't expecting this. The NASD, in a 2004 proposal to tighten rules on naked short-selling, wrote, "Naked short-selling ... can result in long-term failures to deliver, including aggregate failures to deliver that exceed the total float of a security. NASD believes that such extended failures to deliver can have a negative effect on the market.
"Among other things, by not having to deliver securities, naked short-sellers can take on larger short positions than would otherwise be permissible, which can facilitate manipulative activity. Further, significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends."
Some 93.89% of the respondents to the Investrend Poll at http://www.investrendinformation.com said that the DTCC should be “punished” for its interferences with the media, especially FinancialWire, which has been reporting on this issue for almost two years.
The censorship has since admitted to in a letter posted at http://www.investrend.com/Admin/Topics/Articles/Resources/349_1113403487.pdf .
More than a half dozen highly-ranked Republican and Democratic U.S. Senators have weighed in that the U.S. Securities and Exchange Commission’s much-ballyhooed “Regulation SHO” has highlighted the massive extent of the illegal practice but has done nothing to stop it.
The main lists for Regulation SHO are at http://www.nasdaqtrader.com/aspx/regsho.aspx and http://www.nyse.com/Frameset.html?displayPage=/threshold .
Even the DTCC has admitted its “fails to deliver” is massive, amounting to upwards of $6 billion a day, according to DTCC Deputy General Counsel Larry Thompson.
A former U.S. Under Secretary of Commerce for Economic Affairs, Robert J. Shapiro, now chair of Sonecon, LLC, a private economic advisory firm, accused Thompson of making “inaccurate or misleading” statements. Shapiro, who holds a Ph.D from Harvard University, was the principal economic advisor to former President Bill Clinton in his initial Presidential campaign.
Shapiro currently provides economic analysis to the law firms of O’Quinn, Laminack and Pirtle, Christian, Smith and Jewell, and Heard, Robins, Cloud, Lubel and Greenwood, on issues associated with naked short sales, which he noted includes “matters raised in an interview published by @DTCC with DTCC deputy general counsel Larry Thompson.”
He asserted in his letter that “the extent to which [naked short selling] occurs is in dispute. While this statement may be narrowly correct, objective academic analysis has established that naked short selling has been a widespread practice and one which, when allowed to persist, can pose a threat to the integrity of equity markets. A recent study by Dr. Leslie Boni, then a visiting financial economist at the SEC, analyzed NSCC data and found that on three random days, an average of more than 700 listed stocks had failures-to-deliver of 60 million-to-120 million shares sold short – naked shorts – that had persisted for at least two months. In addition, over 800 unlisted stocks on any day had fails of 120 million-to-180 million shares sold short that also had persisted for at least two months. The total number of naked shorts, including those that had persisted for less than two months, was presumably considerably greater.
“Regarding the extent of naked shorts, Thompson has provided closely-related additional information: ‘fails to deliver and receive amount to about $6 billion daily…including both new fails and aged fails.’ Thompson minimizes this total by comparing it to “just under $400 billion in trades (emphasis added) processed daily by NSCC, or about 1.5% of the dollar volume.” By most people’s standards, a problem involving hundreds of millions of shares valued at $6 billion every day is a very large problem. Moreover, the $6 billion total substantially underestimates the actual value of all failed-to-deliver trades measured when the trades actually occurred. Most of the $6 billion total represents uncovered or naked short sales, many of which have gone undelivered for weeks or months with their market price being marked-to-market every day. As a stock’s price falls, the market price of naked shorts in that stock also declines, reducing the total value of the outstanding failures-to-deliver cited by Thompson.
“In other respects, Thompson’s comparison to the ‘$400 billion in trades processed daily by NSCC’ seems disingenuous and misleading, because that $400 billion total covers not only U.S. equity trades which can involve most of the failures-to-deliver at issue, but many other transactions also processed by the NSCC. The value of all equity transactions on U.S. markets in 2004, for example, averaged $82.3 billion/day. If Thompson is correct that the daily value of fails-to-deliver averages $6 billion, that total is equivalent to 7.2 percent of average daily equity trades or nearly five times the 1.5 percent level suggested by Thompson.
“Furthermore, the DTCC reports on its website that on a peak day, ‘through its Continuous Net Settlement (CNS) system, NSCC eliminated the need to settle 96 percent of total obligations.’ Assuming that CNS nets out the same proportion of trades on other days, $384 billion of the $400 billion in daily trades cited by Thompson are netted out, leaving only $16 billion in daily trades that require the actual delivery of securities. The $6 billion of fails-to-deliver securities existing on any day are equivalent to 37.5 percent of the average daily trades that require the delivery of securities, or 25 times the 1.5 percent level cited by Thompson.
“Thompson tries to explain the large numbers of shares that go undelivered – in most cases arising from naked short sales -- by citing problems with paper certificates, inevitable human error, and the legitimate operations of market makers. This also seems misleading or disingenuous. Regarding problems with paper certificates, the DTCC estimates that 97 percent of all stock certificates are now kept in electronic form. Nor can human error or legitimate market-making operations explain the high levels of failures-to-deliver that persist for months – on any day, an average of 180 million-to-300 million shares have gone undelivered for two months or longer – as documented by Dr. Boni’s analysis of NSCC data.
“Thompson also disparages the attorneys who represent companies that have been damaged or destroyed by massive naked short sales, and their shareholders, by claiming falsely that the cases in this matter have almost all been dismissed or withdrawn. The legal firms that I advise -- O’Quinn, Petrie and Laminack; Christian, Smith and Jewell; and Heard, Robins, Cloud, Lubel and Greenwood – have not lost any motions against the DTCC or its affiliates and currently have one case against the DTCC pending in Nevada and another case against the DTCC pending in Arkansas. In addition, on February 24, 2005, these attorneys were granted an order by the New York Supreme Court ordering the DTCC to produce trading records involving two companies they represent, including records from the Stock Borrow program, which may establish whether large-scale naked short sales were used to manipulate and drive down the stock price of those two companies.
“Thompson also asserts that the plaintiffs suing the DTCC for damages associated with the handling of naked short sales rely on “theories [that] are not an accurate reflection of how the capital market system actually works.” This assertion is inaccurate. There is no dispute about how the capital markets work -- nor any doubt that naked short sales have been used to manipulate and drive down the price of stocks, as seen in numerous death-spiral financing cases. The issue here is the DTCC’s role in allowing or facilitating such stock manipulation through its treatment of extended naked short sales.
“In explaining the DTCC’s role in these matters, Thompson rejects the claim that the NSCC’s Stock Borrow program allows the same shares to be lent over and over again, potentially creating more shares than actually exist or ‘phantom’ shares. By Thompson’s own account, shares borrowed by the NSCC to settle naked short sales are deducted from the lending member’s DTC account and credited to the DTC account of the member to whom the shares have been sold. Therefore, those same shares become available to be re-borrowed to settle another naked short sale and, if that happens, to be re-borrowed again and again to settle a succession of naked short sales. Throughout this process, the actual short sellers may continue to fail-to-deliver the shares to cover their shorts and, as Dr. Boni’s analysis of NSCC data found, the underlying failure can age for months or even years. The process which Thompson describes is one in which shares can be borrowed and lent over and over again, introducing more shares into the market than are legally registered and issued. If any ambiguity remains, Thompson can clarify it by responding to the following query: Once a share that has been borrowed through the NSCC Stock Borrow program is delivered to the purchaser, is that share restricted in any way so it cannot be lent again?
“It is important to note that the Stock Borrow program is used when continuous net settlement cannot locate the shares to settle. As a consequence, Stock Borrow is usually called into play when there are relatively few shares available for borrowing. These are propitious conditions for market manipulation: Unscrupulous short sellers undertake large-scale naked short sales involving stocks for which few shares are available for trading and lending, relying on the Stock Borrow program to borrow the limited available shares, again and again, at sufficient levels to drive down the market price of the shares.
“Thompson notes that of approximately $6 billion in outstanding failures-to-deliver existing on any day, “the Stock Borrow program is able to resolve about $1.1 billion … or about 20% [18 percent] of the total fail obligation.” In this statement, Thompson raises very serious questions about the integrity and operations of the NSCC and DTCC, which he can clarify by responding to the following queries: If the Stock Borrow program “resolves” only 18 percent of total fails, what is the disposition of the remaining 82 percent of outstanding fails? When failures-to-deliver occur that are not resolved through Stock Borrow, does the NSCC credit the undelivered shares to the member representing the buyer, creating genuine “phantom shares”? Finally, how many shares do the borrowing brokers, clearing firms and other participants in the Stock Borrow program owe the NSCC on a typical day, and what is their total value?
“In a related matter, Thompson tries to distance the DTCC from charges that shares held in restricted accounts – for example, cash accounts, retirement accounts and many institutional accounts – are improperly lent through the Stock Borrow program by claiming that responsibility for segregating restricted shares from lendable shares falls to the “broker and bank members” of the DTCC, while responsibility for monitoring or regulating their performance in this matter falls to the stock exchanges and the SEC. As a trust company, the DTCC cannot hold that it has no role, duty or responsibility to ensure the probity of its operations. Thompson could address this issue by responding to the following queries: What procedures does the NSCC have to ensure that shares held in members’ accounts for possible loan through the NSCC Stock Borrow program are unencumbered by regulatory or legal restrictions from being pledged or assigned and eligible to be borrowed? On any given day, how many participants in the Stock Borrow program have lent shares that exceed their lendable shares, in what numbers and of what value?
“Thompson also tries to distance the DTCC as far as possible from the naked short selling that generates most of the extended failures-to-deliver: ‘We don’t have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver … we don’t even see whether a sale is short or not.’ In fact, the DTCC chooses to not distinguish short sales from long sales, chooses to not regulate or stop extended naked short sales, and chooses to not force member firms to resolve protracted naked short sales.
“First, Regulation SHO requires that all transactions be clearly marked short or long. If the DTCC and NSCC do not know whether sales are short or long as Thompson contends, they choose to not know. Second, the NSCC has a clear responsibility and adequate means to stop naked short sales of extended duration, with no legal barrier that would prevent them from so doing. As a trust company with an acknowledged duty to provide investors certainty in the settlement and clearance of equity transactions, the DTCC chose to carry out that duty by assuming the role of counterparty to both sides of every equity transaction, through the operations of the NSCC’s CNS system and the Stock Borrow program. By allowing short sellers to fail-to-deliver shares for months or even years, the NSCC clearly fails to provide certainty in settlement to the buyers, sellers and issuers of securities. Since it is widely known that extended naked short sales have been used to manipulate stock prices in cases of death-spiral financing, and the NSCC created the Stock Borrow program to address failures-to-deliver that prominently include naked short sales, the NSCC and DTCC share a responsibility with the SEC and the stock exchanges to protect investors by resolving extended fails.
“Third, the DTCC and NSCC have the clear capacity to force member firms to resolve the extended failures-to-deliver of their customers by purchasing shares on the open market and deducting the cost from the member’s account. A 2003 study by Dr. Richard Evans and others provides evidence that forced buy-ins by any party occur very rarely. They found that a major options market maker who failed to deliver all or a portion of shares sold in 69,063 transactions in 1998-1999 was bought-in only 86 times or barely one-tenth of 1 percent of the fails. Thompson can clarify investors’ understanding of their operations by responding to the following query: What proportion of shares that are persistent fails-to-deliver, of one month or longer, are ever bought in?
“Thompson acknowledges that the DTCC and NSCC know precisely how many failures-to-deliver exist for each stock and the precise duration of each of these fails. Yet, the DTCC refuses to disclose this information even to the issuer of the stock in question, which Thompson justifies by citing ‘NSCC rules’ prohibiting such a release of data based on ‘the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.’
“This response is both disingenuous and revealing. We know now, for the first time, that the DTCC has full knowledge of the extent of protracted, large-scale naked short sales in all particular cases. We also know now that the DTCC has had this information for at least a decade, since Thompson also notes that ‘fails, as a percentage of total trading, hasn’t changed in the last 10 years.’ Yet, based on the DTCC’s own rules, it allowed these abuses to persist and fester. The DTCC and NSCC can change their rules at any time. Moreover, in this case, those rules are unjustified. Data documenting outstanding short sales in each stock are currently issued publicly, so further data on how many of those short sales are naked would not reveal additional information about the trading patterns of individual firms or in any way empower manipulators. In fact, the DTCC could substantially disarm manipulators by both publicly reporting naked short sales in each issue and pledging to force buy-ins of all naked short sales that persist for more than a limited period.
Surely, if large-scale, extended naked short sales have effectively created “phantom” shares, companies have a responsibility to their shareholders and the right to secure this information from the organization which manages the settlement of short sales. At a minimum, the DTCC should respond to requests by issuers for data on extended failures-to-deliver in their own stocks, both in the past and currently, so they can take steps to resist stock manipulators or bring them to account for past manipulation.
Thompson also claims that the DTCC did not create or manage the Stock Borrow program to serve its own financial interest, insisting that the service generates less than $2 million a year in direct fees to the DTCC and that all DTCC services are priced on a “not for profit” basis that seeks to match revenues with expenses. Without further information, these responses beg the question of whose private financial interest has been served by the Stock Borrow program, especially as the DTCC is owned by the stock markets, clearinghouses, brokerage and banking institutions that use its services. Thompson and the DTCC can clarify this serious matter by responding to the following queries: Do DTCC participant/owners receive interest or other payments through or from the Stock Borrow program for lending the shares of their customers and, if so, how much have they received for these activities over the last 10 years? Further, do DTCC participant/owners receive any dividend, interest or other payments or distributions from the DTCC or its subsidiaries?,” Shapiro concluded.
Neither Thompson nor the DTCC have responded to Shapiro’s wide-ranging allegations.
Recently, former SEC Attorney Peter Chepucavage, previously a staffer for the U.S. Securities and Exchange Commission’s Division of Market Regulation, and a key participant in the release of Regulation SHO, has left the SEC and is now challenging his former agency over the regulation’s inability to reign in illegal market manipulations.
Chepucavage has forwarded his comments to the SEC, under File Nunber 265-23:
“I am responding to your Request for Public Comments on Summary of Proposed Committee Agenda. I wish to incorporate and expand upon the comments of Brad Smith regarding a macro or more comprehensive approach to small companies and to use his term small to medium enterprises (SME'S). A more comprehensive approach is necessary and appropriate because there is a need to review not only the small company issuers but also the markets and broker dealers involved in the raising of capital for SME's and the public perception of the regulation of those markets.
“In a recent explanation of the key points of Reg. SHO, the staff stated “Speculative stocks, such as microcap stocks, often have a high probability of declining in value and a low probability of experiencing above average gains." The committee should review the underlying data for this proposition to determine whether it is true for all low priced stocks in general or just those traded on the pink sheets and otcbb with a view to determining whether such stocks could ever be suitable for retail investors or whether they should only be sold to investors qualified by knowledge of these markets.
“In the column Washington Investing, Wash Post 5/23/05 p.1 Jerry Knight refers to the "purgatory of the Pink Sheets, a nearly unregulated neither market for trading stocks.” The committee should evaluate this statement and if necessary recommend increased practical regulation such as short sale reporting and Reg SHO coverage.
“Reg. SHO excluded these stocks from its coverage and the committee should therefore review why the most speculative stocks are not included.
“The SRO short sale reporting rules exclude these stocks from their coverage. See petition of the Pink Sheets to include them as an example of a market seeking more regulation.
“The SRO'S have failed to enforce their locate requirements for short sales thereby encouraging naked shorting in these markets. Except for one case, the penalties imposed over the last 10 years include modest fines probably less than trading profits made. ”These stocks are not eligible for margin or options and thus the loan supply is curtailed enabling naked shorts and the inability to hedge. See Comments of Professor Angle to Reg SHO.
“The Commission is reluctant to provide an arbitrage exemption for short sales which makes the distribution of many small company issues thru Pipes and Wt arbitrage. The committee should review the merits of such an exemption.
“The presidents and CEO'S of small broker -dealers believe they are often held responsible for their employees conduct while those of large broker dealers rarely are . They also believe penalties imposed on small bd's constitute a much larger portion of their net capital and are inherently unfair. This is an old argument but continues to resurface and should be addressed.
“The chairman of the PHLX recently noted that he worried that the Commission staff would be overwhelmed with the NYSE/ARCHIPELAGO and NASDAQ/INSTINET mergers and not have time for the rule filings of other smaller SRO's.
“Small companies are more likely to be referred to as penny stocks, unless like Lucent at $2.50 a share they are listed on the NYSE.
“There may be no reliable evidence that small bd's and small companies create more regulatory issues than the Enrons, Worldcoms, Tycos and other similar large companies that have required significant regulatory resources. The committee should review whether they do in fact create more regulatory issues.
“There is a proliferation of unregistered finders operating in the area of SME'S because of the lack of clear guidance from the Commission. It should also consider studying the role of finders in the process and might consider whether those finders should be registered as investment advisers rather than bd's.
“The Committee should not be reluctant to challenge conventional norms in its approach. The Committee should therefore recommend a special study of the regulation of SME's and small bd's to determine if the regulatory scheme is adequate and consistent and does not impose a greater burden on them especially in light of their job creating value in the U.S. It might also recommend the creation of an independent small business/small bd office at the Commission with a significant increase in staffing. While it is not the Commission's role to encourage small to medium enterprises or bd's, it is their obligation not to hinder them and to pay equal attention to them. This Committee has a rare opportunity to set a future agenda for SME'S in this country .As the markets rapidly consolidate, attention to SMEs and bd's is important whether it results in more or less regulation or more reasonable regulation,” the former SEC attorney concluded.
A controversial audio of a purported conference call conducted by officials of Bear Stearns (NYSE: BSC) contains allegations that the SEC had shared with Bear Stearns the names of hundreds of companies that it had said would be on the threshold lists but which were not on the official lists published, and that regulators had confided to Bear Stearns and others that the regulators are selectively enforcing provisions against “fails to deliver” securities according to a kind of floating set of “interpretations” rather than strictly according to the law.
The blockbuster audio is posted at http://www.investigatethesec.com/Bear080705.wma .
U.S. Senator Elizabeth Dole (R-SC) recently joined U.S. Senators James Talent (R-MO), Richard Shelby (D-AL), Susan Collins (R-ME), Robert Bennett (R-UT) and Richard Durbin (D-IL) in questioning U.S. Securities and Exchange Commission about what they call the “failure” of Regulation SHO to curtail unlawful, predatory securities trading.
The current Senate line-up carries significant heft. Senator Collins is chair of the Homeland Security and Governmental Affairs committee, Senator Shelby is chair of the Senate Banking Committee, Senator Durbin is Assistant Democratic Leader and Senator Bennett is Republican Whip. The Senators’ letters are posted at http://www.americaneedstoknow.com
“Stockgate Today” publisher David Patch said that the Senators have 23 good reasons, citing that many companies, including Martha Stewart Living Omnimedia (NYSE: MSO), Delta Air Lines (NYSE: DAL), Krispy Kreme (NYSE: KKD) and Netflix (NASDAQ: NFLX), that remain “not settled” on the official threshold lists maintained by the New York Stock Exchange and Nasdaq five months later.
“Stockgate Today” is published at http://www.investigatethesec.com . The Senators’ letters to shareholders and the SEC are posted at http://www.americaneedstoknow.com
Patch said that most of the 23 companies hardest-hit by unlawful stock manipulations in full sight of market regulators, including those at the SEC, such as Annette Nazareth, head of market regulation, who belittles complaints as coming from those who “want to see their stock go up,” have had double-digit declines in stock valuations over the 94 days they have been on the highly-public list.
He also noted that in the March, 2005 Euromoney Magazine article on illegal naked short selling, Head of Market Regulation Annette Nazareth’s assistant, James Brigagliano said that prior lawbreakers were “grandfathered” because “we were concerned about generating volatility where there were large pre-existing open positions, and we wanted to start afresh with new regulation, not re-write history.”
“So does Ken Lay, but he can’t,” retorted Patch.
This disputed “grandfathering” has not yet been taken up by Congress, but the 23 companies on the threshhold list for over days are new transgressions, and presumably they can’t be dealt with either because Nazareth and Brigagliano are concerned about “generating volatility.”
Also, in a blockbuster event almost equal to the mysterious “postponement” of “Dateline NBC,” the U.S. Securities and Exchange Commission has inexplicably given the DTC’s National Securities Clearing Corp. “immunity” in the form of limited liability for willful misconduct or violations of Federal securities laws.
The Notice regarding the SEC’s action is at http://www.nscc.com/impnot/notices/notice2005/a6029.pdf
Some legal experts are questioning whether the SEC, without the approval of Congress, has the authority to limit the NSCC’s liability. There have been similar questions about the SEC’s authority to unilaterally “grandfather” securities violations prior to Regulation SHO.
The new regulation is sure to be litigated since the DTCC and the NSCC were the subject of lawsuits claiming their “stock borrow program” is illegal counterfeiting, prior to the rule approval by the SEC.
Also, recently a stock transfer agent, Transfer Online Inc., had asked then-SEC Chair William Donaldson to put a stop to the control the Depository Trust & Clearing Corp. and Automatic Data Processing (NYSE: ADP) are fast gaining over the transfer business, and to demand DTCC transparency.
Excerpts from the letter, posted at http://www.faulkingtruth.com/Articles/LettersToEditor/1012.html , states: “Over the years as the amount of shares held at DTC has increased it has become more and more difficult to determine who owns the shares, who is trading them and if the trading is proper. This trend, and the resulting problems I will detail below, continues to increase because a minority of the total number of shareholders are reflected on the books and records of the corporation, most activity takes place behind the wall of ownership that is designated as Cede & Co. and neither the company nor the transfer agent has any access to the underlying information.
“Furthermore, DTC recently managed to put through a rule change (Release No. 34-50758A; File No.S7-24-04) that prohibits a transfer agent from representing any company who seeks to withdraw from the DTC system. This change effectively leaves companies with no voice or choice in the management of their stock and their ability to have any transparency as to what is actually taking place in the market in regard to their stock.
“I receive calls from companies seeking information as they watch millions of shares trade in a single day, who watch their share price decrease in value and who have no access to information regarding who is behind the trading of these shares, or if in fact the trades are at all legitimate. As the system now operates, most companies have a large percentage of shares on their books registered to Cede & Co.
“Given the importance of shareholder voting and communication one would assume that the same requirements placed on transfer agents as to accuracy and reporting would be placed on ADP and Cede & Co. as they usually hold or service the majority of the shares owned in any given company.
“I have found; however, that when presented with the tabulation reports from ADP the share totals they report sometimes exceed the total number of shares outstanding for the company. Let me restate this because it is a very important part of my concern about a system that is more and more headed in the direction of increased control by DTC. The shares presented by ADP, that are the shares voted by the brokers on behalf of the shareholders for whom they hold accounts, EXCEED when added to the shareholders of record the total number of shares outstanding.
“Where are these extra shares coming from? Why are there no controls on the number of shares held in the nominee name Cede & Co. vs. the ownership on the books and records of the brokers and why is the company not privy to any information unless it pays whatever fees it is told it must pay by the organizations that control the data?
“In fact, as the system is evolving, DTC is de facto becoming the largest transfer agent in the industry even though it is an organization formed by and working for the interests of the brokerage community. If, ultimately, the S.E.C. is in place to protect investors then this issue can not be ignored because in the end when the market is completely under the control of the brokers and the organizations that represent them then the market can neither be transparent nor fair.”
The “Important Notice” from the DTCC regarding the NSCC demonstrates that the entities are a “self-regulatory organization” under the auspices of the SEC, which ramps up the media interference to First Amendment violations.
The DTCC said that the “approved changes create a uniform standard limiting NSCC’s liability to direct losses caused by the NSCC’s gross negligence, willful misconduct, or violation of Federal securities laws for which there is a private right of action.”
In addition, the organization stated, “the changes memorialize an appropriate commercial standard of care that will protect NSCC for undue liability, permit the resources of NSCC to be appropriately utilized for promoting the accurate clearance and settlement of securities, and are consistent with similar rules adopted by other self-regulatory organizations and approved by the Commission.”
The DTCC had asked for the rule December 8, 2004. It is not known how the proposed rule slipped through the cracks on the public and Congressional levels prior to the approval.
The National Coalition Against Naked Shorting stated that the action was sought and approved hastily because “they have been willfully violating securities laws for years, know that it will come out in court, and want to have a piece of paper to fall back on,” adding that it corroborates “the theory that the stock borrow program violates a host of securities laws, that the NSCC knows it, and that they have been counterfeiting stock for years and just now are starting to catch on to the idea that they will get caught.”
In his communication to then-SEC Chair William Donaldson, Sen. Durbin also contested the claim by the Depository Trust and Clearing Corp., a unit ot the New York Stock Exchange and NASD, that it has no responsibilities under Regulation SHO.
Senator Durbin’s letter to Donaldson appears to sharply contest the Depository Trust & Clearing Corp.’s contention that it has no role in Regulation SHO.
“I am writing to request information regarding the August 25, 2004 Securities and Exchange Commission (SEC) short sale regulation, designated Regulation SHO. On March 9, 2005, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Regulation SHO, in which Chairman Bennett spoke with you about the regulation’s effects on the illegal practice of naked short selling. I thank you for your testimony and I hope that you can follow up on some of my concerns not fully addressed by the Banking Committee hearings.
“I appreciate the efforts of the Securities and Exchange Commission (SEC) to control abusive short selling practices. As a result of Regulation SHO, the names of firms with large amounts of unsettled shares are published on the Threshold Security List daily. This list assists individual investors in making informed decisions about potential manipulation of the market, and gives regulators and investigators a centralized list of firms with significant numbers of undelivered shares. However, it has come to my attention that Regulation SHO may not be curtailing abusive naked short selling practices.
“Several of my constituents have contacted me since the SEC introduces Regulation SHO. They have raised concerns about potential loopholes in settlement regulations. During your recent testimony before the Banking Committee, Chairman Bennett asked you about the ability of brokerage houses to shuttle unsettled shares every 13 days in order to avoid settling the borrowed shorted shares. Due to time constraints at the hearing, the committee did not receive a complete answer. This issue is worthy of a full response.
“Additionally, my constituents have expressed concern about SEC enforcement of Regulation SHO. While the Threshold Security List publicizes securities that might have been manipulated, I am concerned that some securities repeatedly appear on the list. What steps is the SEC taking to investigate trading practices that result in vast quantities of unsettled shares, and to punish those people who violate SEC naked short selling regulations? What is the SEC doing to ensure that the Depository Trust & Clearing Corporation (DTCC) is complying with Regulation SHO, and what actions does the SEC undertake when the DTCC identifies large quantities of shares that have not been delivered?
“It is important that the SEC identify abuses and prevent manipulative naked short selling practices that undermine faith in the market. Thank you for your attention to this matter. I look forward to your timely response,” Senator Durbin concluded.
Pink Sheets head Cromwell Coulson has asked the SEC to publish short positions on all over the counter and bulletin board stocks, and that request is currently in a comment period.
The request for rulemaking, which Coulson has told companies traded on the Pink Sheets, is needed “to make regulators turn on the lights and protect investors from the menance of hidden short selling in the OTC market,” is at http://sec.gov/rules/petitions.shtml
In an email to Donaldson, Coulson had said “I believe that it is very important to require the disclosure of short positions because the lack of transparency is allowing promoters to defraud investors by blaming all selling on naked market maker short selling. Disclosure and transparency can easily remedy the issue.”
In other news on the naked short-selling front known as “StockGate,” adding to what TheStreet.com founder James Cramer calls the “Hedge Fund Relief Act,” the termination of the Uptick Rule, is the fact that those using illegal naked short selling in the past have been granted a kind of amnesty for acts before the first of 2005. The SEC just “grandfathered” those illegally-begotten gains and resultant counterfeit shares into the system, so these windfall gains are now available to downtick with reckless abandon on downticks.
The “grandfathering” admission is at http://www.sec.gov/spotlight/keyregshoissues.htm
In the same document, the SEC has inexplicably stated that not all forms of illegal naked short selling, the equivalent of counterfeiting shares in public companies, are actually “illegal.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in its media censorship.
In a recent editorial, Investrend Information head Gayle Essary questioned whether the board and principal shareholders would “be party to shenanigans that lead to the censorship or disabling of any media” that he says is “un-American activity.”
Essary said that the arrogance the DTCC expressed in its censorship efforts shows that the entity has “become too large, too encompassing, too powerful, too unresponsive to those it serves, primarily the investing public, and too unresponsive to the Congress under whose auspices it should be operating.
“First, it is time to unconflict it, with real public representations on its board,” he said, and second, “it is time to break it up, with its various duties provided by smaller agencies under separate unconflicted boards.”
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
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On a more serious note:
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
Former SEC Attorney Challenges SEC on Regulation SHO regarding Protection of Small Business Issuers – July 15, 2005
David Patch
If what we have been hearing is true, more SEC Attorneys may be leaving the Commission for Private Practice and then exposing the deficiencies in the SEC’s own ability to be unbiased to categories of investors and issuers when it comes to market abuses.
Recently former SEC Attorney Fellow Peter Chepucavage was working for the SEC’s Division of Market Regulation and was one of the key team members in the release of Regulation SHO. Peter and I met when I conducted a one-man protest in front of the SEC last July and had spoken on frequent occasions ever since. I now find that my disappointment with Peter’s ability to get matters resolved was unjust as clearly after reading the memo below, his hands were tied in attempts to do the right thing. Politics at the agency took precedence over investor protection.
Peter is now part of the Private Sector and willing to fight for small business issuers. During the first Small Business Council meeting held recently by the SEC they requested comments on topic matter for the meeting. Peter has apparently voiced his opinion and ironically Regulation SHO was subject matter he brought up.
The letter is presented in it’s entirety below:
From: Peter Chepucavage
Sent: May 26, 2005
To: rule-comments@sec.gov
Subject: File No. 265-23
To Members of the SEC Advisory Committee on Smaller Public Companies
I am responding to your Request for Public Comments on Summary of Proposed Committee Agenda. I wish to incorporate and expand upon the comments of Brad Smith regarding a macro or more comprehensive approach to small companies and to use his term small to medium enterprises (SME'S). A more comprehensive approach is necessary and appropriate because there is a need to review not only the small company issuers but also the markets and broker dealers involved in the raising of capital for SME's and the public perception of the regulation of those markets.
In a recent explanation of the key points of Reg. SHO, the staff stated “Speculative stocks, such as microcap stocks, often have a high probability of declining in value and a low probability of experiencing above average gains." The committee should review the underlying data for this proposition to determine whether it is true for all low priced stocks in general or just those traded on the pink sheets and otcbb with a view to determining whether such stocks could ever be suitable for retail investors or whether they should only be sold to investors qualified by knowledge of these markets.
In the column Washington Investing, Wash Post 5/23/05 p.1 Jerry Knight refers to the "purgatory of the Pink Sheets, a nearly unregulated neither market for trading stocks.” The committee should evaluate this statement and if necessary recommend increased practical regulation such as short sale reporting and Reg SHO coverage.
Reg. SHO excluded these stocks from its coverage and the committee should therefore review why the most speculative stocks are not included.
The SRO short sale reporting rules exclude these stocks from their coverage. See petition of the Pink Sheets to include them as an example of a market seeking more regulation.
The SRO'S have failed to enforce their locate requirements for short sales thereby encouraging naked shorting in these markets. Except for one case, the penalties imposed over the last 10 years include modest fines probably less than trading profits made.
These stocks are not eligible for margin or options and thus the loan supply is curtailed enabling naked shorts and the inability to hedge. See Comments of Professor Angle to Reg SHO.
The Commission is reluctant to provide an arbitrage exemption for short sales which makes the distribution of many small company issues thru Pipes and Wt arbitrage. The committee should review the merits of such an exemption.
The presidents and CEO'S of small broker -dealers believe they are often held responsible for their employees conduct while those of large broker dealers rarely are . They also believe penalties imposed on small bd's constitute a much larger portion of their net capital and are inherently unfair. This is an old argument but continues to resurface and should be addressed.
The chairman of the PHLX recently noted that he worried that the Commission staff would be overwhelmed with the NYSE/ARCHIPELAGO and NASDAQ/INSTINET mergers and not have time for the rule filings of other smaller SRO's.
Small companies are more likely to be referred to as penny stocks, unless like Lucent at $2.50 a share they are listed on the NYSE.
There may be no reliable evidence that small bd's and small companies create more regulatory issues than the Enrons, Worldcoms, Tycos and other similar large companies that have required significant regulatory resources. The committee should review whether they do in fact create more regulatory issues.
There is a proliferation of unregistered finders operating in the area of SME'S because of the lack of clear guidance from the Commission. It should also consider studying the role of finders in the process and might consider whether those finders should be registered as investment advisers rather than bd's.
The Committee should not be reluctant to challenge conventional norms in its approach. The Committee should therefore recommend a special study of the regulation of SME's and small bd's to determine if the regulatory scheme is adequate and consistent and does not impose a greater burden on them especially in light of their job creating value in the U.S. It might also recommend the creation of an independent small business/small bd office at the Commission with a significant increase in staffing. While it is not the Commission's role to encourage small to medium enterprises or bd's, it is their obligation not to hinder them and to pay equal attention to them. This Committee has a rare opportunity to set a future agenda for SME'S in this country .As the markets rapidly consolidate, attention to SMEs and bd's is important whether it results in more or less regulation or more reasonable regulation.
Small investors need small broker dealers for sound advice and small issuers need them to underwrite and market their securities. These markets and brokers deserve the same amount of attention as the NYSE and NASDAQ BECAUSE THEY ARE SPAWNING GROUNDS FOR THOSE LARGER MARKETS.
If a former member of the SEC is concerned about the ability of the SEC to aggressively protect all companies equally, and concerned that the SEC willfully neglected an entire group of investors and issuers over a blanket generalization, what exactly is the value of the agency? I have spoken to other former SEC attorney’s who have essentially mimicked the opinions stated above. The SEC was willing to sacrifice the lesser companies because THEY felt they were not worth the efforts. As if our Tax dollars allow such prejudice.
Regulation SHO is a failure because it does not seek out resolution to the issuers most abused by the very fraud it is intended to stamp out. If a former SEC Attorney fellow working on the rulemaking has this to say, what more do we need to acquire full hearings into the matter?
How far has the SEC gone to violate Constitutional rights to equal protection under the law? It is certainly time Congressional Oversight and the White House start deciding which side of the fence they will be on when this breaks open.
http://www.investigatethesec.com/DP150705.htm
gb
I thought Bagdad Bob was reincarnated as Jeff Mitchell, denyer of the existence of naked shorts, paid bashers and hedgie scams.
Pleased to meet Ya! I'm damned glad Saddam isn't being tried in Cali....
Bagdhad Bob, is that you?
regret not being able to go to D.C. on monday, but i get the sense my feelings will be well spoken by those who are able to attend.
first, the head of knight stepped down....the head of the SEC stepped down the next day....who chickened out today? i wonder why nobody wants to be around next week....
I like this link...excellent analysis of MM and Specialist ability to Legally destroy a company and my portfolio
http://www.ncans.net/manipulation1.htm
Good morning stockrocker...Hope you are hungry because I am going to give you and any others a lot to chew on!(LOL) Here goes,,,ENJOY
May 19, 2005 (FinancialWire) The group set to demonstrate in front of the U.S. Securities and Exchange Commission June 6 before heading to Capitol Hill and then to New York, may have a new target: Annette Nazareth, director of market regulation at the SEC, who, despite what some say is a Marie Antoinette attitude towards victims of industry lawbreakers, seems in line to be appointed to become a Commissioner.
Nazareth was quoted in February in the New York Times (NYSE:NYT) as “doubting” that threshold companies such as Overstock (NASDAQ: OSTK), Martha Stewart Living Omnimedia (NYSE: MSO) or Novastar Financial (NYSE: NFI) were being “manipulated,” and that victims of illegal naked short sales are simply people who want their “stocks to go up.”
She said those who complain of their losses to illegal trading activity have an attitude that “it’s a criminal conspiracy when stocks move the wrong way, and the government should do something about it.”
“What is criminal,” said one who believes Nazareth’s appointment, so far championed by U.S. Senators Charles Schumer (D-NY) and Harry Reid (D-NV), would be disastrous for small investors who someday expect justice and a fair playing field in the markets, “is that someone could be in a position of authority at all with this kind of anti-investor attitude.”
National Counterfeit Conspiracy Days are scheduled in Washington, DC on June 6, and in New York City June 7 by a group planning a film to highlight the national financial scandal known as StockGate. Its website is http://www.counterfeitconspiracy.com
The film project, said to be a “Michael Moore”-type docudrama, is planned by Fuego Entertainment of Miami.
The group is organizing the citizen lobbying effort June 6, beginning at 11:30 a.m., in front of the U.S. Securities and Exchange Commission building, followed by lobbying on Capitol Hill.
“After we make our United Voice heard on Capitol Hill, we are headed to New York City by busloads to make that same voice known to all the world from the hub of the financial district where cameras from all over the world have a constant eye on what’s happening,” the organizers stated.
“Our busses will depart Washington D.C. on June 7th at 7:30am to head to NYC. We will be protesting on Times Square at 2 p.m. After an afternoon on Times Square we will head back to D.C.”
In other recent StockGate developments, Senator Richard Durbin has joined Senator Robert Bennett in complaining about the ineffectiveness of Regulation SHO, and a Global Links (OTC: GLKC) shareholder, Dennis Smith, was told in an email by Wells Fargo (NYSE: WFC) that it can not provide delivery of Global Links certificates because it and E*Trade Group (NYSE: ET) are hopelessly short. And the individual who started the controversy, Robert Simpson, has said he has also been unable to get delivery from Oppenheimer Holdings (NYSE: OPY).
In his communication to SEC Chair William Donaldson, Sen. Durbin also contested the claim by the Depository Trust and Clearing Corp., a unit ot the New York Stock Exchange and NASD, that it has no responsibilities under Regulation SHO.
Overshadowing all of this, of course, is the admitted tampering with the media by the DTCC in curtailing distribution of FinancialWire via Yahoo (NASDAQ: YHOO) via Investors Business Daily and the Dow Jones (NYSE: DJ) MarketWatch, and its suspected interference in the mysterious “postponement” of a DTCC expose on General Electric’s (NYSE: GE) Dateline NBC.
Senator Durbin’s letter to Donaldson appears to sharply contest the Depository Trust & Clearing Corp.’s contention that it has no role in Regulation SHO.
“I am writing to request information regarding the June 23, 2004 Securities and Exchange Commission (SEC) short sale regulation, designated Regulation SHO. On March 9, 2005, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Regulation SHO, in which Chairman Bennett spoke with you about the regulation’s effects on the illegal practice of naked short selling. I thank you for your testimony and I hope that you can follow up on some of my concerns not fully addressed by the Banking Committee hearings.
“I appreciate the efforts of the Securities and Exchange Commission (SEC) to control abusive short selling practices. As a result of Regulation SHO, the names of firms with large amounts of unsettled shares are published on the Threshold Security List daily. This list assists individual investors in making informed decisions about potential manipulation of the market, and gives regulators and investigators a centralized list of firms with significant numbers of undelivered shares. However, it has come to my attention that Regulation SHO may not be curtailing abusive naked short selling practices.
“Several of my constituents have contacted me since the SEC introduces Regulation SHO. They have raised concerns about potential loopholes in settlement regulations. During your recent testimony before the Banking Committee, Chairman Bennett asked you about the ability of brokerage houses to shuttle unsettled shares every 13 days in order to avoid settling the borrowed shorted shares. Due to time constraints at the hearing, the committee did not receive a complete answer. This issue is worthy of a full response.
“Additionally, my constituents have expressed concern about SEC enforcement of Regulation SHO. While the Threshold Security List publicizes securities that might have been manipulated, I am concerned that some securities repeatedly appear on the list. What steps is the SEC taking to investigate trading practices that result in vast quantities of unsettled shares, and to punish those people who violate SEC naked short selling regulations? What is the SEC doing to ensure that the Depository Trust & Clearing Corporation (DTCC) is complying with Regulation SHO, and what actions does the SEC undertake when the DTCC identifies large quantities of shares that have not been delivered?
“It is important that the SEC identify abuses and prevent manipulative naked short selling practices that undermine faith in the market. Thank you for your attention to this matter. I look forward to your timely response,” Senator Durbin concluded.
Wells Fargo had written to Smith:
“The other broker/dealer who is short shares of your security is E*Trade. Though this type of activity makes it difficult to issue physical certificates, it is legal and within regulations.
“There is no definite date by which E*Trade would have to purchase the shares. In many cases, a broker/dealer will sell shares they don't hold hoping that the price will fall. If it does fall, the broker/dealer will buy the shares at that time, and deliver those newly acquired shares, making a profit. If the stock price continues to rise, the broker/dealer will eventually buy the shares and deliver them to prevent any additional losses.
“According to our trading desk, E*Trade was the only broker/dealer offering shares of GLKC yesterday. This has been the case since you originally requested your certificate. Anybody who has purchased this security in that time period has likely purchased the shares from E*Trade.
“You are free to sell the shares anytime. When E*Trade acquires shares, they would be delivered to the current owner. However, a certificate cannot be issued until the shares are actually received.
Pink Sheets head Cromwell Coulson has asked the SEC to publish short positions on all over the counter and bulletin board stocks, and that request is currently in a comment period.
The request for rulemaking, which Coulson has told companies traded on the Pink Sheets, is needed “to make regulators turn on the lights and protect investors from the menance of hidden short selling in the OTC market,” is at http://sec.gov/rules/petitions.shtml
In an email to Donaldson, Coulson had said “I believe that it is very important to require the disclosure of short positions because the lack of transparency is allowing promoters to defraud investors by blaming all selling on naked market maker short selling. Disclosure and transparency can easily remedy the issue.”
In other news on the naked short-selling front known as “StockGate,” adding to what TheStreet.com founder James Cramer calls the “Hedge Fund Relief Act,” the termination of the Uptick Rule, is the fact that those using illegal naked short selling in the past have been granted a kind of amnesty for acts before the first of 2005. The SEC just “grandfathered” those illegally-begotten gains and resultant counterfeit shares into the system, so these windfall gains are now available to downtick with reckless abandon on downticks.
The “grandfathering” admission is at http://www.sec.gov/spotlight/keyregshoissues.htm
In the same document, the SEC has inexplicably stated that not all forms of illegal naked short selling, the equivalent of counterfeiting shares in public companies, are actually “illegal.”
The DTCC actions in the StockGate mire are the most serious, if not notorious since the agent of two SROs, the New York Stock Exchange and NASD is also peopled by some 21 directors whose companies, such as Merrill Lynch & Co. (NYSE: MER), State Street Corporation (NYSE: STT) and Goldman Sachs (NYSE: GS), are unlikely to support the DTCC in what attorney Marshal Shichtman, Esq., has termed “strong-arm” tactics.
The DTCC has admitted it has engaged in an act of censorship of this newsletter in squelching its redistribution by Investors Business Daily, and via Investors Business Daily, to Yahoo Finance, a portal owned by Yahoo! (NASDAQ: YHOO), and it is a suspect in the sudden and so far unexplained “postponement” of a widely anticipated expose by Dateline NBC.
In a wide-ranging letter to the DTCC, Robert J. Shapiro has charged statements made by Larry Thompson, DTCC Deputy General Counsel, were “inaccurate or misleading,” and asked the DTCC to correct the record and respond to his comments and questions.
Shapiro is chair of Sonecon LLC, a private economic advisory firm in Washington, D.C., who served as U.S. Under Secretary of Commerce for Economic Affairs from 1998 to 2001, Vice President and co-founder of the Progressive Policy Institute from 1989 to 1998, and principal economic advisor to Governor William J. Clinton in the 1991-1992 presidential campaign.
He holds a Ph.D. from Harvard University and has been a Fellow of the National Bureau of Economic Research, Harvard University, and the Brookings Institution.
Shapiro currently provides economic analysis to the law firms of O’Quinn, Laminack and Pirtle, Christian, Smith and Jewell, and Heard, Robins, Cloud, Lubel and Greenwood, on issues associated with naked short sales, which he noted includes “matters raised in an interview published by @DTCC with DTCC deputy general counsel Larry Thompson.”
He asserts the following in his letter:
Thompson begins by asserting that “the extent to which [naked short selling] occurs is in dispute.” While this statement may be narrowly correct, objective academic analysis has established that naked short selling has been a widespread practice and one which, when allowed to persist, can pose a threat to the integrity of equity markets. A recent study by Dr. Leslie Boni, then a visiting financial economist at the SEC, analyzed NSCC data and found that on three random days, an average of more than 700 listed stocks had failures-to-deliver of 60 million-to-120 million shares sold short – naked shorts – that had persisted for at least two months. In addition, over 800 unlisted stocks on any day had fails of 120 million-to-180 million shares sold short that also had persisted for at least two months. The total number of naked shorts, including those that had persisted for less than two months, was presumably considerably greater.
Regarding the extent of naked shorts, Thompson has provided closely-related additional information: “fails to deliver and receive amount to about $6 billion daily…including both new fails and aged fails.” Thompson minimizes this total by comparing it to “just under $400 billion in trades (emphasis added) processed daily by NSCC, or about 1.5% of the dollar volume.” By most people’s standards, a problem involving hundreds of millions of shares valued at $6 billion every day is a very large problem. Moreover, the $6 billion total substantially underestimates the actual value of all failed-to-deliver trades measured when the trades actually occurred. Most of the $6 billion total represents uncovered or naked short sales, many of which have gone undelivered for weeks or months with their market price being marked-to-market every day. As a stock’s price falls, the market price of naked shorts in that stock also declines, reducing the total value of the outstanding failures-to-deliver cited by Thompson.
In other respects, Thompson’s comparison to the “$400 billion in trades processed daily by NSCC” seems disingenuous and misleading, because that $400 billion total covers not only U.S. equity trades which can involve most of the failures-to-deliver at issue, but many other transactions also processed by the NSCC. The value of all equity transactions on U.S. markets in 2004, for example, averaged $82.3 billion/day. If Thompson is correct that the daily value of fails-to-deliver averages $6 billion, that total is equivalent to 7.2 percent of average daily equity trades or nearly five times the 1.5 percent level suggested by Thompson. Furthermore, the DTCC reports on its website that on a peak day, “through its Continuous Net Settlement (CNS) system, NSCC eliminated the need to settle 96 percent of total obligations.” Assuming that CNS nets out the same proportion of trades on other days, $384 billion of the $400 billion in daily trades cited by Thompson are netted out, leaving only $16 billion in daily trades that require the actual delivery of securities. The $6 billion of fails-to-deliver securities existing on any day are equivalent to 37.5 percent of the average daily trades that require the delivery of securities, or 25 times the 1.5 percent level cited by Thompson.
Thompson tries to explain the large numbers of shares that go undelivered – in most cases arising from naked short sales -- by citing problems with paper certificates, inevitable human error, and the legitimate operations of market makers. This also seems misleading or disingenuous. Regarding problems with paper certificates, the DTCC estimates that 97 percent of all stock certificates are now kept in electronic form. Nor can human error or legitimate market-making operations explain the high levels of failures-to-deliver that persist for months – on any day, an average of 180 million-to-300 million shares have gone undelivered for two months or longer – as documented by Dr. Boni’s analysis of NSCC data.
Thompson also disparages the attorneys who represent companies that have been damaged or destroyed by massive naked short sales, and their shareholders, by claiming falsely that the cases in this matter have almost all been dismissed or withdrawn. The legal firms that I advise -- O’Quinn, Petrie and Laminack; Christian, Smith and Jewell; and Heard, Robins, Cloud, Lubel and Greenwood – have not lost any motions against the DTCC or its affiliates and currently have one case against the DTCC pending in Nevada and another case against the DTCC pending in Arkansas. In addition, on February 24, 2005, these attorneys were granted an order by the New York Supreme Court ordering the DTCC to produce trading records involving two companies they represent, including records from the Stock Borrow program, which may establish whether large-scale naked short sales were used to manipulate and drive down the stock price of those two companies.
Thompson also asserts that the plaintiffs suing the DTCC for damages associated with the handling of naked short sales rely on “theories [that] are not an accurate reflection of how the capital market system actually works.” This assertion is inaccurate. There is no dispute about how the capital markets work -- nor any doubt that naked short sales have been used to manipulate and drive down the price of stocks, as seen in numerous death-spiral financing cases. The issue here is the DTCC’s role in allowing or facilitating such stock manipulation through its treatment of extended naked short sales.
In explaining the DTCC’s role in these matters, Thompson rejects the claim that the NSCC’s Stock Borrow program allows the same shares to be lent over and over again, potentially creating more shares than actually exist or “phantom” shares. By Thompson’s own account, shares borrowed by the NSCC to settle naked short sales are deducted from the lending member’s DTC account and credited to the DTC account of the member to whom the shares have been sold. Therefore, those same shares become available to be re-borrowed to settle another naked short sale and, if that happens, to be re-borrowed again and again to settle a succession of naked short sales. Throughout this process, the actual short sellers may continue to fail-to-deliver the shares to cover their shorts and, as Dr. Boni’s analysis of NSCC data found, the underlying failure can age for months or even years. The process which Thompson describes is one in which shares can be borrowed and lent over and over again, introducing more shares into the market than are legally registered and issued. If any ambiguity remains, Thompson can clarify it by responding to the following query: Once a share that has been borrowed through the NSCC Stock Borrow program is delivered to the purchaser, is that share restricted in any way so it cannot be lent again?
It is important to note that the Stock Borrow program is used when continuous net settlement cannot locate the shares to settle. As a consequence, Stock Borrow is usually called into play when there are relatively few shares available for borrowing. These are propitious conditions for market manipulation: Unscrupulous short sellers undertake large-scale naked short sales involving stocks for which few shares are available for trading and lending, relying on the Stock Borrow program to borrow the limited available shares, again and again, at sufficient levels to drive down the market price of the shares.
Thompson notes that of approximately $6 billion in outstanding failures-to-deliver existing on any day, “the Stock Borrow program is able to resolve about $1.1 billion … or about 20% [18 percent] of the total fail obligation.” In this statement, Thompson raises very serious questions about the integrity and operations of the NSCC and DTCC, which he can clarify by responding to the following queries: If the Stock Borrow program “resolves” only 18 percent of total fails, what is the disposition of the remaining 82 percent of outstanding fails? When failures-to-deliver occur that are not resolved through Stock Borrow, does the NSCC credit the undelivered shares to the member representing the buyer, creating genuine “phantom shares”? Finally, how many shares do the borrowing brokers, clearing firms and other participants in the Stock Borrow program owe the NSCC on a typical day, and what is their total value?
In a related matter, Thompson tries to distance the DTCC from charges that shares held in restricted accounts – for example, cash accounts, retirement accounts and many institutional accounts – are improperly lent through the Stock Borrow program by claiming that responsibility for segregating restricted shares from lendable shares falls to the “broker and bank members” of the DTCC, while responsibility for monitoring or regulating their performance in this matter falls to the stock exchanges and the SEC. As a trust company, the DTCC cannot hold that it has no role, duty or responsibility to ensure the probity of its operations. Thompson could address this issue by responding to the following queries: What procedures does the NSCC have to ensure that shares held in members’ accounts for possible loan through the NSCC Stock Borrow program are unencumbered by regulatory or legal restrictions from being pledged or assigned and eligible to be borrowed? On any given day, how many participants in the Stock Borrow program have lent shares that exceed their lendable shares, in what numbers and of what value?
Thompson also tries to distance the DTCC as far as possible from the naked short selling that generates most of the extended failures-to-deliver: “We don’t have any power or legal authority to regulate or stop short selling, naked or otherwise. We also have no power to force member firms to close out or resolve fails to deliver … we don’t even see whether a sale is short or not.” In fact, the DTCC chooses to not distinguish short sales from long sales, chooses to not regulate or stop extended naked short sales, and chooses to not force member firms to resolve protracted naked short sales.
First, Regulation SHO requires that all transactions be clearly marked short or long. If the DTCC and NSCC do not know whether sales are short or long as Thompson contends, they choose to not know. Second, the NSCC has a clear responsibility and adequate means to stop naked short sales of extended duration, with no legal barrier that would prevent them from so doing. As a trust company with an acknowledged duty to provide investors certainty in the settlement and clearance of equity transactions, the DTCC chose to carry out that duty by assuming the role of counterparty to both sides of every equity transaction, through the operations of the NSCC’s CNS system and the Stock Borrow program. By allowing short sellers to fail-to-deliver shares for months or even years, the NSCC clearly fails to provide certainty in settlement to the buyers, sellers and issuers of securities. Since it is widely known that extended naked short sales have been used to manipulate stock prices in cases of death-spiral financing, and the NSCC created the Stock Borrow program to address failures-to-deliver that prominently include naked short sales, the NSCC and DTCC share a responsibility with the SEC and the stock exchanges to protect investors by resolving extended fails.
Third, the DTCC and NSCC have the clear capacity to force member firms to resolve the extended failures-to-deliver of their customers by purchasing shares on the open market and deducting the cost from the member’s account. A 2003 study by Dr. Richard Evans and others provides evidence that forced buy-ins by any party occur very rarely. They found that a major options market maker who failed to deliver all or a portion of shares sold in 69,063 transactions in 1998-1999 was bought-in only 86 times or barely one-tenth of 1 percent of the fails. Thompson can clarify investors’ understanding of their operations by responding to the following query: What proportion of shares that are persistent fails-to-deliver, of one month or longer, are ever bought in?
Thompson acknowledges that the DTCC and NSCC know precisely how many failures-to-deliver exist for each stock and the precise duration of each of these fails. Yet, the DTCC refuses to disclose this information even to the issuer of the stock in question, which Thompson justifies by citing “NSCC rules” prohibiting such a release of data based on “the obvious reason that the trading data we receive could be used to manipulate the market, as well as reveal trading patterns of individual firms.” This response is both disingenuous and revealing. We know now, for the first time, that the DTCC has full knowledge of the extent of protracted, large-scale naked short sales in all particular cases. We also know now that the DTCC has had this information for at least a decade, since Thompson also notes that “fails, as a percentage of total trading, hasn’t changed in the last 10 years.” Yet, based on the DTCC’s own rules, it allowed these abuses to persist and fester. The DTCC and NSCC can change their rules at any time. Moreover, in this case, those rules are unjustified. Data documenting outstanding short sales in each stock are currently issued publicly, so further data on how many of those short sales are naked would not reveal additional information about the trading patterns of individual firms or in any way empower manipulators. In fact, the DTCC could substantially disarm manipulators by both publicly reporting naked short sales in each issue and pledging to force buy-ins of all naked short sales that persist for more than a limited period.
Surely, if large-scale, extended naked short sales have effectively created “phantom” shares, companies have a responsibility to their shareholders and the right to secure this information from the organization which manages the settlement of short sales. At a minimum, the DTCC should respond to requests by issuers for data on extended failures-to-deliver in their own stocks, both in the past and currently, so they can take steps to resist stock manipulators or bring them to account for past manipulation.
Thompson also claims that the DTCC did not create or manage the Stock Borrow program to serve its own financial interest, insisting that the service generates less than $2 million a year in direct fees to the DTCC and that all DTCC services are priced on a “not for profit” basis that seeks to match revenues with expenses. Without further information, these responses beg the question of whose private financial interest has been served by the Stock Borrow program, especially as the DTCC is owned by the stock markets, clearinghouses, brokerage and banking institutions that use its services. Thompson and the DTCC can clarify this serious matter by responding to the following queries: Do DTCC participant/owners receive interest or other payments through or from the Stock Borrow program for lending the shares of their customers and, if so, how much have they received for these activities over the last 10 years? Further, do DTCC participant/owners receive any dividend, interest or other payments or distributions from the DTCC or its subsidiaries?, Shapiro concluded.
In a recent editorial, Investrend Information head Gayle Essary questioned whether the board and principal shareholders would “be party to shenanigans that lead to the censorship or disabling of any media” that he says is “un-American activity.”
The DTCC’s letter to Investrend’s counsel, Marshal Shichtman, Esq., is posted at http://www.investrend.com/Admin/Topics/Articles/Resources/349_1113403487.pdf
Essary said that the arrogance the DTCC expressed in its censorship efforts shows that the entity has “become too large, too encompassing, too powerful, too unresponsive to those it serves, primarily the investing public, and too unresponsive to the Congress under whose auspices it should be operating.
“First, it is time to unconflict it, with real public representations on its board,” he said, and second, “it is time to break it up, with its various duties provided by smaller agencies under separate unconflicted boards.”
DTCC board members include Michael C. Bodson, Managing Director, Morgan Stanley (NYSE: MWD); Gary Bullock, Global Head of Logistics, Infrastructure, UBS Investment Bank (NYSE: UBS); Stephen P. Casper, Managing Director and Chief Operating Officer, Fischer Francis Trees & Watts, Inc.; Jill M. Considine,Chairman, President & Chief Executive Officer, The Depository Trust & Clearing Corporation (DTCC);
Also, Paul F. Costello, President, Business Services Group, Wachovia Securities (NYSE: WB); John W. Cummings, Senior Vice President & Head of Global Technology & Services, Merrill Lynch & Co. (NYSE: MER); Donald F. Donahue, Chief Operating Officer, The Depository Trust & Clearing Corporation (DTCC); Norman Eaker, General Partner, Edward Jones; George Hrabovsky, President, Alliance Global Investors Service; Catherine R. Kinney, President and Co-Chief Operating Officer, New York Stock Exchange; Thomas J. McCrossan, Executive Vice President, State Street Corporation (NYSE: STT); Bradley Abelow, Managing Director, Goldman Sachs (NYSE: GS); Jonathan E. Beyman, Chief Information Officer, Lehman Brothers (NYSE: LEH); and Frank J. Bisignano, Chief Administrative Officer and Senior Executive Vice President, Citigroup / Solomon Smith Barney's Corporate Investment Bank (NYSE: C), Eileen K. Murray, Managing Director, Credit Suisse First Boston (NYSE: CSR); James P. Palermo, Vice Chairman, Mellon Financial Corporation (NYSE: MEL); Thomas J. Perna, Senior Executive Vice President, Financial Companies Services Sector of The Bank of New York (NYSE: BNY); Ronald Purpora, Chief Executive Officer, Garban LLC; Douglas Shulman, President, Regulatory Services and Operations, NASD; and Thompson M. Swayne, Executive Vice President, JPMorgan Chase (NYSE: JPM).
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that was a very impressive letter, i must say... this is going to be one Helluva story when it all comes to light. these dirty sob's are due some justice, not just another "grandfather clause", or another regsho list.
stockrocker...if you are around you might like this one...havent really absorbed all myself but will ASAP...BTW hang in there!!
How's this for starters?
May 24, 2005
Leslie Hakala
Counsel for the Division of Enforcement
Securities and Exchange Commission
5670 Wilshire Boulevard, Suite 1100
Los Angeles, CA 90036
Dear Ms Hakala:
Please forgive the presumption of an unsolicited letter but I feel constrained to communicate with you.
I am touched by your personal story and congratulate you for perseverance and success in the face of adversity. To the point, I address this open letter to you both as an admirer and as a concerned investor in several companies I believe to be illegally shorted, one of which is currently on your agenda (CMKX). It is my hope that you will personally resonate to what truth may be in this letter and that moreover you will forward this to all SEC attorneys for their independent perusal.
Most likely you are now painfully aware of the SEC’s internal conflict(s) re the emerging “Stockgate” revelations that center on electronic counterfeiting of market securities. In your place, I would probably feel somewhat set up and a little used. It seems SEC staff attorneys are instructed to enforce only selective securities regulations while well-connected superiors contravene regulations of more universal import.
You (and most SEC staff attorneys) are no doubt aware Regulation SHO grandfathers all past failures to deliver, effectively legitimizing years of counterfeiting without so much as a token fine or slap on the wrist of any entity responsible. Take your pick of entities in the “short” chain…the DTC, Cede and Co., the NSCC, certain Market Makers, various off-shore and domestic Hedge Funds, certain Broker/Dealers, certain Institutional Banks…not one was taken to task. Equally ludicrous, SHO ostensibly corrects a problem the SEC’s top brass repeatedly denies exists. This is not rocket science…even a cursory review reveals this “regulation” gave the counterfeiters a get out of jail free card despite inordinate “profits” gleaned from selling naïve investors phony shares created to dilute the value of hundreds (maybe thousands) of targeted companies. The end game is to dilute the targeted company out of business so the failure to cover becomes moot; moreover the money made (translate stolen) from the sale of the counterfeit shares is likely never reported or taxed. With boatloads of easy money in the mix none of the participants are anxious to make good on their failures to deliver, after all, if the SEC’s top cop doesn’t care, why should they?
Most SEC staff attorneys are aware (or should be) that “top cop” regulatory officer Annette Nazareth has long been the chief apologist for what we now understand to be blatant counterfeiting. Under her “watch”, the illegal activity multiplied exponentially and now appears systemic. Nazareth (and now Donaldson) would have us believe there is no illegal naked shorting whatsoever, but if there is perhaps just a little bit of naked shorting (wink, wink), it is somehow necessary for the “good” of the market.
George Orwell would love all this. We also hear the SEC "conventional wisdom" that all pink sheets are pump and dump scams in the first place and probably 96% deserve to be put out of business. If the 4% that do not “deserve to be put out of business” get whacked (or put of business) in the process, that’s perfectly OK…kind of like friendly fire or collateral damage and never mind the dollar loss to the naïve small investor. In reality, the percentage of “honest” pinks is of course considerably higher than the 4% admitted by Nazareth with damage to small investors increased proportionally. Inexplicably, Nazareth is now recommended for a big-time promotion instead of being sent to jail, the precise location many victimized investors devoutly wish to see her “settle”, so to speak. Fortunately for Nazareth, she has friends in high places. Being married to the Vice-Chairman of the Federal Reserve would seem to have advantages despite (or maybe because of) the Fed’s own apparent complicity in this sordid affair of the naked shorts. I would imagine Annette and Roger have lots to talk about. The Federal Reserve is guilty by association with the Depository Trust Company, the Federal Reserve’s cash-guzzling stepchild. It is common knowledge the DTC arrogantly scoffs at even the pretence of transparency by cavalierly refusing to disclose short positions and transaction records germane to the convoluted Stock Borrow Program. The whole issue of naked shorts will remain cloudy until the DTC is forced to open its books.
Most SEC staff attorneys will soon be aware (as are you, Ms. Hakala, through CMKX), of the growing number of outraged American investors now convinced they have been robbed by a rigged system beholden to big (and crooked) players cavalierly fashioning their own “rules”. Any rationalization whatsoever for continually allowing the sale of something one does not own (and continually fails to acquire) seems suspect at best, conspiratorial at worst. There seems to be growing evidence of large scale, on-going failures to deliver not only in CMKX but also in scores of other securities. I personally exchanged several emails with one broker, Wells Fargo Securities, wherein WF named E-trade as their broker/dealer and moreover identified them as being short 5 million shares of GLKC with no specific time constraints within which to cover, thus the certificate I requested was (and still is) simply unavailable. I was surprised at Wells Fargo’s ultimate candor and, if you have an interest, I would be delighted to send you a record of the entire (and rather preposterous) exchange. In an attempt to gather first hand evidence of naked shorting I had purchased a few shares of GLKC shortly after Senator Bennett identified the company as a poster child for naked shorts during a recent Senate Banking Committee hearing. I trust you are aware of the Committee hearing to which I refer; Senator Bennett attempted (unsuccessfully) to get some straight answers from Chairman Donaldson regarding the subject phenomenon of naked shorting. Donaldson’s responses were, to be charitable, obtuse, and he was instructed by Bennett to report back to the committee with some answers they could understand. Might you know if a date has been set?
Most SEC staff attorneys I’m sure believe (at least in principle) the small investor deserves a level playing field but will, for a variety of personal reasons, continue to ignore or rationalize the “short” issue. I pray however (and I’m not a praying man) that one or two SEC staffers has the courage and conviction to transcend their comfort zone, come clean and blow the whistle. It would be a real service to working America.
Ms. Hakala, you would be the ideal whistleblower in that your center of gravity is unquestioned. You are an extremely bright light, so bright in fact that now, with new information, you must suspect your employers’ malfeasance in this whole sorry phenomenon. There seems to be growing evidence of a trail of major mischief snaking in and out the SEC’s back door. I would imagine your interactions with Bill Frizzell have been instructive and that you have become at least “suspicious” of collusion in your own workplace, have you not?
As a major player in this drama it is likely you will (like it or not) go down in history one way or another as the story of CMKX (together with the Stockgate scandal) plays out. While CMKX may have some dirty or unreported linen, in my view the counterfeiting activity associated with Stockgate is a trillion times more egregious (literally and figuratively) and undermines our entire economy. There is considerable dark speculation as to where some illegal and unregulated hedge fund profits eventually land; anti-American interests are at the top of many lists.
Leslie (if I may presume to call you Leslie), while I don’t suppose I expect you to actually blow the whistle on SEC complicity (or will actually forward this to fellow SEC staffers), I would love to be pleasantly surprised. An epiphany with attendant will to action sometimes springs from strange sources when least expected.
As an aside, one thing for sure…this is Great Theater for us all and I bet you never dreamed you would encounter the legendary Robert “Iron Bob” Maheu. I think you would agree Mr. Maheu is a separate reality all by himself and that just possibly he is on to something of major import; hence his association with Urban Casavant and CMKX.
In any event, thank you very much for reading this and allowing a small investor like me to express his views. Needless to say I am anxiously awaiting the next chapter in the continuing saga of “The SEC Meets CMKX.”
Regards and good health,
XXXXXX
XXXXXX
XXXXXX
Ccs: The Honorable Brenda P. Murray, Bill Frizzle, Don Stocklein
stockrocker....NO ...you are not by yourself on this issue.I am the moderator on GZFX board here on Ihub and have seen our stock as well as many others in recent months tha IMO have been victimized by naked short selling.The fact that MMs can legally do this in order to "maintain an orderly market" is to me the biggest problem of all.It gives these guys a license to steal!!If no shares are in inventory then NO shares should be sold PERIOD on OTC stocks.And if no shares are available to borrow on marginable equities then no shares should be borrowed!!!Plain and simple.Stop naked shorting with Market Makers first and IMO you will see the problem almost totally disappear...These guys have been having a very lucrative field day at our expense and continue to do so.I have seen stock after stock trade through very strong support on OTC at PPS levels that only an idiot would sell at.....VERY BRIGHT RED FLAG for shorting IMO.NO you are not alone...I trade very cautiously and very sparingly because of the assumption and evidence of this problem.Thanx for your efforts and hang in there..
Am i the only one (other than David Patch) who gives a sh_t about this? I-hub has this great board for venting our thoughts, yet nobody cares to share?
SEC sues and fines 3 hedge funds
Agency claims illegal short sales before share offerings
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) - The Securities and Exchange Commission sued
and fined three hedge funds for illegally short-selling shares of several
companies before secondary offerings.
Galleon Management LP, Oaktree Capital Management LLC and DB Investment
Managers Inc., a unit of Deutsche Bank, were sued for breaking an
anti-manipulation rule and agreed to pay a total of almost $2.4 million in
disgorged profits, penalties and interest, the SEC said in a statement
Thursday.
Deutsche Bank (DB: news, chart, profile) shares declined 2.5% to $77.60 in
late morning trading Thursday.
In a short sale traders sell borrowed securities, hoping to buy them back
later at a lower price. They then return the securities to the lender at the
original price, pocketing the difference.
Short-selling is a legal and important part of securities markets. However,
when short sales undermine the integrity of capital-raising efforts such as
secondary, or follow-on, share offerings, they can be illegal.
A short sale is illegal when it's covered with securities obtained in a
follow-on share sale if the short trade occurred five days before the
pricing of that offering, the SEC said.
Enforcing this "is an important way to protect the integrity of the public
offering process and to discourage activities that could unfairly influence
the market for an offered security," Peter Bresnan, an associate director in
the SEC's Division of Enforcement, said.
Shareholders of the company issuing more shares suffer from this type of
illegal short-selling because it can artificially depress prices before an
offering, Bersnan added.
Companies are also short-changed by the practice because it may cut the
valuation of a follow-on offering, ultimately reducing "an issuer's proceeds
from the deal by millions of dollars," the SEC said.
Galleon, Oaktree and DB Investment Managers illegally sold stock short
before secondary share sales by 22 companies, the SEC alleged.
The three hedge funds made $1,040,882, $169,773 and $15,585 respectively
from the trades, the agency added.
Galleon and Oaktree also created "sham" transactions to make it look like
they were trading within the rules, the SEC claimed.
The funds built up large short positions within the restricted period,
purchased shares in a follow-on offering and then "engaged in further
transactions or trading practices" to make it look like the deal complied
with the rules, the agency explained.
The three funds didn't admit or deny the allegations.
Alistair Barr is a reporter for MarketWatch in San Francisco.
STOCKGATE TODAY, May 17th...
An online newspaper reporting the issues of Securities Fraud
May 17, 2005, David Patch
Today Refco Group confirmed the receipt of a Wells Notice by the SEC over
their participation in the 2001 illegal shorting and manipulation of Sedona
Corporation stock.
A Wells Notice is notification issued by regulators to inform individuals
and companies of completed investigations where infractions have been
discovered.
In 2001 Sedona Corporation stock was manipulated through an orchestrated
scheme of illegal shorting [naked shorting]. In February of 2003 the SEC
brought to conclusion an enforcement action against financier Rhino Advisors
and Rhino Executive Thomas Badian for their orchestration of the
manipulation. The $1 Million civil fine was only the tip of the proceedings
against Rhino as the SEC handed over audiotapes whereby the Rhino Executives
were reportedly recorded bribing US Brokers to collapse the stock of Sedona.
Excerpts of the audiotapes were later used in December 2003 criminal arrest
warrants issued against Thomas and Andreas Badian.
Now, after 4 years of conducting an investigation, the SEC stepped up to the
plate and initiated actions against one of Rhino Advisors co-conspirators in
the stock manipulation.
While we can expect more to come, some fighting this long battle are not
lost on the irony as to whom the SEC sought out for enforcement after Rhino
Advisors. A Securities Clearing firm.
According to the Refco Group website, Refco operates “As the largest
non-bank futures commission merchant, REFCO clears millions of trades daily
with efficiency in processing, accuracy in administration and speed in data
handling.” Adding further, “Centralized clearing allows you to manage your
global trading activity, margin requirements, and cash management operations
more efficiently and effectively.”
For months we have heard the Depository Trust and Clearing Corporation
[DTCC], recognized as the national clearance and settlement system for the
US Financial markets, make claims that they have no role to play in naked
shorting. The DTCC only clears and settle trades. Now, the second firm to
fall in the stock manipulation of Sedona Corporation was the clearing firm.
If a clearing firm only clears trades how are they part of the manipulation?
This only adds fuel to the allegations that the problem of naked shorting is
deeper rooted than the SEC has been willing to offer to Investors, Issuers,
and Congress. The “whacko’s” as so many are being labeled by our Government
Officials and the media may have been on to something after all.
Recent allegations brought against former SG Cowen and Co.’s former Managing
Director Guillaume Pollet are associated with a minimum of 10 separate PIPE
deals involving illegal shorting activities. The same allegations brought
against Rhino Advisors in the Sedona Corporation manipulation.
Who cleared the trades executed by SG Cowen? The DTCC?
Then there is the NASD Charges brought against Hedge Fund Manager Hilary
Shane and Brokerage Friedman, Billings, and Ramsey [FBR] in which illegal
shorting ahead of a CompuDyne PIPE deal was executed. In the NASD complaint
against Shane are details of 975 separate short sale trade executions taking
place on shares she did not possess or comply with affirmative determination
to make delivery on. How was the DTCC involved in Ms. Shane’s illegal
trading activities? In executing 975 separate trades, some had to pass
through the DTCC representing either Shane’s Fund or the buy-side Broker
Dealer.
How about the undisclosed number of trades executed by FBR? For FBR, the
allegations were damaging enough that well respected Industry insider and
co-CEO Emanuel Friedman resigned his post over the scandal.
Several weeks ago Senator Bennett questioned SEC Chairman William Donaldson
in a Financial Services hearing before the Senate Banking Committee about
the SEC’s Regulation SHO. The Senator stated SHO wasn’t working. SHO being
the SEC’s newly created reforms to short selling.
The result of the rapid dialogue was that a separate meeting between the SEC
and Senator Bennett would take place. Behind closed doors where the public
could not listen in.
Only then did we hear further allegations that the rank and file attorneys
at the SEC banded together and went to SEC management voicing displeasure at
managements desire to hush this problem. The rank and file reportedly being
fed up with taking the heat for something they have wanted to fix but
something management was trying to cover up requested resolution to this
issue. If management refused they would resign, move to the private sector,
and state their positions from the private side.
And then again last week I was in a conference call in which a DC Insider,
wishing to remain anonymous, who informed me that the Senate Banking
Committee was split over what to do regarding naked shorting. Apparently SEC
Management and Wall Street Insiders are pressuring the Committee to leave
SHO to the agency. Truly resolving the naked shorting issue could result in
substantial money being lost for the Wall Street firms if forced settlements
were mandated. Those large “pre-existing open positions” the SEC pardoned
could be costly if forced settled.
Unfortunately they have already been costly to investors, businesses, and
taxpayers while they remain profitable to Wall Street.
With Wall Street being the primary management force behind the DTCC, and
with failure in clearing and settlement being the primary mechanism of
illegal shorting, the recent Wells Notice to Refco Group closes the loop on
where this leads. The cases to date include manipulation, bribery, fancy
book keeping [2 sets of books], insider trading, and criminal conspiracy.
The cases also involve tens of thousands of trades executed that never
settled.
So why is the SEC’s Regulation SHO bad for the investor?
SHO is not based on forcing trades to settle as required by law. The SEC
actually pardoned past abuses like these very cases the SEC is slowly
seeking enforcement on. SHO is based on having regulators detect and seek
enforcement on excessive violators. SHO waits for abuse to reach excessive
levels and only then does it start to initiate forced buy-ins on future
fails. For Sedona Corporation, investors still suffer the losses as the
SEC’s investigation is entering its 4th year.
You don’t have to believe all I say here, check them out for yourself. This
is all the public information made available to us and posted on
www.investigatethesec.com.
What we the small investors seek is full transparency of the SEC on what
they are not telling the investing public and the taxpayers who continue to
foot the bill for this fraud. We simply want to know what the SEC management
team is thinking. Are we really mere pawns in their good old boy network?
For more on this issue please visit the Host site at
www.investigatethesec.com
great tool for fighting the naked shorts...
http://www.buyins.net/tools/buyin_imminent.php
laptoptrader, thank you for this great post...
http://www.investorshub.com/boards/read_msg.asp?message_id=6118488
Be sure to check on the GLKCE and GLKC boards here on Ihub for info on this company "poster child of naked shorting".It went pink a couple of days ago thanks in part to the efforts of the naked short sellers.Very interesting reads especially on the GLKCE board.Glad to see this board in place BTW...simple
beware of the smokescreen...
Issue: The horrible practice and financially devastating effects of naked shorting in the financial marketplace. In general, naked shorting is defined as selling a security short without borrowing the necessary securities to make a delivery, thus resulting in a failure to deliver the securities to the rightful owner. The main goal of naked short selling is to engage in harmfully affecting the stock price of a company in order to manipulate and create downward pressure on the security. This ultimately affects a corporation’s ability to raise money by selling stock to the public because its stock price becomes too depreciated. It is estimated that this harmful and serious practice that has caused billions of dollars in damage.
Confronting: Naked short selling has been fiercely combated by many corporations, including vigorous attempts by a small publicly traded company named Universal Express. "Universal Express, which has been in the forefront of the battle against the 'naked shorters' since 1997 has pending a viable suit for extensive monetary damages against the SEC and others in Federal Court in Florida,” according to Richard A. Altomare, Chairman & CEO of Universal Express. With the support of numerous organizations, individual investors and public companies have brought this issue to light and naked shorting is just now starting to come under the microscope. You can bet that this will be just the beginning of heated times.
Avoiding: The DTC has recently distanced itself from the naked short selling scandal. "The Depository Trust & Clearing Corporation (DTCC) has provided its bank and broker customers with a detailed explanation of its Stock Borrow program and the issue of naked short selling in an effort counter a widespread campaign of distortions and misleading information." said Stuart Z. Goldstein, managing director of DTCC Corporate Communications and spokesperson for the company. The latest press release from the DTCC indicates that their position to insist on their lack of responsibility in the naked short selling scandal will continue to stand. The press release goes on to read that the DTCC's "aim is simply to correct misstatements of fact. We have confidence that our regulators, who carefully review our activities, understand that short selling is a trading strategy and is not related to the post-trade clearance and settlement process." Clearly there is a denial of accountability of who is responsible for this ongoing problem.
Confronting: Recently, EagleTech Communications issued an open letter responding to the statements posted on the DTCC website by First Deputy General Counsel Larry Thompson similar to those of Stuart Goldstein. The company believes that the Stock Borrow Program clearly leaves the door open to naked short selling, citing evidence in the 73 page Treatise entitled, Short Selling, Death Spiral Convertibles, and the Profitability of Stock Manipulation by Professor Finnerty of Fordham University. One reason is that "sellers can continue to fail to deliver because the NSCC can borrow the shares it needs to meet its clearing obligations through the stock borrow program." Another is that the stock borrow program allows the shares to be recycled. Each stock loan gives rise to another stock futures contract. Any single share could actually be relent multiple times, giving rise to multiple futures contracts." This is certainly contrary to the position that DTC Counsel Larry Thompson holds. To conclude, the company pressed the DTCC in producing Eagletech's court ordered trading records, which will clear the air in showing the truth as to how the Stock Borrow Program has negatively affected Eagletech’s publicly traded shares. However, given the historical stance of the DTCC on this issue, it will be difficult to see if any resulting actions will be taken to rectify the situation.
Avoiding: It appears that the Securities and Exchange Commission has now backed down from their former toughened stance on naked short selling. In the Securities and Exchange Commission's own words, "naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules." The reasons given involve the debate over the sometimes innocent causes of failing to deliver shares or stock certificates. According to the Securities and Exchange Commission, "failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the normal three-day settlement period." At first glance, it appears that the Securities and Exchange Commission will fail to take additional force to strengthen Regulation SHO. Because the Securities and Exchange Commission has now given the impression that the ongoing battle against naked short selling is nearly an allusion, it will be a long while before the best interests of investors are finally defended.
Fellow investors...
with all the games and dirty little secrets on wall street, why are these and other stock bashers bent on destroying EVERY SINGLE otc:bb and pink sheet stock? big as texas, every micro-cap stock has at least one full time basher, and the more succesful the company (such as GTEL of late), the number of bashers multiplies. this is a last ditch effort by the market makers to weasle out of their naked shorting problems. how desperate are they? i've been tos'ed from raging bull about 5 times (lost count) in less than four months, for standing up to these and other stock bashers (hi, go_buckey000!). as one of my good friends put it, i've "made some very powerful enemies". too bad for them. i'm a fighter, and i'm not going to ignore them, and let them continue to carry on with their smokescreen........
i encourage each and every personal investor to join in this war on financial terrorism.
that being said, i personally thank each and every one of you who share my stance on this issue. and remember........
Grand Overview of Naked Short selling;
There’s a form of the securities fraud known as naked short selling that is becoming very popular and lucrative to the market makers that practice it. It is known as “Cellar boxing” and it has to do with the fact that the NASD and the SEC had to arbitrarily set a minimum level at which a stock can trade. This level was set at $.0001 or one-one hundredth of a penny. This level is appropriately referred to as “the cellar”. This $.0001 level can be used as a "backstop" for all kinds of market maker and naked short selling manipulations.
“Cellar boxing” has been one of the security frauds du jour since 1999 when the market went to a “decimalization” basis. In the pre-decimalization days the minimum market spread for most stocks was set at 1/8th of a dollar and the market makers were guaranteed a healthy “spread”. Since decimalization came into effect, those one-eighth of a dollar spreads now are often only a penny as you can see in Microsoft’s quote throughout the day. Where did the unscrupulous MMs go to make up for all of this lost income? They headed "south" to the OTCBB and Pink Sheets where the protective effects from naked short selling like Rule 10-a, and NASD Rules 3350, 3360, and 3370 are nonexistent.
The unique aspect of needing an arbitrary “cellar” level is that the lowest possible incremental gain above this cellar level represents a 100% spread available to MMs making a market in these securities. When compared to the typical spread in Microsoft of perhaps four-tenths of 1%, this is pretty tempting territory. In fact, when the market is no bid to $.0001 offer there is theoretically an infinite spread.
In order to participate in “cellar boxing”, the MMs first need to pummel the price per share down to these levels. The lower they can force the share price, the larger are the percentage spreads to feed off of. This is easily done via garden variety naked short selling. In fact if the MM is large enough and has enough visibility of buy and sell orders as well as order flow, he can simultaneously be acting as the conduit for the sale of nonexistent shares through Canadian co-conspiring broker/dealers and their associates with his right hand at the same time that his left hand is naked short selling into every buy order that appears through its own proprietary accounts. The key here is to be a dominant enough of a MM to have visibility of these buy orders. This is referred to as "broker/dealer internalization" or naked short selling via "desking" which refers to the market makers trading desk. While the right hand is busy flooding the victim company's market with "counterfeit" shares that can be sold at any instant in time the left hand is nullifying any upward pressure in share price by neutralizing the demand for the securities. The net effect becomes no demonstrable demand for shares and a huge oversupply of shares which induces a downward spiral in share price.
In fact, until the "beefed up" version of Rule 3370 (Affirmative determination in writing of "borrowability" by settlement date) becomes effective, U.S. MMs have been "legally" processing naked short sale orders out of Canada and other offshore locations even though they and the clearing firms involved knew by history that these shares were in no way going to be delivered. The question that then begs to be asked is how "the system" can allow these obviously bogus sell orders to clear and settle. To find the answer to this one need look no further than to Addendum "C" to the Rules and Regulations of the NSCC subdivision of the DTCC. This gaping loophole allows the DTCC, which is basically the 11,000 b/ds and banks that we refer to as "Wall Street”, to borrow shares from those investors naive enough to hold these shares in "street name" at their brokerage firm. This amounts to about 95% of us. Theoretically, this “borrow” was designed to allow trades to clear and settle that involved LEGITIMATE 1 OR 2 DAY delays in delivery. This "borrow" is done unbeknownst to the investor that purchased the shares in question and amounts to probably the largest "conflict of interest" known to mankind. The question becomes would these investors knowingly loan, without compensation, their shares to those whose intent is to bankrupt their investment if they knew that the loan process was the key mechanism needed for the naked short sellers to effect their goal? Another question that arises is should the investor's b/d who just earned a commission and therefore owes its client a fiduciary duty of care, be acting as the intermediary in this loan process keeping in mind that this b/d is being paid the cash value of the shares being loaned as a means of collateralizing the loan, all unbeknownst to his client the purchaser.
An interesting phenomenon occurs at these "cellar" levels. Since NASD Rule 3370 allows MMs to legally naked short sell into markets characterized by a plethora of buy orders at a time when few sell orders are in existence, a MM can theoretically "legally" sit at the $.0001 level and sell nonexistent shares all day long because at no bid and $.0001 ask there is obviously a huge disparity between buy orders and sell orders. What tends to happen is that every time the share price tries to get off of the cellar floor and onto the first step of the stairway at $.0001 there is somebody there to step on the hands of the victim corporation's market.
Once a given micro cap corporation is “boxed in the cellar” it doesn’t have a whole lot of options to climb its way out of the cellar. One obvious option would be for it to reverse split its way out of the cellar but history has shown that these are counter-productive as the market capitalization typically gets hammered and the post split share price level starts heading back to its original pre-split level.
Another option would be to organize a sustained buying effort and muscle your way out of the cellar but typically there will, as if by magic, be a naked short sell order there to meet each and every buy order. Sometimes the shareholder base can muster up enough buying pressure to put the market at $.0001 bid and $.0002 offer for a limited amount of time. Later the market makers will typically pound the $.0001 bids with a blitzkrieg of selling to wipe out all of the bids and the market goes back to no bid and $.0001 offer. When the weak-kneed shareholders see this a few times they usually make up their mind to sell their shares the next time that a $.0001 bid appears and to get the heck out of Dodge. This phenomenon is referred to as “shaking the tree” for weak-kneed investors and it is very effective.
At times the market will go to $.0001 bid and $.0003 offer. This sets up a juicy 200% spread for the MMs and tends to dissuade any buyers from reaching up to the "lofty" level of $.0003. If a $.0002 bid should appear from a MM not "playing ball" with the unscrupulous MMs, it will be hit so quickly that Level 2 will never reveal the existence of the bid. The $.0001 bid at $.0003 offer market sets up a "stalemate" wherein market makers can leisurely enjoy the huge spreads while the victim company slowly dilutes itself to death by paying the monthly bills with "real" shares sold at incredibly low levels. Since all of these development-stage corporations have to pay their monthly bills, time becomes on the side of the naked short sellers.
At times it almost seems that the unscrupulous market makers are not actively trying to kill the victim corporation but instead want to milk the situation for as long of a period of time as possible and let the corporation die a slow death by dilution. The reality is that it is extremely easy to strip away 99% of a victim company’s share price or market cap and to keep the victim corporation “boxed“ in the cellar, but it really is difficult to kill a corporation especially after management and the shareholder base have figured out the game that is being played at their expense.
As the weeks and months go by the market makers make a fortune with these huge percentage spreads but the net aggregate naked short positions become astronomical from all of this activity. This leads to some apprehension amongst the co-conspiring MMs. The predicament they find themselves in is that they can’t even stop naked short selling into every buy order that appears because if they do the share price will gap and this will put tremendous pressures on net capital reserves for the MMs and margin maintenance requirements for the co-conspiring hedge funds and others operating out of the more than 13,000 naked short selling margin accounts set up in Canada. And of course covering the naked short position is out of the question since they can’t even stop the day-to-day naked short selling in the first place and you can't be covering at the same time you continue to naked short sell.
What typically happens in these situations is that the victim company has to massively dilute its share structure from the constant paying of the monthly burn rate with money received from the selling of “real” shares at artificially low levels. Then the goal of the naked short sellers is to point out to the investors, usually via paid “Internet bashers”, that with the, let’s say, 50 billion shares currently issued and outstanding, that this lousy company is not worth the $5 million market cap it is trading at, especially if it is just a shell company whose primary business plan was wiped out by the naked short sellers’ tortuous interference earlier on.
The truth of the matter is that the single biggest asset of these victim companies often becomes the astronomically large aggregate naked short position that has accumulated throughout the initial “bear raid” and also during the “cellar boxing” phase. The goal of the victim company now becomes to avoid the 3 main goals of the naked short sellers, namely: bankruptcy, a reverse split, or the forced signing of a death spiral convertible debenture out of desperation. As long as the victim company can continue to pay the monthly burn rate, then the game plan becomes to make some of the strategic moves that hundreds of victim companies have been forced into doing which includes name changes, CUSIP # changes, cancel/reissue procedures, dividend distributions, amending of by-laws and Articles of Corporation, etc. Nevada domiciled companies usually cancel all of their shares in the system, both real and fake, and force shareholders and their b/ds to PROVE the ownership of the old “real” shares before they get a new “real” share. Many also file their civil suits at this time also. This indirect forcing of hundreds of U.S. micro cap corporations to go through all of these extraneous hoops and hurdles as a means to survive, whether it be due to regulatory apathy or lack of resources, is probably one of the biggest black eyes the U.S. financial systems have ever sustained. In a perfect world it would be the regulators that periodically audit the “C” and “D” sub-accounts at the DTCC, the proprietary accounts of the MMs, clearing firms, and Canadian b/ds, and force the buy-in of counterfeit shares, many of which are hiding behind altered CUSIP #s, that are detected above the Rule 11830 guidelines for allowable “failed deliveries” of one half of 1% of the shares issued. U.S. micro cap corporations should not have to periodically “purge” their share structure of counterfeit electronic book entries but if the regulators will not do it then management has a fiduciary duty to do it.
A lot of management teams become overwhelmed with grief and guilt in regards to the huge increase in the number of shares issued and outstanding that have accumulated during their “watch”. The truth however is that as long as management made the proper corporate governance moves throughout this ordeal then a huge number of resultant shares issued and outstanding is unavoidable and often indicative of an astronomically high naked short position and is nothing to be ashamed of. These massive naked short positions need to be looked upon as huge assets that need to be developed. Hopefully the regulators will come to grips with the reality of naked short selling and tactics like "Cellar boxing" and quickly address this fraud that has decimated thousands of U.S. micro cap corporations and the tens of millions of U.S. investors therein."
Another excellent source of info on Naked Shorting is
http://www.faulkingtruth.com
The best place to learn about naked shorting is
http://bobosrevenge.blogsppot.com
The average investor know nothing about this ever increasing manipulation for the benefit of, not the investor, but the hedge fund and market manipulators. The article is about 30 pages long but very worth while reading. Would appreciate comments-good nor bad.
TIA
Lets talk!
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